"We Are Living In A Different World": BofA Can't Explain What Is Going On With Volatility

Tyler Durden's picture

With the VIX once again pummeled on Friday and set to open below 10 yet again, here are some statistics from Kyle Beard of Bloomsbury advisory: "The VIX has only traded below 10 41 times since 1993 (intra-day). 21 of those occurrences have taken place since May 1, 2017. When you consider there have been 6,179 trading days since 1993, you realize how incredible this is."

By the numbers:

However, it's not just the VIX: as BofA's David Woo points out, volatility across financial markets has collapsed in recent months:

  • The MOVE index, which measures interest rate volatility across the US yield curve, is hovering just above the 52 level that represents the trough of the index since 1988. Only in 2007 and 2013 was the index lower, and only barely.
  • VIX has again dropped below 10. The only time it was lower since the inception of the index in 1990 was briefly in 1993.
  • 3-month EUR/USD vol is now below 7. Since the inception of the euro, EUR/USD vol was only lower twice, in 2007 and 2014.

BofA aggregates these volatility measures by first taking z-scores of the individual measure and then taking an average of the three series. The results are shown in the chart below. The aggregate volatility measure is near its lowest level in twenty years.

As the chart above shows, there are only two other periods during which volatility was as depressed as it is right now:

  • Early 2007: The consensus at the time was that the Fed had completed the tightening cycle (the last hike was in June 2006) and was likely to remain on hold for the foreseeable future.
  • Early 2014: The consensus at the time was that after the end of the winding down of QE4, the Fed would be in a holding mode for an extended period.

Woo then notes that what these two episodes have in common "was that the Fed was seen as either done with hiking rates or still far away from starting to hike rates" and adds that "this makes it very difficult to reconcile the current depressed level of volatility and the fact that the Fed is still in the middle of its hiking cycle."

And, adding to BofA's confusion, Woo says the he would go one step further: "If the market is underpricing the uncertainty with respect to the outlook of US monetary policy, we are even more concerned that it seems totally impervious to the risk of two potentially disruptive, if not dangerous, Games of Chicken likely to unfold in the summer and the beginning of the fall."

While we will have more to say on these two particular "games of chicken", we fast forward to Woo's conclusion, in which he notes that "we find it difficult to reconcile the record low volatility in financial markets at the moment with growing political risk in Washington and geopolitical risk in Asia. There are many reasons why we are living in a different world than the one we used to know and we would caution against relying too much on history for forecasting the likely outcome of these risks."

It appears that what is bothering David Woo is the same thing that bugged DB's Aleksandar Kocic two weeks ago, who however unlike Woo, managed to not only define this decoupling between "risks" and markets, calling it simply "complacency", but also quantified it and found precisely when the market "broke" - some time in 2012.

As a reminder, this is what Kocic said:

Current levels of complacency are alarming. This is what everyone is talking about. Despite growing uncertainties and tensions, the market volatility refuses to rise. Persistence of low volatility is increasing the penalty for potential dissent and reinforces one sided positioning. As a consequence, the risk of disorderly unwind is growing. And the longer this regime continues, the lower the threshold of painful unwind. Currently, VIX at 15% is perceived as a problem although before the crises it had traded above 20% most of the time. Similar observations hold for rates gamma, currently around 60bp, compared to pre-crisis averages around 100bp.

While we know what caused the problem (central banks), and when it emerged (2012), the open questions of when and why this decoupling will (violently) end and how it will impact asset prices remains unanswered.

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foodstampbarry's picture

His name was Klaus Eberwein


DrData02's picture

Klaus or Seth, it doesn't matter.  When the murderers are so well connected as the Clintons or Bush NOTHING will ever come of it.

Iconoclast421's picture

WTF do you expect with debt fueled buybacks and central banks buying hand over fist? The VIX is not a measurement of fiscal insanity. It can be easily manipulated BY fiscal insanity.

bowie28's picture

Why does ZH or anyone bother doing analysis about these charts and metrics?  With all the QE, HFT, central banks propping up markets directly and via shadow buyers, TBTF banks cooking the books with derivatives, any analysis based on the assumption of a functioning and transparent market is mental masturbation. 

No one can predict when it all falls apart no matter how many charts and graphs you look at and compare to previous charts and graphs.

The current market can be summed up very simply without any confusing charts:  Everything about it is a fraud and they don't even try to hide this any more.  They know it's all going to crash and burn so they are looting and stealing as much as they can as fast as they can and will keep looting and stealing until there is nothing left to loot and steal and then it will collapse. 

Haus-Targaryen's picture

I remember back in 2012, specifically Q3 -- calm had just swept over world market's after Draghi's "Whatever it takes speech" but yields in the PIIGS were still stubbornly high, although payable .. for the time being.  Credit was expanding and "New all time high" was becoming ever more common in one market or another.  

I remember it was then, while I was in the middle of my Masters' Thesis when I looked at the data (I was a newbie on ZH back then) and realized 100% the system was unsustainable and would implode spectacularly sometime in the near future.  

I was sure it was going to be Summer/Fall of 2013.  I started my stack, got into cryptos and then BTC and LTC took off --- then in October sometime JP Morgan Chase began limiting withdraws of $50k or more at a single time.  2013 came and went as did 2014, 2015 and 2016.  Every year I was more and more certain it would be the year that followed.  

I used the time to prepare for what was to come, both financially and emotionally.  

And here we sit, with markets and asset price valuations at all time levels $16 silver and collapsing cryptos.  

Every day that goes by is another day I am surprised the system has sustained itself. Everyday this continues the more sure I am of some apocalyptic melt-down in the markets and world political systems.  

However, I have come to some conclusions along the way, and perhaps these will help out others who are like me -- you know the data clearly shows this cannot continue and will end (at least should) end in a ball of flames.  

But it doesn't, so fellow ZH'ers a few things to take to heart as we are once again in the summer doldrums looking towards September and October, hoping *this year* we'll get our pound of flesh: 

1) We no longer have markets.  We have tools used for placating the population as price discovery is long gone. 

2) These tools used for placating the population -- once called markets -- are firmly controlled by a group of people whose literal survival depends on them continuing.

3) This system will not collapse until either:

a) Those in control want it to collapse

b) Someone comes our way which those that control what used to be markets overlook/"mis-"underestimate and all hell breaks loose.

4) Absent 3a or 3b happening, equity markets and all other asset classes will continue to grind sideways-up-ish infinitely while quality of life for those in the bottom 99.95% of the population continue to get squeezed out of existence. 

5) Keep stacking, keep preparing --- but this could go on longer than any of us want it to. 

asteroids's picture

History will repeat itself, eventually. The debauching of the currency to pay geometrically increasing debt leads to collapse. It is inevitable. The Decline and Fall of the American Empire.

fbazzrea's picture

The Decline and Fall of the American Empire.

in one sentence:

The debauching of the currency to pay geometrically increasing debt leads to collapse.

Pollygotacracker's picture

Some good comments. The CB's will either destroy currency as we know it today, or they will crash the markets. There is no other way out for them. 

Paul Kersey's picture

"BofA Can't Explain What Is Going On With Volatility (but can BofA Explain This?)


According to U.S. District Attorney Preet Bharara, $14 million of  the $230 million in the Russian mob's allegedly ill-gotten gains wound up in Bank of America accounts and Gotham real estate, including condos in the Financial District and Midtown, whose market prices were in the low seven figures.

fbazzrea's picture

The CB's will either destroy currency as we know it today, or they will crash the markets.

ultimately, at this point, are not the two possible outcomes inseparable?

the USD is toasting... will be burnt soon. a market crash precipitating a financial meltdown will most undoubtedly domino into a massive decline in federal tax revenues, sinking the U.S. into default (reset).

i see no way out without both occuring. 

Silver Savior's picture

Give me another year to buy up gold and silver then let it all go to hell. The system is worthless as fuck.

Vinividivinci's picture

"We would caution against relying too much on history...".
"Those who cannot remember the past, are doomed to repeat it".
Gee, I wonder which of these statements I believe.../sarc.

66Mustanggirl's picture

"Algorithmic trading (automated trading, black-box trading, or simply algo-trading) is the process of using computers programmed to follow a defined set of instructions for placing a trade in order to generate profits at a speed and frequency that is impossible for a human trader."

Now mind you.....I'm no financial policy expert with 12 letters behind my name, but I do possess a PhD in common sense and life experience and I'm kinda thinkin' THAT wasn't such a hot idea.

lester1's picture

Let's be honest here..

 There is no volatility because of the Federal Reserve's PPT buying stocks and bonds. Basically everything is being nationalized in ALL markets !!

Bay of Pigs's picture

The ESF is a good place to start as well.

lester1's picture

Let's be honest here..

 There is no volatility because of the Federal Reserve's PPT buying stocks and bonds. Basically everything is being nationalized in ALL markets !!

enough of this's picture

Low volatility and an abnormally high level of complacency are symptomatic of a rigged market.  The data, in the form of stock prices, is manipulated by algo traders and the biggest manipulator of all, the Fed.  The strong correlation between the Fed's balance sheet and the S&P 500 index leaves no doubt that the market is rigged.  

The market has become a rigged horserace, where the horses leave the gate and line up in a predetermined order against the rail to the finish line like a merry-go-round.

At some point, however, Mother Nature will her way and upset the contrived trading environment.  Reversions to the mean and beyond are a bitch. 

zzzz88's picture

the reason is so simple---

the market is rigged and fucked too hard to react normally,

wait and see what more weired things will happen

xrxs's picture

This goes on as long as contango > decay.  Once the black swans land though, people are going to get burned.

rejected's picture

Doesn't matter


Silver Savior's picture

Bank of America: We are living in a different world today because of too big to fail banks such as yourself and utterly stupid corporate policies just to name a few. 


----- Soon to be ex account holder.

silverer's picture

"We Are Living In A Different World."

OK, so we'll do that for another few years. After that, something else. Keep propping it up, boys. Good work.

hola dos cola's picture

What happened to Yellen, who after a buildup had everybody hanging on her lip then going abroad to sound 'hawkish' but backhome at her last halfyear adress procastrates herself before the dovish?

Flipflops like that are mostly observed during a pump and dump. Looking at the market...

Move to the sidelines, invest in your local community.

Lost in translation's picture

Hardly surprising.

BofA can't explain why its tellers don't speak English.

24Richie's picture

Perhaps thing are different because the vast majority of trading is done by computer programs rather than people.  Trading seems to happen witrh little regard for fundamentals  and low volatility is a side effect.

. . . _ _ _ . . .'s picture

All those VIX lottery tickets are starting to look like regular lottery tickets.

I'm still a fan of long volatility, though. Just double your bet every year.

DaBard51's picture

Algos, nerves of silicon they have...



When nine hundred years old you become, look this good you will not.

vegas's picture

Known this for months; glad you started to figure it out. It has made trading mostly a joke, excluding the stock indices, which for the most part is a BTFD opportunity until it isn't. When the "punchbowl" finally gets taken away some day, and the redemptions all hit the passive investment funds [Dow30 & SP500 ETF's and/or index funds] at the same time, central banks will be impotent to do anything. When that day comes, look the fuck out.



Lizardking's picture

Just wait for 30-34K on the DOW, then you'll see some volatility.

libertyanyday's picture

quants , algos, and computers.........they rarely operate on emotion.  Human trades are 7 percent. 


Apeon's picture

"There are many reasons why we are living in a different world than the one we used to know and we would caution against relying too much on history for forecasting the likely outcome of these risks."


 The Economic System has Changed---cannot explain it---did not understand the old one very well----and don't understand this one either----but it is different.

Like going to Calculus from Algebra and Geometry, skipping Trig.

Or, I used to understand my wife-[in certain ways]-, but since men of pause, am not so sure?

         or Why the hell did the font get smaller?    [apparently it only got smaller in the prep box]-[wonder if that is a harbinger of my economic situation]


I have a system-----I call it Gut-Chart----when I see lots of traffic, and new buidings going up, seems like things are ok, even if I cannot explain it.