Shhhh, It’s Quiet Out There

The Week Ahead

November 20, 2017

In equity markets, we’ve come to the point in the old western movie where our hero looks out over the horizon and warns that “it’s quiet out there…too quiet.” A run of low implied and realized volatility had some suggest that we’re somehow overdue for a big shakeout, not because valuations are high, but because it’s been such smooth sailing.

A recent NY Fed study put that theory to the test, and it comes up short. In general, realized equity market volatility is persistent and mean reverting, but there’s no tendency for a period of quietude to jump to a period of high volatility. Instead, when volatility is tame, the next month is more likely to also see below-average realized volatility, although over time a move back to the average is likely.

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Wait to See Plan C, or D

The Week Ahead

November 13, 2017

You might be tempted to spend the weekend pouring through the details of the US tax system and the Republicans’ proposed reforms. Don’t waste your time. As President Trump said about health care, who knew that wholesale tax reform could be so complicated? There will be a point at which investors and economists need to get into the weeds of the reforms, but we’re going to have to wait to see plan C, or plan D, before it’s worth the bother.

We already had Plan A, the House Ways and Means Committee bill, and yesterday marked the unveiling of Plan B, the Senate Republicans’ bill. But as anyone who has taken a US civics course would know, neither will become law in their current form. After each gets amended and then, in all likelihood, passed by their respective legislatures, a conference committee from both houses will have to meet and draw up a unified common bill for Congressional approval and Trump signage.

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Who’s in Charge Here?

The Week Ahead

November 6, 2017

Google will be flooded by those searching “Jerome Powell” now that his nomination for Fed Chair has been unveiled. Powell fits the bill as a Republican who has not dissented from Yellen’s gradualist approach, and no President really wants a hawk as his central bank’s chieftain.

But for two reasons, it’s hazardous to assume that Powell’s voice will be as decisive as Yellen’s or Bernanke’s in terms of the decisions reached by the FOMC. It might be as important to Google the names “Brian Madigan” and “Thomas Laubach”.

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