VIX STILL fighting the equity mania
5 Day Correlation: VIX Index and S&P 500 Index. Click for larger image
Riding on the back of continued gains in equity indexes, TCM strategies were all substantially higher in August. The mania in tech names in particular has become reminiscent of the late 90s, boosting our Smart Tech strategy by nearly 30% since May and over 10% in August alone. Curiously, late in the month the VIX index began rising alongside equity markets, bucking the normal inverse relationship and suggesting discomfort with the market’s torrid pace or perhaps growing apprehension over the coming US Presidential Election.
Money Games
While those fortunate enough to own assets celebrate their nominal gains, we are reminded of a college party where guests played games to earn play “dollars” that could be used to bid on such coveted prizes as a gift certificate to the local Chili’s. While the preoccupation among starving students was with competition in the game room, in reality the real action was in the money room.
When vying for resources with ring-toss and dart skills proved tedious, new money began to find its way into the hands of the organizers near the vault upstairs- slowly at first, then growing increasingly bold as the night wore on. While obscene sums began to be exchanged for increasingly questionable “games” upstairs, activity in the downstairs economy dwindled as hours of game earnings now barely registered on the bid sheet. With the best prizes impossibly out of reach, participants focused on buying the items they could as their prices also steadily rose, all the while marveling at the vast resources of the organizers upstairs, never understanding the real game.
While stock prices soar as the Fed prints and funnels trillions to mega-cap tech companies through its bond purchases, it is important to keep in mind that every new dollar is also a new claim on society’s resources. Similar to a stock split, manipulating the value of the dollar is an accounting maneuver that creates an illusion of wealth, with real costs for everyone and true benefits for only a select few. If the market ever comes to this realization, the adjustment could be dramatic; investors today would be wise to have a plan.