Here's an update to a chart I featured last June. Today's plunge in global markets qualifies as a genuine panic, according to this measure of how pessimistic the market is, and how much actual deterioration in the fundamentals there has been. The chart takes the Vix index of implied equity volatility and divides it by the yield on 10-yr Treasuries. The higher the Vix, the higher the degree of market uncertainty and fear; the lower the yield on Treasuries, the weaker the economy is perceived to be. So a higher ratio is bad, and a lower ratio is good. This is almost as bad as the first European sovereign debt scare which struck in April of last year.
click to enlarge
The Vix is currently over 28, and the 10-yr yield has dropped to 2.46%, which is only a few bps higher than the lows it hit last October when the market thought we were in a double-dip recession.
However, as this next chart shows, the Vix is still substantially below its previous peaks, so the driving factor behind the increase in the Vix/10-yr ratio is the very low level of 10-yr yields, which decline like this only when driven by fears of an imminent recession. This suggests that the market is very concerned about the onset of a global economic slump, triggered by PIIGS defaults which cause such great stress among European banks that contagion effects ripple throughout the world. Are we finally on the cusp of "the end of the world as we know it?" I doubt it. We've survived worse situations.
UPDATE: Here's the top chart with today's closing values (Vix = 32, 10-yr = 2.42%). It will be very interesting to see whether this panic can be arrested if tomorrow's jobs numbers are decent.