Short View: Uncertainty reigns

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Warren Buffett is the world’s best-known investor, not least because he has strong views and a long-term perspective which have made him immense profits.

His explanation for Berkshire Hathaway’s biggest investment ever – Tuesday’s offer to buy a US railroad company – conforms to this style. Valuing Burlington Northern Santa Fe at $44bn, he said it was “an all-in wager on the economic future of the United States”.

Most other investors are less certain. Indeed, for many, the questions are multiplying. Is the global economic stimulus-fuelled growth sustainable? Will central banks be able to shift monetary policy without causing a market panic? The clearest indication of the mounting concerns is the steady rise in the Chicago Board Options Exchange’s Vix index. It measures the cost of insuring against volatility in the S&P 500 index. After hitting a low of about 20, it is back above 30. This signals distress.

When the Vix was heading for record highs last October, in the wake of the bankruptcy of Lehman Brothers, Mr Buffett said he was buying US stocks. “Be fearful when others are greedy, and be greedy when others are fearful,” he said. Investors who bought the S&P 500 index back then have made more than 10 per cent.

Whether greedy or fearful, many investors are confused. The Vix, often called Wall Street’s “fear gauge”, could well be rebranded as the “uncertainty gauge”. And uncertainty over stocks signals uncertainty about oil and the dollar, too, in light of the strong, and growing, correlations between these assets.

This makes the job of those able to offer guidance – such as the Federal Reserve in its statement on Wednesday after a two-day policy-setting meeting – even harder. Another word for uncertainty is unpredictability, and this means markets could respond in unexpected ways to signals about the future.

John Authers is on sabbatical.

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