Goldman: “Periods Of Low Vol End In Tears… The Biggest Risk Is Central Banks”
by Tyler Durden
ZeroHedge.com
Jun 21, 2017
One month ago, unleashing the latest series of warnings that the current period of low volatility will not have a very unhappy ending, came from Bank of America, which said that “These Markets Are Very Weird.” A few weeks later, JPM’ Marko Kolanovic warned that complacency will end in “catastrophic losses” for short vol strategies followed promptly by Deutsche Bank’s Aleksandar Kocic who demonstrated that there is no scarcity of scary adjectives when he likewise warned that the current period of market “metastability” will showed lead to “cataclysmic events.” Now it’s Goldman’s turn.
In a note by Goldman’s Christian Glissman seeking to explain “The upside of boring – risks and asset allocation in low volatility regimes”, the vol strategist joins the bandwagon and writes that while “low volatility periods do not have to end in tears, they often do.” His explanation:
Volatility tends to cluster and is often low for a good reason – this indicates investors should add risk during those periods. However, a prolonged low vol period can also eventually result in excessive risk taking and latent risks from elevated valuations. But moving out of a low vol period does not have to come with a material ‘risk off’, at least initially. Usually volatility tends to spike and equities settle into a higher volatility regime first (Exhibit 37) and the average drawdown is less than 5%.
Markets often enter a higher vol regime before there are larger equity corrections, usually 6-24 months later (Exhibit 38). This suggests a more gradual risk reduction as markets shift into a more persistent higher volatility regime as the macro backdrop worsens. Currently, we see little recession risk in the next 12 months although growth momentum may have peaked and the US economy is moving more late cycle.
The Rest…HERE
