"This Has Never Happened Before": Goldman Warns Low-Vol Regime Is In Jeopardy

Tyler Durden's picture

Picking up on something we first noted over a month ago, and following last week's VIX fireworks, this morning Goldman's Ian Wright looks at the rapid changes in the volatility landscape - beyond just last Thursday's near historic surge in the VIX which shot up from single digits to over 17 in 48 hours - and points out something that has never been observed before: the ratio of VVIX to VIX, or the vol of vol relative to implied volatility as per the VIX, just hit the highest level on record, while the VVIX itself spiked to the highest level since the August 2015 ETFlash crash.

The also confirmed something else we observed in mid-July when we showed that the price of VIX convexity had hit an all time high, when we said that the market has never trusted the VIX as little as it did then.

In any case, the surge in the VVIX/VIX ratio prompted Wright to, well, write that the "low vol regime is under threat" from recent events in North Korea.

The Goldman strategist observes that, as a result of tensions involving the US and North Korea, "markets became concerned about potential escalation, which could negatively affect what has been a broadly good macro environment."  As part of this broad repricing of vol, the VIX spiked roughly 40% on Thursday, and the VVIX, measuring the vol of vol, jumped to its highest level since August 2015.

Is this the turning point in the low-vol regime? Here Wright points to some of his previous observations, when he wrote that "vol spikes often occur after unpredictable major geopolitical events such as wars and terror attacks, or adverse economic or financial shocks." However, whether a higher volatility regime persists generally depends on recession risks and a slowing business cycle, and perhaps this time also uncertainty over central bank policies (and inflation). "As a result, the key question is whether the current spike spills into the macro or not."

For now, Goldman believes that last week's sell-off is a "risk premium move, rather than a move based on growth expectations" so no need to panic just yet. And yet, Goldman admits the market is not nearly as sanguine.

In our view, it is likely that the low volatility regime persists until the growth/rates mix turns more negative. But the ratio of the VVIX to VIX reached its highest level in history last week, suggesting that, although vol has remained relatively anchored, markets are already significantly pricing the more latent risk that the volatility regime shifts.

And while Goldman itself does not quite agree with the market's take just yet, stating that "we believe it is too early to call the end of the current low vol regime" it does remind clients that "we previously recommended 'hedges' such as 97/93 put spreads and gold strangles to protect from sudden vol spikes. We are Neutral equity over 3m and continue to believe hedges like those above make sense."

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me123me's picture

VIX in all its forms is pretty much useless. Tells you very little. 

order66's picture

Yawn. Slap the Ask.

lester1's picture

Who the fuck in their right mind is buying SNAP today ?



spastic_colon's picture

think inverse........someone needs to sell into rallies and they're getting a helping hand (invisible).......the question is who the f**k is buying everything today.

eclectic syncretist's picture

Maybe the central banks are buying all the shares that the banksters are shorting, so that the banksters make a killing when the central banks sell en masse. After all, it's not like the central banks ever have to give an accounting of their activities. What's to stop them from colluding for profit?

Seal's picture

The #Fed with our tax dollars

negan2's picture

Dead Cat Bounce from short covering.


shizzledizzle's picture

Don't know... Seen it hit 13.00 and thought about loading up on puts again.

Ajax-1's picture

Are you referring to Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps?

spastic_colon's picture

fuck you goldman................put your (clients) money where your mouth is

taketheredpill's picture

Pricing is changing? Typo?  At Goldman??


NEOSERF's picture

Market up 0.6% and XIV up 9.6%....all is good

silverer's picture

The markets are building something undefined, and never seen before in financial history. When it gets up off the gurney and walks, that's when everyone will freak out.

GunnerySgtHartman's picture

Do you think that the likes of GS will freak out?  Or are the banksters knowingly creating the monster?

Overleveraged_and_Impatient's picture

Ladies and gentlemen dO NOT FUCK WITH THE STOCK MARKET! We are quickly approaching 3000 by year end S&P 500.

onthedeschutes's picture

Goldman, being honest with anyone, has never happened before....and never will.

MrBoompi's picture

VIX and that other thing, VVIX, are just derivatives created to entice suckers into potentially foolish bets.  I could give a fuck about VIX or whether or not Goldman whines about it.  

Quinvarius's picture

All these market firsts.  I'd say Yellen's delay of raising rates rally has run it's course.  Trees don't grow to the sky no matter how much you water them.  Everything trades.