Tuesday, March 23, 2021

Volatility: Buy It Or Sell It?

Here's a question for market people (and not only): do you buy volatility here or sell it? For those less market inclined, do you expect more or fewer pronounced swings in markets? Are financial markets going to go up and down significantly, or are they just going to trend? 

Note: Many people think that VIX, the CBOE volatility index, is a measure of volatility; in fact, it isn't.  It is best described as a "fear" index, since it is based on the balance of prices between out of the money put and call options. The higher the price of puts, the higher the index. Interestingly, VIX just made a new 13 month low a couple of days ago (and, conveniently for us tea leaf readers, closed a chart gap - see below).


 VIX Index

While interesting in itself (hmmm... puts are cheap, you say?), it's not what I'm talking about. My question is about volatility per se. For example, let's take 10-year Treasury bonds.  They are currently a hot topic, with yields trending up sharply due to fears of inflation.  

Say you are the Treasury and have to fund the massive $1.9 trillion Biden program.  You need to auction a whole lot of bonds into a rather shaky market, hoping there won't be a repeat of the last, disastrous 7-year bond auction.  What do you do?  Leave it up to the good will of the Bond Vigilantes? None other than Bill Gross has been making ugly noises recently, after all. (Short Treasurys, inflation will go to 4%).

So, you need to put a stop to yields trending up - somehow. You need to create volatility, to break the "trend (up) is your friend" meme in bond yields and strike fear into the icy cold hearts of them bond-shorting Vigilantes. How do you do it?

There are two ways:

  • Short term, make absolutely sure that the next couple of auctions go well.  Line up your bidding ducks, call in all your favors with banks, foreign and domestic funds, cajole speculators and investors alike.  Shouldn't be too difficult, Pax Americana still wields a heavy sword, after all. (Tragically, quite literally - see Boulder, CO).
  • After that, surprise the market with a concrete policy change signal.  For example, have the Fed announce that it is now confident the economy is out of the woods and will soon re-examine its bond buying and/or zero interest rate policies.  The stock market won't like it, but there are much bigger fish to fry here, like the cost of servicing the ballooning debt - can't screw around with that.

So, to answer my own question, I would be a buyer of volatility right now (Not VIX, necessarily).  

Then again, I'm an idealist, always thinking that the American political elite is smart, capable and at least one step ahead of the crowd.  (I know, I know... Trump..).

PS Mr. Biden just announced another $3 trillion spending program for infrastructure, climate change, etc.  Eh, a trillion here, a trillion there, pretty soon you're talking about serious money...



  1. Laugh... I like this plan much more =)

    Best of luck from your closest rival. One day, I hope we will replace you. But not now and not like that.

    Best Regards,

    1. The process has started... When the President of the US publicly says "if we don't do xyz the Chinese will have our lunch.." it's a blinking neon sign the size of... dunno... The Great Wall?? :)

  2. The Chinese have a long way to go. Its not the technology or the economics. That is the easy part. Its our societal structure. Think a depression will be good for us. Force some soul searching.

    I dun think it is good to introduce the world to the wonders of current Chinese culture.

    That is not an isolated case for China and no, it is not true that every culture has its goods and bads. I dun think something like that has ever happened to a noble lady in Western civilization.