Thursday, September 8, 2011

[click to enlarge]

by Howard Simons, Minyanville


"Another indicator flashing red is the term structure of zero-coupon implied volatility. These levels have blown so far past the 2008-2009 highs that those readings look perfectly normal on the chart [above]. The two-year Schatz’ (German note) volatility has increased furthest and fastest as the market is convinced the present levels and very steep German yield curve are unstable.

Higher volatility means markets are less liquid and all parties involved have to pay higher costs to fix and hedge their credit commitments. Maybe someone, somewhere, believes paying high insurance costs on two-year money at levels considered untenably low is conducive to economic growth. I do not and have not, and the macroeconomic track record since 2008 supports my skepticism.

Most of the time entrance into a new war prompts people to ask a question along the lines of, 'Is this another Vietnam?' We have been asking whether the current markets are another 2008. No; it is different in many ways but it is worse in others. Until these eurozone credit market stresses are reduced, we are still in trouble."

Complete article viewable here.

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