Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 10/13) 

Editor’s Note: Liz Peek is a financial columnist. 

The next government handout should be cases of Dramamine to investors suffering from motion sickness.

The market has never, ever, been so volatile. The VIX, a measure of expected volatility, spiked above 80 yesterday – an unheard-of level, and four times the norm just a year ago.

But then, the economy has never been beset by so many different violent influences. Consider this line from today’s Financial Times: “Switzerland moved to restore confidence in its banking system yesterday …” Switzerland? Land of cuckoo-clocks, chocolate and a banking system rock-solid (and secretive) ever since Hannibal strolled through the Alps? Wow.

This past week brought nearly all stragglers into the misery pool. Commodities plummeted, compounding problems for hedge funds that have recently turned in some of their worst-ever performances. Investors are increasingly taking their money away from hedge-fund managers, causing a dreaded downward spiral of selling. In September redemptions totaled more than $40 billion, and industry observers expect the trend to accelerate. Hedge funds have reduced their leverage, but many still have borrowings of four or five times the securities in their portfolios. They are racing to sell assets to further reduce their debt, and to meet clients’ demands for cash.

This is one of the causes for the collapse in commodities prices. Most notable is oil, which has fallen below $70 per barrel, or by half, in just a few months. This should be – and is—good news for consumers, and for sectors like the airlines that have nearly been bankrupted by soaring fuel costs. It is also positive for the U.S., tempering our trade deficit. Oil demand has dropped sharply, to be sure; it is now running 9% lower than year-earlier levels in the U.S., as a result of declining economic activity and conservation efforts. But it is also true that oil positions are being liquidated by funds, just like stocks.

More surprising than the downdraft in oil prices is that precious metals prices are declining as well. Gold was off 4.1% yesterday and silver ended down 5.4%. Normally in times like these, gold prices would be soaring as investors seek a safe haven. Amazingly, gold prices are only about 5% higher than they were a year ago. Given the panicky times, I would have expected to see gold above $1000 per ounce, instead of the mid- $800 range.

In fact, the only safe haven has been and continues to be U.S. Treasury securities. The yield on two-year U.S. government bonds was 1.62% yesterday, down from 3.98% a year ago. On ten-year bonds the yield was 3.97%, down from 4.55% a year ago. That drop in yield means a nice jump in price for those lucky enough to have bought these instruments a year ago.