September 30, 2017 — During most of this year, the VIX — the Volatility Index on The Chicago Board Options Exchange — has been at the lowest levels of the last ten years. It recently dipped below 9, even lower than March 2007, just before the sub-prime mortgage crisis. It looks as though, once again, investors do not sufficiently appreciate how risky the world is today.
Known colloquially as the “fear index,” the VIX measures financial markets’ sensitivity to uncertainty, in the form of the perceived probability of large changes in the stock market. It is inferred from the prices of option on the stock exchange (which pay off only when stock prices rise or fall a lot). The low VIX in 2017 signals that we are in another “risk on” environment, when investors move out of treasury bills and other safe haven assets and instead “reach for yield” by moving into riskier assets like stocks, corporate bonds, real estate, and carry-trade currencies.
Figure 1: The VIX is at its lowest since 2007
September 8, 2017 — Nine years ago this month, the US sub-prime mortgage crisis morphed into a severe global financial crisis. Many Americans across the political spectrum angrily demanded financial reform, by which they meant a tightening of financial regulation. Indeed, important reforms were subsequently enacted, in particular the 2010 Dodd-Frank bill.
Today, those reforms are increasingly under assault. Most recently, the Trump Administration is proposing a roll-back of regulation of banks as well as of other financial institutions. The recent decisions of Fed Governors Stan Fischer and Dan Tarullo to retire are also worrisome signs. Continue reading
August 29, 2017 — Americans have under-estimated the nuclear threat from North Korea and misunderstood what policies would reduce it. At the same time they have over-estimated the importance of bilateral trade deficits with China and misunderstood what policies would reduce them. Now these two different issues intersect.
My preceding post discussed the Chinese trade aspect of the problem. Here I review the geo-politics and history of the North Korea nuclear problem. Continue reading