Ultra-low Volatility #ThisTimeIsDifferent

merkinvestments.com / Axel Merk, Merk Investments / June 14, 2017

We increasingly see claims low volatility in the markets may be structural. Even as we agree that some of the analyses we see make good points, we are concerned we may be setting ourselves up for a major shock. Let me explain.

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Before getting into the details about the current environment, let me make some general observations. In my experience, complacency, with its cousin low volatility, is the best bubble indicator I am aware of. Perceived safety gets investors to pile into investments that they later regret. When it happens on a massive scale, major market distortions may be created that can lead to financial crises. And as the tech bubble that burst in 2000 shows, even if there is no systemic risk, the unwinding can be most painful to investors. In 2008, however, the perception that home prices always had to rise had become engrained in highly levered, yet illiquid, financial instruments, causing the unwinding to bring the global financial system to its knees. In our assessment, however, make no mistake about it: assuming for a moment the next crash won’t take down a major bank, doesn’t imply it cannot wipe out much more of your wealth than you ever anticipated.

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