Volatility Compression - advanced

[silverman47]

Hi,


I have a friend, who works in a ... lets say an investment position. Who i believe to be a credible source of up to date market information. I dont want to reveal where or who this person is because i'm privileged to this information and i dont want to land this person in the shit legally. This is very new information from this person.


But what i was interested to know if anybody can tell me the implications of this are :

Volatility Compression, universal callapse in term structures of volatility cuves, and declining volatility at the front end - financial assets



My guess would be extreeme deflation, and i should probably hold more gold than silver, but i'd be interested to know what some more savvy investors have to say about this. So if you could please keep your replies to more educated responses please. I say that not in a condescending way, but in a more of a helpful, lets get to the point way.

Thanks in advance.

 

[thatguy]

If anyone can explain extreme deflation without systemic collapse i'm all ears. Massive sovereign debts + Massive individual debts + Printing presses extreeme deflation.

The only real issue is who is going to take on all the debt? Answer is governments. Next question is what are they going to squander it on? Answer is wars and welfare (of the corporate and poor kind)

Both will end in systemic collapse just hyperinflation kicks the can and we all know how much governments love kicking the can.

EU is a good example of how mild deflation + big debts pans out
Extreeme deflation and the end result of hyper inflation are remarkably similar. The medicine or short term pain for long term gain is deflation forget it

It's punchbowl all the way... hic

 

[silverman47]

I understand the choice for the planners is inflation, but for a serious bout of short term deflation, how much could silver drop.

I mean far more serious than we have experienced so far.

 

[thatguy]

I understand the choice for the planners is inflation, but for a serious bout of short term deflation, how much could silver drop.

I mean far more serious than we have experienced so far.

$17-$19 is not off the cards IMHO... the problem with PMs dropping with deflation is the people with the real $$ (read China) would snaffle the whole lot (gold that is) and that is unacceptable to certain governments that have access to helicopters and printing presses

 

[wrcmad]

But what i was interested to know if anybody can tell me the implications of this are :

Volatility Compression, universal callapse in term structures of volatility cuves, and declining volatility at the front end - financial assets

This is a very vague statement - which assets? I am guessing you are referring to US credit and money markets?

It is no secret that implied volatility curves have collapsed in the last few weeks in the US since Bernakes QE3 announcement. Implied volatility is basically a measurement of future uncertainty in options and futures markets - the lower the volatility curve, the less the percieved future uncertainty of prices.

Because the Fed has committed to removing virtually all new supply from the market for the foreseeable future, thus keeping a lid on mortgage yields, the need to hedge volatility risk via options has been dramatically reduced.
The consensus is that QE III is focused on two objectives: One, lowering mortgage rates to help spur housing market activity, and two, raising the value of risk assets by inflating the currency. Thus, the perceived uncertainty risk is low, causing volatility curves to collapse to near record levels.

What are the implications? I don't know.

At the moment you have investors long on the bond market, with "Bernake's monetary easing" pushing rates as low as they can go. At the same time, the low rates are good for earnings reports, and that is causing investors to go head long on the stock market as well. Both of these in a theoretically inflationary environment with underlying earnings relatively poor (but bolstered by low interest rates) ....... a seeming recipe for disaster.

So, one thing I do know is that this perceived certainty may be a false perception, and the implications will likely be everyone running in the same direction until the bubble bursts.

But that is just my perception.