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Tuesday, August 26, 2008

 

"jaws of death"


i recently noted a preliminary sell signal in the volatility measures i examine. but here is something else related to volatility that i hadn't seen before. via the ft, the comments of john hussman.

... the continued widening of credit spreads ... increasingly suggests that default risk may be starting to spread beyond the financial sector into the broader economy. Meanwhile, there is a relative complacency in the stock market because investors are still convinced that the extreme “tail risk” in the markets has been removed by the Federal Reserve and the U.S. Treasury.

... the markets are presently trading on a theme that largely overlooks the potential (and in my view, the reality) of a significant U.S. recession. At the point of recognition, we may very well observe abrupt weakness in both stock prices and the U.S. dollar.


adds the ft:

The Vix shows equity markets anticipating a fall in volatility, but credit indicators suggest otherwise.

Are we again seeing the return of the credit/equity decouple? With interbank lending rates still sky high, there’s perhaps still a case to say equity is looking overpriced.


the credit-equity disconnect is a standing feature of this downturn -- while equity has arguably not even priced in a recession, credit is pricing for something closer to depression. but this widening of the discrepency may have actionable short-run implications.

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