Urgently Feeding Insurance Carrots ~ The Risk Averse Alert

Tuesday, April 03, 2012

Urgently Feeding Insurance Carrots

The dog wagging Fed tail no doubt is finding its insurance assets essential in times when the "butterfly effect" from the Fed tail's flail is becoming increasingly difficult to control.


There's something to be said for the several instances these past couple years when options premiums (such as $VIX measures) were rapidly driven down toward absolute lows. Specifically, March-April 2011 and subsequently June 2011 are interesting because it appears concerted resistance to weakness still to develop was put up via the equity insurance business, as premiums fell with considerable haste. It's likely the aim simply was to maintain the market's prop dating back to 2009 following brief challenge, this by encouraging increased hedging. Yet here, the mere appearance of urgency in the effort to prop up the market rather indicates a greater underlying vulnerability desperate to insure some balance in a challenge whose risk is exposed heightened. Thus, last August's setback.

We could add February-March 2010 and November-December 2009 as similar instances when one might conclude urgency to maintain the market's prop was heightened. Just as happened in 2011, this ushered in a brief period of considerable weakness whose worst moment was the "flash crash" of May 6, 2010.

Just look at the pronounced urgency on display now. We still are waiting for $VIX momentum to turn positive. Once it does disaster probably will not be far off.

Fast Money
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