VIX - Hedge or Spec? Part 2VOLATILITY S&P 500TVC:VIXFPS_DennyThe conclusion of my last post (find it here) was that large institutions, Wall Street broker/dealers, banks and the like, were heavily hedged against equity risk (represented as VIX). Therefore, it wasn't going to go anywhere. Let's take a look at what it's been doing in the month since my post. Interesting. The range is clearly expanding, but the market has made close to no net movement. Let's see what VVIX is up to. Now that's hot. The range of equity volatility expanding, but the volatility of the volatility of equity range is downtrending? I pointed out in the last post how VIX was making new lows while VVIX was not, and that is no longer true. Both market have made highs since and lows since then, but while both have made a new low on the daily, only the VIX has made a new high on the daily. The opposite of the trend that existing in August. Interesting. Let's flip over to bond volatility MOVE for a second. Ain't that something. This is a daily bar chart of the last year and a half or so, since nothing interesting happens in bonds in less than a month (with the exception of global market crises). Volatility here is compressing. Crude Oil volatility OVX is doing the same. While VIX is expanding, and VVIX is down-trending, two of the hottest markets right now, Oil and Bonds are compressing. Something is quite amiss here, and I suspect we have a classic case of "someone got their hand caught in the cookie jar" on Wall Street. Let's take a closer look at those markets. A messy chart here. Crude oil, along with some benchmarks for bond markets. Crude, on a wider spread may still be in a compression pattern, and aggregate bonds have flattened out, but yields for Treasuries are at all time highs. What is of note about that, is that pretty much all options and derivatives priced with the BS model (which is basically all of them), have a component called Rho which is the sensitivity to risk-free interest rates, of which Treasury bonds are a large contingent. So let's think about flows here. Higher oil and oil derivatives causes inflation, because the use of products like diesel are heavily relied upon in virtually every major industry, from farming and mining to data centers and logistics. We are coming out of a low-oil-price regime for the better part of the last decade, and it is safe to assume that since producers hedge years in advance, they were positioned for the climate-change regime to proliferate and not for war in Iran to double the price in a year. Big oil has hit the jackpot, but likely was hedged against it. Since it is very possible this latest rally is producers unwinding those hedges through their broker/dealers, as the banks behind those transactions are now hitting the news with reports about how they see this new war-driven regime persisting. In addition to the fact that oil futures are ridiculously backwardated, this would suggest inflation will persist. Therefore interest rates will rise, and to counter the Fed will raise rates. Therefore the return on cash is higher, and the risk in equity is higher. Well, we have now seen the Fed raise rates, and equity volatility expand right on time. The VVIX down-trending means that this is priced in. Because it is the job of smart money to see this kind of thing coming. Think about MOVE for a second though. Higher overnight rates generally do not effect duration the way they effect money markets and bills. But in the Powell regime hikes became a clear Fed signal that something was amiss, and MOVE would rise. Warsh set a hawkish tone and markets called his bluff, forcing his hand to raise. As of Tuesday, the rate hike odds were 90% for a 25bps hike, which was delivered. But what does this mean for markets at large? Consider that at 3.75%, Treasuries are not only the most liquid sovereign paper on the market, but the highest yielding sovereign paper on the market. Media pundits have been calling for years for a crash in duration Treasuries, with the US fiscal spending at all time highs and a gigantic debt. But every sovereign in the world has that kind of debt, it's only one sovereign that can offer competitive rates on their product. With the AI rally stalled, inflation on the horizon, and VIX swinging up and down, what does anyone think large institutions are buying right now? There was big news about a Scandinavian pension selling its Treasury holdings, what are they gonna buy? German paper at 2.5%?' It seems to me that VIX hedging is unwinding. The ebbs and flows are now mostly a product of speculation, which tends to be rife around the time of Fed meetings as they generally tend to be pretty volatile events that set the trend for a few months. But the compression in oil and bond volatility indicates some form of suppression, and there are many possible sources of this. Higher volatility in these markets does not really benefit anyone. This post has very little to do with VIX, and as an investor myself I do not like to disclose my positions. This is a platform for ideas. Reading between the lines and thinking critically about markets is what a trader is supposed to do. There is a deep upset brewing in markets right now, and it virtually invisible on the surface. Reportedly positioning for Treasuries is virtually all shorts. It is NEVER just about one market. A special thank you to Mr. Martin Armstrong for teaching me that lesson. Keep fighting the good fight traders.