Inflation and Volatility Making a Comeback?

We have been saying for the past couple of weeks that volatility has been nonexistent and is due for a comeback. By way of none other than Lloyd Blankfein, CEO of Goldman Sachs, here is his take on the lack of volatility.

While stock market volatility has dropped to a seven-year low as major indexes continuously rise to record highs, that blissful investing state can’t last forever, says Goldman Sachs CEO Lloyd Blankfein.

The luxury of a steady, calm, quiet market” might continue for a period, but will ultimately halt, Blankfein told CNBC

“At the end of the day, it’s not a normal condition to have interest rates at zero,” he said. “Eventually people will acknowledge higher [economic] growth. Money as a commodity will start to cost something again. . . . That in itself will produce a shock to the market.”

The danger constantly lurks of “some exogenous event . . . that’s going to cause people to have to reset their portfolios,” Blankfein noted.

“There is always something coming that we don’t know about because nobody know what is the future is,” he added.

How long and how low has volatility been? The folks over at Bespoke Investments were kind enough to share this research for us.

 

In fact, it has been two months (42 trading days) now since the S&P 500 last had a move up or down of 1% or more.  To put that in perspective, you have to go back nearly 20 years to 1995 to find a period where the S&P 500 went longer without a move of that magnitude.

 Since 1928, there have been 30 other streaks that lasted longer than 40 trading days.  While extended streaks have been rare in the last twenty years, it hasn’t always been that way.  For example, from the early 1950s through the early 1970s, there were numerous periods of extended calm in the market.  In fact, the years 1963, 1964, and 1965 each saw streaks of more than 100 trading days without a 1% move (the 1965 streak ended in February 1966).  –Tuesday June 17, 2014

 http://www.bespokeinvest.com/thinkbig/2014/6/17/1-moves.html

The inflation trade is making its way back in the aftermath of the Federal Open Market Committee meeting this week. In Janet Yellen’s press conference traders got the feeling that the FOMC is a bit too complacent when it comes to recent inflation statistics which seem to be heating up. Traders bid up the inflation trade across asset classes as gold/silver rallied and Treasury yields rose while the yield curve steepened. Is inflation back? It would change the game a bit. Keep an eye on gold.

Gold bounced off of its lows very aggressively this week in the aftermath of the FOMC meeting. We may now be looking at the top end of that range to see if that can repel the gold bulls. $1400 is going to be a key number. Can it break out of its recent range? A break through $1400 on the upside would ignite a new round of short covering and perhaps foretell a move back into inflation trade winners. US 10 year Treasury yields are also up against resistance and at key levels.  Keep a close eye on gold and the 10 Year US Treasury. A move back towards the inflation could be a game changer.

Speaking of inflation. During the financial crisis we have looked to England as the Canary in the Coalmine. England has a much smaller economy and the Bank of England chose many of the same tricks that the FOMC has used here in the US. The difference may be the impact that the BOE had on their much smaller economy. It is akin to turning a speedboat around rather than a battleship.

In the BOE governor’s annual address to bankers in the heart of London’s financial district, Mr. Carney said that rapid growth and tumbling joblessness mean that the time to begin raising interest rates is drawing nearer.

“There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect,” Mr. Carney said, according to a text of his remarks. –6/12/2014 WSJ Jason Douglas

Treasuries and Gold continue to be our risk temperature gauge. Watch the yield on the 10 Year US Treasury and keep an eye on gold. We could be in for an equity melt up here as investors are caught with too much cash. While the FOMC continues to play the music investors are forced to dance.

In Blankfein’s interview on CNBC I thought that he nailed the description of investing and being in the investing business. Build scenarios and invest accordingly.

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

 

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

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