Share This Article

Facebook LinkedIn
Twitter Reddit
Print Email
Pinterest Gmail
Yahoo
Money Morning
×
  • Invest
    • Best Stocks to Buy
    • Stock Forecasts
    • Stocks to Sell Now
    • Stock Market Predictions
    • Technology Stocks
    • Best REITs to Buy Now
    • IPO Stocks
    • Penny Stocks
    • Dividend Stocks
    • Cryptocurrencies
    • Cannabis Investing
    • Angel Investing
  • Trade
    • How to Trade Options
    • Best Trades to Make Now
    • Options Trading Strategies
    • Weekly Trade Recommendations
  • Retire
    • Income Investing Guide
    • Retirement Articles
  • More
    • Money Morning LIVE
    • Special Investing Reports
    • Our ELetters
    • Our Premium Services
    • Videos
    • Meet Our Experts
    • Profit Academy
Login My Member Benefits Archives Research Your Team About Us FAQ
  • Invest
    • Best Stocks to Buy
    • Stock Forecasts
    • Stocks to Sell Now
    • Stock Market Predictions
    • Technology Stocks
    • Best REITs to Buy Now
    • IPO Stocks
    • Penny Stocks
    • Dividend Stocks
    • Cryptocurrencies
    • Cannabis Investing
    • Angel Investing
    ×
  • Trade
    • How to Trade Options
    • Best Trades to Make Now
    • Options Trading Strategies
    • Weekly Trade Recommendations
    ×
  • Retire
    • Income Investing Guide
    • Retirement Articles
    ×
  • More
    • Money Morning LIVE
    • Special Investing Reports
    • Our ELetters
    • Our Premium Services
    • Videos
    • Meet Our Experts
    • Profit Academy
    ×
  • Subscribe
Enter stock ticker or keyword
×
Join 100,000+ Like-Minded Investors Today
Twitter
Tags: Investing Tips

How to Play the New Normal: Spiking Volatility

By Shah Gilani, Chief Investment Strategist, Money Morning • @ShahGilani_TW • June 24, 2013

View Comments

Start the conversation

Comment on This Story Click here to cancel reply.

Or to contact Money Morning Customer Service, click here.

Your email address will not be published. Required fields are marked *

Some HTML is OK

Shah GilaniShah Gilani

Strap on your seat belts...and get ready for a ride...a very bumpy ride.

After having assumed US equities would keep chugging higher with little deviation from "up," things are starting to look a bit different.

Have you been watching Japan? It's a cautionary tale that is about to play out in the US, and globally.

Massive monetary easing in Japan since January tanked 10-year JGB (Japanese government bond) prices and the yield on their 10-year bonds doubled. On top of that, Japanese stocks soared 32%, only to see a series of huge one-day drops and a few smaller-bounce upside rallies.

The volatility has been unprecedented.

The question for investors now is: How do you make money now that the Fed has signaled the beginning of the end of quantitative easing that has stimulated global markets higher?

Here's the first thing you need to know.

Crisis = Danger and Opportunity

Volatility is the new normal, or abnormal, and it's going to be everywhere.

The Federal Reserve, the Dr. Frankenstein of this monster, just hit the master switch to bring that volatility to life.

The Fed took care to build up the markets. It drove the dollar down to hike exports and in the process got some people hired.

It liquefied banks with money by buying their crappy mortgage-backed paper for good old cash...which the banks leveraged to buy more crappy mortgages to sell to the Fed.

Now that's how you trade when you have a backstop! They liquefied the government's mounting deficit problems by buying almost all of its new debt.

To be precise, they didn't buy it directly from the government.

Sign up for SMS so you never miss special events, exclusive offers, and weekly bonus trades.

The banks bought it from the government first, then they repo'd (repurchase agreements) those bonds between each other to generate even more short term cash, which they then used to buy more of the government's bills, notes and bonds, which they then sold at marked-up prices to the Fed.

Now that's how you trade when you have a backstop!

So far so good, right? The play by the Fed was to keep interest rates at basically zero for borrowers, not like you, but kind of like the banks, oh yeah, that would be only the banks.

Everyone benefited by super low rates.

Corporations borrowed cheaply to pay down more expensive debt and borrowed still more to buy back their stock to decrease their total number of shares so their earnings per share looked a lot better. Which was all part of the plan to hike stock prices.

The Fed's idea of creating an equity asset bubble was to make the market hit new highs so people got all warm and fuzzy inside and with that wealth effect making them dizzy, they reached into their empty wallets and purses to whip out their credit cards to spend, spend, spend. Why? Because it feels good.

Don't you feel good?

Fed Exit Strategy: Pee in the Punchbowl

But the party had to end sometime. And Thursday was the beginning of the beginning of the end of the party.

Because the dollar was beaten down, other countries had to beat down their currencies (because they need to export too!). We're about to see the residual effects of all that beating down (which ironically was caused by something called stimulus).

We're going to see real currency wars. The first salvos have already been fired. The big guns are eventually going to come out. Welcome to massive currency volatility.

Because interest rates were so low for so long, yield-starved investors clamored for junk bonds that had some decent potential for income. Issuers fell over themselves to supply the demand and hundreds of billions of dollars of junk has been injected into ETFs and CLOs (collateralized loan obligations) and CDOs (collateralized debt obligations) and are now all subject to massive volatility if rates rise and rising rates impact issuers' ability to pay what they owe investors.

Welcome to massive high-yield debt volatility.

Because banks have been so pumped up (kind of like on a cocktail of steroids and creatine) and have to deal with rising rates, they will hold off making loans to consumers because they don't want to get caught lending long at fixed rates when their short-term borrowing costs (which is how they finance their loan books) are rising. Mortgage money will be more expensive.

Welcome to massive volatility in housing...mortgages, home prices and everything to do with housing.

And that's just the beginning.

Where Do Investors Look

So how do you make money in the markets?

Here's what me and my subscribers did, in my Capital Wave Forecast service.

We shorted the Australian dollar (by buying puts on an ETF) because currency wars will necessitate Australia devalues its currency to sell more of their commodities...that trade is up 85%.

We shorted 20-year maturity bonds (by selling puts on an inverse bond ETF), not once but twice. We saw the Capital Wave known as QE-forever rolling over as bond vigilantes began selling the 10-year in spite of the Fed's stimulus, like what happened in Japan...those trades are up 64% and 52%.

We shorted junk bonds (by buying puts on two ETFs: HYG and JNK) because the money chasing yield into junk paper began to topple over...those trades are up 57% and 56%.

And we got into these positions a few weeks ago.

We're also short corn and NASDAQ and looking Frankenstein straight in the eyes.

Oh yeah, we're long gold too. Hey, nobody's perfect. It's the market after all. Fortunately, we're only down 15% on that trade, and we're sticking with it!

So, if you want to make some money in the markets, play all the asset classes, play the volatility, play the new "Abby Normal" (a bow to Mel Brook's Young Frankenstein, which is certainly more entertaining than what we're about to live through).

Join the conversation. Click here to jump to comments…

Shah GilaniShah Gilani

About the Author

Browse Shah's articles | View Shah's research services

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

… Read full bio

Login
guest
guest
6 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Micheke
Micheke
9 years ago

How can i be getting your suggestions

0
Reply
Kevin
Kevin
9 years ago

How about call options on the VIX? Seems a slam dunk, unless premiums have jumped already.

0
Reply
DD
DD
9 years ago

It's only the new normal because people let it be.

It's like when I hear statements such as "life is unfair" or words to this effect. Well it's only people that make life unfair or let things becomes unfair and overly unbalanced that it then affects people. Life usually does not get unfair all on its own!

0
Reply
enthusceptic
enthusceptic
9 years ago

This is all very confusing!I prefer mid to long term, 3- 10 years.

0
Reply
steve baron
steve baron
9 years ago

What stocks to short??

0
Reply
David Ganz
David Ganz
9 years ago

Do you recommend purchasing the VXX?

0
Reply


Latest News

June 6, 2023 • By Tom Gentile

This Secret Options Pattern Is More Reliable than Price Movement

June 6, 2023 • By Shah Gilani

earnings
AI Is Going to Send This Stock Skyward - Buy It ASAP

June 6, 2023 • By Garrett Baldwin

Postcards: These Four Stocks Are Showing Real Momentum
Trending Stories
ABOUT MONEY MORNING

Money Morning gives you access to a team of market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.

QUICK LINKS
About Us COVID-19 Announcements How Money Morning Works FAQs Contact Us Search Article Archive Forgot Username/Password Archives Profit Academy Research Your Team Videos Text Messaging Terms of Use
FREE NEWSLETTERS
Total Wealth Research Power Profit Trades Profit Takeover Penny Hawk Trading Today Midday Momentum Pump Up the Close
PREMIUM SERVICES
Money Map Press Home Money Map Report Fast Fortune Club Weekly Cash Clock Night Trader Microcurrency Trader Hyperdrive Portfolio Rocket Wealth Initiative Extreme Profit Hunters Profit Revolution Quantum Data Profits Live Trading Alliance Trade The Close Inside Money Trader Expiration Trader Flashpoint Trader Darknet Hyper Momentum Trader Alpha Accelerators Weekly Profit Cycles Brutus Alerts Resource Traders Alliance

© 2023 Money Morning All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning.

Address: 1125 N Charles St. | Baltimore, MD, 21201 | USA | Phone: 888.384.8339 | Disclaimer | Sitemap | Privacy Policy | Whitelist Us | Do Not Sell or Share My Personal Information

wpDiscuz