Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How the VVIX Collapse Reveals a New Market Regime
Transcript
- Lucas: So the VIX is at 16.78, up about a percent on the week. That's mildly elevated but nothing crazy. But the VVIX — the VIX of the VIX — has dropped nearly 6 percent in the same period to 88.43. That's a collapse in what's basically the price of volatility insurance on volatility itself. Luna: The VIX of the VIX. I love that phrase. For listeners who haven't tracked this — the VVIX measures implied volatility on VIX options. So it's telling us how much uncertainty traders see around future VIX levels. Lucas: Exactly. And when the VVIX drops sharply while the VIX holds steady, it signals that options dealers are getting very comfortable with the current volatility regime. They're not pricing in tail risk around a spike. That's a pretty unusual posture given where we are in the cycle. Luna: Define 'where we are in the cycle' — because we've got the S&P at 7,501, the Nasdaq up 2.4 percent this week alone. That doesn't exactly scream fear. Lucas: No, it doesn't. But look at the macro backdrop. Real GDP growth just came in at 1.6 percent annualised for Q1 — that's a rebound from 0.5 percent, but it's still below trend. The 10-year yield is at 4.49 percent, the 2-year at 4.20. That spread is only 27 basis points. We just came out of an inverted curve. Historically, that's been a zone where markets get jittery. Luna: Right. And yet the VVIX is saying 'nah, we're fine.' That feels like cognitive dissonance. Lucas: It does. And that's why I think this VVIX collapse is the more interesting signal than the VIX itself. The VIX at 16.78 — that's above the long-term median of about 15. So you could argue there's still some anxiety priced in. But the VVIX at 88.43 is near the low end of its post-2020 range. It was above 120 during the regional banking crisis in 2023, and it spiked to 150 during the COVID crash. Luna: So the VIX says 'cautious,' the VVIX says 'complacent.' Which one wins? Lucas: Historically, when the VVIX gets this low while the VIX is in the mid-teens, it's been a contrary indicator. Think late 2017, early 2018 — VIX was around 11, VVIX was in the 80s. Then February 2018 happened. Volmageddon. The VIX spiked to 50 in a week. Luna: Ouch. So you're saying the options market is underpricing the chance of a volatility explosion. Lucas: I'm saying the options market is pricing in a very narrow range for future VIX outcomes. The VVIX is a measure of the expected volatility of the VIX — think of it like a volatility smile for the VIX itself. When that smile flattens, it means dealers are selling tail protection cheaply because they don't see a catalyst. Luna: And what might that catalyst be? Because the macro calendar is pretty packed. We've got the Fed transition — Kevin Warsh is reshaping the playbook. Plus the Strait of Hormuz peace talks are supposedly starting, but we've seen conflicting headlines all week. Lucas: Right. And those are exactly the kind of binary events that usually keep the VVIX elevated. The fact that it's dropping suggests traders are either ignoring those risks or they've decided the outcomes are benign. Peace talks in the Gulf removing a tail risk? Possible. But also possible that the market is just complacent because the trend has been up. Luna: The Nasdaq up 2.4 percent in five days, the Dow at 51,565, small caps up 1.2 percent — it's a risk-on party. And the VVIX is the designated driver who's had one too many. Lucas: That's the metaphor. And I want to be clear — I'm not predicting a crash. But when you see this kind of divergence, it pays to understand the mechanics. The VVIX dropping means the cost of hedging a VIX spike has gotten cheaper. If you're a portfolio manager, this is actually the time to maybe buy a little tail protection, because the insurance is on sale. Luna: So you're saying buy the dip in volatility products. Lucas: Cautiously. But yes. The VIX futures curve is in contango — further months are more expensive. So rolling VIX futures is a losing game. But buying VIX call spreads when the VVIX is this low can be a cheap lottery ticket. The trade is asymmetric: you know your max loss, and if something breaks, the payoff can be multiples. Luna: What's the analogue you're looking at? You mentioned 2018. Any other periods where VVIX got this low? Lucas: Summer 2014. VIX was around 12, VVIX in the 80s. The market drifted higher for months, then the VIX spiked to 20 in October on Ebola fears and geopolitical stuff. Another one: mid-2019, before the repo market blew up in September. VIX was around 15, VVIX around 90. Then repo rates spiked, the Fed had to intervene, and the VIX jumped to 25. Luna: So the common thread is a hidden fragility that the VVIX doesn't capture until it's too late. Lucas: Exactly. The VVIX is a measure of perceived fragility. When it's low, the market is saying 'we think the system is resilient.' And sometimes that confidence is warranted. But sometimes it's just a function of low realized volatility feeding into lower implied volatility in a self-referential loop. Luna: And right now, realized vol has been low. The S&P has basically gone straight up since the April lows. The VIX has drifted down from 20 to 16. The VVIX has followed. So it's not irrational — it's just extrapolative. Lucas: Right. And the danger is always that the extrapolation breaks. The question is what breaks it. Could be a hawkish surprise from the Fed under Warsh. Could be an escalation in the Middle East despite peace talks. Could be something we haven't thought of. Luna: That's the thing about tail risk — by definition, it's not in the consensus forecast. Lucas: So let's bring it back to the listener. If you're a long-term investor, the VVIX might seem arcane. But it's actually a useful sentiment gauge. When it's this low, it's worth asking: is my portfolio positioned for the possibility that calm breaks? Not panicking, just checking. Luna: You mean like having some cash, some Treasuries, maybe a tail hedge? Lucas: Exactly. Cash is yielding over 4 percent right now on money market funds. That's not nothing. And if the VIX spikes, you can redeploy. The VVIX is telling you that the market is not expecting that spike. Which is exactly when it tends to happen. Luna: All right, so we've got the VVIX as a contrary indicator, the VIX in the middle of its range, and the macro backdrop with GDP growth ticking up but still below trend. The 10-year yield at 4.49 is also worth noting — that's up from 4.43 a week ago. That's a pretty meaningful move for a week. Lucas: It is. And that's another piece of the puzzle. Rising long-term yields typically hurt growth stocks, but the Nasdaq is ripping. So either the bond market is wrong about growth, or the stock market is ignoring it. The VVIX says neither is worried. That's a tension that usually resolves one way or the other. Luna: And the Fed under Warsh — you've got to think he's watching this too. He's talked about 'regime change in a velvet glove.' If the VIX stays low and risk assets keep rallying, does he feel emboldened to keep rates higher for longer? Lucas: I think that's the velvet glove part. He wants to avoid shocking the market. But if the VVIX is telling him the market is complacent, he might see room to nudge rates up without triggering a panic. The question is whether he's right. Luna: Or whether the VVIX is the canary that's already passed out. Lucas: Look, I'm not saying sell everything. But if you're the kind of listener who likes to understand what the market is pricing in, the VVIX is a great tool. It's not a timing signal — you can't trade it directly. But it's a window into the collective psyche of the options market. Right now, that psyche is unusually calm. That alone is worth noting. Luna: And speaking of the collective psyche — we've been doing these episodes for a while now, and we've kept them completely ad-free. That's been a deliberate choice. If you find these market breakdowns useful, and you want to support keeping them free of sponsor interruptions, there's a simple way. Just head to buy me a coffee dot com slash fexingo. It's a small gesture, but it really helps us keep the lights on and the independence intact. Lucas: Yeah, I second that. We've never wanted to have a bank or a trading platform telling us what to talk about. Listener support is what makes that possible. So if you've gotten something out of this VVIX deep dive, or any of the other 65 episodes, that's the link. No pressure, just grateful. Luna: Alright, back to the markets. So the VVIX at 88.43 — we've established it's low. But what's a reasonable target if complacency breaks? Where could it go? Lucas: If the VIX spikes to 25, the VVIX could easily jump to 120 or 130. That's a 40 percent move. And if the VIX goes to 30, which is not unprecedented, the VVIX could hit 150. The point is the asymmetry. The VVIX has more room to go up than down from here. Downside is maybe 10-15 percent if the VIX grinds lower. Upside is 50-100 percent if something breaks. Luna: That's the kind of risk-reward that tail hedgers live for. Lucas: Exactly. And I think that's the real takeaway for this episode. Not that the market is about to crash, but that the options market is currently offering cheap insurance on a volatility spike. Whether you buy it or not depends on your time horizon and your conviction. But knowing that the VVIX is flashing that signal is valuable information. Luna: So next time someone says 'the VIX is low, everything's fine,' you can say 'yeah, but what about the VVIX?' and watch their eyes glaze over. Lucas: That's the dream. But seriously — the VVIX is one of those underappreciated indicators that can give you an edge. It's not perfect, but when it diverges from the VIX like this, it's worth paying attention. So keep an eye on it. We'll be back next week with another angle.