For a permabear like Societe Generale strategist Albert Edwards, this week’s correction is further proof that markets aren’t as healthy as they seem but not a reason to relent. Instead of having some relief that equities’ full valuation have come down a bit, he’s wondering why volatility always seems to accompany bear markets instead of bull markets, and what might happen if bond market volatility picks up.
Albert Edwards worries about rising bond volatility
“What I have never really been able to understand is why vol only rises when the market declines,” Albert Edwards writes. “But the chart and maths tell me that markets must rise in a smoother way than they decline – the latter being violent and often disorderly as years of gains are often wiped out in a few months.”
Albert Edwards, who claims that he has “absolutely no idea what my colleagues in our derivatives department are talking about 95% of the time,” prefers to look at realized volatility instead of the VIX since the two measures are nearly the same, but it’s more straightforward to calculate the former using the 90-day standard deviation of daily market changes.
He says that FX volatility has been contributing to equities volatility, and wonders what would happen if bond volatility also starts to pick up. He doesn’t make any specific predictions Most analysts expect US bond yields to go up (they hardly have any further down to go), so if volatility behaves the same way in a bond bear market as an equity bear market we may find out.
Albert Edwards says he isn’t the only ‘stopped clock’
It’s easy to Albert Edwards’ and other perma-bears’ constant warnings, but he points out that no one complains when the eternally optimistic get it wrong wrong.
“As an uber-bear I am used to being called a stopped clock,” he writes. “By contrast the market embraces a bullish forecaster however often they are shown to be overly optimistic… The market loves a bull, even if it is a stopped clock too.”
In this case, he’s talking about the IMF, which recently published another set off bullish global GDP growth projections, and investors welcome the good news even though the IMF’s projections in previous years have been ‘serially wrong,’ says Edwards.