The other day, we said the following about the market’s obsession with explaining persistently suppressed vol:
Volatility has become the market’s perpetual topic du jour (does it make sense to use “perpetual” and “du jour” in the same sentence? Not sure on that).
Suppressed vol has become ubiquitous. And the amusing thing about ubiquity is that it has a way of making everyone think they’re entitled to have an opinion on whatever it is that’s ubiquitous. That’s certainly the case with volatility – these days, everyone who’s bought themselves some VXX or XIV lately thinks they’re Rocky Fishman.
That’s the (black) magic of VIX ETPs. Hordes of retail investors have been transformed virtually overnight into futures traders much the same way as the rampant proliferation of margin debt in early 2015 helped turn every bored housewife in China into a leveraged Shenzhen day trader.
This dynamic has created a veritable cacophony of explanations as to why equity vol is so low.
If you cut through the noise, it’s probably some combination of plunging stock and sector correlations; gamma; central bank liquidity; and a kind of “success breeds success” dynamic in short vol strats.
Well, former FX trader Richard Breslow agrees that “adding to the [low vol] narrative” has become “something of a parlor game,” but he’s going to play along and offer his take which is far simpler than most: volatility is low, Breslow says, because there’s so much going on that people would rather just “block it all out” by buying index funds.
After all, isn’t that the best way to indulge your inner “FOMO” tendency while simultaneously decrying “villainy”?
Read more below from what is a pretty amusing missive…
It’s become something of a parlor game to add to the narrative of why market volatility has been so low this year. First of all, it hasn’t, and secondly, the mass hysteria that accompanies every move means it can traumatize with less. But whatever your take, the one I find most curious is that there just haven’t been any economic surprises. All I can say to that is “wow.”
- Economies are comprised of a lot more than the latest number release. Especially if you’re trying to seriously forecast where they might be headed. The round trip in the Mexican peso had little to do with the ups and downs of anything but political risk, internationally and domestically. And they carried major implications for the economy including minor issues such as inflation and trade
- And let’s not forget places like South Africa. On Tuesday, they just surprised 18 out of 19 surveyed economists and tipped into recession. Yes, it moved markets. But the rains came, how did this happen? Politics, politics, politics. It’s meager consolation to convince yourself that it can never happen in a real country like ours where the affairs of state are always conducted civilly
- Beware in assuming “our” economic cycles are dead because of heavy-handed central bank intervention tactics. If you believe that, then recessions, and booms for that matter, are things of the past. But we really shouldn’t jump to that hopeful conclusion. Let alone assert the fallacy that potential contagion from elsewhere no longer exists. Or, if you do, then buy and hold is the only investing strategy that makes sense. Are you prepared to do it? Now you really should read that disclaimer about how past results aren’t always harbingers of future ones
- Global equities have been trending. Eerily, sovereign bond yields look like they want to try doing so as well. That doesn’t mean there isn’t anything going on. Or that investors have figured out what’s making the world tick: other than official fealty to financial conditions indexes and sovereign wealth funds being busy picking winners and losers continues apace
- In reality, there’s so much going on that people are dealing with it by blocking it all out. It’s an added allure of index funds. You get to decry villainy and irrationality while simultaneously investing in it under the guise of having no choice
- Will the Fed hike? Is it the right thing to do or not? Are they done or still just getting started? How about the ECB? How do they talk tough while hoping everyone reacts dovishly? Scientific polling methods seem to have narrowed the projected spread in the U.K. election to somewhere between dead heat and a double-digit lead, depending on how the weather turns out on voting day. Extraordinary to conclude there aren’t any surprises to be concerned about