When you are in the business of buying and selling volatility you can get sort of cynical about whether volatility is a thing, and whether it is appropriate to buy and sell it. We talked earlier today about the fact that if you have a client who doesn’t care about something valuable, then you should buy as much of it from him as you can; you can guess where I learned that. It is superficially persuasive to tell a customer “you don’t get any benefit from the volatility of your stock so you should just sell it to us,” but ultimately you can’t eat volatility. You eat buying low and selling high, and so you rigorously translate the customer’s sale of volatility into buying low (from the customer) and selling high (to the customer). Science!
So I started reading this San Francisco Fed note about “uncertainty” with a certain amount of skepticism. Reuters describes the finding as “Uncertainty over the economic outlook has added between one and two percentage points to the U.S. unemployment rate since 2008,” and you might reasonably say “shut up, uncertainty hasn’t increased the unemployment rate, expectations that things will be bad have increased the unemployment rate through perfectly unsurprising self-fulfillingness.” Managers don’t stop hiring just because they think things will be pretty good, but with a small chance of a delightful surprise. It’s the drift, not the variance.
The SF Fed’s note does not entirely dispel that concern; it measures “uncertainty” based on a Michigan consumer survey that “has polled respondents each month on whether they expect an ‘uncertain future’ to affect their spending on durable goods, such as motor vehicles, over the coming year,” and I suppose each consumer can make his own choice about translating “uncertain” into “scary.” Here is that uncertainty graphed against the VIX and I submit to you the differences are instructive: