This market is preoccupied with suppressed vol.
And that’s kinda fucking weird when you think about it, right?
I mean, one is not usually preoccupied with something that represents boredom, or complacency.
If one is “bored”, one is not “preoccupied” and if one is “preoccupied” one might be a lot of things (“agitated,” “enthralled,” “worried,” etc., depending on the nature of what it is one is preoccupied with), but conceptually one cannot be preoccupied with boredom. That’s contradictory. It just doesn’t work that way.
Or at least it’s not supposed to — work that way, that is.
But the unique thing about complacency in markets is that a lot of people think it presages a possibly imminent return to a state of affairs that is anything but static. Rampant complacency in markets creates a self-fulfilling dynamic that all at once perpetuates the low vol regime while embedding greater and greater amounts of risk into the system (think levering up by CTAs, risk parity, and vol control funds). So it feeds on itself while simultaneously creating a situation where a reversal of the self-feeding loop could be catastrophic. (VIX ETPs are a big part of this)
Think of it like a still pond and the longer the pond stays still, the more still it gets. But simultaneously, the “stiller” it is, the bigger and heavier is the stone held by someone standing next to the pond. The only question in that scenario is whether some catalyst will ultimately prompt that person to cast the stone into the water.
That’s why in the case of markets, it is not entirely paradoxical to be “preoccupied” with “boredom.” The other reason a preoccupation with boredom isn’t a complete paradox in the market context is because one can make money by being bored.
There have been all kinds of attempts to explain and elaborate on the low vol regime, some more successful than others.
Well on Friday evening, Deutsche Bank’s Aleksandar Kocic took a stab at it.
When Kocic decides to put his trademark style to work in the course of explaining some particular dynamic he thinks is at play in markets, you might as well go back to the drawing board if you are another analyst and you’re working on a piece about the same subject.
In a true testament to the accuracy of that characterization, what you’ll read below actually renders my own take on low vol. (the one you read above) largely useless by drawing a distinction I failed to draw between “boredom” and “waiting.”
And with that, we present Kocic’s latest, a piece which will immediately make every other analyst writing about volatility click and drag whatever they were working on to the trash bin after which they will sit staring at the blinking cursor on an empty Word doc for a couple of hours.
Via Deutsche Bank
Gamma in the times of abandonment of denial of immediacy
Volatility declines either when the markets are predictable or when there is no consensus. In a relatively short time we have transitioned from consensus- to dissensus-driven vol selling regime. Last week has reaffirmed what previous weeks have already outlined: The fractal nature of the breakdown of consensus. The fracture is taking place across all contexts and scales, from long-term traditional cross-cultural and transcontinental to intraparty tactical alliances, they have all been challenged and shaken up in a relatively short time.
Dissensus has emerged as a new paradigm – an absolute inability to form consensus across variety of contexts, accompanied with an onset of a breakdown of conventional frames of reference. So, what does one do when no decision can be made? Well, one waits. As a consequence, the market flows are slowing down and vol sellers emerging. This is where the things begin to develop ambiguous overtones.
Vol selling as a way to earn carry is somewhat of a logical paradox. Waiting is universally denigrated — it lacks the charm of boredom or desire (it is difficult to enjoy people for whom we have waited too long). Waiting is not simply a passage of time — waiting time must be endured rather than traversed. Generally, people are willing to pay money to avoid waiting. Time during waiting is slow and thick. Waiting always carries hierarchical overtones. It is seen as assigned to the poor and powerless so as to ritualistically reinforce social and political demarcation — long waiting lines are for the people with less dignity and selfpride, disenfranchised folks in general.
Selling gamma is an act of abandonment of denial of immediacy. In the same way that issuing debt is equivalent to selling future time (a creditor has an implicit claim on debtor’s future), shorting gamma means selling waiting time. Waiting time as an asset is highly undesirable — no one wants to be long waiting time. Short gamma is a way of disposing of it. This means that you can sell something you don’t want and get paid for it. It is a risky trade, but a trade which is hard to resist, especially when the waiting time is abundant.
This has been the logic behind the recent wave of vol selling across the markets. But the reason behind it has been very different from the same trade during the QE days.
In a relatively short time we have transitioned from consensus- to dissensus-driven vol selling regime.