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By Paul Justice, CFA | 05-25-2010 11:47 AM

Investing in Volatility

Morningstar's Paul Justice and Bradley Kay on the factors driving the market turmoil and ways to invest in the volatility that is spreading worldwide.

Securities mentioned in this video
VXX iPath S&P 500 VIX ST Futures ETN

Paul Justice: Fix one leak, and another springs. I'm Paul Justice with Morningstar, director of ETF research. Today I'm joined by Bradley Kay, and we're here to talk about rising volatility in global markets in the wake of what was an apparent fix for Greece.

We're seeing market fears now spread across not only Europe, but all the way into Asia. If you could, please help us figure out an answer as to why this volatility is spiking now, and what kind of systemic problems do we have.

Bradley Kay: It certainly seem so surprising, especially for someone who's been paying attention to the more positive news that's been coming out of the U.S. economy recently.

But on the other hand we have, in Korea especially, there's been very much rising political tension, which has ignited a bit of a powder-keg economy we've already had there with the situation in Europe. So, Greece especially coming inches away from default, then that possibly leading to contagion throughout the rest of the Mediterranean region. Italy's not on great standing. Spain and Portugal, certainly there was even, today, a great deal of concern about them.

The stock markets did very poorly. It really seems to be that even though people thought that this package might do the trick, that this 700 billion euro rescue package might do the trick, the markets don't seem to be believing it right now.

Justice: Sure. It almost leads to global inflation fears. It used to be that the dollar was pegged as the weak currency that everyone would flee. The euro was very popular. But now we see the structural weakness emerge there, just as the U.S. ceases doing its own monetary expansion policy.

Now Europe seems to be following in the same, and it's leading to weakness not only in that region, but it's spread across the globe at this point in time. If we throw in the political fears, geopolitical, possibly warfare, it's leading to a great deal of instability, and it's also spreading across, not only in U.S. capital equity markets, but also in the bond markets at this point in time.

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