The financial media’s approach to the fiscal cliff story was about as subtle as a herd of elephants. Every day we were bashed over the head with the dire consequences that would befall our nation the very moment we hit January 1st. Never mind that it wasn’t true – it made a good story, and doomsaying is tried and true method of boosting ratings.
But for all the media’s efforts, the “market” was about as scared as Felix Baumgartner is of heights… not very. In the days before the deal was finally reached, we saw a modest spike in the CBOE’s volatility index – the VIX, but overall the amount of fear as measured by the so called “fear index” was essentially nonexistent.
With the fiscal cliff in the rear view mirror, we’re now approaching the debt ceiling – and this time around an apocalyptic hysteria might actually be justified. Unlike the fiscal cliff, any debt ceiling shenanigans which result in the US not paying some of its debts on time could have immediate impact. Casting doubt on the reliability of US debt is not something easily erased, and there are far more ways this legislative showdown could go wrong than go right.
And how has the VIX responded to this possibility? It’s about as scared Baumgartner on the Dumbo ride at Disney, dropping to its lowest level since June 2007.
Disclaimer: past performance is not necessarily indicative of future results.
So what’s going on? How can the VIX be so low when there’s so much that could still go wrong? Is everyone really convinced that Congress is going to behave like adults and solve this before we’ve irreparably damaged the United States’ credibility? Do they think that the Obama administration is bluffing about their unwillingness to use the 14th amendment or the trillion dollar coin to avert disaster at the last minute? Is this a case of partying until the lights go out?
Or, have we just been “crisised” out? There are still several weeks left for the financial media to get their hysteria machine up and running, and for the VIX to increase to levels that make more sense in the shadow of such a crisis.
All we know is that volatility expansion tends to come out of periods of low volatility like we’re seeing now – a sort of calm before the storm; so the lower it goes and the more people ignore looming crises, so much the better for long volatility loving managed futures which should benefit from its eventual move higher. Of course, sooner rather than later would sure be nice.