UBS on Volatility: ‘Even if the Market Rallies, Volatility is Likely to Stay Bid’

Julian Emanuel from UBS made a compelling call in a Bloomberg interview this morning, suggesting that the land apes who are trading this market without a care in the world, sinking VIX into the dirt, are likely to be proven wrong — ahead of the French elections. Perhaps Julian didn’t read my Pulitzer winning piece on XIV and how betting against volatility is the easiest path toward Vanderbilt riches.

The UBS perma-bear stated, ‘hedges are cheaper than they’ve been in many, many years. By that perspective, even if the market rallies, volatility is so low, it’s likely to stay bid.’

His core thesis wasn’t so much about the market going down, but the fact that complacency is high, alongside consumer confidence, which juxtaposes poorly against the tepid economic backdrop.

Emanuel concludes, ‘what you’re seeing now is the phenomenon of low correlation, literally to an unprecedented degree. We’ve seen it a couple times through history, and basically, it is the primary reason the VIX has been driven to this level. And, ostensibly, the reason why that’s happening is you have this disconnect between the economy growing at point 7 in the first quarter on one hand and confidence levels off the charts. From a positioning point of view, people positioned for better growth, the reflation trade what have you, now they’re waiting for the convergence of the economic data and the confidence data — basically causing a do nothing attitude.’

VIX with a $10 handle is definitely compelling, in spite of the grandness of XIV. If I were to play the VIX, aside from the options market ahead of the French elections, I’d buy TVIX — just for the heck of it.