In last few days we have seen something we haven’t seen for some time. Stock market dropped like we haven’t seen before, or that is the impression you get from media. Thing they don’t tell is the obvious fact that the higher you go the bigger same % moves are. But of course the change from markets made out of “Teflon” and record low and stable VIX is notable. To me it is time to ask what might be behind this change, and is this normal correction, warning or reminder few facts and algorithm based trading?
Official story in media is that markets are afraid of higher interest rate level. But on other hand for several years we have been told that the economy is great and FED will be raising interest rates several times in each year. So are markets now afraid FED will actually do what they say?
Many people who are much smarter in economic issues have estimated some levels on interest rates that would create problems. Those levels are quite close each other and we are getting near/at those levels. Interesting thing is that same time precious metals and also cryptos dropped. Question to be asked is if there is fear/panic why money is not going to safe heavens or alternative places?
Correction is overdue on lot of opinion. We have been spoiled with “one way only markets” that we might have forgotten the concept of random walk and normal corrections. VIX shorts have been at high levels and according to some sources even FED have been shorting VIX. So why is this happening now?
So big part of trades is being done by computers and algorithms that you can say they are major or at least big part of markets. We have seen some flash crashes before and have heard many warnings that next bear market will be even steep than before. This might explain reactions from media but won’t tell you what or why those algorithm based sales would have started.
I’m not giving any economical advises here, but I hope that you will ask some of those or other questions about the situation.
The valuations are high on many cases, but there has been so much of “money printing” and there has been a short of yields in safer instruments so money has been looking for that in riskier assets and more and more of speculation on that there will be no problems, “black swan” or any too bad things from central banks. This including interest rate, QE, tightening/tapering etc. And to this point total assets of major central banks have been increasing.
Going forward the main issues to me are the actions of central banks, will they react to this and what they will do about interest rates. Many have believed for couple of years that they will have “markets back” and will do “whatever it takes”. To this day that have been right call, but has this changed? Also you should be looking at debt (bond) market. That is the most important market there is. And also you should be looking where money is going, is it waiting on the side, going into “safe heavens” or somewhere else? And also what yield curves are doing, are they going flat or inverse.
There are pressure to raise interest rates and cut balance sheets that central banks would some tools and “ammunition” when next needed. Also there is pressure to keep interest rates low to stimulate and keep countries budgets from getting much worse. There would lot of problems rolling debts at significantly higher interest rates. On other hand now savers have been punished (except stock markets and higher risk investments) and this is problem for pension funds and savers that can’t or won’t go too much in those. Also there is so much debt and unfunded liability out there that there are no easy way out.
So there will be some “interesting” times ahead to many of us and already we have seen that 2018 will not be like 2017 in markets. Was this correction, warning, reminder or game changer will be found out...
