How complacent are US equities? The most complacent ever, or at least according to one measure of hedging costs.

I spent a good deal of time this week lamenting the drowsy summer lull that’s manifesting in “crazy“-low realized vol. Suffice to say the melt-up on Wall Street has turned into a somewhat sleepy affair, despite periodic “spot up, vol up” cameos and other manifestations of “crash-up” dynamics.

Relatedly, demand for downside hedges is subdued, a state of affairs which looks “spooky” when juxtaposed with re-leveraging across both systematic and discretionary investor cohorts.

With that in mind, BofA’s Benjamin Bowler called attention to what he described as the “cheapest S&P puts you likely have ever seen.”

“Since our data began in 2008, it has never cost less to protect against an S&P drawdown in the next 12 months, as high rates align with low implied vol and correlation to offer a historic entry point for hedges,” he wrote, in a concise assessment that spoke to both key themes mentioned above.

Obviously, record cheap hedges are notable in the context of a still precarious macro environment, not to mention the fraught geopolitical landscape.

As the right-most figure above shows, hedging costs are now as cheap as they were during the Yellen low-vol bubble of 2017. That stretch, Bowler reminded market participants, “broke several historical records for equity market complacency, including by some measures the lowest level of US equity vol in history.”

Many readers will fondly recall that the 2017 low-vol bubble set the stage for the events of February 5, 2018, when, on Jerome Powell’s very first day as Fed chair, the VIX ETN complex imploded, wiping out legions of day traders in the process. That episode is enshrined in the annals of market history as “Volmageddon,” and is remembered as the quintessential modern example of “stability breeding instability.”

Bowler went on to call the juxtaposition between record-low hedging costs and a still tenuous macro-policy conjuncture “striking,” especially given 2023’s aggressive re-rating for equities, which trade at 20x (27x for the Nasdaq 100). Hedges shouldn’t be as cheap as they are “in an environment of 3-4% inflation, a real threat of recession, extreme macro volatility and high S&P valuations despite high interest rates and a shaky Fed put,” he wrote.

I couldn’t have said it better myself, although I did say it. One of this week’s dailies was called “Low vol, high rates.”