Brane Space: The Economic VIX Index, Stock Behavior and Kneecapping Trump's 'Edge' On The Economy

"Gimme four more years and I swear I'll crash it for good!"

A large number of investors are fortunately familiar with the VIX or volatility index. Basically the Vix volatility index, is Wall Street's "fear gauge". It is a barometer of how unstable stocks are in responding to current crises or shocks. For example, the VIX shot to its highest level in 3 years on Feb. 5, 2018 following the Congressional Budget Office's reaction to the passage of the Trump-GOP tax cuts. This was on the heels of projections of $1, 083 trillion in borrowing costs for 2019, and $1,128 trillion in 2020. The street's reaction conveyed in the VIX then was traced to the enormous borrowing costs projected for successive years.

Unlike the VIX, there is another measure called the Economic VIX Index, created by Jim Paulsen, a chief investment strategist at Leuthold Group. This index reflects the volatility in growth. It's important now because its history over the decades since World War II shows two things:

1) Stocks do best when economic volatility in the U.S. is at its lowest.

2) Stocks do best when economic volatility in the U.S. is at its highest.

It is clear that the stock bubble currently is feeding off of (2) which in turn is being driven by the pandemic. In other words, the pandemic - not Trump- is responsible for the incipient volatility which in turn is a function of the uncertainty. Hence, the pandemic is controlling the economy. As Frank Trentmann writes in The New Republic (September, p. 33):

"What makes this virus so damaging is its synchronized effect on activities that depend on mobility and proximity. Fewer tourists and business travelers translate into fewer hotel and restaurant guests and fewer visitors to shops, special exhibitions, concert halls, and musicals....The virus has effectively stopped several pistons of consumer economy at once. Tourism and mobility, restaurants and retail, live entertainment and sports. Each of these is a big sector in its own right."

Which of course makes it even more imperative the virus be brought under control, something Trump and and his retinue of ass clowns have been unwilling to do. See also e.g.

The Virus Controls The Economy - Not The Reverse: ...'

This is critical to process, given one of the confounding aspects of current polls is the seeming edge Trump has in the handling of the economy - which for many also includes stocks (given people are looking at their 401ks as well as unemployment numbers) Indeed, the careful observer can surmise that Trump is getting credit for what the economy WAS, pre-pandemic, not how the looming recession, job losses, immense suffering (especially for many about to be evicted) are directly his fault for his mishandling of the response to the pandemic. This indeed is a connection Dems need to make in their convention because clearly too many voters are not making it - else Biden would be ahead of Trump in the economy category too.

Most savvy people who actually follow events, as well as serious economists, are quite aware Trump's oafish, belated, incoherent response to the pandemic in the U.S. - including calling it a "hoax" for 2 weeks, and not having a coordinated national policy (like mandating masks ) is why the U.S. is floundering compared to so many other nations that got their acts together. That chaos in turn is why there has not been a coherent reopening and why people (including teachers) are still not able to return to work with confidence, or go out to eat or whatever with any confidence. In many ways Trump then has wrecked the economy, not done anything to help it and much more to crash it.

But this is what the Dems now need to drill into people's heads. (Many of whom are likely 'low information' voters). This is especially as Jim Paulsen was quoted last week (WSJ, Business & Investing) as warning:

"Over the next four quarters we'll have a level of economic volatility never before seen in the postwar period. It will blow away the volatility of the 2007-09 recession when the Economic VIX shot up to its previous postwar peak."

His comment implies the havoc caused by Covid 19 will continue apace, and also there is little chance the virus will be under control - certainly so long as Trump is heading the government. That means stocks will likely dive as much as rise, even as homelessness spikes and job creation sputters in the absence of a coordinated national strategy - including testing and contact tracing.

But this also means stocks are likely to continue to do well, even as the Main Street economy craters and Biden - if elected- is likely to inherit a mess ten times worse than what the credit crisis left Obama back in 2009. Why then would stocks continue to do well in such an atmosphere of upheaval, uncertainty, and volatility? According to Paulsen:

"This is because the economy is in an unsustainable situation and everyone is working to improve it, both government and companies. So policy officials are scared to death and they are bringing every conceivable tool they have to get us out of the situation."

But again, we need to clarify here this is based on an expectation. But that hopeful, optimistic expectation, i.e. that "everyone is working to improve the situation" cannot happen if Trump gets a 2nd term. This is why Michelle Obama made the remark last night: "If you think things cannot possibly get worse, trust me they can can and they will, if we don't make a change in this election. This is why we have to vote like our lives depend on it."

This followed her description of Trump as a person out of his depth in filling the job of president, e.g.

“Donald Trump is the wrong president for our country. He has had more than enough time to prove that he can do the job, but he is clearly in over his head. He cannot meet this moment. He simply cannot be who we need him to be for us.”

Hence, any positive expectation rests on Trump's defeat and it needs to be a wipe out so he can't bitch, piss and moan about mail ballots "rigging" the election.

One last perspective on the Economic VIX: Over seven decades it ranged from 0.2 to 3.4. (The numbers represent the standard deviations of quarterly annualized percentage changes in U.S. nominal GDP over the previous 3 years divided by the average annualized quarterly growth rate over those 3 years.) Now, Paulsen projects the Economic VIX will hit 13 in coming months.

That may well be whether Trump is defeated and a competent administration takes over, or not.

See Also:

The uneven rally that took US stocks to a record high

And: