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Goldman Warns This Extreme Indicator "Is Rare Outside Of A Recession"
The current VIX level of 26 is equal to the median VIX level over the last three recessions. As Goldman warns, while extreme VIX levels periodically occur, our analysis shows that VIX levels in the high-twenties to low-thirties for extended periods of time are rare outside of recessions. Furthermore, this was foreseeable as equities were ignoring potential warning signs from other asset classes prior to the recent sell-off.
Via Goldman Sachs,
While extreme VIX levels periodically occur, our analysis shows that VIX levels in the high- twenties to low-thirties for extended periods of time are rare outside of recessions. The second quarter revised US GDP print was 3.7% and our tracking estimate for Q3 currently stands at 2.3%, which biases us toward a mean reversion to lower VIX levels.
High-twenties to low-thirties VIX equates to recession volatility
On the economic front: Many investors have argued that VIX levels in the high-twenties to low-thirties are justified. We argue that while periodic spikes should be expected, it is hard to sustain high VIX levels outside of recessions. A few simple statistics:
- Recession volatility: The median level of S&P 500 realized volatility in a recession month has been 17.5 back to 1929.
- Non-recession volatility: The median level of realized vol in a non-recession month has been 11.4.
- VIX over the last three recessions: VIX levels go back to January 1990. Since that time there have been three recessions. Average VIX levels in the first two recessions (1990-1991, 2001) were 25 and 26 respectively. The worst of the worst was of course the Great Financial Crisis. Average VIX levels in the 2008-2009 recession were 34.
Volatility perspective: A simple VIX exercise. Suppose that we are not in a recession. Then, applying a hefty 5 point risk premium to the non-recession S&P 500 realized volatility number of 11.4, would suggest that median VIX levels might be somewhere in the neighborhood of 16.5. Even if we were in a recession, applying the same 5 point risk premium to the median level of S&P 500 realized volatility in a recession month would suggest a VIX level of 22.5 (17.5 + 5 = 22.5). Using averages instead of medians pushes the VIX higher due to the skewness in the underlying distribution of volatility (22.5+ 5=27.5).
While the VIX may have overshot its typical response to the S&P, the bigger question is whether equities were ignoring warning signs from EM FX, HY, oil and rates moves that have been building over the last year. Was the VIX too low to begin with?
Our results do suggest that relative to cross asset risk metrics the VIX was low in mid-August.
But that same analysis also shows that the VIX not only caught up but actually overshot cross asset risk moves by 12-14 points when it peaked above 40. Using cross asset risk metrics in order to generate a VIX range points to current VIX levels between 22 and 24 versus a closing VIX level of 26.05 on August 28th. While the VIX may struggle to find its new home, we think it’s headed lower if our economic projections are correct.
Were equities ignoring potential warning signs from other assets prior to the recent sell-off?
In our view, equity volatility is part cyclical, part positioning and liquidity, and partly reflective of financial distress or systemic risk. So the VIX can be high even when the economics are not poor. We tend to look at cross asset relationships during periods of stress. Cross asset risk metrics often provide higher frequency clues as to whether the VIX may be over- or under-shooting the stress in another asset classes. Earlier in 2015, non-equity asset volatility levels had been pushing higher while the VIX was still below 13 in mid-August. What if equity volatility was lagging and the VIX should have been much higher coming into the recent bout of equity volatility? That would imply that the VIX was too low and that equities were merely “catching-down”.
Which assets have historically been the most correlated to the VIX?
Emerging market weakness, the decline in oil prices, rise in high yield spreads and increase in rates volatility have all been areas of concern in 2015. Exhibit 8 shows the correlation between the VIX vs. other asset classes based upon daily changes each calendar year back to 2008. US HY spreads and EM FX have consistently been the most positively correlated to the VIX, while correlations back to S&P 500 returns have been strong and negative ranging from -0.76 to -0.89. Oil and rates have tended to have the weakest correlations back to the VIX.
Howver, Goldman concludes that in their view, the large VIX overshoot relative to recent S&P moves points to a vol spike driven more by positioning and liquidity more than fundamentals... though that merely ensures they are not antagonzing their economic 'forecasters' guess for growth this year. rather than fundamentals.
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maggot speak
Oh how I hate equities.....
Whudduya mean they cut the power? They're animals!
You forgot the ,'they can't' part, no these are not animals, they are 'ruthless people' ala, the movie Authur.
Curiouser and curiouser, Goldman keeps putting out pieces of pending doom and gloom.
How about for Depressions? Does it work for those, too?
The VIX was too low because of Fed intervention...
..why worry about volitility w/ PPT ?
it is really as simply as that! the fed is out of bullets....
it is really as simply as that! the fed is out of bullets....
hard to trust anything coming from the Squid.
Where's the picture of Kermit with his hands spreading his cheeks?
I hope the new muppet show has a few goldman themed skits. Hell, they could have jamie dimon as a special guest taking kermit from behind.
jamie dimon dressed up as miss piggie with a huge strap on? we need moar details.
I love how these heroin junkies like to pretend that we aren't already in a depression.
Pillage and rape are fun for the doer, so why would they be depressed ?
..more needles coming in Sept
Correction, we are currently in a recession.
Don't worry though, the depression is on its way!
No, we are in a depression and have been since 2000. It's just been masked over by massive amounts of debt, SNAP, and homeless shelters.
Valid point, and I see where you are coming from.
I guess I just come from the viewpoint that the things you mention are all full blown recession characteristics that will lead to the depression. The depression is when all of the things you mentioned that are holding up the veneer cannot any longer and all fall apart. My depression is when SHTF and the markets go into full-blown freefall with no possibility to cover up from the Central Planners.
In the end though, this is all semantics. The important thing is having awareness of what is really going on and what will go on.
Agree to disagree per se.
Whew...and I thought we were in a depression.
sounds like they are short vix and talking their book..hope vix goes thru 40 again shortly
where is that goldman sacks atm machine? i must withdraw all my money
Recession/depression since 2001 - the "good times" weren't real.
Go look at the Dow chart for 2001
My, my, my, my nirple hits me so hard
Makes me say, "Oh my Lord, Thank you for blessing me
With a mind to rhyme and two hype feet."
It feels good, when you know you're down
A super dope homeboy from the Oaktown
And I'm known as such
And this is a scam, uh, you can't touch...
You will never hear the gov say the word recession again
Not true. They will but only when it is advantageous for them. Probably when they try introducing new laws that help them (e.g. monitoring financial transactions even more).
they mean the PPT were ignoring...
Proven way to increase investment discipline http://www.decisiveinvesting.com/blog/discipline/7-steps-to-increase-dis.../
Wow...I guess this means I need to invest in "Gold" man! A play on words...but I like the tune of it...
actually - that is one of the BETTER things that I have heard Goldman say recently. They are probably right. If you look at the VIX from the point of view of levels and time - both factors together - you probably can draw some useful conclusions.
Zion-o-meter is going hot.
Fuck Goldman.
nsa received some irs files, and found a few billion dollars were freed up over the weekend, so the gs carnival barkers are out.
BUY THE HELL OUT OF VOL. GS MUST BE SHORT.
Perhaps because we have been in a depression since QE and ZIRP started? LOL.
Considering we have been in a SUPRESSED DEPRESSION for parts of 7 years this is a no-brainer.
Goldman's "warns" have been coming later and later since they've become a research house instead of a prop shop.
How about this explanation: "That's because we are, in fact, in a recession." Manipulated earnings, economic reports, and everything else.. contrived... smoke and mirrors to hide the truth.
How about this explanation: "That's because we are, in fact, in a recession." Manipulated earnings, economic reports, and everything else.. contrived... smoke and mirrors to hide the truth.
The only thing I want to hear from Goldman is that their CEO was found hanging from a lamppost wearing nothing but a very small clown's hat strategically placed on his midsection.
The operative words are 'Goldman warns'.
nuff said.