Over the past few months of increasingly disconcerting and seemingly unnatural market calm, it's become fashionable to offer up pat explanations as to why volatility has essentially gone extinct at the same time that the leader of the world's largest economy has taken to managing geopolitical risk via Twitter. If you're JPMorgan, for example, the answer to the VIX puzzle lies in placid economic fundamentals. Others point to a sort of feedback loop between volatility products and the market itself.
These explanations might be right to some degree, but they're boring. More importantly, they don't satisfy our innate desire for conflict and cataclysm. So it was a relief when Goldman Sachs Asset Management CIO Jonathan Beinner took the stage at the Bloomberg Invest Summit and validated widespread suspicions that the VIX has become unmoored from reality. Asked about the current state of volatility, Beinner answered:
We don't think it's justified, certainly not to the level where it is ... It used to be that 15 was a low number, now you're at 10. And that is basically saying that the potential outcomes are a tighter band, not a wider band. And that looks pretty worrying.
The recent surge in populist politics, Beinner said, has widened the range of potential market outcomes, both positive and negative. Giant tax cuts remain possible (if vanishingly so). So does trade war or just, like, war war. But the VIX reflects the opposite: a smaller set of potential market-shaking outcomes. Beinner didn't offer an explanation for the disconnect. Still, it's always good to learn that it's not you but everyone else who's nuts.