(Some) Volatility Is Good For You, Stability NOT REALLY MUCH

All of this runs counter to the propaganda with which we are regaled on a regular basis. For example, investors are informed that the lower the volatility of their portfolios, the lower the risk. But, in 2008 that turned out not to be true. Recently, as volatility in the broadly viewed S&P 500 resolved right down to historic lows this season, investors thought that the magic of low volatility was to stay here.

Central banks–through their regular interventions when marketplaces started to fall–had somehow constructed a no-lose situation for traders. The annals of volatility in markets and in life suggests that high volatility lies just throughout the bend after a prolonged period of low volatility. It is impossible to say what would trigger the type or kind of crash we saw in 2008. For the present time, the Chinese stock market crash and recent negative financial news in China and the United States have unnerved many investors. The Chinese stock market is currently more than halfway to a 2008-style meltdown.

Stocks in Europe and the United States have finally began to fall in earnest after holding up and even improving in the face of major declines in rising markets such as Brazil, Indonesia, Malaysia, and Turkey. Money rushed from the growing marketplaces to major developed economies looking for–you guessed it–stability. In the wake of the 2008 crash central banks and governments were determined to revive economic growth.

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They didn’t care and attention that we got too much manufacturing capacity, too much housing, many banks too, too many brokerages, and an excessive amount of many other things as well. That excess had to be adopted by consumers and businesses with usage of cheap borrowed funds, funds those groups would spend to regenerate the economy.

Marginal businesses, overleveraged speculators in real property, and insolvent banking institutions and brokerages had to be bailed out so they could live to speculate and operate another day. The excesses of the prior bubble would be carried over to another. Few would be disciplined for his or her errors. The seeming market balance and low volatility engineered by central standard bank connection buying and zero interest policy after the 2008 crash is an illusion. It is very much like the illusion that a quiescent earthquake fault gives to the people who live over it. The stress on the unseen fault builds over a long period gradually.

Everything is fine until the sudden adjustment comes and the ground starts to shake taking highways, bridges and buildings with it. It is the geological equivalent of a market crash. But as Nassim Nicholas Taleb and his coauthor, Gregory Treverton, this year in Foreign Affairs described previous, these ideas about volatility apply not only to markets, but to entire countries also. The piece contrasts the seeming stability of Syria with the relatively chaotic environment in Lebanon before the Arab Spring. But Lebanon which has had to adapt itself to new conditions after a 15-season civil battle has proven robust in the face of wide-spread upheaval throughout the center East.