Ever since the unprecedented Brexit bounce in markets, underpinned by loud guarantees from central bankers around the globe that risk assets will simply not be allowed to sell off, increasingly more vocal concerns have emerged about trader complacency, culminating this morning in an article by Mohamed El-Erian titled "Calm markets raise big risks for complacent investors" in which the chief economic advisor to Allianz says that "A sustained period of low volatility manufactured by central banks cannot disguise growing problems." True, but it can and always does help ignore them until such time as the central-bank induced complacency goes away, usually amid cries that central bankers are losing control.
However, is it really complacency? According to one of our favorite charts by Deutsche Bank's Jim Bianco which looks at the ratio of the trailing S&P500 PE to the quarterly average VIX, the market was not actually complacent. Instead, it went almost overnight from "Realistic and disciplined", skipping "Complacency", and is now on the cusp of "Mania."
The latest reading is shown by the highlighted triangle in the chart below. It has never been higher.
Why is this important? Because every time this ratio approached the mania phase, most notably in 2000 and 2007, stocks tumbled shortly after.
Furthermore, if instead of using increasingly spurious non-GAAP EPS numbers, and opting for GAAP data instead, the PE/VIX ratio has never been higher. However, it should be added, risk assets have never had this level of explicit central bank backstop and support either.
Perhaps for the S&P500 to finally crack we have to break beyond the mere "Mania" phase, which at this rate is no longer inconceivable, and boldly go where this particular index has never gone before.