The Volatility Pincer Movement. You Ain't Seen Nothin Yet.

I've written repeatedly on here about the concept of volatility. And, that market volatility is really a function of fundamentals. And, that volatility is destined to return to the markets. Quite a while ago I showed a measure of market volatility and that it had fallen to the lowest level since the start of the massive equity market run beginning in 1995.

As volatile as equity markets appears to have become, I expect them to become significantly more volatile. Frankly, because as we've discussed repeatedly, my work supports a position that this is the biggest global asset, and by inference, economic bubble the world has ever seen.

Learning to measure and take advantage of market volatility would have allowed one to recognize the stock market blow upwards from 1995-2000 and the oil bull from 1999-2007 as two examples. In both instances we saw a similar tightening of volatility before their respective moves. With no other knowledge, one would have known these outcomes were likely to develop by properly measuring market volatility. Oil's direction was easy to determine given it was $12 a barrel. The only way to go was up given years of underinvestment in an industry that has always had boom and bust cycles. Of course, I never would have guessed $103 a barrel oil in 1999. But, then it doesn't surprise me now that it is here. Wall Street's financial engineering has created so many massive messes that I never should have expected anything less than a similarly massive mess in commodities. Using volatility alone the direction of the stock market move that developed in 1995 wasn't as obvious to predict given stocks were already fairly valued at the time. But, once the move started, it was obvious the move was going to continue higher.

On that note, the above graphic is a volatility band measurement of equity market volatility. Volatility bands tighten as volatility decreases. And, even though market volatility may seem extreme in today's environment with 100 point Dow swings the norm so far this year, the bands are still tightening. What does this mean? If history is to repeat itself, the market is storing up a massive sum of energy as the pincers tighten. If history is any guide we are going to see a large move. How large? Very large. And, I mean very large. Possibly as large or larger than the moves following 1995 and 2000 in equities. That means economic volatility is likely to be well beyond what anyone is imagining. Will that be constructive economic volatility or destructive economic volatility? Well, that's for you to decide. But, I will note that the bands are tightening exactly as Wall Street traders have rammed commodities to stratospheric levels in anticipation of continued global growth and continued global inflation. Something I have repeatedly said will likely end as the world joins the U.S. in a global deflation. In other words, I expect economic growth around the world to slow substantially or worse. From my perspective the only question is how long the global supply chain takes to feel the effects of receding liquidity and receding fundamentals.

Of course, you may hold a perspective that the next move be even higher as the U.S. economy weakens. That premise argues the dollar is going to continue to drop and commodities will continue to rise. And, that we are in a period of hyper-inflation. And that the government is printing money. And we will see something of what has been talked of time and again recently in the media; stagflation. All of these are very common themes we read or hear about every day in the press. And, I believe they are all wrong. The outcome is simply a matter of when we see investor and economic exhaustion. I believe that time is very near. Which also supports a major premise I have repeated quite often. That is, that Wall Street as an industry is peaking.