13 Ways Of Looking At Record Low Volatility

Tyler Durden's picture

By now it is widely known that with the VIX cratering to levels not seen since 2007, and the "old" VIX, the one based on OEX calls and puts, plunging to record low, complacency, confidence (in the Fed's central planning) and a lack of any fear is pervasive.

Why is this a concern? One simple reason: as Princeton professor Markus Brunnermeier explains, this is the so-called "paradox of volatility" - "When measured market volatility is low, people feel empowered to take on more leverage and more liquidity mismatch, which leaves the whole system more prone to sharp movements. This dynamic occurred during the “Great Moderation.” During that period,  fundamental and asset volatility was generally low and market participants took on much more leverage."

Of course, what he defines the paradox of volatility is merely a rephrasing of Minsky. As Goldman's Charles Himmelberg explains, when asked if low volatility is an ominous signal, he says:

"It should make us worry. We have a lot of historical experience with the so-called “Minsky framework” of how credit cycles play out: a period of low volatility tends to generate complacency on the part of investors, corporations, households, and regulators as they become more and more comfortable with the notion that the volatility that they have recently experienced is a thing of the past and not likely to be repeated in the near term. As a result, they take on more leverage, which leaves them even more vulnerable when volatility inevitably rears its ugly head again and valuations decline. Recession ensues, its severity depending on the degree of imbalances. Today, the incentives for leverage are arguably as strong as they were in 2004-2006.”

In other words, we have nothing to fear but the lack of fear itself.

However, since everyone and their pundit grandmother has opined on volatility in the past month, we will say no more and instead of Wall Street, we will do a Wallace Stevens, with 13 ways of looking at record low volatility, in charts.


But while vol in vritually all asset classes is crashing, there is one place where uncertainty it is going up:

Source: Goldman

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JenkinsLane's picture

This is all gonna end just swell.

TeamDepends's picture

So, it would appear then, that if there was no manipulation whatsoever, that volatility would be through the roof? Is that the gist of the gimp?

El Vaquero's picture

I think it implies that when the manipulation finally quits working, we're going to see a lot of pent up volatility, and possibly a weather forecast that includes a 50% chance of it raining bankers.

FlyinHigh's picture

Why are charts always "Blue"?

bonin006's picture

They want to be fair and balanced. Red is bad, green is good, but blue is neutral.

DR's picture

When the CBs are the counterparty to all the risks in the financial system you would expect low volatility.

disabledvet's picture

"no one is making any money off of volatility." there is no better example of this then hedge fund performance. simply put "it stinks."

in the meantime corporate performance since the collapse has been exemplary...or just innovation period actually. So on top of a huge explosion in energy production in the USA (at all levels...not just oil and condensate but in alternatives like wind and solar) we've had a tremendous explosion in innovation (Teslas, 3 d printing, nano-materials) all of which are "conspiring" to make investing in the debt markets a various hazardous enterprise indeed.

200,000 dollars for a willy's jeep World War II vintage?

over a million dollars per mortar system? does that include the ammo?

here's what 200 grand gets you relative to the Army: http://en.wikipedia.org/wiki/General_Dynamics_Flyer that at least looks like a replacement for the Hummvee.

why don't the Marines just use all the Army surplus Humvees?

I Write Code's picture

He said:

When measured market volatility is low, people feel empowered to take on more leverage and more liquidity mismatch

But I don't think "empowered" is the right word, "desparate to match average historical returns" is more like it.  But the point is almost good, it means the overall volatility is something like a constant, like squeezing a balloon, it just goes somewhere else.

I think the current low volatility is simply forced by the Fed.  I guess Janet wants us happy to BTFATH.  I don't think there's anything more to say about it.

Wild Theories's picture

wooo, weekend chart porn...


This is why hockey sticks are neccessary, they provide the only 'volatility' left so even grandma can make money on her retirement saving investments, people need to understand they are really doing it as a public service, for YOU.

They even go to the trouble of making it predictable enough even grandma can follow, it's around the same time as she takes her pills.

But no, people have to bitch and rage about 'rigged' markets, as if most of them could actually make moar money when the markets were 'unrigged', what an ungrateful lot...


Bemused Observer's picture

all this low volatility is because the 8 people who actually ARE trading stocks today can't move fast enough to get that sucker up.

There just aren't enough of them to move the massive beast.

FreeBull's picture

"Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria."

- Sir John Templeton



d edwards's picture

A very wise man!


Instead of "paradox of volitility" how about "volitility vortex?" sounds more trendy!

overmedicatedundersexed's picture

want to know the reason this market is thin? look no further than how many went to jail after 2008, how many BK co's were bailed out or taken over (GM)..compare that to the S&L crisis and over 2000 banksters who faced criminal trials..the investors then moved out of markets as justice was overlooked ..no justice no market.

what did john templeton come out and say, nothing silence, as did most of the so called men of finance and business...throw in law profs, business school profs , and our public servents silence..

TBT jail is the problem, and we all are paying for injustice.


eishund's picture

R we in ze eye of ze storm?

SystemOfaDrown's picture

The only thing we have to fear is "No Fear" itself!

Dragon HAwk's picture

It's Quiet Bill....   Too Quiet...