What fascinates me lately is the amount of opinions out there how issues should be solved. Some are valid solutions, yet most of these people should not lose their day jobs! Whether we’re talking the eurozone, our Fed or politics, the opinions vary on what to do. The markets have started to reflect the many views of uncertainty, the VIX rising mostly out of fear of the unknown.
There is Only One Fed
We have a Fed meeting coming up and likely the members have telegraphed what we should expect. Most of the talk has centered around doing no more past QE2, which is set to finish in a couple of weeks (actually, last purchases will be in early July). When the members gather this week there could be a contentious fight – inflation hawks speaking louder while the doves argue that economic growth is slowing. Chairman Bernanke is on record saying he needs to see strong growth and reduced unemployment before removing accommodation. While some may argue the QE2 experiment was a waste of time and increased inflation, I would argue that inflation expectations have not risen; the purchase of treasuries has been moot – rather inflation is induced by a rise in commodities from strong demand and lower supplies. Money is sitting in banks and while there is evidence of lending it is a far cry from what the Fed was hoping for. The many opinions of monetary policy are out there but last I looked we only had ONE Fed and ONE Fed Chairman – like him or not he is the master of the game board. If that means another dose of stimulus then…
Confusion in the EuroZone
No denying the Greek situation is troubling. In fact, it may be a race zero and restructuring. The markets reflect the potential failure, a 75% probability within 5 years of default on debt. At risk of a steep haircut or total wipeout are the bondholders of sovereign debt which include Germany, France and other healthy Euro nations. Without an airtight solution it’s just kicking the can down the road – at some point that can stops rolling. Talk of austerity measures do not sit well with the citizens of Greece but perhaps it’s time they face the music – take the medicine to get your house in order. This case is being studied closely as Ireland and Portugal are right behind Greece. It’s hard to know what a default will bring but it cannot be a good thing for bondholders. If Greece takes the easy way out I supect other nations in trouble will follow their lead.
VIX is Getting ‘Jiggy’
It just took the end of June VIX trading to get this going but we’re finally seeing some fear and worry enter the market. Since May we have seen the calmness of this index (mostly due to the calendars that had been established and rolled with short SPX puts), yet now we see some activity. Friday backed away from the recent highs yet we are loathe to establish a downtrend. As the uncertainty regarding Greece continues look for this to continue upward as players look to buy protection on the cheap.