Correlation between VIX and Gold?

Some consider the VIX index as a measure of "market fear." Indeed, the index does depend on demand for S&P 500 puts, which is a good sign that portfolio managers are worried about a market drop. I have been thinking recently that gold is another measure of "market fear." When people become concerned about the economy and the solvency of the federal government (along with inflation), they buy gold.

So, we should be able to see a correlation between the VIX and gold, right?
Let's look into it. I'll plot the daily closing value of Gold on the vertical axis and the daily closing value of the VIX on the horizontal axis. My data set goes back to 1991 and contains over 4,000 data points.

What an interesting pattern we see here! I have to say, it does not look like what I was thinking it would look like. The only re-assuring aspects of the graph are the points in the top right (when gold is high, the VIX is high, signaling a correlation) and the points in the bottom left (gold is low, VIX is low, signaling a correlation). Most of the other points, however, do not signal a correlation.
One might argue that Gold is influenced by inflation, while the VIX is not. That would be a good argument. Here is the same graph with the gold price adjusted for inflation using the GDP deflator:

Not as much of a change as we would like. I still find this graph to be very interesting and hope others might be able to comment on it’s value…

Buy Treasuries?

I really am having a hard time understanding some of these "experts" giving advice on where to put your money. Here's another example. His position is that things are going to get worse. State and Municipal governments are going to have huge budget shortfalls this year and are going to require a bail-out by the federal government. His suggestion is to buy treasuries for safety.

Why, why, why would someone tell you to buy Treasuries right after they describe the huge amounts of debt that the government is going to have to take on? How do problems for state and munis cause a bad stock market? Where's the logic in this advisor's argument?

No one seemed to take note when some pointed out that the federal government could easily lose their AAA status. This article is from Sept 08! Think where we are now, with Obama pushing an $800 billion stimulus.

I've had enough of this "the world is ending" talk. Treasuries have peaked. It's time to sell.

Confirmation?

Today's news is a real vindication of my study. As mortgage rates continue to decline to record lows, real estate prices continue to sink. This would seem counter-intuitive, but it non-the-less frequently occurs.

However, I have no doubt that the decrease in mortgage rates will eventually provide a lift to the real estate market. The stock market has had a nice rebound, possibly signaling that the worst is over. It has been quite some time since we have had a headline about a major bank failing. All of the steps that the government has taken and the nature of the business cycle will, I believe, improve economic conditions in 2009.

Happy New Year!

Change Reserve Requirement?

I've been hearing that Ben Bernanke is using "every available tool" to spur the economy. Dropping interest rates to 0 and lending money freely have been drastic moves, but he is still not using every tool at his disposal.

The Fed has one tool that I haven't heard anybody talking about. The Fed sets the reserve requirement for banks. This power is considered by economists to be the "sledge hammer" of their powers, having a more dramatic impact on the economy than setting rates or making loans.

My question is, do we not need a "sledge hammer" right now? The use of this third power would directly impact the credit issues this country is experiencing. It would have a positive impact on banks that cannot loan because they have capital constraints.

While I'm not advocating lowering the reserve requirement forever, it is available to Ben Bernanke to use to try to get our country through this crisis.

Quadlet on Time.com

Time magazine writer Stephen Gandel has posted an article on Time.com Treasury's Plan for Mortgage Rates Could Be Costly. He references my 2006 article Are Real Estate Prices Dependent on Mortgage Rates. The Time.com article discusses a secret Treasury plan to lower mortgage rates to spur the housing market. Stephen's article uses my article to be critical of the plan, like a counter-point. The article also has a quote from a professor emeritus of Wharton to back up my claims.

So, you might ask, do I think the Treasury should go through with such a plan? I would say yes. The real conclusion to draw from my study is that the link between mortgage rates and real estate prices is not a simple one. The economy is a complex interconnected web of correlations and cause-effect relationships. There is no "silver bullet" simple answer to our economy's current problems. In my opinion, the Treasury and Fed should use every tool available to them.

Part of the government's job is to act in difficult times to help the economy get through the cycle and ease the natural corrections of the economy. The government should run a deficit in 09 to help spur the economy. As long as the president understands that in 2-3 years, when the economy is charging again, that the government needs to return to surpluses. Even though no one is talking about it, the Social Security problem is not going to fix itself...

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I hope to make this a great place for everyone affiliated with me and Quadlet to come and discuss a broad range of issues.

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