Misguided Attempts

Yesterday was good to me in that, as the S&P fell, the VIX calls increased to the point that they wiped out the loss on the SPY 136 puts from Friday.  The puts also expanded just enough to help out.  I hedged the position at the end of the day with SPY 138 calls after waiting patiently all day. Then I took off for dinner with some good friends that I hadn't seen in a while.

What does the market want to do from here?  I don't know, but I will wait for an extreme now.  There will be every opportunity this week for volatility and price swings outside of the narrow 2-day range.  I still view 1395 as a sell and 1370-1375 as a buy.  The latter especially because of the bounce from last night.  The market doesn't look like it wants to go straight down from here.  I think it needs another high on much weaker momentum and a rising VIX.

I heard a lot of talk about Bill Gross' latest Investment Outlook.  Allow me to cherry pick my favorite sentence:

Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades. 

The most important word in this statement is attempted.  USAToday reported back in 2009 (the only figure I could find just now) that the total debt obligations of the US government -- including everything from Medicare to Social Security to military pensions to public debt -- was $63.8 trillion.  It is this mountain of debt that any attempted inflationary solution must overcome.

Didn't the Fed expand their balance sheet to something like $3 trillion in an attempt to provide stimulus back in 2008-2009?  True, the markets loved it, but it didn't help us grow out of the problem. 

This is why I often say that the Fed can't afford to win this fight and that it will eventually be forced to sidestep further stimulus simply to preserve itself.  

It's also why an attempted inflationary solution might well bring on the unintended consequence of deflation due to a massive global liquidation of debt . . . by default.

Ironically, it's a Fed day today.  Tomorrow is an ECB day.  I'm not expecting any solutions.  Only misguided attempts.