You Asked – So I Brought in the Expert
Earlier this week, I sat down with more than 600 of you for a live Q&A about how coronavirus – and its impacts on the global economy – could affect startups and their angel investors.
Not only was I absolutely floored by the turnout… I was also impressed by the caliber and quantity of questions you all had for me. It really felt like I was sitting in the boardroom with hundreds of my fellow experts, hashing out the details of a complicated situation.
But I know many of you had questions about what’s going on in the public markets, too. And, while I do own stocks, it’s just not the area I’m most qualified to teach about.
Which is why I’m bringing in my friend and colleague, Shah Gilani.
Shah ran his first hedge fund back in 1982 – and went on to help develop the Volatility Index (VIX), one of the most widely used market indicators in the world. Today, he helps people see through what the media wants them to hear – and get to the heart of what’s really going on.
Here are some of the highlights from our conversation…
- What is the VIX?
The VIX is a number, 15 for example or 50, but that number, that 15 or 50 or whatever it is, is actually a percent, meaning its shorthand for 15% or 50%. The percent being how much the S&P 500 (the market) might move annually, based on what “investors” see happening over the next 30 days.
So, if the VIX is 15, it means investors expect the market could be up or down 15% over the next year. If it’s 50, investors expect the market could be up or down 50% over the next year.
Who are the “investors” we’re talking about? They are investors and traders who buy and sell options on the S&P 500 index.
The CBOE (Chicago Board of Options Exchange) looks at the prices of call options and put options that investors and traders are constantly buying on the SPX (the S&P 500 index) that expire within 23 to 37 days from the day the VIX is being calculated, and it is calculated from second to second every day the market is open.
Investors buy and sell puts and calls that mostly expire 30 days out to make bets on the direction of the market, whether they’re speculating or hedging, or for whatever reasons they’re buying and selling those near-term expiring options.
The CBOE, mathematically, based on the Black-Scholes options pricing model, extracts the volatility measure implied in the prices traders are paying to calculate what trading “implies” they expect volatility to be.
The VIX is not any guarantee that that’s what volatility will be; it’s just what investors are paying that reflects their short-term expectations. What most people don’t understand is that, while the VIX measures expected or implied volatility in the future, it’s actually not so forward-looking as it is looking at the present, because the prices are “live” and a direct reflection of what investors and traders are feeling (some say fearing) now.
The reason the VIX goes up so quickly when markets are going down is a function of the higher prices investors are paying for put options on the SPX.
- What is the Fed doing in the face of this crisis? Can it do more?
Second, QE (quantitative easing) 4 has been initiated, where the Fed buys treasuries and mortgage-backed securities from banks. It’s opened its Discount Window to make cheap loans to institutions that need money, it partnered with the Treasury Department to set up a $10 billion fund to back money market funds, and it’s already expanded that to essentially back not just money market mutual funds but commercial paper issuers directly, meaning corporations that need to borrow almost every day.
Now the Fed’s backstopping the municipal bond market by buying muni bonds. They’re doing everything they have to. And they’ll have to do a lot more, a lot more. We will see the Fed do things it has never done before and frankly doesn’t have authority to do. But the economy desperately needs central bank backing at this time.
- How much lower can the Dow go?
It’s not about the market anymore; it’s about the economy. It’s about companies’ ability to survive in some cases, industries’ ability to survive no sales. This is unprecedented, and markets are totally in the dark. There are no valuation models in existence that can predict, let alone price, securities in this environment.
- Is Bitcoin a wise investment now?
- What’s the one thing you wish the media was saying about the market right now?
What I like most about Shah is his blunt honesty. He’s not afraid to tell it like it is. And when it comes to coronavirus and its impact on the markets… he knows better than anyone what could happen next.
Just click here to read his most recent article. It’s the most gripping, straight-to-the-point, and important piece I’ve read so far about how the Fed – and the rest of the country – is going to deal with this crisis. If you own stock… if you’re considering buying on the dip… or if you just want to keep your finger on the pulse of this rapidly-evolving story… you won’t want to miss this.
We’ll talk soon.
Until next time,