Gresham, Fisher, Volatility
(Gitanshu Buch,
June 2003)
1. A Savvy Spec
alluded to the invocation of Gresham's Law in connection
with FRB fighting deflation. I finally found it.
http://www.dallasfed.org/htm/research/pdfs/bd0503.pdf
5/03 presentation by Dallas Fed VP and Economist, mulls
various options in
zero interest rate environment for stoking economy.
These options summarize as follows, and generally achieve one
objective: put
cash in investors' / consumers' hands, and take risk off their
hands. they
will spend it and restoke the economy.
It doesn't matter if the FRB loses $ on the trade.
Alternatives listed:
- FRB's open market purchases of T-bills = cash in hands of
investors, debt
retired.
- buying foreign currencies with newly printed US$ won't work
unless the
foreigners collude, since they can print more to neutralize
our buying.
- buying ginnie/fannie like debt in addition to t-bonds/ 1 to
n-yr notes.
- buying real assets, gold and equities (though currently
prohibited under
the Fed Act, certain emergency provisions exist).
"Quote of the day" from this paper, when referring to buying
back longer
dated govt and quasi-govt debt as the neatest choice (hence
p'haps used by
FRB Chairman in recent congressional testimony when pointedly
asked about
plans to fight deflation):
"No one, we believe, has a good QUANTITATIVE sense of the
mechanics of this
strategy."
Emphasis theirs.
It must be great being the FRB.
...
Gresham's Law, per Murray Rothbard in A History of Money
and Banking in the
US before the 20th Century [ ISBN 0945466331 ], states
that when government
compulsorily overvalues one money and undervalues another, the
undervalued
money will leave the country or disappear into hoards, while
the overvalued
money will flood into circulation.
He was talking about Britain's experiment with silver & gold
currency
manipulation in the 1800's, but who's complaining. 3rd world
childhood
permanently burns the meaning of "flee" and "hoard" into your
head.
...
2. Interesting observation by Kenneth Fisher in the current
Forbes.com,
online by free registration, but link here anyway:
http://www.forbes.com/forbes/2003/0623/162.html?_requestid=141
Quoting pieces:
"Test yourself. What is the more likely return for the market
in any given
year--say, 2009: (a) something between 0% and 20%, or (b)
something outside
that range? "
The long-run average is 10% a year. Figuring that the results
cluster
closely around the average, most people would bet that (a) is
the correct
answer--that stocks return between 0% and 20% most of the
time.
The truth is just the reverse. Since 1925 the market has
fallen within the
0% to 20% band in 24 years, or 30% of the time. In 70% of the
years the S&P
500's total return was either better than 20% or negative. Big
moves are the
norm in the U.S. "
Not something one can't measure for oneself...
And then draws the following conclusion:
"Look at rolling ten-year periods in the history of the U.S.
market, and
measure the size of the smallest round-trip, meaning moves
from high to low
and back within the decade. The quietest ten-year interval was
1963-72, when
the swing was 34%. The biggest swing came in 1929-38, at 97%;
the average
swing was 57%. Those are big enough numbers to drive most
folks crazy. Don't
go crazy. After three bad years prepare yourself for upside
volatility, the
good kind"
...
3. This past week, the Vaunted VIX went up 5 days in a row
with the OEX/SPX
going up on the first 4 of those 5 days (and into early
Friday).
Nobody knows what happened after, for it shattered the
illusion that
volatility only goes up in the stock market when prices go
down...
Free historical VIX data from CBOE:
http://www.cboe.com/MktData/vixarchive.xls