Sunday, August 23, 2015

VIX: Back to Context

In my last article on Seeking Alpha, which you can view here, we discussed the different types of events and how to interpret the context of what is happening.

Earlier last week someone asked me if this was a political or economic event. I quickly answered political because I believed the market moves were in response to The Fed and China. Then I got to thinking about it.

Why hasn't The Fed raised interest rates yet? The answer is slow growth.

The Fed has been trying, desperately, to get inflation going for an extended period of time. The results have been less than stellar but probably far better than if rates were raised two years ago.

In a world of increased globalization, many countries are finding it very hard to grow their way out of debt. If you look around at balance sheets, many countries are in positions where, if global inflation doesn't pick up, they are stuck. Greece is a prime example and will eventually revert back to its own currency or need debt forgiveness. They practically pawned their country out to the whole of Europe (mainly Germany) and now need to pay back funds that should be going towards growth, infrastructure, education, etc. I am not sticking up for them, because I believe that you reap what you sow. Years of mismanagement leads to those sorts of problems.

However, look at the U.S., our balance sheet isn't much better. However, our economy is. What if it wasn't? Guess what is on the chopping block: growth, infrastructure, and education. We still run deficits and will need to adjust the debt ceiling. It is just on the back burner because more important things are going on. The slower the growth (inflation) the larger this problem will become.


Getting back to the VIX. I now believe this is turning into an economic event. Even though the U.S. economy is one of the better economies when looking at the globe, we are now interconnected more than ever. Disruptions in China will have ripple effects.

Should the VIX futures continue rise, I will start shopping for a position. However, it will be on a day to day basis and I really need to have a high reward potential for the level of current risk.

I would urge caution and risk management right now above everything else. Yes, you lose 100% of the chances you don't take. However, not losing is sometimes better than not winning.

Keep an eye out for my article on SeekingAlpha that should be published shortly. Have a great week!

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