Where Did Market Volatility Go?
October 18, 2006 (Project Syndicate)

Television and newspapers continue to trumpet every twist and turn of global financial markets. In truth, however, the big story is the uneerie calm that has engulfed virtually every major asset class, from stocks to bonds. Is the whole investment world on Prozac?

Conspiracy theories abound, particularly among the ranks of financial traders, for whom volatility is like wind to a sailor. These traders confidently figure that as long as markets gyrate, no matter what the direction, they can always make money. And, thanks to the rest of us who don’t have the time, information, and skill to match wits with them, they are mostly right. But, with today’s dormant markets, the pickings are slim.

The favored bogeymen of the day are giant government investors, particularly Asian central banks, with their trillions of dollars in assets. These superfunds, whose managers do not necessarily share the same passion for profit as private investors, are said to be squeezing the life out of interest rates and exchange rates. “The big Asian central banks are oppressing us,” one young trader recently complained to me.

What a difference a decade makes. During the 1990’s, private investors looked at big, lumbering central banks as cash cows, long on money and short on financial acumen. George Soros once made a billion dollars off the Bank of England in just an hour. His basic strategy was a standard one: bet against any central bank that tries to defend an inconsistent macroeconomic policy.

AntiSpin: I have another explanation. I've seen this before. When headline index prices rise to new nominal peaks in the face extremely low volatility and high optimism, it means that the smart money is going short the smart way–quietly. I'm doing the same, starting today.

To add to these indicators, an ill wind blows in from the East. Today Condoleezza Rice talks publically about deterring a North Korean nuclear attack on Japan with a US nuclear counter-attack on North Korea.

Rice promises to defend Japan from North Korea
October 18, 2006 (Colin Joyce - Telepgraph)

Condoleezza Rice warned North Korea today that America would use the “full range” of its military powers if Pyongyang launched a nuclear strike on Japan.

As she arrived in Tokyo on the first leg of a mission to galvanise opposition to Kim Jong-il’s regime, Ms Rice made clear that America would protect its key regional ally against any threat following North Korea’s atomic test.

“I want to make sure that everybody understands that the US will fully act on our defence obligations under the mutual defence treaty,” said Ms Rice. “The United States has the will and the capability to meet the full range, and I underscore the full range, of its deterrence and security commitment to Japan.”