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Long-Dated VIX Still Priced For Depression Risk
Since the spike in VIX in October of last year, short-dated volatility (and correlation) has dropped significantly, but the vol term-structure has steepened, and long-dated volatility remains stubbornly high. Goldman Sachs updates their volatility debt cycle thesis today and so far we are following the typical cycle post-volatility-spike - realized vols drop, short-term implied vols drop, term structure steepens, long-term vols drop - leaving them focused on both the implications of the current low levels of short-term vol and the high-levels of long-term vol. In brief, short-term volatility reflects very closely the current macro environment (GDP growth, ISM, high-yield, and Goldman's models) but longer-dated volatility trades significantly worse. The front of the volatility curve is in-line with the economics, the back is still pricing in potential damage. The volatility (variance swaps) market is expecting realized volatility to be very high over the next 5-10 years - the only time this has happened was during The Great Depression.
The four-stage model of post vol spike market behavior is very useful (if not somewhat obvious) in considering where we are in terms of sentiment.
Stage 1 has clearly evolved as 1m S&P 500 realized vol has dropped to 10, 20% of its peak level of 50 in Aug-11. Interestingly, 1m realized correlation has also dropped notably during that period from 0.83 in 2011 to 0.23 currently.
Stage 2 has occurred as VIX (implied vol) has tracked realized vol lower (but at a significant lag admittedly). The spread between VIX and 1m realized vol is currently 8 vols - almost double its 20 year average (no wonder its so attractive to keep selling that premium).
The steepening in the vol term structure that we have been discussing recently is Stage 3 and at 7 vol points (12m - 1m term structure), its almost 20x the 20-year average of only 1 vol point (again for the stat arbs, it would seem vol flatteners were 'cheap') but as Goldman points out, the current macro environment (modeled by GDP growth, ISM, high-yield, and other models) is priced in, realized should be around 14, and VIX around 18-20 - or where it is now.
So that leaves Stage 4. This is the evolution back to normality of the longer-dated volatility market. This has not happened.Long-dated variance swap markets are priced to expect very significant realized vol - on a scale with those exhibited during the Great Depression.
It is clear that the overhang of the realization that the impossible is possible (post US downgrade and then Greek PSI) leaves professionals willing to bid for longer-dated macro (vol) protection.
Professionals remain anxiously aware that the global debt super-cycle has ended and that we face deleveraging and deflationary pressures for years to come, short-dated vol will continue to ebb and flow with each band-aid and risk flare but investors deep-down know that the 'big one' remains around the corner.
As Jim Reid noted this morning in his macro strategy:
Indeed Debt/GDP ratios across the Western World are in many places still growing, especially in the public sector. So sluggish growth and high debts across the whole of the Western World leave us more vulnerable to shocks for a long period ahead. Although markets are in a healthy state at the moment it would only take a relatively mild cross-wind to expose the problems again. We desperately need decent growth across the Developed World in order to reduce the fragility of the system.
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Relax, NewtObamney has a plan!
Hope is a great investment strategy....
Professionals remain anxiously aware that the global debt super-cycle has ended and that we face deleveraging and deflationary pressures for years to come...
Professionals remain cognitively dissonant that the global debt super-cycle has ended and that we face deleveraging and deflationary pressures for years to come...
There... fixed it...
I am personnaly sick of the FED completely distorting every market and making it impossible to trade and price things properly
...as is just about everyone on the globe...with the exceptions of everyone in Europe and Jamie Dimon, of course.
DON'T DISS POOR JAMIE! HAVEN'T YOU DONE ENOUGH! (Just kidding)
Bang on Zola - could not agree more. All the FED is doing is causing commodities to rise and making it harder for the 99% to survive plus we can't trade (as you said). Let the markets fall and then we can recover - no more bandaids!!!
This is a better article than former VIX discussions
Vix is 30 day options ANNUALIZED, longer term options are pricier to reflect REAL 1 year vol increases
I still love how confusing this all is to everyone
right, buy low and sell high. Not the other way around.
Ahso, now I get it. I sure wish somebody would have said that sooner while I still had some money...
Yes but its cause theres quite the difference in talking about VIX options vs futures, not to mention that you cant trade the spot and yet so many focus on that in their musings.
Buy the SPX ATM straddle and the surrounding ITM and OTM. Then keep rolling it up and down while hedging your deltas to neutral. That's as close as you get.
It used to be based off the OEX and was just a reference of Vol.
The talking heads try to make it out as a market predictor.
There's plenty of room from growth in EU summit hot air
All the FED is doing is causing commodities to rise and making it harder for the 99% to survive plus we can't trade casas prefabricadas
heh heh
goldman said "global supercycle"
coool...
here we see that D00M is already priced in, too!
hava nice day!
<=== party on, wayne!
<=== party on, garth!
these derivatives of D00M guarantee a 2.7% GDP growth no matter how high she blows!
This poll sponsored by "Noah's Arcade"...
We used to call any Arcade or game or anything that was impossible a "Noah's" Some will get it some will not
I give you QE3: The manipulated USD/RMB exchange rate.
http://www.indexmundi.com/xrates/graph.aspx?c1=USD&c2=CNY&days=3650
Should cause commodity inflation and a relative increase in finished product prices from China => Inflation exported back to America.
Also the parabolic section kind of correlates with parabolic increases in commodity prices in 07/08. The recent increase is linear not exponential, someone changed the function used. I think they broke the world in 08.
The whole things seems to come down to interest rates.
Big tits. Big tits.
If you can hold them at zero without mega-inflation, then the Ponzi will continue.
But if inflation starts to hit hard, then the games all over.
The banks go bust again.
Has anyone done comparitive work on the Nikkie since thier peak to study the volume levels in conjuction with their QE programs
I have done comparative work on the Nikkie vs the Nookie index. However, this is proprietary data that I only share with a few close friends and institutional clients (wink, wink, nudge, nudge).
Above everything else the only thing that seems to be working are the OEW charts.
ah, the centrifuge...
So... is it safe to dip my toes into TVIX yet?
Was wondering that myself. Are there tvix options??
Ah, a 4th derivative play for the retail investor.
Not kidding here, you might as well put that money on fire while lighting a nice cigar, at least youll grab the attention of some females. Seriously.
I hear you, ZeroPower - and I am that retail investor.....
It sure was nice making the massive gains on tvix in the summer/fall though
When Papandreou announced the referendum, for instance, it was a 50% gain in 18 hours
Yeah that shit is pretty toxic
High volatility over the next 5-10 years? Well I guess so: no volatility, nobody makes a buck on Wall St. Duh. Fer sure there's no economy out there.
Long term SPX vol is sticky, it is always higher than it "should" be, due to VA hedging. Goldman know this and are trying to get clients to sell (not uniquely, so are DB).
With high vol and high divs, SPX long dated puts are certainly expensive relative to other indices. But its not clear when you will realise the profit from a short position, unless you are willing to hold to maturity - and in the next 5 years there will be times when those puts you sold to GS are much more expensive than now, thats when your risk manager tells you to buy them back at extreme levels... and GS will happily show you an offer.
thank god somebody here has a clue. the world has been stuffed completely to the gills of short variance/vol, there is no marginal seller of any significance left. just remember, as in all crowded trades, he who panics first wins...
Hello "is their anybody in there", somebody tell the experts we are already well into a depression.
the only thing that keeps everyone from knowing that the depression is already well healed in and upon the republic is that social welfare spending bailing out all the (free loaders with hand outs) keep the masses from lining up around the government building with lengths of rope, tar, feather pillows, rails and other items of the populace decent. we have 5 million foreclosures and counting, forward price all you want, all you are doing is prolonging the agony of the masses who will wake up one day to find that the government has no more of other peoples money to give them and then things get real dicey. cheers!
Social welfare spending prevents the masses from lining up around the block at soup kitchens.
There fore what cannot be seen is hidden in the form of a plastic benefit debt card.
Tattooed identy bar codes (compliments of the new/old facist regime) soon.
Some choice; Obammy or Mittens! Bend over hard. More of the same coming with a vengence!
Oh and by the way -
there are no markets anymore -
just interventions.
^^ Good point. ^ This one too.
Who cares what the VIX says, the guys over at CNBCialis just posted an article that the market is experiencing a "Golden Cross" and its risk on. I guess they did not get the memo that in most industrialized countries youth unemployment is dangerously high. Have fun with you bull shit technical indicators, Golden Cross, Hindenburg Cross etc.
Its just the slide... look at the skews.
And yet the DOW keeps holding the level,still playing the ignore bad news and waiting on only good news to get it higher. I'm sure they're looking at the earth shattering event of the FBI's favorite IPO---Facebook--to get this overpriced fucking garbage to the 13k mark and I am just literally going to shit my pants but yet won't be one bit surprised.
There's also differences betwenn "now and then".........back in the day DIGITAL ZEROS didn't exist for one. With technology we could have 50% of the population in tent city with 5.6% unemployment and DOW 15k. I seriously doubt that happens but the worse things get the more desparate attempts will be made.
Billions on war, billions to foreign countries, billions to banksters, it's all grandmas, the unemployed and the disabled's fault. The US has been hijacked and I can seriously say it's a fucking disgrace. The recent Oakland movement's burning of the flag was misguided. Don't hate the US, hate the rotten motherfuckers that are running it.
Fuck 'em all 2012. Get the rope.
"history doesn't repeat itself - it just regurgitates the excesses"
Between the US and Europe drama, the comedy is transparent. Insert any current public servant wishing to live off the system with big promises. Old video...
DEBT LIMIT - A GUIDE TO AMERICAN FEDERAL DEBT MADE EASY
I live in the mid-west, in a city that had no housing bubble. We have some foreclosures, but it's not horrendous. We are almost a 1-industry town, and that industry has had massive layoffs. For the first time in several years, I went to a mall this weekend to buy some clothes. It was around 1 pm, and the parking lot was packed. I had to park at the extreme end of the parking lot. It was like I would have expected it at Christmas.
djsmps, you live in that city; what's your conjecture as to why the mall is so busy so soon after Consumermas?
I think the malls are doing OK in spite of the retrenchment of the aspirational classes because they are placating themselves with buying tangible goods, like clothes, instead of the trips and bling and the bigger ticket non-tangible luxuries that they had been consuming.
The rationale is, well I didn't go to Italy last summer so I deserve to/can afford to go to the mall and spend a couple of hundred on shoes that are on sale at half-off.
(or: I strategically quit paying my mortgage three months ago, cause the house is upside down, so I can afford to spend a couple of hundred on shoes).
First post...reading the site for 1 year now and love the posts and the articles!!
I live in Holland (a 52 pct income tax country) and travel to USA almost every year. I hate to see NY etc. getting worse and worse every year.
I hear lot of negative remarks abt europe on this site but every time i Stay in the USA it gives me the feeling your country is in deeper sheit than ours.
The 1 pct really gave nothing back to your country...ripped it for their own purpose: infrastructure looks like sheit, buildings neglected etc etc. People getting poorer and poorer. Detroit Wauw!
Visit Holland or one of the other countries on the other side of the ocean and see what the difference is. The higher taxes gave us a richer environment with better infrastructure and overall less poor people.
MACRO wise I think bothe USA and Europe are in the same deep sheit and cannot come out of this without riots or war.
For options: this year think it still safe to sell 30 pct lower strikes on index puts on Dow, DAX and AEX for Dec 2012 , Puts are pricing in much too high. for example: 1/3 of the AEX index is covered by Royal dutch and Uniliver alone!!! Cannot see those moving to those levels this year with QE3+4+5+6 coming.
I don't see how growth can help. The rate at which we are accumulating debt far outstrips the rate of growth in the best of times. Anual GDP growth was below 8% from 1970 to the present, but the U.S. national debt has been growing by over 13% a year for the last three years. It's a pipe dream to think the U.S. can reach growth of 13% needed to keep up with the growth of debt.
I also think it's a false assesment of the current market state to say we are healthy. That is the view through the rose colored glasses the media must be wearing. For every good economic indicator reparted lately there appears to be another bad one, like flat consumer spending, or 3 to 1 lower than expected earnings reports, or lower than expected GDP growth. It is clear the exuberence is extreme when bad news gets treated like it doesn't exist and the mantra becomes we are doing much better, even as more bad news piles up. We may not need any kind of shock for the bad economic indicators to continue and accellerate.
anxiety is major reason for depression. Nanoblur