The surprise yesterday was gold. We’re always looking for congruence within the paradigms we’ve learned to believe in. I had heard somewhere gold was a safe haven play. During periods of fear or worry, in theory, we should see gold rise while money moves away from risky assets (like the S&P).
That didn’t happen yesterday.
We’ve been told over and over gold is a safe asset, real money. Those rules are too simplistic and after getting burned a few times we start doubting our basic notions. And the press doesn’t bother with details. If gold is up they’ll say “The Fed” and if gold is down, “Cyprus”. In reality information we never see is what drives these markets. In the case of gold it might be sovereigns buying (or selling), Fed fear, short covering, muppet trading, shenanigans in a dark pool, an Asian holiday, or a sublime combination. Traders scramble for an explanation, they scramble to mount another paradigm, to justify tomorrows trade. I do it, you do it, that’s the game. The game gets easier though when you accept that you’re basing a decision on incomplete, simplistic, and probably false, information. I can tell you categorically, whatever your model is, it’s wrong. In all cases, even Goldman Sachs, a Central Bank, or a sneaky congressman will eventually find his assumptions, wrong.
Today it’s the Euro’s turn to surprise. For all the justification we’ve built into our models: the Euro is doomed, the European markets are in a major funk, the Euro-Zone growth forecasts are dismal, housing is strong, the ECB is providing easy money, etc. yet… Parabolic moves contrary to the most preconceived notions, abound. How can this be? I’ll say it again. Whatever your model is, it’s wrong. You don’t have the ‘right’ information.
That’s not as pessimistic as it sounds. If for example you had market-moving information pointing to a rise in the Euro, or a fall in gold, would you telegraph it to the world? Probably not, yet the fact that Goldman just did that proves my earlier point… My assumption is wrong, or at best very limited. OK, Goldman has a serious profit motive to telegraph certain information, still…
So what’s the point of all this? I’ve been noticing more and more parabolic moves which don’t make sense to my humble models. That strikes me as strange. A new normal? It just doesn’t seem that the cross market volatility has been ‘figured out’ or resolved. It’s only slightly reflected in the VIX. These extreme moves across commodities, forex, bonds, stocks are pointing to something out of the ordinary. But what?