November 2012 - Richard 'Jerry' Haworth: Sheep may safely graze

“Sheep may safely graze
All the wolves have been rounded up
And put to bed

Sheep may safely graze
There are only days of happiness
Up ahead”

Nick Cave and the Bad Seeds with apologies to Johann Sebastian Bach

We continually bang the drum at 36 South for volatility and the fact that its nature is cyclical and mean reverting. Global volatility across all asset classes has “reverted” and in some cases is trading at multi-year lows. Low volatility implies safety; an environment where sheep may safely graze. Everything is as it should be and lambs are gamboling beside the stream. Or are they?

 Behind the scenes, however, in this Potemkin village setting, central bankers are working feverishly to keep the illusion alive.

To quote some more lyrics from the beautiful piece of music alluded to above …
“And you should wake tomorrow
The fences are all torn down
The woods are full of howling beasts
And there is nobody around
And everything seems foreign
To your little ways
That's just the Gods above    (read central bankers)
Making it safe to graze”

We suspect, just like little children imbue superpowers on their parents, that we assume too much of our central bankers. They can only do so much.

The one fabulous tool they DO have at their disposal is the ability to bring money into existence, and by doing so, they create “just a teeny weeny bit of inflation” which is merely a trick to delude us that everything is OK because prices  are rising and we associate prices rising with wealth creation. Let us collectively ignore the reality that it is actually wealth destruction in the medium to long term.

But this little bit of inflation is negating the effects of credit de-leveraging and the slowdown of consumer spending, creating an illusion of stability.

And credit to the “Gods above”… they have manufactured a low volatility environment for financial markets which should encourage the sheeple to come out into the paddock and graze yet the paddocks are empty. The sheeple are cowering in the bond market shelter looking nervously out at the woods which are still “full of howling beasts”. Sheeple may be stupid but not that stupid!

But volatility is cyclical and no matter how much you artificially supress it, it will find expression somehow when it is time. And the current low volatility points to the fact that it will occur sooner rather than later.

And in the distance a bell tolls …..”ask not for whom the bell tolls, it tolls for “vol-atil-ity”.