Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the Fed Is Watching the VVIX More Than the VIX
Transcript
- Lucas: So the VIX is sitting at 15.48 after a four percent jump this week, but the VVIX—the volatility of that volatility—is holding near 86.5, basically flat. That divergence is one of those quiet signals that tends to matter more than the headline number. Luna: Right, because a low VIX makes everyone feel safe, but if the VVIX is elevated, it means the market is pricing in a higher chance that the VIX itself is going to spike. That's the real risk. Lucas: Exactly. And that's what we're digging into today—why the VVIX matters more than the VIX right now, and how that gap is showing up in the cost of protection. Let's start with the basics: the VIX measures expected volatility in the S&P 500 over the next thirty days, but the VVIX measures the expected volatility of the VIX itself. Think of it like the market's anxiety about its own anxiety. Luna: So if the VIX is low but the VVIX is high, the market is calm but nervous about becoming nervous. That seems like a recipe for a sudden shift. Lucas: That's the thing. Historically, when the VVIX is elevated relative to the VIX, it often precedes a sharp move in the VIX, which means a sharp move in the market. We saw this in late 2018 and again in early 2020—the VVIX started climbing weeks before the sell-off actually happened. Luna: And right now we've got the VIX at 15.48, which is below its long-term average, but the VVIX at 86.5 is actually above its own average. That's a pretty stark divergence. Lucas: It is. And it's not just a theoretical curiosity. It directly affects options pricing. When the VVIX is high, options on the VIX become more expensive, and that ripples into the cost of hedging a portfolio. So an investor who thinks they're protected with a put spread might be paying a lot more than they expect. Luna: Can you give a concrete example? Because I think that's where it gets real. Lucas: Sure. Imagine a portfolio manager in early August. The VIX is around 14, so they decide to buy a three-month put on the S&P 500 to hedge against a pullback. They assume the premium is cheap because implied volatility is low. But because the VVIX is high, the market is pricing a higher probability that volatility spikes during that window. So the put costs significantly more than it would have six months ago, when the VVIX was lower. Luna: So the hedge is more expensive, but the protection is still worth it in a downturn. The problem is when the market drops, the VIX spikes, and the VVIX can spike even harder—making that hedge even more valuable, but also making it harder to roll or extend. Lucas: Exactly. And that's the trap. You think you're hedged, but the cost of maintaining that hedge can eat into returns if the market just chops sideways. It's this sort of volatility tax on insurance. Luna: So what's driving the VVIX higher right now? Is it the macro picture, the Treasury yields, what? Lucas: A few things. The 10-year Treasury is at 4.74 percent, up from 4.69 last week, and the 30-year is at 5.27. That's a steep long end, and it's feeding uncertainty about the economy. Plus, real GDP growth is cooling—it came in at 1.5 percent annualized last quarter, down from 2.1. That kind of deceleration gets the derivatives market nervous, even if the spot market is still grinding higher. Luna: And that's why the VIX can stay low while the VVIX stays high—the spot market is being held up by a narrow group of mega-caps, but the options market is pricing in more tail risk. Lucas: Right. The S&P 500 is near 7,674, but it's being propped up by a handful of names. The breadth underneath is weaker, and the VVIX is kind of the market's way of saying that the calm isn't broad-based. It's concentrated. Luna: So for a retail investor, what should they be watching? Is it the VVIX itself, or are there other signals? Lucas: The VVIX is a good leading indicator, but it's not the only one. Look at the term structure of the VIX futures, the put to call ratio, and the skew in the options. But the VVIX is a nice single number to track because it captures the market's expectation of how much the VIX will move. If you see the VVIX climbing while the VIX stays low, that's a red flag. Luna: And that's exactly what we're seeing now, so I guess the question is: what does this mean for the next few months? Lucas: It doesn't mean a crash is imminent, but it does mean the risk-reward for buying protection is skewed. If you're a long-term investor, this might be a good time to check your portfolio's downside exposure and maybe trim some positions that have run up a lot. The cost of hedging is high, but that's also a sign that the market is pricing in more uncertainty. Luna: So it's not time to panic, but it's time to be deliberate. And that fits with the show's whole thesis about surviving downturns. Lucas: Exactly. And one thing that strikes me about this VIX/VVIX dynamic is how it interacts with the broader theme of market concentration. We've talked about index funds and the hidden cost of concentration, and this is another layer: if the market is being driven by a few stocks, then any shock to those names could send the VIX spiking, and the VVIX would spike even harder. Luna: So the VVIX is almost like a measure of how fragile the market's calm is. And right now, it's saying the calm is pretty fragile. Lucas: Right. And that's why I think this has a direct application for our listeners. If you have a portfolio that's heavily weighted in tech or growth, you might want to consider how much downside protection you actually have. A lot of investors think they're diversified because they own an index fund, but if the index is top-heavy, the diversification is partly illusory. Luna: Yeah, and that's something we've touched on before, but the VVIX gives it a concrete, quantifiable edge. It's not just a gut feeling that the market is fragile; there's a number that's telling you that. Lucas: And that number is 86.5, versus a historical average that's more like 80. So we're above that, and it's been climbing for a few weeks. It's not screaming imminent doom, but it's definitely a yellow flag. Luna: So if someone wants to track this themselves, what's the easiest way? Just look up the VVIX on a financial site? Lucas: Yeah, it's listed as a standard index, and most platforms will have it. You can see the daily level and the trend. I like to look at the ratio of VVIX to VIX—if that's rising, it tells you that the market is getting more nervous about volatility itself. Luna: And that ratio is at about 5.6 right now, which is on the high side. For context, it's usually around 4.5 to 5. Lucas: Good point. That's a quick way to gauge it. And if you see that ratio breaking above 6, that's a serious red flag. We're not there yet, but we're trending in that direction. Luna: So what would it take for the VVIX to start coming down? A broader market rally, or maybe a drop in Treasury yields? Lucas: Probably a combination. If we get some reassuring economic data—say, inflation staying contained, or GDP stabilizing—then the VVIX could drift back down. But also, if the market breadth improves, if more stocks are participating in the rally, that would ease the tail-risk premium. Until then, I'd expect the VVIX to stay elevated. Luna: And that's something that could persist for months, even if the market doesn't crash. That's a lot of expensive hedging. Lucas: It is, and that's why I think the practical takeaway is to be selective with your hedging. Maybe you don't need full crash protection, but you might want to buy some cheap out-of-the-money puts on the VIX itself, which would benefit from a spike. Or use a put spread to lower the cost. The key is to be aware that the market is pricing in more risk than the spot VIX suggests. Luna: And remember, if today's conversation made you think differently about your portfolio's risk, that's exactly what we're here for. If you want to help us keep having these conversations ad-free, you can support us at buy me a coffee dot com slash fexingo. It's a small thing that makes a big difference. Lucas: We appreciate that, genuinely. And it does help us keep the lights on without any corporate sponsors. Luna: Yeah, totally. But back to the VVIX—I think the biggest misconception is that a low VIX means low risk. But this shows that's not always true. Lucas: Exactly. The VIX is like the speedometer, and the VVIX is like the engine temperature. You can be driving at a moderate speed, but if the engine is starting to overheat, you should pay attention. And right now, the temperature gauge is definitely creeping up. Luna: So keep an eye on that number. And if it starts to drop, we can all breathe a little easier. Lucas: Right. And we'll be watching it for you. For now, thanks for listening, and we'll catch you next time.