USDJPY / VIX

Warning: I am not an expert and the following text is basically BULL SHIT. You have been warned.

I look at these two charts all the time before I make my investment decisions.

1. USDJPY

I am a big fan of channel. As you can see in the following chart - USDJPY is testing the support of the channel bottom.













(2) VIX - CBOE Volatility Index

The age of low volatility is over?










My reasoning is as follows:

1. The investment boom in these years (post 2001) is due to the availability of cheap money and low volatility
2. Money is cheap because the rate is very low by historical standard. This is further fueled by carry trades (against major and EM currencies) and relaxation of credits
   
3. Low volatility environment encourages investors to take on more risk, even for the risks that do not have a good risk-to-reward ratio.

Violation of one of these two conditions would cause serious result. Much has been said about carry trade unwinding, but I could not see a lot of discussions on volatility.

I believe that volatility itself is a sufficient condition to cause the stock market to collapse:

1. Prudent investors tend to step back when volatility increases - i.e. withdraw money from the market and put them into traditionally safe investments (whether they are still safe or not - that's another question)
2. They withdraw money by selling the equities directly and through redemption of funds. In order to prepare for redemptions, these funds (mutual / hedge funds) need to sell equities as well. This problem is amplified by the low cash ratio of funds in these years
3. Supply of money through credit is likely to fall. The harm caused by subprime mortgage is not the mortgage itself (it only accounts for a very small portion of the credit market), but the repricing of risks for existing investments and demand for a much higher risk premium for new loans.

Again this is all bull shit - you have been warned.