What IS market volatility anyway??? Here's a somewhat brief discussion...
Volatility for market players
When investing directly in a security, volatility is often viewed as a negative in that it represents uncertainty and risk. However, with other investing strategies, volatility is often desirable. For example, if an investor is short on the peaks, and long on the lows of a security, the profit will be greatest when volatility is highest.
In today's markets, it is also possible to trade volatility directly, through the use of derivative securities such as options and variance swaps. See Volatility arbitrage.
Volatility versus direction
Volatility does not measure the direction of price changes, merely how dispersed they are expected to be. This is because when calculating standard deviation (or variance), all differences are squared, so that negative and positive differences are combined into one quantity. Two instruments with different volatilities may have the same expected return, but the instrument with higher volatility will have a larger swings in values at the end of a given period of time.
For example, a lower volatility stock may have an expected (average) return of 7%, with annual volatility of 5%. This would indicate returns from approximately -3% to 17% most of the time (19 times out of 20, or 95%). A higher volatility stock, with the same expected return of 7% but with annual volatility of 20%, would indicate returns from approximately -33% to 47% most of the time (19 times out of 20, or 95%)
Volatility is a poor measure of risk, as explained by Peter Carr, "it is only a good measure of risk if you feel that being rich then being poor is the same as being poor then rich".
So... what does that mean, if anything, to people involved in the financial markets?
Here's something I've been thinking about a little bit...
The banks got TRILLIONS of dollars of tax payer money from the government at the height of the financial crisis... In both cash and guarantees. Remember that?
We HAD to give them the money because they had a (BIG!) gun to our collective heads and were threatening to go bankrupt and totally destroy the world economy if we, the American people, didn't bail them out, ie; cover all their losses from horrible over-leveraged 'bets' that they had made based on faulty mathematics models...
A lot, if not nearly all, of that money is still sloshing around in the banking system to this very day...
What were the main 'concerns' during the crisis? Liquidity and cash... The banks were ALL insolvent! They had to have huge cash infusions to keep them afloat. Not that the money was EVER intended to enter the real economy and help any there... That would/could cause rampant inflation, not a good thing. The money, OUR money, was always intended only for the balance sheets of the banks... To prop them up, to prevent bankruptcy, to make it appear as though our financial system was still on solid ground. To show that the banks had plenty of money...
After all the accounting fraud that allowed banks to hide toxic assets with things like 'Mark to Fantasy'... Then what?
So really the most important issue was for the banks to repay the tax payer money, of course, but also to somehow increase their own profits exponentially. To recapitalize. Smack in the midst of the worst recession/depression America has seen in at least decades, possibly ever...
So how could the banks possibly hope to make huge profits in an economy that they themselves had just totally wrecked? Tough problem...
Enter the markets... Equities... (and likely forex too)
This is where we get to volatility and market manipulation...
One way banks, especially the LARGE ones (which, coincidentally, happens to be the ones in the most 'trouble') can make profits is through trading in the markets...
Now just supposed what would happen, could happen, IF world governments and world central banks were to collude with each other in order to control stock markets?
Collude:
# conspire: act in unison or agreement and in secret towards a deceitful or illegal purpose; "The two companies conspired to cause the value of the stock to fall"
wordnetweb.princeton.edu/perl/webwn
# Collusion is an agreement, usually secretive, which occurs between two or more persons to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage . ...
en.wikipedia.org/wiki/Collude
# to act in concert with; to conspire
Might they not do so when/if threatened with world economic and governmental collapse on a scale never before seen by mankind???
Me thinks they just might... But that's likely just the conspiracy theorist in me... lol
IF world governments and world central banks were to seize complete control of the markets what could they do?
F*ck with people... To put it simply... lol
IF the banks KNOW in advance that tomorrow the market will go UP 250 points and the day after that it will go DOWN 325 points that information would make it pretty easy to trade for profits no? Simply buy today and sell tomorrow...
What if that's what all this volatility is really about? Just a big vacuum cleaner hooked up to the rigged market casino in order to suck out immense amounts of capital?
That combined with a constant drum beat out of Washington, from the federal reserve, from a complicit media, about how much the economy is improving? Combined with governmental manipulation of economic numbers that has been going on now for decades... Like the understated, by half, unemployment rate. Like adjustments made to the way CPI (inflation) is calculated to hide the fact that your money is worth less year after year after year? Adjustments to the way GDP is calculated? And on and on...
After all, what good is data to governments if it can't be manipulated to win elections? Or to control populations? To paint 'pictures' of reality for society to admire...
Of course for one to believe the things *I* believe requires one to do the unthinkable... Believe in conspiracy...
Greg
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