Alex's Blog

Volatility cycle post Lehman

The value of investments and the income they produce can fall as well as rise.


I have talked about Quantitative Easing in previous posts and I strongly believe it will remain relevant specifically when we consider investments.

The pattern we see has been in evidence since late 2008 can be summarised as below:

  • A QE programme is announced and markets rally hard to a cap resistance point, e.g. 7000 points on the FTSE, once the programme has run its course markets stabilise and begin to decline but with considerable volatility
  • The market nears floor resistance point, if we are considering the FTSE as a benchmark again then this might be around the 6000 point mark. The market remains volatile and hovers above the resistance point threatening to breach the floor
  • Governments and Supranationals start to panic fearing a catastrophic decline in global markets. Pressure on ECB, Fed, BoE, etc. from long only pension and asset managers and other institutional investors to intervene with a new stimulus package
  • Increased volatility and possible breach of floor (resistance point) as markets wait nervously for details the next QE programme announcement, where for example, the most relevant variable might include the size of the stimulus
  • Next QE programme is announced and markets rally hard
  • The cycle continues …

Things to note are, QE is becoming less effective and Supranationals and Governments are becoming wary of using these measures for fear of creating another asset bubble (we are already in one again) but they are also aware that they have no choice but to continue using QE otherwise markets are likely to plummet.

A point to note is that pretty much all banks, hedge funds and asset managers have been and are making their secondary market profits by ‘trading volatility derived from QE stimuli and other Government and Supranational liquidity provisions’. This has been going on since post September 2008 (after the Lehman default).

A CVolatility cycle post Lehman