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\t\tCavendish has rejected private equity interest in the firm.\t<\/p>\n
Despite simmering political crises and looming economic risks, markets are riding a low-volatility sugar high \u2013 fuelled by central bank interventions \u2013 but the longer reality is ignored, the sharper the eventual correction, says Helen Thomas<\/p>\n
With markets taking an early summer holiday, basking in the glow of record highs for the S&P500, it can seem as if political risks are simply pesky flies to be swatted off a delicious Pimm\u2019s and lemonade. Who cares if the Labour Party is eating its own majority over the devilish detail of disability benefits or that it fell to the Vice-President of the US to break a tie in the Senate to pass the landmark tax cut bill? Why bother to notice that France\u2019s Prime Minister only managed to survive a No Confidence vote thanks to the backing<\/a> of Marine Le Pen\u2019s right-wing National Rally party? Or that the President of the Federal Reserve is set to become a lame duck within a couple of months once his successor has been named? Or that the tariffs which set off recession fears are due to kick in next week after the three month pause?<\/p>\n None of it matters when the Vix index, the so-called \u2018fear gauge\u2019, is plumbing towards the lows of the year. If volatility is expected to remain subdued then investors feel that they can plough into risky assets with impunity. This sets off a virtuous cycle, where steady increases in stock markets cause people to sell volatility, which encourages more buying of stocks as the Vix falls, and so on and so on. After all, what\u2019s the point in owning insurance if it keeps expiring worthless?\u00a0<\/p>\n Except this isn\u2019t quite how insurance is supposed to work. The longer that time passes without lightning striking or floods descending, the more likely that the once in a lifetime event is going to occur at some point in the future. Our psychology doesn\u2019t always work like this but financial markets are supposed to be rational mathematical aggregation machines. If some potentially volatile events lie ahead, and it\u2019s cheap to own insurance against such an event, the price of the insurance should rise, not fall. In this way, prices should reflect all probable known information. If you want to protect yourself against war in the Middle East, trade tariffs between China and the EU, or a fiscally incontinent government, plenty of derivatives exist with which to do so. If Elon Musk might be deported or lose government contracts, the price of Tesla and SpaceX can adjust instantly to reflect this risk.<\/p>\n Everyone is incentivised to ignore bad things<\/p>\n But price formation in markets has changed. Rather than once bitten, twice shy, it has become profitable to be once bitten, twice excited.\u00a0<\/p>\n