Will Spiking Vol Drag Global Growth Down?

Tyler Durden's picture

While we grow weary of endless talking-heads pointing to contemporaneous VIX charts as somehow indicative of why equities are up/down/sideways and the lack of comprehension of the non-directional bias of what is simply a measure of dispersion, we do recognize the critical way that volatility-spikes (and other vol-related indicator divergences) reflect short- and medium-term market uncertainty. Having modeled business cycles through the eyes of realized and implied volatility, we were heartened to read Goldman Sachs excellent discussion of the macro-economic impact of uncertainty shocks and why the post-2009 vol spikes leave global growth at much greater risk of significant downside. Critically, they note that while previous episodes of vol-spikes have been relatively well-contained, current risks seem much less tightly defined with unusually frequent bouts of extreme volatility, leading to much longer-lasting impacts on growth than normal.

Goldman Sachs Global Economics Weekly

The Risks to Global Growth from Spiking Volatility

One of the most striking complaints from investors and businesses over the past few months has been that uncertainty about the future economic outlook is so much higher than normal, making it harder to commit to decisions to spend, hire or invest. Uncertainty about the Eurozone sovereign crisis, the US debt debate, the fiscal hangover from the crisis, the regulatory response and the efficacy of counter-cyclical policies are all frequently cited issues that cloud the outlook.




In financial markets, the sharp rise in market volatility - unusual this far into a recovery - reflects the same phenomenon. Over the past few months, the VIX - the most widely followed measure of implied equity volatility - spiked to 48 and realised equity volatility rose above 40. The messiness of the US debt ceiling debate and the intensification of the Eurozone crisis over the summer were the proximate causes, but concerns about a renewed recession against the background of constrained policy have loomed large.


It seems natural that this kind of spike in uncertainty and volatility not only reflects economic worries but will itself have an impact on the growth picture. Economists since Keynes at least have understood that rising uncertainty and volatility are likely to hurt spending, particularly for big-ticket items like durables and investment purchases.

They go on to discuss why uncertainty matters - explaining how the 'option' for CEOs to 'wait-and-see' on spending decisions becomes so much more valuable when volatility is high (just as puts and calls are more 'valuable' when implied vol is high):

The [most recent] shocks associated with the shift in financial markets were the renewed pressures as the Eurozone financial crisis spread in earnest to Italy, and the loss of confidence that followed the US debt ceiling debate and downgrade. But on a range of issues, the world has seemed a more ‘binary’ place of late. Implied volatility in equities is one of the cleanest proxies for financial market views of how uncertain the future might be.


While the renewed volatility in markets is a reflection of these economic forces, most investors’ intuition is that this uncertainty is in turn a weight on the economy itself, and one that may dampen activity going forward. It is common to hear that CEOs are less comfortable committing either to invest or to hire until the situation in Europe, the path of the US economy or the regulatory picture becomes clearer.


This intuition has long been a part of how economists think about spending decisions, particularly large irreversible decisions such as investments or durable purchases. By committing to a big purchase, you relinquish the ‘option’ to wait for more information about whether it is a sensible idea or not. When uncertainty is high, that option is particularly valuable. And so it may make sense to delay decisions until things become clearer, entering a ‘wait-and-see’ mode in the meantime.


Of course, all of this is irrelevant without a framework for judging vol impacts and using complex-sounding (but actually rather straightforward) VAR modeling, Goldman is able to create an impulse response function - simply put, given a spike in vol, what happens to various macro factors over time:

As is clear, the peak (negative) impact post a vol spike occurs around six months with a 1% drop in industrial production and a 0.6% drop in employment. This is 'averaged' over seventeen major vol-spike scenarios that have occurred over the past 55 years. The latest spike in vol is large enough and prolonged enough to suggest the same kind of impact this time around - leaving the impact likely to peak in early 2012.

Not exactly a positive sign for all the global growth decoupling theorists, but Goldman does note four important factors when trying to translate this perspective into growth expectations:

First, one key consideration is the important qualifier above: ‘than otherwise’. Our results suggest that growth should be weaker than it would have been, but the baseline still matters. Most of the US data - as summarised by our CAI - has not yet shown further deceleration since the summer. The volatility shock is really only two months old, so much of the data needed to assess its impact may not yet be available. But our analysis - and Bloom’s - suggests its impact should be being felt by now. If it continues not to be visible in absolute terms, this would suggest either that we are seeing a lower impact than average or that, without it, growth would have been improving (as many forecasters believed going into the summer).


Second, we have highlighted the unusually depressed state of durable spending, the low level of inventories and the low levels of housing investment, at least for the US economy, as a reason for thinking it is harder to generate a significant recession than normal. Given these are key areas where uncertainty delays spending, the fact that they are already at low levels may dampen the impact of volatility relative to some other episodes.


Third, the uncertainty shock is not the only shock. The direct impact on financial conditions has been sizable in places, particularly in some European economies. And in the US, we still worry about the impact of fiscal restraint. These forces may ultimately play a greater role in determining the outlook than the impactof higher uncertainty and volatility.


Fourth, uncertainty shocks may not be over. What is unusual about the current recovery, as we mentioned earlier, is the recurrence of bouts of extreme market volatility. We saw one in May 2010 and again this year. Our central view is that, despite the latest policy commitments, the Eurozone sovereign crisis is unlikely to have a lasting resolution soon. And many other issues that have generated uncertainty - the US fiscal debate and the constraints on monetary policy - are unlikely to fade soon either.


From which they conclude, rather pessimistically:

... the current risks — particularly in Europe, but also more broadly — seem much less tightly defined and, as we have showed, the frequent recurrence of bouts of extreme volatility is unusual. The risk is that we are in an environment where volatility is more persistently higher than normal, at least until a broader resolution of the major policy risks is provided. Until that resolution is forthcoming, and we can be confident that volatility is receding more permanently, it will be legitimate to worry that its impact on growth could also be longer-lasting than normal.

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dasein211's picture

Corzine was SENT into MF Global with the objective of collapsing it and rolling the remains into Goldman (presumably). And he was paid eight figures to do it, AND promised SEC TREAS after Geithner. If you had said six months ago that the largest FCM in the U.S. would be taken down, everyone would have laughed in your face, but here we sit. The only question is, who is next? How long will an FCM like ADM last before looking at Dodd-Frank and saying, "Screw this. We're selling our clearing operations and we'll just go back to straight-up product merchandizing." Why shouldn't they? If the FCM profit center is made impossible by the government and the corrupt regulatory bodies, why would they continue to operate an FCM? Why not sell to Goldman or one of the other megabank entites and then do their exchange-traded hedge business through them as a customer? When will the old Chicago boutique firms be similarly forced out, either through regulation that makes their business impossible, or through outright sabotage as with Corzine and MF? None of you FCMs are safe. THEY WILL COME AFTER YOU AT SOME POINT. You have been targeted for extermination. Either you wake up to this fact and expose these regulatory bodies, megabanks and the Federal Government and fight them, or you are going to end up like MF, being bought by Goldman or one of the other fascist government-connected megabanks for pennies on the dollar. You have been warned.

From a trader that saw through all this BS on TF's website. She sent that around CHMEX this AM> SATAN Sachs is Coming

HUGE_Gamma's picture

When I was a young child, i had dreams and aspirations of growing up and one day becoming a proprietary credit derivatives trader at a major investment bank.. Unfortunately, thanks to people like Corzine, Dodd-Frank, and Volcker my future is to one day seperate documents for compliance and send mass chain emails with useless ad-hoc reports. 



Flakmeister's picture

I really don't know what to make of this post....I don't how well it'll play well Zucotti Park ;-)

rajat_bhatia's picture

Everything's Evolving. Everything's falling apart

Unprepared's picture

After high school, I had dreams of joining a HF and building a super trading program based on complex econometric models.

Moving into the wreckage of what was a decent industry, disillusion is quite strong. We are inheriting a broken system.

At least we may get the chance to be first row witnesses of when the SHTF.

Yancey Ward's picture

God, I was so lacking in ambition high school.  All I dreamed of was banging the head cheerleader.

HD's picture

...And some dreams should never die.

Richard Chesler's picture

All Goldman Sachs commentary ought to come from pound-them-in-the-ass federal prison.


Step up to Rajat Gupta already you miserable cowards!!!


SpeakerFTD's picture

Most conspiracy theories should be viewed with a skeptical eye, but in this case, I keep coming back to one basic question.


Why would a seasoned pro like Corzine lever up his company to a mortal risk level on a SINGLE position, using sovereign debt, which at a minimum was known to have significant downside risk?   Any fool of a risk manager would have looked at the trade and its effect on MF's balance sheet and capital and said, wait, I'm all for taking risk, but you are literally betting the house on this one trade.   It makes no sense, unless Corzine is either galactically stupid (which he's not), or he just ran a diabolic and brilliant long con on MF stakeholders.    

The only thing missing from the mafia script is the fall guy, the middle manager who takes all responsibility, serves his time, and is welcomed back as a made man after a few years.     I would expect that name to emerge in the next few days.   


rajat_bhatia's picture

Seems you've got something there, Exactly WHY would such "educated" people do this? Maybe it all because of hubris, that bane of the wall street culture

Milton Waddams's picture

He is jealous of Hank Paulson? 

Hank won the GS CEO spot.

Hank got to be TresSec while Corz a lowly Gov.

Hank got away with 'murder', maybe he is trying to show that he can do the same??

slewie the pi-rat's picture

hmmm...spiking volatilty

i think in the college game, you'd get an unsportsmanlike conduct penalty, but no downside at all, in the pros


Those aren't spikes. They are squid legs...

caerus's picture

hey remember this stuff?

floyd 2001


chump666's picture

I agree, volatility till the end of the world.  That is the trade.  Good example a few secs again, HK HSBC PMI comes out a tiny bit better market ran with it for less than a few mins.  Now back to selling.  News headline trading.

mynhair's picture

More chart porn.  Your time is better spent stealing this:


Your Boobs aren't forever.

mynhair's picture

Compare this


and this


If you don't steal them now, they may not be there tomorrow.

Lost 2 Dani Wilde's by dinking.

Spitzer's picture

GOLDLINE is being charged with 19 criminal charges of  fraud.



Conax's picture

Kind of ironic since volatility is key to traders trying to make money.  I know small businesses become very cautious borrowing or sticking their necks out when things are  jumpy. Unlike banks they avoid doing anything rash. Growth must suffer.

paarsons's picture

Where is the global growth everybody talks about?

All I see is shit and more shit.


mynhair's picture

OMG!  This is what it was like 35 yrs ago:



I knew them in Issaquah...they played at the prom.

BT310's picture


Short vol. here. if llord blankfien is on the other side, so be it.

select issues. 



Milton Waddams's picture

Look the big fear is whether long term US GDP growth is going to ratchet down.  The answer is yes, absent another multiyear sustainable asset bubble, yes it is.  Bernank, as much as an asshole as he is, has said over and over again that the Fed can only do so much- it can pump bubbles and enrich banks- and that it is up to the political process to figure out how to fix the economy.  Well the political process is a absolute fucking joke; bumbling clowns desperately trying to get in on the corruption money train.  So basically America is fucked.  Sure Ben can blow a stock bubble but it eventually collapses.  It is up to DC now.  Ben will pump money into the PDs above and beyond what it takes to  generate avg gains but only if Europe burns.

Georgesblog's picture

Uncertainty is the playground of gamblers and other dreamers.


prophet's picture

Goldman and their shocking super spikes.

Vol is anti-persistent and the fact that it is less so now is cause for concern or rather uncertainty. 

Are you sure about that?

Blather ----

without this higher uncertainty things would be more certain

things are so uncertain now that they may not be able to get all that much more uncertain

there are more things to be uncertain about than just the amount of uncertainty

it is uncertain whether uncertantity will continue to spike [actually it is certain and this is circular to the second point]

and the clients eat this stuff up which is why they are clients and we are ... well, we are

and finally

we grow weary of the endless focus on talking down to those who are wrong rather than a tireless didactic approach to those intent on making a difference