First, there's the seemingly unending uncertainty over whether there'll be a new Greek Drachma. Despite strong indications that Greece is about to fire up their own printing presses (non-compliance with bail out terms, contracting economy, etc), the odds are that they'll stay in the union. If Greece "fails", market participants will increase their bets on "who's next", which will lead to Euro zone bailouts becoming increasingly more expensive (let's face it, even the ECB acting as a backstop is a bailout), and at some point this would be universally acknowledged as unsustainable. Once accepted, this would lead to the effective end of the Euro zone, the end of German exports to the Euro area, and a drastic decrease in German sales further afield - this will prove vastly more costly to Germany than a federalization of all Euro countries' debt issues; in fact, federalism will strongly support German industry (through a combination of a competitive global currency, and a large supportive "home market"). Recent German economic data strongly supports this view, but, of course, political interpretation could deviate. But, after the doldrums, the odds are for more barely-face-saving covert federal underwriting of the currency, unless... Unless Greek leftists manage to convince their electorate that the Euro is only a tool and extension of an imperialist pax-Germanica engineered to funnel all riches back to the fatherland, and that freedom, while not free, can only be bought by being a sovereign capable of printing.
On other stages other dramas are being rehersed. There's the US election (which, again, is earning its reputation as the "best entertainment money can buy" - provided you like a nice tragedy), the CHF is busy crippling segments of Switzerlands' non-diversified economy (while all banks continue to suffer and taxation initiatives continue to erode Swizerlands safe haven status), China desperately tries to both promote and control growth while giving the appearance of addressing issues of income inequality and access/corruption (recent high profile efforts would, in the parlance of the theater, surely be considered farcical), resource economies continue as two-speed economies (despite recent price pressures), and finally there's a moribund Japanese economy - escaping criticism only because no one has the energy left to criticize it.
For the most part people are optimists. US politicians continue to promise solutions. Chinese living in big cities will happily inform you that if you look straight up you can sometimes see that the sky is blue. Safe havens and resource economies (sometimes one and the same) while losing diversification and undermining their future prospects are universally envied. And, Japan's ever increasing debt burden is priced by the markets as sustainable. The obvious argument is, of course, that none of this is sustainable and we'll soon witness wealth destruction on a massive global scale. Frankly, there are too many scenarios to analyze, and, in some cases too little good quality data, so opinions proliferate while facts remain hard to find, but here's a takeaway:
The US 30 year bond, yields close to 2.8%, but if the US economy falters (more than it's already done), and if yields approach Japan's then the present value of the long bond will increase by around 25%. Odds are this won't happen, the USA is not Japan, but if Greek's decide on sovereignty then the long bond will destroy the market value of all in its path. So, in a low volatility environment, while the sheeple are captivated by the Olympic spectacle, it may be the right time to “cheaply” hedge some bets, and, feeling inspired by the gymnasts, perform some straddles – one thing is certain, volatility will be back.
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