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It definitely doesn’t feel that way, but this is an era of remarkable economic peace. In fact, the degree of stability in the global economy is probably unprecedented.
Don’t believe us. Here is a graph (via Toby) that shows the 20-year-old rolling standard deviations of American economic growth, all the way back to the beginning of the 19th century:
Of course, different countries will subtly show different things. In some countries it can look like terribly different. But the US is fairly representative of a broader trend in the global economy.
Despite how turbulent things often feel, the economy is now a lot more stable than in the past, with even major events-such as the financial crisis of 2008 and COVID-19 and the inflatory aftermath that only modest, short-lived revival in economic turbulence. At least compared to the revolutions that we have seen throughout history.
However, there is a lot of volatility elsewhere.
This graph – supplied from data by Deutsche Bank – shows all times that the volatility of the American stock exchange has jumped with 1.5 standard deviations or more. As you can see, the flourishing of this volatility such as this was quite rare for half a century, but have become both more usual and more violent since the 1990s.
US shares suffered in the 50 years after the Second World War 13 Of these volatility peaks, and the average volatility of those episodes, 34.2 (and that includes the record in volatility on Black Monday from 1987). In the following years there have been 16 Volatility pikes, with the full -peaks on average 43.
That we seem to suffer from more sudden shocks is not a new observation. Not even remotely. But it is worth emphasizing how recent events underline how it stays true.
Many people attributed the volatility of volatility to the era of zero-interest rate policy, but as the April tumult shows-as the events in the nineties and 2000s did not have good enough work-that this was always an easy take.
The volatility was indeed on average lower in the ZIRP era. The VIX index that measures the volatility in the short term that is implied by options, in contrast to the actual realized volatility-average average in 2010-2019, compared to the long-term average of a shadow under 20.
But even since 2020, the VIX has only had 21.35 on average, quite close to the average since the founding of 1992. This despite three fairly large stock markets since then. In other words, we are in an era of a lower average volatility, but more sudden and wild shocks when the calmness then crushes.
So why are financial markets more susceptible to sudden shocks, while the economy is apparently much more stable than in the past?
Jim Reid van Deutsche Bank has argued that it is a combination of the Fiat -Malutaregime after the 70s, liberalization of the financial market and persistently rising debt levels. This has born the financial system that, according to him, is more vulnerable to frequent disruption, but also able to engineer strong recovery – with one large reservation:
However, the catch is that every recovery starts with a larger debt overhang than the previous one, sowing the seeds for the next crisis. It is a self -sewing tree/bus cycle.
Although the recent episode of Liberation Day differs slightly from traditional shocks, you could say that the same trends that we have identified have encouraged the unbalanced global trading system that the tariff shock has led. Moreover, the reversal of the liberation day policy and the subsequent strong stroking in markets was probably fueled by concern about the amount of debts that the US now has and the impact that the policy had on bond markets.
In general, I continue to believe that volatility shocks and mini crises have been wired in today’s financial architecture. In recent decades we have usually solved every crisis with more leverage or aggressive monetary policy. But with inflation and yields now higher than they have been for the majority of this period – and with growing concerns around tax sustainability – we may be far closer to the end of this era than the beginning.
Maybe. FT Alphaville is in favor of more technical statements, such as the explosive increase in derivaten-driven leverage in financial markets; How a volatility feedback loop is embedded by the widespread use of VAR models and strategies for volatility-oriented strategies; And the evolving nature of liquidity in the modern era of high -frequency trade. Your theories go into the reactions.
Continue reading:
– How a Volatility virus infected Wall Street (FT)
