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All Good Things...Over the last few years, the broader economy and the techonomy have been incredibly steady and visible in their growth phase. During this time, volatility in the capital markets has fallen to all-time lows, and it has stayed near all-time lows. Are we supposed to believe that volatility will remain near these lows? Are we supposed to believe that the steady boom times of the last five years are likely to remain steady? I sure don't think so. History would tell us otherwise, too. Economies, markets, boom times -- they're cyclical. And this part of the cycle is five years old. I believe we're set up for some wildly volatile activity and binary outcomes for this economy and market over the next three to five years.
Echo Techo BubbleThe conundrum is trying to resolve the extreme bubble/depression cycle in tech with the steady growth of the last five years. That's a large factor in why I've been focusing on preparing for my increasingly likely
I'm no chartist, but that long-term chart of many important sectors of our economy underscores why you've got to be at least a bit cautious in the summer of 2007 as we're hitting these highs. Good times don't last forever, and it's been a long five years of good times out of that Great Tech Depression. Take a look at this 10-year chart of the VIX, a measure of volatility in the stock markets:
Individual stocks tell an even wilder story that we need to remember during these insanely good economic and market times. Here's Bookham, ( BKHM) for example, over the last decade:
Here's Yahoo! ( YHOO) (Don't you love these guys who want to give Semel credit for "creating shareholder value" when the stock has gone from bubbled to almost depressioned out before he ever got there?):
Buy volatility. Sell steadiness. Stick with long-dated calls and puts while the premiums are still cheap. And most of all, don't be greedy by getting levered up in the summer of 2007.