Complacency Everywhere by Attain Capital

Josh Brown had a quick little post this week about the comparisons with the 2007 market highs which summarized the current volatility environment quite nicely:

“To recap – Volatility is nowhere to be found – not in currencies, in fixed income or in equities. Complacency rules the day as investors and institutions gradually add more risk, using leverage and increasingly exotic vehicles to reach for diminishing returns in an aging bull market.”

Now, we’ve all seen the headlines recently about stocks being at all time highs and volatility getting lower and lower and lower. And the chart trotted out more often than not to show this is everyone’s favorite volatility measure, the VIX, which is currently sitting at fresh 7 year lows…


(Disclaimer: Past performance is not necessarily indicative of future results)
Data Courtesy: Yahoo Finance

But here’s the thing that’s driving those who do more than just stocks (read: global macro, fixed income traders, currency traders, managed futures, etc.) —  CRAZY.  You see, it isn’t just the stock market that’s seeing record low volatility. Complacency is everywhere. It’s for sure in stocks…, but it’s also in Bonds (the tightest 3 month range in 35 years), it’s in Currency markets (the tightest consecutive monthly ranges in the Euro since inception), and it’s in Energy markets (Crude Oil’s only moved in a 14% range this year, the smallest reading in 20 years.

But don’t just take our word for it… here’s one of the charts accompanying Goldman’s President Gary Cohn’s presentation explaining why the bank is having issues making trading profits, with a nice breakdown of the low volatility in bonds and the Euro, in particular – along with stocks.


(Disclaimer: past performance is not necessarily indicative of future results)
Charts Courtesy: Zerohedge

And here’s a rather ugly chart courtesy of Market Watch showing just how low volatility is in no less than 20 different currency pairs. Those red triangles under red bars on top of blue lines next to dark blue x’s with a purple bar through it represent the current one month implied volatility for each currency pair.


(Disclaimer: Past performance is not necessarily indicative of future results)
Chart courtesy: MarketWatch

If you’re having trouble reading the chart (we don’t blame you), here’s how they explain it:

“The current implied one-month volatility is denoted by the red triangle in the chart. “Implied volatility is below the 5th percentile of the history of implied volatilities (since 1999 in most cases),” wrote Jordan Rochester, Jens Nordvig and Rahul Jain of Nomura in a note.”

And then there’s the low volatility in Crude Oil we discussed not long ago, where the range through the first five month’s of the year has been a paltry $14, or just 14% of the difference between the high and low. We went back and took a look at the annual range in crude oil as a percentage of the high/low price average – and you’ll see the same pattern:


(Disclaimer: Past performance is not necessarily indicative of future results)

What’s happening – is all really right in the world and this complacency is deserved, or is this the proverbial calm before the storm. The Goldman presentation blamed government intervention, and we think back to a piece in 2013  by managed futures heavyweight Transtrend which looked at the tall heads associated with low volatility, and how that pinching of the curve naturally leads to a widening of the tails… (it has to go somewhere).Where does the ‘missing’ risk hide? Precisely: in a higher kurtosis. All these 0% return days form a high peak…this peak pulls the distribution ‘inward’ (i.e., like we have seen above, the standard deviation downwards), causing the returns on the outsides to now overshoot the Normal curve. There we have our ‘fat tails.’

“…What we see here is the exchange of standard deviation for kurtosis. The risk stays the same, but through the lower standard deviation it is more treacherous. It is now hidden in the higher kurtosis. Remember we did not increase the kurtosis by a direct addition of tail-risk, but by adding an (in itself not dangerous) high peak. To those who are not alert to this phenomenon, such a high peak may give a false sense of security.”

“The Managed Futures Blog is a compilation of thoughts, research, attempts at humor, and more from the team at Attain Capital Management (“Attain”). Attain pairs high net worth individuals, RIA’s, and institutional investors with alternative investments in commodities, managed futures, and global macro strategies through privately offered funds and managed accounts. Click here to sign up for their insight and analysis.”