Tuesday, March 23, 2010

U.S. Financial Markets Return to Pre-Crisis Levels

The CBOE Volatility Index (^VIX) closed at 16.35 today, the lowest closing value since May 15, 2008 and the second lowest closing value since July 2007, more than two-and-a-half years ago (see top chart above). The VIX has closed at or below 17.0 for five consecutive days, for the first time since July 2007.

The Bloomberg U.S. Financial Conditions Index (BFCIUS) has closed above or close to 0.50 for the last nine days, for the first time since June 2007 (see bottom chart above).

Taken together, the return of these two important market indicators of: a) stock market volatility (VIX), and b) the overall conditions in U.S. financial and credit markets (BFCIUS), to their pre-crisis levels of the summer of 2007 provide further evidence that the worst is far behind us, and U.S. financial markets are once again stable and healthy.

17 Comments:

At 3/23/2010 7:52 PM, Blogger juandos said...

"the overall conditions in U.S. financial and credit markets (BFCIUS), to their pre-crisis levels of the summer of 2007 provide further evidence that the worst is far behind us, and U.S. financial markets are once again stable and healthy"...

Hmmmm, what happens when socialism greedy fingers start reaching deeper into the 'disposable income' of employed people, won't that start to affect the financial markets after a little while?

Health-Care Overhaul Changes to Start Taking Effect This Year

States Sue Over Overhaul That Will Bust State Budgets

 
At 3/23/2010 7:53 PM, Blogger juandos said...

"the overall conditions in U.S. financial and credit markets (BFCIUS), to their pre-crisis levels of the summer of 2007 provide further evidence that the worst is far behind us, and U.S. financial markets are once again stable and healthy"...

Hmmmm, what happens when socialism's greedy fingers start reaching deeper into the 'disposable income' of employed people, won't that start to affect the financial markets after a little while?

Health-Care Overhaul Changes to Start Taking Effect This Year

States Sue Over Overhaul That Will Bust State Budgets

 
At 3/23/2010 8:19 PM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 3/23/2010 9:35 PM, Blogger misterjosh said...

Talking to a Brit at a conference today & he said "Your disposable income just seems surreal to us" He indicated that it's mostly manifested in much smaller homes and fewer luxuries for them.

I said oh don't worry, with the new legislation, we'll get parity with you soon enough.

Only it'll be worse because our doctors are paid twice as much as theirs are.

 
At 3/23/2010 9:58 PM, Blogger PeakTrader said...

There are at least two ways to deal with the moral hazard of "too-big-to-fail."

1. Through regulation.

2. Through a deep depression.

It would seem regulation is the better choice.

However, there's a third way. Allow moral hazard to continue and bail-out the financial industry when necessary.

In the 2000s, the U.S. financial industry distributed trillions of dollars to the masses from the excess capital created and captured in the global economy, and the global saving glut, which helped raise U.S. actual output towards potential output. It seems, the excess capital was distributed efficiently, to the masses, and the risk was diversified or spread worldwide.

All the U.S. government had to do was bailout the financial industry, e.g. TARP, and a large tax cut would've allowed households to pay-off or pay-down debt to help strengthen the financial industry. Also, stronger household balance sheets would spur demand to increase production and help minimize the recession. The government would only be refunding money to the private sector.

The U.S. was on a path to a soft-landing or mild recession, until Lehman failed in Sep '08, and then the economy fell off a cliff. It would've been better if global imbalances corrected slowly rather than suddenly.

 
At 3/24/2010 12:54 AM, Blogger bobble said...

This comment has been removed by the author.

 
At 3/24/2010 12:57 AM, Blogger bobble said...

MPerry:"The CBOE Volatility Index (^VIX) closed at 16.35 today . . . provide[s] further evidence that the worst is far behind us, and U.S. financial markets are once again stable and healthy."

i think you are misinterpreting the meaning of VIX.

16 is almost exactly the value VIX was at when the market peaked on October 11, 2007. the market then crashed.

this doesn't mean that the market will now crash. on the other hand it doesn't mean that the market won't crash.

 
At 3/24/2010 8:25 AM, Blogger The Balf said...

It's when everything looks good that you need to look over your shoulder. The U.S. economy is on life support and the housing hangover is still out there. Great blog though.

 
At 3/24/2010 9:20 AM, Anonymous morganovich said...

that's a dead wrong assessment and a common misinterpretation of the vix.

vix is not a leading indicator in any way. it's just a sign of how much premium people are willing to pay for options.

go back and look at the vix index from august 2008. it was at about these levels, and we were about to see the worst stock market in a generation. the whole argument about the vix returning to pre crisis levels meaning anything about market or economic direction is obviously meaningless once you think about it.

the vix is always very low right at the top of a bubble. it was 16 in march of 2000 too.

you cannot use a vix level to argue that "the worst is behind us". it means nothing of the sort. 2 months later it was 90 which is a sign of deep fear and enormous demand for hedges.

let me say this again very clearly: the vix has no forward predictive value except MAYBE as a contrarian indicator when it hits extreme values. (and even that is VERY limited - calling the bottom in october 2008 when the vix peaked would have been 4 months early and incurred another 25% loss in the S+P.)

 
At 3/24/2010 2:40 PM, Blogger Methinks said...

Peak Trader,

Regulation doesn't deal with the too big to fail problem. Regulation creates it.

 
At 3/24/2010 2:42 PM, Blogger Methinks said...

Thanks, Morganovich. I was about to launch into that when I saw your post.

So, I'll say only "what he said".

Professor, you have to stop this nonsense. But, thank you not calling it the fear index anymore.

 
At 3/24/2010 5:56 PM, Blogger bobble said...

PT:"Allow moral hazard to continue and bail-out the financial industry when necessary."

so, lets make wall street one big GSE? it worked so well for fannie and freddie.

 
At 3/24/2010 7:47 PM, Blogger PeakTrader said...

Bobble, how will that reward Wall Street for the enormous value it contributed to the U.S. economy?

 
At 3/24/2010 8:22 PM, Blogger bobble said...

PT:" how will that reward Wall Street for the enormous value it contributed to the U.S. economy?"

are you being sarcastic? jeez, hope so. some of those folks belong in jail.

as far as rewards, wall street seems able to reward itself generously.

 
At 3/24/2010 10:43 PM, Blogger juandos said...

bobble gets it wrong again: "are you being sarcastic? jeez, hope so. some of those folks belong in jail"...

If you think the WSJ bankers and fund managers belong in jail does that mean you think the likes of Barney Frank, Chris Dodd, Franklin Raines, et al should be executed?

 
At 3/25/2010 5:18 AM, Anonymous Obama is the Anti-Christ said...

http://firedoglake.com/2010/03/23/new-harris-poll-finds-nearly-one-fourth-of-republicans-believe-obama-may-be-the-antichrist/


New Harris Poll Finds Nearly One Fourth of Republicans Believe Obama May Be the Antichrist

 
At 3/25/2010 9:49 PM, Blogger bobble said...

juandos:"If you think the WSJ bankers and fund managers belong in jail does that mean you think the likes of Barney Frank, Chris Dodd, Franklin Raines, et al should be executed?"

no, but i think jail time is probably warranted.

 

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