1 00:00:02,400 --> 00:00:06,760 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:08,640 --> 00:00:11,320 Speaker 2: I'm Stephen Carroll and this is Here's Why, where we 3 00:00:11,400 --> 00:00:13,640 Speaker 2: take one new story and explain it in just a 4 00:00:13,680 --> 00:00:19,400 Speaker 2: few minutes with our experts here at Bloomberg. The back 5 00:00:19,440 --> 00:00:21,560 Speaker 2: and forth between the fin and White House, that's not healthy. 6 00:00:21,840 --> 00:00:25,040 Speaker 2: Some of those price pressures from tariff starting to creep in. 7 00:00:25,200 --> 00:00:26,720 Speaker 3: The fear you can have is that it's not only 8 00:00:26,800 --> 00:00:30,120 Speaker 3: goods inflation coming from tariffs, it's also the upside rigial 9 00:00:30,160 --> 00:00:33,559 Speaker 3: services inflation coming from wages. It's really beneath the surface 10 00:00:33,640 --> 00:00:35,760 Speaker 3: that we do still expect to see the impact of 11 00:00:35,800 --> 00:00:36,760 Speaker 3: policy changes. 12 00:00:36,920 --> 00:00:39,920 Speaker 1: Some of these larger structural issues remain. 13 00:00:40,159 --> 00:00:41,839 Speaker 3: You know, if you're walking on a lake and the 14 00:00:41,880 --> 00:00:44,720 Speaker 3: ice is frozen and sound safe, but when you start 15 00:00:44,720 --> 00:00:48,280 Speaker 3: hearing cracks, and that's what I feel like, it's too late, 16 00:00:48,320 --> 00:00:49,320 Speaker 3: once you go through the ice. 17 00:00:49,600 --> 00:00:52,200 Speaker 2: There are plenty of big issues out there for investors 18 00:00:52,240 --> 00:00:53,040 Speaker 2: to worry about. 19 00:00:53,520 --> 00:00:54,760 Speaker 1: But just days out. 20 00:00:54,560 --> 00:00:58,120 Speaker 2: From Donald Trump's next tariff deadline, stock markets have hit 21 00:00:58,240 --> 00:01:02,200 Speaker 2: record highs and latility as measured by the VIX known 22 00:01:02,240 --> 00:01:06,280 Speaker 2: as Wall Streets Fear Index, has all but disappeared. So 23 00:01:06,360 --> 00:01:09,360 Speaker 2: our investor is just feeling zen where is the VIX 24 00:01:09,680 --> 00:01:13,520 Speaker 2: missing something? Here's why there isn't more fear in the 25 00:01:13,640 --> 00:01:17,880 Speaker 2: fear index. Our market support of Valerie title joins me. 26 00:01:17,959 --> 00:01:20,880 Speaker 2: Now for more Valerie. First of all, why is the 27 00:01:20,959 --> 00:01:22,720 Speaker 2: VIX known as a measure of fear. 28 00:01:23,440 --> 00:01:27,120 Speaker 3: Essentially, what we know about markets is they tend to 29 00:01:27,319 --> 00:01:31,320 Speaker 3: go down in very sharp magnitudes over short amount of 30 00:01:31,400 --> 00:01:34,640 Speaker 3: time versus going up in a large magnitude in a 31 00:01:34,640 --> 00:01:36,680 Speaker 3: short amount of time. So we have had days where 32 00:01:36,680 --> 00:01:40,160 Speaker 3: the stock market drops twenty percent. Right nineteen eighty seven, 33 00:01:40,200 --> 00:01:43,400 Speaker 3: Black Monday stock market was down twenty percent in one session. 34 00:01:43,800 --> 00:01:45,919 Speaker 3: We have never had a session where the stock market 35 00:01:45,959 --> 00:01:49,640 Speaker 3: is up twenty percent. So that is something that's called skew. 36 00:01:50,040 --> 00:01:53,920 Speaker 3: And why that's important is because most assets, when you're 37 00:01:53,920 --> 00:01:58,080 Speaker 3: looking at the volatility of them, have a significant right tail. 38 00:01:58,280 --> 00:02:02,320 Speaker 3: So there is securfitally higher risk of a larger drop 39 00:02:02,360 --> 00:02:04,560 Speaker 3: to the downside than there is of a large rise. 40 00:02:05,520 --> 00:02:08,799 Speaker 3: And so when we look at volatility measures, essentially when 41 00:02:08,800 --> 00:02:11,920 Speaker 3: we see something like the VIX spike, the market is 42 00:02:12,000 --> 00:02:15,600 Speaker 3: essentially pricing in the market falling by a large amount. 43 00:02:15,639 --> 00:02:18,120 Speaker 3: So volatility is a great measure. But what we need 44 00:02:18,160 --> 00:02:21,720 Speaker 3: to remember is that normally when volatility is rising, something 45 00:02:21,800 --> 00:02:24,399 Speaker 3: bad has happened to this asset because we know we're 46 00:02:24,400 --> 00:02:26,560 Speaker 3: more likely to fall off a cliff in the equity 47 00:02:26,560 --> 00:02:28,560 Speaker 3: market than we are to one day walk in and 48 00:02:28,560 --> 00:02:32,320 Speaker 3: the equity market's up twenty percent. So what exactly does 49 00:02:32,400 --> 00:02:35,560 Speaker 3: the VIX measure? Well, that's a fun thing to explain, Steven. 50 00:02:35,880 --> 00:02:38,000 Speaker 3: So let's just take where the VIX is trading right now. 51 00:02:38,000 --> 00:02:40,640 Speaker 3: It's trading at sixteen, and that is giving us a 52 00:02:41,240 --> 00:02:44,359 Speaker 3: log normal volatility over the next three months. 53 00:02:44,360 --> 00:02:46,800 Speaker 1: So it's crazy already. 54 00:02:47,240 --> 00:02:49,520 Speaker 3: So essentially what that means is that to back that 55 00:02:49,600 --> 00:02:54,240 Speaker 3: out into a daily implied percentage swings of the equity market, 56 00:02:54,280 --> 00:02:56,480 Speaker 3: we have to divide it by the square root of 57 00:02:56,520 --> 00:02:58,480 Speaker 3: the number of how many trading days are in the year, 58 00:02:58,520 --> 00:03:00,320 Speaker 3: and that's two hundred fifty two, So it by the 59 00:03:00,360 --> 00:03:03,520 Speaker 3: square of tifty two, which is roughly sixteen. So with 60 00:03:03,600 --> 00:03:06,760 Speaker 3: the VIX at sixteen now, it's implying a one percent 61 00:03:06,840 --> 00:03:09,600 Speaker 3: daily swing. Sixteen divided by sixteen is one one percent 62 00:03:09,680 --> 00:03:11,480 Speaker 3: daily swing in the equity market. And how it back 63 00:03:11,520 --> 00:03:14,839 Speaker 3: set out. It's an index that tracks various amounts of 64 00:03:14,919 --> 00:03:17,400 Speaker 3: options on the S and P five hundred call options 65 00:03:17,440 --> 00:03:21,680 Speaker 3: put options straddles all around a horizon that expire in 66 00:03:21,760 --> 00:03:24,720 Speaker 3: twenty three days to thirty seven days, and it kind 67 00:03:24,760 --> 00:03:27,320 Speaker 3: of waits that to a thirty day benchmark. So what 68 00:03:27,360 --> 00:03:29,720 Speaker 3: this is selling us is the VIX at sixteen. We 69 00:03:29,800 --> 00:03:32,920 Speaker 3: divide that by sixteen, telling us it's implying a one 70 00:03:32,960 --> 00:03:36,120 Speaker 3: percent daily swing over the next thirty days. 71 00:03:36,400 --> 00:03:37,320 Speaker 1: So pretty low. 72 00:03:37,680 --> 00:03:41,320 Speaker 2: But how has the VIX tracked events like Donald Trump's 73 00:03:41,320 --> 00:03:43,200 Speaker 2: tariff announcements for example. 74 00:03:43,240 --> 00:03:47,360 Speaker 3: So at times where the actual equity market starts to 75 00:03:47,400 --> 00:03:50,080 Speaker 3: move a lot, you normally see the VIX rising as well. 76 00:03:50,280 --> 00:03:52,440 Speaker 3: You know that happened back at the beginning of the 77 00:03:52,520 --> 00:03:55,680 Speaker 3: year April second, the VIX shot up to sixty in 78 00:03:55,760 --> 00:03:59,160 Speaker 3: the days after Trump's announcement, and that was implying around 79 00:03:59,200 --> 00:04:02,720 Speaker 3: to three and a half maybe four percent daily swing 80 00:04:02,800 --> 00:04:05,360 Speaker 3: in the equity market. So it is a forward looking measure, 81 00:04:05,520 --> 00:04:08,400 Speaker 3: but it normally does take into account what's happened in 82 00:04:09,040 --> 00:04:12,080 Speaker 3: the brief history. So like with the vicks trading at sixteen, 83 00:04:12,200 --> 00:04:14,680 Speaker 3: right now, we think about what's on the event horizon 84 00:04:14,840 --> 00:04:16,480 Speaker 3: over the next three months. Well, we don't have a 85 00:04:16,520 --> 00:04:19,280 Speaker 3: lot of Central bank decisions, you know, they're all on 86 00:04:19,600 --> 00:04:24,479 Speaker 3: holiday in August August is normally a low liquidity time 87 00:04:24,480 --> 00:04:26,520 Speaker 3: where there's not a lot of trading, so it captures 88 00:04:26,520 --> 00:04:29,159 Speaker 3: into that horizon, but then also capture things going on 89 00:04:29,200 --> 00:04:32,719 Speaker 3: in September, so there's another FED decision, there's another payrolls decision. 90 00:04:33,160 --> 00:04:35,240 Speaker 3: You know, we do have these ongoing trade negotiations which 91 00:04:35,279 --> 00:04:38,000 Speaker 3: are supposed to come to fruition on August first. 92 00:04:38,040 --> 00:04:38,640 Speaker 1: So it does. 93 00:04:38,680 --> 00:04:41,560 Speaker 3: Capture in a lot of potential risk events. But what 94 00:04:41,560 --> 00:04:43,719 Speaker 3: it's essentially telling us now is it's not too worried 95 00:04:43,760 --> 00:04:45,320 Speaker 3: about it. It's at quite a low number for where 96 00:04:45,320 --> 00:04:46,560 Speaker 3: it's been trading earlier this year. 97 00:04:46,720 --> 00:04:48,839 Speaker 2: It looks like a bit of a shrug, to be honest. 98 00:04:49,160 --> 00:04:51,320 Speaker 2: Is there somewhere else then that we should be looking 99 00:04:51,440 --> 00:04:55,160 Speaker 2: for an idea of whether investors are worried or how 100 00:04:55,200 --> 00:04:58,600 Speaker 2: worried they are. Is something like gold a better measure? 101 00:04:59,040 --> 00:05:02,840 Speaker 3: You know, some maybe argue that it is, But if 102 00:05:02,880 --> 00:05:05,359 Speaker 3: you think about gold being driven by other factors like 103 00:05:05,400 --> 00:05:08,560 Speaker 3: central banks increasing their allocation, you know, mainly out in Asia, 104 00:05:08,920 --> 00:05:10,800 Speaker 3: China being a big buyer of gold, it can also 105 00:05:10,839 --> 00:05:13,920 Speaker 3: tell you different things. But it is useful sometimes on 106 00:05:14,279 --> 00:05:16,599 Speaker 3: a big risk off move that you do see gold rising, 107 00:05:17,000 --> 00:05:18,960 Speaker 3: but it's driven by other factors as well. 108 00:05:19,000 --> 00:05:21,240 Speaker 1: But in a nutshell, what the VIX is. 109 00:05:21,279 --> 00:05:23,239 Speaker 3: Kind of telling us right now is that the market 110 00:05:23,279 --> 00:05:27,760 Speaker 3: has really gotten a tougher skin around Trump trade headlines, 111 00:05:27,880 --> 00:05:31,440 Speaker 3: around all of the policy uncertainty under Trump's second administration. 112 00:05:32,000 --> 00:05:33,160 Speaker 1: It just seems like, you. 113 00:05:33,080 --> 00:05:35,680 Speaker 3: Know, where before and maybe the market was overreacting to 114 00:05:35,880 --> 00:05:39,200 Speaker 3: every tariff threat. At the moment, the market is kind 115 00:05:39,240 --> 00:05:41,839 Speaker 3: of looking through it in some way, thinking that that 116 00:05:41,880 --> 00:05:45,359 Speaker 3: we more understand Trump's style of you know, setting the 117 00:05:45,360 --> 00:05:48,080 Speaker 3: bar really high with the number and then negotiating it 118 00:05:48,120 --> 00:05:50,280 Speaker 3: down lower. So in some way, maybe the market is 119 00:05:50,360 --> 00:05:54,080 Speaker 3: just believing that these trade agreements will lower the number 120 00:05:54,120 --> 00:05:56,880 Speaker 3: of terrafs, and in some way believing that maybe after 121 00:05:57,080 --> 00:05:59,520 Speaker 3: Trump's tariffs are set, that there's really not a lot 122 00:05:59,560 --> 00:06:01,560 Speaker 3: of surprise left on Trump's economic agenda. 123 00:06:01,560 --> 00:06:04,400 Speaker 1: He's already passed the tax bill a few weeks ago. 124 00:06:04,600 --> 00:06:07,720 Speaker 3: So it's definitely confusing many investors why all of a 125 00:06:07,760 --> 00:06:11,320 Speaker 3: sudden the market is starting to look through this policy uncertainty, 126 00:06:11,640 --> 00:06:14,360 Speaker 3: Whereas at the beginning of the year, policy uncertainty was 127 00:06:14,360 --> 00:06:16,880 Speaker 3: at high. You know, the equity market was falling out 128 00:06:16,880 --> 00:06:18,800 Speaker 3: of bed nearm in April, you know, SB five hundred 129 00:06:18,839 --> 00:06:21,960 Speaker 3: went down near twenty percent. It just seems like the 130 00:06:22,000 --> 00:06:24,680 Speaker 3: market has gotten a tougher skin, and that's reflected and 131 00:06:24,720 --> 00:06:25,640 Speaker 3: how the VIX is trading. 132 00:06:26,240 --> 00:06:28,320 Speaker 1: So is the VIX still a useful measure? 133 00:06:29,080 --> 00:06:32,120 Speaker 3: Oh, definitely, I mean it is a useful measure in 134 00:06:32,160 --> 00:06:35,880 Speaker 3: a way that risk managers likely still use it as 135 00:06:35,920 --> 00:06:38,680 Speaker 3: a as a big input into evaluating the riskiness of 136 00:06:38,720 --> 00:06:42,000 Speaker 3: a equity portfolio. So these measures of implied volatility are 137 00:06:42,040 --> 00:06:45,960 Speaker 3: definitely used by risk managers to assess how risky a 138 00:06:46,040 --> 00:06:49,280 Speaker 3: portfolio is. And then at the same time, you know, 139 00:06:49,520 --> 00:06:51,400 Speaker 3: it is telling us something. It's telling us that the 140 00:06:51,440 --> 00:06:55,679 Speaker 3: market isn't worried. So obviously, Stephen, we have known many times, 141 00:06:55,680 --> 00:06:57,719 Speaker 3: I mean, especially this year, that the market gets it wrong, 142 00:06:57,720 --> 00:06:59,760 Speaker 3: and it gets it wrong all the time by a 143 00:06:59,800 --> 00:07:03,240 Speaker 3: big magnitude. So let's say we fast forward three months, 144 00:07:03,400 --> 00:07:05,719 Speaker 3: and let's say a lot of chaos has happened in 145 00:07:05,760 --> 00:07:09,440 Speaker 3: between now and October. There's obviously a high likelihood what 146 00:07:09,480 --> 00:07:12,040 Speaker 3: the VIX is pricing now isn't going to come to fruition. Right, 147 00:07:12,080 --> 00:07:14,160 Speaker 3: it can't necessarily predict the future, but it's a good 148 00:07:14,720 --> 00:07:20,120 Speaker 3: measure of how investors are viewing riskiness and implied volatility 149 00:07:20,120 --> 00:07:22,800 Speaker 3: in the equity market, and that does bleed into other 150 00:07:22,840 --> 00:07:23,600 Speaker 3: assets as well. 151 00:07:24,040 --> 00:07:26,960 Speaker 2: Okay, Valerie Tattel, our market supporter, thank you very much. 152 00:07:27,480 --> 00:07:29,960 Speaker 2: For more explanations like this from our team of three 153 00:07:29,960 --> 00:07:33,000 Speaker 2: thousand journalists and analysts around the world, go to Bloomberg 154 00:07:33,040 --> 00:07:38,520 Speaker 2: dot com slash explainers. I'm Stephen Caroll. This is here's why. 155 00:07:38,760 --> 00:07:41,160 Speaker 2: I'll be back next week with more. Thanks for listening.