Friday, August 12, 2011

VIX to September 11 levels

By way of Moneyscience, Nicholas Bloom notes that the VIX -- the so-called fear index -- has spiked to the same level it reached just after 9/11 (not quite as high as during late 2008):





What this means for the future is uncertain -- it is a measure of uncertainty, after all -- but Bloom suggests, by analyzing 16 previous episodes of similar spikes, that a short recession is very likely, as economic growth generally follows some level of coherent confidence, and that is obviously lacking:
I have studied 16 previous uncertainty shocks – events like 9/11, the Cuban Missile Crisis, the Assassination of JFK – and the only certain thing about these is they lead to large short-run recessions (Bloom 2009).

When people are uncertain about the future they wait and do nothing.
  • Firms do not to hire new employees, or invest in new equipment if they are uncertain about future demand.
  • Consumers do not buy a new car, a new TV, or refurnish their house if they are uncertain about their next pay-check.
The economy grinds to a halt while everyone waits.

I cannot attest to the reliability of the statistical analysis (16 events is quite few, after all), but the conclusion would hardly be surprising.

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