Ok, so remember how, last week, we made a big deal out of vol. of vol.?
Specifically, we mentioned that VVIX hit its highest level since the yuan devaluation…
… and that the ratio of vol. of vol. to VIX hit the highest level on record:
We actually said that more than once. And more than twice. And more than three times. But who’s fucking counting (besides us), right?
- ‘Something’s Amiss’: Vol Of Vol Soars To Highest Since Yuan Devaluation
- Vol. Of Vol. Set For Highest Close Since 2015 But Here’s Why BTFD Will Win (Again)
Oh, and we talked about it again on Sunday in “Testing The Sacred Cow.” Here’s an excerpt from that piece (note the super-fun visual with the E*Trade and Scottrade logos hiding on the robes of the worshippers):
Recent history has taught us that every vol. spike is an alpha opportunity. Every dip is a buy. The rapidity with which vol. spikes have “mean reverted” has increased over time…
… and indeed, that’s one explanation for elevated vol. of vol. (which, you’re reminded, was trending higher relative to the VIX well before last week, when the risk-off mood caused VVIX to hit a post-yuan-deval high):
So, is “this time different”? That is, have we finally come to the end of the “mean reversion” regime in vol. and if so, does that presage the imminent demise of BTFD, that most sacred of sacred market cows?
So in short, we didn’t just “mention” this in passing. We kinda obsessed over it and as it turns out, Goldman thinks it’s notable too.
Read below as the bank explains that although what you see above is some shit that no one has ever actually seen, “the low vol regime should persist”…
Without lasting growth shock, the low vol regime should persist – selective hedges make sense.
Tensions involving the US and North Korea were in focus last week. Markets became concerned about potential escalation, which could negatively affect what has been a broadly good macro environment. The VIX spiked roughly 40% on Thursday, and the VVIX, measuring the vol of vol, jumped to its highest level since August 2015. We previously recommended ‘hedges’ such as 97/93 put spreads and gold strangles to protect from sudden vol spikes. We are Neutral equity over 3m and continue to believe hedges like those above make sense – however, we believe it is too early to call the end of the current low vol regime. Earlier this summer, we wrote that vol spikes often occur after unpredictable major geopolitical events such as wars and terror attacks, or adverse economic or financial shocks. Whether a higher volatility regime persists generally depends on recession risks and a slowing business cycle, and perhaps this time also uncertainty over central bank policies (and inflation). As a result, the key question is whether the current spike spills into the macro or not.
Thus far, we would consider the sell-off a risk premium move, rather than a move based on growth expectations. In our view, it is likely that the low volatility regime persists until the growth/rates mix turns more negative. But the ratio of the VVIX to VIX reached its highest level in history last week, suggesting that, although vol has remained relatively anchored (Exhibit 28), markets are already significantly pricing the more latent risk that the volatility regime shifts.