January 26, 2004

Discounting the Election

One of the reasons the VIX is so lowly is that no one thinks much of anything will happen between now and the election. In other words, there won't be a change in the dollar policy (i.e. the U.S. monetary authorities will let the dollar slide and force others to do something about it.) or in interest rate policy--low rates, after all, being the engine of the housing boom. This begs the question of what would happen AFTER the election...and if markets discount the future...won't they discount what's going to happen after the election BEFORE the election? THAT depends on how certain you are which things would definitely happen after the election. And of course, no one can be sure that, for example, interest rates WILL rise after the election, taking some of the currency pressure off Europe and Asia. It's one thing to buy the rumor and sell the news. It's another thing to try and guess what the rumor will be and trade it ahead of time. The further you get ahead of the present in your prognostications, the more speculative your forecasts become. After awhile, it's just educated guessing, at best. But...if everyone is certain rates will rise after the election...a truly efficient market, reflecting the opinions of all the actors, would price the rate increase before it actually happened...i.e. before the election. Wouldn't it? Unfortunately, the future is so murky right now...that no one seems comfortable taking a strong position on the future of interest rates. Thus the complacency. Incidentally, one good way to take advantage of the complacency is to buy puts on IIX.


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