Worldvolatility at 4,59% in USD terms

After all-time highs in the big equity markets and news about the longest bull market in history, the Worldvolatility have declined. The major thesis is still that the Worldvolatility will touch 4% before any major financial storm. The treasury market is very calm at this point, having a volatility of only 1/6th of its all time high sat at Dec 18th 1981.

Some readers might wonder why 4% is often mentioned here at Worldvolatility. That is because the Worldvolatility have turned up very close to 4% eight times since 1974. This have only happened in good times often before market tops.

That is an empirical fact in the post Bretton-Woods era.

On a more philosophical level the 4% might represent the minimum dynamism needed in a market economy, anything lower would be possible in a planned economy maybe, but not in a market driven capitalistic society.

 

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Worldvolatility at 4,88% in USD terms

The Worldvolatility stayed firmly under 5% through the spring of 2018. There have been slightly higher equity volatility than last year but gold and treasuries have been calm. The major thesis here at Worldvolatility is still that the Worldvolatility will touch 4% again before the next major financial storm.

Worldvolatility at 4,89% in USD terms

After a wild February in the equity markets the Worldvolatility have risen to 4,89% in USD terms. The move felt dramatic and some reverse VIX ETF:s have been wiped out. In situations like this the Worldvolatility can sort out wheter the move is significant for the financial system as a whole. The short answer is that it has not been a dramatic move when looking at gold, treasuries and equity like Worldvolatility does. The increase in the level of the Worldvolatility is there but the dramatic move in the equity markets have been cushioned by far smaller moves in treasuries and gold.

4,89% is a low level historically as we can see below.

Why truncation of x axis in bottom graph at 4%?

Answer to readers about graphs:

The top graph shows the evolution of the worldvolatility since 1974. An empirical observation that can be easily seen is that the values seem to stop decreasing around 4%. Why at 4%? That is unknown at this point, but it seems to hold as a worldvolatility low.

The bottom graph is just a zoom (in the long graph from 1974) from the last time the worldvolatility hit a 4% low , which was in the summer of 2014. The truncation of x axis at 4% is just to get a close up on the evolution of the worldvolatility.

So both graphs show the same evolution of the Worldvolatility, the bottom one being the close-up and the top one being the “big picture” from 1974.

Worldvolatility at 4,59% in USD terms

The Worldvolatility have taken a sharp step down with equityvolatility hitting historical lows. The volatility of the treasuries are approaching really low levels but still have some way to go to historical lows sat at July 14th 1978. Back then the extreme calm of the treasuries were followed by extreme monetary events in the following years with the Worldvolatility spiking at 17,53% in October 15th 1982. In the close-up below (bottom graph) we can see that if the Worldvolatility is moving any lower now it is likely to approach the historical lows around 4% for the 9th time since 1974.

Worldvolatility at 5,47% in USD terms

The Worldvolatility still resides in the lower range of the uptrend that started in 2014. A low reading at 5,27% occured in the beginning of July before the North Korea story broke out. The Worldvolatility stands today at 5,47%. The period since 2014 is starting to look a lot like the late 1990s. Back then the Worldvolatility went sharply from around 6% to 8% before Nasdaq broke in March of 2000. A sharp increase(say before Q4 2018) up to 8% from where we are now would look a lot like 1999 all over again. Right now it is too early to say if this will happen.

Worldvolatility at 5,59% in USD terms

The risk parity weighted asset volatility (the Worldvolatility) stands at 5,59%. This is clearly within the normal range since the early 1970s. The 8th low at around 4% since 1974 occured in 2014 and from this low reading a clear uptrend can be seen until today. This can still be seen as mean reversion and the Worldvolatility have many levels to pass on the upside before it can be said to be high. In other words: -We live in a “normal” world at the moment resembling the late 1990s.

The risk parity weighted asset volatility

The path towards creating a worldvolatility have now reached the stage of an assetportfoliovolatility. The portfolio assets are :US 10 year treasuries, NASDAQ and gold. The portfolio is risk parity weighted and weekly rebalanced to capture actual experienced voll by the biggest asset managers in the world.

The last little increase looks small but captures the uptick in volatility after Brexit. The next phase towards worldvolatility will be some method to capture changing monetary regimes, with the China SDR inclusion in late 2016 being an example of a change of this type.

Aug21th 2016