Palisade Research - Tue, Feb 6, 2018

Volatility isn't as Rare as They Tell You - So Use It

painting of a snow capped mountain with a lake and red arch in front

When will we learn from the ghost of Hyman Minsky?

"Low volatility breeds high volatility."

Don't know who that is?

Don't worry - almost no one does. . .

And that's a good thing because it gives us a great competitive advantage.

Hyman Minsky was an economist who passed away in 1996. He came up with many interesting things, but the most important two in my opinion was his views on volatility and behavioral economics.

He explained that years of prosperity and long periods of calm markets are what create excessive risk taking and reckless speculation.

Therefore, the current low volatility is the foundation for extreme volatility in the future.

Otherwise said, when investors feel safe and complacent, they take on more risky investments because of feeling secure.

This is more important than ever in today's easy money and debt fueled markets.

I decided to test Minsky's theory.

I looked at the VIX - the volatility index - over the last year.

And sure enough, long periods of low-volatility are met with sudden huge spikes in turbulence. . .

13-months line chart of the CBOE Volatility Index

For instance, in the last year the VIX has soared over $15 on five separate occasions.

That's roughly once every 73 days. . .

What I'm getting at is volatility isn't as rare as the experts make it out to be.

Look how much the VIX has gone up since January 18th - after five months of relative calm.

Good ol' Minsky was on to something.

Going forward it is important for us to remember that the periods of calm and euphoria are met with sudden spurts of volatility.

Don't get caught off guard - instead you should embrace the inevitable high turbulence.

By finding assets that do well during volatility - my favorite is the junior gold mining stocks and put options on overvalued stocks - you can position yourself to make huge gains during the chaos.

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