Volatility of Volatility Summary
Economic Stability, Policy Uncertainty Shocks and Market(s) Volatility
You will never hear us hedge when asked about our expected path for markets by saying we expect markets to be ‘volatile.’ Having spent our formative years on the street in equity derivatives at Lehman Brothers, we respect the concept too much to use it as throw away language when we don’t have conviction about the path for market prices. In our view volatility is a function of underlying economic secular and cyclical forces that typically get shocked out of an unstable equilibrium by domestic and increasingly international, monetary, fiscal and/or regulatory policies. Additionally, our front row seat for the financial crisis at Lehman Brothers taught us an unforgettable lesson about how cross asset class correlation transmits shocks through increasingly interconnected capital markets.
Let’s begin our review of the current state of volatility with domestic underlying macroeconomic trends. As it stands today, economic volatility, specifically the components of the Fed’s dual mandate, inflation and employment, are both experiencing historically low volatility.
Friday’s soft employment report surprised the markets just as April’s strong report did, however, employment growth has been remarkably stable around 2% for seven years.
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Barry C. Knapp
Managing Partner
Ironsides Macroeconomics LLC
908-821-7584
https://www.linkedin.com/in/barry-c-knapp/
@barryknapp