{"id":31073,"date":"2025-06-17T09:54:59","date_gmt":"2025-06-17T09:54:59","guid":{"rendered":"https:\/\/financialrush.com\/?p=31073"},"modified":"2025-06-17T09:54:59","modified_gmt":"2025-06-17T09:54:59","slug":"the-era-of-sudden-shocks-revisited","status":"publish","type":"post","link":"https:\/\/financialrush.com\/?p=31073","title":{"rendered":"The era of sudden shocks \u2014 revisited"},"content":{"rendered":"<p> \n<\/p>\n<div>\n<p>Stay informed with free updates<\/p>\n<p class=\"article__content-sign-up-topic-description o3-type-body-base\"><span>Simply sign up to the <!-- -->Global Economy<!-- --> myFT Digest &#8212; delivered directly to your inbox.<\/span><\/p>\n<p><iframe class=\"article__content-sign-up-iframe close\" scrolling=\"no\" id=\"signUpIframe\" data-prev-url=\"\/register\/in-article-sign-up?ft-content-uuid=16feefb7-e968-4531-8d96-ca4d7cded330&amp;concept-id=29e67a92-a3b8-410c-9139-15abe9b47e12\"><\/iframe><\/div>\n<div id=\"article-body\">\n<p>It definitely doesn\u2019t feel like it, but this is an era of remarkable economic tranquility. In fact, the degree of stability in the global economy is probably unprecedented. <\/p>\n<p>Don\u2019t take our word for it. Here\u2019s a chart (via <a href=\"https:\/\/www.ft.com\/toby-nangle\" data-trackable=\"link\">Toby<\/a>) showing the 20-year rolling standard deviations of US economic growth, going all the way back to the beginning of the 19th century:<\/p>\n<div class=\"n-content-layout\" data-component=\"flourish\" data-component-id=\"23778454\" data-component-type=\"flourish-in-article\">\n<figure class=\"n-content-picture n-content-layout__container\"><a href=\"#23778454\"><picture data-asset-type=\"flourish\" data-flourish-id=\"23778454\" data-flourish-type=\"visualisation\">\n<div id=\"23778454\" class=\"cp-message o-message o-message--inform o-message--notice\" data-o-component=\"o-message\">\n<div class=\"o-message__container\">\n<div class=\"o-message__content\">\n<p class=\"o-message__content-main\">Some content could not load. Check your internet connection or browser settings.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<p><\/picture><\/a><\/figure>\n<\/div>\n<p>Sure, different countries will show subtly different things. In some countries it might look <em>very<\/em> different. But the US is reasonably representative of a broader trend in the global economy. <\/p>\n<p>Despite how turbulent things often feel, the economy is a lot steadier now than it used to be, with even major events \u2014 such as the financial crisis of 2008 and Covid-19 and its inflationary aftermath \u2014 only causing modest, shortlived upticks in economic turbulence. At least compared to the upheavals that we\u2019ve seen throughout history. <\/p>\n<p>However, there\u2019s plenty of volatility elsewhere.<\/p>\n<figure class=\"n-content-image n-content-image--full\" data-component=\"image-set\"><picture><source media=\"(min-width: 700px)\" srcset=\"https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/ftcms%3A1d80cdca-86b0-45b5-9d14-2dfaebbeb02d?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=700&amp;dpr=1 1x,https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/ftcms%3A1d80cdca-86b0-45b5-9d14-2dfaebbeb02d?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=700&amp;dpr=2 2x,https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/ftcms%3A1d80cdca-86b0-45b5-9d14-2dfaebbeb02d?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=700&amp;dpr=3 3x,https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/ftcms%3A1d80cdca-86b0-45b5-9d14-2dfaebbeb02d?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=700&amp;dpr=4 4x,https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/ftcms%3A1d80cdca-86b0-45b5-9d14-2dfaebbeb02d?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=700&amp;dpr=5 5x\" width=\"3500\" height=\"2500\"\/><source media=\"(max-width: 490px)\" srcset=\"https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/ftcms%3A5c137d68-9acf-4e3c-a339-3a28fdf0bcdf?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=490&amp;dpr=1 1x,https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/ftcms%3A5c137d68-9acf-4e3c-a339-3a28fdf0bcdf?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=490&amp;dpr=2 2x,https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/ftcms%3A5c137d68-9acf-4e3c-a339-3a28fdf0bcdf?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=490&amp;dpr=3 3x\" width=\"1500\" height=\"2000\"\/><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2F23917440-4b4f-11f0-bfdb-ed00317cb8e7-standard.png?source=next-article&amp;fit=scale-down&amp;quality=highest&amp;width=700&amp;dpr=1\" alt=\"Column chart of Times when volatility spikes by more than 1.5 standard deviations. Bars show peak of realised volatility at the time.   showing An era of more sudden shocks?\" data-image-type=\"graphic\" width=\"3500\" height=\"2500\" loading=\"lazy\"\/><\/picture><\/figure>\n<p>This chart \u2014 from data supplied by Deutsche Bank \u2014 shows all the times US stock market volatility has suddenly jumped by 1.5 standard deviations or more. As you can see, bursts of volatility like this were fairly rare for half a century, but have since the 1990s become both more common and more violent. <\/p>\n<p>In the 50 years after WWII, US equities suffered <strong>13 <\/strong>of these volatility spikes, and the average realised volatility of those episodes was 34.2 (and that includes the record jump in volatility on 1987\u2019s Black Monday). In the 30 subsequent years there have been <strong>16 <\/strong>volatility spikes, with the vol peaks averaging 43.<\/p>\n<p><a href=\"https:\/\/www.ft.com\/content\/f25dbda0-5ecf-11ea-b0ab-339c2307bcd4\" data-trackable=\"link\">That we seem to be suffering more sudden shocks isn\u2019t a new observation<\/a>. Not even <a href=\"https:\/\/www.ft.com\/content\/54f514da-3aba-11e9-b856-5404d3811663\" data-trackable=\"link\">remotely<\/a>. But it\u2019s worth highlighting how recent events underscore how it remains true. <\/p>\n<p>A lot of people attributed the volatility of volatility to the zero-interest-rate-policy era, but as April\u2019s tumult shows \u2014 if the events of the 1990s and 2000s didn\u2019t do a good enough job \u2014 that this was always a facile take. <\/p>\n<p>Volatility was indeed lower on average in the ZIRP era. The Vix index \u2014 which measures the near-term volatility implied by options prices, as opposed to actual realised volatility \u2014 averaged just under 17 in 2010-2019, compared to its long-run average of a shade below 20. <\/p>\n<p>But even since 2020 the Vix has only averaged 21.35, pretty close to the average since its 1992 inception. This despite three fairly major stock market upheavals since then. In other words, we\u2019re in an era of lower average volatility, but more sudden and ferocious shocks when then calmness does shatter. <\/p>\n<p>So why are financial markets more prone to sudden shocks, when the economy is seemingly much more stable than it was in the past? <\/p>\n<p>Deutsche Bank\u2019s Jim Reid has argued that it is a combination of the post 1970s fiat currency regime, financial market liberalisation, and persistently rising debt levels. This has birthed financial system that he thinks is more vulnerable to frequent disruption but also capable of engineering strong recoveries \u2014 with one major caveat:<\/p>\n<blockquote class=\"n-content-blockquote o3-editorial-typography-blockquote\">\n<p>The catch, however, is that each recovery starts with a larger debt overhang than the last, sowing the seeds for the next crisis. It\u2019s a self-reinforcing boom\/bust cycle.<\/p>\n<p>While the recent Liberation Day episode differs somewhat from traditional shocks, you could argue that the same trends we identified have encouraged the imbalanced global trading system that prompted the tariff shock. In addition the reversal to the Liberation Day policy and subsequent strong bounce in markets was likely sparked by concerns around the amount of debt the US now has and the impact the policy was having on bond markets.<\/p>\n<p>Overall, I continue to believe that volatility shocks and mini-crises are hardwired into today\u2019s financial architecture. Over the past few decades, we\u2019ve typically solved each crisis with more leverage or aggressive monetary policy. But with inflation and yields now higher than they\u2019ve been for most of this period \u2014 and with growing concerns around fiscal sustainability \u2014 we may be far nearer to the end of this era than the beginning.<\/p>\n<\/blockquote>\n<p>Perhaps. FT Alphaville favours more <a href=\"https:\/\/www.ft.com\/content\/f25dbda0-5ecf-11ea-b0ab-339c2307bcd4\" data-trackable=\"link\">technical explanations<\/a>, such as the explosive rise in derivatives-powered <a href=\"https:\/\/www.ft.com\/content\/a02208ee-87ff-4ad5-8e0f-a23281975664\" data-trackable=\"link\">leverage<\/a> across financial markets; how a volatility feedback loop has been embedded by the widespread use of VAR models and <a href=\"https:\/\/www.ft.com\/content\/aad452a8-660b-11e5-a57f-21b88f7d973f\" data-trackable=\"link\">volatility-targeting strategies<\/a>; and the evolving nature of <a href=\"https:\/\/www.ft.com\/content\/5b1cab62-4a55-11e8-8ee8-cae73aab7ccb\" data-trackable=\"link\">liquidity<\/a> in the modern era of high-frequency trading. Your theories go in the comments. <\/p>\n<p><strong>Further reading:<br \/><\/strong>\u2014 <a href=\"https:\/\/www.ft.com\/content\/be68aac6-3d13-11e8-b9f9-de94fa33a81e\" data-trackable=\"link\">How a volatility virus infected Wall Street <\/a>(FT)<\/p>\n<\/div>\n\n<br \/><a href=\"https:\/\/www.ft.com\/content\/16feefb7-e968-4531-8d96-ca4d7cded330\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Stay informed with free updates Simply sign up to the Global Economy myFT Digest &#8212; delivered directly to&hellip;\n","protected":false},"author":6,"featured_media":31074,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[23],"tags":[],"class_list":["post-31073","post","type-post","status-publish","format-standard","has-post-thumbnail","category-us","cs-entry","cs-video-wrap"],"_links":{"self":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts\/31073","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=31073"}],"version-history":[{"count":0,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts\/31073\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/media\/31074"}],"wp:attachment":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=31073"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=31073"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=31073"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}