VIX Falls as Fear Returns

Fear is looking cheap again.

The Volatility Index fell yesterday to 18.98 – its lowest level since April 29. That date happens to fall a few days after the Dow and the S&P hit their post-2007 highs…and a few days before the May 6 “flash crash.”

If you’re not familiar with the VIX, it’s a measure of fear in the market, based on what people are paying for options on the S&P 500.

VIX Decline

Today, even as fear rises ever so slightly, the VIX struggles to break through 20.

“We are getting close to extreme territory,” said Chris Mayer on April 12, when the VIX sat below 16. “We are near the limits of what that great rubber band of life will absorb before it snaps back. The VIX usually hovers between 10-20. So we are not quite there yet, but the tension is building.”

He went on to cite some of the factors…

“The financial system is still a rather creaky affair. Leverage is still high. Banks remain undercapitalized. The credit cycle has not yet run its full course, as there are still significant credit losses hiding in the cupboards of banks.

“Then there are the governments of the world. The US has awful credit metrics. It is bleeding money and owes huge debts. The states are also bleeding money and have large debts, including giant gaps in unfunded pension liabilities. They are perhaps worse off, because unlike the US government, the states cannot print their own money. Then there is the EU. And Japan.”

We ask this morning: How much of this has changed, six months later to the day?

Addison Wiggin
for The Daily Reckoning