Deutsche Bank: The Market’s Current “Metastability” Will Lead To “Cataclysmic Events”
With the VIX slammed at the close of trading on “quad-witch” Friday, sending it just shy of single-digits once again and pushing stocks back in the green in the last seconds of trading, the much discussed topic of (near) record low volatility simply refuses to go away, which means even more attempts to i) explain it, ii) predict what ends the current regime of “endemic complacency” and iii) forecast the “catastrophic” damage to markets when it does finally end as JPM’s Kolanovic did earlier this week, when he set the bogey on a modest increase in the VIX from 10 to just 15.
Overnight, applying his typical James Joycean, stream-of-consciousness approach to capital markets, Deutche Bank’s derivatives analyst Aleksandar Kocic penned his latest metaphysical essay on this topic, which covered most of the above bases, and which postulates that far from “stable” the current market equilibrium is one which can be described as “metastable”, the result of widespread complacency, and which he compares to an avalanche:”a totally innocuous event can trigger a cataclysmic event (e.g. a skier’s scream, or simply continued snowfall until the snow cover is so massive that its own weight triggers an avalanche.”
He also inverts the conventionally accepted paradigm that lack of volatility means lack of uncertainty, and writes that to the contrary, it is the ubiquitous prevalence of uncertainty that has allowed vol to plunge to its recent all time lows, keeping markets “metastable.”
How does the regime change from the current “metastable” regime to an “unstable” one? To Kocic the transition will take place when uncertainty, for whatever reason, is eliminated: “Big changes threaten to explode not when uncertainty begins to rise, but when it is withdrawn.” He also points out that while there is punishment for those who seek to defect from a “complacent regime”…
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