For the last year the government and the Federal Reserve has pulled out the stops for financial stability. They have performed every feasible measure to make the system stable and the market secure. Mohammed El-Erian, a voice of the bond vigilante, has expressed that monetary policy will have a neglible effect going future. These measures have only delayed inevitable deleveraging.
As the Q3 starts and stimulus begins to have a negative effect on growth, there will need to be a change in expectations to experience the anemic economic situation that we are currently experiencing. This change in expectations will make the current stock prices look expensive and unsustainable.
Any additional measures will come from fiscal stimulus. But the Republicans think they can take Congress back in November and thus will hamstring any Obama or Peloisi initiative between now and then. Thus if any issues appear, there is significant political risk to any solution. This will create a significant possibility large volatility between now and then.
Why not take advantage of that?
The author is long VXX at $19.