The end of volatility

The last week may represent the end of volatility and further ascent of manipulated markets. With a fall of just under 40% in five days, the greatest in 25 years since the VIX contract began trading, the market has said fear is gone, risk is gone, uncertainty is a thing of the past. Now I don't really believe that uncertainty is gone for good or that volatility has truly disappeared but the fall after the Greece and China crises suggests that global markets are just being manipulated through government intervention and regulation.

There is no tail risk in markets because governments do not want anyone to feel the pain of loss. China has outlawed downside risk. Through providing liquidity, changes in margin lending, stopping supply through a suspension of IPO's, restrictions on futures trading, and pressuring the direct purchase of stocks, market signals have no meaning. There is no sense of valuation. If you think stocks are worth less, it does not matter. Governments will keep prices from collapsing. There is big differences from price limits or circuit breakers to slow market declines and give investors time to assess versus the current no downside rules. 

Greece is a similar story. Private investors and depositors have said they do not believe the markets are safe. That does not matter. The governments will use their ability to create liquidity to get  these financial firms alive even though everyone realizes the banks are not solvent and the government will not be able to make good on their plans. 

The QE programs have moved well beyond the providing of liquidity during a crisis to supporting fixed income markets and banks around the world. Central banks are the largest holders of Treasuries. The Fed does not have a creditable plan for reducing its balance sheet and is the market for many issues. Central banks do not believe the markets can function without their support.

It is no wonder that volatility has declined and will stay low until we have the period of reckoning when governments have to give up their role as protector or does not have the power to stop market forces. This will only lead to more concentrated risks