A few years ago I took my son in what turned out to be an absolutely terrifying rollercoaster ride while vacationing in Florida. Yes, I admit, those five minutes scared me, and as hell-ride neared its end I sincerely worried that my five-year-old had been turned in his seat.
I reached, I found the hand (with some relief) and asked if I was okay. He paused, breathed, and said, "That was awesome!"
Which of course brings us to invest. These are times of volatility in equity markets - enough to give many an investor a bad case of nausea. The VIX, the Council Exchange key measure of volatility in the S & P 500 Chicago, fired several times throughout January. In Canada, the VIXC (measuring volatility in the S & P / TSX 60) saw big jumps in the autumn and winter, and still is about 75% higher than it was last September. And in oil futures, volatility is 400% from its 52-week low, as measured by the Chicago Board of Exchange Volatility Index crude oil.
It is generally accepted that the higher volatility of an investment, the greater the risk. But how much or how real that risk is may depend on your point of reference. History shows that volatility peaks around recessions, as it did in 2008. But also peaks during minor events such as the eurozone crisis of 2010 or the Asian financial crisis of 1997. What were, well, not so great disasters in the grand scheme.
One reason is difficult to know what the volatility appears to be driven by many uncertain data points. What seems we are witnessing is the contrast between what the economist Fischer Black called information and noise. "People sometimes trade on the information in the usual way. They are right to expect profit from these businesses," he wrote in 1985. "On the other hand, people sometimes traded on noise like information. If expect to make noise gains from trade are wrong ".
Even a glance at the financial headlines will make clear that there is much noise about the markets these days. The media are paid to talk, it's true. And back in the day, the street basically ignored them - thinking that by the time information reaches the papers, it is too late. But times have changed, and now plugged, investors always faced with staff equivalent of Big Data: information and opinion and analysis of what apparently know what to do with it.
Geopolitically, economically, the news is good one day, uncertain or downright bad the next. US corporate earnings for Q4 2014 came quite strong. Meanwhile, in Europe, Greece and the EU are playing an interplay of chicken on debt and austerity, the result of which may (or may not) decide the fate of the European Union itself or send global markets into a tailspin. A little further east, Russia and the West are prepared for a confrontation over Ukraine. Far to the east, the China trade data entered on the low side - another sign that the world's second largest economy is slowing faster than feared.
Then there is the oil price. One day, an OPEC official says he sees falling prices get much worse (this after prices have been reduced by 50%). A few days later, the International Energy Agency announced that it is "business-as-unusual" for the oil markets. And somewhere there Citigroup published a report saying that $ 20 a barrel could be just around the corner (along with the end of OPEC). This, incidentally, is just the big things that is covered in the financial press - for cable television commentators, the cup runneth over with speculation on oil prices. What does this mean? Who the hell knows?
In this context of global uncertainty, central banks are just behaving uniformly - easing in Europe and Japan, tightening in the US Oh, and then there was the sudden rate cut by the Bank of Canada, who noted that perhaps our central bank could not 't really understand what is happening in the economy.
Fischer, incidentally, also predicted that one day (when their trade theories noise would be widely accepted) "The conventional fiscal and monetary policies will be viewed as ineffective."
Perhaps we are not yet there. But while the markets are trying to figure out what things are worth, we can expect more volatility, maybe more. And that leaves investors two options: stand aside and watch the roller coaster genius - or hang on for the ride of your life.
