Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Hi are you good to see you again? Nice, good
Speaker 2: to see Thank you guys for having me.
Speaker 3: No, thank you for coming anything going on this weekly?
Speaker 2: Yeah, you know, we've been feeling stuff, seeing stuff for
Speaker 2: a while. But you know, by the end of last
Speaker 2: week it was like, this is getting pretty hectic and
Speaker 2: I had to drive like eight hours each way up
Speaker 2: to New Hampshire. I got back Sunday, I was like,
Speaker 2: I got to start this right now.
Speaker 3: I did a deadlift one Jimmy, Okay, go.
Speaker 1: Uh marches.
Speaker 3: This isn't after school Special, except.
Speaker 1: I've decided I'm going to base my entire personality going
Speaker 1: forward on campaigning for a strategic pork reserve in the US.
Speaker 2: Where's the best with imposta?
Speaker 1: These are the important question? Is that robots taking over
Speaker 1: the world.
Speaker 3: No. I think that like a couple of years, the
Speaker 3: AI will do a really good job of making the
Speaker 3: Odd Lots podcast. And people say, I don't really need
Speaker 3: to listen to Joe and Tracy anymore.
Speaker 2: We do have.
Speaker 3: The perfect welcome to lots more where we catch up
Speaker 3: with friends about what's going on right now.
Speaker 1: Because even when Odd Lots is over, there's always lots more.
Speaker 3: And we really do have the perfect guest. So would
Speaker 3: you say that like stuff was already getting a little
Speaker 3: hairy last Like, what were those early signs. Was it
Speaker 3: just Wednesday during defense decision or what were what were
Speaker 3: you starting to see?
Speaker 2: Well, there's different time horizons, for sure, and I think
Speaker 2: one of the things that we absolutely have to discuss
Speaker 2: is the signal from Skew Right Skew is this you know,
Speaker 2: relative measure of kind of demand for downside versus demand
Speaker 2: for upside, which is, you know, something that we can
Speaker 2: come back to later, but without a doubt, when you
Speaker 2: began to see Skew, you relentlessly stay bid. When you
Speaker 2: begin to see the volatility of volatility, stay so bid
Speaker 2: even as stocks were, you know, trying to kind of
Speaker 2: stabilize after some of the recent death by papercut of
Speaker 2: geopolitical and kind of earnings disappointments. So you know, obviously
Speaker 2: the growth dynamic is a big part of this too,
Speaker 2: as far as you know, the labor data finally catching down.
Speaker 2: But you know, it told you that there was this
Speaker 2: you know, grab into tails and you know a big
Speaker 2: part of the messaging that I've been giving since March
Speaker 2: April period was that we had been living in this
Speaker 2: really interesting world where in the end of April SKW
Speaker 2: was extremely extremely historically all time kind of flat levels,
Speaker 2: meaning that it was really representative of two things. Extremely
Speaker 2: low demand for downside extremely high demand for.
Speaker 3: Upside downside protection. Right, all right, just want just for
Speaker 3: listeners to make sure.
Speaker 2: Right, and kind of when you look at the forwards
Speaker 2: and in my view, is this skew really on a
Speaker 2: longer horizon, like decades type horizon to me is representative of,
Speaker 2: you know, what's the actual risk taking, risk appetite backdrop,
Speaker 2: Meaning it's heavily related to central bank policy. So for instance,
Speaker 2: in the kind of q E era where you know,
Speaker 2: the FED was trying to incentivize a wealth effect, right,
Speaker 2: they wanted you to be leveraged long assets, and in
Speaker 2: that because that's economically you know, virtuous right consumption, you know,
Speaker 2: paper wealth effect all those things, you were leverage long
Speaker 2: risk assets. SKEW is deep because you had something to hedge.
Speaker 2: But after the events that created that, you know, idiosyncratic
Speaker 2: stacking of stuff from the FEDS inflation rethink in twenty nineteen,
Speaker 2: the flexible average inflation targeting the tariffs impact into COVID,
Speaker 2: into the supply chain disruption, into the stimulus plus you know,
Speaker 2: the tectonic stimulus, which had never been tried before. In
Speaker 2: addition to the unprecedented quantitative easing, you finally had this
Speaker 2: escape velocity inflation event, which then forced the FED behind
Speaker 2: the ball, and it forced them to have to tighten
Speaker 2: in a place that we've never seen before. And QT
Speaker 2: right as opposed to QE. They needed to create a
Speaker 2: negative wealth effect because they could only impact demand side inflation,
Speaker 2: and with demand side inflation being the only lever that
Speaker 2: they could pull, they had to create a negative wealth effect.
Speaker 2: And in that environment, skew went extremely flat. You didn't
Speaker 2: own underlying They were telling you to get out of
Speaker 2: risk assets. They were telling you to park in cash.
Speaker 2: Cash isn't at the money put right, it's a hedge. There.
Speaker 2: You were able to sleep at night collect three four
Speaker 2: five percent. At times, the only tail that you were
Speaker 2: afraid of was no left tail, was no crash downside event.
Speaker 2: It was about missing the right tail. It was a
Speaker 2: missing the rally, the upcrash, the upcrash. So the last
Speaker 2: two years, you know, kind of prior to the last
Speaker 2: six months let's say the last two years, we were
Speaker 2: in this super bizarre place to a lot of people,
Speaker 2: counterintuitive with positive spot meaning kind of underlying market VALL correlation.
Speaker 2: You know, VALL was going higher as the market was
Speaker 2: rallying because people didn't have the exposure on we're being
Speaker 2: forced to chase, right. Data was beginning to soften, Inflation
Speaker 2: was starting to come off the FED. It was kind
Speaker 2: of opening the door to the end of the tightening cycle,
Speaker 2: and you were under positioned, so you're grabbing into calls,
Speaker 2: and that same positive spot VALL correlation on selloffs meant
Speaker 2: that VALL would grind lower because you were in this
Speaker 2: really virtuous backdrop for VALL selling, right, So down days
Speaker 2: were opportunities to sell VALL. And at the core of
Speaker 2: everything that has kind of happened over the last week,
Speaker 2: in particular the last few days really has been about
Speaker 2: that kind of come to Jesus moment for the short
Speaker 2: VALL trade of the past two years. So you know,
Speaker 2: you had this dynamic where flat skew is a feature
Speaker 2: of quantitative tightening, and at the march kind of extremes
Speaker 2: we started beginning to see skew steep and again pretty impulsively,
Speaker 2: and that was the signal that you know, we were
Speaker 2: going to resume back to this prior world of a
Speaker 2: negative spot vult correlation.
Speaker 1: So we are speaking with Charlie mcgelligate. He is, of course,
Speaker 1: the cross asset macro strategist at Nomora and the guy
Speaker 1: we like to call when we need to start talking
Speaker 1: about Greek letters and things like delta hedging and all
Speaker 1: of that. Charlie, what are we calling the sell off?
Speaker 1: I came up with an idea that I'm I'm quite
Speaker 1: proud of.
Speaker 2: Give it to me. I mean, it sounds like fodder
Speaker 2: for my subject, Lineman.
Speaker 1: Yes, yes, you can have this one volma fedian and
Speaker 1: the valma is AI, so it's volatility ai fed And
Speaker 1: yet that's good.
Speaker 3: That really rolls.
Speaker 1: Yeah, I know, meta, it's going to be useful.
Speaker 2: Multivariate. Yeah, I mean, look, there's you know we spoke about,
Speaker 2: you know, the macro catalyst that kind of set off
Speaker 2: this event, you know, and a lot of people I think,
Speaker 2: you know, way off the mark with regards to oh
Speaker 2: it's you know, it's yen carry unwined or oh you know, yeah.
Speaker 1: Wait, talk more about that, because I see lots of
Speaker 1: people saying it's the yen carry unwined, So the idea
Speaker 1: that people were borrowing in yen at a low interest
Speaker 1: rate and then investing that in risk assets. But if
Speaker 1: that was happening on a scale which would cause the
Speaker 1: market moves that we've seen in the past couple of days,
Speaker 1: I would have thought that you would see more of
Speaker 1: an impact in stuff like credit, right, like ig or
Speaker 1: high yield, and that hasn't really happened because my impression
Speaker 1: was always like a lot of targets of the carry
Speaker 1: trade were actually in credit right.
Speaker 2: I mean my like very simplistically, the carry trade, if
Speaker 2: anything at best, is simply representative of risk appetite. And
Speaker 2: when carry trades are popular and thus crowded and leveraged,
Speaker 2: it speaks to a backdrop of low volatility. You need
Speaker 2: low volatility to be able to accumulate those positions, you know,
Speaker 2: short this to buy this higher yielder. And you know,
Speaker 2: without question, as far as the butterfly flapping its wings event,
Speaker 2: the Bank of Japan allowing people to be structurally short
Speaker 2: the end for decades because of their just consistency with
Speaker 2: regards to this, you know, perma Dubvish posture. Then switching
Speaker 2: in pretty short time, arising into something more hawkish than expectations,
Speaker 2: particularly that last meeting where they you know, they raised
Speaker 2: by more than kind of market expectations. They ultimately are
Speaker 2: targeting half the bond buying, and they'd already cut off
Speaker 2: the ETF purchases. That that was absolutely not helpful for
Speaker 2: the carry trade. But for the carry trade as far
Speaker 2: as our industry goes, it is one piece of the puzzle.
Speaker 2: As far as the kajillion strategies out there, and yes,
Speaker 2: Carrie had been popular, Carrie had been crowded. To build
Speaker 2: into those trades, you need low volatility. A lot of
Speaker 2: those trades then look like trend trades. A lot of
Speaker 2: those trades are overlapping and concentric with CTAs. But it
Speaker 2: in and of itself was not the issue.
Speaker 3: Yeah, I was gonna say, it often feels like, because
Speaker 3: we did a recent episode on the correlation trade, and
Speaker 3: we've talked about the low vault trade, it often feels
Speaker 3: like these are all the same trades and different the
Speaker 3: carry trade being another one, the momentum trade being another one,
Speaker 3: the same trade in different flavors.
Speaker 2: I say this all the time. This is often used
Speaker 2: with regards to these deleveraging events. It's oftentimes used when
Speaker 2: discussing you know, systematic strategy, you know of all events,
Speaker 2: but you know, volatility is the exposure toggle in modern
Speaker 2: market structure, and that being the case stained periods of
Speaker 2: low volatility where I would say that, you know, the
Speaker 2: big shift, the bigger shift from a macro catalyst to
Speaker 2: me that occurred over the past few weeks was back
Speaker 2: to this idea that we had been consensually and comfortably
Speaker 2: in a low Vall narrative as the market was forced
Speaker 2: into a soft landing consensus last year, right, people were,
Speaker 2: you know, perpetually trying to pull forward the hard landing recession,
Speaker 2: and end of twenty two, start of twenty three, you
Speaker 2: had the CIVB crisis that was going to be the
Speaker 2: credit crunch that pushed us over the edge, fighting fighting,
Speaker 2: fighting for the recession that never came. Ultimately, we kind
Speaker 2: of got stopped into this really comfortable backdrop soft landing
Speaker 2: fed would still be supportive. Treasury did a little work
Speaker 2: around the edges to ease financial conditions and lighten the
Speaker 2: load of the Treasury sell off and the long and
Speaker 2: rate volatility in the fall, and that low Vall backdrop
Speaker 2: was really facilitating this massive growth in the shortfall stuff
Speaker 2: that's been out there and the AUM growth. And it's
Speaker 2: not just shortvall premium income ETFs, of course, it's VRP,
Speaker 2: it's dispersion strategies, it's you know, correlation short correlation trades,
Speaker 2: it's qis, you know at banks, their proliferation, especially being
Speaker 2: used by multi strategy hedge funds which are big users
Speaker 2: of those products. All of that stuff created the short
Speaker 2: vall supply. And here's kind of the kicker to me
Speaker 2: with regards to that soft landing outcome, which was consensual.
Speaker 2: We had had a kind of assigned a zero delta
Speaker 2: of a hard landing, but we had been saying for
Speaker 2: quite a long time market had been fixated this mark.
Speaker 2: This economy goes as far as the consumer goes, and
Speaker 2: the consumer is a function of the employment data. And
Speaker 2: when in you know, less than a month span, we've
Speaker 2: seen six of the last seven major US labor releases
Speaker 2: at magnitude downside surprises. You kind of got the whites
Speaker 2: of the eyes of this trade, where well, holy moly,
Speaker 2: like maybe that's not a zero delta, Maybe that's a
Speaker 2: twenty delta on the hard landing and that completely ruptures
Speaker 2: as a macro catalyst, the comfort and the delta on
Speaker 2: that short vall trade, the comfort in that soft landing trade,
Speaker 2: and that, to me, if anything, if you want to
Speaker 2: point to one thing, was what lit the match to
Speaker 2: then take advantage of the larger structural short ball supply that,
Speaker 2: like every other short ball build up in history, does
Speaker 2: have a stopping out, and that's where we are.
Speaker 1: I do think it's kind of funny that one of
Speaker 1: the things that's happened in recent days is the yield
Speaker 1: curve has uninverted. And the yield curve, of course, was
Speaker 1: the thing that last year when everyone was focused on recession,
Speaker 1: they were so focused on the curve inversion, and now
Speaker 1: it's like, oh, it uninverted, but actually we're all worried
Speaker 1: about the hard landing now. Anyway, how much short vall
Speaker 1: exposure do you think is still out there? Or have
Speaker 1: the past couple of days seen a cleaning of the house,
Speaker 1: so to.
Speaker 2: Speak, so great? You know, it's the trillion dollar question.
Speaker 2: I think a lot of folks after that Friday freakout,
Speaker 2: and this is again, this is part of the issue here.
Speaker 2: We've been conditioned on a multi year decade type of
Speaker 2: look back. We've been conditioned to see these opportunities to
Speaker 2: monetize downside hedges or say VIX upside convexity, you know,
Speaker 2: or SMP downside in this span of hours when you
Speaker 2: have these whatever the macro catalyst is, you know, we
Speaker 2: slide from dealers from a long gamma spot to a
Speaker 2: short gamma spot at trigger systematic synthetic short gamma. You
Speaker 2: get these accelerant flows and you have these wipeouts. You
Speaker 2: have like a couple of hours max. To monetize those
Speaker 2: hedges before reflexive all sellers reappear, before the dip buyers reappear.
Speaker 2: And I think the hard lesson here was due to
Speaker 2: the magnitude of how much shortfall there were across you know,
Speaker 2: multiple strategies that we referenced earlier. A lot of people
Speaker 2: ended the day Friday thinking that they could be SHORTVALL
Speaker 2: and maybe short delta, you know, short the market, but
Speaker 2: also too short ball coming out of that trade because
Speaker 2: the wall moves were so magnificent, you know, so outlier.
Speaker 2: The issue then became that they got their fingers blown
Speaker 2: off on the Monday reopen, so you know, you can
Speaker 2: lose money trying to do that based on prior back
Speaker 2: test on these VALL squeezes and these outlier ball squeezes.
Speaker 2: It's when Asia crashed overnight, and that in and of
Speaker 2: itself is another conversation, another you know, probably a separate
Speaker 2: recording for us. But when Asia crashed overnight and those
Speaker 2: people woke up and vall was where it was, and
Speaker 2: you saw more you know, more bid for tails and
Speaker 2: vivix went absolutely bonkers.
Speaker 1: Oh yeah, volatility of volatility, that was yeah, you know.
Speaker 2: As far as just a read on demand for tales,
Speaker 2: it was over for those people. So the second day
Speaker 2: in a row and now you have a pattern here
Speaker 2: where you know, for me one, shame on you, for
Speaker 2: me twice shame on me, where you've gotten your your
Speaker 2: fingers blown off two days in a row trying to
Speaker 2: play this trade. And by the way, this VALL squeeze,
Speaker 2: this vall out performance on a beta adjusted look was
Speaker 2: unlike anything we'd seen, I'm telling you, like past COVID extremes.
Speaker 2: At a point past vallmageddon, we're to LTCM. You know,
Speaker 2: some of these metrics were unbelievable, whether it was VIX
Speaker 2: relative to S and P, whether it was vall of
Speaker 2: all relative to VIX, whether it was skew relative to
Speaker 2: add the money imply valves all these different metrics one
Speaker 2: hundred percentile. This was a volume. This was not a
Speaker 2: stocks event, and that occurred. You're now dealing with an
Speaker 2: environment from a risk management perspective, and I know you
Speaker 2: just had some really good content, you know, talking about
Speaker 2: risk management on the show. From a risk management perspective,
Speaker 2: and your var that it is going to be incredibly
Speaker 2: difficult to get that you know, reflexive say systematic buyer
Speaker 2: back in the market right now, or that discretionary macro
Speaker 2: trader who who's running the back test and the back
Speaker 2: tests are saying after these types of overreactions, you've got
Speaker 2: to be long the market in shortfall. But the problem
Speaker 2: is you're blowing out your risk budget now on down
Speaker 2: days we snap back overnight in Japan, you're blowing out
Speaker 2: your risk budget up with You're not going to be
Speaker 2: able to allocate any risk into this trade of any
Speaker 2: size that's going to make a difference. So we're still
Speaker 2: on very thin ice and the market is still priced
Speaker 2: for a lot of crash.
Speaker 3: I'm glad you brought it back to the sort of
Speaker 3: simple macro, which is just that look, you know, suddenly
Speaker 3: people realized on Friday, maybe that soft land between Paul
Speaker 3: on Wednesday and the employment report on Friday. Maybe that
Speaker 3: soft landing scenario that everyone consensus had emerged. Maybe it's
Speaker 3: no done deal. You said it could be a separate recording.
Speaker 3: Can you give us like the thirty second version of
Speaker 3: that Sunday night Asia crash and what you thought was
Speaker 3: going on there or what was on your mind?
Speaker 2: Then we've seen so many times after a Friday sell off,
Speaker 2: Asia just act poorly, right, I mean, and I you know,
Speaker 2: I then too think back to like the financial crisis
Speaker 2: where you know, it was one large hedge fund kind
Speaker 2: of liquidating their converts book that really started like a
Speaker 2: knock on calamity leading it, you know, around the Leman event.
Speaker 2: You know, this I think too, was then further amplified.
Speaker 2: Let's look at Japan specifically. The Japan trade has been
Speaker 2: a great trade. The long knee k the short end
Speaker 2: obviously the care component have been great trend trades with
Speaker 2: high sharps for a reason. You know, there's a fundamental
Speaker 2: economic story this. You know, you got the third arrow achieved,
Speaker 2: You've got you know a wage renegotiation. Now corporates have
Speaker 2: pricing power consumers and can digest it all this stuff.
Speaker 2: They escape deflation. Great story. It was crowded and it's illiquid,
Speaker 2: and it doesn't trade very well. And in a world
Speaker 2: where the US exceptionalism trade is dominated for a decade,
Speaker 2: and Europe is eternally tied into China, and Europe is
Speaker 2: eternally cyclical, and they don't buy back their stocks and
Speaker 2: they don't have any secular growth tech and all those things,
Speaker 2: a lot of global equities managers were looking for opportunities
Speaker 2: to diversify out and play Japan. And that meant real
Speaker 2: money in Japan, and that meant hedge fund started chasing
Speaker 2: in Japan. That meant retail certainly domestically in Japan playing
Speaker 2: the stock market boom. So you just had a lot
Speaker 2: of hot money, a lot of fast money, a lot
Speaker 2: of slow money in a place that doesn't trade very well.
Speaker 2: And when you got that first d risking, particularly amongst
Speaker 2: a lot of overseas leveraged pod multi strat investors that
Speaker 2: have been there, you shoot first, ask questions later. It's
Speaker 2: skinny exits and the deleveraging and getting out of a
Speaker 2: place that is that type of liquid liquidity constrained. It
Speaker 2: was you know, just a magnitude's move, but it was
Speaker 2: all the stuff that had the highest sharps. It was
Speaker 2: topics banks, right, It was all those things that are
Speaker 2: going to be most sensitive to you know, escaping negative
Speaker 2: interest rates, and you know you crowded into them and
Speaker 2: you crowd out of them. And the magnitude of those
Speaker 2: moves now as you're seeing both down and back up,
Speaker 2: you know, speaks to how much leverage was in that trade.
Speaker 2: And that was just a particularly sloppy unwind.
Speaker 1: So, as you said, people have had their fingers burnt
Speaker 1: multiple times now and we think there might be some
Speaker 1: short vall exposure still left in the market. What are
Speaker 1: these sort of I guess either pain points that you're
Speaker 1: looking at that would accelerate the downside or the sort
Speaker 1: of things you need for a durable recovery. As you said,
Speaker 1: I guess it's going to take some time for those
Speaker 1: like windows of volatility events and the var spikes to
Speaker 1: fade into the distance. But is there anything there that
Speaker 1: you're watching?
Speaker 2: So the thing to me where I was still uncomfortable,
Speaker 2: for instance, in the micro term about you coming into
Speaker 2: today and how if we'd be able to hold onto
Speaker 2: the rally last night was at the end of the
Speaker 2: US cash equity session yesterday, it was an ugly close
Speaker 2: from a ball perspective, Vall went out bid, skewing out
Speaker 2: bid Vallavall was super firm, super sticky. There was no
Speaker 2: pullback despite you know, for instance, in the last couple
Speaker 2: minutes of the day, there was a large hedge online,
Speaker 2: large put spread on line that bought you know, just
Speaker 2: about four and a half billion bucks of Delta in
Speaker 2: a rally, it's like twenty handles. But like VALL was
Speaker 2: still stressy. That to me is indicative of the fact
Speaker 2: that they're still and I think it's a dealer problem.
Speaker 2: I think it's a market maker problem that there is
Speaker 2: still a lot of embedded kind of short gamma in
Speaker 2: the VIX complex and there still is a lot of
Speaker 2: short skew out there maybe in like the dealer the
Speaker 2: S and P positioning and that VIX complex is really interesting, guys,
Speaker 2: because I feel like maybe we talked about this when
Speaker 2: I was on the show once before, but on a
Speaker 2: kind of pre Dodd Frank view versus where we are
Speaker 2: now from speaking with VIX dealers VIX options dealers around
Speaker 2: the street, you maybe have ten percent twenty percent max
Speaker 2: of the risk taking capacity that you used to have.
Speaker 2: But as the equity market rally became so unstable over
Speaker 2: the course of the past year, VIX upsides. So VIX
Speaker 2: calls was or you know, all spreads. But that's not
Speaker 2: a true hedge. That's a separate conversation where it's kind
Speaker 2: of the most popular tail hedge out there. You know,
Speaker 2: VIX is inherently convexed. It's a square root of variance,
Speaker 2: so it's going to move off the line, it's going
Speaker 2: to outperform and do you know, kind of a crashy
Speaker 2: type situation. There was a massive amount of short VIX
Speaker 2: calls for dealers over the course of the past year.
Speaker 2: We've had a couple events, we get squeezy and then
Speaker 2: it you know, fills back in. People keep reloading on
Speaker 2: it because this trade has been quite cheap. Once this
Speaker 2: short vall trade really began to implode, what you started
Speaker 2: seeing and we did recently have another reload last week
Speaker 2: of dealer of a dealer getting short you know, really
Speaker 2: big size and VIX calls. When VVIX starts expanding like that,
Speaker 2: you know, that they are stressed and scrambling to cover
Speaker 2: what is effectively their short gamma, and they have to
Speaker 2: go out and they have to buy VIX delta, which
Speaker 2: is buying VIX futures, or they have to go out
Speaker 2: in this case because we're now negative spot vault correlation,
Speaker 2: I meaning as the market's going lower of all is
Speaker 2: going higher again, they have to go out in short futures.
Speaker 2: So that to me, when we saw the market staying
Speaker 2: stressing into the clothes, I know that people are still
Speaker 2: you know, buried in some of those trades and are
Speaker 2: not out. I think a lot of people were finally
Speaker 2: getting the shoulder tap in the last you know, thirty
Speaker 2: minutes yesterday saying this hasn't pulled back. We haven't been
Speaker 2: able to cover this. We got to cover and cover
Speaker 2: out some of this risk. So that to me was
Speaker 2: indicative on the go forward to the point that you
Speaker 2: raised with regards to when do things stabilize. I want
Speaker 2: to see this current flow which is just hedge unwined
Speaker 2: hedge monetization, which is going to help stabilize the market
Speaker 2: in periods. I want to see that turn more into
Speaker 2: a willingness for the ball sellers to reemerge out of
Speaker 2: their bunkers. That's a big if, right now, right are
Speaker 2: you able to be short vall? Are you able to
Speaker 2: be short gamma? Are you able to be short skew
Speaker 2: or you be able to short crash, you know, systematically
Speaker 2: in light of the ball events of the last few
Speaker 2: days and whether or not you can get approval or
Speaker 2: the risk budget to put that trade on. But there
Speaker 2: still has been massive asset growth across the VRP complex,
Speaker 2: across the premium income ets, across the dispersion books, across QIS.
Speaker 2: Products that are exploiting zero DTE options, no overnight risk,
Speaker 2: Those still have to trade, those still have to sell all,
Speaker 2: those still have to short VEGA. And I think that
Speaker 2: they are going to slowly reappair. And as they begin
Speaker 2: to slowly reappear, and that's going to take time, dealers
Speaker 2: start getting longer gamma again. Range compression begins to set
Speaker 2: back in trailing realized VALL windows begin to roll back
Speaker 2: over ever so incrementally. But the trick is this VALL control,
Speaker 2: which is kind of a euphemism, a generic for anything
Speaker 2: from target volatility funds to various annuities. To assume of
Speaker 2: these balanced funds that shift out of equities into cash
Speaker 2: or during of all event, well, we view them as
Speaker 2: the primary source of much of this deleveraging over the
Speaker 2: last week again volatilities or exposure toggle, we got it.
Speaker 2: We think they've sold almost over the past two weeks
Speaker 2: one hundred and thirty billion bucks of equities because of
Speaker 2: that realized VALL issue that we're talking about, where you know,
Speaker 2: still with the front Vick's future right now. As I
Speaker 2: was walking in here was kind of you know, twenty
Speaker 2: eight or so, you're still you know, pricing in something
Speaker 2: close to one point eight percent daily moves in the
Speaker 2: S and P. You know, it's going to take a
Speaker 2: month of fifty basis point moves to get half of
Speaker 2: that buying back. Even just two weeks of fifty BIPs
Speaker 2: moves a day, which is a magnitude smaller versus where
Speaker 2: we are right now and we're still priced for stress,
Speaker 2: is barely going to create any buying right now. So
Speaker 2: you need a sustained period of calm. You don't need rallies,
Speaker 2: you just need you know, VALL tends to mean revert
Speaker 2: at some point. You've got to keep feeding volatility with
Speaker 2: big moves or else it tends to mean revert lower,
Speaker 2: and that's when the ball sellers reappear, and that's when
Speaker 2: dealers get long gamma, and that's when markets begin to
Speaker 2: compress again, and that's when you know, we can see
Speaker 2: some kind of resumption of, say, more constructive behavior.
Speaker 1: Joe, you know what's cool. On the terminal, you can
Speaker 1: chart target VALL equity exposure and you can see it
Speaker 1: peeking in sort of June and then obviously falling very
Speaker 1: precipitously in recent days. So that's kind of cool. Charlie.
Speaker 1: We have to keep this fairly short because it's an
Speaker 1: emergency episode. We want to get it out quickly. But
Speaker 1: I have one very important question for you, which is
Speaker 1: I have someone visiting me in the next week or
Speaker 1: so in New York. Where should I take them for steak? Oh?
Speaker 2: Good question.
Speaker 1: I figure you're the guy to ask. We ask you
Speaker 1: about VALL and meet basically.
Speaker 2: You know it's so funny is that I get, you know,
Speaker 2: I'm a home steak guy, like I have a half
Speaker 2: cow share, so I get, you know, these parts delivered
Speaker 2: to me from up think Tracy would have.
Speaker 1: Yeah, I love bone marrow. I have.
Speaker 2: The bone marrow on the steak then, right.
Speaker 1: It's like eating a life force.
Speaker 2: I drink at the bone, broth, all that stuff. So
Speaker 2: I honestly am somewhat averse to restaurant steakhouses, oftentimes cooking
Speaker 2: with vegetable oil, siedos, all that stuff. I've always been
Speaker 2: like a big, brawny New York City steakhouse type of
Speaker 2: a guy, So like a very generic smith and wooly
Speaker 2: type of a Yeah, lunch.
Speaker 1: Yeah, actually, I'd be totally Actually.
Speaker 3: My lunch plans just fell through, so I actually have
Speaker 3: some time. We could talk through some stuff. Let's good
Speaker 3: steak for lunch.
Speaker 1: Yeah, let's do that, okay.
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