Wednesday , December 12 2018
Home / LewRockwell / Never Mind Volatility

Never Mind Volatility

Summary:
So who’s holding the hot potato of systemic risk now? Everyone. One of the greatest con jobs of the past 9 years is the status quo’s equivalence of risk and volatility: risk = volatility: so if volatility is low, then risk is low. Wrong: volatility once reflected specific short-term aspects of risk, but measures of volatility such as the VIX have been hijacked to generate the illusion that risk is low. But even an unmanipulated VIX doesn’t reflect the true measure of systemic risk, a topic Gordon Long and I discuss in our latest program, The Game of Risk Transfer. The financial industry has reaped enormous “guaranteed” gains by betting against volatility. As volatility steadily declined over the past two years, billions of dollars were

Topics:
Charles Hugh Smith considers the following as important:

This could be interesting, too:

Don Boudreaux writes Quotation of the Day…

Tim Worstall writes We can’t afford social care already so let’s promise ourselves more

Kai Weiss writes Tax Competition: A Practical Way to a Low-Tax World

José Niño writes The Deep State Wants Your Guns

So who’s holding the hot potato of systemic risk now? Everyone.

One of the greatest con jobs of the past 9 years is the status quo’s equivalence of risk and volatility: risk = volatility: so if volatility is low, then risk is low. Wrong: volatility once reflected specific short-term aspects of risk, but measures of volatility such as the VIX have been hijacked to generate the illusion that risk is low.

But even an unmanipulated VIX doesn’t reflect the true measure of systemic risk, a topic Gordon Long and I discuss in our latest program, The Game of Risk Transfer.

The financial industry has reaped enormous “guaranteed” gains by betting against volatility. As volatility steadily declined over the past two years, billions of dollars were reaped by constantly betting that volatility would continue declining.

Other “guaranteed” trades have been corporate buybacks funded by cheap credit and passive index funds Central bank policies–near-zero interest rates and “we’ve got your back” asset purchases that made buying every dip a no-brainer trading strategy–have changed as banks attempt to dial back their stimulus and near-zero rates, and as a result volatility cannot continue declining in a nice straight line heading toward zero.

Higher interest rates have introduced a measure of uncertainty in another “guaranteed gains” trade–betting that interest rates would continue declining. All of these trades were “guaranteed” by central bank stimulus and intervention. In effect, price discovery has been reduced to betting that central banks will continue their current policies–‘don’t fight the Fed.”

Now that central banks have to change course, certainty has morphed into uncertainty, and risk is rising, regardless of what the VIX index does on a daily basis.

Here is what a “guaranteed gains by buying the dip” market looks like: just bet that central banks will buy every dip and suppress volatility, and you’re a genius.

Never Mind Volatility

Until the recent spot of bother that destroyed the short-volatility trade, betting on declining volatility “guaranteed gains”:

Never Mind Volatility

Charles Hugh Smith
Charles Hugh Smith is an American writer and blogger. He is the chief writer for the site "Of Two Minds". Started in 2005, this site has been listed No. 7 in CNBC's top alternative financial sites. His commentary is featured on a number of sites including: Zerohedge.com., The American Conservative and Peak Prosperity. He graduated from the University of Hawaii, Manoa in Honolulu. Charles Hugh Smith currently resides in Berkeley, California and Hilo, Hawaii.

Leave a Reply

Your email address will not be published. Required fields are marked *