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The Official Cambridge Dictionary defines the term “jaunty” as: “showing that you are happy and confident”.
With a Dow at 11,000 and most European indices striking new 52-week highs I feel that jauntiness has return to equity markets worldwide.
While this alone is not surprising (markets have always swung from pessimistic to optimistic and back), the rapid and extreme trip from the March 2009 dooms days to April 2010 sunshine strikes me as overly optimistic.
Especially since most questions regarding our economic future remains unanswered, such as the US and UK consumer debt levels of the post-2000-era.
As today’s news of the EU Greek bailout make obvious, we have just shifted the global debt burden from private into public hands through the bailout of the banks.
I find it fascinating how global equity markets show almost no reaction to the current public debt debate. Just imagine what would have happened if Greece had stumbled in late 2008 or early 2009.
The market’s view on risk was just completely different back then.
One of the European Union member states almost goes broke? You think this is big news, the market’s reaction: yawn.
A good indicator of the aforementioned jauntiness is the price investors have to pay for portfolio protection. Most commonly, market observers look at the implied volatility of index options to get an idea of the price investors are willing to pay for protection.
Just take the German market as an example: the VDAX (a volatility index) has just hit a two-year low and now trades at a significant discount to its long-term average of approximately 20.
Click here for an up to date chart
As witnessed during the 2004-2007 goldilocks (not too hot and not too cold) economic environment, volatility can decline to unprecedented lows and stay there for, what seems, an awfully long time.
But, low volatility gives us the chance to buy cheap portfolio insurance in the form of index put options against possible black-swans (sharp unforeseen market corrections).
The paradox is that insurance is the cheapest when nobody seems to need it.
You may thus want to stock up on some out-of-the-money index put options while Ms. Market enjoys her jauntiness.
You never know what may happen.
Tim du Toit is the editor of Eurosharelab. Kindly note that this blog is published for
information purposes and is not investment advice. Please refer to our disclaimer.
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