Ho hum, move along, nothing to see here (really)

I can’t load the image into WordPress for some reason, but check out this picture of how VIX — one measure of U.S. market volatility — is behaving in recent weeks and months.  It’s down, and staying low.

This is one reason why I am not much covering the government shutdown or debt ceiling crisis, though I view both disputes as inefficient, harmful, and tactically unwise to boot.  In fact, that graph should be plastered below most of the blog posts you read on these topics.


As long as it is posted with the warning that "past results do not indicate future performance." Low volatility is fine until it isn't. It is good in the short-term that VIX doesn't rise along with government shutdown/debt ceiling debates, but it tells us almost nothing about the future, except that people may be very unprepared when volatility comes. Don't get comfortable.

Yes AND all the hand-wringing over incidentals is just marketing.

>As long as it is posted with the warning that “past results do not indicate future performance.”

Such a proviso would be irrelevant in this context.

Also, look closer, the VIX HAS actually spiked pretty sharply the past couple of weeks, from around 13 to over 20, highest it's been since June 24.

Still, the market is mostly yawning which is Tyler's point. We won't default even one penny on the debt service. My guess is there will be a face-saving can-kick of some kind right at the deadline around Oct 16 or 17. If not, then Treasury will keep paying on the debt but stop sending out Social Security checks and so on. How long will the impasse last once Grandma is calling Ted Cruz and Joe Wilson wondering where her check is?

This all makes perfect sense when you combine democracy with a skewed income distribution. Republicans are doing what they can, which isn't much. And then you have the feature where plenty of people will tell the mall cops they did a great job when the reality is they did slightly worse than I could do myself. So, how do you separate the bullshit from reality? You rely on betting markets.

'and tactically unwise to boot'

Why would a self-described libertarian care about the stupidity of the Republican party being 'tactically unwise'?

Because we have a two-party system.

And would like to keep it that way. One-party Democratic rule is really, really awful.

China calls their system "one-party democracy".

I have to be honest - the people and party members I knew who worked for the Libertarian party in NoVa would feel that part of the problem is just how many people are unable to see that our belief in the importance of either of the dominant parties is something to change, not accept.

But honestly, it has been a while since I've actually had much contact with actual libertarians, compared to the well funded faux ones. Like those who have any interest in the Republican party and its woes - except to profit from any lack of tactical wisdom found in either of the two dominant parties.

Now, living in a country where a new political party, with a distinctive philosophy, has created a large amount of democratic change (nothing creates change liked scared politicians pandering to former voters who will vote them out of office when they do not follow the clearly expressed will of voters) has been refreshing. Especially watching the potential birth of a new party, die Piraten, who may become established at some point, having only existed for around a half decade.

Because libertarians are also citizens, and not everyone views life as a series of zero sum battles with opponents?

Even more telling is the realized volatility. Over the last 10 days for the S&P 500 it's actually below 10%...the VIX premium is huge.

That was my thought too. I watch the VIX every day and have been noticing that, relative to realized volatility, the VIX has been rising substantially over the last few days. The risk premium is quite large although, admittedly, Wolfers's graph shows that volatility expectations are still quite low relative to a longer history of the last few years.

The vix is being pressed down by the fed, (the only time it's risen in the last year was when there was a real belief that the fed was considering winding down QE). Ironically, Obama should barricade a few blocks north if he really wants to instill some sort of panic.

The VIX is derived from options prices, so the only way the Fed could directly "press down" the VIX would be to actively sell options on the S&P, which I don't think that it's doing. Now, if you're saying that QE is providing macroeconomic stability that, in turn, is leading to less volatility in the equity markets, then I guess that could be true.

The fed isn't doing it directly, it's providing a free put on the S&P 500. Free means there's premiums without risk for option traders and they've pushed the price to very low levels.

One thing you learn quickly working in Washington is politicians are good at politics and nothing else. Obama and his coreligionists tried to create a market panic and were laughed off. They tried to create a public panic and have been dismissed. The reason in both cases is everyone outside of DC knows the drill. This is just theatrics. As long as Big Ben is cranking away, everything is good on Wall Street. As long as Joe Taxpayer is still in the yoke pulling the wagon, the economy will stagger on.

Well we have it on no less an authority than the New York Times that the market is wrong, wrong, wrong:


Well, the good news is that the New York Times is saved. All they have to do is buy some put (no pun intended) their money where their mouths are, and they'll be set for decades.

That didn't go so well. Scratch the "buy some".

So the pun WAS intended!

Undone by a typo.

The Carlos Slim Shopper's opinion is noted.

What shutdown?

On a long time horizon it looks low, sure, but it has definitely spiked in the past two days relative to the past 2-3 years, and importantly volume interest is up, so the expectations of volatility are higher.

It's small, but there definitely is something to see here.

I'm confused. Does this mean the market doesn't think a default would be bad or does it mean the market doesn't take the threat of default seriously?

It means there were some transactions recorded.

"Does this mean the market doesn’t think a default would be bad or does it mean the market doesn’t take the threat of default seriously?"


Can you repeat the question?

This means the market doesn't take the threat of default seriously. It's an interesting game; everyone (in the market) knows that default would be so horrendously bad that they can't imagine the politicians letting it happen. And the weird consequence is that the market's relative calm cannot be taken as a signal that a default wouldn't be bad; which is to say the market is not providing the sort of information we usually think of it as providing. I feel like this is related to how crashes occur in the first place, but I haven't thought through the consequences of that model yet.

There's just tremendous historical ignorance among the J-school crowd, there have been something on the order of 25 shutdowns in the past 50 years. There was a lull in recent times but that was unusual.

The actual figure is 17 times total in history...but your point is a good one. Government shutdowns are not a big deal, and in fact do some good focusing voters on the issues of spending. Playing games with our debt service and credit rating? That's new, and that's a frickin' mess.

Too late. The credit rating is about the accumulated debt and the unnatural costs of debt right now.The risk is how long the price fixing scheme run by the Fed can last. As Japan shows us, quite a long time.

The market, and voters for that matter who chose divided government, know that the only way to have any fiscal discipline imposed is this type of theatrics. Taking money away from politicians and bureaucrats is taking away their power. They will react like someone is castrating them. The noises out of Washington make sense if you put that picture in your mind. It will get louder.

Yeah, it's gonna be a long five years- hunker down.

Dear Washington,

Where did the breezy "debt limit must be increased no strings attached' position come from? What possible use would such a debt ceiling be under such circumstances?

But this is the dance we've chosen- prolly see a 5-7% market drop as we get close- prolly need it to shake you guys out of your stupor- then we get a couple hundred billion dollar increase in the debt limit- enough to buy time and end the paid vacations for government employees- which buys y'all through year-end.

Dust off Simpson-Bowles, which is Obama's baby. 11 of 18 commissioners supported the recommendations of the report. Considering it's chock-full of spinach, this is something of a miracle.

Start implementing this shite- now. If there's progress, mebbe you get another couple hundred billion on the credit limit for New Year's, but that's gonna have to be it for a while.


The American Taxpayer

A stable growing economy can be represented by a steady outward shifting of both IS LM. Y grows steadily and real interest rates remain fairly constant. Since real interest rates are derived from the payout of assets, steadier real interest rates mean less asset price volatility. And if the goods market is shifting out at a slightly faster rate than the money supply (i.e. recovery), real interest rates are actually rising, which as Alex explained in a post decreases the asset volatility effect of interest rate movements.

Volatility increases in recessions because the the two sides of the scissor blades start moving in unexpected directions, affecting the equilibrium price on the vertical axis. It's not helped if there's massive uncertainty about the form of and effect of the policy response. The Government shutdown is a threat to the US fiscal situation, yet if it hasn't effected measures of volatility it's because it has few implications for the direction and growth rate of macroeconomic aggregates. That doesn't mean its unimportant. Rather it suggests the credibility of the US congress to pay down Gov't debt can tank without hurting aggregate demand or real productivity growth.

Where did you get the notion anyone was even considering paying down debt?

Volatility is unaffected because the 17% shutdown is meaningless -- the government will end up spending all that money anyway, plus extra to arrest WW II vets visiting their memorials and traffic police to prevent people from stopping to look at Mt. Rushmore.

I'm taking your ball and going home!

Ya I agree. The furloughed employees are going to be paid eventually so its not really contractionary, that was my point about macro aggregates. Calling it paying down debt was a mistake - I meant avoiding default.

I'm pretty sure I've read before how markets are terrible at predicting fat-tailed events. Events like the United States entering a state of technical bankruptcy due to the reckless, irresponsible policies of one party.

So, is it possible this is merely a market failure, as market participants continue to assume there'll be some 11-th hour solution?

This would probably be a bigger non-story if this were happening next week.

Which party is that? The Democrats are slobbering with delight figuring that this will mean them winning the house in 2014.

^VIX data by YCharts

Not sure if the embed function will work here, but this chart shows the VIX up 24% for the month; a month view shows it up 32%; 6 months at 41%. Sure, it is not as high as some of those historical peaks, but it is still up.

More specifically, if one looks from Sept. 20 to Oct. 7, it went from 13.12 to 19.25, or something like that, which is nearly a 50% increase, although that level is still welll below what we saw in during the last debt ceiling runup debate. OTOH, the stock market was down today by about the most since all this got going. Something tells me that the complacency of the markets is starting to disapear.

"Meh, VIX is only at August 2008 levels. Should be fine."

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