Skip to comments.Opinion: We’re now seeing the sharp edge of volatility’s sword and it cuts deep
Posted on 05/23/2020 7:18:37 AM PDT by MeneMeneTekelUpharsin
Central bank actions have for the most part suppressed market volatility since the financial crisis of 2008. This is part of a deliberate strategy to lower risk, which is measured by volatility. Reduced risk, its hoped, will facilitate borrowing to boost growth. Yet these measures have failed in their primary objective, instead encouraging speculation which now exerts significant influence over markets and prices.
Artificially low volatility has driven a wide range of investment strategies which generate small returns under stable conditions but are vulnerable to large losses under stressful conditions. Depending on how it is measured, an amount of more than $2 trillion and as much as $8 trillion may be exposed in this way.
The strategies themselves vary. [SNIP] For example, risk parity programs allocate funds across different assets using quantitative models. As risk, measured as volatility, declines, portfolios are biased towards riskier assets. If volatility increases, portfolios favor safer assets including bonds and cash. In addition to the price exposure to the underlying assets, the strategy assumes the risk of changes in volatility as well as the correlation between the assets, both of which can be highly variable. Many common quantitative strategies, like risk premia, commodity trading advisor funds and factor investments have similar dynamics.
Volatility, correlation, and volatility-of-volatility are important because they highlight how distorted economic reality has become. Savers and those charged with managing peoples savings simply cant meet hurdle rates of return in this environment. They have deliberately or unwittingly taken on additional risk to avoid seeing their purchasing power devalued. These investments may provide short-term excess returns but contain hidden fragilities that may be ruthlessly exposed in the near future.
(Excerpt) Read more at marketwatch.com ...
When prices are being calculated based on earnings from 2022 things are a little out of whack.
Its going to be a tough year or two.
Now that the LONG overdue market correction has occurred under cover of Covid, and the economy has been pruned of its dead branches such as JC Penney and Pier 1 Imports, etc., it’s going be be an amazing year or two as we witness abundant new economic life, with fresh green shoots sprouting everywhere.
- Chance the Gardener.
I understand what that means. I'm starting to worry about myself.
Could you expand
The author has a doom and gloom story to sell. I’m sure some FReepers will love it.
So what’s a Satyajit Das?
Yes those dead branches like Boeing, Ford, and Caterpillar.
Companies need someone to sell to. And the world is not buying right now. The US economy is a world wide thing—and the world is not coming back any time soon.
When imports of products and parts; AND the exports start coming back we may see a recovery. But there is just nothing in the pipeline to generate much activity.
Bars, Salons, and Hotels will spur a little activity for a little time. But if the jobs don’t come back in the large manufacturing areas, the “recovery” will be short lived.
Pumping money into the system (the banks and stock market) will work for a while—but by most accounts the big money is sitting on the sidelines right now. With the Fed buying $5 billion a day in US Treasuries—and the central banks over the world buying a bunch of bonds there is not real, broad support for anything right now.
Sure, it could turn around. But I am skeptical that we will see that before 2021.
No matter the small stuff; but ya gotta “GROK” what really counts.
Re Stranger, Strange Land/Heinlein/Exodus.....
GunnyG@ Planet WTF/Where Nothing Works.
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