By Mark Kaufmann, of Tommy’s Tax
All over the world, national economies are sick with the coronavirus — and governments have implemented feverish economic reactions as a result. The main symptom of this economic disease is one of sustained and repeated lockdowns, and the chasms they have opened up internationally, which have crippled businesses and reserves.
So perhaps it is no surprise that our old friend quantitative easing has made a comeback. It worked to smoothen out the global crisis of 2007-08, after all. But re-establishing QE is only one of the innovations that central governments around the world are rolling out. For example, since the first lockdown, the United States has already expanded its money supply by an annualised rate of more than 100 per cent — meaning it has essentially been handing out money left, right and centre.
No one really knows what the consequences of such actions will be. But it’s clear we’ve decided to go “full speed ahead” — like a daredevil driving over a bridge trying to safely reach the other side as it crumbles around them. There seems to be a pretty even split amongst the experts about whether such an act will lead to inflation or deflation.
New tricks and new philosophies
The old-school spectators will naturally be anxious to see the tsunami of new money washing over society and, to those who think they’ve already spotted giant inflation on the horizon, Bitcoin and gold have already reacted accordingly.
Yet the newer generation of financial engineers do not show the same concerns. They are likely to scoff at the idea that simply printing money equals inflation. Indeed, newer philosophies are likely to recommend QE to the point that it does create inflation, and then a proper drainage of the money tsunami with taxation to kill the inflation monster if it does appear. This is the new economic arrogance (or genius) that is steering the daredevil car over the bridge.
Then there is the options market — perhaps the most sophisticated market of all — where buyers and sellers gamble on the right to trade at some future moment in time. The options market has its own value, called ‘implied volatility’. We can think of implied volatility as a chasm between where a price should be and where it actually is. Essentially an attempt to measure the market’s unknown unknowns. Implied volatility guesstimates are very difficult at the best of times, and even more formidable now. Now the implied volatility of the global economy is into-the-stratosphere levels of sky high.
Volatility, implied volatility and value
Even without the ominous coronavirus, with its future trajectories, emerging variants, and the possibility of immuno-escape, our experimental leap into the economic wilderness is enough to cast an impenetrable blanket of uncertainty that no one but the oldest in society will have ever seen in their lifetimes.
But at least, to try to cast things in a positive light, volatility will bring about radical change. And this change could end up being a way forward, a form of progress.
If there is a silver lining, it is that all this volatility and implied volatility is what makes the options in the options market more valuable. If two things determine an options’ value, it is the longer the time between the present time and when it expires, and how volatile it is. As the expiry date draws closer, and if its volatility reduces, then an option becomes less valuable. Given the current nature of the global economy, with its high volatility and with expiry dates so far away they cannot be seen, our options to some extent are “rich”.
Real-time progress and opportunities
In the end, the market will go its own way — and the market is always right. There’s a saying in economics, that even when the markets are wrong, they’re still right. If they seem wrong, it is only because the economist does not understand why they are, in fact, right. If the great financial experiments we are currently running are to succeed, they will at the very least need plenty of support. But whether they will get the support they need, time will tell.
Meanwhile, at the time of writing, blockchains and crypto coins and the other instruments of decentralised finance continue to explode in worth and popularity. They march on, knowing they may well be blissfully untouched by the chaos that is certain to come at some point.
Whether it be a recession, depression, inflation or deflation. No matter how bad things in the market get, there is always somebody having the time of their lives. What we need to do is find out exactly who it is that is positioned to take advantage, and to learn from the opportunities that are opening up for them. That is also progress.
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