Chaos is the new cool

Happy hump day, dear reader.

I told you yesterday this poll was coming…

Who do you reckon will win the US election?

I want to know what the Capital & Conflict readership thinks. I’m not asking who will win the popular vote, as the electoral college can make that irrelevant – I just want to know who you think will end up with the keys to the White House, the top chair in the Oval Office, and access to the nukes come November.

Just click whichever you think is gonna win and then head back to this email:

The event is obviously a hugely important one for all investors, even (and in some respects, especially) for us here in Blighty. That said, I was slightly taken aback when Nickolai Hubble forwarded me this headline from the financial press this morning:

Source: Bloomberg

The riskiest event ever anticipated in financial markets? Seems a bit extreme, even when you consider how important the event is.

But when you look a little deeper, it comes down to the amount of money now sloshing around a previously esoteric “volatility” market.

The “VIX futures” mentioned in that headline are a means of hedging, or speculating upon higher perceived volatility in the US stockmarket. The VIX, or volatility index, is a reflection of how volatile US stocks are perceived to be in the present, and the futures contracts allow market participants to bet on the direction of this perception.

Think investors will be uncertain and uneasy about the stockmarket in a month’s time? Significantly more so than today? Then you may want to buy a VIX futures contract that matures in one month. If the VIX index ends up higher in one month than the cost of the futures contract today, then you’ll pocket the difference.

Conversely, if you believe the opposite – that investors will feel more certain and confident about the future for stocks in one month – then you may want to sell, or “short”, the VIX future that matures in one month. If you’re right and the VIX index ends up lower than the cost of the VIX future you sold, then you’ll get to pocket the difference.

Over the past decade, the VIX has stayed low, only spiking up intermittently and getting crushed soon after whenever it does, having something of a “low attention span” and getting bored whenever calamity has struck.

This dynamic has seduced many investors who try to milk the VIX for excess returns, and income in this uber-low interest rate environment. More and more players with more and more money have arrived in the game, poking and playing with VIX futures and options contracts to make money – financial instruments about as far removed from the real economy as you can get.

I confess that I too have done this, and fell for the charms of the VIX. Been fascinated by it, enamoured with its exotic nature. This one changing number containing fear, hope, greed, and anxiety can steal your gaze. Its moves can feel impossible to decipher as it undulates and gyrates through the trading day, and it has an uncanny ability to surprise you.

The audience for the VIX just keeps on growing, and the bets on how it’ll move in the future are getting bigger. So many people are betting that the VIX will be higher in November than it is in October and December, that expressing such a market view (by selling the October and December VIX futures, and buying two November VIX futures) has never been more expensive. For that trade to pay off, the VIX will need to really explode during election month.

This is the VIX future that’ll expire closest to the election. It’s been bid up to such a degree that pre-2020, the last time investors were betting on this much volatility coming, was during the sovereign debt crisis in 2011:

When investors are anticipating this much volatility to come in the next eight weeks, you have to wonder exactly how much, and what kind of chaos we’re gonna witness.

Then again, as I mentioned earlier, the VIX has the ability to surprise investors like few others. Could it be that during election month, the market is becalmed, volatility vanishes, and everybody betting on a November of chaos and calamity gets wiped out? Food for thought.

We’ll return to the US election tomorrow. In the meantime, I’ll leave you with an insight from the mailbag.

Last week I asked you if any of your friends or family have been recommending you buy gold. With my mates telling me gold is a buy, I worried that this was a contrarian indicator, and wanted to know whether this is a broader phenomenon.

One reader writes in with his views and an illustration that just as the volatility market is now jammed with tourists, plenty of new blood has arrived in the broader investment space – and they’ve a lot to say.

Thankfully I don’t have any friends who think (due to my humble origin) that this [gold] is a buy or whatever. However in a mirror image, my main trading platform allows ‘punters’ to post comments on individual stocks…. I have never (after 30 years at a City broker) seen so much ***** commentary. I don’t know where these people come from, but they have crazy baseless comments on every daily move, whether up 3% or down 3%. Daily, Weekly or Monthly fluctuations are meaningless …. The Markets, currency, stocks or precious metals, are run on a daily/monthly basis by Idiots/Morons, who are looking to make a profit tomorrow…

With Commodities just look at supply and demand and forget about the short term fluctuations. I read something a few days ago, from a book by Edward Griffin, which said that 1 Gold Sovereign at the Savoy Hotel in 1913 bought dinner for 3 people and the same coin will buy the Same today. Apparently a paper £5 note has lost 95% of its value since and may buy you a pint of beer today. You’ll never (maybe if you are lucky… for a short time) make money trying to daytrade/out-guess Mr. Market. I dont care what the daily chatter about Gold/Silver is, may have to survive some major down moves….. I know my 1913 Savoy sovereigns will be worth a 100 times than the 2020 plastic notes in a 100 years.

Hopefully my scribblings here at Capital & Conflict aren’t contributing to the noise…

Here’s to dinner in the Savoy in a hundred years!

All the best,

Boaz Shoshan
Editor, Capital & Conflict

PS While the market may be bracing for a ravaging November, a certain sushi investment is soaring – up 1,455% in just three days…

Category: Market updates

From time to time we may tell you about regulated products issued by Southbank Investment Research Limited. With these products your capital is at risk. You can lose some or all of your investment, so never risk more than you can afford to lose. Seek independent advice if you are unsure of the suitability of any investment. Southbank Investment Research Limited is authorised and regulated by the Financial Conduct Authority. FCA No 706697.

© 2020 Southbank Investment Research Ltd. Registered in England and Wales No 9539630. VAT No GB629 7287 94.
Registered Office: 2nd Floor, Crowne House, 56-58 Southwark Street, London, SE1 1UN.

Terms and conditions | Privacy Policy | Cookie Policy | FAQ | Contact Us | Top ↑