I originally posted this on Reddit for my members. It is relevant to the market action today which saw a sharp intraday reversal with a VIX crush.
I wrote this on April 24, 2023 during the Silicon Valley Bank crisis:
The chart data is old and since I wrote this a couple of things has changed:
Oil is now decoupled from this VIX - I have written extensively on how the US was pissing off the Saudis and they would do something - and they have.
Inflation is worse.
Rates are rocketing higher.
The FED is (for now) pulling liquidity from the market - but it won't last.
April 24, 2023
Ok, on Saturday I went over a new trade. I opened a starting position with VIX calls.
But the real BIG news is I finally know why the VIX is staying down. One of the (very few) people I follow on Twitter published an excellent article and while I won't bore you with all of the technicals, I want to share with you why the VIX is low, who is doing it and how to tell when it will start moving. I will give you a hint why its low: it is because of the same company that caused "Volmageddon" in 2018 which is when volatility spiked and all hell broke loose in the credit markets, before moving to the equity markets.
WHY THE VIX IS LOW:
The VIX is being kept artificially low bc if it goes up, the entire country of Switzerland will financially implode. Why? Bc of CREDIT SUISSE. They took it on the chin when SVIB failed, had to be bailed out by the Swiss government, and then UBS was forced to buy them after the bondholders were illegally smashed. WHY??????
The GDP of Switzerland is 800B per year.
The amount of derivatives that CS owns? $17 TRILLION. And guess what else they own a shit ton of? US STOCKS.
So, if CS was allowed to fail, and they were experiencing a massive bank run, then their failure would have collapsed the global financial system. I am not exaggerating.
So what does this have to do with VOL? It's super simple once I show you.
WHO IS KEEPING VOL LOW?
Global central banks. If VOL spikes higher, then not only CS, but any other "Too big to fail" bank will be affected bc once one bank starts unwinding, it becomes a exponentially increasing problem - its the nature of derivatives.
Global banks know whats at stake and thats why they are artificially suppressing the VIX, just like 2018.
HOW ARE THEY DOING THIS?
They are doing this through the creation of new products like the 0DTE VIX options that started trading today, that are completely retarded and only meant to be used by central banks to pound the VIX DOWN.
Additional tools being used to manipulate the VIX are SVIX/UVIX. They only exist as financial weapons to suppress the VIX. This is COMPLETELY AGAINST ANY FREE MARKET POLICY.
In fact, there are now 8 of these products (three in the past month!!) that every day are suppressing the VIX.
HOW DO I KNOW WHAT YOU ARE SAYING IS CORRECT?
First, because I do not present to you something I have not fully researched and understood.
Second, because if you look at the following graphic, VIX and HYG (High Yield Corporate Bond ETF) - they trade like a pair: they move together.
But they stopped moving together at THE SAME TIME SVIB FAILED. YUP
VIX is purple, HYG is orange. Easy to see isn't it?
In fact, according to his calcs, the VIX should be at .....64! 60 freaking 4!
Let's make this more interesting - here are all the current products being used to keep the VIX low:
Do you understand? The global banks, primarily the US and its friends at Government Sachs and the DEvil JPM, created all of these products to suppress the VIX.
Oil is one of the tools being used intraday to compress the VIX. Central banks use various oil contracts intraday to control the VIX (but its only one tool; others are USD and the new VIX ETFs - SVIX, UVIX, etc. and the 1dte VIX options).
Here is why OIL is so important to the VIX:
I am not a graphic designer so excuse the simplicity of the following but I like to keeps things simple.
Suppress Oil and suppress VIX - easy to see.
In the above its easy to see why Oil is so important.
If the Fed wants to support the market, it must lower inflation.
To lower inflation, it must keep oil low.
If it can keep Oil low, inflation stays low, interest rates stay low, the VIX stays low and the market goes up.
The Fed has a problem:
Inflation has been rising, and I dont care what the Fed says because I see it food prices, mortgage rates, everything.
Rates have been RISING.
The way to lower inflation is for the Fed to PULL money out of the system.
BUT THE FED HAS BEEN INJECTING LIQUIDTY TO PREVENT THE COLLAPSE OF BANKS. This is seen by the growth of the Fed's balance sheet:
The Fed's balance sheet grows when among other things, they lend more money to banks via the Discount Window. They can do other things but this is the primary way.
Here's the problem and its simple supply and demand:
When there are more dollars (liquidity) chasing the same amount of product, the prices of the products rise (inflation).
THEREFORE: the Fed should be pulling liquidity not adding if they are worried about inflation. But they are not. Why?????
These are the reasons:
If they pull liquidity then banks balance sheets will worsen and more banks will fail.
If more banks fail, then economies and countries will worsen. Credit Suisse??
If countries fail, then the US has much less control over how those countries behave.
And if countries and banks fail, then the bankers behind both make a lot less money, or in some countries, they go to jail.
If bankers go to jail, politicians at the very least dont get reelected and at worse, they die.
Ok, so now that we have the relationships and the possible outcomes, how does the Fed monkey hammer the oil market down???
First, look at this chart. The purple is the VIX. The bars are oil. Heres the last couple of months. When Oil goes down, VIX for some reason goes down. Pretty easy to see.
If the VIX goes up:
Rates go up = BAD
Market goes down = BADDER
HOW ARE THEY DOING THIS?
Well the release from the SPR helped but there is only so much oil in SPR.
Through the oil futures market
Through the oil options market
Through the oil spot prices
With help from its friends Japan, Europe, the devil (JPM), etc. <--- they also use #2-4 to assist.
There you go. An oversimplified explanation how oil is being used to suppress the VIX and why keeping the VIX low is so important.
Of course, as I shared, the Fed has many more tools to compress the VIX which supports the market.
The Fed can print more money which has the effect of lowering interest rates which is deflationary. Less dollars chasing the same products forces the product prices down.
The Fed can lend less money to banks - WAIT, NO THEY CANT BC THE BANKS WILL FAIL. HAHAHA - Fed is stuck.
The Fed can let the VIX rise and let the market fall, which is very devaluing. NOPE, CANNOT DO THIS BC BANKS WILL FAIL.
The Fed is playing whack a mole - my bet is that sooner than later they fail.
Bottomline: The Fed is stuck between supporting our economy, THEIR JOB, and saving banks that shouldn't have been saved in 2008 - $CS et al. They are trying to do both but at the end of the day, they know if they let more BIG banks fail, then everything gets much worse. Remember that Credit Suisse has $17 Trillion in derivatives. If they fail, game over.