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Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom keene Jeleye.

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Speaker 1: We bring you insight from the best in economics, finance,

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Speaker 1: investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com and of course on the Bloomberg to

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Speaker 1: run you through the market action and what action we

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Speaker 1: have seen over the last couple of days. I'm very

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Speaker 1: pleased to say we've got a snack show right over

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Speaker 1: all over again on are on Bloomberg Surveillance, including Mark Chandler,

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Speaker 1: Brown Brothers, harrim and global head of Currency Strategy Kit

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Speaker 1: Jugs also joining us of soccer say as general Kit

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Speaker 1: joining us from London. I want to begin with you, sir.

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Speaker 1: An important note that came into my inbox from your

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Speaker 1: south this morning. The addiction to low volatility perhaps bigger

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Speaker 1: than the addiction to low rates. Let me throw a

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Speaker 1: kit Well, it just strikes me that so that they're related,

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Speaker 1: right This, this low interest rate regime we've been in

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Speaker 1: since the Financial crisis, has has pushed money looking for

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Speaker 1: yield either to be taking low volatility strategies, which meant

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Speaker 1: for a long time buying things that were low in

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Speaker 1: volatility and that suffered de volatility picked up across markets,

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Speaker 1: so corporate bonds, high yield, easy examples of high yielding

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Speaker 1: currencies and so on. And then clearly, you know, we

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Speaker 1: have invented more and moderivatives that allow people to go

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Speaker 1: short of volatility on a retail basis or on a

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Speaker 1: wider basis than just outside you know, a few trading rooms.

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Speaker 1: And and that's where some of the worst of the

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Speaker 1: pain has been felt in this crisis. And I guess

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Speaker 1: that's you know, it's an evolution of the market away

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Speaker 1: from away from what we saw in two thousand and

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Speaker 1: six seven um as as the as the financial bubble grew,

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Speaker 1: when money was going into be um an addiction to

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Speaker 1: low rate, but an addiction that came through in structured

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Speaker 1: credit and through addiction into the into the property. Mark. Yeah,

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Speaker 1: this feels different in that sense, Mark Chandler. At the moment,

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Speaker 1: the volatility almost isolates its equity. Do you see it

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Speaker 1: bleeding through to effex bleeding through to bonds, because that's

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Speaker 1: not happening in the material way yet. Yeah. Partly it's

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Speaker 1: what's happened is that the dollar has gotten stronger and

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Speaker 1: the end has gotten strong. It's primarily because people are

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Speaker 1: unwinding these positions where they've used the dollar in the

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Speaker 1: end as a funding currency. But I'm not so sure

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Speaker 1: that that this is that this is a big crisis

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Speaker 1: or anything. I think most retail investors are not really

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Speaker 1: involved with these vix plays. At the end of the day,

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Speaker 1: I think that this is mostly a Wall Street sort

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Speaker 1: of staring at its navel and not really looking at

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Speaker 1: the bigger picture and the bigger pictures. Essentially, this emerging

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Speaker 1: markets were was up about thirty three percent last year.

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Speaker 1: There's still up on the year now. The US stock

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Speaker 1: market many people like myself, including some feed officials, dot

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Speaker 1: the stock market was elevated and where are we now

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Speaker 1: basically where we were at the end of say, early January.

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Speaker 1: I think that this is uh, this is grossly exaggerated.

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Speaker 1: The economic impact grosly exaggerated. Like I say, I think

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Speaker 1: that it hasn't really been a spill over and economic issues. Well,

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Speaker 1: I have to say, Mark, I haven't heard an exaggeration

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Speaker 1: on the economic issues, and I haven't heard an exaggeration

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Speaker 1: from the bulk of the people I've spoken to either

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Speaker 1: on the spillover effect. Let's be clear though, this isn't

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Speaker 1: an exaggeration When we talk about a key trade last year,

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Speaker 1: which was short volt blowing up. The short vault trade

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Speaker 1: has blown up. Now we can talk about what that means,

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Speaker 1: the spillover effects. But I don't think it's an exaggeration

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Speaker 1: to sit here and say that a lot of investors

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Speaker 1: worldwide bet on an extended period of calm and that

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Speaker 1: has ended. It's blown up in a significant white I'm

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Speaker 1: actually sure that there's so many investors have been playing

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Speaker 1: for this. For example, myself, what did I do? People

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Speaker 1: like myself we've been buying throughout four one key equities.

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Speaker 1: Is this a big skire for us? Are we playing

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Speaker 1: low volatility as if it's going to last forever by

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Speaker 1: being long starts and being longsome ets, we being long credit?

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Speaker 1: Is it not an embedded low volatility trade? Being long

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Speaker 1: e M? Is that not an embedded low volatility trade?

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Speaker 1: Isn't When you project for low volatility, aren't you expecting

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Speaker 1: to have risk assets like e M and credit outperfore

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Speaker 1: Most people input low volunto that portfolios and expect credit,

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Speaker 1: a M and other risk assets to out perform. Well,

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Speaker 1: that's why I'm suggesting to you that despite this jump

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Speaker 1: in VIX, the e M stocks are still up on

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Speaker 1: the year. And when I did last year, you know,

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Speaker 1: the Russell one thousand had Russell has a one thousand

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Speaker 1: value index and I Rustle one thousand growth index last year.

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Speaker 1: As you would imagine, the growth index well outperformed the

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Speaker 1: value Last week, when the stock market began selling off,

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Speaker 1: the growth index held up better than the value index.

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Speaker 1: So I don't see this as some kind of big unworning.

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Speaker 1: I've been quiet, folks, because I'm staring at my navel.

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Speaker 1: That's what we're doing on I'm I'm, I'm I'm just

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Speaker 1: staring there. Good morning everyone. Yesterday we need to say,

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Speaker 1: we need to say thank you to the Bloomberg surveillance

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Speaker 1: team for heroic work from Friday over to Monday and

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Speaker 1: getting smart conversation on and we continue to drive that

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Speaker 1: for this morning. I hate to say this, Kitchen, but

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Speaker 1: I featured your research note this morning when you were

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Speaker 1: not on. You'll get the royalty check. Uh and within

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Speaker 1: that was wrong? Yen? How much stronger is strong? Yen?

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Speaker 1: If for one O nine, one ten, can this be

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Speaker 1: a news item from March or April? Well, I think

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Speaker 1: the market is you know, the end is being kept

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Speaker 1: deliberately at least ten per cent, about ten percent away

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Speaker 1: from its fair value by the Bank of Japan's policies.

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Speaker 1: That's what the e c D was doing to the

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Speaker 1: Euro year ago. Um, and they mustn't papering under their breath.

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Speaker 1: Last May we went, we started moving. The Bank of

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Speaker 1: Japan is desperate to not let that happen, and I

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Speaker 1: think the market can now see that. It can see

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Speaker 1: that the Japanese economy is recovering and the end won't

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Speaker 1: be able to stay this week forever in the middle

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Speaker 1: with turmoil. UM. I think that at the bare minimum

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Speaker 1: in the end is now in a lower range than

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Speaker 1: it was, and it's still going to have to work

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Speaker 1: flat out stop it appreciating tempercent. That was great. Kit

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Speaker 1: didn't answer my question March end. Let me see if

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Speaker 1: you can, what is the level where yen becomes stronger. Yeah,

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Speaker 1: Kit talks about a new range and all the politics,

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Speaker 1: but ken yen is the litmus paper of the flows system.

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Speaker 1: Can it really go to some dramatic yen strength? Well,

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Speaker 1: here's what I suspect is that is to say that

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Speaker 1: I think the Japanese are willing to accept a stronger

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Speaker 1: yen provided it takes place among a weaker dollar environment.

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Speaker 1: More broadly, and it happens gradually, And so I think

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Speaker 1: that the fact I don't I don't think you see

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Speaker 1: the Japanese holding the yen down here, but I think

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Speaker 1: that the Japanese are willing to accept a stronger yen

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Speaker 1: partly to help the deflect some protectionist sentiment coming from

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Speaker 1: the United States. As you know, Japan has a large

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Speaker 1: and growing current account surplus, which antagonizes some people in

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Speaker 1: the administration. So I'll take issue with whether they are

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Speaker 1: accepting a stronger yen, and the reason being, if they

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Speaker 1: are going to accept a stronger yen, are they willing

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Speaker 1: to accept higher yields? And it's quite clear to me

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Speaker 1: that they're not. They're trying to camp the Japanese ten

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Speaker 1: year just ten basis points mark, and what we saw

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Speaker 1: last week, as soon as there was any kind of

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Speaker 1: volatility um rates, any kind of pickup in yields, guess

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Speaker 1: what the b RJ got aggressive. Again, Let's just assume

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Speaker 1: they are willing to accept the stronger yen. Are they

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Speaker 1: willing to accept high yields? I say so, I agree

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Speaker 1: with you that they pushed back quickly when the yields

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Speaker 1: hit their target. And that is to say that the Japanese.

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Speaker 1: I think a lot of people are confused the Japanese policy.

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Speaker 1: It's not just qualitative quantitative easy anymore, but this yield

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Speaker 1: curve control, which requires him to buy fewer bonds. So

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Speaker 1: I don't acceptably the fact that they tapered last year

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Speaker 1: because the balance sheet only expanded by forty trillion yen

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Speaker 1: instead of instead of eighty trillion yen. So but my

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Speaker 1: thinking is goes along these lines, is that the Japanese

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Speaker 1: are willing to accept. I mean, look what's happened. The

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Speaker 1: dollars strengthened, excuse me, the dollar weekend most of last year,

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Speaker 1: the yen strength, and they didn't protest that. And so

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Speaker 1: I think that that's what I mean by willing to

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Speaker 1: accept the especially in the context of a wider move

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Speaker 1: in the foreign exchange market. Kit Jukes, before we let

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Speaker 1: you run off to your afternoon and suck, and he's

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Speaker 1: working to suck John, Afternoon, John, this is like you

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Speaker 1: know two. You know, he's an expert action in French parades.

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Speaker 1: We'll get him in touch with the president, Kit Jukes.

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Speaker 1: When when I look at yields coming in two basis

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Speaker 1: points today, two year in two basis points, ten year

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Speaker 1: into thirty year bounds three basis points as well. What

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Speaker 1: does that signal to you? Lower yields this morning. I

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Speaker 1: think it signals to me that once we've given the

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Speaker 1: market a bit of a bit of a shock, but

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Speaker 1: there are still buyers. There are still buyers out there

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Speaker 1: for the fixed in market. That people have seen a

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Speaker 1: bad inflation number, they've seen some volatility, you know that

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Speaker 1: they they've got themselves a little bit alarmed, but that

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Speaker 1: at the end of the day that there were buyers

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Speaker 1: above two eighty and tenure notes, they'll be buyers and

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Speaker 1: there'll be a lot of buyers at three or five.

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Speaker 1: And I just think we might have to see the

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Speaker 1: other side of three three defend at some point in

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Speaker 1: terms I doubt. Okay, that's the end of the year. Kid,

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Speaker 1: John Ferris my name, I'm flustered. You're forgetting in, John.

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Speaker 1: This is great when we have kit Chicks and Mark

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Speaker 1: Chandler around and it's fantastic to get that real perspective

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Speaker 1: and they're unspending the sex market, are they friends? Okay? Alright?

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Speaker 1: Kit Chicks is state General, We've gotta let you go, sir.

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Speaker 1: Thank you very much for giving its your time without questioning.

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Speaker 1: Our interview of the day always timely with a former

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Speaker 1: Governor of the Bank of England, but nevermore so with

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Speaker 1: a terrific news slow Governor, King, wonderful to speak to

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Speaker 1: you again. And I noticed, Governor that Chery Yelling has

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Speaker 1: been relegated in a fashion off the Fed is Aston

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Speaker 1: Villa was relegated out of the Premier League two years

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Speaker 1: are about to come back into the Premier League. Will

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Speaker 1: enjoy her retirement? Well we will see, but we know

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Speaker 1: for certain she's been relegated. What was the pressure on

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Speaker 1: you when you were relegated out of the Bank of England?

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Speaker 1: How do you keep quiet the first weeks after your

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Speaker 1: life changes. I think the first thing you want to

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Speaker 1: do when you leave the Bank of England or indeed

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Speaker 1: the Fed, is to have a break on a holiday

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Speaker 1: and get away from it all, and then gradually to

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Speaker 1: adjust to a new lifestyle. But do not rush to

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Speaker 1: decide what you want to do next. It took me

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Speaker 1: nine months to decide what I wanted to do next, Governor,

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Speaker 1: King Jonathan here. Some central bank governors presidents have the

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Speaker 1: luxury of taking some time to to settle in, find

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Speaker 1: a way around the offices, and find a way around

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Speaker 1: the various rooms down the hallway. M J. Pal Jerome Pale.

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Speaker 1: The Chairman of the Federal Reserve turns up at the FED,

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Speaker 1: and the market starts falling out of bed. How to

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Speaker 1: shoot the chairman? The new Chairman of the Federal Reserve

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Speaker 1: approach a situation like the one playing out before us, Well,

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Speaker 1: I think in the way that he has done. After Ay,

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Speaker 1: he's known for several months that he would become Chairman

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Speaker 1: of the Fed. He's been at the FED for several years.

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Speaker 1: He knows his way around, so he's been able to

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Speaker 1: think through how he would handle the first week or

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Speaker 1: a few weeks, and before long there'll be another meeting

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Speaker 1: of the f O m C and he will be

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Speaker 1: able to put across his views. Then, Governor, I'd like

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Speaker 1: to address something you've been thinking a lot about. And folks,

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Speaker 1: the history of this is back to mc chesney Martin

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Speaker 1: in ninety one, where the Chairman of the Fed really

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Speaker 1: went up against President Truman over the independence of a

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Speaker 1: central bank. We take that for granted now, Governor King,

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Speaker 1: and you suggest we should not how do we reassert

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Speaker 1: independence in any central bank and as well a central

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Speaker 1: bank and President Trump's Washington. So I think there are

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Speaker 1: two different dimensions to this. One is monetary policy and

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Speaker 1: the other is dealing with financial crises and in particular

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Speaker 1: problems in the banking system. I think on the first

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Speaker 1: the important thing is to keep educating the public as

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Speaker 1: a whole about the importance of price stability. It's very

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Speaker 1: easy for people to take low inflation for granted in need.

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Speaker 1: The phrase price stability was once defined as when people

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Speaker 1: stopped talking about inflation. But it's very important that they're

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Speaker 1: reminded of the dangers of going back to a world

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Speaker 1: of high inflation. So constantly explaining the remit and the

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Speaker 1: mandate of the central bank and why it needs to

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Speaker 1: be a set of decisions taken by a group of people,

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Speaker 1: not one person, but a group of people working together

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Speaker 1: independently from day to day political pressures is very important,

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Speaker 1: and I think that's the question of stating it as

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Speaker 1: well as making sure that's what happens. The second one

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Speaker 1: is I think more difficult, which is that in a

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Speaker 1: financial crisis, it's inevitable that the central bank will be

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Speaker 1: the source of liquidity to keep the economy funckoning, but

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Speaker 1: it should not be seen as providing that liquidity as

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Speaker 1: a favor to the banks. There has to be a

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Speaker 1: political agreement between Congress and said or between parliaments in

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Speaker 1: the Central Bank as to the circumstances and the terms

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Speaker 1: on which they will provide that liquidity. That is what

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Speaker 1: was missing during the last crisis, and it's what we

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Speaker 1: need to put in place now. You and I have

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Speaker 1: talked about your acclaimed speech in Scotland where you essentially

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Speaker 1: lectured the United Kingdom toward Badget and the idea that

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Speaker 1: there has to be a way to do this, a

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Speaker 1: modern Badget, if you would. Alan the late Allan Meltzer,

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Speaker 1: of course, has talked about this was some emotion. Are

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Speaker 1: we in a good place today? You know, to take

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Speaker 1: the present crisis. If we have the equity VALL slip

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Speaker 1: over into fixed income vall, are we in a place

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Speaker 1: where the proverbial discount window will be open? No, We're

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Speaker 1: not in a good place. One of the problems is

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Speaker 1: that the response of Congress to the last crisis, understandably so,

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Speaker 1: was to try to restrict the discretion of the Federal

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Speaker 1: Reserve in providing liquidity to institution and the market, and

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Speaker 1: I think that that is the wrong direction in which

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Speaker 1: to go. I think the Federal Reserve would have been

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Speaker 1: better served by being given the freedom to exercise that discretion,

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Speaker 1: but under a set of conditions which Congress had laid

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Speaker 1: down in advance, rather than simply limiting or preventing the

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Speaker 1: Fed from lending when it feels it's necessary to do

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Speaker 1: so in a crisis. So when the banks say they're

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Speaker 1: very well capitalized and they're much much stronger than they

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Speaker 1: were before, what do you say back to that, Well,

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Speaker 1: the banks are certainly better capitalized, particularly in the United

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Speaker 1: States and the United Kingdom, less well so in Europe.

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Speaker 1: So we ought to be concerned about whether problems in

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Speaker 1: the banking system elsewhere in the industrialized world could spill

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Speaker 1: over to our banks and our economy. But it's not

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Speaker 1: just the amount of equity capital which banks issue that

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Speaker 1: matter here. If people, for one reason or another lose

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Speaker 1: confidence in banks, or simply do not know whether banks

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Speaker 1: will be able to meet their liabilities, then the natural

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Speaker 1: thing is for people who provide short term credit to banks,

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Speaker 1: whether their retail depositors or wholesale depositors like hedge funds,

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Speaker 1: they may run for the exit, and we don't have

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Speaker 1: a system that will cope with a run on the

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Speaker 1: banking system short of the FED actually throwing large amounts

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Speaker 1: of money at it, and as I say, Congress has

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Speaker 1: been limiting the ability of the FAD to do that. Well.

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Speaker 1: The argument that's being perpetuated by the banks, obviously in

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Speaker 1: the United States and by others in Washington, d C.

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Speaker 1: As well, is that the regulatory rules post crisis, the

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Speaker 1: capital rules, have become a burden and that ultimately it's

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Speaker 1: stopped lending. That for some reason, these banks would have

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Speaker 1: been able to lend a whole lot more if they

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Speaker 1: didn't have these rules on them, and that business would

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Speaker 1: be a whole lot better. That's the argument coming from

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Speaker 1: this administration as well. To some extent, do you subscribe

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Speaker 1: to that argument, because I sense from listening to you

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Speaker 1: now you don't. But I have a sympathy with one

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Speaker 1: part of the argument. The regulatory system has become absurdly complex.

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Speaker 1: If you have a system that can only be described

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Speaker 1: in tens of thousands of pages, there is something really

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Speaker 1: wrong with it. And I think the attempt to put

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Speaker 1: in place so much detail in the regulation is an

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Speaker 1: attempt to prevent the last crisis happening. What we need

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Speaker 1: is something very simpler, much broad, broader bart brush, which

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Speaker 1: would both ensure that the leverage of the banks is

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Speaker 1: capped and ensure that we have a method for dealing

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Speaker 1: with bank runs if they were to occur. What we

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Speaker 1: don't want is a system of banking in which the

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Speaker 1: people who determine banking decisions are compliance officers. But then,

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Speaker 1: critically with this, what your comments Government, King are extraordinary,

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Speaker 1: They're very very timely and very very important. What does

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Speaker 1: the quote unquote next crisis look like to governor King

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Speaker 1: if it's not the last crisis? Well, I don't want

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Speaker 1: to speculate on what the next crisis will look like,

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Speaker 1: and we have no idea when it will come. But

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Speaker 1: the areas of a weakness in the current system are

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Speaker 1: really focused on the amount of debt that exists, not

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Speaker 1: just in the US and UK, but really across the

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Speaker 1: world as a whole. Debt in the private sector in

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Speaker 1: the world relative to GDP is higher now than it

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Speaker 1: was in two thousand and seven, and of course public

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Speaker 1: debt is even higher still. So what one might fear

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Speaker 1: would be that if there were defaults, not very many.

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Speaker 1: A few defaults where people then revised their view about

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Speaker 1: the value of assets on the balance sheets of financial

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Speaker 1: institutions and intermediaries around the world. Then you would find

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Speaker 1: that not only would the value of the assets go down,

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Speaker 1: but so with the value of the equity cushion available

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Speaker 1: to absorb losses. And that's the kind of thing that

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Speaker 1: can induce financial panic. Now I'm not saying it will happen.

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Speaker 1: It may never happen, but that is the area of

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Speaker 1: weakness that I would look to at present. This is

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Speaker 1: incredibly important. Comments from Irvin King Folks of course at university,

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Speaker 1: the former governor of the Bank of England. Why do

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Speaker 1: you bring in a really esteem guest from Washington, Mr

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Speaker 1: William Hogland. Yes, he is the senior vice president of

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Speaker 1: the Bi Partisan Policy Center, and that really just scratches

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Speaker 1: the surface of Mr Hogland's career in Washington and service

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Speaker 1: to the country. Formerly staff member director of the Senate

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Speaker 1: Budget Committee, reporting to former U S Senator Pete Dominici,

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Speaker 1: chairman ranking member, and he's really an expert when all

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Speaker 1: things related to Washington and the government. And he's also

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Speaker 1: a former attendee of the US Merchant Marine Academy. So um,

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Speaker 1: he knows a thing or two about the Jonesack. Mr Hoglan,

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Speaker 1: thank you very much for for being with us. I

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Speaker 1: just leave it open to you to to give us

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Speaker 1: your reaction to the back and forth the slanging match

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Speaker 1: that seems to be taking place on a regular basis

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Speaker 1: in Washington. Uh, do you believe that they people in Washington,

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Speaker 1: the politicians, do they recognize that every time they do this,

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Speaker 1: there is the level of a steam sinks lower. I

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Speaker 1: can't get much lower than it already is. I think

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Speaker 1: when you look at the ratings out there in terms

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Speaker 1: of Congress, they are at one of the lowest rates

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Speaker 1: they've ever been in terms of recording of that particular statistic.

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Speaker 1: So do they understand it? You would think they would

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Speaker 1: understand it. I think you understand. I think they now

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Speaker 1: understand that the last government shutdown that we went through

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Speaker 1: a few weeks ago here for three days is something

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Speaker 1: they do not want to go through again. And I

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Speaker 1: think you're hearing that both from the Democrats and the Republicans.

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Speaker 1: And I didn't hear it from the present yesterday, unfortunately,

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Speaker 1: but that definitely is UH an understanding that we don't

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Speaker 1: want to shut down over with. The difficulty here is,

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Speaker 1: of course, can they come to some sort of an agreement.

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Speaker 1: We're almost five five months into the current year and

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Speaker 1: we still haven't fixed and set what our spending should

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Speaker 1: be for the current year and continue to operate over

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Speaker 1: these things called continuing resolutions, which is not a way

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Speaker 1: to run government at all. Um and and quite interestingly enough,

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Speaker 1: come Monday, under the law, the president is to submit

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Speaker 1: his budget for the fiscal year that begins this October.

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Speaker 1: So we haven't even finished up the current year and

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Speaker 1: we're already starting to get into next year's budget process.

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Speaker 1: So it's a it's rather disappointing and uh and and

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Speaker 1: despairing on on the way our government is working today. Well,

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Speaker 1: in your thirty three years of federal government service, what

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Speaker 1: have is there something that you could impart to the

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Speaker 1: various participants in this drama that would lead us maybe

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Speaker 1: not to an agreement or some kind of uh compromise,

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Speaker 1: but some kind of amicable divorce. I mean, you know,

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Speaker 1: like actually maybe share the same kitchen but still be divorced. Well,

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Speaker 1: be nice, first of all, if they would work five

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Speaker 1: days a week instead of but basically three days. If

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Speaker 1: they would basically stay in town like everybody else does,

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Speaker 1: work a four hour work. We could a minimum and

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Speaker 1: be here throughout and get to know one another and

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Speaker 1: get to know them on an individual level. Democrats and Republicans.

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Speaker 1: It is something that we, uh, we really have lost

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Speaker 1: that kind of connection and getting to know the other person,

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Speaker 1: to know the other person's position, understand that we have

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Speaker 1: differences of opinions. Uh, it might be helpful, But more importantly,

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Speaker 1: it just seems to me that what we have to

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Speaker 1: understand you cannot do. You cannot govern in a country

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Speaker 1: that's as large as the United States, with as many

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Speaker 1: diverse views as we have out here in a in

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Speaker 1: a partisan way. It has to be a by no

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Speaker 1: surprise coming from the Bipartisan Policy Center that I would

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Speaker 1: say that the way you get things done is you

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Speaker 1: you comper Wise, I think Madison a head and mine

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Speaker 1: and uh uh or we just don't see the compromise

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Speaker 1: up there in the time that we've got left too

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Speaker 1: short a time, Mr Hogdon, We'll do a longer about soon.

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Speaker 1: Mr Madison did not know a trillion dollar deficit. What

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Speaker 1: does the phrase a trillion dollar deficit mean to William

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Speaker 1: Hoglan It's unbelievable. It's something that I would never have

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Speaker 1: expected we would ever see. It is something that creates

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Speaker 1: a high level of debt that is going to be

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Speaker 1: a pressure on future generations. It is attacks on future

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Speaker 1: generations which will lower the standard of living in the future.

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Speaker 1: That's what a tree and dollar deficit means to me today. Well,

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Speaker 1: thank you so much, William Hogan, way too short today,

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Speaker 1: uh joining us. He served in the Madison In administration

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Speaker 1: with Albert Gallaton. A few years ago. Bill Hoblan a

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Speaker 1: legend in Washington with his work, including with a senator

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Speaker 1: from Tennessee, Mr frist uh In. He is with by

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Speaker 1: Artisan Policy Center. I'd like to tell you this is

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Speaker 1: the most important interview of the day of it. Of

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Speaker 1: course I can't say that, and Mr Worther won't hang

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Speaker 1: up the phone because Mervin King was on and that's

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Speaker 1: an important interview. But everybody at Bloomberg Surveillance are huge. Hee.

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Speaker 1: What do we have a team? Is it like we're

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Speaker 1: up to forty two people? Is on the team? I

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Speaker 1: think it's forty two. That's just the people that opened

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Speaker 1: the door for me and get me lunch in that

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Speaker 1: hold the umbrella. Yes, very good. Anyways, they know I've

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Speaker 1: been a complete pain for forty hours saying get Stewart

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Speaker 1: war thero on joining us now from b MP Perry

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Speaker 1: BA and someone who writes abcusely professional derivative Greek symbol

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Speaker 1: lettered articles on volatility is the authority, Mr Stewart. Thank

431
00:23:57,400 --> 00:24:01,680
Speaker 1: you for taking your time away from b MP Perry duties.

432
00:24:01,760 --> 00:24:04,919
Speaker 1: What is the single thing you're writing this morning about

433
00:24:05,400 --> 00:24:10,320
Speaker 1: as you observe the VIX index? Tom, thank you very

434
00:24:10,400 --> 00:24:11,959
Speaker 1: much for having me on a pleasure to be here

435
00:24:12,000 --> 00:24:14,800
Speaker 1: and for the kind introduction. We put up a note

436
00:24:14,840 --> 00:24:18,720
Speaker 1: this morning, and I really I want to focus on

437
00:24:18,880 --> 00:24:23,240
Speaker 1: the fact that from here volatility is likely biased lower

438
00:24:23,440 --> 00:24:26,840
Speaker 1: rather than higher on a technical basis, and when talking

439
00:24:26,840 --> 00:24:30,360
Speaker 1: about the VIX complex, I think there's been some misunderstanding

440
00:24:30,400 --> 00:24:33,399
Speaker 1: in the market as far as what does that lead misunderstanding?

441
00:24:34,680 --> 00:24:36,640
Speaker 1: You know, I think people are looking at the vix

442
00:24:36,680 --> 00:24:40,840
Speaker 1: e TV products the headlines around those, because they're you know,

443
00:24:41,119 --> 00:24:45,800
Speaker 1: highly observable and well known and observable in financial press.

444
00:24:45,800 --> 00:24:49,520
Speaker 1: But really the the dislocation is in the VIX spot index,

445
00:24:50,080 --> 00:24:53,239
Speaker 1: which is really true a reflection of the cost of

446
00:24:54,400 --> 00:24:57,399
Speaker 1: SMP options on a third day maturity, So it's the

447
00:24:57,520 --> 00:25:00,800
Speaker 1: SMP options themselves in the front rather the VIX futures

448
00:25:00,840 --> 00:25:03,560
Speaker 1: which drive these products. That where we see the real

449
00:25:03,560 --> 00:25:06,240
Speaker 1: trigger of the dislocation and see the current opportunity in

450
00:25:06,240 --> 00:25:10,520
Speaker 1: the market. The the the spot market, the present market has,

451
00:25:10,560 --> 00:25:14,880
Speaker 1: the carnage of the credit sweez product, the number of product, etcetera, etcetera, etcetera.

452
00:25:15,359 --> 00:25:18,600
Speaker 1: What did the future pricings of the VIX tell you?

453
00:25:19,960 --> 00:25:23,199
Speaker 1: So we see that at the the cash fix is

454
00:25:23,240 --> 00:25:26,080
Speaker 1: trading above the future levels. The curve is inverted, and

455
00:25:26,119 --> 00:25:28,080
Speaker 1: so really what the market is telling you is that

456
00:25:28,080 --> 00:25:31,119
Speaker 1: there's volatility now, but we're expecting a version in the future.

457
00:25:31,600 --> 00:25:35,440
Speaker 1: And you know, I think the positioning has changed dramatically, um.

458
00:25:35,480 --> 00:25:38,720
Speaker 1: As I said when we had that discussion yesterday morning

459
00:25:38,720 --> 00:25:41,919
Speaker 1: on your show, the you know, there were large inflows

460
00:25:42,080 --> 00:25:46,280
Speaker 1: into UH exchange traded products that were short volatility on Friday.

461
00:25:46,680 --> 00:25:50,879
Speaker 1: Those essentially those flows of those positions were unwound, and

462
00:25:50,920 --> 00:25:53,120
Speaker 1: now we actually see that the market is very long VIX.

463
00:25:53,640 --> 00:25:56,200
Speaker 1: So if anything, it's suggesting that the market is actually

464
00:25:56,200 --> 00:25:58,479
Speaker 1: well hedged at this point. Um I would say, as

465
00:25:58,520 --> 00:26:02,120
Speaker 1: far as flows that we've seen, um, they've been primarily

466
00:26:02,160 --> 00:26:05,399
Speaker 1: unwinding of hedges, which is really constructive, and it seems

467
00:26:05,400 --> 00:26:08,320
Speaker 1: that the market is now at least anticipating that the

468
00:26:08,359 --> 00:26:11,160
Speaker 1: worst is over. Shout out to my colleague Carl Rica Donna.

469
00:26:11,240 --> 00:26:14,040
Speaker 1: We make jokes about aerospace that we end up looking

470
00:26:14,080 --> 00:26:16,640
Speaker 1: at the Greek letter theta, which is the time function.

471
00:26:17,000 --> 00:26:20,520
Speaker 1: Stewart Orther, you look at alphabeta, gamma, the acceleration of

472
00:26:20,560 --> 00:26:24,040
Speaker 1: all these trends and other Greek soup, vega, etcetera. If

473
00:26:24,080 --> 00:26:27,320
Speaker 1: I look at theta out the X axis. There's a

474
00:26:27,320 --> 00:26:31,000
Speaker 1: belief that if you have a stochastic spike in VIX

475
00:26:31,560 --> 00:26:36,560
Speaker 1: and it come back down, it dampens out over days, weeks,

476
00:26:36,840 --> 00:26:39,720
Speaker 1: or even months. Do you have a sense of when

477
00:26:39,880 --> 00:26:44,080
Speaker 1: VIX dampens back to normal? Is it's six weeks out?

478
00:26:44,560 --> 00:26:49,520
Speaker 1: Is that this Friday? When would that be? So? I

479
00:26:49,560 --> 00:26:52,440
Speaker 1: think this is an interesting question because what we saw

480
00:26:52,480 --> 00:26:57,720
Speaker 1: in was any VIC spike was immediately followed by a

481
00:26:57,880 --> 00:27:01,200
Speaker 1: reversion back to extremely low levels. Solve you know cinematic

482
00:27:01,240 --> 00:27:06,119
Speaker 1: volatility sellers that looked at this market which was auto

483
00:27:06,160 --> 00:27:09,199
Speaker 1: realizing at low levels and would sell into any of

484
00:27:09,200 --> 00:27:11,760
Speaker 1: those rallies. Now I think it's different. We're going to

485
00:27:11,760 --> 00:27:14,480
Speaker 1: see a reversion back to a lower level. UM, but

486
00:27:14,640 --> 00:27:17,120
Speaker 1: it's not going to happen as quickly because I think

487
00:27:17,320 --> 00:27:20,439
Speaker 1: a number of market participants of now, UM, you know,

488
00:27:20,520 --> 00:27:23,080
Speaker 1: experience what we would call of our shock in the

489
00:27:23,119 --> 00:27:26,120
Speaker 1: sense that case scenario happened. You don't go right back

490
00:27:26,160 --> 00:27:28,159
Speaker 1: in after that, UM, if you were at least in

491
00:27:28,200 --> 00:27:30,560
Speaker 1: that positioning before you know. This is the critical point,

492
00:27:30,600 --> 00:27:32,199
Speaker 1: folks and Stewart. I don't want to get you in

493
00:27:32,240 --> 00:27:34,400
Speaker 1: trouble with your general counsel. So if you don't want

494
00:27:34,400 --> 00:27:37,160
Speaker 1: to answer it, fine. What you just heard their, folks,

495
00:27:37,240 --> 00:27:40,720
Speaker 1: is the pro analysis at this time is different. There's

496
00:27:40,760 --> 00:27:44,119
Speaker 1: been the var value at risk shock where the legal

497
00:27:44,200 --> 00:27:46,320
Speaker 1: types are gonna say, no, you can't do that. You

498
00:27:46,359 --> 00:27:50,080
Speaker 1: can't reinstitute those habits that lead to the spike up,

499
00:27:50,119 --> 00:27:55,280
Speaker 1: spike down. Fine, how does that translate over to other

500
00:27:55,520 --> 00:28:00,760
Speaker 1: asset classes away from equity dynamics? Are there the police

501
00:28:01,440 --> 00:28:04,760
Speaker 1: gonna say, we had a var shock and equities, so

502
00:28:04,800 --> 00:28:07,679
Speaker 1: we're going to change our behavior in the hedging and

503
00:28:07,720 --> 00:28:12,119
Speaker 1: derivative structure of fixed income markets, foreign exchange and foreign

504
00:28:12,160 --> 00:28:16,080
Speaker 1: exchange markets as well. So this is really one of

505
00:28:16,119 --> 00:28:18,600
Speaker 1: the interesting parts about the sellout that we saw, which

506
00:28:18,640 --> 00:28:20,720
Speaker 1: was that you know, all the all those treasuries and

507
00:28:20,800 --> 00:28:22,960
Speaker 1: you know rates broadly have been selling off over the

508
00:28:23,080 --> 00:28:27,480
Speaker 1: last few weeks. The uh, you know, the market moves

509
00:28:27,480 --> 00:28:33,240
Speaker 1: and equities were enormously larger in relative magnitude terms versus

510
00:28:33,240 --> 00:28:36,040
Speaker 1: other asset classes um. And one of the things that

511
00:28:36,720 --> 00:28:39,560
Speaker 1: we had noted was putting pressure on the SMP ball

512
00:28:39,600 --> 00:28:44,560
Speaker 1: complex last year was really selling from other types of investors,

513
00:28:44,600 --> 00:28:48,960
Speaker 1: such as fixed income investors. Selling equity volatility realizing that

514
00:28:49,000 --> 00:28:52,440
Speaker 1: it prevents potentially was a better risk reward at the time,

515
00:28:52,880 --> 00:28:55,680
Speaker 1: um than selling fixed income volatility, and same thing with

516
00:28:55,760 --> 00:28:58,360
Speaker 1: FX for that matter. So um, you know, I think

517
00:28:58,360 --> 00:29:02,280
Speaker 1: there was a prolifer ration of cross asset volatility trading

518
00:29:02,360 --> 00:29:06,480
Speaker 1: last year that might not return to normal as investors

519
00:29:06,480 --> 00:29:08,720
Speaker 1: look back to their own asset classes and play it

520
00:29:08,760 --> 00:29:11,320
Speaker 1: a little closer to home from here, What will you

521
00:29:11,440 --> 00:29:14,400
Speaker 1: do here? What will you what? What is the trade

522
00:29:14,760 --> 00:29:19,400
Speaker 1: recommendation as we go from ten to five zero four

523
00:29:19,480 --> 00:29:23,480
Speaker 1: point three standard deviation move back down to under two

524
00:29:23,520 --> 00:29:27,200
Speaker 1: standard deviations twenty four point six nine on the VIX?

525
00:29:27,320 --> 00:29:31,560
Speaker 1: What is the to do list for Stewart warther So

526
00:29:31,680 --> 00:29:35,640
Speaker 1: we actually looked into a few different scenarios, UM. And

527
00:29:36,040 --> 00:29:38,000
Speaker 1: if we look at history and use that as a guide,

528
00:29:38,080 --> 00:29:42,120
Speaker 1: we find that when the SMP declines by oversea in

529
00:29:42,120 --> 00:29:45,400
Speaker 1: a current week, then it actually tends to his historically

530
00:29:45,400 --> 00:29:47,760
Speaker 1: bounced back in the following week. However, when an event

531
00:29:47,880 --> 00:29:52,160
Speaker 1: like Monday happens over the preceding or the following month,

532
00:29:52,800 --> 00:29:55,520
Speaker 1: it's really split fifty fifty as far as what the

533
00:29:55,520 --> 00:29:58,720
Speaker 1: spot market does, what the price of stocks do? UM.

534
00:29:58,800 --> 00:30:04,040
Speaker 1: You know, I I think the more obvious implementation, or

535
00:30:04,360 --> 00:30:07,200
Speaker 1: the more obvious answer to this is, you know, it

536
00:30:07,280 --> 00:30:10,840
Speaker 1: seems that because of the unwind in some of the

537
00:30:10,920 --> 00:30:14,280
Speaker 1: volatility space, that we would see vicked futures biased to

538
00:30:14,320 --> 00:30:16,719
Speaker 1: the downside, and that we would see vall under pressure

539
00:30:16,760 --> 00:30:21,720
Speaker 1: as opposed to the stock market rallying back to its priory.

540
00:30:22,240 --> 00:30:25,840
Speaker 1: No go ahead, No, I would say that. I think

541
00:30:25,880 --> 00:30:28,640
Speaker 1: this is the million dollar question and the thing that

542
00:30:28,720 --> 00:30:31,239
Speaker 1: a lot of our institutional investors are probably grappling right now,

543
00:30:31,240 --> 00:30:33,840
Speaker 1: which is does it all normalize or does the spot

544
00:30:33,840 --> 00:30:36,200
Speaker 1: market go back to where it was, or even PIM,

545
00:30:36,200 --> 00:30:41,680
Speaker 1: does VOLL normalize or leak over to other asset classes.

546
00:30:41,800 --> 00:30:45,280
Speaker 1: Most of our interviewers say, no, that will not happen.

547
00:30:46,080 --> 00:30:47,600
Speaker 1: Well you want to jump in, Yeah, well let me

548
00:30:47,600 --> 00:30:49,320
Speaker 1: have a Greek letter you'd like. Do you want to

549
00:30:49,320 --> 00:30:52,000
Speaker 1: talk about me? No, I was gonna do critosis, but

550
00:30:52,040 --> 00:30:57,680
Speaker 1: I'm not going to start. Stewart helped me here. Just

551
00:30:57,720 --> 00:31:01,800
Speaker 1: to simplify this, is it possible that what happens is

552
00:31:01,840 --> 00:31:04,080
Speaker 1: the same thing that happens all the time? You have

553
00:31:04,480 --> 00:31:09,800
Speaker 1: institutions or smart investors who use a product to hedge

554
00:31:10,000 --> 00:31:14,800
Speaker 1: a position, and then that hedge looks profitable and then

555
00:31:14,840 --> 00:31:17,960
Speaker 1: they turn that hedge into something that is designed to

556
00:31:18,040 --> 00:31:23,880
Speaker 1: actually pay the money. Is that what happened? Yeah? I

557
00:31:24,240 --> 00:31:26,520
Speaker 1: would I would answer it this way, which is that

558
00:31:28,520 --> 00:31:32,280
Speaker 1: volatility tends to trade at a premium because you know,

559
00:31:32,360 --> 00:31:35,959
Speaker 1: generally there are it is a cartotic asset which involves

560
00:31:36,000 --> 00:31:39,560
Speaker 1: a number of spikes. Generally people are compensate thus have

561
00:31:39,680 --> 00:31:43,200
Speaker 1: to be compensated for selling options. But you know, as

562
00:31:43,200 --> 00:31:45,840
Speaker 1: far as the use of options, I think there are

563
00:31:45,840 --> 00:31:48,880
Speaker 1: a number of uses both for hedging and for um,

564
00:31:48,960 --> 00:31:51,440
Speaker 1: you know, for instance, premium at risk only long investing,

565
00:31:51,440 --> 00:31:55,040
Speaker 1: as well such as a call replacement. So um. The

566
00:31:55,120 --> 00:31:58,520
Speaker 1: interesting market change though, and this I think that someone

567
00:31:58,520 --> 00:32:03,560
Speaker 1: answers your question has been with yields extremely low. We're

568
00:32:03,560 --> 00:32:06,880
Speaker 1: in an environment where people are seeking yield. When volatility

569
00:32:06,920 --> 00:32:10,440
Speaker 1: is low, a yields are low, then selling options creates

570
00:32:10,440 --> 00:32:14,600
Speaker 1: another form of yield enhancement, either through underwriting or call overwriting.

571
00:32:14,600 --> 00:32:18,120
Speaker 1: It now, um, those strategies have worked extremely well. So

572
00:32:18,280 --> 00:32:20,680
Speaker 1: the fact that you know we have a one or

573
00:32:20,840 --> 00:32:23,200
Speaker 1: you know a few day market moved to the downside, doesn't,

574
00:32:23,600 --> 00:32:27,760
Speaker 1: you know, um, nullify gains in those types of strategies

575
00:32:27,800 --> 00:32:29,760
Speaker 1: that have occurred over the past number of years that

576
00:32:29,800 --> 00:32:31,960
Speaker 1: have been extremely profitable. But I think it makes people

577
00:32:32,000 --> 00:32:34,840
Speaker 1: more cautious about and going forward. Thank you so much, Stuart.

578
00:32:34,880 --> 00:32:38,160
Speaker 1: Whether greatly appreciate time out from your BMP Perry bod Day.

579
00:32:38,320 --> 00:32:40,760
Speaker 1: Maybe you look forward to speaking to you later this

580
00:32:40,840 --> 00:32:48,680
Speaker 1: week or into next week. Thanks for listening to the

581
00:32:48,680 --> 00:32:55,200
Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,

582
00:32:55,560 --> 00:32:59,719
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at

583
00:33:00,000 --> 00:33:04,080
Speaker 1: I'm keen before the podcast, you can always catch us worldwide.

584
00:33:04,520 --> 00:33:05,600
Speaker 1: I'm Bloomberg Radio