The Herald Bulletin

Morning Update

Breaking News

June 24, 2014

Who put sleeping pills into Wall Street's water?

NEW YORK — Is the lack of fear on Wall Street something to fear?

Sunni extremists are inching closer to Baghdad. A housing bubble in China is deflating. Russia is massing troops near the Ukrainian border again. Military forces in Egypt and Thailand have staged coups.

In a world suddenly more dangerous, you'd think fund managers and traders would be selling and buying and selling again in a frenzy of second-guessing. Instead, they're the picture of calm and contentment.

People are trading 38 percent less each day than they did four years ago. Prices of bonds and stocks are barely moving day by day. For 46 days in a row the Standard and Poor's 500 index has risen or fallen by less than 1 percent, a state of serenity unmatched since 1995. Then, last Wednesday, Federal Reserve Chair Janet Yellen told investors the U.S. economic recovery was on track, and things got really dull. A gauge of expected swings in stock prices, known as the "fear index" among traders, sunk to lows not seen since 2007, when stocks began a 2 ½ year plunge.

Which helps explain why the calm may not last: The lack of fear is spooking some people.

"It's quiet out there," says Robert Buckland, chief global stock strategist at Citigroup. "Eerily quiet."

As with weather, the theory goes, so with markets: Calm often precedes storms. Investors get cocky, take on too much risk, and prices of stocks and bonds collapse.

Most professional investors, strategists and economists don't appear worried that the lack of worry is leading to reckless bets, not yet anyway. Yellen, for one, says there's little evidence of trouble brewing. But a few dissenting voices see trouble aplenty.

Investors are borrowing money more than ever to buy stocks. Sales of "junk" bonds from the riskiest companies are at a record. Some investors are so heedless now that they're willing to accept rock-bottom interest payments to lend to risky countries.

Spain, struggling to collect taxes from a population facing 26 percent unemployment, is paying just 1.3 percent to borrow money for five years, less than the U.S. pays.

Says Michael Lewitt, founder of the Credit Strategist Group, an investment manager: "No one is afraid of anything."

The list of things to shrug off over the past three years is lengthy: two dozen government collapses, surprise military moves and mass demonstrations.

That tally comes from a recent Citigroup report that, predictably, created few waves. Titled "Taking It To The Streets," it attributes much of the political turmoil lately to a combustible mix of angry middle classes and the ease with which they can organize using the Internet and social media.

In Italy, "Pitchfork Protests" broke out over political corruption and unemployment in December as demonstrators blocked roads and occasionally clashed with police. In Brazil, people have taken to the streets over high transportation costs and expenses for hosting the World Cup.

The Citigroup report suggests this new "vox populi risk" isn't going away soon and asks, Why so little reaction from investors?

David Levy, chairman of the Jerome Levy Forecasting Center, blames "fear fatigue." Investors have faced down lots of trouble over the years, from a European debt crisis to a pair of near defaults by the U.S. government. None of these things have kept stocks down for long.

"It's hard to be scared all the time," Levy says. But, he adds, "The more sectarian violence, the more countries fighting civil wars, the greater the potential for something going wrong."

Another reason for calm is central banks. From Tokyo to Washington and London, they've kept short-term borrowing rates they control low and bought trillions of dollars worth of bonds to push down long-term rates, too. Many investors are convinced little can upset markets as long as central banks are willing to pump money into the financial system.

The problem is, panic can spread fast at times when there is little trading. A few big sales can push prices down dramatically. That is what happened last summer, when owners of municipal bonds found few buyers during a bout of selling. Panic mounted and prices plunged.

Other areas of the $100 trillion global bond market are vulnerable, too. Some investors have been fretting for years that bonds are due to drop after a three-decade bull run. With the low levels of trading in some corporate and government bonds, the fear now is a single big move could push them over the edge.

Japanese government bonds may be especially fragile. Credit Strategist's Lewitt notes that some 70 percent of these bonds are bought by the country's central bank upon issuance now, then held to maturity instead of re-sold on the market.

The lack of supply means that the first trade in Japanese bonds some days doesn't occur until the afternoon, which is stunning considering that Japan's government debt market is the second-largest in the world. Lewitt fears that prices could suddenly drop in that thinly traded market, walloping investors with losses, spreading fear and setting off selling and losses elsewhere.

"All markets are linked through webs of ownership," says Lewitt. "There's no escaping."

That said, it may all work out in the end.

Buckland, one of the authors of Citi's "vox populi" report, notes that periods of calm don't always presage turmoil. In 1995, for instance, the fear index was also low. The S&P 500 ended that year up 38 percent, including dividends.

Then there is this line of argument, offered up in a June 13 report from Charles Schwab: With more people worried about the lack of worry, maybe it's the wrong time to worry.

If you don't find that logic convincing, assuming you can follow it, there's a way of betting the calm will break: Buy a stake in the clumsily named VelocityShares Daily Long VIX Short-Term ETN, a fund that tracks the fear index. The price of the fund will rise as people get worried.

But you better hope for nothing short of Armageddon. Despite all the chaos in the world this year, the fund has dropped 32 percent.

 

1
Text Only
Breaking News
  • Beef pollutes more than pork, poultry, study says

    Raising beef for the American dinner table does far more damage to the environment than producing pork, poultry, eggs or dairy, a new study says.

    July 22, 2014

  • High child poverty casts pall over gains in Hoosier schools

    Indiana children are doing better in school, according to a new report from the Annie E. Casey Foundation, but the high rate of child poverty remains a big concern.

    July 22, 2014

  • Check doctors' vitals, before they check yours

    Americans consider insurance and a good bedside manner in choosing a doctor, but will that doctor provide high-quality care? A new poll shows that people don't know how to determine that.

    July 21, 2014

  • Afghan vet who fought wounded gets Medal of Honor

    Bleeding from both legs and his arm, Ryan Pitts kept firing at about 200 Taliban fighters, even holding onto his grenades an extra moment to ensure the enemy couldn't heave them back. On Monday, President Barack Obama draped the Medal of Honor around his neck, in a somber White House ceremony that also paid tribute to his nine platoon comrades who died that summer day in Afghanistan.

    July 21, 2014

  • NASA names building for moonwalker Neil Armstrong

    NASA honored one of its most famous astronauts Monday by renaming a historic building at the Kennedy Space Center in Florida.

    July 21, 2014

  • Indy to use computer game to teach kids about law

    Indianapolis police are trying out an interactive computer game based on television's "Jeopardy!" to prevent teenagers from falling into lives of crime by teaching them about the consequences of breaking Indiana's laws.

    July 21, 2014

  • McDonald's, KFC in China face new food scandal

    McDonald's and KFC in China faced a new food safety scare Monday after a Shanghai television station reported a supplier sold them expired beef and chicken.

    July 21, 2014

  • Friend convicted of impeding Boston Marathon probe

    A college friend was convicted Monday of trying to protect Boston Marathon bombing suspect Dzhokhar Tsarnaev by agreeing with another friend to get rid of a backpack and disabled fireworks they took from his dorm room three days after the attack.

    July 21, 2014

  • Hopkins settles pelvic exam suits for $190 million

    Johns Hopkins Hospital has agreed to a $190 million settlement with more than 8,000 patients of a gynecologist who secretly photographed and videotaped women's bodies in the examining room with a pen-like camera he wore around his neck, lawyers said Monday.

    July 21, 2014

  • Train with plane crash bodies leaves rebel town

    A refrigerated train bearing the bodies of many of the 298 people killed in the Malaysia Airlines plane disaster pulled away Monday afternoon from a rebel-held town in eastern Ukraine.

    July 21, 2014

Featured Ads
More Resources from The Herald Bulletin
AP Video
Raw: Israel Bombs Multiple Targets in Gaza Veteran Creates Job During High Unemployment Raw: Cargo Craft Undocks From Space Station Widow: Jury Sent Big Tobacco a $23B Message New Orleans Plans to Recycle Cigarette Butts UN Security Council Calls for MH 17 Crash Probe Obama Bestows Medal of Honor on NH Veteran Texas Sending National Guard Troops to Border Hopkins to Pay $190M After Pelvic Exams Taped Foxx Cites Washington 'Circus Mirror' NASA Ceremony Honors Moon Walker Neil Armstrong Obama Voices Concern About Casualties in Mideast Diplomacy Intensifies Amid Mounting Gaza Toll AP Exclusive: American Beaten in Israel Speaks Obama Protects Gay, Transgender Workers Raw: Gaza Rescuers Search Rubble for Survivors Raw: International Team Inspects MH17 Bodies Raw: 25 Family Members Killed in Gaza Airstrike US Teen Beaten in Mideast Talks About Ordeal 'Weird Al' Is Wowed by Album's Success
Parade
Magazine

Click HERE to read all your Parade favorites including Hollywood Wire, Celebrity interviews and photo galleries, Food recipes and cooking tips, Games and lots more.
Hyperlocal Search
Premier Guide
Find a business

Walking Fingers
Maps, Menus, Store hours, Coupons, and more...
Premier Guide
Helium debate
Helium
Front page
Poll

Do you expect your physician to follow state standards and laws?

Of course
Not always
Never thought about it
     View Results