The Leuthold Group constructs their Risk Aversion Index (RAI) with a combination of market based indicators, including credit and swap spreads, implied vol, currency moves, and commodity prices. No doubt quantitative easing is repressing market fear.
They also note that periods of low risk aversion tend to run longer than streaks of elevated risk aversion. How long this time? We don’t know but we’re going to think long and hard over the holiday about the potential macro swans in 2013.
Here’s are eight starting thoughts we will contemplating and researching:
1) Japan pushes too hard with fiscal and monetary easing and tips over into a debt and currency crisis; 2) markets begin to fret over France and Italy; 3) the U.K. starts to have trouble and doubts increase over its debt sustainability; 4) inflation begins to creep up calling into question the sustainability of global quantitative easing due to the rise of stagflation; 5) increased political instability caused by stubbornly high unemployment; 6) the U.S. can’t get it together politically to implement the necessary structural economic and fiscal reforms; 7) China’s financial and credit problems surface and create panic in the local financial markets; and 8) geopolitical tensions in Asia get hot.
How will these affect our trading? We’ll go with the trend, keep them on our radar and try to find cheap avenues to express or hedge the swan events.
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