Navigating the Perfect Storm: Inflation, Volatility, and Uncertainty in Financial Markets. Reviews from: (01-11 to 01-20)
You’re going to want to read this. We have three major analyses to go through today.
Inflation, Rising Costs, and Government Corruption: Navigating the Upcoming Global Debt Crisis.
Navigating the Unpredictable Volatility Market: Understanding the Risks and Payoffs of Hedging Against Market Declines.
Uncertainty in Financial Markets: Navigating the Potential Risks of Fed Policy, Japan's Debt, and Cryptocurrency Volatility
YouTube Channel: Wall St For Main St
Title: Dave Collum: 2023 Will Have Even More Gaslighting To Hide Upcoming Global Government Debt Crisis?
Here are the top takeaways:
Inflation is a real and pressing problem, despite what the government's Consumer Price Index may say. The CPI is flawed in that it does not take into account the true cost of living for consumers or the true cost of inputs for businesses. As a result, inflation is being underestimated, and the problem is only getting worse.
Inflation has already begun to rear its ugly head in the form of higher prices for basic goods and services. Eggs, for example, have seen a sharp increase in price due to a combination of higher feed costs and lower production levels. This trend is likely to continue as businesses pass on their higher costs to consumers.
In addition, workers are beginning to demand higher wages in order to keep up with the rising cost of living. However, even if wages do rise, they will only do so much to offset the rising cost of living.
The Federal Reserve is trapped and that the only way out is through a generational secular bear market. This will be difficult for people because inflation will make it hard to keep up with costs and interest rates will make it difficult to buy new homes. The Forex markets are potentially an emergent system, like the repo market of 2019, where the entire system could start to fishtail.
The problem is that the central banks have too much power and control over our lives and the economy, and they are able to pick and choose winners and losers. The only way out of this is for the central banks to start normalizing interest rates and allowing the economy to do some more rotting.
It is clear that climate change is a problem that we need to address. However, we cannot rely on renewable energy sources to solve the problem. We need to look at other options, such as nuclear power, to provide the energy we need to power our homes and businesses.
The food and energy supply chains are facing challenges due to crop failures and the war in China. The Chinese government has admitted to having bad crop failures in the past few years, and this could lead to higher prices for food and energy next year. The war in China is also a potential reason for higher prices, as it could disrupt the world's supply of wheat.
The corruption in the government is causing major problems for the economy and it is only getting worse. The debt is growing at an unsustainable rate and there is no end in sight. The government is spending more money than ever before, and there is no sign of them slowing down. This is a major problem that needs to be addressed.
Newsletter: The Last Bear Standing
Title: Swimming Naked.
Here are the top takeaways:
The volatility market is effectively an insurance market for the underlying asset class (most commonly equity markets, though increasingly important in other assets such as interest rates and FX). Like most derivatives, cause and effect is a two-way street. Volatility is influenced by changes in equity prices, but changes in the price of volatility also influence the price of equities.
Everyone invested in the stock market is indirectly tied to this high-stakes, high-variance game, whether they recognize it or not. The structure of the volatility market is inherently unstable - inevitably leading to dramatic spikes in volatility and sharp market declines.
Unlike this roulette wheel, no one knows the precise probability of a dramatic spike in volatility, and so it is much harder to price. The odds are constantly changing and are influenced by the wagers themselves. Spikes in volatility accelerate when sellers are caught offsides and are forced to cover. A higher premium paid by the buyer means a higher margin of safety for the seller, raising the bar necessary to trigger a short-covering feedback loop. Despite the year-long bear market, volatility as a hedge has failed and has added to losses instead.
Pricing Tails. There are many ways to insure against market declines or buy volatility with a range of risk and payoff parameters. A simple short position against the market is the most simple with the lowest risk. Buying market puts provides additional leverage depending on the strike and expiry. You can also buy volatility exchange-traded-products (ETPs) which provide direct exposure to VIX futures contracts. The highest risk and most levered positions are options on the VIX or volatility ETPs. Out-of-the-money (OTM) market puts or OTM volatility calls provide exposure to the extreme tails of the distribution - a dramatic spike in volatility or market crash. These instruments are like high-deductible insurance policies. They have the cheapest premiums, but with the highest threshold before they become profitable. The allure is an extraordinary payout - the risk is that they rarely ever pay.
Deep OTM options may not influence the price of volatility initially, but the recent behavior of volatility in the stock market is strange, and many investors are worried that it portends a coming crash. However, it is important to remember that past crashes have been sudden and unexpected, while the current situation is different. The market has been slowly and steadily climbing for nearly a year now, with no signs of slowing down. This doesn't mean that a crash can't happen, but it does suggest that investors should be more cautious than they have been in the past.
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