It is a matter of record that America’s economic recovery over the last four years has been little more than a statistical hoax.  Although real GDP supposedly has grown by 10.4 percent over that time, economist Kurt Richebacher calculates that gains would be no higher than 4 percent if honest numbers were used. Instead, the government’s spinmeisters continue to grossly understate the rate of inflation while using hedonic adjustments to turbo-charge reported gains in productivity. Dr. Richebacher says that such duplicity has been taking place on a breathtaking scale, causing, for instance, a 9.4 percent rise in business spending on computers over the last four years to become a hedonically enhanced 113.4 percent.

Each of us knows, through personal experience and anecdote, that the cost of living is rising much faster than the government would have us believe, and that good jobs are as hard to come by as they are to keep.  But if the average American is working harder than ever merely to stay afloat, it is not clear how such feeble economic growth as we’ve experienced in recent years will enable said worker to extricate himself from a financial pillory, much less improve his lot.

Flaccid Market

This fact has not been lost on investors, as the stock market’s flaccid performance over the last five quarters attests. But investors have not been the only casualty of diminished expectations, as witness the death spiral of the VIX shown in the chart below. Clearly, it is becoming increasingly difficult for traders and hedgers – the nimblest players in the investment world – to eke out a living.  And if these intrepid souls can no longer cut it, what hope is there for the rest of us?

 (Click on image to enlarge)

There are undoubtedly traders who would sacrifice their first-born just to have volatility return for a few months. But  they should be careful what they wish for, since my hunch is that the moribund stock market is about to inundate us all with a volatility tsunami. Before that happens, though, we could expect the humbling process to continue until the hardiest momentum players have been asphyxiated, just like the unsuspecting mayflies of the tech boom before them.

We’ll Stay Short

Of course, it’s possible the process has already begun, benchmarked by the peak in the broad averages on March 7. But the earliest sign occurred quite a while ago when, in late 2003 the VIX breached a hidden-pivot support at 14.79, sounding the death knell for traders and hedgers. The failure of this support hinted that volatility was about to fall almost literally off the charts. And so it has, very nearly, causing whatever post-boom opportunities that remained to evaporate like dew on cactus.

And now, if volatility is about to return, presumably in conjunction with a breakdown of the stock market, my guess is that it will be signaled by a close above 14.79 on the weekly VIX chart. We’ll be watching from a safe distance, nursing the sixty QQQ puts we bought a short while ago, when the index hit a minor peak. We are also short the S&P futures – from within a single tick of the March 7 top – and will continue to use a wide trailing stop, since, in my opinion, the market's downside risk at current levels vastly exceeds its upside potential.