The Straight Line

Now that everyone is back at their post, except me, of course, volatility has crept back into the markets. There are a few points that are important to remember. First, virtually nothing, except interstate highways out West, runs in a straight line. There are going to be these up and down jerky moves in all markets until the right balance of fear and greed bring it back into equilibrium. The VIX really is a measure of volatility, but its predictive capacity in this period of time is limited; more on that in the next sentence. Second, as alluded to, the equity market this time is along for the ride. The real show here is fixed income, primarily in the front end. That is why it is different this time. The last time there was a parallel situation was 100 years ago, the Panic of 1907. Back then, in the pre-Fed era, JP Morgan, the man not the back, stepped in and strongarmed his banker friends into providing liquidity during a credit seize-up. That event led to the legislation that created the Federal Reserve. The modern Fed is measured in its response when it can be. They will the appropriate action when necessary. While the talking heads were initially demanding an immediate cut in Fed Funds, the Fed's approach is more gradual, adding liquidity in measured amounts to bring more order back to the money markets. By taking this "straight line" approach, the Fed can keep its powder dry for future actions if necessary. This contrasts with the ECB, which has pumped massive amounts of liquidity into the system, without much longer-term effect. The last point is that there are excesses in the system that need to be resolved. The quants and theoretical guys that own this crap-ola need to change their mindset from a "mark-to-model" to a "mark-to-market" valuation. Only then will markets stabilize.