How Low Can Volatility Go?

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1:48How low can the VIX go? Hi, everyone. Welcome to the Real Vision Daily Briefing. with me today is Jared Dillian, editor of the Daily Dirt Nap newsletter. Hi, Jared. It's great to see you. Yeah, good to be here. So what do you make of the VIX getting down below 17? So the VIX is this sort of measure volatility, but a lot of people kind of consider it the fear index. And so when it's really low, it suggests that things are super calm and everything's fine, but it feels like that's not the case. What do you make of this? Are you watching this? Does it matter? What do you think it's telling us? I have a lot of thoughts about it.

2:25So first of all, realize volatility. I'm like, I'm looking at a three-day chart of the S &P right now. The S &P is on over three days. It's been on every single day. Like realize volatility is zero, right? So if you're long options, just kind of a dumb example, if you're long straddles and the market isn't moving, they're melting, like people are going to be selling volatility, right? So it's really a function of realize going down. I think that people kind of have this reflex that when volatility gets low, they want to buy volatility. They want an expressive view that volatility is going higher.

3:07So they do this through VXX or calls on VXX or they buy calls on the VIX. And I can tell you, there has been more money wasted on betting on higher volatility than any other strategy in the markets, right? There's been billions of dollars in premium bought on VIX calls that have just evaporated. So my advice to people is if you see implied volatility getting lower, then you have to understand that this condition could persist for a very long time. Now, I remember in 2004, 2005, 2006, the VIX actually got below nine, right? And it was a bit of a bubble in option selling, like everybody was selling options.

3:57but the market was moving 10, 20 basis points a day. And this lasted for like two years. So just because the VIX got in the 16 handle today doesn't mean you want to run out and buy VXX. Like this could persist for a really long time. Does that tell us anything about the broader market or the performance of stock markets or are the correlations kind of breaking down? Well, one thing it tells us, there is a correlation between equity volatility and credit spreads. So when equity volatility goes down, it usually means that credit spreads compress, which usually means that it's a positive economic sign.

4:38I mean, last year, volatility is a funny thing. We had a big bear market last year. The market was down top to bottom 25%. And yet the VIX never really got much above 30%, right? Whereas during the pandemic, when the market crashed 35%, the VIX got above 80. Okay. So there's a lot of dynamics, which I don't think people fully understand about how volatility behaves. But I'm just saying like it could stay low for a really long time, which by the way is bad for the newsletter business. Like my business is kind of correlated with the VIX, right? When the VIX is high, I get new subscriptions. When the VIX is low, like it's really quiet and boring and nobody wants to subscribe to the Daily Dirt app.

5:27Okay, well, now we have to pay attention. Good thing you're an author and a DJ and a million other things. We'll talk about that in a second. But it does seem a little odd, I think, though, because people feel like we have this maybe banking crisis that's stabilized, but we don't really know what's going to happen. We still have a war. We have China. There are all these sort of tensions, and yet it's not reflected in the market. We're in the middle of earnings. Netflix is out, Morgan Stanley out, Tesla's out any minute. And so far, nothing seems to be moving the market. Do you see any catalysts to break stocks out of this range?

6:05I think the Fed meeting could be a catalyst for even more ball selling, right? So the Fed meeting is May 3rd. It's next week. And if the Fed signals, if they hike 25 basis points and then basically signal that they're going to pause. Stocks are going to rally significantly, perhaps 2%, 3%, 4 % in a day, and you're going to get an even bigger ball crush, and the bigs will go down to like 15%, 14%, something like that. That's my opinion. It's interesting because I think people are looking for that, right? And everyone's kind of waiting for the timing. We have a lot of people asking that. But this year has been such a year of kind of disconnects.

6:49I was really, really struck. Raoul did, for all of you who are watching and asked questions yesterday, Raoul took over the daily briefing and did an AMA, Ask Me Anything. And it was really interesting because the tone in the chat and in the questions was kind of dark and gloomy. A lot of people worried about war, about running out of energy, about AI. And Raoul was really struck by it. In fact, here's a clip of him kind of reacting to it in real time. Let's have a listen. don fun don does cynicism maybe mean people are in disbelief and that's exactly what it is you know at periods of great change people get really cynical i was on a spaces call today and i could hear a friend of mine really pushing back on ai no it's not it's not happening ev it's not happening it's all nonsense i'm like maybe it is maybe it isn't but you don't sound like you've an open mind to it because I think people fear change and that's understandable if you don't have that abundance mindset going into this kind of stuff it's unsettling because everything you took to understand as stable isn't stable everything you thought was new is now not new anymore it's actually really hard so I may kind of joke about the kind of scarcity mindset, the mindset of no, don't change, the fear of change.

8:13But look, it's a complete understandable thing. And people don't like it and they find arguments against stuff because they don't want change. And that's okay. But change still comes and there's nothing you can do about it. So you might as well just embrace it. You know, I wanted to play that because psychology is important, right? It does matter. What's your sense right now when you look at sentiment, because I know that's something you watch closely, Jared. Are people operating from a place of fear? Where are we on this sort of bullish, bearish, the world's ending kind of scale here? Yeah. I mean, Raoul and I agree on a lot.

8:52I don't talk to him a great deal. I might email him like once a month or something like that, but I do talk to him and we're generally on the same page on a lot of things. There is a lot of pessimism out there, which is weird because stocks are up almost 20 % off the lows. And you would think that sentiment would start to normalize a little bit and people would get bullish, but it hasn't happening. If you ask me on a scale of 1 to 10 where sentiment is, I'd say it's about 2.5, maybe even 2. I don't watch a lot of TV, but if you turn on CNBC or any of the financial news channels, there's a lot of pessimism.

9:30I was talking to my broker the other day. He talks to his clients. He said, everybody is gloom and doom. So it's pervasive. And if you think about the fact that stocks are up almost 20 % and people are still this bearish, what do you think the next 20 % move in stocks is going to be? Yeah. Yeah, it is interesting. That's why I mentioned it's a strange time of disconnects. And we do, by the way, Rob did that AMA. We do these on the platform as well, because I think it is really important for people to kind of just air whatever they want. And you unearth a lot of interesting things like this sort of undercurrent of concern and worry.

10:11I know you talk a lot about these issues. I mentioned you're an author as well. Your book just hit Amazon, which published Those Bastards, which I love. And I read your essays anyway as they come out. We both have one. But it's interesting to me because you talk a lot about these issues. And one of them that I read that really struck me was, we're all here to feel a little stress. Talk to me about that because I feel like especially, you're talking about it in general in life. A lot of these essays are just sort of life. They're not necessarily about investing, but I think there's a lot of crossover and people are feeling really stressed.

10:50They almost become paralyzed. They don't know what to do. And we hear a lot of that in the questions. What do you mean we're all here to feel a little stress. Well, that story comes from when I first started at Lehman. This was in 2001. The different desks were doing presentations to the associate class. And there was a guy from FX research and the ding dong next to me raises his hand and says, is your job stressful? Which is like the dumbest question of all time. But the guy, he stood there and he thought about it. And he's like, we are all here to feel a little stress, right? Which at an investment bank, Like that's why you work at an investment bank to feel stressed.

11:28Like being a trader is like one of the most stressful jobs imaginable. Like being a banker is stressful. So one of the things I find interesting is that there's a lot of talk about avoidance of stress, right? Like I don't want to do X because that is going to be stressful, right? But really, if you think about the most successful people in the world, there are people who sought out stress. They tried to expose themselves to as much stress as possible. And stress is really pain. Like what it is, is pain. You're having a physiological reaction to a psychological stressor. You're actually feeling pain.

12:09But when you feel pain and you handle it like an adult and you come out the other side, you grow as a person, right? So, you know, it's funny, like I have, I have my annual conference next week in Pauly's Island, right? So I have like a hundred daily Dirt Nap subscribers coming down in the conference, super stressful. I got to deal with the venue and the food and, you know, I'm going to be playing music and I got to, I got to wrangle like, you know, 12 speakers and it's a lot of stress, right? But, and every year I ask myself, like, why do I put myself through this? You know, it's not really for the money, you know, but you do it because you grow as a person.

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14:33Yeah, no, I think that that's true. And it reminds me of a conversation that Denise Schill and I had. And I think she shared during Festival of Learning when we were doing a session with Raoul and Tony that she had a client that had losing trades on their portfolio. And it was so frustrating. It was sick of a lot. And then she just said, why don't you get rid of it? And part of it was the stress of having to admit that it was a wrong trade and just coming to terms with it. And then the minute that he did, it was such a relief. And it was something to that effect. It was a fantastic story. But again, it is that not avoiding stress, kind of confronting it, dealing with it and moving on.

15:12It can really kind of handicap you if you don't. Yeah, yeah. No, I mean, I do the same thing. Like I'll have a losing position and it's bugging me and it's bugging me and it's bugging me and I don't do anything about it. But once I sell it, I feel a million times better. Like I'm like, why the hell did I wait so long to sell that thing? Yeah, I love it. I'm gonna, I really, I love that idea where I'll help you feel a little stress. And once again, I'm definitely gonna use that on my kiddos. You also wrote one sort of leaning more into the positive. And I think this is kind of what Rao was getting at.

15:44called You Can Do Anything, which I found really empowering because I think the changes that are coming for me, especially when you talk about some of this AI stuff, and keeping up with what's happening with technology in general, the way it's changing everything can be really daunting. But you kind of make the case that if you want to do it, you put the work in, you can conquer stuff. Yeah. In the beginning of the essay, I talked about those extreme makeover shows, right? If you remember those things. I love those. I know. So did I. And a lot of people said they were kind of cruel and exploitative and stuff like that.

16:17But this is where you had somebody who was objectively ugly, like they were just an ugly person. Or unstylish. Or whatever. But they gave them a makeover, new hair, new teeth, whatever. And I thought it was terrific. And one of the things, this is like a big theory of mine, but I truly believe that 90 % of personal appearance is effort and not genetics. It's not genetics. Like anybody can look good if they want to. They can go shopping for clothes. They can do their hair or whatever. So the lesson in this is that you can really do anything you want, right? You can do absolutely anything you want if you put in the time, right?

16:57So like I'm a DJ. So, you know, if I really wanted to, if I really wanted to spend 12 hours a day doing this, producing tracks, whatever, putting them on beat port, touring, I could do that. You can do absolutely anything you want. Yeah, absolutely. I love that. And that's part of what our mission is, right? And that's what we preach. You can, no matter who you are, you can get your head around this stuff. We try to break it down so everyone can understand it and sort of move into the future because we all have to kind of have a handle on it. Loving the comments. Is this it? Said disconnect equals opportunity.

17:33Totally agree. And someone else just pointing out that Ray Dalio, So, oh, maybe same person, just put out a fear piece sort of on LinkedIn because the psychology matters. I have some ideas of a conversation I want to have with Denise. So we're going to try to get her back in this environment as well because I think it'll be super helpful. All right. We got a lot of people want to talk about stuff, though, Jared. So I'm going to get a question or two in. We have a link, by the way, where you can find the book. Highly recommend. It's super funny, too, which I love. Jared has a wicked sense of humor.

18:05I just have my husband laughs all the time. He's reading it in the other room. I can hear them. Someone's read the book already because they say, what's wrong with cargo shorts?

18:16I love it. It's an inside joke, but read the essay, one of the essays in there and you'll find out that's the one that had me, one of the ones that had me laughing a lot. But someone asking about gold, please discuss gold. Thank you. What are your thoughts on gold, chart? Well, it's technically speaking, I mean, really gold is 90 % technicals, but technically speaking, it's run into a little congestion around the all-time highs, which I'm not super worried about. Brent Donnelly, who I'm sure you know, he had a tweet that got some attention, I think it was yesterday. He pulled up a Google trends chart of the search term, how to buy gold.

18:59And he showed that it is now at the highs of where it was in 2011 when gold peaked. And that generated a lot of discussion. First of all, I'm not sure that Google Trends normalizes that search data over time. And there's a lot more people using Google than there were in 2011. But anecdotally speaking, I mean, I do think that sentiment on gold has gotten a little positive. But relative to where it was in 2011, it's nothing. Like there was so much bullishness in 2011. Peter Schiff was on TV every other day. You had those cash for gold stores. You had all these gold commercials, gold mine and stuff like that.

19:41It was actually bananas. I mean, that was a bubble. And we are nowhere near that today. So, you know, yeah, there's a lot of disagreement, not a disagreement about gold, but there are people who are starting to wonder, because it's kind of been a kind of chronically under delivers, doesn't it? I think that's the problem. Well, I mean, I think that's true, but I think there's a difference between perception and reality. I mean, one of the reasons that gold has gotten so popular in the last couple of weeks is it's really the only thing that's working. You know, I mean, like gold is close to the all-time highs and stocks are down 15 % from the all-time highs and bonds are a mess and credit is a mess.

20:23I mean, if you go and look around all the asset classes, it's the only thing that's working. So the longer that happens, the longer a trade works, the more sponsorship it's going to attract and it's going to work more. It's reflexivity. So I'm kind of a permable in gold. And when I say permable, I just want to explain what I mean by that. My thesis when I started investing in gold in 2005 was that it would outperform stocks on a long-term basis, like 10 or 20 years. And since 2005, gold has outperformed stocks. And I think it will continue to outperform stocks. That's the thesis. Someone asked me, when gold crosses 2100, it could really attract capital.

21:11Is there a level that you think draws a lot more institutional money in? because that's one of the things we've talked about, Rick Rule. Even if you see a slight increase in allocation, you know, traditionally to get back to maybe where they were before, you could kind of see a big move. Is there a level that you're looking at as important, Jared? Are you just happy with the progress so far? Well, the all-time highs are around 2060. We're about 3 % away from that. So it's not that far away. I do want to point out one interesting thing, and I haven't heard anyone else mention this. You know, gold is up a little, but GDX is up a lot.

21:42And GDX, the gold mining ETF, is outperforming gold for the first time in a really long time. So I was kind of watching this happen. I was watching gold was kind of unched every day and GDX was going up every day. I kind of think that there's some large entity, kind of like a Bridgewater or a big macro fund or something like that, that made a big trade in miners. We're talking about a couple of billion. Because if you look at the GDX chart, it went straight up from 25 to 35 over the period of about a month and a half. And it was a little unusual. So I think that somebody or a group of people are starting to take a strategic look at the miners.

22:31All right. I want to make sure we get some other topics in here too. Thank you. So question, what do you think of the debt ceiling drama? Could that be a catalyst for a correction in the market? I think it's definitely possible. The Republicans, I had a conversation with somebody in politics, and it was a Republican. And I said, you know, it's really a bad idea to force this debt ceiling issue because it's going to boomerang back at the Republicans. You're going to shut down the government. The Republicans are going to get blamed, whatever. and his response was very interesting. He said, look, he says, we won the midterm election.

23:21Like this is what the voters put us in Congress to do. We are going to do it. So I think the probability of a shutdown or some impasse with the debt ceiling is very, very high. I think there's a very high probability of that. So I just don't know how to express that. you were talking a bit about Europe in one of your in one of your recent notes in one of your recent newsletters UK inflation surprised the upside today a lot of people not like what they saw coming out there are you still looking at Europe as attractive or did that change the scenario at all for you no it doesn't change the scenario I definitely saw the inflation number I I mean, did you know that the top performing developed markets index in the world this year is the CAC in France?

24:12Like, who would have guessed that? It's up 16 % year to date. The CAC, right? Like, Europe continues to outperform the U.S. It absolutely continues. So, and it's very quiet. Not a lot of people are noticing. But this is one of these outperformance trades that could last for years. I've talked about this on the daily briefing before. Like this just continues to work over and over again. So do you think it's just because it's coming from, they're coming from such low levels that, you know, they just have more ground to make up? Or is there something fundamental that's driving this? And it's interesting because you have massive, you know, massive protests going on over pension reform there.

24:55So, you know. Honestly, I don't know, but it's working. So, yeah. Yeah. What about bonds? I know we've got some questions about that too, as well. It's funny because a lot of people right now are saying, don't look at the VIX, look at the move index. We just had a really, really interesting conversation with Michael Howell and Raoul on the platform. I encourage everyone to watch it if they haven't had a chance to yet. Michael Howell, of course, tracks liquidity and the influence that's having on bond markets. What do you look Jared, are you feeling like, where do you think yields are going? Honestly, I think yields are kind of in the middle of a range.

25:40I don't think there's a lot to do here. You know, we kind of have some certainty around Fed policy for the first time in a while. I would say the confidence around Fed funds estimates is probably the highest that it's been in over a year, you know. So I just don't, I think bonds are in a range. I don't think there's a lot to do. You think that we are going to see rate cuts this year? I mean, someone just, someone noted in the chat, where's the lagged impact of all the rate hikes last year? The economy's still humming. You know, if you asked me two months ago if I thought we were going to get rate cuts this year, I would have said yes.

26:24Now I'm not so sure. I'm kind of changing my mind. And this Fed is very different from other Feds we've had in the past. If you think about the Bernanke-Michigan Fed of the 2000s, they were depression economists. They studied the Great Depression. And, I mean, Bernanke's whole mission was to find the causes and the solution of the Great Depression. And that's how it got quantitative easing. These economists are a different generation. they grew up with the inflation in the 1970s they their model is Paul Boker so I think it's going to take a lot for the Fed to cut rates I mean I'm not like a lot of people think that maybe if unemployment gets to four and a half five percent that the Fed will cut I'm not even necessarily sure so I do think they're going to pause and they're going to pause for a while but I think the rate cuts at the end of the year are looking less likely.