Global View What Could Shock The VIX. BIX, FIX Or Credit Growth. August 2017
What Could Shock The VIX? BIX, FIX Or Credit Growth?Recent weeks have seen the VIX index hit all-time lows, despite gathering signs of cracks appearing in the US edifice, such as poor economic data, a sliding US dollar, political logjams hurting prospects for healthcare and tax reform, high stock market valuations and a US Fed seemingly committed to reverse QE and raise rates. This report argues that volatility moves between extended periods of high and low risk, and it also tends to move sequentially from bonds to forex to stocks, what we have previously dubbed the BIX-FIX-VIX relationship. First in the chain is, the BIX bond market volatility, and curiously it seems that this largely depends on liquidity factors and the Fed's 'Forward Guidance' statements on the path of policy rates, not on the spurious 'Great Moderation'.
CrossBorder Capital Ltd (CrossBorder) is a London based, FCA registered, independent investment firm founded in 1996. It is owned by its partners and has no affiliations with banks, stockbrokers or other financial institutions.
CrossBorder's core competence is the measurement and analysis of global liquidity flows. Liquidity is a source of funds, in contrast to money which is a use of funds. It is defined as the flow of cash plus credit, or more explicitly as savings plus the change in base money plus the change in bank credit. Liquidity is therefore a more comprehensive measurement of fund flows than the monetary aggregates used traditionally. Liquidity research is applied to determining the outlook for a range of asset classes including equities, fixed income, currencies and hedge fund styles over varying time horizons.
Central to this analysis is the monthly collection and analysis of balance sheet data from over seventy of the world's central banks to quantify the level and direction of liquidity in each country. This data is publicly available, aggregate as opposed to sample, and rarely significantly revised. It is also little used by investors, and CrossBorder's prime utility is bringing this set of data to investors in a timely and user-friendly way.
CrossBorder's insights rest on two philosophical assertions: first, there is a regular cycle of liquidity, and asset class price movements tend to move sequentially over the cycle. By measuring where we are on it, we can significantly reduce 'fat tail' outcomes in our predictions for asset price movements. Secondly, weightings of asset classes held by investors in aggregate tend to revert to the long term mean. By measuring the variance from this mean, we can understand whether a particular trade is 'crowded' or the reverse.
CrossBorder offers these insights both as the Liquidity Research research service, and in the form of systematically allocated in-house funds. Clients of the Liquidity Research service include leading banks, fund managers (both traditional and hedge) and insurance companies located worldwide. CrossBorder additionally manages and advises on tactical asset allocation products for third parties.
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