Rough Seas Ahead: Go Long Volatility

“I can put my record against any leader around the world in terms of digging
ourselves out of a terrible, almost unprecedented financial crisis”
~ President Barack Obama

God Bless that ignorance! He must sleep like a baby at night. He’s not even half way through the magic act and he’s acting like he just finished the prestige. I mean the printing presses aren’t even cold yet and he’s prancing around like he’s pulled a debt free college educated millennial from his hat.

All this celebration for what? $4 Trillion dollars printed. Over $8 Trillion added to the public debt. And what do we have to show? Minimal  growth? Labor Force participation at multi decade lows? Where’s the fracking escape velocity we were promised?!

Look I didn’t believe we’d ever get this mysterious escape velocity. Though to be fair I don’t believe in the Easter Bunny, Santa Claus or the Keynesian Economics either.

The point is, our economy and financial system is no better than it was six years ago. When Bill Gross’ took an escape pod over to Janus Capital, he showed that in regards to stability we are worse off. PIMCO was forced to dump a large portion of bonds onto the open market. Unfortunately for them, they found the market to be less liquid than they would have liked.

I mentioned this in a previous post but it’s worth mentioning again, the corporate debt markets are a lot less liquid than they used to be. And when you get a big sell off into an illiquid market you can get big swings in volatility.

This means that volatility although low for now, is not likely to remain low for long. Once again, I’d like to reiterate how big a fan I am of long term out of the money VIX calls. If you see the VIX holding steady in the 12 and lower range, you should look to pick up the longest term available contracts and just hold. With rough seas of volatility ahead, it is a very safe play right now.

Remember the last time the Fed stopped printing money the VIX spiked to over 40, and the bond markets were more liquid then. If that happens now, who knows what will happen. So enjoy the low volatility while it lasts.

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