It takes some persistence and some sleuthing to detect some wariness in markets these days. However, there was one clue buried in a manager letter that I recently read – it was a single sentence reference to Hyman Minsky and his caution on long periods of stability leading to accentuated instability later. Intrigued I uncovered the quote:
We are currently experiencing (or coming off) the triple low – low interest rates, low growth and low inflation (more on that in another post). We might add low volatility to that trifecta. Low and falling volatility has been the norm since 2008, although based on the chart below the current lows could persist for some time (and they have historically):
Currently volatility remains cheap, and currently the cost of an S&P put is the same dollar amount that it was pre-crisis, despite the index being double what it was then. This dislocation is curious, and perhaps needs to be evaluated, particularly as investors focus on an underappreciated “right tail”.
The focus on the right tail (c.f. the surge in 1 year 120% calls has led to them being the richest that they have been in a year) corresponds with a breathless desire to get in on the current rally and not get left behind.