by Chris Kimble
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Crude Oil’s decline has been rare in a couple of ways, percentage decline and how quickly it took place.
The decline took it down to support that has been in play since the 2009 financial crisis lows. Momentum is now the lowest its been in over 20-years.
Could the low be in place in Crude? It seems a little early to make that call.
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by Trading the Odds
The majority of readers will already be familiar with the fact that the CBOE Volatility Index® (VIX®) is not a tradable asset (it is just a number), and trading the VIX® in fact means trading its derivatives (futures) or even derivatives of derivatives (options on futures, ETFs/ETNs like XIV® – VelocityShares Daily Inverse VIX Short-Term ETN – and VXX – iPath® S&P 500 VIX Short-Term Futures™ ETN – ).
Due the mean reverting nature of the VIX® (e.g. when bottoming out in the 10-12 range, a sudden spike is much more likely than a further drop, and conversly after a sudden spike to extended levels, a (quick) drop and/or slow decrease to regular levels is just a question of time and much more likely than a further rise), timing and trading the VIX® would of course be much easier than timing and trading its derivatives (and derivatives of derivatives) where one has to take into account (and overcome) time to maturity (futures, options), time decay, risk premium (futures, options, ETFs/ETNs), roll yield (ETFs/ETNs), term structure (contango/backwardation of futures), seasonalities (e.g. FED announcement days, the last days before maturity, …), among others.
Some time ago MarketSci published an intersting article about timing (and trading) the VIX® ( Random Thoughts RE: Trading Volatility ETFs (Part 1) ), utilizing a 10-day EMA (Exponential Moving Average) and a 10-day SMA (Simple Moving Average), going long (selling short) the VIX® index at the close when the 10-day EMA of the VIX® closed under (over) the 10-day SMA. Expectably (selling short an asset which is always bottoming out in the 10 – 12 range) – in contrast to going long the XIV® (selling short volatility) – the short side of the trade was more or less treading water over the course of the time frame under review (since 1990) while the long side went straight up (low risk / high reward).
But as previously shown, with respect to a highly volatile asset like the VIX® , a 10-day moving average – even an EMA – is disadvantageous compared to a shorter-term moving average. And additionally – at least with respect to trading the Volatility Risk Premium Strategy – utilizing the CBOE Mid-Term Volatility Index ( VXMT® ) as a the repective trigger index instead of the VIX® may have some benefits again as well.
To make a long story short:
Image I shows the respective equity curves:
(1) VIX® with 10d EMA vs. 10d SMA: blue line (complies to MarketSci’s posting)
(2) VIX® with 3d EMA vs. 10d SMA: grey line
(3) VIX® before 1/1/2008 , VXMT® after 1/1/2008 with 3d EMA vs. 10d SMA: red line
(4) 120% of VIX® | -20% of VXMT® with 3d EMA vs. 10d SMA: black line
* just VIX® before 1/1/2008 , VXMT® after 1/1/2008
(5) 120% of VIX® | -20% of (VIX® + 10%) with 3d EMA vs. 10d SMA: green line
* before 1/1/2008, VIX® had been increased by 10% in order to replicate the VXMT®
Image I – Total Equity Curve(s)
(01/01/1990 – present)
Some remarks are mandatory:
(1) Any additions/changes in the respective underlying are only related to the exponential moving average ( e.g. 120% of VIX® | -20% of VXMT® ). The 10-day SMA remains unchanged and is always based on the VIX® index.
(2) The blue line represents MarketSci’s 10-day EMA | 10-day SMA mean reversion strategy. The respective performance (hypothetically trading the VIX®) could’ve been easily boosted by utilizing a 3-day EMA instead of a 10-day EMA ( grey line ). Simply replacing the VIX® by the VXMT® index ( red line ) would be very disadvantageous (a least with respect to a mean reverting strategy) due to the fact that the VXMT® is regularly trading (significantly) above the VIX® index ( contango ). Even better works a mixture of 120% VIX® minus 20% of VXMT® , regularly (artificially) reducing the index value ( black line ).
(3) This very simple mean reversion strategy works best when applying this kind of ‘mixture’ right from the start, means first of all simulating VXMT® index values in the simplest way by adding a constant 10% premium to VIX® index values before VXMT® index values are available (1/1/2008), and secondly applying the previously mentioned formula again ( 120% of VIX® | -20% of (VIX® + 10%).
Image II shows the respective equity curves (long / short seperately) for MarketSci’s 10-day EMA | 10-day SMA (black / grey) and the 120% of VIX® | -20% of (VIX® + 10%) with 3d EMA vs. 10d SMA (green line) mean reversion strategy.
Image II – Total Equity Curve(s)
(01/01/1990 – present)
And last but not least – probably surprising the most – the respective Summation Index, simply representing the running total of net advances = raw quality of forecast (getting an index move right: +1 ; getting it wrong: -1). This image clearly shows that trading is NOT about being right or wrong (means just getting the direction of the move right), but all about making money (effectiviness and efficiency). MarketSci’s 10-day EMA | 10-day SMA (blue line) and the 120% of VIX® | -20% of (VIX® + 10%) with 3d EMA vs. 10d SMA (green line) mean reversion strategy are at equal level (at the end of the field !), but the latter strategy is doing things in an optimal way, being right when the VIX® index moves big and losing small when being wrong (it ouperforms the 10-day EMA | 10-day SMA strategy by a factor of 1E+8) while the “VIX® before 1/1/2008 , VXMT® after 1/1/2008 with 3d EMA vs. 10d SMA” ( red line ) is at the top of the pack even after 1/1/2008, unfortunately winning small and losing big, depleting its net asset value since 1/1/2008 by 99.9%.
Image III – Summation Index
(01/01/1990 – 10/15/2014)
But how to take advantage of these findings will be subject to another posting. And may be some food for thought for your own analysis as well.
by Bill Bonner
Last week, McKinsey Global Institute reported that the world’s total debt levels were twice what we thought – $200 trillion, or about three times the planet’s total output.
So, what a relief it was to discover… only a few hours later… that there was nothing whatsoever to worry about. Our concern was totally misplaced. It was nothing but a colossal misunderstanding or, as Nobel laureate economist Paul Krugman put it in the New York Times, a “bad analogy.”
So now, we can go back to our Portuguese lessons here in São Paolo without a care.
Growth in global debt, per the latest McKinsey report on the non-deleveraging echo bubble era: Since Q4 2007, global debt levels have increased by a cool $57 trillion. Thankfully, Paul Krugman informs us that it “doesn’t matter”. Phew! Dodged a bullet there! – click to enlarge.
Are you curious about how much progress we are making in Portuguese? We didn’t think so. But we’ll tell you anyway. We pride ourselves on our ability to learn foreign languages quickly. Put us down in any city in the world… and after three days of intensive language lessons we’ll be able to walk into any bar in the city and order a beer. With confidence.
So it is in São Paulo. We can’t conjugate the verb conhecer yet. We can’t pronounce it either. But we have mastered the essentials – “please,” “thank you” and “debt bomb.”
Only now there’s no further need to think about debt. Especially here in Brazil. Even after 13 years of socialist government, public debt is only 60% of GDP. According to World Bank data, private credit was 70% of GDP as of the end of 2013 – or barely a third of America’s 192% level.
Of course, Brazil used to be a basket case of epic proportions. At the start of 1980, for example, a hamburger cost about 4 cruzeiros (the Brazilian currency from 1942 to 1986). The same hamburger cost about 5 trillion cruzeiros by Christmas 1997.
Brazil had to bring in a new currency – the real – and a new government to set things right. That’s not the kind of thing you forget overnight. Especially when there is a whiff of inflation in the air. Prices are already rising in Brazil at an annual rate of 7.1% – beyond the government target of 4.5% plus or minus two percentage points… and the highest rate since 2003.
But why bother to think about it? “Deficits don’t matter,” said Dick Cheney. “Debt doesn’t matter either,” says Paul Krugman.
In developed economies, the private sector has slightly lowered its debt load (by 2 percent of GDP), while public debt has exploded into the blue yonder as the banking system’s losses were socialized – click to enlarge.
What a pity. All these years, we’ve been laboring under the illusion that these things mattered. Thank goodness Krugman has finally clarified things. From his piece in yesterday’s New York Times, modestly titled “Nobody Understands Debt”:
“You can see that misunderstanding at work every time someone rails against deficits with slogans like “Stop stealing from our kids.” It sounds right, if you don’t think about it: Families who run up debts make themselves poorer, so isn’t that true when we look at overall national debt? No, it isn’t. An indebted family owes money to other people; the world economy as a whole owes money to itself. […]
Because debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer).”
Let’s see. Debt doesn’t make us poorer. So we don’t need to worry about it. But does it make us richer? Ah, there’s the question… For if it makes us neither poorer nor richer, why bother with it at all?
What’s that you say, Paul, it CAN make us richer, if it is used intelligently? Isn’t that the whole point of lowering interest rates? Aren’t the lower rates supposed to encourage borrowing, spending… and greater wealth?
So, there is something about debt that can have a real effect on the bottom line, isn’t there? Debt, invested properly in wealth-producing assets, can make both borrower and lender richer. And if that is so, isn’t it also likely that debt CAN make us poorer? Don’t we all know that is also true?
You borrow money … you squander it … and you’re worse off. And so is the person to whom you owe the money. You can’t pay. He can’t collect. You both lose. It doesn’t matter whether you are a family or a nation. You’re all worse off. Debt does matter, after all.
We are not surprised that Mr. Krugman of all people has dug up the old “we owe it to ourselves” canard. This is patently untrue.
As Ludwig von Mises presciently wrote:
“It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract. A host of sophisticated writers are already busy elaborating the moral palliation for the day of final settlement. The most popular of these doctrines is crystallized in the phrase: A public debt is no burden because we owe it to ourselves. If this were true, then the wholesale obliteration of the public debt would be an innocuous operation, a mere act of bookkeeping and accountancy. The fact is that the public debt embodies claims of people who have in the past entrusted funds to the government against all those who are daily producing new wealth. It burdens the producing strata for the benefit of another part of the people. It is possible to free the producers of new wealth from this burden by collecting the taxes required for the payments exclusively from the bondholders. But this means undisguised repudiation.”
According to the McKinsey report, world debt has grown by $57 trillion since the beginning of the crisis in 2007… raising the level of debt to GDP by 17 percentage points.
That – not real economic growth – explains why US stocks are so expensive. It is also why there is a house for sale in Florida for $139 million.And it’s why a single painting – which was worth almost nothing when put on the market in the late 19th century – recently changed hands at auction for $300 million.
This reveals the true absurdity of Krugman’s “debt doesn’t matter” argument… and the futility of central bank policies since 2007. The financial crisis that began in 2007 came as a result of too much bad debt in the US housing and financial sectors.
Americans couldn’t pay down that bad debt. They had to put on the brakes. Suddenly, all those mortgage-backed securities proved to be worthless… and every bank on Wall Street was threatened with bankruptcy.
How did the feds respond? They stepped on the gas! Government debt grew by $25 trillion over the last seven years. And 8 out of 10 households (mostly out of the US) have more debt than they did in 2007.
Meanwhile, China has quadrupled its total outstanding debt – from $7 trillion in 2007 to $28 trillion last year. China’s debt – approaching 300% of GDP – is now greater than that of the US or Germany. And half of it is collateralized by real estate. Yes, dear reader, we live in an Age of Wonders…
We wonder what will happen to $200 trillion worth of world debt when the collateral gives way. We wonder why anyone would pay $300 million for a single painting by a dead Frenchman.
We wonder when the Nobel Foundation will reconsider …
Private and public debt trends in the US, the UK and the euro area compared. And no, “we” do not “owe the public debt to ourselves”. “We” owe it to the people who bought government bonds – who are a distinct group. Of course “we” were not asked if we really agreed with this debt expansion. No citizen includes his share of the public debt on his personal balance sheet, and yet, it has been contracted in his name. However, there is a deep-seated belied that the paternalistic State is in possession of some secret stash of wealth from whence these debts can be paid. Unfortunately this is not the case – click to enlarge.
As Ludwig von Mises pointed out:
“The long-term public and semi-public credit is a foreign and disturbing element in the structure of a market society. Its establishment was a futile attempt to go beyond the limits of human action and to create an orbit of security and eternity removed from the transitoriness and instability of earthly affairs. What an arrogant presumption to borrow and to lend money for ever and ever, to make contracts for eternity, to stipulate for all times to come!”
by Charles Hugh Smith
We are living in an era where a single statement of truth will drive a pin into the global bubble of phantom assets and debts, and the lies spewed to justify those bubbles.
How many nations are blessed with political and financial leaders who routinely state the unvarnished truth in public?
Only two come immediately to mind: Greece and Bhutan: Greece, where the new leadership repeatedly states the nation is bankrupt and extend-and-pretend policies are finished, and Bhutan, which explicitly rejects worshipping the false god of growth as measured by GDP (gross domestic product).
Bhutan has opted to measure well-being not by bogus "growth" (digging holes and filling them, and other Keynesian Cargo Cult nonsense), but by Gross Domestic Happiness: It's Time to Retire Gross Domestic Product (GDP) as a Measure of Prosperity (April 18, 2014)
In other words, with remarkably few exceptions, the global Status Quo is a vast Empire of Lies.
I have used the phrase empire of lies since 2007:
Empire of Lies, Kingdom of Magical Thinking(October 30, 2007)
Empire of Debt, Empire of Lies (August 6, 2008)
Ron Paul used the phrase in his book The Revolution: A Manifesto which was first issued in January, 2008, which means he probably drafted it many months or even years before.
Regardless of its origin, the phrase perfectly captures the total dependence of the Status Quo on a constant spew of lies. The complete and total dependence on lies was cemented on December 5, 1996, when Alan Greenspan's injudicious tidbit of truthtelling--Greenspan hinted that the stock market might be manifesting irrational exuberance--caused the stock market to plummet sharply.
Political and financial leaders took notice of the incredible fragility of the inflating financial bubble and vowed to never publicly state anything remotely close to the truth lest the entire contraption of debt, waste, fraud and bogus accounting collapse.
What would happen if national and corporate accounts met the guidelines of strict accounting? We all know the flim-flam falsehoods of fake numbers would vanish and the nakedness of our bankruptcy and low net profitability would be revealed.
And what would be the immediate consequence of strict accounting? The collapse of asset bubbles predicated on the belief that the bogus numbers accurately reflected reality.
What would happen if the unemployment rate was calculated on the number of full-time jobs and the number of people who are ages 18 to 65? Given that only 44% of employable people have full-time jobs, the true unemployment number would not be a rosy 5.6%.
The Big Lie: 5.6% Unemployment (www.gallup.com)
If corporate profit statements were stripped of accounting gimmicks, would the stock market continue rising at a rate that is five times the expansion rate of the economy? Nobody dares speak the truth lest the equity market bubbles collapse.
What would an honest accounting of government's unfunded liabilities for promised pensions and healthcare find? As Jim Quinn recently observed, the most accurate such accounting for the U.S. government found $200 trillion in unfunded liabilities--a staggering sum that is roughly twelve times the entire U.S. GDP--a sum that will require far higher taxes and a dramatic reduction in promised pensions/healthcare.
Does any political or financial leader dare speak this truth in public? What would happen if someone did declare that the monetary Emperor had no clothing?
We are living in an era where a single statement of truth can act as a pin on the global bubble of phantom assets and debts, and the lies spewed to justify those bubbles.
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