Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom keene Jeleye.
Speaker 1: We bring you insight from the best in economics, finance,
Speaker 1: investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com and of course on the Bloomberg to
Speaker 1: run you through the market action and what action we
Speaker 1: have seen over the last couple of days. I'm very
Speaker 1: pleased to say we've got a snack show right over
Speaker 1: all over again on are on Bloomberg Surveillance, including Mark Chandler,
Speaker 1: Brown Brothers, harrim and global head of Currency Strategy Kit
Speaker 1: Jugs also joining us of soccer say as general Kit
Speaker 1: joining us from London. I want to begin with you, sir.
Speaker 1: An important note that came into my inbox from your
Speaker 1: south this morning. The addiction to low volatility perhaps bigger
Speaker 1: than the addiction to low rates. Let me throw a
Speaker 1: kit Well, it just strikes me that so that they're related,
Speaker 1: right This, this low interest rate regime we've been in
Speaker 1: since the Financial crisis, has has pushed money looking for
Speaker 1: yield either to be taking low volatility strategies, which meant
Speaker 1: for a long time buying things that were low in
Speaker 1: volatility and that suffered de volatility picked up across markets,
Speaker 1: so corporate bonds, high yield, easy examples of high yielding
Speaker 1: currencies and so on. And then clearly, you know, we
Speaker 1: have invented more and moderivatives that allow people to go
Speaker 1: short of volatility on a retail basis or on a
Speaker 1: wider basis than just outside you know, a few trading rooms.
Speaker 1: And and that's where some of the worst of the
Speaker 1: pain has been felt in this crisis. And I guess
Speaker 1: that's you know, it's an evolution of the market away
Speaker 1: from away from what we saw in two thousand and
Speaker 1: six seven um as as the as the financial bubble grew,
Speaker 1: when money was going into be um an addiction to
Speaker 1: low rate, but an addiction that came through in structured
Speaker 1: credit and through addiction into the into the property. Mark. Yeah,
Speaker 1: this feels different in that sense, Mark Chandler. At the moment,
Speaker 1: the volatility almost isolates its equity. Do you see it
Speaker 1: bleeding through to effex bleeding through to bonds, because that's
Speaker 1: not happening in the material way yet. Yeah. Partly it's
Speaker 1: what's happened is that the dollar has gotten stronger and
Speaker 1: the end has gotten strong. It's primarily because people are
Speaker 1: unwinding these positions where they've used the dollar in the
Speaker 1: end as a funding currency. But I'm not so sure
Speaker 1: that that this is that this is a big crisis
Speaker 1: or anything. I think most retail investors are not really
Speaker 1: involved with these vix plays. At the end of the day,
Speaker 1: I think that this is mostly a Wall Street sort
Speaker 1: of staring at its navel and not really looking at
Speaker 1: the bigger picture and the bigger pictures. Essentially, this emerging
Speaker 1: markets were was up about thirty three percent last year.
Speaker 1: There's still up on the year now. The US stock
Speaker 1: market many people like myself, including some feed officials, dot
Speaker 1: the stock market was elevated and where are we now
Speaker 1: basically where we were at the end of say, early January.
Speaker 1: I think that this is uh, this is grossly exaggerated.
Speaker 1: The economic impact grosly exaggerated. Like I say, I think
Speaker 1: that it hasn't really been a spill over and economic issues. Well,
Speaker 1: I have to say, Mark, I haven't heard an exaggeration
Speaker 1: on the economic issues, and I haven't heard an exaggeration
Speaker 1: from the bulk of the people I've spoken to either
Speaker 1: on the spillover effect. Let's be clear though, this isn't
Speaker 1: an exaggeration When we talk about a key trade last year,
Speaker 1: which was short volt blowing up. The short vault trade
Speaker 1: has blown up. Now we can talk about what that means,
Speaker 1: the spillover effects. But I don't think it's an exaggeration
Speaker 1: to sit here and say that a lot of investors
Speaker 1: worldwide bet on an extended period of calm and that
Speaker 1: has ended. It's blown up in a significant white I'm
Speaker 1: actually sure that there's so many investors have been playing
Speaker 1: for this. For example, myself, what did I do? People
Speaker 1: like myself we've been buying throughout four one key equities.
Speaker 1: Is this a big skire for us? Are we playing
Speaker 1: low volatility as if it's going to last forever by
Speaker 1: being long starts and being longsome ets, we being long credit?
Speaker 1: Is it not an embedded low volatility trade? Being long
Speaker 1: e M? Is that not an embedded low volatility trade?
Speaker 1: Isn't When you project for low volatility, aren't you expecting
Speaker 1: to have risk assets like e M and credit outperfore
Speaker 1: Most people input low volunto that portfolios and expect credit,
Speaker 1: a M and other risk assets to out perform. Well,
Speaker 1: that's why I'm suggesting to you that despite this jump
Speaker 1: in VIX, the e M stocks are still up on
Speaker 1: the year. And when I did last year, you know,
Speaker 1: the Russell one thousand had Russell has a one thousand
Speaker 1: value index and I Rustle one thousand growth index last year.
Speaker 1: As you would imagine, the growth index well outperformed the
Speaker 1: value Last week, when the stock market began selling off,
Speaker 1: the growth index held up better than the value index.
Speaker 1: So I don't see this as some kind of big unworning.
Speaker 1: I've been quiet, folks, because I'm staring at my navel.
Speaker 1: That's what we're doing on I'm I'm, I'm I'm just
Speaker 1: staring there. Good morning everyone. Yesterday we need to say,
Speaker 1: we need to say thank you to the Bloomberg surveillance
Speaker 1: team for heroic work from Friday over to Monday and
Speaker 1: getting smart conversation on and we continue to drive that
Speaker 1: for this morning. I hate to say this, Kitchen, but
Speaker 1: I featured your research note this morning when you were
Speaker 1: not on. You'll get the royalty check. Uh and within
Speaker 1: that was wrong? Yen? How much stronger is strong? Yen?
Speaker 1: If for one O nine, one ten, can this be
Speaker 1: a news item from March or April? Well, I think
Speaker 1: the market is you know, the end is being kept
Speaker 1: deliberately at least ten per cent, about ten percent away
Speaker 1: from its fair value by the Bank of Japan's policies.
Speaker 1: That's what the e c D was doing to the
Speaker 1: Euro year ago. Um, and they mustn't papering under their breath.
Speaker 1: Last May we went, we started moving. The Bank of
Speaker 1: Japan is desperate to not let that happen, and I
Speaker 1: think the market can now see that. It can see
Speaker 1: that the Japanese economy is recovering and the end won't
Speaker 1: be able to stay this week forever in the middle
Speaker 1: with turmoil. UM. I think that at the bare minimum
Speaker 1: in the end is now in a lower range than
Speaker 1: it was, and it's still going to have to work
Speaker 1: flat out stop it appreciating tempercent. That was great. Kit
Speaker 1: didn't answer my question March end. Let me see if
Speaker 1: you can, what is the level where yen becomes stronger. Yeah,
Speaker 1: Kit talks about a new range and all the politics,
Speaker 1: but ken yen is the litmus paper of the flows system.
Speaker 1: Can it really go to some dramatic yen strength? Well,
Speaker 1: here's what I suspect is that is to say that
Speaker 1: I think the Japanese are willing to accept a stronger
Speaker 1: yen provided it takes place among a weaker dollar environment.
Speaker 1: More broadly, and it happens gradually, And so I think
Speaker 1: that the fact I don't I don't think you see
Speaker 1: the Japanese holding the yen down here, but I think
Speaker 1: that the Japanese are willing to accept a stronger yen
Speaker 1: partly to help the deflect some protectionist sentiment coming from
Speaker 1: the United States. As you know, Japan has a large
Speaker 1: and growing current account surplus, which antagonizes some people in
Speaker 1: the administration. So I'll take issue with whether they are
Speaker 1: accepting a stronger yen, and the reason being, if they
Speaker 1: are going to accept a stronger yen, are they willing
Speaker 1: to accept higher yields? And it's quite clear to me
Speaker 1: that they're not. They're trying to camp the Japanese ten
Speaker 1: year just ten basis points mark, and what we saw
Speaker 1: last week, as soon as there was any kind of
Speaker 1: volatility um rates, any kind of pickup in yields, guess
Speaker 1: what the b RJ got aggressive. Again, Let's just assume
Speaker 1: they are willing to accept the stronger yen. Are they
Speaker 1: willing to accept high yields? I say so, I agree
Speaker 1: with you that they pushed back quickly when the yields
Speaker 1: hit their target. And that is to say that the Japanese.
Speaker 1: I think a lot of people are confused the Japanese policy.
Speaker 1: It's not just qualitative quantitative easy anymore, but this yield
Speaker 1: curve control, which requires him to buy fewer bonds. So
Speaker 1: I don't acceptably the fact that they tapered last year
Speaker 1: because the balance sheet only expanded by forty trillion yen
Speaker 1: instead of instead of eighty trillion yen. So but my
Speaker 1: thinking is goes along these lines, is that the Japanese
Speaker 1: are willing to accept. I mean, look what's happened. The
Speaker 1: dollars strengthened, excuse me, the dollar weekend most of last year,
Speaker 1: the yen strength, and they didn't protest that. And so
Speaker 1: I think that that's what I mean by willing to
Speaker 1: accept the especially in the context of a wider move
Speaker 1: in the foreign exchange market. Kit Jukes, before we let
Speaker 1: you run off to your afternoon and suck, and he's
Speaker 1: working to suck John, Afternoon, John, this is like you
Speaker 1: know two. You know, he's an expert action in French parades.
Speaker 1: We'll get him in touch with the president, Kit Jukes.
Speaker 1: When when I look at yields coming in two basis
Speaker 1: points today, two year in two basis points, ten year
Speaker 1: into thirty year bounds three basis points as well. What
Speaker 1: does that signal to you? Lower yields this morning. I
Speaker 1: think it signals to me that once we've given the
Speaker 1: market a bit of a bit of a shock, but
Speaker 1: there are still buyers. There are still buyers out there
Speaker 1: for the fixed in market. That people have seen a
Speaker 1: bad inflation number, they've seen some volatility, you know that
Speaker 1: they they've got themselves a little bit alarmed, but that
Speaker 1: at the end of the day that there were buyers
Speaker 1: above two eighty and tenure notes, they'll be buyers and
Speaker 1: there'll be a lot of buyers at three or five.
Speaker 1: And I just think we might have to see the
Speaker 1: other side of three three defend at some point in
Speaker 1: terms I doubt. Okay, that's the end of the year. Kid,
Speaker 1: John Ferris my name, I'm flustered. You're forgetting in, John.
Speaker 1: This is great when we have kit Chicks and Mark
Speaker 1: Chandler around and it's fantastic to get that real perspective
Speaker 1: and they're unspending the sex market, are they friends? Okay? Alright?
Speaker 1: Kit Chicks is state General, We've gotta let you go, sir.
Speaker 1: Thank you very much for giving its your time without questioning.
Speaker 1: Our interview of the day always timely with a former
Speaker 1: Governor of the Bank of England, but nevermore so with
Speaker 1: a terrific news slow Governor, King, wonderful to speak to
Speaker 1: you again. And I noticed, Governor that Chery Yelling has
Speaker 1: been relegated in a fashion off the Fed is Aston
Speaker 1: Villa was relegated out of the Premier League two years
Speaker 1: are about to come back into the Premier League. Will
Speaker 1: enjoy her retirement? Well we will see, but we know
Speaker 1: for certain she's been relegated. What was the pressure on
Speaker 1: you when you were relegated out of the Bank of England?
Speaker 1: How do you keep quiet the first weeks after your
Speaker 1: life changes. I think the first thing you want to
Speaker 1: do when you leave the Bank of England or indeed
Speaker 1: the Fed, is to have a break on a holiday
Speaker 1: and get away from it all, and then gradually to
Speaker 1: adjust to a new lifestyle. But do not rush to
Speaker 1: decide what you want to do next. It took me
Speaker 1: nine months to decide what I wanted to do next, Governor,
Speaker 1: King Jonathan here. Some central bank governors presidents have the
Speaker 1: luxury of taking some time to to settle in, find
Speaker 1: a way around the offices, and find a way around
Speaker 1: the various rooms down the hallway. M J. Pal Jerome Pale.
Speaker 1: The Chairman of the Federal Reserve turns up at the FED,
Speaker 1: and the market starts falling out of bed. How to
Speaker 1: shoot the chairman? The new Chairman of the Federal Reserve
Speaker 1: approach a situation like the one playing out before us, Well,
Speaker 1: I think in the way that he has done. After Ay,
Speaker 1: he's known for several months that he would become Chairman
Speaker 1: of the Fed. He's been at the FED for several years.
Speaker 1: He knows his way around, so he's been able to
Speaker 1: think through how he would handle the first week or
Speaker 1: a few weeks, and before long there'll be another meeting
Speaker 1: of the f O m C and he will be
Speaker 1: able to put across his views. Then, Governor, I'd like
Speaker 1: to address something you've been thinking a lot about. And folks,
Speaker 1: the history of this is back to mc chesney Martin
Speaker 1: in ninety one, where the Chairman of the Fed really
Speaker 1: went up against President Truman over the independence of a
Speaker 1: central bank. We take that for granted now, Governor King,
Speaker 1: and you suggest we should not how do we reassert
Speaker 1: independence in any central bank and as well a central
Speaker 1: bank and President Trump's Washington. So I think there are
Speaker 1: two different dimensions to this. One is monetary policy and
Speaker 1: the other is dealing with financial crises and in particular
Speaker 1: problems in the banking system. I think on the first
Speaker 1: the important thing is to keep educating the public as
Speaker 1: a whole about the importance of price stability. It's very
Speaker 1: easy for people to take low inflation for granted in need.
Speaker 1: The phrase price stability was once defined as when people
Speaker 1: stopped talking about inflation. But it's very important that they're
Speaker 1: reminded of the dangers of going back to a world
Speaker 1: of high inflation. So constantly explaining the remit and the
Speaker 1: mandate of the central bank and why it needs to
Speaker 1: be a set of decisions taken by a group of people,
Speaker 1: not one person, but a group of people working together
Speaker 1: independently from day to day political pressures is very important,
Speaker 1: and I think that's the question of stating it as
Speaker 1: well as making sure that's what happens. The second one
Speaker 1: is I think more difficult, which is that in a
Speaker 1: financial crisis, it's inevitable that the central bank will be
Speaker 1: the source of liquidity to keep the economy funckoning, but
Speaker 1: it should not be seen as providing that liquidity as
Speaker 1: a favor to the banks. There has to be a
Speaker 1: political agreement between Congress and said or between parliaments in
Speaker 1: the Central Bank as to the circumstances and the terms
Speaker 1: on which they will provide that liquidity. That is what
Speaker 1: was missing during the last crisis, and it's what we
Speaker 1: need to put in place now. You and I have
Speaker 1: talked about your acclaimed speech in Scotland where you essentially
Speaker 1: lectured the United Kingdom toward Badget and the idea that
Speaker 1: there has to be a way to do this, a
Speaker 1: modern Badget, if you would. Alan the late Allan Meltzer,
Speaker 1: of course, has talked about this was some emotion. Are
Speaker 1: we in a good place today? You know, to take
Speaker 1: the present crisis. If we have the equity VALL slip
Speaker 1: over into fixed income vall, are we in a place
Speaker 1: where the proverbial discount window will be open? No, We're
Speaker 1: not in a good place. One of the problems is
Speaker 1: that the response of Congress to the last crisis, understandably so,
Speaker 1: was to try to restrict the discretion of the Federal
Speaker 1: Reserve in providing liquidity to institution and the market, and
Speaker 1: I think that that is the wrong direction in which
Speaker 1: to go. I think the Federal Reserve would have been
Speaker 1: better served by being given the freedom to exercise that discretion,
Speaker 1: but under a set of conditions which Congress had laid
Speaker 1: down in advance, rather than simply limiting or preventing the
Speaker 1: Fed from lending when it feels it's necessary to do
Speaker 1: so in a crisis. So when the banks say they're
Speaker 1: very well capitalized and they're much much stronger than they
Speaker 1: were before, what do you say back to that, Well,
Speaker 1: the banks are certainly better capitalized, particularly in the United
Speaker 1: States and the United Kingdom, less well so in Europe.
Speaker 1: So we ought to be concerned about whether problems in
Speaker 1: the banking system elsewhere in the industrialized world could spill
Speaker 1: over to our banks and our economy. But it's not
Speaker 1: just the amount of equity capital which banks issue that
Speaker 1: matter here. If people, for one reason or another lose
Speaker 1: confidence in banks, or simply do not know whether banks
Speaker 1: will be able to meet their liabilities, then the natural
Speaker 1: thing is for people who provide short term credit to banks,
Speaker 1: whether their retail depositors or wholesale depositors like hedge funds,
Speaker 1: they may run for the exit, and we don't have
Speaker 1: a system that will cope with a run on the
Speaker 1: banking system short of the FED actually throwing large amounts
Speaker 1: of money at it, and as I say, Congress has
Speaker 1: been limiting the ability of the FAD to do that. Well.
Speaker 1: The argument that's being perpetuated by the banks, obviously in
Speaker 1: the United States and by others in Washington, d C.
Speaker 1: As well, is that the regulatory rules post crisis, the
Speaker 1: capital rules, have become a burden and that ultimately it's
Speaker 1: stopped lending. That for some reason, these banks would have
Speaker 1: been able to lend a whole lot more if they
Speaker 1: didn't have these rules on them, and that business would
Speaker 1: be a whole lot better. That's the argument coming from
Speaker 1: this administration as well. To some extent, do you subscribe
Speaker 1: to that argument, because I sense from listening to you
Speaker 1: now you don't. But I have a sympathy with one
Speaker 1: part of the argument. The regulatory system has become absurdly complex.
Speaker 1: If you have a system that can only be described
Speaker 1: in tens of thousands of pages, there is something really
Speaker 1: wrong with it. And I think the attempt to put
Speaker 1: in place so much detail in the regulation is an
Speaker 1: attempt to prevent the last crisis happening. What we need
Speaker 1: is something very simpler, much broad, broader bart brush, which
Speaker 1: would both ensure that the leverage of the banks is
Speaker 1: capped and ensure that we have a method for dealing
Speaker 1: with bank runs if they were to occur. What we
Speaker 1: don't want is a system of banking in which the
Speaker 1: people who determine banking decisions are compliance officers. But then,
Speaker 1: critically with this, what your comments Government, King are extraordinary,
Speaker 1: They're very very timely and very very important. What does
Speaker 1: the quote unquote next crisis look like to governor King
Speaker 1: if it's not the last crisis? Well, I don't want
Speaker 1: to speculate on what the next crisis will look like,
Speaker 1: and we have no idea when it will come. But
Speaker 1: the areas of a weakness in the current system are
Speaker 1: really focused on the amount of debt that exists, not
Speaker 1: just in the US and UK, but really across the
Speaker 1: world as a whole. Debt in the private sector in
Speaker 1: the world relative to GDP is higher now than it
Speaker 1: was in two thousand and seven, and of course public
Speaker 1: debt is even higher still. So what one might fear
Speaker 1: would be that if there were defaults, not very many.
Speaker 1: A few defaults where people then revised their view about
Speaker 1: the value of assets on the balance sheets of financial
Speaker 1: institutions and intermediaries around the world. Then you would find
Speaker 1: that not only would the value of the assets go down,
Speaker 1: but so with the value of the equity cushion available
Speaker 1: to absorb losses. And that's the kind of thing that
Speaker 1: can induce financial panic. Now I'm not saying it will happen.
Speaker 1: It may never happen, but that is the area of
Speaker 1: weakness that I would look to at present. This is
Speaker 1: incredibly important. Comments from Irvin King Folks of course at university,
Speaker 1: the former governor of the Bank of England. Why do
Speaker 1: you bring in a really esteem guest from Washington, Mr
Speaker 1: William Hogland. Yes, he is the senior vice president of
Speaker 1: the Bi Partisan Policy Center, and that really just scratches
Speaker 1: the surface of Mr Hogland's career in Washington and service
Speaker 1: to the country. Formerly staff member director of the Senate
Speaker 1: Budget Committee, reporting to former U S Senator Pete Dominici,
Speaker 1: chairman ranking member, and he's really an expert when all
Speaker 1: things related to Washington and the government. And he's also
Speaker 1: a former attendee of the US Merchant Marine Academy. So um,
Speaker 1: he knows a thing or two about the Jonesack. Mr Hoglan,
Speaker 1: thank you very much for for being with us. I
Speaker 1: just leave it open to you to to give us
Speaker 1: your reaction to the back and forth the slanging match
Speaker 1: that seems to be taking place on a regular basis
Speaker 1: in Washington. Uh, do you believe that they people in Washington,
Speaker 1: the politicians, do they recognize that every time they do this,
Speaker 1: there is the level of a steam sinks lower. I
Speaker 1: can't get much lower than it already is. I think
Speaker 1: when you look at the ratings out there in terms
Speaker 1: of Congress, they are at one of the lowest rates
Speaker 1: they've ever been in terms of recording of that particular statistic.
Speaker 1: So do they understand it? You would think they would
Speaker 1: understand it. I think you understand. I think they now
Speaker 1: understand that the last government shutdown that we went through
Speaker 1: a few weeks ago here for three days is something
Speaker 1: they do not want to go through again. And I
Speaker 1: think you're hearing that both from the Democrats and the Republicans.
Speaker 1: And I didn't hear it from the present yesterday, unfortunately,
Speaker 1: but that definitely is UH an understanding that we don't
Speaker 1: want to shut down over with. The difficulty here is,
Speaker 1: of course, can they come to some sort of an agreement.
Speaker 1: We're almost five five months into the current year and
Speaker 1: we still haven't fixed and set what our spending should
Speaker 1: be for the current year and continue to operate over
Speaker 1: these things called continuing resolutions, which is not a way
Speaker 1: to run government at all. Um and and quite interestingly enough,
Speaker 1: come Monday, under the law, the president is to submit
Speaker 1: his budget for the fiscal year that begins this October.
Speaker 1: So we haven't even finished up the current year and
Speaker 1: we're already starting to get into next year's budget process.
Speaker 1: So it's a it's rather disappointing and uh and and
Speaker 1: despairing on on the way our government is working today. Well,
Speaker 1: in your thirty three years of federal government service, what
Speaker 1: have is there something that you could impart to the
Speaker 1: various participants in this drama that would lead us maybe
Speaker 1: not to an agreement or some kind of uh compromise,
Speaker 1: but some kind of amicable divorce. I mean, you know,
Speaker 1: like actually maybe share the same kitchen but still be divorced. Well,
Speaker 1: be nice, first of all, if they would work five
Speaker 1: days a week instead of but basically three days. If
Speaker 1: they would basically stay in town like everybody else does,
Speaker 1: work a four hour work. We could a minimum and
Speaker 1: be here throughout and get to know one another and
Speaker 1: get to know them on an individual level. Democrats and Republicans.
Speaker 1: It is something that we, uh, we really have lost
Speaker 1: that kind of connection and getting to know the other person,
Speaker 1: to know the other person's position, understand that we have
Speaker 1: differences of opinions. Uh, it might be helpful, But more importantly,
Speaker 1: it just seems to me that what we have to
Speaker 1: understand you cannot do. You cannot govern in a country
Speaker 1: that's as large as the United States, with as many
Speaker 1: diverse views as we have out here in a in
Speaker 1: a partisan way. It has to be a by no
Speaker 1: surprise coming from the Bipartisan Policy Center that I would
Speaker 1: say that the way you get things done is you
Speaker 1: you comper Wise, I think Madison a head and mine
Speaker 1: and uh uh or we just don't see the compromise
Speaker 1: up there in the time that we've got left too
Speaker 1: short a time, Mr Hogdon, We'll do a longer about soon.
Speaker 1: Mr Madison did not know a trillion dollar deficit. What
Speaker 1: does the phrase a trillion dollar deficit mean to William
Speaker 1: Hoglan It's unbelievable. It's something that I would never have
Speaker 1: expected we would ever see. It is something that creates
Speaker 1: a high level of debt that is going to be
Speaker 1: a pressure on future generations. It is attacks on future
Speaker 1: generations which will lower the standard of living in the future.
Speaker 1: That's what a tree and dollar deficit means to me today. Well,
Speaker 1: thank you so much, William Hogan, way too short today,
Speaker 1: uh joining us. He served in the Madison In administration
Speaker 1: with Albert Gallaton. A few years ago. Bill Hoblan a
Speaker 1: legend in Washington with his work, including with a senator
Speaker 1: from Tennessee, Mr frist uh In. He is with by
Speaker 1: Artisan Policy Center. I'd like to tell you this is
Speaker 1: the most important interview of the day of it. Of
Speaker 1: course I can't say that, and Mr Worther won't hang
Speaker 1: up the phone because Mervin King was on and that's
Speaker 1: an important interview. But everybody at Bloomberg Surveillance are huge. Hee.
Speaker 1: What do we have a team? Is it like we're
Speaker 1: up to forty two people? Is on the team? I
Speaker 1: think it's forty two. That's just the people that opened
Speaker 1: the door for me and get me lunch in that
Speaker 1: hold the umbrella. Yes, very good. Anyways, they know I've
Speaker 1: been a complete pain for forty hours saying get Stewart
Speaker 1: war thero on joining us now from b MP Perry
Speaker 1: BA and someone who writes abcusely professional derivative Greek symbol
Speaker 1: lettered articles on volatility is the authority, Mr Stewart. Thank
Speaker 1: you for taking your time away from b MP Perry duties.
Speaker 1: What is the single thing you're writing this morning about
Speaker 1: as you observe the VIX index? Tom, thank you very
Speaker 1: much for having me on a pleasure to be here
Speaker 1: and for the kind introduction. We put up a note
Speaker 1: this morning, and I really I want to focus on
Speaker 1: the fact that from here volatility is likely biased lower
Speaker 1: rather than higher on a technical basis, and when talking
Speaker 1: about the VIX complex, I think there's been some misunderstanding
Speaker 1: in the market as far as what does that lead misunderstanding?
Speaker 1: You know, I think people are looking at the vix
Speaker 1: e TV products the headlines around those, because they're you know,
Speaker 1: highly observable and well known and observable in financial press.
Speaker 1: But really the the dislocation is in the VIX spot index,
Speaker 1: which is really true a reflection of the cost of
Speaker 1: SMP options on a third day maturity, So it's the
Speaker 1: SMP options themselves in the front rather the VIX futures
Speaker 1: which drive these products. That where we see the real
Speaker 1: trigger of the dislocation and see the current opportunity in
Speaker 1: the market. The the the spot market, the present market has,
Speaker 1: the carnage of the credit sweez product, the number of product, etcetera, etcetera, etcetera.
Speaker 1: What did the future pricings of the VIX tell you?
Speaker 1: So we see that at the the cash fix is
Speaker 1: trading above the future levels. The curve is inverted, and
Speaker 1: so really what the market is telling you is that
Speaker 1: there's volatility now, but we're expecting a version in the future.
Speaker 1: And you know, I think the positioning has changed dramatically, um.
Speaker 1: As I said when we had that discussion yesterday morning
Speaker 1: on your show, the you know, there were large inflows
Speaker 1: into UH exchange traded products that were short volatility on Friday.
Speaker 1: Those essentially those flows of those positions were unwound, and
Speaker 1: now we actually see that the market is very long VIX.
Speaker 1: So if anything, it's suggesting that the market is actually
Speaker 1: well hedged at this point. Um I would say, as
Speaker 1: far as flows that we've seen, um, they've been primarily
Speaker 1: unwinding of hedges, which is really constructive, and it seems
Speaker 1: that the market is now at least anticipating that the
Speaker 1: worst is over. Shout out to my colleague Carl Rica Donna.
Speaker 1: We make jokes about aerospace that we end up looking
Speaker 1: at the Greek letter theta, which is the time function.
Speaker 1: Stewart Orther, you look at alphabeta, gamma, the acceleration of
Speaker 1: all these trends and other Greek soup, vega, etcetera. If
Speaker 1: I look at theta out the X axis. There's a
Speaker 1: belief that if you have a stochastic spike in VIX
Speaker 1: and it come back down, it dampens out over days, weeks,
Speaker 1: or even months. Do you have a sense of when
Speaker 1: VIX dampens back to normal? Is it's six weeks out?
Speaker 1: Is that this Friday? When would that be? So? I
Speaker 1: think this is an interesting question because what we saw
Speaker 1: in was any VIC spike was immediately followed by a
Speaker 1: reversion back to extremely low levels. Solve you know cinematic
Speaker 1: volatility sellers that looked at this market which was auto
Speaker 1: realizing at low levels and would sell into any of
Speaker 1: those rallies. Now I think it's different. We're going to
Speaker 1: see a reversion back to a lower level. UM, but
Speaker 1: it's not going to happen as quickly because I think
Speaker 1: a number of market participants of now, UM, you know,
Speaker 1: experience what we would call of our shock in the
Speaker 1: sense that case scenario happened. You don't go right back
Speaker 1: in after that, UM, if you were at least in
Speaker 1: that positioning before you know. This is the critical point,
Speaker 1: folks and Stewart. I don't want to get you in
Speaker 1: trouble with your general counsel. So if you don't want
Speaker 1: to answer it, fine. What you just heard their, folks,
Speaker 1: is the pro analysis at this time is different. There's
Speaker 1: been the var value at risk shock where the legal
Speaker 1: types are gonna say, no, you can't do that. You
Speaker 1: can't reinstitute those habits that lead to the spike up,
Speaker 1: spike down. Fine, how does that translate over to other
Speaker 1: asset classes away from equity dynamics? Are there the police
Speaker 1: gonna say, we had a var shock and equities, so
Speaker 1: we're going to change our behavior in the hedging and
Speaker 1: derivative structure of fixed income markets, foreign exchange and foreign
Speaker 1: exchange markets as well. So this is really one of
Speaker 1: the interesting parts about the sellout that we saw, which
Speaker 1: was that you know, all the all those treasuries and
Speaker 1: you know rates broadly have been selling off over the
Speaker 1: last few weeks. The uh, you know, the market moves
Speaker 1: and equities were enormously larger in relative magnitude terms versus
Speaker 1: other asset classes um. And one of the things that
Speaker 1: we had noted was putting pressure on the SMP ball
Speaker 1: complex last year was really selling from other types of investors,
Speaker 1: such as fixed income investors. Selling equity volatility realizing that
Speaker 1: it prevents potentially was a better risk reward at the time,
Speaker 1: um than selling fixed income volatility, and same thing with
Speaker 1: FX for that matter. So um, you know, I think
Speaker 1: there was a prolifer ration of cross asset volatility trading
Speaker 1: last year that might not return to normal as investors
Speaker 1: look back to their own asset classes and play it
Speaker 1: a little closer to home from here, What will you
Speaker 1: do here? What will you what? What is the trade
Speaker 1: recommendation as we go from ten to five zero four
Speaker 1: point three standard deviation move back down to under two
Speaker 1: standard deviations twenty four point six nine on the VIX?
Speaker 1: What is the to do list for Stewart warther So
Speaker 1: we actually looked into a few different scenarios, UM. And
Speaker 1: if we look at history and use that as a guide,
Speaker 1: we find that when the SMP declines by oversea in
Speaker 1: a current week, then it actually tends to his historically
Speaker 1: bounced back in the following week. However, when an event
Speaker 1: like Monday happens over the preceding or the following month,
Speaker 1: it's really split fifty fifty as far as what the
Speaker 1: spot market does, what the price of stocks do? UM.
Speaker 1: You know, I I think the more obvious implementation, or
Speaker 1: the more obvious answer to this is, you know, it
Speaker 1: seems that because of the unwind in some of the
Speaker 1: volatility space, that we would see vicked futures biased to
Speaker 1: the downside, and that we would see vall under pressure
Speaker 1: as opposed to the stock market rallying back to its priory.
Speaker 1: No go ahead, No, I would say that. I think
Speaker 1: this is the million dollar question and the thing that
Speaker 1: a lot of our institutional investors are probably grappling right now,
Speaker 1: which is does it all normalize or does the spot
Speaker 1: market go back to where it was, or even PIM,
Speaker 1: does VOLL normalize or leak over to other asset classes.
Speaker 1: Most of our interviewers say, no, that will not happen.
Speaker 1: Well you want to jump in, Yeah, well let me
Speaker 1: have a Greek letter you'd like. Do you want to
Speaker 1: talk about me? No, I was gonna do critosis, but
Speaker 1: I'm not going to start. Stewart helped me here. Just
Speaker 1: to simplify this, is it possible that what happens is
Speaker 1: the same thing that happens all the time? You have
Speaker 1: institutions or smart investors who use a product to hedge
Speaker 1: a position, and then that hedge looks profitable and then
Speaker 1: they turn that hedge into something that is designed to
Speaker 1: actually pay the money. Is that what happened? Yeah? I
Speaker 1: would I would answer it this way, which is that
Speaker 1: volatility tends to trade at a premium because you know,
Speaker 1: generally there are it is a cartotic asset which involves
Speaker 1: a number of spikes. Generally people are compensate thus have
Speaker 1: to be compensated for selling options. But you know, as
Speaker 1: far as the use of options, I think there are
Speaker 1: a number of uses both for hedging and for um,
Speaker 1: you know, for instance, premium at risk only long investing,
Speaker 1: as well such as a call replacement. So um. The
Speaker 1: interesting market change though, and this I think that someone
Speaker 1: answers your question has been with yields extremely low. We're
Speaker 1: in an environment where people are seeking yield. When volatility
Speaker 1: is low, a yields are low, then selling options creates
Speaker 1: another form of yield enhancement, either through underwriting or call overwriting.
Speaker 1: It now, um, those strategies have worked extremely well. So
Speaker 1: the fact that you know we have a one or
Speaker 1: you know a few day market moved to the downside, doesn't,
Speaker 1: you know, um, nullify gains in those types of strategies
Speaker 1: that have occurred over the past number of years that
Speaker 1: have been extremely profitable. But I think it makes people
Speaker 1: more cautious about and going forward. Thank you so much, Stuart.
Speaker 1: Whether greatly appreciate time out from your BMP Perry bod Day.
Speaker 1: Maybe you look forward to speaking to you later this
Speaker 1: week or into next week. Thanks for listening to the
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