Listen, I mean there’s good news and there’s bad news about last week.
The bad news is that Seth Golden blew up and a bunch of former logistics managers at big box retail stores were forced to ponder a return to their mundane existence coordinating the cigarette break schedule for their subordinates who had never heard of something called “the VIX” until their former (and now future) bosses abruptly quit last year, kicking over a DVD display on the way out the front door while shrieking something about being an “XIV millionaire.”
And please, spare me your bullshit about how that isn’t funny anymore, because you goddamn well know it is.
The other bad news is that when the living-room-vol.-seller tycoons blew up it triggered the most vicious VIX spike in history and that, in turn, spooked the holy shit out of everyone else, leading directly to a scenario where investors were bouncing off the walls like coked-out ferrets selling everything one minute and buying it all back the next, a situation that reached a cartoonish climax on Friday when a truly absurd late afternoon panic bid (egged on by a binge-tweeting Jim Cramer) drove the Dow higher by 330 points into the closing bell.
That’s the bad news.
The good news is that according to BofAML, this was “not THE Minksy Moment” it was just “a Minsky moment”:
In the immortal words of Phil Connors, “I’m a god, I’m not THE God.”
So why wasn’t this THE Minksy Moment? Well, here’s BofAML to explain:
Although this week saw a Minsky Moment for VIX, this is not THE moment we had in mind. We anticipate there will eventually be a massive correction to risk assets at the end of this economic cycle, which we don’t see coming until at least 2020, if not later. That’s THE Minsky Moment that we had in mind.
Basically, this isn’t “the big one, Elizabeth.”
But beyond that kind of general, 30,000-foot assessment, BofAML offers some insight via their Global Financial Stress Index. Here again, there’s good news and there’s bad news. The bad news is, it jumped 0.50 from January to February and that’s the fifth sharpest monthly increase on record:
And “that’s just one week into the month!,” the bank exclaims (the exclamation point is in the original note).
Ok, but here’s the good news about that. The good news is that if you look at the breakdown, that spike is down to the dramatic jump in equity volatility, captured in the SKEW sub-index. What didn’t move (or barely moved, as far as I can tell) was the liquidity stress sub-index. Here’s the comparison:
For BofAML, this is a big deal. In fact, it’s a Trump-ish “yuuuge”. To wit:
This is huge. We think it is remarkable testament to all the regulatory reforms and recapitalization of the financial system that has occurred since the Great Financial Crisis.
That, or it’s a testament to blind faith in the central bank backstop that,
not incidentally, has also been part and parcel of the post-crisis environment.
So the question going forward is pretty simple. If spillover is for now being contained by the assumption that the policymaker “put” is still in place (even if the strike has moved), what happens if central banks’ silence (or perceived ambivalence) ends up causing markets to question their faith in the Almighty?
Or, to borrow from Phil Connors again, what happens if Draghi/Kuroda/Powell decide to proceed with normalization despite the turmoil, effectively conveying the following message to markets:
Look, we’re just a god, we’re not THE God.