Tuesday, September 30, 2008

how nervous are we?

There is a huge influx of info right now about what's going on in the markets, so I won't add (much) to it, but I do want to point your attention to three cool points right now:

1. "The 3 A.M. Phone Call" from Paul Krugman in the NYT is a great, short article about the fallacies in McCain's campaign and the potential impact it could have on our economy. The article has shot up to the #1 most emailed article in the past 24 hours in light of recent events. On the topic of partisan politics there is a really cool graphic of who voted "No" yesterday @ NYTimes.com - or just click here.

2. VIX - "VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Referred to by some as thefear index, it represents one measure of the market's expectation of volatility over the next 30 day period." - Wikipedia

Yesterday I was sitting in the UT Financial Technology and Trading Center for most of the day which was a fortunate set of circumstances as it was the single greatest day to be hanging around the best and brightest finance students in central Texas. I was able to sit in on part of an MBA class where they just turned on CNN and started watching what was going on in the markets. The prof pointed out that the traders being interviewed after the bailout failed to be passed were saying things like "yes the bailout didn't get passed but they'll go back to the drawing board and hammer something out coming up here." There was optimism that it would be passed even when it had just failed to come through to everyone's dismay. But even among the students there were mixed feelings on whether there should be a bailout at all as no one can be sure of its impact or what the logistics of the plan yet. One boy (who is inevitably looking at investment banking) took issue with the fact that the "golden parachute" might get the air let out of it and said the government shouldn't be able to control who gets paid what - leave that to the markets. I agree but isn't there something wrong when people are being paid billions of dollars? Should we at some point step in to nudge the invisible hand?

Anyway, later I came back to the FTTC to continue working and FOX News was there preparing to do a segment on that same prof. He pointed to the VIX index as a measure of the nervousness of the markets. He said this shows that markets are shaky but its not the worst its ever been. (I live twittered about this - LOL @ my silly self)

This is the VIX index over the past year:

Notice how it has shot up in the past few days relative to the rest of the year. If I had more time I would put in markers through the year so we could get a feel for how the market has responded to earlier events. But I don't, so I won't.

Now compare that to VIX over the past 10 years:

You can see that the last time the VIX index was as high as it is now (although it's down 12% today as of 11 AM as markets rebound a bit) was during the tech bust of the late 90's and the subsequent recession of 2000-2001. In an economy that seems to be driven by fickle investors who may or (most likely) may not have all relevant information (just see what happened with United)

3. Intrade Prediction Markets - Intrade is often cited for its political prediction markets which you'll see as soon as you click on the site but it's basically a place you can go to speculate on real events.

"We've created an exchange for you to trade (speculate on) events that directly affect your life, like politics, entertainment, financial indicators, weather, current events and legal affairs - these are our trading categories. Within each category we list a set of contracts, a contract is an event that will have an unambiguous result. For example, some of our political contracts are: "Will George Bush be re-elected in 2004" or "Will John Kerry win the Democratic Nomination". Each one is an event with an unambiguous result, either George Bush will be re-elected or he won't." - from intrade.com
Below is the history of "US Recession in 2008." US Recession in 2009 looks similar. You can see how the price of a "share" has an overall decreasing trend although just the tail end of it shows a small reversal. Intrade is by no means always right or reliable but it's another piece of information to put in your toolbox.

I'm torn on the bailout and luckily I'm not one of the people who have to make a decision on it. This is one of those things where we won't get a true sense of how bad it is until we're out of it and looking at it in 20/20. The prof did mention that it might be a good time to get in the markets while everything is low - buy low sell high, right? - but that's assuming we're not on the verge of a complete collapse.

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