Epsilon Theory Professional
My take on the “massive” VIX election premium? Not massive enough.
This isn’t a “fiscal cliff” we’re talking, which was about as manufactured a “crisis” as I’ve seen. This is an honest to god non-trivial chance that we have an intractably disputed election and Constitutional crisis in the United States, against a backdrop of widespread violence in American cities. If that sounds like a VIX of 30 to you … well, bless your heart.
Massive real-world household formation growth + positively correlated stock and bond prices + ZIRP forever and ever amen = an inflationary shock to your portfolio.
I don’t know when, and I don’t think it happens before the election, but this is the recipe.
The time to start preparing your portfolio for an inflationary shock and the havoc it will wreak on what you think is a well-diversified portfolio of stocks and bonds is NOW.
We think we can identify the periods where market participants are primarily focused on either multiples, fundamentals, or technicals in the way they talk and think about investing.
Each of these narrative regimes – multiples-focused, fundamentals-focused, and technicals-focused – generates a powerful signal of subsequent market dispersion (cross-sectional volatility) and subsequent market performance.
It’s a big day for us here at Epsilon Theory, as we launch a new monthly narrative monitor – Security Analysis Methods.
That’s a mouthful and it sounds boring, but I promise you it’s anything but. Even more so than the Central Banks monitor, I think this is the most powerful investment application we’ve developed yet.
As the kids would say, I’m old enough to remember Charles Keating and Neil Bush.
I’m old enough to remember the slow-burning dumpster fire that was the S&L Crisis of the late 1980s, when politically connected bankers used their influence to enrich themselves and secure regulatory forbearance for their crappy loans.
It’s happening again.
The more I see these midday mysterious reversals in the growth/value relationship, the more I think that there is a Common Knowledge shift happening and not just a month-by-month shift in the Wall Street drum-beating for this sector or that sector.
A shift in Wall Street drum-beating is good for a trade. A shift in Common Knowledge, though … that’s a Big Deal.
I don’t expect everyone to be as excited about the arrival of the new ET Professional Narrative Monitors as Steve Martin was about the arrival…
The Fed completes its transformation of the credit market into a political utility, the EU tops the US in economic growth prospects for the first time in living memory, and Americans are losing faith in “America”.
A narrative backlash is developing against RIAs and other asset managers that took PPP money.
Fair or not, this narrative is pure red meat for anti-Wall Street sentiment, particularly in an election season and particularly as the stock market goes up even as the real economy suffers.
Legacy Monitor Archive (Pre-January 2020)