Investing and the VIX

The riskiest moment for investment firms and individual investors to commit capital to an investment is the best moment - or is it? In the past 25 years there have been four market bottoms: the 1987 crash, the 1990 Iraq war bottom, the 1998 LTC bottom, and the 2002-2003 dot com bottom and second Iraq war bottom. Characteristic of these four periods included four indicators; front page headlines of market pains, an Investors Intelligence survey of less than 40 percent bulls, large outflows from mutual funds, and a VIX reading above 40. A reading in the VIX of above 40 indicates pure panic in the market place. Given the VIX has moved as high as 80 on Oct 27, the highest it has ever been, you may think and still think even at 53, where it is today, that investing would be a viable option. Knowing how close we came to a second great depression, had we not had the knowledge of the first one and the methods to prevent another one, we can pretty well gauge that it was entirely possible. Seeing the VIX jump to 80 is understandable given that possibility, but this may not be the best moment to jump in for investment firms. If you look at volatility during the Great Depression and the 1907 Bankers Panic, which was as high as present fear values, the fallout was more severe.

Even though we have the tools available to prevent the collapse of the financial structure of the country (so far so good) we may be in a situation similar to the 1929 and 1907 crashes; a long term decline in the stock market. Whats different about the four bottoms previously mentioned is that there was a bounce back. There wasn't a bounce back in 1907 or 1929. During those crashes the market headed a lot lower following the sharp rise in volatility. The question then becomes, are the stops in place today able to stop a long term decline in stocks? The amount of debt and the debt mentality of this country isn't changing and won't change until our standard of living and quality of living decline to levels unbearable (modest in comparison to other countries). Saving is the most important financial policy that firms, governments, and individuals should keep (China's savings rate is 40 percent while the USA's is...zero percent, the lowest since the Great Depression). Until this sinks in we will continue putting band-aids on a rotting system. We will eventually have an enormous ball of band-aids holding together something that is no longer salvageable. When we unwind the ball of band-aids and heal the real underlying problems in the system, it will be safe to enter the market again. Lets just say it will be a while.