It would appear that the sell-side is in a full-court-press to convince the world that the levitation of nominal equity prices is indeed the start of something new and secular – as opposed to the inevitable consequence of global monetary experimentation. To wit, Goldman has done an excellent job of divining the seven previous regimes within the volatility (or VIX) cycle and believes (with 89% probability) that we have entered a new ‘great moderation’-like eighth regime. They are happy to admit that the ECB ‘promise’ to remove the left-tail, and the Fed and BoJ’s work to open-endedly compress realized volatility is to blame – but the current VIX levels would imply a notably lower (than 2012) realized volatility on average throughout 2013. However, the back-end of the curve remains steep (and unyieldingly less ebullient), the skew is extremely complacent, and as every premium-selling call-writing ‘this-is-easy’ trader knows picking up nickels in front of the steam roller works well – until it doesn’t.
Are we in a new regime for VIX? or is it simply over-confidence in central-banks’ short-term ability to maintain the optics?
and in detail:
But it is still different this time from during the Great Moderation as the longer-dated protection market remains bid…
and the skew is extremely complacent:
It would seem that curve steepeners and skew compression have been paying too well for too long and at some point the crowded trade becomes the pain trade… especially with implied vol now trading inside of realized vol once again…
So, while Goldman suggests we are indeed in a new lower VIX regime, we humbly suggest that VIX regime switching has accelerated in this peculiarly binary outcome world of low-growth or depression scenarios… and with currency wars escalating already, the opportunity for a risk flare seems more probable than possible.
Charts: Bloomberg and Goldman Sachs