Dear Uncle Sam: Get Well Soon, the End is Near

John Ransom
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Posted: Mar 13, 2013 12:01 AM

One of the most-widely watched indices of market sentiment, the Chicago Board of Options Exchange (CBOE) Volatility Index- also know as the VIX, (symbol: VIX)- while not exactly moving in uncharted territory, is moving at least in the rarefied air puffed by the central bankers of the world.

The VIX is now near record lows.

Being a contrary indicator, the VIX tends to move up as stocks move down and it moves down as stocks move up.

And stocks have been moving up- if you didn't notice- thanks in large measure to loose money policies by the Federal Reserve that bring money to Wall Street, not Main Street.

"All is well," the public bankers at the central banks around the world are saying to the private bankers on the Wall Streets around the world; even as the central banks distribute their Get-Well-Soon cards disguised as dollars, pounds, francs, lire and renminbi.

And, at least for now, you should believe them- that all really is well.

Or as well as free money can make a stock market, as opposed to, say, an economy.

And that's one reason why we are seeing so little volatility in the stock market, as opposed to, say, the jobs market. At least volatility as measured by the VIX.

While the VIX has briefly touched these low levels previously- see previous, history-altering stock market corrections- the VIX doesn't stay worry-free for long periods of time. But it generally stays low as long the central bankers intervene and give away money, as they are doing now.

The VIX is called the "fear index" for a reason. It measures how much fear there is the in the market. Conversely, It can also be thought of, as it should be today, as the "un-fear" index because it also measures greed.

In this case, greed is not a negative, but an agnostic term.   

Who doesn't like free money for the stock market? Not much fear in that. So you can buy today with confidence knowing that there will be another guy in line tomorrow ready to buy, his pockets lined with fresh, central bank money.

Lows, however, on the VIX, are eventually followed by periods of sharp fear, usually caused by unforeseen events: Tsunamis can cause fear to spike; wars can drive the VIX up. Or even vacations at Martha's Vineyard can cause fear, especially when taken after you screw up debt ceiling negotiations, which result in a weird sequester idea that you never, ever think will be implemented because: 1) you're smarter than everyone and; 2) you have the transcripts from Accidental College to prove it.

In Obama's case, fear could be caused by a combination of all three of these events. 

Liquidity- that is our supply of money - has never been greater thanks to the Fed's free-money-for-people-not-named-you policy.

The broadest measure of money supply, M2, is over $10 trillion in the US and still growing at a robust pace. China leads the world in creation of new money. Then there are the aggressive efforts in Europe and Japan for money creation to stimulate economies around the world.

So there is a big wad of cash just sitting there waiting to work.

But the velocity of money- the element that would take all that money and turn it into jobs- has never been slower. The velocity of money measures how quickly money changes hands in the economy.

The velocity of money multiplied by the amount money supply on hand, generally, is a good way of pegging where inflation is supposed to be. It’s kind of the E=MC2 equation for the financial world.

If inflation is low, even though there is a ton of money out there, then the velocity of money must be really, really, really low, as indeed it is.       

Companies aren’t spending that cash on much. They’re banking it instead.

Money goes into things like the stock market and gold and oil and silver and taxes and stock buy-back programs.

Thus the market goes up, while the fear index goes down, down to historically low levels.

And now there is only two ways that this can end.

The stock market will continue to go up based on a new golden age where fear in the market just keeps shrinking. And, as a consequence, the fear index will continue to go down.

Or it won’t.

The end.