Friday, January 18, 2013

Wall Street Back In Greed Overdrive, circa 2007

There have always been disconnects between what the greedbots on Wall Street perceive to be reality versus what the average American is experiencing, however, today's chasmic divergence between these two worlds is as wide as it has ever been...

Just today, consumer confidence came in at the lowest level in a year. While the article says the fiscal cliff was cited as a key concern, this survey was taken after the fiscal cliff deal was struck on January 1st. In addition, today's reading came before the new tax hike came into effect, so it was a window of time that was optimal for obtaining a relatively optimistic reading. Which explains why Wall Street didn't anticipate such a big drop in sentiment - they were expecting consumers to be ebullient at the prospect of a five week fiscal deal i.e. in line with the reaction of the parabolic stock market.

Meanwhile, the other half of the disconnect came this morning when the VIX options volatility index hit "13", its lowest level since July 2007 (as of today's close it's actually well below 13).  As you see below, July 2007 was when the Dow made the first top of its all time high. The black line is the VIX which measures the level of investor "anxiety" as imputed from options prices. Suffice to say, that speculators who bought put options the last time the VIX hit 13, did "well", because the morons who price options always underprice them at tops and overprice them at bottoms. And exactly why investors would feel as complacent about the market today, as they did at the all time high in 2007, will be the question for all ages. We know one thing - as it was in 2007, this will all resolve in the direction of reality, which is down: