Currently we are witnessing a suppression of volatility similar to what was seen in late 2017 prior to the famous Feb. 2018 "Volmageddon" event. The only reason this suppression of volatility is considered bullish is because most of the people putting on this short-term trade are playing with other people's money. Over the past 15 years of non-stop monetary bailout, investors have been systematically conditioned to ignore risk. Which means that this can only end one way: With systemic meltdown.
Oct. 10th, 2023:
“If you remember 2017, right before we got into Volmageddon in February 2018, the volatility environment smelled similar to right now”
Derivatives specialists have argued that options-selling funds are acting as a market tranquilizer, day in day out - all of which essentially serve as indirect wagers on stock calm"
“It works until it doesn’t”
Wall Street's favourite business model - something that mints coin until it explodes at public expense.
Below is what this looks like visually via the short VIX ETF. The big drop was Feb. 2018. Keen observers will note that this rally in complacency is almost 2x longer than the previous two vacations from reality.
The risks are so obvious today, that everyone merely assumes they must be "priced in" to this Disney market. In the same way that the most obvious subprime was NOT priced in last cycle.
Recently even Nassim Taleb - author of the "Black Swan" event, called today's risks a "White Swan" event i.e. common and obvious.
“Systems don’t correct themselves without some kind of pain.”
“A white swan! It’s a white swan event,” Taleb said during the interview.
"He believes the economic risks we currently face are obvious. After years of ultra-low interest rates in the U.S., Americans have piled on unsustainable levels of debt"
I've said this exact same thing for many years - but I'm not famous enough to first invent a fictitious financial term and then reject my own theory publicly. Because in the world of finance there is no such thing as a true "Black Swan" event. Per Minsky theory, money managers steadily increase risk over the course of the cycle until something explodes, then they tell their investors it was a "Black Swan" event, in order to exonerate themselves. In this elongated post-2008 cycle, conflict of interest has been put on steroids. Fifteen years of continuous monetary bailouts has conditioned investors to ignore even the most obvious of risks.
The Fed has many times attempted to re-calibrate their financial risk index in order to more accurately predict financial crises. However, each time they do so, investors onboard even more risk. Which means that this latest financial meltdown will come as a total surprise to unprepared central banksters and volatility selling gamblers alike.
Which gets us to this war in Israel. The current war started 50 years (+1 day) from the Yom Kippur War of 1973. Back in that war, Israel was caught off guard by a simultaneous Arab attack via the Golan Heights and the Sinai Peninsula. It was almost a total disaster for the Israeli side, but in the end the attack was repelled. After the war, Golda Meir resigned in shame.
In similar fashion this latest incursion came as total surprise. All because an interlude of stealth war preparation was widely conflated as Middle East peace, delivered by The Punisher Netanyahu.
That's where the comparison between these two events largely ends. The 1973 war triggered the OPEC oil embargo because the Arab nations wanted to punish the U.S. for siding with Israel. That embargo coincided with the closing of the Nixon gold window, both of which fueled the infamous 1970s stagflation. To believe the same massive commodity shock could be absorbed now is a fool's errand. As Taleb asserts above, current levels of debt are totally unsustainable. At best this Middle East conflagaration will serve to accelerate the Lehman Moment.
Something like this:
