13 Ways Of Looking At Record Low Volatility
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:
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