Changing winds
Guest post by Marc Chandler of Marc to Market.
Averted Terror Plot
The “biggest” news of the day is regarding the suspected alleged terror plot against Fed. The suspect was caught by the police. More from NBC 4 NY.
A suspected terrorist parked a van packed with what he thought was a 1,000-pound bomb next to the Federal Reserve building in Lower Manhattan and tried to detonate it Wednesday morning before he was arrested in a terror sting operation, authorities said.
The suspect, 21-year-old Quazi Mohammad Rezwanul Ahsan Nafis, is a Bangladeshi national who came to the U.S. on a student visa in January for the specific purpose of launching a terror attack here, authorities said. He allegedly told an undercover agent last month that he hoped the attack would disrupt the presidential election, saying “You know what, this election might even stop,” according to the criminal complaint against him.
The complaint said Nafis wrote a statement claiming responsibility for what he thought would be the Fed attack, saying he wanted to “destroy America” by going after its economy. He referred to “our beloved Sheikh Osama bin Laden” in the statement, which was stored on a thumb drive. (Full article here).
History of Market Crashes
Some 25 years ago, Wall Street saw its biggest one-day percentage slide ever sparking familiar worries about small investors and depressions. The long-term damage wasn’t as severe as the 1929 crash, but the 1980’s bubble pop was spectacular by any measure. Here’s a look at 10 other great market crashes and some of their unusual consequences. Courtesy Market Watch. Full article here.
Ratio of VIX to Realized Volatility Higher Than Any Year Since 1996
What about that “extreme” reading of VIX term structure. Bill Luby of Vix and more starts the explanation process.
Before I dive into a series of posts about the VIX futures, I think it is important to add some context in the form of several observations about the relationship between the VIX and the historical volatility (HV) of the S&P 500 index. In the absence of any information about the future, it turns out that historical volatility (a.k.a. realized volatility or statistical volatility) can provide a reasonably accurate measure of future volatility. In fact, it is more difficult than one might imagine to incorporate information about the future to come up with a better estimate of future volatility than what can be gleaned just by extrapolating from recent realized volatility.
Looking at historical data, the VIX has an established history of overestimating future realized volatility. In fact, in the 23 years of VIX historical data, there was only one year – 2008 – in which realized volatility turned out to be higher than that which was predicted by the VIX.
As the chart below shows, early traders made a habit of dramatically overestimating future volatility. From 1990-1996, for instance, the VIX overshot realized volatility by an average of 49%. Since 1997, the magnitude of that overshoot has dropped dramatically, to about 24%, as investors apparently began to realize that they had been overpaying for portfolio protection in particular and for options in general.
The Big Four Economic Indicators: Updated Real Retail Sales and Industrial Production
Guest post by Doug Short.
Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.
There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:
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The weight of these four in the decision process is sufficient rationale for the St. Louis FRED repository to feature a chart four-pack of these indicators along with the statement that “the charts plot four main economic indicators tracked by the NBER dating committee.” In his July 10thBloomberg TV interview, ECRI’s Lakshman Achuthan cites these four in his remarks. He says, and I quote “When you look at those four measures, they are rolling over.” On September 13th Achuthan again reappeared on Bloomberg TV and reasserted the ECRI recession call, stating again that the US is already in recession and that future revisions to the data will support their call. See the last 30 seconds of the interview for comments on downward revisions.
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