A Goldman Sachs trading desk is telling clients that record equity highs have made conflict cheaper for policymakers — and that tail-risk protection has never been more affordable.
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Goldman warns geopolitical risk rises as VIX holds near 14
A Goldman Sachs trading desk is telling clients that record equity highs have made conflict cheaper for policymakers — and that tail-risk protection has never been more affordable.
Goldman Sachs' Delta-One trading desk warned that record-high equity markets and historically loose financial conditions have lowered the political cost of conflict, urging clients to buy cheap tail-risk protection as the VIX hovers near 14.
"When the market is booming, the constraint on decision-makers is reduced; when the S&P 500 is at all-time highs and financial conditions are loose, going to war actually becomes easier," Rich Privorotsky, head of Goldman Sachs' Delta-One trading desk, wrote in a client note published Aug. 17.
The warning comes as the S&P 500 has recovered to record levels after July's deleveraging, with the VIX holding near 14 and financial conditions at their loosest in years. Middle East tensions have escalated with vessels coming under attack, yet markets have shown little reaction — a desensitization that Privorotsky flagged as precisely the kind of complacency that precedes sharp repricing. Oil inventories sit at unusually low levels while crude trades in the $80-90 range, leaving the market exposed to upside risk if the conflict widens. Extreme tail-risk hedge costs are at historic lows, creating a window for investors to build protection at minimal expense.
The desk's broader positioning calls for holding nominal assets — the S&P 500, gold — while shorting bonds and buying cheap VIX call options or spreads. Privorotsky favors financials, semiconductor capital expenditure, industrials, and broad cyclicals, while avoiding bond proxies including consumer staples, telecoms, and REITs.
Long-End Yields Pressure the Fed Toward a Credibility Hike
Privorotsky identified long-end rates as the market's "only real sore spot." The weakness in long-dated Treasuries stems not from any single policy decision but from structural supply pressure: with the federal deficit running at 6-7 percent of GDP, the Treasury and investment-grade issuance pipeline remains enormous, crowding out private demand. Term premia are rising and real yields sit at extremely elevated levels.
He also flagged a non-consensus view: if the Fed fails to achieve its inflation target for an extended period, it risks a credibility loss. Hammack, Logan, and Kashkari already voted for rate hikes in July, and sustained pressure on long-end yields could eventually force the Federal Open Market Committee to act. "Perhaps the Fed will eventually hike to restore credibility," he wrote. "The front end is anchored by policy, but the long end is not. A flatter curve might actually help."
The view diverges from Goldman's chief economist Jan Hatzius, who wrote separately that markets remain "too hawkish" on the funds rate. Hatzius said a September hike has become "very unlikely" after softer retail sales, a slowing labor market, and cooling inflation prints. CME FedWatch data shows 30 percent odds of a 25-basis-point hike in September, with a pause priced at nearly 70 percent. Goldman's economics team predicts the Fed will hold the federal funds target range at 3.50-3.75 percent through 2026, with any cuts postponed to 2027. Just a week earlier, traders had fully priced a 25-basis-point hike by December; that expectation has now shifted to January 2027.
The tension is visible across markets. The 2-year Treasury yield slipped to 4.12 percent while the 10-year fell to 4.676 percent, and the dollar index dropped 0.31 percent to 99.36. Bitcoin rose more than 1 percent to $63,503 as rate-hike odds receded.
AI Remains a One-Way Trade, but Cash Flow Is the Test
On artificial intelligence, Privorotsky argued the biggest beneficiary is the broad market rather than any single company. Each unit of compute cost continues to fall while the practical value per dollar of output rises, a trend that should eventually benefit nearly every industry. The real winners, he said, may be those who capture AI's benefits at the lowest cost — not the heaviest spenders. Recent earnings season strength has dispelled some of the market's earlier pessimism about AI monetization.
He remains cautious on hyperscaler capex, deferring that debate. "I still hold to the Cuba Gooding Jr. principle," he wrote. "If free cash flow doesn't show up, I don't buy."
The July deleveraging that markets widely acknowledged appears largely complete, with total and net leverage at healthier levels. With most covered-call strikes already breached near current highs, September could bring forced buying pressure as positioning sits below historical norms for these levels. Privorotsky sees cheap upside optionality in the near term, with European Stoxx volatility in single digits and the VIX near 14.
This article is for informational purposes only and does not constitute investment advice.
