Wednesday, February 7, 2018
Trying to gain more perspective on what broke
So, after the panic has apparently subsided, or at least gone into a short-term lull (hard to tell with volumes the way they are), let's try and puzzle out what broke.
Obviously the $VIX system broke. XIV is dead, and that means that a major market mover of the front 2 months in the $VIX futures option market has died.
$VIX futures are a signal for bots. I mean hell, I'd program a bot with a $VIX futures input. But the signal today means something completely different than what it meant a week ago, because XIV is no longer trading the front 2 months. That is a really big change; of course, eventually the big boys can switch to implementing in-house front-month CBOE $VIX futures strategies to replace the XIV mechanism they had been outsourcing to Suisse.
So the US equity market mechanism won't fully recover until all the bots are reprogrammed to take into account the change in $VIX futures participation.
Bitcoin? Yes, that broke too, but who fucking cares? I cannot see why any serious market participant would buy or sell based on the goings on in an OTC Ponzi scheme, which is what bitcoin is. That won't move pensions, and it won't move Goldman's prop desk unless they're morons.
US economy? Nothing wrong with it right now. The Fed even under Powell won't raise rates so high that they kill investment, and investment ultimately is what drives the economic cycle.
Do stocks need to come down to a lower P/E for prices to be sustainable? Maybe, but if so, why aren't Republicans still puking stocks today? I don't think that asset inflation has suddenly stopped; in fact, giving more income to the working class through minimum wage raises will actually provide a hell of a lot of support to consumption at the bottom end of the Keynesian cross. Earnings growth may actually come, though unfortunately the timing of that is different than it's ever been before because the bourgeois rentier sector has already had their own recovery.
Yabut, if interest rates keep rising, won't that hurt anyone? Well, rising US interest rates should kill emerging markets, if the past is any indication. They haven't been murdered yet, despite the US having gone into a bull market. Maybe a year or two of higher rates will bring about some major crisis in EMs, which this time around will kill the world economy much worse than it ever did before. But for now, all is swell.
It's hard to tell what to make of the lull that's seized the market by noon today, except perhaps that everyone is done doing whatever they wanted to do and are now busy retooling the bot army.