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Forward Guidance
Dean Curnutt: Market Insurance Is Cheap, Stock-Bond Correlation Is Positive, And “Interesting” VIX Opportunities
Feb 5, 2024
Dean Curnutt, founder and CEO of Macro Risk Advisors, discusses the bear market in volatility and worrisome positive correlation between stocks and bonds. He explores the impact of stock-bond correlation on investors and observations in the bond market. Curnutt also talks about Bitcoin as a hedge, VIX as a measure of implied volatility, and market predictions. He delves into the impact of Federal Reserve cuts, debt duration, and historical movements of the VIX. Curnutt explores option pricing, volatility risk premium, and unique market dynamics in 2022. Additionally, he discusses stock correlation and common options mistakes made by institutional investors.
01:24:09
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Quick takeaways
- The correlation between stocks and bonds has recently flipped, moving in the same direction, which raises concerns about the bond market's health and portfolio diversification.
- Despite the significant increase in interest rates, the real economy has been minimally impacted due to favorable debt terms and longer durations, resulting in low realized volatility in credit markets.
Deep dives
The Bond Market as the Central Risk Asset
The bond market is considered the central risk asset because it tends to move in the opposite direction of risk assets like stocks. During risk-off events, when disruptive events occur, stocks fall while the bond market becomes a flight to safety asset, attracting capital. This negative correlation between stocks and the bond market has historically provided diversification benefits for portfolios. However, since 2022, the correlation between stocks and bonds has flipped, with both moving in the same direction. This change has led to concerns about the bond market's health and its impact on portfolio diversification.
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