Bloomberg Audio Studios, podcasts, radio news.

Bloomberg Audio Studios, podcasts, radio news.

It's good. It's good.

It's good. It's good.

You know, markets are fun and as we said, springs.

You know, markets are fun and as we said, springs.

Here, Yeah, markets finally got interesting.

Here, Yeah, markets finally got interesting.

Oh man, I mean I have so many thoughts.

Oh man, I mean I have so many thoughts.

Oh good, all right, if you can't tell from my normal stream of consciousness operations.

Oh good, all right, if you can't tell from my normal stream of consciousness operations.

You know how I know it was bad, Joe go on. It was one of those weeks where we talked about negative gamma quite a lot's.

You know how I know it was bad, Joe go on. It was one of those weeks where we talked about negative gamma quite a lot's.

Pretty interesting gamma again.

Pretty interesting gamma again.

Interestingly, we didn't talk that much about standard deviations, which is kind of funny. Normally those two kind of go hand in hand, but not last week.

Interestingly, we didn't talk that much about standard deviations, which is kind of funny. Normally those two kind of go hand in hand, but not last week.

It was weird.

It was weird.

What's gamma again? I feel so dumb because I know we've talked about gamma and it's just one of those things like what.

What's gamma again? I feel so dumb because I know we've talked about gamma and it's just one of those things like what.

Is it again? Should we get you a refresher?

Is it again? Should we get you a refresher?

Yeah?

Yeah?

I need one of those Guide to the Greeks books or something like a little like laminated card that I can want.

I need one of those Guide to the Greeks books or something like a little like laminated card that I can want.

Someone should do a coffee table.

Someone should do a coffee table.

But yeah, yeah, guide to the Greeks like Greek stuff these days, you know, because I'm into like ancient history and everything like that. I know what alpha is, I know.

But yeah, yeah, guide to the Greeks like Greek stuff these days, you know, because I'm into like ancient history and everything like that. I know what alpha is, I know.

What beta is.

What beta is.

After that, I started to get a little dicey. I did a deadlist.

After that, I started to get a little dicey. I did a deadlist.

I'm both the most popular trader and most successful trader at Citadel.

I'm both the most popular trader and most successful trader at Citadel.

That is going viral.

That is going viral.

Uh barges.

Uh barges.

This is an after school special, except.

This is an after school special, except.

I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the.

I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the.

US Black Goal. These are the important question.

US Black Goal. These are the important question.

Is it robots taking over the world? No.

Is it robots taking over the world? No.

I think that, like in a couple of years, the AI will do a really good job of making the Odd Lots podcast. One day that person will have the mandate of Heaven.

I think that, like in a couple of years, the AI will do a really good job of making the Odd Lots podcast. One day that person will have the mandate of Heaven.

How do I get more popular and successful?

How do I get more popular and successful?

We do have.

We do have.

You're listening to lots More, where we catch up with friends about what's going on right now, because.

You're listening to lots More, where we catch up with friends about what's going on right now, because.

Even when the Odd Lots is over, there's always lots More.

Even when the Odd Lots is over, there's always lots More.

And we really do have the perfect best Oh the definition, I feel like I've done this before. But gamma. Gamma is the option sensitivity to the change in delta, and delta is the option sensitivity to the underlying price. So gamma is like the change of the change. It's a function of the underlying price. But it's second order, and I guess negative gamma that's when delta is the opposite direction to the stock price movement. So delta goes down if the underlying asset price is going up, and then it becomes less negative if the underlying asset price is falling. And we usually see people talk about this during market selloffs because all the options traders have to basically sell or buy stuff to hedge all that changing exposure, and the suspicion is always that that hedgeig activity are pushing the market in one way or the other. I think that's it. Okay, I did it, Charlie. You should write a book, a coffee table book on the Greek letters.

And we really do have the perfect best Oh the definition, I feel like I've done this before. But gamma. Gamma is the option sensitivity to the change in delta, and delta is the option sensitivity to the underlying price. So gamma is like the change of the change. It's a function of the underlying price. But it's second order, and I guess negative gamma that's when delta is the opposite direction to the stock price movement. So delta goes down if the underlying asset price is going up, and then it becomes less negative if the underlying asset price is falling. And we usually see people talk about this during market selloffs because all the options traders have to basically sell or buy stuff to hedge all that changing exposure, and the suspicion is always that that hedgeig activity are pushing the market in one way or the other. I think that's it. Okay, I did it, Charlie. You should write a book, a coffee table book on the Greek letters.

I'm liking this, like Spartans versus Romans, history vibe or regard.

I'm liking this, like Spartans versus Romans, history vibe or regard.

Yeah, that's very you I feel that's very Yeah.

Yeah, that's very you I feel that's very Yeah.

Yeah, it resonates.

Yeah, it resonates.

It resonates. Could have something to do with the beard.

It resonates. Could have something to do with the beard.

Well, if you just think about it with regards to who is long and who is shortened option at a certain level. And that's so much of what we're asked to do, you know, in our job is to get a sense for where these potential acceleration points or potential gravity points are. And you're looking at the whole spectrum of strikes across the S and P index options, and you're then doing your kind of risk calculations and your Greek's calculations, and you net out all of those strikes. You have to identify calls sold, call spot puts sold, put spot, multi leg tracks.

Well, if you just think about it with regards to who is long and who is shortened option at a certain level. And that's so much of what we're asked to do, you know, in our job is to get a sense for where these potential acceleration points or potential gravity points are. And you're looking at the whole spectrum of strikes across the S and P index options, and you're then doing your kind of risk calculations and your Greek's calculations, and you net out all of those strikes. You have to identify calls sold, call spot puts sold, put spot, multi leg tracks.

It's it's quite complex.

It's it's quite complex.

I think in the past there's a lot of false narrative because people made kind of two core assumptions on dealer positioning before you had the actual exchange tagged data which now gives you the actuals. Those two prior assumptions are the dealers are short puts to hedges and long calls from overriders, these VRP of all sellers that you hear so much about these days, that create dynamics where the market is trapped in long gamma, right, because we're constantly dealers are constantly getting stuffed from these premium collectors. But short gamma matters because that's where you get these potential jump off points where you blow through level or a dealer is short a strike and then you get that prevailing market move is fed into so that matters.

I think in the past there's a lot of false narrative because people made kind of two core assumptions on dealer positioning before you had the actual exchange tagged data which now gives you the actuals. Those two prior assumptions are the dealers are short puts to hedges and long calls from overriders, these VRP of all sellers that you hear so much about these days, that create dynamics where the market is trapped in long gamma, right, because we're constantly dealers are constantly getting stuffed from these premium collectors. But short gamma matters because that's where you get these potential jump off points where you blow through level or a dealer is short a strike and then you get that prevailing market move is fed into so that matters.

In case you can't tell, we are here with Charlie Mcalligant. He is of course, a strategist over at Nomora the person to talk to when it comes to this kind of market technicality. And we are recording this on March nineteenth. We're either stupid or brave for doing this, like right before a FED decision. I'm going to choose brave because the bar is fairly low now.

In case you can't tell, we are here with Charlie Mcalligant. He is of course, a strategist over at Nomora the person to talk to when it comes to this kind of market technicality. And we are recording this on March nineteenth. We're either stupid or brave for doing this, like right before a FED decision. I'm going to choose brave because the bar is fairly low now.

Well, and like so in my view is like there's been so much volatility lately, Tracy, regardless of what happens in the forty eight hours between now and then, there's enough to talk about, Yeah for sure.

Well, and like so in my view is like there's been so much volatility lately, Tracy, regardless of what happens in the forty eight hours between now and then, there's enough to talk about, Yeah for sure.

Okay, So, speaking of what happened last week, you mentioned specific points at which the sell off can accelerate, and I think in your notes you had like five thousand and six fifty and five thousand and five sixty something like that as your points on the S and P five hundred at which point the sell off could accelerate. We did get to a low of like five thousand, five hundred on the Thursday, but we saw stocks recover. Why did that happen?

Okay, So, speaking of what happened last week, you mentioned specific points at which the sell off can accelerate, and I think in your notes you had like five thousand and six fifty and five thousand and five sixty something like that as your points on the S and P five hundred at which point the sell off could accelerate. We did get to a low of like five thousand, five hundred on the Thursday, but we saw stocks recover. Why did that happen?

So there was two large short gamma strikes in the S ANDP index options diaspora for dealers, and I think it was I think it was fifty six hundred and then fifty five sixty five particular level, which is part of this large listed trade in the market that is well socialized out there that at the end of this month, so not this week's options expiration, but the end of this month, the March quarterly exists and is part of something called a put spread collar where a call is sold out of the money to then help finance this put spread in the market. And that fifty five sixty five is a short strike, which means that in this case it looks like short gamma. I think the fact is about that, however, and thus this idea of well, at this point in the month, where it's still a few weeks out from happening, it could in fact potentially behave as you would think, is this acceleration point through it? Once you did, you kind of bounced around it held three or four times, and.

So there was two large short gamma strikes in the S ANDP index options diaspora for dealers, and I think it was I think it was fifty six hundred and then fifty five sixty five particular level, which is part of this large listed trade in the market that is well socialized out there that at the end of this month, so not this week's options expiration, but the end of this month, the March quarterly exists and is part of something called a put spread collar where a call is sold out of the money to then help finance this put spread in the market. And that fifty five sixty five is a short strike, which means that in this case it looks like short gamma. I think the fact is about that, however, and thus this idea of well, at this point in the month, where it's still a few weeks out from happening, it could in fact potentially behave as you would think, is this acceleration point through it? Once you did, you kind of bounced around it held three or four times, and.

It kind of crashed through it.

It kind of crashed through it.

The thing is is that the market knows that this trade gets rolled and rebalanced, i should say, into the next quarter's trade at the end of this month, and you know that there is going to be a ton of vega for sale as part of the and so then this strike in some ways actually ends up looking quite dissimilar from your typical idea of short gam as.

The thing is is that the market knows that this trade gets rolled and rebalanced, i should say, into the next quarter's trade at the end of this month, and you know that there is going to be a ton of vega for sale as part of the and so then this strike in some ways actually ends up looking quite dissimilar from your typical idea of short gam as.

This acceleration point.

This acceleration point.

Depending on where the market is at the time of expiration, which will affect what the client does with those strikes and sets the new putspread collar. But I think the larger conversation that I want to have about VAW is that much of the incoming has been about why is VALL actually seemingly unresponsive?

Depending on where the market is at the time of expiration, which will affect what the client does with those strikes and sets the new putspread collar. But I think the larger conversation that I want to have about VAW is that much of the incoming has been about why is VALL actually seemingly unresponsive?

Yeah, so the VIX, Like I know, the VIX went up, but I think it went to like twenty nine, and you compare that to like it was above eighty in twenty twenty and even in twenty twenty two it was like thirty six or in the thirties. VALL was really quiet in twenty four.

Yeah, so the VIX, Like I know, the VIX went up, but I think it went to like twenty nine, and you compare that to like it was above eighty in twenty twenty and even in twenty twenty two it was like thirty six or in the thirties. VALL was really quiet in twenty four.

Yeah, August twenty twenty four got nearly four anyway.

Yeah, August twenty twenty four got nearly four anyway.

Yeah, So the last time I was in here was after that August shock, and that was it proper as as I kind of framed it at the time and still will, the world was aggregated around this soft landing viewpoint and all of a sudden in the span of one day's worth of data, but it was really even a week of data of labor data sixty five. Yeah, and that was because we repriced the left tail. All of a sudden there was a hard landing risk because the labor data shocked us. You know that U rate jump and then the NFP miss. The difference at this time around is that since the election, right, Donald Trump is the personification of a gamma agent.

Yeah, So the last time I was in here was after that August shock, and that was it proper as as I kind of framed it at the time and still will, the world was aggregated around this soft landing viewpoint and all of a sudden in the span of one day's worth of data, but it was really even a week of data of labor data sixty five. Yeah, and that was because we repriced the left tail. All of a sudden there was a hard landing risk because the labor data shocked us. You know that U rate jump and then the NFP miss. The difference at this time around is that since the election, right, Donald Trump is the personification of a gamma agent.

We are the only person I know who describes Trump as a gamma agent.

We are the only person I know who describes Trump as a gamma agent.

Everyone knows the terms, right, but I'm a living personification again.

Everyone knows the terms, right, but I'm a living personification again.

And I think, look, his mandate is to break status quo. And we talked that last August shock about the idea that the concept of a carry trade because we were being asked about the carry online, which is kind of like this false narrative. But the idea of any sort of carry trade or positioning high sharp ratio trade right a high risk adjusted return is that you need a period of low volatility to kind of aggregate that position, to build that leverage into the trade because it keeps working, the wall is low, the price keeps working higher. That builds the leverage in the system that hence builds the risk. Right, stability breeds instability. In this case, Donald Trump, even if the market was misidentifying the macro of his policies at the time, which we should talk about, Oh.

And I think, look, his mandate is to break status quo. And we talked that last August shock about the idea that the concept of a carry trade because we were being asked about the carry online, which is kind of like this false narrative. But the idea of any sort of carry trade or positioning high sharp ratio trade right a high risk adjusted return is that you need a period of low volatility to kind of aggregate that position, to build that leverage into the trade because it keeps working, the wall is low, the price keeps working higher. That builds the leverage in the system that hence builds the risk. Right, stability breeds instability. In this case, Donald Trump, even if the market was misidentifying the macro of his policies at the time, which we should talk about, Oh.

You're just never going to get that risk build up.

You're just never going to get that risk build up.

Well, in this case, starting November, you know when it really took shape.

Well, in this case, starting November, you know when it really took shape.

And I think the market had.

And I think the market had.

Been sensing certainly since kind of the summer skew was seepening. Skew matters, right, just as a relative measure of kind of demand for downside versus demand for upside put skew which is like deep out of the money downside relative do not the money put was jacked ninety something percentile because of all of the potential chaos agency expensive. The fall was already quite expensive going into this scenario, even if maybe the macro catalyst went wrong way and I think there's two big things that happens, So let's talk about this past.

Been sensing certainly since kind of the summer skew was seepening. Skew matters, right, just as a relative measure of kind of demand for downside versus demand for upside put skew which is like deep out of the money downside relative do not the money put was jacked ninety something percentile because of all of the potential chaos agency expensive. The fall was already quite expensive going into this scenario, even if maybe the macro catalyst went wrong way and I think there's two big things that happens, So let's talk about this past.

Week or really was past three weeks.

Week or really was past three weeks.

Yeah, you had crowded narratives and crowded thematic positioning.

Yeah, you had crowded narratives and crowded thematic positioning.

With a lot of leverage.

With a lot of leverage.

Right, that is what the prime broker's data shows and frankly still shows like gross exposure your lungs and your shorts in aggregate still kind of ninety something percentile was one hundred percent of coming into the year. Though we also had high nets, So you had a lot more long than short either way, a lot of leverage in the system.

Right, that is what the prime broker's data shows and frankly still shows like gross exposure your lungs and your shorts in aggregate still kind of ninety something percentile was one hundred percent of coming into the year. Though we also had high nets, So you had a lot more long than short either way, a lot of leverage in the system.

Give us like a little zoom out. Basically from mid November to as you said, about three weeks ago it started turning. I think the peak on this February nineteenth or something like that. Yes, but talk to us just about that sort of kind of an upcrash in the wake of the people loading into everything risky, from crypto to Tesla and everything. Yeah, what was going on there? And then how extreme did that get?

Give us like a little zoom out. Basically from mid November to as you said, about three weeks ago it started turning. I think the peak on this February nineteenth or something like that. Yes, but talk to us just about that sort of kind of an upcrash in the wake of the people loading into everything risky, from crypto to Tesla and everything. Yeah, what was going on there? And then how extreme did that get?

Yeah, I mean that's the perfect segue here, because like in the sense that the post election narrative, and remember the rates sell off beginning in September, when the market really got their arms around seemingly some of this polling that was showing much more credible kind of Trump lead. Yeah, the rate sell off, meaning yields going higher, was about this idea that regardless of who won, but particularly if Trump won, that we had become both sides become economic populous, and that fiscal dominance was this overriding theme where like, we don't have a tolerance for pain as a society. We saw the kind of the steroidal impact of fiscal stimulus in the post COVID world, which kind of was the tiebreaker for finally getting an inflation shock as we all experience. So this idea that he was going to take an already strong economy and overheat it with d with tax cuts and these other stimulative measures completely had the market thinking about further extension of US exceptionalism. Right. This ability to outperform rest of the world for a whole number of reasons, which is a separate podcast, but like positioning was like long US assets, Europe was going to be cutting sooner because they were feeling the brunt of the slowdown force more so there China had all sorts of issues, right, rest of world struggling US exceptionalism and part of US exceptionalism not just kind of like global hedgemon, strongest economy, deregulation, all these stimultive measures in the pipes was also too. This idea of tech innovation and tech innovation was the story of last year, in the last two years, with the last ten years was with regards to AI, right, Yeah, it used to be fang back in the teens, right. So this idea of megacap tech, all those things that made people, you know, the completely dictated stock market last year like MAG seven, MAG eight thirty five percent of the S and P five hundred and fifty percent of the NASDAC. Concentration of all of these kind of tech and disruption themes in the market that was a big part of the US exceptionals and trade. Well, guess what those trades are really crowded, they're really loaded into And two shocks happened. The first shock was the market and this is why I started, you know, going out and talking about hedging for downside in February. Was this idea that the market I think was misunderstanding the phasing or the sequencing of a Trump economic plan, which was you've got to do the painful stuff first in order to get to the stimulative stuff later. And that's spread that time spread, you know, you had to kind of try to engineer a slowdown to then be able to get the rate cuts via the disinflation that he is trying to create, which ultimately you know, this idea of like fiscal contraction to potentially then fiscally expand and say the other shock, it's.

Yeah, I mean that's the perfect segue here, because like in the sense that the post election narrative, and remember the rates sell off beginning in September, when the market really got their arms around seemingly some of this polling that was showing much more credible kind of Trump lead. Yeah, the rate sell off, meaning yields going higher, was about this idea that regardless of who won, but particularly if Trump won, that we had become both sides become economic populous, and that fiscal dominance was this overriding theme where like, we don't have a tolerance for pain as a society. We saw the kind of the steroidal impact of fiscal stimulus in the post COVID world, which kind of was the tiebreaker for finally getting an inflation shock as we all experience. So this idea that he was going to take an already strong economy and overheat it with d with tax cuts and these other stimulative measures completely had the market thinking about further extension of US exceptionalism. Right. This ability to outperform rest of the world for a whole number of reasons, which is a separate podcast, but like positioning was like long US assets, Europe was going to be cutting sooner because they were feeling the brunt of the slowdown force more so there China had all sorts of issues, right, rest of world struggling US exceptionalism and part of US exceptionalism not just kind of like global hedgemon, strongest economy, deregulation, all these stimultive measures in the pipes was also too. This idea of tech innovation and tech innovation was the story of last year, in the last two years, with the last ten years was with regards to AI, right, Yeah, it used to be fang back in the teens, right. So this idea of megacap tech, all those things that made people, you know, the completely dictated stock market last year like MAG seven, MAG eight thirty five percent of the S and P five hundred and fifty percent of the NASDAC. Concentration of all of these kind of tech and disruption themes in the market that was a big part of the US exceptionals and trade. Well, guess what those trades are really crowded, they're really loaded into And two shocks happened. The first shock was the market and this is why I started, you know, going out and talking about hedging for downside in February. Was this idea that the market I think was misunderstanding the phasing or the sequencing of a Trump economic plan, which was you've got to do the painful stuff first in order to get to the stimulative stuff later. And that's spread that time spread, you know, you had to kind of try to engineer a slowdown to then be able to get the rate cuts via the disinflation that he is trying to create, which ultimately you know, this idea of like fiscal contraction to potentially then fiscally expand and say the other shock, it's.

Lost in the wash here.

Lost in the wash here.

And this wasn't just a Trump growth scare, right, we are growth scare every Q one into Q two.

And this wasn't just a Trump growth scare, right, we are growth scare every Q one into Q two.

That's an artifact of the post COVID at KO. Right.

That's an artifact of the post COVID at KO. Right.

We had a good piece from Neil about Duo about that any.

We had a good piece from Neil about Duo about that any.

Yeah, so that matters, right, you know, that was part of my thesis, like, look and see the trajectory. We have these overheated animal spirits Q one numbers and then this seasonal adjustments kick in and we have a growth.

Yeah, so that matters, right, you know, that was part of my thesis, like, look and see the trajectory. We have these overheated animal spirits Q one numbers and then this seasonal adjustments kick in and we have a growth.

Scare in Q two or into Q three.

Scare in Q two or into Q three.

But the other element here was the deep seek story and tech innovation in that market concentration. And guess what, there's all sorts of those names aren't just massive parts of index and massive thematic parts Retail investors and hedge fund longs and things like that, think about their impact in the leverage GTF space, which has just absolutely grown massively. That's a source of synthetic negative gamut in the market, which you know, on the end of day rebalancing into an update, they've got a ton to buy at the end of the day. And eighty percent of those assets happened to be concentrated in kind of like concentric tech disruption circles. So you add in this massive rethink on what had been the perpetual motion machine of Ai Capex and that deep seak shock, IDIA trades down seventeen percent. Kind of after that realization that weekend of what we're looking at, all of a sudden, a massive valuation shock in an earnings repricing effectively.

But the other element here was the deep seek story and tech innovation in that market concentration. And guess what, there's all sorts of those names aren't just massive parts of index and massive thematic parts Retail investors and hedge fund longs and things like that, think about their impact in the leverage GTF space, which has just absolutely grown massively. That's a source of synthetic negative gamut in the market, which you know, on the end of day rebalancing into an update, they've got a ton to buy at the end of the day. And eighty percent of those assets happened to be concentrated in kind of like concentric tech disruption circles. So you add in this massive rethink on what had been the perpetual motion machine of Ai Capex and that deep seak shock, IDIA trades down seventeen percent. Kind of after that realization that weekend of what we're looking at, all of a sudden, a massive valuation shock in an earnings repricing effectively.

Tracy, did you see this from Eric Belcunis yesterday? Vista shares filing for an animal spirits ETF A and I am in a two x animal spirits ETF wild, which will hold the five fastest growing two X single stock ETFs at any given time.

Tracy, did you see this from Eric Belcunis yesterday? Vista shares filing for an animal spirits ETF A and I am in a two x animal spirits ETF wild, which will hold the five fastest growing two X single stock ETFs at any given time.

Isn't that just called momentum?

Isn't that just called momentum?

Yeah, but that's not that momentum isn't enough.

Yeah, but that's not that momentum isn't enough.

It's momentum with leverage, and guess what, there will be options on it too. So there's synthetic negative gamma and actual real negative gamma. So the final point here is you had these two shocks to what consensus was, consensus positioning and consensus narrative. Now, all of a sudden, this realization that Phase one is going to have to engineer a slowdown to get the stimulative stuff that Trump wants.

It's momentum with leverage, and guess what, there will be options on it too. So there's synthetic negative gamma and actual real negative gamma. So the final point here is you had these two shocks to what consensus was, consensus positioning and consensus narrative. Now, all of a sudden, this realization that Phase one is going to have to engineer a slowdown to get the stimulative stuff that Trump wants.

Yeah, isn't that weird? Like why are we crashing economic growth to boost economic growth?

Yeah, isn't that weird? Like why are we crashing economic growth to boost economic growth?

Well?

Well?

Because I think in this case, like there is something credible.

Because I think in this case, like there is something credible.

To the idea that the deficit.

To the idea that the deficit.

Spending was a market concern, right, I mean, think about what rates were doing last year when we were talking about fiscal dominance. What's ironic here is that you then get punished for trying to address it. So look at Europe for instance, and this is like a big trade in the market right now. It's like very simplistic, but this is the way that acid allocators.

Spending was a market concern, right, I mean, think about what rates were doing last year when we were talking about fiscal dominance. What's ironic here is that you then get punished for trying to address it. So look at Europe for instance, and this is like a big trade in the market right now. It's like very simplistic, but this is the way that acid allocators.

Think and move.

Think and move.

Right, who's fiscally contracting and tightening and who's fiscally expanding and stimulating Europe?

Right, who's fiscally contracting and tightening and who's fiscally expanding and stimulating Europe?

Right?

Right?

Trump said, Look, we might be talking about the end of Breton Woods post World War II packs Americana here, right, We're no longer going to protect you for you to buy US dollar assets and use our currency. So guess what Europe has to go out create this financing and with that, all of a sudden, now they are a fiscal expander after years of being the.

Trump said, Look, we might be talking about the end of Breton Woods post World War II packs Americana here, right, We're no longer going to protect you for you to buy US dollar assets and use our currency. So guess what Europe has to go out create this financing and with that, all of a sudden, now they are a fiscal expander after years of being the.

Shift.

Shift.

It's a real potential regime shift. Even though I think this ultimately creates the conditions where if you do kind of crash the economy and you can't stick the landing on this engineered recession, then you inevitably have to fiscally expand, and that's why I think a lot of these like long Europe long China trades.

It's a real potential regime shift. Even though I think this ultimately creates the conditions where if you do kind of crash the economy and you can't stick the landing on this engineered recession, then you inevitably have to fiscally expand, and that's why I think a lot of these like long Europe long China trades.

Will be quick to move their feet.

Will be quick to move their feet.

I can't say this is a tectonic, permanent structural shift yet, because the worst it gets for us and we get punished, and you have fiscal tightening and markets sell off and all those bad things to create a negative health effect, which in the short term help get the disinflation, to get the FED cuts right, to get the stimulus through right. This is all part of this kind of second order thinking that you need to be looking into.

I can't say this is a tectonic, permanent structural shift yet, because the worst it gets for us and we get punished, and you have fiscal tightening and markets sell off and all those bad things to create a negative health effect, which in the short term help get the disinflation, to get the FED cuts right, to get the stimulus through right. This is all part of this kind of second order thinking that you need to be looking into.

Okay, so we had a wild but not disorderly sell off. Sounds like my high school report card, but I imagine it was still painful for certain investors. So we just mentioned momentum like that must have been painful. Multistrats must have had a hard time because we saw a lot of the over performers underperforming and the underperformers suddenly overperforming. How was it give us some like market color?

Okay, so we had a wild but not disorderly sell off. Sounds like my high school report card, but I imagine it was still painful for certain investors. So we just mentioned momentum like that must have been painful. Multistrats must have had a hard time because we saw a lot of the over performers underperforming and the underperformers suddenly overperforming. How was it give us some like market color?

Well in some of those.

Well in some of those.

I mean, you look at the biggest multistrats that have been one hundred percent of the net alternative investment or hedge fund inflow over the past X number of years. Right, So like long short isn't where it's at anymore. It's about the market neutrals, and that's just speaking to their equities components. But of course they have these other risk diversifying strategies with incredibly tight risk management tight stops, and that's how when you apply a lot of leverage to these small controlled market neutral gains, you then get these incredible annual returns that those biggest shops have been posting. But the fact of the matter is crowding happens, and leverage on top of crowding happens, and then shadow level it happens with leverageddtfs, leverage on and all control target volatility and CTAs and all that stuff is synthetic negative gamma in the market.

I mean, you look at the biggest multistrats that have been one hundred percent of the net alternative investment or hedge fund inflow over the past X number of years. Right, So like long short isn't where it's at anymore. It's about the market neutrals, and that's just speaking to their equities components. But of course they have these other risk diversifying strategies with incredibly tight risk management tight stops, and that's how when you apply a lot of leverage to these small controlled market neutral gains, you then get these incredible annual returns that those biggest shops have been posting. But the fact of the matter is crowding happens, and leverage on top of crowding happens, and then shadow level it happens with leverageddtfs, leverage on and all control target volatility and CTAs and all that stuff is synthetic negative gamma in the market.

So and even where you know.

So and even where you know.

There's a very well publicized loss with regards to index are, uh, you know at one of these funds whatever, I think that was probably negatively impacted. They have to model out the flows across the diaspora of things out there at the end of the day to do their index ads and deletes. Well, they're probably getting screwed with by a lot of the leverage GTF flows the end of the day that are completely nuking and creating these big overshoots and these big negative gamma type moves. So the long story short is that for the month of February, let's say, talking with people deep in the inside, senior traders and whatnot, these were losses one month losses that people had not experienced, that have been there, you know, four or five type years in places that just don't lose money.

There's a very well publicized loss with regards to index are, uh, you know at one of these funds whatever, I think that was probably negatively impacted. They have to model out the flows across the diaspora of things out there at the end of the day to do their index ads and deletes. Well, they're probably getting screwed with by a lot of the leverage GTF flows the end of the day that are completely nuking and creating these big overshoots and these big negative gamma type moves. So the long story short is that for the month of February, let's say, talking with people deep in the inside, senior traders and whatnot, these were losses one month losses that people had not experienced, that have been there, you know, four or five type years in places that just don't lose money.

They just stop you so effectively.

They just stop you so effectively.

Now it is a tribute to the model, however, that there's no blow ups, there's no ltcms here. I mean, yeah, they didn't make money. They might have had worst month or in the start of March with also you know, going the wrong way too, but you're not going existential here. Yeah, So that actually speaks to the model working. The bigger issue, and I think the bigger thought process takeaway here is that when you have trades over a period of time or built on the status quo of us exceptionalism, right, that is effectively a carry trade. And we had leverage built into the system for fifteen years of QE. We had leverage built in the system from modern monetary theory and the outright money drops that we've done over the show. Oh that's your fault, so maybe yeah. So, I mean, all of these things created this ugly de leveraging effect even at market neutral shops.

Now it is a tribute to the model, however, that there's no blow ups, there's no ltcms here. I mean, yeah, they didn't make money. They might have had worst month or in the start of March with also you know, going the wrong way too, but you're not going existential here. Yeah, So that actually speaks to the model working. The bigger issue, and I think the bigger thought process takeaway here is that when you have trades over a period of time or built on the status quo of us exceptionalism, right, that is effectively a carry trade. And we had leverage built into the system for fifteen years of QE. We had leverage built in the system from modern monetary theory and the outright money drops that we've done over the show. Oh that's your fault, so maybe yeah. So, I mean, all of these things created this ugly de leveraging effect even at market neutral shops.

The good news is it wasn't a VALL feature.

The good news is it wasn't a VALL feature.

It wasn't a VALL event because we were already hedged. That's why SKU was high. Implied VALL was high. All the put SKU was high, so it didn't become a VALL event, which is where you get some of those accelerant flows to kick in.

It wasn't a VALL event because we were already hedged. That's why SKU was high. Implied VALL was high. All the put SKU was high, so it didn't become a VALL event, which is where you get some of those accelerant flows to kick in.

On this note, I have a slightly weird question, but could we ever get to the point where the volatility complex is so large and so in demand that you're just never going to have a volatility event like we saw in twenty eighteen something along those lines, because everyone is paying through the nose for downside protection.

On this note, I have a slightly weird question, but could we ever get to the point where the volatility complex is so large and so in demand that you're just never going to have a volatility event like we saw in twenty eighteen something along those lines, because everyone is paying through the nose for downside protection.

Well, I mean, ironically, it's when you're well hedged that you then have a condition where you can create the crash, right, which means that dealers are short all these puts.

Well, I mean, ironically, it's when you're well hedged that you then have a condition where you can create the crash, right, which means that dealers are short all these puts.

I think, I guess you have to have sellers on the other side too.

I think, I guess you have to have sellers on the other side too.

Well, that's the big thing that we've conditioned the behavior, whether it's you know, fed stepping in that moral hazard dynamic, or nowadays politicians fiscal stepping up, whether it's Silicon Valley Bank and seventy different new five letter acronym liquidity special features in the market that put out fires. And that's why the back test on VALL selling strategies and the AUM in VALL selling strategies just keeps working like you sell the Panics. And that's what ultimately what ends up happening when you have this short optionality dynamic in the market, whether it's dealers short reel downside hedges, or it's CTA trend flipping from along to a short and having to sell more of the lower it goes, or target volatility funds is like a hedge overlay doing the same thing, or leveragedtfs. You know, you get the point. Now, what ends up happening is that it's the option sellers that stop the problem because they come back in.

Well, that's the big thing that we've conditioned the behavior, whether it's you know, fed stepping in that moral hazard dynamic, or nowadays politicians fiscal stepping up, whether it's Silicon Valley Bank and seventy different new five letter acronym liquidity special features in the market that put out fires. And that's why the back test on VALL selling strategies and the AUM in VALL selling strategies just keeps working like you sell the Panics. And that's what ultimately what ends up happening when you have this short optionality dynamic in the market, whether it's dealers short reel downside hedges, or it's CTA trend flipping from along to a short and having to sell more of the lower it goes, or target volatility funds is like a hedge overlay doing the same thing, or leveragedtfs. You know, you get the point. Now, what ends up happening is that it's the option sellers that stop the problem because they come back in.

They give dealers back.

They give dealers back.

Their gamma, They sell optionality, they sell rich vall. The market stabilizes, ranges compress. You need to keep feeding volatility. Volatility is mean reverting and if you can't keep having daily one and a half percent moves, which is a big ask. You need persistent new bad news otherwise realize. Volatility compresses ranges, compress vall. Sellers feel more confident, they fill in. Dealers get long gamma. We stabilize. People start covering their monetizing their hedges. They take those off. That creates delta to buy. The market starts rallying people by short data upside it, squeeze it. That's the cycle that we're on, like this really short term ecosystem. But valse sellers are I would say, the bigger players now than hedge buyers. And that's a real footprint of the past twenty years ever since QE, where the previous buyers of volatility were real asset managers like long onlyes and things like that. After QE, a lot of those folks, big pension funds became sellers of volatility.

Their gamma, They sell optionality, they sell rich vall. The market stabilizes, ranges compress. You need to keep feeding volatility. Volatility is mean reverting and if you can't keep having daily one and a half percent moves, which is a big ask. You need persistent new bad news otherwise realize. Volatility compresses ranges, compress vall. Sellers feel more confident, they fill in. Dealers get long gamma. We stabilize. People start covering their monetizing their hedges. They take those off. That creates delta to buy. The market starts rallying people by short data upside it, squeeze it. That's the cycle that we're on, like this really short term ecosystem. But valse sellers are I would say, the bigger players now than hedge buyers. And that's a real footprint of the past twenty years ever since QE, where the previous buyers of volatility were real asset managers like long onlyes and things like that. After QE, a lot of those folks, big pension funds became sellers of volatility.

Yeah, this was Bill Gross's thing when he stood up on stage and said, everyone sell volatility. That's like the only trade right now because nothing is happening, right you have to you have to bet on nothing. Yeah.

Yeah, this was Bill Gross's thing when he stood up on stage and said, everyone sell volatility. That's like the only trade right now because nothing is happening, right you have to you have to bet on nothing. Yeah.

Maybe one other point I would make on volatility. The reason that it got so wacky in August, for instance, was the fact that conditioning that says sell the rich vall and remember like the non farm payroll and U rate data was that Friday, and we crashed hard, but everybody was so conditioned that we closed the market that day with anybody in the VALL space saying I want to be short ball, short delta, I want to sell this rich vall, but still think the market normalizes here because we can't maintain this richness in volatility. Well then the NICK opened down twelve percent because it was like a kind of a hot leverage trade at that time, and it was the second day that got people stopped out. The other point here too was that that day of Friday, one of the largest ball players in the market, thinking that they were doing themselves a solid and hedging by buying vix calls, ended up creating their own demise in a sense because that created some of that short vixed convexity that then really went wild over the span of the next day and a half and created a bigger issue within the ball complex. So this is the idea that when you have buyers of hedges, they actually create the conditions for the crashes.

Maybe one other point I would make on volatility. The reason that it got so wacky in August, for instance, was the fact that conditioning that says sell the rich vall and remember like the non farm payroll and U rate data was that Friday, and we crashed hard, but everybody was so conditioned that we closed the market that day with anybody in the VALL space saying I want to be short ball, short delta, I want to sell this rich vall, but still think the market normalizes here because we can't maintain this richness in volatility. Well then the NICK opened down twelve percent because it was like a kind of a hot leverage trade at that time, and it was the second day that got people stopped out. The other point here too was that that day of Friday, one of the largest ball players in the market, thinking that they were doing themselves a solid and hedging by buying vix calls, ended up creating their own demise in a sense because that created some of that short vixed convexity that then really went wild over the span of the next day and a half and created a bigger issue within the ball complex. So this is the idea that when you have buyers of hedges, they actually create the conditions for the crashes.

Well, I guess we'll see what happened with meeting and we'll see.

Well, I guess we'll see what happened with meeting and we'll see.

If there's like a big regime ship because it's eventually right, maybe something will change, maybe I mean maybe one day, mean reversion, welcome to an end.

If there's like a big regime ship because it's eventually right, maybe something will change, maybe I mean maybe one day, mean reversion, welcome to an end.

The volatility is mean reverting normally maybe, but what if we just get it or not normal times? So we'll see.

The volatility is mean reverting normally maybe, but what if we just get it or not normal times? So we'll see.

Lots More is produced by Carmen Rodriguez and dash El Bennett, with help from Moses Onam and kil Brooks.

Lots More is produced by Carmen Rodriguez and dash El Bennett, with help from Moses Onam and kil Brooks.

Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg Podcasts.

Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg Podcasts.

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