Volatility Selling Is Back

First things first, the bull market and the predominantly retail-driven frenzy in cryptocurrencies, SPACs, NFTs, and BANG stocks—BlackBerry (BB), AMC (AMC), Nokia (NOK), and GameStop (GME)—are to me all derivatives of the fact that the policy mandarins of the world are showering the real economy and financial markets with unprecedented levels of liquidity.

To be clear, I do not mean to disparage traders who are able to extract value from these markets; all the more power to them. What I am saying is that if global monetary policymakers were not doing QE by the trillions, on an annualized basis, the bull market in many of these things would evaporate like mist on a hot summer morning.

Meanwhile, in old-school assets—themselves beneficiaries of QE—the overarching theme at the moment seems that the vol-sellers are back in charge. The VIX has hurtled lower, to just over 15, and at this rate it will soon be in the low teens. The same is the case for the MOVE index for fixed income volatility, which is also now clearly driving lower, hitting a 13-month low of 53.4 in May. 

For comparison, the most previous low in the VIX was just over 12 in November 2019, coinciding with a period of very low volatility through Q4 in that year, and for the MOVE, the recent low traces back to July last year, at around 41.

From an empirical perspective, volatility is famously auto-correlated—low volatility begets low volatility, high volatility tends to lead to higher volatility and so on—until, of course, something happens. Black Swans notwithstanding, the two most obvious catalysts possible for a regime change in volatility is a shift in central bank policy— tapering of QE—and the grim realization that a new virus variant has managed to beat our vaccines.

The second chart shows that the six-month trailing return on the MSCI World remains robust, at 10-to-15%, compared to a clear slowdown in the rate of change in global central bank QE. This is probably not an issue in the very near-term. After all, the pace of QE is still punchy. By my calculations, the Fed, the ECB, and the BOJ bought $300- to-400 billion's worth of assets per month between April and June, and none of them are feeding markets with information that this is ending anytime in the very near future.

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