Practical analysis for investment professionals
06 April 2018

Weekend Reads: Hi Volatility Edition

You must have noticed that volatility has returned to global financial markets. Hi Volatility!

Volatility wants to know if you missed it. Well, did you?

If you are an active equity investment manager, you must love the return of volatility, high volatility!


But are equity markets still even relevant? Years ago, I pointed out that the number of equity listings had nosedived. This wasn’t just true in the United States, either. In fact, equity listings were down in every region across the globe except Asia <shock!>. This observation ended up appearing in US Congressional testimony. It was my first time testifying before Congress, thankfully in absentia. I argued there and elsewhere that companies just did not need access to public markets like they had in the past.

John Kay seems to concur that the bloom is off the equity market rose. Lo and behold, another story points out what’s obvious to those paying attention: Public equity markets just are not as important as they used to be.

Yes, much of volatility’s return can be ascribed to the actions of the executive branch of the US government, but fissures are also appearing in debt markets and contributing to emotional blowback. For example, did you know that the IMF has warned about the mounting threat of a debt crisis in developing countries? Or that risks are skulking in the US high-yield market, specifically BBB-rated debt? Or that there are (Hi!) volatility spikes in LIBOR that have some investors transfixed ? Or that US subprime auto buyers are disappearing from the showrooms?

I am tracking this latter development closely because of the suburban nature of much of the US housing market: Most US workers drive to work each day. So automobiles are critical assets. When coupled with US consumer debt data, the dearth of subprime auto buyers might signal a crack in the global economy. Could it be that, at long last, interest rates matter again?

In the Great Recession, credit agencies came under fire for their role in giving a free pass to many derivatives securities backed by mortgages, for example. In what may be a (snarky) sign that the financial markets have peaked, credit agencies are once again seen as creditable.

Another indication that we may have reached a peak? Global regulators have apparently cleared their decks of classic malfeasance cases and are turning their attention to more mundane issues. For example, the Competition and Markets Authority (CMA), the anti-trust watchdog in the United Kingdom, is discussing breaking up investment consultants and their advice and management businesses.


The big news in fintech since I last wrote is the downward trajectory of cryptocurrencies and blockchain. They are both generating less interest and less value. Why? Hi Volatility! Bitcoin, in particular, has experienced massive price volatility in 2018. Ouch! No need for me to feature a story on this issue, as surely you are tracking it, too — along with every business writer.

However, for those who see a future in the application of artificial intelligence (AI) and machine learning to investing, this fascinating piece illuminates what may be a rich scientific testing ground for years to come: A Goldman Sachs computer model recently warned of an impending bear market, but Goldman analysts didn’t believe it.

Who will prove prescient? Human or machine?

Environmental, Social, and Governance (ESG)

The next selection reveals the “shocking” truth of the extraordinarily famous Stanley Milgram obedience studies. You may have heard of these experiments: They involved “teachers” and “learners,” and to the unwitting teachers — the true subjects of the studies — purported to explore the connection between memory and learning. Whenever learners answered a question incorrectly, teachers were instructed to give them electric shocks of increasing voltage. Only the learners were actors and the shocks fake: Milgram just wanted to test how much pain the teachers would be willing to inflict when ordered to by an authoritative “researcher.”

According to Milgram’s published results, the vast majority of the test subjects carried out their orders and administered the shocks despite the protests, screams, and, finally, foreboding silence of the supposed learners.

Well, it turns out that this narrative isn’t quite true, and that a very careful review of what really happened based on an extensive audit of the research data, footage, and notes is tame by comparison. Milgram apparently stretched the truth to generate attention for his work and, crucially, further funding.

Why is this important?

First, scientists are human beings, too, and, hence, subject to their own prejudices and preferences. This does not mean that we question science and the scientific method. Rather, we question scientists because of the power of their ideas.

Second, Milgram’s experiments have encouraged many people to take a very cynical view of human nature and embrace mercenary attitudes about behavior and a belief that values do not matter. Of course, this is just my opinion and may be unsubstantiated by actual data. But people have cited Milgram’s experiments as justification for devil-may-care attitudes.

Well, it turns out we may not be so badly behaved after all. Turns out that morals and ethics may actually be more hardwired than we thought, too. This means we cannot treat this hardwiring so dismissively.

Fun Stuff

Last up this month is something that made me say, “Wow!” Our first look at Jupiter’s poles. Until next month!

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Voss also sub-contracts for the well known firm, Focus Consulting Group. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: [email protected]

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