Something peculiar is happening in western capital markets. Almost every measure of volatility has tumbled to unusually low levels. If you look at the degree of actual (or “realised”) price swings – and projected (or “implied”) future movements – investors are behaving as if the world is utterly boring.
This is bizarre. Financial history suggests that at this point in an economic cycle, volatility normally jumps; when interest rate and growth expectations rise, asset prices typically swing (not least because traders start betting on the next cyclical downturn). And aside from economics, there are plenty of geopolitical issues right now that should make investors jumpy. European elections have just propelled populist leaders into power, and events in Ukraine and the Middle East are tense.
But investors are acting as if they were living in a calm and predictable universe. Take a look, for example, at Wall Street’s so-called “fear index”, the Vix, which measures the implied volatility of S&P 500 equities. During the financial crisis this surged above 80, and later hovered around 30; it is now just above 11, a low level not sustained since 2007.