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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.

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Speaker 2: I'm Tracy Alloway.

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Speaker 3: And I'm Joe Wisenthal.

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Speaker 2: Joe, how would you describe current market conditions?

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Speaker 3: Up into the right every day? Basically we're recording this

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Speaker 3: June thirteen, and we're probably like at new highs in

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Speaker 3: the futures. Yeah, it's just everything just goes up all

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Speaker 3: the time, and it's pretty easy. Yeah.

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Speaker 2: But even when you say up into the right, if

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Speaker 2: you're looking at something like the SMP five hundred, yeah,

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Speaker 2: I mean it's gone up a lot. Yeah, But on

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Speaker 2: a day like Wednesday, when we had the FMC decision

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Speaker 2: and we had inflation data coming in softer then expected,

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Speaker 2: even then the SMP five hundred was up by like

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Speaker 2: less than a percent.

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Speaker 3: Yeah, But you add a bunch of less than a

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Speaker 3: percent put together a historical year of returns.

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Speaker 2: I mean, but no one wants to wait for all

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Speaker 2: those days to pile up. So if you look at

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Speaker 2: the single stocks, I mean, there have been days when

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Speaker 2: in video was up like almost ten percent.

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Speaker 3: So this is the thing, you're right, And this is

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Speaker 3: the thing about the market, which is like I am

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Speaker 3: like a boring s and P five hundred every month,

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Speaker 3: like put you know, a few dollars into some ETF.

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Speaker 3: But then I see other people around me getting like

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Speaker 3: really rich because they bought in video, and it's really annoying.

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Speaker 2: What if I told you there was a way that

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Speaker 2: you could square those two things, so boring indices and

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Speaker 2: the volatility in single stocks.

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Speaker 3: I don't want those volatility in single sex talk of

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Speaker 3: the upside of single stocks, Okay, but yes, if I

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Speaker 3: can have both getting really rich and being boring, that's

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Speaker 3: fine too.

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Speaker 2: Okay, So today we're going to be talking about something

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Speaker 2: that I've wanted to do an episode on for a

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Speaker 2: long time. We're going to be talking about the dispersion trade.

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Speaker 2: Have you tried at that? Not?

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Speaker 3: No, I mean, basically other than the prep that I

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Speaker 3: did for this episode fifteen minutes ago.

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Speaker 2: No, I'm going to try not to be offended because

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Speaker 2: I did write about it a few months ago, which

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Speaker 2: should actually I wrote a story about it, and I

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Speaker 2: wrote a newsletter, an all thoughts newsletter. Joe, Yeah, go on,

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Speaker 2: all right, it's a good thing. We're having this conversation then, Okay,

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Speaker 2: the dispersion trade. So basically it sort of falls into

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Speaker 2: the bucket of another type of short vault.

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Speaker 4: Trade, and the idea I sort of do that.

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Speaker 2: Okay, good, we're getting somewhere. The idea is, basically, you

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Speaker 2: have traders that are using equity options to bet on

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Speaker 2: this is the important thing, the relative volatility between single

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Speaker 2: stocks and stock indexes. Okay, so you know, typically you

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Speaker 2: might see someone go long volatility in a basket of

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Speaker 2: individual stocks using single stock options while simultaneously betting that

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Speaker 2: volatility in an index like the S and P five

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Speaker 2: hundred is going to stay relatively low.

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Speaker 3: So implicitly, I guess there's an opportunity to sell that

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Speaker 3: volatility to the people hedging a portfolio and then doing

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Speaker 3: the other set on the other side. Yeah, that's exactly it.

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Speaker 2: So you kind of need two things for this to work.

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Speaker 2: You need the market dynamics to basically be volatile single

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Speaker 2: stocks and kind of boring, you know, overall benchmark indices.

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Speaker 2: But you also need the cost to make sense, so

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Speaker 2: when you're buying that volatility, it all has to kind

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Speaker 2: of net out. But recent months, for a while now

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Speaker 2: that has been the case, and there's a lot of

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Speaker 2: anecdotes on Wall Street that this trade is absolutely booming.

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Speaker 3: Yeah, I mean we talk about these from time to

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Speaker 3: time on the show. Sometimes it's expressed more directly and

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Speaker 3: some sort of implicit short vix trade. Sometimes it's talked

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Speaker 3: about very explicitly, like a few years ago, I don't know,

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Speaker 3: twenty eighteen in or whatever, like the real short vix

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Speaker 3: trade that blew up and never wanted to get it,

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Speaker 3: the Vollmageddon trade. I don't remember what either. There was

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Speaker 3: like twenty seventeen or two twenty eighteen or something like that.

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Speaker 3: But from time to time, one thing that seems to

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Speaker 3: be clear is that there are various flavors of trades

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Speaker 3: that become very popular, and all that needs to happen

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Speaker 3: is for roughly you don't even need the market to

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Speaker 3: go up or anything like that, You just roughly need

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Speaker 3: the status quota persists.

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Speaker 2: Yeah, absolutely, I mean traders are very good at making

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Speaker 2: money off of anything, sometimes even nothing. Basically the continuation

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Speaker 2: of what's been happening.

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Speaker 3: And you know the one thing and that you said

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Speaker 3: it and you're intro and the consistency is that among

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Speaker 3: people who say, like own the broad index or just

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Speaker 3: own risk assets period, there is probably a persistent inclination

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Speaker 3: to overpay for downside protection that premium, and that creates

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Speaker 3: an opportunity then for someone to get on the other

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Speaker 3: side and sell that premium.

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Speaker 2: Yeah, and we are going to get into all of this.

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Speaker 2: I'm very pleased to say we do, in fact have

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Speaker 2: two perfect guests for this particular episode. We're going to

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Speaker 2: be speaking with Michael Purvis, CEO of Tall back In

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Speaker 2: Capital Advisors, and also Josh Silva, managing partner and CIO

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Speaker 2: at Passaic Partners. So, thank you so much for coming

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Speaker 2: on the show.

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Speaker 4: Thank you great to be here.

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Speaker 5: Why don't we.

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Speaker 2: Start with an introduction? Tell us who you are and

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Speaker 2: how you know each other.

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Speaker 6: Well, I'll start. This is Michael Purvis, Tollbock and Capital Advisors.

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Speaker 6: We are a cross asset research for which means we

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Speaker 6: get into the major asset classes on how they kind

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Speaker 6: of define each other. That means equities, that means rates, FX,

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Speaker 6: sometimes commodities, but also volatility. I sat on various option

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Speaker 6: desks over the years and I like to look at

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Speaker 6: life in the markets a little bit through the lens

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Speaker 6: of volatility. I'll let Josh describe himself and his firm.

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Speaker 5: Sure, my name is Josh Silva, I'm the CIO and

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Speaker 5: founder of Passaic Partners, a Deriva based asset manager who

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Speaker 5: uses Deridis as a tool either to reduce risk, enhance risk,

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Speaker 5: or manage a multi asset portfolio, looking at implied volatilities

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Speaker 5: as an indicator of when to take risk and when

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Speaker 5: not to.

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Speaker 6: Josh and I have known each other for I don't

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Speaker 6: know what ten years, twelve years now, and in full disclosure,

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Speaker 6: Josh is a client of Tolbach and we also share

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Speaker 6: office space, so.

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Speaker 4: We're constantly talking about the markets.

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Speaker 3: So Tracy and I don't have to do anything. We

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Speaker 3: could just listen to gab about vall and that can

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Speaker 3: be our episode.

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Speaker 4: Yeah.

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Speaker 5: I don't know how exciting everyone else would find that. Yeah,

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Speaker 5: at least the two of us would be very excited

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Speaker 5: about it.

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Speaker 3: Tracy described it, and I pretended to sort of have

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Speaker 3: some maybe intuitive sense of going on. But how would

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Speaker 3: you either one of you could start like basically describe

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Speaker 3: the legs or the basic construction of the dispersion trade.

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Speaker 5: This is Josh. I'll start off first thing. I think

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Speaker 5: you did a very good job of describing the trade

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Speaker 5: quite frankly, but I will go into where the origins

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Speaker 5: of it which is more fun. Yes, so you have

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Speaker 5: an old Chicago pit trader. So let's go back in

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Speaker 5: time to the old Chicago pits and.

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Speaker 3: Yeah, already speaking our language.

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Speaker 5: So it really came out of the ability to manage risk.

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Speaker 5: I mean, were talking about a trade that was originally

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Speaker 5: designed as a risk management trade. You know, post eighty

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Speaker 5: seven and crash. You know, Chicago used to be just

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Speaker 5: a bunch of single traders managing their own money. Post

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Speaker 5: eighty seven crash, the people who survived ended up running

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Speaker 5: a lot of big trading groups which I could have

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Speaker 5: fifty to one hundred traders working for them in various pits.

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Speaker 5: You know what ended up happening was when you survived

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Speaker 5: the eighty seven crash, you learned I don't want to

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Speaker 5: experience the eighty seven crash. And so this version trade

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Speaker 5: came out of the ability to manage quite frankly, the

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Speaker 5: tale of that risk back in the nineties. That changed

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Speaker 5: as we got into dot com. And what I mean

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Speaker 5: by that is it's sort of a familiar little taste

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Speaker 5: to it. You have a certain sector which everyone's buying

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Speaker 5: and everyone's making money while the rest of us are

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Speaker 5: lonely owning the SMP and they're chasing upside, and so

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Speaker 5: what that ends up doing is you would come into

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Speaker 5: the pit. And I remember this with AOL specifically, if

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Speaker 5: you can talk about an old stock, and all day,

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Speaker 5: every day they were buying calls. Every day they were

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Speaker 5: buying call spreads, and so you had to collect inventory

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Speaker 5: to prepare for that coming bid into options. And so

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Speaker 5: you ran that inventory long and to reduce your THETA

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Speaker 5: or your decay bill, you would sell some index and voila,

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Speaker 5: you have the start of the dispersion trade. Now, granted,

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Speaker 5: that was at a time when spreads were significantly wider,

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Speaker 5: volumes were significantly smaller, and the size of the notional

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Speaker 5: amount was significantly smaller as well. And so that's how

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Speaker 5: this sort of came about. And I think Tracy put

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Speaker 5: it perfectly. You own a basket of single stocks, and

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Speaker 5: you use the index to help reduce that risk. And

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Speaker 5: at the end, both sides of that trade made money

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Speaker 5: in the nineties as well, and so it became a

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Speaker 5: very very profitable trade, which leads us into the two thousands.

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Speaker 5: And again I've been doing this wait probably too long.

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Speaker 5: I like to call it a trade in the nineties

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Speaker 5: and someone taught me this a long time ago. There's

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Speaker 5: trading and there's investing. It became an investment in the

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Speaker 5: two thousands. In other words, it wasn't traders just moving positions,

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Speaker 5: because when you trade, you can be very nimble, very quickly.

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Speaker 5: And that's what market makers are very good at doing,

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Speaker 5: which is we like to call picking up the nickel

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Speaker 5: in front of the steamroller. And that's what the dispersion

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Speaker 5: trade was originally in the two thousands and leading into

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Speaker 5: two thousand and eight, two thousand and nine, it became

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Speaker 5: an investment. In other words, I think I listened to

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Speaker 5: your old podcast and EXIV became an investment. That's what

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Speaker 5: the dispersion trade is becoming.

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Speaker 2: Well, I have a question, which is it's kind of

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Speaker 2: hard to tell how popular this trade actually is. Everything

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Speaker 2: is sort of anecdotal. I remember when I first heard

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Speaker 2: about it. It was actually from one of Michael's notes,

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Speaker 2: and you've laid it out perfectly, Michael. But then I

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Speaker 2: went back and I started doing some research and searching

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Speaker 2: for mentions of dispersion trade, and one of the things

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Speaker 2: I found was, you know, a mention in the Bear

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Speaker 2: Traps Report where they were talking about multi strat funds

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Speaker 2: putting quote massive amounts of money in the dispersion trade.

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Speaker 2: But then you can't find actual figures, like it's very

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Speaker 2: hard to find estimates for how much of this is

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Speaker 2: going on. So walk us through, like what indications you

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Speaker 2: might have or what you're looking at in order to

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Speaker 2: determine how popular this trade actually is.

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Speaker 6: Well one way to get a sense for that. And

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Speaker 6: it's all kind of indirect, right, there's no big government

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Speaker 6: report that talks about how much you know, how many

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Speaker 6: options are in this trade, or how much capitalist is

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Speaker 6: in this trade. But if you look at the CBO

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Speaker 6: Implied Correlation Index, it actually is just now the three

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Speaker 6: months implied correlation index is actually at the lowest levels

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Speaker 6: it's ever been, and they have a couple of the

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Speaker 6: one month implied correlation is also not exactly at record lows,

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Speaker 6: but very very close to it. So that's a little

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Speaker 6: bit of an indication where you can infer that certainly

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Speaker 6: people are pushing this trade here.

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Speaker 5: Yeah, and it's working, right, Everyone's making lots and lots

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Speaker 5: of money on it, which is typically what happens in

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Speaker 5: short ball trades. People tend to make a lot of

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Speaker 5: money until they don't, right, and so you could go

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Speaker 5: back to different ball events. I mean, we could talk

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Speaker 5: about nineteen ninety seven, and we could talk about ninety eight,

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Speaker 5: we could talk about eighteen, we could talk about twenty.

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Speaker 5: There's different vall things that have occurred where you didn't

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Speaker 5: know how big the trade was until you knew how

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Speaker 5: big the trade was. And it's sort of the nature

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Speaker 5: of short vault. It's so funny is that I've been

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Speaker 5: doing this for a long time, marketing shortfall strategies. In

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Speaker 5: twenty and twenty twenty one, you might as well had

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Speaker 5: your hair on fire because nobody had any interest in it.

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Speaker 5: Now everyone's interested in why, because it works, and when

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Speaker 5: it works, it works very very well. The problem with

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Speaker 5: all these things, as I always like to say, is

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Speaker 5: when it becomes too big for the market and there's

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Speaker 5: too much leverage, and so the question always is where

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Speaker 5: is the size and where is the leverage and how

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Speaker 5: much leverage does it take. We've learned through all these

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Speaker 5: shortfall events it only takes one bad participant to create

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Speaker 5: an unwine or a liquidation. And that's what we saw

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Speaker 5: in ninety seven, that's what we saw in ninety eight,

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Speaker 5: that's what we saw in twenty eighteen. So again this

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Speaker 5: is not an unheard of thing.

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Speaker 6: Right, I think, just to add on to that, I mean,

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Speaker 6: one of the things you know, and I know Tracy

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Speaker 6: and Jo are always focused on that vomaged in from

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Speaker 6: February of twenty eighteen, which was this ETF right where

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Speaker 6: you could see that ETF every day and you could

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Speaker 6: see how that ETF crew. One of the things today

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Speaker 6: with this dispersion trade and whether this will become a

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Speaker 6: vommageddon two dot zero is that you don't have that clarity.

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Speaker 6: It's a little the waters are a little bit murkier here.

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Speaker 6: So you can pick up anecdotes here and there, you

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Speaker 6: can look at implied in disease. You get a sense,

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Speaker 6: you know, Josh is in the options market every day,

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Speaker 6: and you pick up things, but it's hard to put

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Speaker 6: a crisp number on it.

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Speaker 5: It's the unknown, right, you're testing the unknown.

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Speaker 3: So the thing about that inverse VICXYTF that blew up,

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Speaker 3: it was a trade that existed in various forms for

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Speaker 3: a while, and then someone went along and like productized it,

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Speaker 3: and so then suddenly like you could see like it's

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Speaker 3: am or it's daily volume. Just a quick definitional thing

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Speaker 3: because I just so that listeners can understand when we

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Speaker 3: talk about the c BO three month Applied Correlation Index,

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Speaker 3: and it's basically at all time lows or near all

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Speaker 3: time lows or something like that. That is just saying that

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Speaker 3: based on the volatility of all the stocks that exist

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Speaker 3: in the index, it suggests that there is a wide

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Speaker 3: level of expected dispersion among the outcomes.

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Speaker 6: Yeah, it's not every stock in the indexes, it's the

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Speaker 6: top fifty. It's typically market cap weighted there, which is

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Speaker 6: I think it's very relevant to today's discussion.

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Speaker 3: Actually, can one of you explain just sort of like

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Speaker 3: from a fundamental standpoint why it is that not in

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Speaker 3: a realized basis, but on a trading basis, essentially, implied

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Speaker 3: volatility for the index tends to be higher than if

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Speaker 3: you add up all of the implied volves for all

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Speaker 3: of these individual stocks.

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Speaker 5: So it actually ends up the index ends up being

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Speaker 5: lower because of the relationship of stocks with each other.

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Speaker 5: So you know, when you think about it's like, but

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Speaker 5: people pay more for the protection of the indet, they

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Speaker 5: pay more for the implied versus real lias.

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Speaker 3: Okay, that's that's sorry, that's right.

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Speaker 5: Yeah, yeah, that's it. So they and the reason you

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Speaker 5: know they do that is because, as you said, they're

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Speaker 5: hedging downside. They're not hedging downside as much as they

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Speaker 5: normally do right now. But that's a different conversation for

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Speaker 5: a different day. The way it works is to think

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Speaker 5: about it is that if you have this basket of

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Speaker 5: single names that create the vall of the index is

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Speaker 5: a combination of all those added up their variants plus

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Speaker 5: their covariance, which is the matrix of how they're related

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Speaker 5: to each other. So if tech stocks goes up and

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Speaker 5: utilities go down, well, then that reduces the volatility index

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Speaker 5: because they're moving in opposite directions. When they all move

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Speaker 5: together is when the correlation trade has a problem, and

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Speaker 5: that usually occurs in some sort of liquidation events.

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Speaker 4: Okay, right, so think about it this way.

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Speaker 6: So in a good benign market like we have right now,

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Speaker 6: you could be long Metavol and you could be long

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Speaker 6: Exxon ball and Exon might disappoint for some reason and

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Speaker 6: the stock goes down and the ball explodes, maybe metas

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Speaker 6: stock price or just higher for some reason. The ball

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Speaker 6: may go up to there, you know, ignoring the actual

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Speaker 6: weights of the in the index. If those two stock

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Speaker 6: events cancel each other out. Yeah, the S and P

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Speaker 6: is kind of flat, right, you know on those two things,

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Speaker 6: but the dispersion trader may have made very good money.

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Speaker 5: And Tracy put it perfectly. It's like, then the video

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Speaker 5: is going up and the index is just kind of

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Speaker 5: quietly moving higher, and that's because of correlation. I mean,

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Speaker 5: if they're all correlated together, the index would be up

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Speaker 5: as much as the video. So that's another way to

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Speaker 5: think about it, which it's not right.

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Speaker 2: Fund managers can dream, yes, we can all.

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Speaker 6: Dream, right, but Joe just to put this kind of

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Speaker 6: prosaically right, Yeah, like you know, when correlations go up

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Speaker 6: really high and when this trade gets unwound viciously, right,

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Speaker 6: think of that as the equity asset class being sort

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Speaker 6: of in a zero one condition, Like people are just

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Speaker 6: getting out right, They're like, Okay, I'm exiting equities because

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Speaker 6: something bad is happening and I need to sell everything,

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Speaker 6: whether it's Exon and Meta or a small cap or whatever.

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Speaker 6: Right in a more benign condition where people are you know,

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Speaker 6: I want to be inequities, right, but I'm going to

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Speaker 6: really be able to discriminate among the fundamentals or whatever's

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Speaker 6: driving that stock picking exercise, then dispersion works correlation both

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Speaker 6: implied in realized drops.

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Speaker 5: Yeah, I mean another way to think about it is

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Speaker 5: it's another way of being short tails. Okay, Yeah, the

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Speaker 5: hedge funds love being short tails. That's how they make money.

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Speaker 2: So I want to go back to something that you

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Speaker 2: touched on earlier, Josh Ware. You were talking about previous

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Speaker 2: historical instances, and when I hear portfolio insurance that this

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Speaker 2: is a type of portfolio insurance, I think black shoals,

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Speaker 2: And then I start thinking about correlation, which we already

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Speaker 2: touched on, and I guess people, you know, trying to

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Speaker 2: figure out the correlation across a portfolio and maybe not

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Speaker 2: doing it that well as you know the experience of

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Speaker 2: nineteen eighty seven kind of taught us. Talk to us

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Speaker 2: about the maths that go into this, and like, what

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Speaker 2: guarantee I guess, or what comfort can we take that

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Speaker 2: people are actually calculating correlation correctly, because again, like correlation

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Speaker 2: is one of the trickiest concepts in all of finance

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Speaker 2: and history is absolutely littered not just with nineteen eighty seven,

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Speaker 2: but I mean you could argue two thousand and eight

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Speaker 2: and the ghostiand Copula was also an instance of a

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Speaker 2: failure to accurately capture correlation risk. But it seems difficult.

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Speaker 5: It's incredibly difficult. And what I remember again going back

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Speaker 5: in time, is when you look at these old Chicago groups,

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Speaker 5: MO second most important person in the group was the

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Speaker 5: risk manager. Because we're talking about times when you know,

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Speaker 5: we're talking about Intel four twenty five trips or whatever

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Speaker 5: those things are called. You know, we used to run

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Speaker 5: risk matrices and stuff that you'd have to run overnight.

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Speaker 5: Those computers are actually less powerful than your current phone,

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Speaker 5: So that's the kind of way you'd have to look

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Speaker 5: at it. So you need a really good risk manager,

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Speaker 5: and you need someone who understands what that tale event

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Speaker 5: looks like and what the portfolio is going to do.

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Speaker 5: Do I have faith that, you know, I call some

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Speaker 5: of the smartest people in the room, some of the

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Speaker 5: people that I stood next to in the pit are

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Speaker 5: going to be fine. Yes, I think they're actually going

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Speaker 5: to make money on this event. Yes, because they're the

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Speaker 5: smartest people in the room. I do think there are

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Speaker 5: funds who probably do not have risk managers who understand

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Speaker 5: that that do not have properly quantified that tail event

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Speaker 5: risk and the biggest issue, which is the thing that

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Speaker 5: scares me the most, is the liquidity aspect. And you

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Speaker 5: can see what's happening in single stocks. I think BAA

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Speaker 5: call it what the fragility index. I think was what

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Speaker 5: they call it, which I thought was one of the

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Speaker 5: funnier names. But that's a whole other thing. Stocks are

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Speaker 5: moving all over the place, and why because there's no liquidity,

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Speaker 5: and so wonderful thing about liquidity is when you're putting

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Speaker 5: on a trade or an investment, as I like to

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Speaker 5: say this again, I say, is an investment when you're

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Speaker 5: training it like a market maker, it's a trade when

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Speaker 5: you're putting it on and setting and forget it, it's

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Speaker 5: an investment. Is that when you try to get out

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Speaker 5: of it, it's really hard. And that was the experience

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Speaker 5: of twenty eleven. Twenty eleven correlation traded over one. Why

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Speaker 5: because you couldn't get out, and to get out you

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Speaker 5: had to pay. And that's how these things go. And

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Speaker 5: so what I like to say about these events is

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Speaker 5: that when there is a liquidation, it'll be hard, it'll

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Speaker 5: be fast, and it'll be dramatic like we saw with

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Speaker 5: Vallmageddon or in nineteen ninety seven, which was a put

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Speaker 5: seller that blew up, But typically the market after that

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Speaker 5: is pretty awesome.

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Speaker 6: Just to add on to that, I think what's really

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Speaker 6: important when we were talking about these sort of vommageddon

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Speaker 6: twos is to really distinguish that this doesn't necessarily mean

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Speaker 6: something's broken economically or earnings wise, or fundamentally in any way,

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Speaker 6: shape or form like we saw with Vamageddon. As we

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Speaker 6: saw in two thousand and December of twenty eighteen, when

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Speaker 6: you saw crazy price action, you know, the Vicks you know,

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Speaker 6: was soaring into just before Christmas of that year.

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Speaker 4: There was nothing wrong.

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Speaker 6: There was a lot of questions about what power weather

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Speaker 6: Pal's going to pivot and whether, you know, the whole

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Speaker 6: far from neutral things setting that stage then, But that

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Speaker 6: was a lot about modern market structure and the financialization

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Speaker 6: of the equity asset class, which is very different than

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Speaker 6: the nineteen nineties.

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Speaker 4: Yeah, that's a very important thing.

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Speaker 6: If you look at options growth, like you know, Josh

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Speaker 6: and I talk about this all the time, but like

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Speaker 6: S and P, options growth has been growing dramatically eight

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Speaker 6: percent per year, and then that escalated in the last

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Speaker 6: couple of years to much higher levels. Cash volumes have

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Speaker 6: been completely flat.

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Speaker 4: I'm talking S and P right.

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Speaker 6: So when you have that, you're going to get funkier

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Speaker 6: price action at the index level and at the single

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Speaker 6: stock level too, with people chasing in Vidia calls or

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Speaker 6: in Vidio puts, you know whatever, You're going to get

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Speaker 6: a much more financialized and erratic price action, which can

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Speaker 6: also then be one of the added matches to light

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Speaker 6: the fire for you know, a potential VOMA get into.

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Speaker 5: Yeah, it's again, it's you only need one bad player.

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Speaker 5: I think the majority of people are not.

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Speaker 2: Well, this is what I wanted to get into because

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Speaker 2: with Volma get in, like okay, you could kind of

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Speaker 2: see that coming, and in fact a lot of people

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Speaker 2: did because you knew that once the Vicks curve inverted,

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Speaker 2: it was just going to be the end for some

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Speaker 2: of these volatility products, and two of them in particular

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Speaker 2: with the dispersion trade. The one thing I struggle with

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Speaker 2: is like what would be the proximate cause for the unwind.

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Speaker 3: Or a telltale sign like the inversion, like this is

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Speaker 3: flashing a yellow light.

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Speaker 5: So in twenty eleven, it was a sovereign debt crisis

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Speaker 5: that caused a liquidation in public equities or a fear

438
00:21:24,600 --> 00:21:28,359
Speaker 5: of public equities movement in nineteen ninety seven, it was

439
00:21:28,440 --> 00:21:31,840
Speaker 5: an Asian financial crisis. Everyone forgets that long term capital

440
00:21:31,880 --> 00:21:34,040
Speaker 5: losts more money selling vaulve than they did on fixed

441
00:21:34,080 --> 00:21:36,679
Speaker 5: income stuff. If you go read When Genius Fails, they

442
00:21:36,680 --> 00:21:38,359
Speaker 5: have the numbers in the back, which is quite an

443
00:21:38,400 --> 00:21:40,200
Speaker 5: interesting The guy who sold options in ninety seven, he

444
00:21:40,240 --> 00:21:42,240
Speaker 5: wrote a book to about three months before it happened,

445
00:21:42,240 --> 00:21:43,879
Speaker 5: which was kind of kind of funny.

446
00:21:43,880 --> 00:21:44,760
Speaker 2: Isn't going to read that.

447
00:21:45,119 --> 00:21:47,439
Speaker 5: The event's going to be something macro?

448
00:21:47,800 --> 00:21:48,080
Speaker 3: Yeah?

449
00:21:48,200 --> 00:21:49,560
Speaker 5: Like I always like to say, how do you get

450
00:21:49,560 --> 00:21:51,639
Speaker 5: a five standard deviation event? You have to get the

451
00:21:51,640 --> 00:21:54,800
Speaker 5: one standard deviation event which causes this to happen, which

452
00:21:54,800 --> 00:21:57,040
Speaker 5: is the second which is what can I just fuse.

453
00:21:56,880 --> 00:21:59,560
Speaker 6: Let's try to get to Joe's question. I think, but

454
00:22:00,119 --> 00:22:02,280
Speaker 6: if we get a macro shock, right, you get a

455
00:22:02,320 --> 00:22:05,359
Speaker 6: big uptick in people wanting to get out of the

456
00:22:05,359 --> 00:22:08,080
Speaker 6: equity asset class. Yeah, right, and they run for the

457
00:22:08,080 --> 00:22:11,199
Speaker 6: fences because something bad is happening. You know what's going

458
00:22:11,240 --> 00:22:14,400
Speaker 6: to happen there is that the VIX index, right, which

459
00:22:14,440 --> 00:22:17,399
Speaker 6: your index ball which you're short, is going to be

460
00:22:17,960 --> 00:22:22,040
Speaker 6: rising much faster than your basketball. That you're long, right,

461
00:22:22,080 --> 00:22:24,359
Speaker 6: and that's where the risk manager taps the dispersion trader

462
00:22:24,359 --> 00:22:26,560
Speaker 6: on the shoulder and saying close out, and then you

463
00:22:26,600 --> 00:22:29,040
Speaker 6: get a sort of a self fulfilling loop there.

464
00:22:29,720 --> 00:22:32,920
Speaker 3: Well, let me put it a different way, which is that, okay,

465
00:22:33,359 --> 00:22:35,639
Speaker 3: the thing that blows this up will be some macro

466
00:22:35,680 --> 00:22:39,560
Speaker 3: event almost by definition unexpected. I don't think any of

467
00:22:39,640 --> 00:22:41,840
Speaker 3: us in this room probably can like really know like

468
00:22:41,880 --> 00:22:45,119
Speaker 3: when some country is going to break, et cetera. So

469
00:22:45,160 --> 00:22:49,120
Speaker 3: at any given time you're putting on this trade, you're

470
00:22:49,160 --> 00:22:51,879
Speaker 3: collecting premium. There's a risk that it blows up with

471
00:22:51,920 --> 00:22:54,840
Speaker 3: a macro event. But at some point in between that

472
00:22:55,000 --> 00:22:58,840
Speaker 3: there must be some calculation where you are not getting

473
00:22:58,880 --> 00:23:03,399
Speaker 3: compensated enough in order to justify the risk that the

474
00:23:03,440 --> 00:23:05,840
Speaker 3: once every five years or the once every ten years

475
00:23:05,800 --> 00:23:09,160
Speaker 3: of macro blow up occurs. So what are those signs

476
00:23:09,240 --> 00:23:11,320
Speaker 3: or whether it's in the pricing where it's like, yes,

477
00:23:11,359 --> 00:23:13,240
Speaker 3: you could still make money on this trade because the

478
00:23:13,280 --> 00:23:16,479
Speaker 3: math is there. But given the fact that there's going

479
00:23:16,520 --> 00:23:18,200
Speaker 3: to be a macro blow up of some sort every

480
00:23:18,200 --> 00:23:20,160
Speaker 3: few years or everybody like this is no longer worth

481
00:23:20,200 --> 00:23:20,399
Speaker 3: the risk.

482
00:23:20,600 --> 00:23:23,439
Speaker 6: The math is still there, you know, implied correlations are

483
00:23:23,480 --> 00:23:27,280
Speaker 6: still higher than realize correlations. Okay, that's helpful, But the

484
00:23:27,359 --> 00:23:29,880
Speaker 6: VIX is not at twenty five right now, right, It's

485
00:23:29,920 --> 00:23:32,720
Speaker 6: down in this thirteen fourteen level. Right, so your risk

486
00:23:32,800 --> 00:23:37,360
Speaker 6: return is not as constructive. Josh, just a grief if

487
00:23:37,359 --> 00:23:39,520
Speaker 6: you will. But I don't think it's as constructive now

488
00:23:39,880 --> 00:23:43,240
Speaker 6: as it was coming off this massive Vall spike we

489
00:23:43,240 --> 00:23:45,000
Speaker 6: had during COVID, right where we've had this sort of

490
00:23:45,200 --> 00:23:50,800
Speaker 6: general reacclimization to the shortfall thesis and various forms of fashions.

491
00:23:51,119 --> 00:23:53,800
Speaker 4: Now it's just gone too far, too long. Yeah, I

492
00:23:53,800 --> 00:23:54,480
Speaker 4: mean certain.

493
00:23:54,480 --> 00:23:56,919
Speaker 5: And it's funny is that you actually pay decay in

494
00:23:57,000 --> 00:23:59,639
Speaker 5: this trade because of the basketest single names is more

495
00:23:59,640 --> 00:24:02,680
Speaker 5: expected incident when you're collecting on the index. I look

496
00:24:02,680 --> 00:24:04,919
Speaker 5: at it as sort of you have the fixes at twelve,

497
00:24:04,960 --> 00:24:06,520
Speaker 5: like how much more money can you bleed out of

498
00:24:06,520 --> 00:24:08,760
Speaker 5: this road? I mean, it's really at that point. And

499
00:24:09,200 --> 00:24:11,720
Speaker 5: that's what I'm saying about. The people who are smarter

500
00:24:11,800 --> 00:24:14,960
Speaker 5: will have reduced this trade who aren't as an investment,

501
00:24:15,000 --> 00:24:18,360
Speaker 5: like the Vall traders reduced short ball in twenty eighteen

502
00:24:18,520 --> 00:24:21,920
Speaker 5: because they knew that twenty seventeen was a multi decade

503
00:24:22,320 --> 00:24:24,040
Speaker 5: low moment we were moving what we moved two percent

504
00:24:24,080 --> 00:24:25,640
Speaker 5: that year in the SMP on a two percent ballve

505
00:24:25,640 --> 00:24:27,480
Speaker 5: because we want up one percent every month. You know,

506
00:24:27,520 --> 00:24:29,080
Speaker 5: the joke is if we go up one percent every

507
00:24:29,080 --> 00:24:31,120
Speaker 5: month for twelve months, it's the all of the SMP zero.

508
00:24:31,560 --> 00:24:33,480
Speaker 5: So it sort of becomes one of those things. And

509
00:24:33,920 --> 00:24:35,199
Speaker 5: so you just get to the point where you're a

510
00:24:35,280 --> 00:24:38,280
Speaker 5: risk managery go what's the upside downside? And the downside

511
00:24:38,280 --> 00:24:40,720
Speaker 5: becomes greater. So when I look at it as a

512
00:24:40,720 --> 00:24:44,200
Speaker 5: person who's managing risk, I just reduce because how much

513
00:24:44,200 --> 00:24:46,080
Speaker 5: more money can you take out of it? Now? Again,

514
00:24:46,119 --> 00:24:50,560
Speaker 5: a lot of this is fundamentally driven by stocks and

515
00:24:50,680 --> 00:24:54,640
Speaker 5: what's happening with stocks and who's making money. A friend

516
00:24:54,640 --> 00:24:56,439
Speaker 5: of mine pointed out, you know, thirty five percent the

517
00:24:56,560 --> 00:24:59,040
Speaker 5: SMP is now AI, right, So you know, how does

518
00:24:59,080 --> 00:25:00,000
Speaker 5: that look?

519
00:25:00,000 --> 00:25:01,600
Speaker 6: Think we should just set the table a little bit

520
00:25:01,640 --> 00:25:04,960
Speaker 6: about what's been Why is this trade so popular right now?

521
00:25:05,080 --> 00:25:05,320
Speaker 4: Right?

522
00:25:05,760 --> 00:25:07,960
Speaker 6: And there's a lot of fundamental reasons that you know,

523
00:25:07,960 --> 00:25:09,760
Speaker 6: if you're a dispersion trader, why you go to your

524
00:25:10,040 --> 00:25:12,640
Speaker 6: boss and say, hey, we need to do this, here's why, right,

525
00:25:13,240 --> 00:25:15,880
Speaker 6: And the reality is is that We're in a strange

526
00:25:15,920 --> 00:25:20,680
Speaker 6: economic cycle, right. We have a risk on condition obviously, right,

527
00:25:20,800 --> 00:25:23,760
Speaker 6: VIX is low, SMP keeps putting on good returns, and

528
00:25:24,160 --> 00:25:28,560
Speaker 6: other risk assets do, right. But how these different sectors

529
00:25:28,600 --> 00:25:31,439
Speaker 6: are moving with each other and the different stocks is

530
00:25:31,480 --> 00:25:32,400
Speaker 6: incredibly low.

531
00:25:32,480 --> 00:25:32,560
Speaker 4: Right.

532
00:25:32,680 --> 00:25:35,159
Speaker 6: Part of that's because we have an unusual cycle. Like

533
00:25:35,200 --> 00:25:38,280
Speaker 6: if you remember, you know, during COVID, oil prices went negative.

534
00:25:38,960 --> 00:25:41,040
Speaker 6: Before that, Oh my god, why would you want to

535
00:25:41,080 --> 00:25:43,320
Speaker 6: own Exon, you know at all? Because of ESG and

536
00:25:43,320 --> 00:25:45,199
Speaker 6: all that, And then of course that reversed oil went

537
00:25:45,200 --> 00:25:47,440
Speaker 6: to one twenty and Exon became you know, the new

538
00:25:47,480 --> 00:25:50,119
Speaker 6: Google for a few months. Right, So you had a

539
00:25:50,119 --> 00:25:52,919
Speaker 6: lot of strange things coming out of this COVID shock

540
00:25:53,080 --> 00:25:56,000
Speaker 6: and all the compounding things there. But of course, you know,

541
00:25:56,080 --> 00:25:58,199
Speaker 6: just in the last year you have AI, right. And

542
00:25:58,240 --> 00:25:59,800
Speaker 6: so one of the things I like to look at

543
00:25:59,880 --> 00:26:03,480
Speaker 6: is sort of how each sector correlates across with other sectors,

544
00:26:03,600 --> 00:26:07,720
Speaker 6: not unapplied on a realized correlation, just the historic trading.

545
00:26:08,280 --> 00:26:10,760
Speaker 6: And what's really interesting there is that if you average

546
00:26:10,800 --> 00:26:13,960
Speaker 6: all the cross sector correlations ten sectors and you see

547
00:26:13,960 --> 00:26:16,200
Speaker 6: how each one, you know, you get a grid. Right

548
00:26:16,240 --> 00:26:20,240
Speaker 6: now that average is about the lowest it's ever been, right,

549
00:26:20,359 --> 00:26:23,080
Speaker 6: the cross sector correlation. But what's I think even more

550
00:26:23,160 --> 00:26:27,200
Speaker 6: relevant is that the tech sectors correlation is the lowest

551
00:26:27,200 --> 00:26:30,960
Speaker 6: it's ever been but for nineteen ninety eight nineteen ninety nine.

552
00:26:31,040 --> 00:26:33,800
Speaker 5: Which keeps getting us back to nineteen eighty eight nineteen

553
00:26:33,880 --> 00:26:34,640
Speaker 5: ninety nine, right.

554
00:26:34,840 --> 00:26:39,040
Speaker 6: And the tech sector is particularly important because the dispersion trade,

555
00:26:39,320 --> 00:26:42,679
Speaker 6: generally speaking, is market cap weighted, and of course the

556
00:26:42,720 --> 00:26:45,959
Speaker 6: tech sectors are dominating the S and P five hundred here.

557
00:26:46,000 --> 00:26:48,240
Speaker 6: So that's one reason why you know, you can say,

558
00:26:48,240 --> 00:26:50,440
Speaker 6: oh my god, like, look at Nvidia, it's so different

559
00:26:50,480 --> 00:26:54,440
Speaker 6: than so many other stocks that if you look at fundamentally,

560
00:26:54,520 --> 00:26:57,399
Speaker 6: the BAG six earnings of this year have exploded twenty

561
00:26:57,400 --> 00:27:00,800
Speaker 6: two percent, the SBX equal weights to four percent. Right, Like,

562
00:27:00,840 --> 00:27:04,200
Speaker 6: there's a lot of fundamental arguments suggesting why this trade

563
00:27:04,240 --> 00:27:06,479
Speaker 6: makes sense here. I think what Josh and I are

564
00:27:06,520 --> 00:27:10,520
Speaker 6: collectively saying is that the trade's been pushed too far here.

565
00:27:10,600 --> 00:27:13,200
Speaker 6: And there's another point I really want to make here too,

566
00:27:13,280 --> 00:27:15,040
Speaker 6: which is that you know, there's a lot of cross

567
00:27:15,119 --> 00:27:18,160
Speaker 6: ass at comparisons with the late nineties right now, interest rates.

568
00:27:17,880 --> 00:27:19,480
Speaker 4: And so forth. Here.

569
00:27:19,520 --> 00:27:22,040
Speaker 6: But what's really interesting is is that the correlations for

570
00:27:22,160 --> 00:27:25,800
Speaker 6: tech and the correlations broadly speaking on a realize basis

571
00:27:26,160 --> 00:27:28,240
Speaker 6: are much more similar to ninety eight and ninety nine

572
00:27:28,280 --> 00:27:31,720
Speaker 6: than there were today. But the VICS back then was

573
00:27:31,800 --> 00:27:34,720
Speaker 6: twenty to twenty five to thirty. It was not go

574
00:27:34,840 --> 00:27:37,720
Speaker 6: back to twenty seventeen, super low VIX, right. You know,

575
00:27:37,760 --> 00:27:40,600
Speaker 6: we even had nine handle prints at one point there,

576
00:27:40,760 --> 00:27:43,560
Speaker 6: and the correlation was very low then. It's very low

577
00:27:43,640 --> 00:27:47,280
Speaker 6: now here. But twenty seventeen was a period when you

578
00:27:47,400 --> 00:27:50,000
Speaker 6: had a very different central banking environment. One of the

579
00:27:50,000 --> 00:27:52,840
Speaker 6: sort of broader cross asset theses I'm arguing is that

580
00:27:52,880 --> 00:27:56,040
Speaker 6: we are normalizing a lot of central bank policies. Are

581
00:27:56,040 --> 00:27:59,359
Speaker 6: not normalizing to twenty seventeen, but to something else, right,

582
00:27:59,400 --> 00:28:02,679
Speaker 6: and if that happens, we may see the vis. I

583
00:28:02,680 --> 00:28:05,520
Speaker 6: think the VIX is getting into a higher range here,

584
00:28:05,800 --> 00:28:08,240
Speaker 6: a higher floor, if you will. And if that happens,

585
00:28:08,920 --> 00:28:11,960
Speaker 6: maybe you don't even need a macro shock to derail

586
00:28:12,040 --> 00:28:15,080
Speaker 6: this dispersion trade. If the VIX is going to start

587
00:28:15,119 --> 00:28:17,760
Speaker 6: sort of grinding higher just because that fed put is

588
00:28:17,840 --> 00:28:19,200
Speaker 6: too far out of the money right now.

589
00:28:19,520 --> 00:28:21,240
Speaker 5: And I think one of the big things you're seeing

590
00:28:21,320 --> 00:28:23,840
Speaker 5: is the lack of put buying in general compared to

591
00:28:23,960 --> 00:28:26,160
Speaker 5: nineteen ninety eight. And the big thing in nineteen ninety

592
00:28:26,160 --> 00:28:28,159
Speaker 5: eight is that we had never seen a FED put

593
00:28:28,200 --> 00:28:31,159
Speaker 5: come in like we have since, and so I think

594
00:28:31,240 --> 00:28:34,000
Speaker 5: the market is comfortable with the FED put coming in,

595
00:28:34,040 --> 00:28:48,040
Speaker 5: So why own puts.

596
00:28:50,680 --> 00:28:52,640
Speaker 2: I definitely want to get into more of like the

597
00:28:52,680 --> 00:28:55,640
Speaker 2: outlook for volatility in general, but before we do, I

598
00:28:55,640 --> 00:28:58,280
Speaker 2: have one more question on the dispersion trade, which is

599
00:28:58,480 --> 00:29:01,400
Speaker 2: can you walk us through who is on the other

600
00:29:01,560 --> 00:29:04,600
Speaker 2: side of this? So maybe hedge funds or some other

601
00:29:04,640 --> 00:29:07,240
Speaker 2: type of trade or are putting this trade on, who

602
00:29:07,320 --> 00:29:10,400
Speaker 2: is selling or buying that volatility from them? There's two

603
00:29:10,480 --> 00:29:11,280
Speaker 2: legs to the trades.

604
00:29:11,600 --> 00:29:14,600
Speaker 5: So back when I was more on the cell side,

605
00:29:14,640 --> 00:29:16,600
Speaker 5: not just more, I was on the cell side. So

606
00:29:16,640 --> 00:29:18,000
Speaker 5: it's twenty eleven.

607
00:29:18,840 --> 00:29:19,720
Speaker 4: You had a.

608
00:29:19,640 --> 00:29:23,200
Speaker 5: Lot of structured retail product trades coming out of Europe

609
00:29:23,240 --> 00:29:26,720
Speaker 5: and Asia that put a lot of single stock vall

610
00:29:27,320 --> 00:29:31,800
Speaker 5: onto investment banks books. They would then sell index as

611
00:29:31,840 --> 00:29:33,320
Speaker 5: a way of getting out of some of that because

612
00:29:33,440 --> 00:29:36,480
Speaker 5: there wasn't enough liquidity in certain things. They did the

613
00:29:36,480 --> 00:29:38,880
Speaker 5: same thing with dividends. They typically get long dividends, and

614
00:29:38,920 --> 00:29:41,040
Speaker 5: so you assume certain dividend growth, and so that's the

615
00:29:41,040 --> 00:29:43,440
Speaker 5: sort of the growth of the dividends swap market as well.

616
00:29:43,840 --> 00:29:46,680
Speaker 5: So they would then use hedge funds as a way

617
00:29:46,720 --> 00:29:51,400
Speaker 5: of off laying that concentrated single stock versus index risk.

618
00:29:51,560 --> 00:29:53,640
Speaker 5: And the reason being is because it doesn't look great

619
00:29:53,680 --> 00:29:56,720
Speaker 5: on of our perspective because you're short tails, and so

620
00:29:56,760 --> 00:29:58,520
Speaker 5: when your var numbers get a little bit too the

621
00:29:58,560 --> 00:30:01,840
Speaker 5: wrong way, obviously the risk march investment banks that you

622
00:30:01,880 --> 00:30:04,320
Speaker 5: need to offload this, and so that what happens is

623
00:30:04,360 --> 00:30:07,360
Speaker 5: they do tend to off load that risk. You know

624
00:30:07,520 --> 00:30:10,560
Speaker 5: where it's coming from now. And again this is totally

625
00:30:10,640 --> 00:30:13,320
Speaker 5: me guessing on the fact of what I'm seeing. Is

626
00:30:13,920 --> 00:30:18,160
Speaker 5: it seems like the market is short single names and

627
00:30:18,360 --> 00:30:21,040
Speaker 5: long index. In other words, if you look at you know,

628
00:30:21,280 --> 00:30:23,480
Speaker 5: with the Burgoci'll put out, oh, the you know, the

629
00:30:23,480 --> 00:30:26,560
Speaker 5: broker market is long ten billion dollars of front month

630
00:30:26,600 --> 00:30:29,479
Speaker 5: gamma or one day gamma going into CPI and then

631
00:30:29,480 --> 00:30:31,200
Speaker 5: the market moves like three percent and everyone's like, well,

632
00:30:31,200 --> 00:30:32,920
Speaker 5: how's that happen. I'm like, well, it's because they're probably

633
00:30:33,000 --> 00:30:37,040
Speaker 5: short single names and a lot of this data. And again, Tracy,

634
00:30:37,040 --> 00:30:40,760
Speaker 5: you put it perfectly like there's no central depository of data.

635
00:30:40,880 --> 00:30:44,240
Speaker 5: We become so data centric in this world. Like I

636
00:30:44,240 --> 00:30:45,920
Speaker 5: feel like when I started in this business, I was

637
00:30:45,920 --> 00:30:48,560
Speaker 5: like the data junkie, and I always obsessed with data

638
00:30:48,560 --> 00:30:50,280
Speaker 5: and what it meant. And then I've realized, well, if

639
00:30:50,320 --> 00:30:51,880
Speaker 5: you know, it's like kind of like looking at baseball,

640
00:30:51,880 --> 00:30:53,920
Speaker 5: when everyone's using data, sometimes you got to move away

641
00:30:53,920 --> 00:30:56,120
Speaker 5: from it to a degree. And there isn't a good

642
00:30:56,200 --> 00:30:58,040
Speaker 5: data set. The only data that we have is what

643
00:30:58,080 --> 00:31:02,040
Speaker 5: Michael's point out is, there's just a massive growth in

644
00:31:02,160 --> 00:31:07,280
Speaker 5: volumes and open interest in options. Everyone's using them, everyone's

645
00:31:07,320 --> 00:31:09,760
Speaker 5: paying attention to them. And so my general feeling is

646
00:31:09,800 --> 00:31:13,040
Speaker 5: that the market is probably long a little bit of

647
00:31:13,040 --> 00:31:15,200
Speaker 5: index and short a little bit of single names.

648
00:31:15,400 --> 00:31:17,920
Speaker 2: So I know you guys are both options guys for

649
00:31:18,000 --> 00:31:21,200
Speaker 2: the most part, But what impact does all that growth

650
00:31:21,280 --> 00:31:24,560
Speaker 2: in the options market end up having on the cash market.

651
00:31:24,680 --> 00:31:27,479
Speaker 2: This is something that comes up again and again, and

652
00:31:27,520 --> 00:31:30,680
Speaker 2: as you say, like the figures if you look at

653
00:31:30,680 --> 00:31:33,640
Speaker 2: the overall market are just stunning, and particularly for things

654
00:31:33,680 --> 00:31:35,440
Speaker 2: like the short dated options, so the one or the

655
00:31:35,520 --> 00:31:37,480
Speaker 2: zero day options. I don't have them in front of me,

656
00:31:37,600 --> 00:31:41,280
Speaker 2: but like talking about lines that go up into the

657
00:31:41,400 --> 00:31:43,240
Speaker 2: right it's just been stunning growth.

658
00:31:43,360 --> 00:31:45,280
Speaker 5: Yeah, is I like to say the tail starts wagging

659
00:31:45,360 --> 00:31:47,760
Speaker 5: the dog a little bit. And I've seen this when

660
00:31:47,800 --> 00:31:50,719
Speaker 5: I was in Europe, when options got bigger, almost than

661
00:31:50,720 --> 00:31:55,360
Speaker 5: the ability to trade stocks. They become the market. You

662
00:31:55,400 --> 00:31:59,320
Speaker 5: see this at month end, where you see large positions

663
00:31:59,320 --> 00:32:02,120
Speaker 5: and options determine how we end the end of the month.

664
00:32:02,200 --> 00:32:06,480
Speaker 5: Is people play cards to determine where we're going to settle.

665
00:32:06,600 --> 00:32:08,120
Speaker 5: I like to say, like the month end is like

666
00:32:08,160 --> 00:32:09,880
Speaker 5: kind of the old fun way of trading. If you've

667
00:32:09,880 --> 00:32:12,760
Speaker 5: ever seen the movie Rounders, which is one of my

668
00:32:12,800 --> 00:32:15,240
Speaker 5: favorite movies, which is a bunch of professional poker players

669
00:32:15,240 --> 00:32:17,320
Speaker 5: from New York go down to the taj and they

670
00:32:17,320 --> 00:32:18,720
Speaker 5: sit at a table and go, we're not going to

671
00:32:18,720 --> 00:32:21,240
Speaker 5: sit here and play against each other, because it's the point.

672
00:32:21,280 --> 00:32:23,760
Speaker 5: And then people sit down at the table that don't

673
00:32:23,840 --> 00:32:26,280
Speaker 5: understand how it works and they just start making money.

674
00:32:26,360 --> 00:32:29,440
Speaker 5: And that's what's happening at month Then there's large passive

675
00:32:30,080 --> 00:32:34,240
Speaker 5: option positions that people are aware of and they trade accordingly.

676
00:32:34,640 --> 00:32:37,160
Speaker 5: And so in that sense, yeah, the tail is wagging

677
00:32:37,160 --> 00:32:39,360
Speaker 5: the doll. And again, when you look at this again,

678
00:32:39,440 --> 00:32:41,560
Speaker 5: it would happen in the nineties where you have if

679
00:32:41,600 --> 00:32:45,400
Speaker 5: every day people are buying calls on AOL or calls

680
00:32:45,480 --> 00:32:48,640
Speaker 5: on Navidia or calls on Apple like they are in

681
00:32:48,640 --> 00:32:52,160
Speaker 5: the last few days, it can drive a stock significantly

682
00:32:52,240 --> 00:32:54,560
Speaker 5: higher or lower. And that's why I think you see

683
00:32:54,560 --> 00:32:58,640
Speaker 5: these large ranges occurring because the options are wagging the dog.

684
00:32:58,800 --> 00:33:02,120
Speaker 2: It's almost like it becomes kind of reflexive at that point, right,

685
00:33:02,200 --> 00:33:05,760
Speaker 2: Like you have all the options that are betting on volatility,

686
00:33:05,960 --> 00:33:09,040
Speaker 2: and so because of all those options, you start seeing

687
00:33:09,320 --> 00:33:10,600
Speaker 2: bigger swings correct.

688
00:33:10,640 --> 00:33:12,360
Speaker 6: One of the interesting things is that, you know, we

689
00:33:12,400 --> 00:33:14,840
Speaker 6: talked about like the VIX floor being twenty back in

690
00:33:14,840 --> 00:33:16,960
Speaker 6: the late nineties, but even though the equity market was

691
00:33:17,000 --> 00:33:19,680
Speaker 6: doing generally quite well most of the time, but the

692
00:33:19,920 --> 00:33:22,720
Speaker 6: peak of the vics in that same time frame, you

693
00:33:22,760 --> 00:33:25,720
Speaker 6: had the Russian ruble crisis, you had the Asia crisis.

694
00:33:26,160 --> 00:33:29,120
Speaker 6: The peaks there were exceeded by vomag Edden speak or

695
00:33:29,400 --> 00:33:31,560
Speaker 6: at the same level here, which was again not a

696
00:33:31,600 --> 00:33:35,000
Speaker 6: fundamental driven thing. So it's really a good way to

697
00:33:35,040 --> 00:33:37,640
Speaker 6: think about just that was sort of a more normal

698
00:33:37,960 --> 00:33:40,880
Speaker 6: VIX environment because there was just you didn't have the

699
00:33:40,920 --> 00:33:43,280
Speaker 6: financialization of the stock market the way you'd have it.

700
00:33:43,560 --> 00:33:46,640
Speaker 5: And again, this is a short tail strategy. It's like

701
00:33:46,640 --> 00:33:49,400
Speaker 5: a converts or a short stale strategy. You know, credits

702
00:33:49,400 --> 00:33:51,400
Speaker 5: to short tail strategy. There's what hedge funds live with.

703
00:33:51,480 --> 00:33:53,400
Speaker 5: I mean, that's what they're really good at doing, is

704
00:33:53,560 --> 00:33:56,320
Speaker 5: selling that tail and managing that risk. And so that's

705
00:33:56,360 --> 00:33:57,120
Speaker 5: where we are.

706
00:33:57,000 --> 00:34:00,080
Speaker 2: Also, Joe, I think people forget nowadays. But like the

707
00:34:00,160 --> 00:34:05,360
Speaker 2: Vollmageddon blow up, so that was like two relatively small etns. Yeah,

708
00:34:05,360 --> 00:34:09,080
Speaker 2: that ended up going belly up, but that sparked a

709
00:34:09,160 --> 00:34:11,239
Speaker 2: sell off, a pretty big sell off in like the

710
00:34:11,280 --> 00:34:13,840
Speaker 2: cash market in the S and P five hundred. People

711
00:34:13,880 --> 00:34:14,760
Speaker 2: forget that, Yeah.

712
00:34:14,560 --> 00:34:17,320
Speaker 3: I forget that element of it that it did break

713
00:34:17,400 --> 00:34:21,799
Speaker 3: containment so to speak, outside of the etns themselves. Can

714
00:34:21,840 --> 00:34:24,200
Speaker 3: we go back to I don't want to just talk

715
00:34:24,200 --> 00:34:26,360
Speaker 3: about AI because AI is a thing, but the AI

716
00:34:26,520 --> 00:34:29,719
Speaker 3: risk factor, which is it seems like a lot of

717
00:34:29,719 --> 00:34:33,319
Speaker 3: the market now many things are being shoved into an

718
00:34:33,400 --> 00:34:36,920
Speaker 3: AI thesis. So it's like Uve, Nvidia, Obviously, you have

719
00:34:36,960 --> 00:34:41,600
Speaker 3: other chip companies. Obviously you have Apple hitting all time highs.

720
00:34:41,880 --> 00:34:44,960
Speaker 3: You have that feeds into Berkshire Hathaway, which owns a

721
00:34:45,000 --> 00:34:47,600
Speaker 3: lot of Apple et cetera. Can you talk a little

722
00:34:47,640 --> 00:34:50,880
Speaker 3: bit more about this sort of not necessarily price correlation

723
00:34:51,080 --> 00:34:53,280
Speaker 3: because we know that I guess you know, the charts

724
00:34:53,280 --> 00:34:55,920
Speaker 3: are the charts, but this sort of thematic correlation, and

725
00:34:55,960 --> 00:34:58,040
Speaker 3: then how you see that affecting the risk.

726
00:34:58,040 --> 00:35:02,279
Speaker 4: Or narrative correlation? Right, narrative quarter coperate or utilities are

727
00:35:02,320 --> 00:35:03,360
Speaker 4: a utilities?

728
00:35:03,440 --> 00:35:04,759
Speaker 3: Yeah, totally industrials.

729
00:35:05,520 --> 00:35:07,399
Speaker 5: I like to say, Wall Street's good at doing one

730
00:35:07,440 --> 00:35:10,239
Speaker 5: thing really really well, selling.

731
00:35:09,920 --> 00:35:12,040
Speaker 4: Greed and telling stories.

732
00:35:12,160 --> 00:35:14,480
Speaker 5: And so they can tell a story about getting people

733
00:35:14,520 --> 00:35:17,520
Speaker 5: to get greedy about this theme. They're really good at

734
00:35:17,520 --> 00:35:20,799
Speaker 5: making money off of it. And so everybody wants to

735
00:35:20,840 --> 00:35:23,799
Speaker 5: sell this theme right now, Like you can sell this theme,

736
00:35:24,000 --> 00:35:26,840
Speaker 5: sell the theme of AI. I mean na video Navidio.

737
00:35:27,600 --> 00:35:28,680
Speaker 3: By the Stocks sell the thing.

738
00:35:28,760 --> 00:35:28,960
Speaker 4: Yeah.

739
00:35:28,960 --> 00:35:30,080
Speaker 5: I mean it's if you think about I mean, the

740
00:35:30,160 --> 00:35:32,400
Speaker 5: video is making incredible amounts of money. I mean the

741
00:35:32,400 --> 00:35:34,000
Speaker 5: amount of money they make in a quarter, I mean

742
00:35:34,160 --> 00:35:36,640
Speaker 5: I never thought was imaginable. Yeah, so of course it's

743
00:35:36,680 --> 00:35:38,640
Speaker 5: a great theme to sell. Now is everyone else going

744
00:35:38,680 --> 00:35:40,480
Speaker 5: to be as good at this theme as them? I

745
00:35:40,480 --> 00:35:43,399
Speaker 5: don't know, But it doesn't mean that Wall Street isn't

746
00:35:43,440 --> 00:35:43,880
Speaker 5: going to sell it.

747
00:35:43,920 --> 00:35:46,680
Speaker 6: But to answer, your question about is there like theme

748
00:35:46,719 --> 00:35:48,719
Speaker 6: correlation to.

749
00:35:49,560 --> 00:35:52,200
Speaker 3: All these training models and one day it's like, you

750
00:35:52,239 --> 00:35:54,480
Speaker 3: know what, they're mostly good for making, but we can't

751
00:35:54,480 --> 00:35:56,680
Speaker 3: figure out how to make money on them canceling the orders.

752
00:35:56,800 --> 00:35:58,240
Speaker 3: But then what happens to this trade?

753
00:35:58,320 --> 00:36:01,400
Speaker 6: I think that's a really good question and very relevant one.

754
00:36:01,400 --> 00:36:03,600
Speaker 6: But I'm going to put up back like my market strategy,

755
00:36:04,160 --> 00:36:06,600
Speaker 6: equity market strategy had on, not my options had on.

756
00:36:07,200 --> 00:36:10,560
Speaker 6: And the thing you have to recognize about today's equity

757
00:36:10,640 --> 00:36:14,400
Speaker 6: market is that it's not necessarily particularly expensive at the

758
00:36:14,719 --> 00:36:16,520
Speaker 6: s and P five hundred level.

759
00:36:16,560 --> 00:36:16,719
Speaker 4: There.

760
00:36:16,760 --> 00:36:18,520
Speaker 6: Obviously there's always parts of it that are a little

761
00:36:18,520 --> 00:36:20,680
Speaker 6: bit high, a little bit low. The SMB is not

762
00:36:20,760 --> 00:36:24,360
Speaker 6: cheap by most any standard here. But what's very important

763
00:36:24,640 --> 00:36:27,799
Speaker 6: is that we're not really driven with a pe expansion

764
00:36:28,120 --> 00:36:32,200
Speaker 6: type of bull market right now. It's really earning's driven here, right,

765
00:36:32,560 --> 00:36:35,320
Speaker 6: And if you look at what sectors are moving higher,

766
00:36:35,600 --> 00:36:38,080
Speaker 6: it's very correlated with how much earnings growth that they're

767
00:36:38,120 --> 00:36:38,680
Speaker 6: doing here.

768
00:36:38,840 --> 00:36:38,960
Speaker 4: Right.

769
00:36:39,280 --> 00:36:41,839
Speaker 6: So let's say, okay, let's say if utilities just don't

770
00:36:41,880 --> 00:36:44,680
Speaker 6: generate their earnings that some of the AI narrators might

771
00:36:44,680 --> 00:36:47,279
Speaker 6: suggest they will, Well, that's going to be reflected and

772
00:36:47,280 --> 00:36:50,880
Speaker 6: the quarterly reports, the analyst estimates, and it doesn't necessarily

773
00:36:50,920 --> 00:36:53,000
Speaker 6: have to mean that there's some big blow up risk

774
00:36:53,120 --> 00:36:55,799
Speaker 6: because of this AI thing. I think it's we're dealing with,

775
00:36:55,880 --> 00:36:59,120
Speaker 6: in many respects, one of the healthiest equity markets we've

776
00:36:59,160 --> 00:37:01,919
Speaker 6: seen in a long time time, because it's not really

777
00:37:01,920 --> 00:37:05,280
Speaker 6: about pe expansion. It's really about really strong earning.

778
00:37:05,080 --> 00:37:07,520
Speaker 3: Screen and it hasn't been about zerp or rate cuts either.

779
00:37:07,680 --> 00:37:09,480
Speaker 4: Now exactly what companies are making money.

780
00:37:09,520 --> 00:37:12,239
Speaker 6: We're having great returns last year with a hawkish or

781
00:37:12,239 --> 00:37:15,360
Speaker 6: at least maybe not hawkish fed but as we saw yesterday,

782
00:37:15,400 --> 00:37:17,040
Speaker 6: but not like, oh my god, we got a cut

783
00:37:17,160 --> 00:37:19,600
Speaker 6: rates to get the s and p up another ten percent.

784
00:37:19,680 --> 00:37:20,400
Speaker 4: That's not happening.

785
00:37:20,440 --> 00:37:23,279
Speaker 5: I mean, companies are really making money. And so when

786
00:37:23,320 --> 00:37:26,400
Speaker 5: we talk about this dispersion trade, from a fundamental standpoint,

787
00:37:26,440 --> 00:37:28,600
Speaker 5: the companies making money or going up and the ones

788
00:37:28,600 --> 00:37:31,640
Speaker 5: who aren't are going down, and so fundamentally it's a

789
00:37:31,760 --> 00:37:34,640
Speaker 5: risk trade. I think, Joe you put it once, it's

790
00:37:34,640 --> 00:37:36,560
Speaker 5: like owning equities is kind of a short ball trade

791
00:37:36,600 --> 00:37:39,040
Speaker 5: to degree, and that's kind of what this is. It's

792
00:37:39,040 --> 00:37:41,600
Speaker 5: a short vaulta degree and owning equities is part of that.

793
00:37:42,200 --> 00:37:45,799
Speaker 5: And you know, that's a trade that people are comfortable with. Now,

794
00:37:45,880 --> 00:37:47,760
Speaker 5: is there a time it goes Yeah? But I truly

795
00:37:47,800 --> 00:37:50,000
Speaker 5: think that, you know, Vall gets a bad name and

796
00:37:50,080 --> 00:37:52,200
Speaker 5: options get a bad name in a lot of ways

797
00:37:52,200 --> 00:37:55,600
Speaker 5: because we have these once in a while bad players

798
00:37:56,000 --> 00:37:57,560
Speaker 5: in the market. I mean twenty twenty we had a

799
00:37:57,560 --> 00:37:59,600
Speaker 5: bad player as well. I mean, that's a lot of

800
00:37:59,600 --> 00:38:02,000
Speaker 5: what happened. And at the bottom was a VALL related event.

801
00:38:02,040 --> 00:38:05,040
Speaker 2: But that's are you talking in treasury or no.

802
00:38:04,840 --> 00:38:06,480
Speaker 5: No, no, no, I'm talking about why the market was

803
00:38:06,560 --> 00:38:09,080
Speaker 5: going up and down ten percent in one day. We

804
00:38:09,120 --> 00:38:11,640
Speaker 5: can't many anymore. There was a product out there that

805
00:38:11,719 --> 00:38:14,560
Speaker 5: created a lot of the VALL that occurred at the bottom.

806
00:38:14,880 --> 00:38:16,480
Speaker 5: If you go look at the bottom, it was right

807
00:38:16,520 --> 00:38:19,759
Speaker 5: when the vics expired. So that's just another conversation for

808
00:38:19,800 --> 00:38:23,120
Speaker 5: another day. But that being said, they have a bad name.

809
00:38:23,200 --> 00:38:25,799
Speaker 5: And I still think that this market, as long as

810
00:38:26,160 --> 00:38:29,080
Speaker 5: Michael puts it perfectly, these companies are making money. There's

811
00:38:29,080 --> 00:38:31,720
Speaker 5: a fundamental reason for this. We have fundamentally a reason

812
00:38:31,719 --> 00:38:34,160
Speaker 5: why we're going up into the right and as long

813
00:38:34,200 --> 00:38:36,920
Speaker 5: as that goes on. As Jo said, this equity market

814
00:38:36,960 --> 00:38:39,000
Speaker 5: is a short vault trade. This is a short fault trade.

815
00:38:39,000 --> 00:38:41,080
Speaker 5: It will work if we go into an O one,

816
00:38:41,160 --> 00:38:43,080
Speaker 5: O two where all of a sudden, what do you

817
00:38:43,120 --> 00:38:46,240
Speaker 5: call it, Y two k goes away and everyone stops

818
00:38:46,280 --> 00:38:48,560
Speaker 5: making the investment in Y two k, which is sort

819
00:38:48,600 --> 00:38:50,239
Speaker 5: of the end or Dogs dot Com all of a

820
00:38:50,239 --> 00:38:52,960
Speaker 5: sudden realize we don't have Dogs dot Com not making money,

821
00:38:53,200 --> 00:38:56,000
Speaker 5: So it's different. As long as those fundamentals are strong,

822
00:38:56,120 --> 00:38:58,359
Speaker 5: this will be fine. You know. I don't think as

823
00:38:58,560 --> 00:39:00,640
Speaker 5: options are going to be as big of a problem

824
00:39:01,040 --> 00:39:04,480
Speaker 5: because everyone's had problems with them, so people are aware

825
00:39:04,480 --> 00:39:06,760
Speaker 5: of it. Again, it's not saying there isn't one player

826
00:39:07,280 --> 00:39:09,960
Speaker 5: who is an out there who's over levered, who's put

827
00:39:10,000 --> 00:39:12,480
Speaker 5: this on in an investment. And again we started this

828
00:39:12,520 --> 00:39:16,640
Speaker 5: as the dispersion trade, not the dispersion investment, and there's

829
00:39:16,680 --> 00:39:19,560
Speaker 5: a huge difference between a trade and an investment.

830
00:39:20,000 --> 00:39:20,759
Speaker 4: Yeah, but I.

831
00:39:20,800 --> 00:39:23,239
Speaker 6: Think all of this, Joe's also one of the reasons why,

832
00:39:23,320 --> 00:39:27,200
Speaker 6: you know, when I do my trade recommendations for market hedging,

833
00:39:27,239 --> 00:39:29,160
Speaker 6: I've certainly been of the view this year that I've

834
00:39:29,200 --> 00:39:32,040
Speaker 6: been very constructive on the equity market. Obviously, anything can happen,

835
00:39:32,160 --> 00:39:35,120
Speaker 6: but the question is do you want to hedge equity

836
00:39:35,160 --> 00:39:37,960
Speaker 6: market risk with S and P puts or with VIX calls.

837
00:39:37,960 --> 00:39:39,920
Speaker 6: And I think this is one of the arguments for

838
00:39:40,000 --> 00:39:42,880
Speaker 6: going with VIX calls. Not that we've seen anything explosive

839
00:39:42,960 --> 00:39:44,640
Speaker 6: yet this year, but if we do see some of

840
00:39:44,680 --> 00:39:46,800
Speaker 6: these things unwined, ye, you're going to get a kicker

841
00:39:46,840 --> 00:39:49,400
Speaker 6: there where you might see the VICS cruise very quickly

842
00:39:49,480 --> 00:39:51,839
Speaker 6: up to forty five. And it probably won't stay there

843
00:39:52,080 --> 00:39:54,480
Speaker 6: unless there's a real good fundamental reason for that to happen.

844
00:39:54,520 --> 00:39:56,520
Speaker 6: But if you do get this volma get into a

845
00:39:56,560 --> 00:39:57,400
Speaker 6: dot zero, that's.

846
00:39:58,520 --> 00:40:01,920
Speaker 2: And you buy that tip to forty five is exciting

847
00:40:02,080 --> 00:40:04,440
Speaker 2: given that we haven't really seen that since like early

848
00:40:04,520 --> 00:40:07,160
Speaker 2: twenty twenty. But talk to us. I guess about the

849
00:40:07,200 --> 00:40:11,359
Speaker 2: general outlook for volatility, particularly cross asset, because so far

850
00:40:11,440 --> 00:40:13,839
Speaker 2: the big story for the past few years has been

851
00:40:14,400 --> 00:40:17,880
Speaker 2: volatility in fixed income. I'm looking at the MOVE index

852
00:40:17,960 --> 00:40:21,280
Speaker 2: right now versus volatility and equities viz.

853
00:40:21,440 --> 00:40:22,040
Speaker 3: The VICS.

854
00:40:22,360 --> 00:40:25,640
Speaker 2: There's just been this enormous gap, like all the interesting

855
00:40:25,680 --> 00:40:26,680
Speaker 2: stuff has happened in.

856
00:40:27,040 --> 00:40:28,840
Speaker 6: Yeah, the way I look at it is that the

857
00:40:29,000 --> 00:40:32,600
Speaker 6: treasury volatility sort of the foundation of the house on

858
00:40:32,640 --> 00:40:38,080
Speaker 6: which so much other volatilities, FX volatilities, equity volatilities, foreign

859
00:40:38,080 --> 00:40:40,640
Speaker 6: equity volatilities are sort of sitting on top of So

860
00:40:41,040 --> 00:40:42,960
Speaker 6: if you look at the move index and Tracy, I'm

861
00:40:42,960 --> 00:40:43,920
Speaker 6: looking at your chart right now.

862
00:40:43,920 --> 00:40:45,920
Speaker 4: If you look at that, it basically.

863
00:40:46,160 --> 00:40:49,160
Speaker 3: Tracy, put your privacy screen up, so.

864
00:40:49,120 --> 00:40:50,600
Speaker 5: I don't have a screen in front of the eyes

865
00:40:50,640 --> 00:40:50,960
Speaker 5: too much.

866
00:40:51,080 --> 00:40:54,520
Speaker 2: Joe, don't say anything bad about our guests in the gap.

867
00:40:55,200 --> 00:40:57,439
Speaker 2: So far, everything's been very flattering, so we're good.

868
00:40:57,560 --> 00:41:01,800
Speaker 6: But that sharp basically shows the ark of the hiking cycle,

869
00:41:01,920 --> 00:41:04,680
Speaker 6: right And if you look at when that move indeck

870
00:41:04,719 --> 00:41:07,960
Speaker 6: started breaking out higher, it was March of twenty twenty

871
00:41:07,960 --> 00:41:11,320
Speaker 6: two when the hiking cycle started. And officially, I guess,

872
00:41:11,360 --> 00:41:13,840
Speaker 6: assuming we don't get any more hikes, which we probably won't,

873
00:41:14,200 --> 00:41:16,000
Speaker 6: you know, that was last a lie. It's kind of

874
00:41:16,000 --> 00:41:17,719
Speaker 6: just stayed there. And if you look at the long

875
00:41:17,800 --> 00:41:20,920
Speaker 6: term history of the treasury volatility or the move indecks,

876
00:41:20,960 --> 00:41:23,799
Speaker 6: when you get to that resting place, the ball comes

877
00:41:23,840 --> 00:41:25,680
Speaker 6: down a lot. Now, there was a lot of all

878
00:41:25,960 --> 00:41:28,120
Speaker 6: late September and October, which was I would argue with

879
00:41:28,280 --> 00:41:31,120
Speaker 6: much more term premium ball there. That's maybe a subject

880
00:41:31,160 --> 00:41:34,760
Speaker 6: for another discussion. But early this year we had seven

881
00:41:34,800 --> 00:41:37,640
Speaker 6: cuts priced and then we went to one cut priced.

882
00:41:37,719 --> 00:41:42,480
Speaker 6: And right now treasury volatility should continue to contract, you know,

883
00:41:42,520 --> 00:41:44,360
Speaker 6: because we're kind of in the short strokes. There's this

884
00:41:44,440 --> 00:41:47,440
Speaker 6: not too much maybe we get something that maybe you know,

885
00:41:47,480 --> 00:41:48,920
Speaker 6: I think there's an argument as we get into the

886
00:41:48,960 --> 00:41:51,839
Speaker 6: elections that maybe the term premium should expand and we'll

887
00:41:51,880 --> 00:41:54,720
Speaker 6: see a little bit more craziness as we get closer

888
00:41:54,760 --> 00:41:57,279
Speaker 6: and closer to November. But I think and I think

889
00:41:57,320 --> 00:42:00,000
Speaker 6: Josh would agree that we're kind of both bearished treasure

890
00:42:00,160 --> 00:42:02,239
Speaker 6: revolve in the near term right now for all the

891
00:42:02,280 --> 00:42:05,320
Speaker 6: obvious reasons that you know, we're in a tweaking situation,

892
00:42:05,520 --> 00:42:08,440
Speaker 6: not any large scale things, and you know, the CPI

893
00:42:08,560 --> 00:42:11,040
Speaker 6: comes a little hot, a little cold, but basically you

894
00:42:11,120 --> 00:42:13,080
Speaker 6: sort of know where the trends are and you know,

895
00:42:13,120 --> 00:42:16,439
Speaker 6: there's just not much more room here. The broader thing, though,

896
00:42:16,520 --> 00:42:18,479
Speaker 6: is that are we going to go see a big

897
00:42:18,520 --> 00:42:21,200
Speaker 6: decline in treasury volatility like we used to know? Right

898
00:42:21,239 --> 00:42:24,319
Speaker 6: you know, back when we had basically zerup and you know,

899
00:42:24,400 --> 00:42:26,920
Speaker 6: like if you look at the ECB's policy rates, they

900
00:42:26,920 --> 00:42:30,080
Speaker 6: were like stuck in concrete at negative levels for six

901
00:42:30,160 --> 00:42:34,160
Speaker 6: years until finally inflation sort of broke up that concrete.

902
00:42:34,239 --> 00:42:36,719
Speaker 6: So if you look at things like the amount of

903
00:42:36,760 --> 00:42:39,120
Speaker 6: negative healing debt in the world that's gone from nineteen

904
00:42:39,160 --> 00:42:41,440
Speaker 6: trillion a couple of years ago to like zero today,

905
00:42:42,000 --> 00:42:46,000
Speaker 6: there is a strategic retreat away from these ultra dubbish policies.

906
00:42:46,680 --> 00:42:49,200
Speaker 6: And I think as that happens, and you're starting to

907
00:42:49,200 --> 00:42:52,440
Speaker 6: see more geopolitical news developed, you know in Europe, you know,

908
00:42:52,480 --> 00:42:56,880
Speaker 6: election wise, deglobalization, they are all that stuff, to my mind,

909
00:42:57,080 --> 00:43:01,160
Speaker 6: should help support higher term premium and also higher rate

910
00:43:01,239 --> 00:43:03,280
Speaker 6: volatility across the curve over.

911
00:43:03,120 --> 00:43:04,040
Speaker 4: The broader things.

912
00:43:04,080 --> 00:43:06,799
Speaker 6: So I get I want to link that back to

913
00:43:06,840 --> 00:43:09,960
Speaker 6: this notion of to remember that you had great equity

914
00:43:10,000 --> 00:43:13,080
Speaker 6: markets in ninety eight ninety nine, and you had a

915
00:43:13,160 --> 00:43:14,879
Speaker 6: VIX much higher than it is right now.

916
00:43:15,120 --> 00:43:15,759
Speaker 4: I think that's a.

917
00:43:16,000 --> 00:43:18,120
Speaker 5: I mean also, like this summer seems like it's lining

918
00:43:18,200 --> 00:43:20,560
Speaker 5: up to be quiet because we have the most that

919
00:43:20,880 --> 00:43:24,120
Speaker 5: the most certain yeah, except for August, right, the election

920
00:43:24,239 --> 00:43:26,560
Speaker 5: certainty is we know what we got, Everyone knows where

921
00:43:26,560 --> 00:43:29,960
Speaker 5: everyone stands, so there's nothing uncertain there. Let's say, you know,

922
00:43:30,080 --> 00:43:32,440
Speaker 5: unless one of the two people isn't running, but that's

923
00:43:32,480 --> 00:43:35,520
Speaker 5: another question for another day. So that's there. As I

924
00:43:35,520 --> 00:43:38,000
Speaker 5: said earlier, I look at and applied volatilities across ASCID

925
00:43:38,040 --> 00:43:40,040
Speaker 5: classes across the globe. One of the things I also

926
00:43:40,080 --> 00:43:42,719
Speaker 5: look at is credit. So credit is as tight as

927
00:43:42,760 --> 00:43:45,080
Speaker 5: it's ever been, and there is a huge correlation between

928
00:43:45,080 --> 00:43:48,600
Speaker 5: credit and vall, especially in times of stress. And so

929
00:43:49,280 --> 00:43:51,520
Speaker 5: I think that the credit picture, I think would be

930
00:43:51,560 --> 00:43:54,040
Speaker 5: the one that would make me the most concern if

931
00:43:54,080 --> 00:43:56,080
Speaker 5: we start seeing you know, everyone's talking about, you know,

932
00:43:56,080 --> 00:43:57,440
Speaker 5: we're going to come to the cliff, and the cliff

933
00:43:57,520 --> 00:44:00,520
Speaker 5: keeps moving of the credit or the real estate market

934
00:44:00,600 --> 00:44:03,600
Speaker 5: or whatever. We'll see what happens. Right, everyone says it's

935
00:44:03,600 --> 00:44:05,239
Speaker 5: this fall we're gonna find out. So I think the

936
00:44:05,280 --> 00:44:06,759
Speaker 5: summer is going to be what it's going to be,

937
00:44:07,480 --> 00:44:08,759
Speaker 5: and we'll see what happens in the fall.

938
00:44:08,880 --> 00:44:11,480
Speaker 6: I'm less worried about a credit event. I'm sure there's

939
00:44:11,480 --> 00:44:13,880
Speaker 6: going to be isolated credit events, but I think it's

940
00:44:13,960 --> 00:44:16,560
Speaker 6: been pretty well signaled. You know, the real state issues.

941
00:44:16,680 --> 00:44:17,560
Speaker 5: It's just real tight.

942
00:44:17,680 --> 00:44:19,960
Speaker 6: Yeah it's been real tight, but there's there's good reasons

943
00:44:19,960 --> 00:44:23,799
Speaker 6: for it to be real tight, and more buyers. But look,

944
00:44:23,840 --> 00:44:26,319
Speaker 6: to me, what I think is interesting and again the

945
00:44:26,360 --> 00:44:29,319
Speaker 6: elections are really starting to come into close focus. And

946
00:44:29,400 --> 00:44:31,319
Speaker 6: one of the things that I'm thinking, you know, like

947
00:44:31,360 --> 00:44:33,600
Speaker 6: you typically get the questions like what do you do

948
00:44:33,640 --> 00:44:36,440
Speaker 6: with the equity market on the election? To me, I

949
00:44:36,480 --> 00:44:38,000
Speaker 6: think the real question is what do you do with

950
00:44:38,000 --> 00:44:40,239
Speaker 6: the bond market on the election? Because what I hear

951
00:44:40,280 --> 00:44:44,400
Speaker 6: from either side, either side of the aisle, there's no

952
00:44:44,480 --> 00:44:47,200
Speaker 6: real plans not announced yet anyway, about how we're going

953
00:44:47,280 --> 00:44:50,919
Speaker 6: to whip inflation. Now right, It's obviously been Biden's achilles heel,

954
00:44:51,520 --> 00:44:54,799
Speaker 6: but a lot of Trump's policies have been at the

955
00:44:54,920 --> 00:44:58,400
Speaker 6: margin at least as inflationary, maybe more so if he

956
00:44:59,040 --> 00:45:01,560
Speaker 6: puts his fingers on the scale of the FED. That's

957
00:45:01,600 --> 00:45:03,719
Speaker 6: where I think the bond market, in the bond market

958
00:45:03,800 --> 00:45:05,200
Speaker 6: volatility discussion gets love.

959
00:45:05,280 --> 00:45:08,279
Speaker 5: And that's going back to the original conversation. If the

960
00:45:08,280 --> 00:45:11,120
Speaker 5: bond market volatility goes up, that's when the dispersion question

961
00:45:11,280 --> 00:45:14,120
Speaker 5: becomes more. So you can almost look at dispersion as

962
00:45:14,120 --> 00:45:16,759
Speaker 5: a way of thinking about bondball because those are the

963
00:45:16,760 --> 00:45:17,840
Speaker 5: correlated one events.

964
00:45:17,920 --> 00:45:18,080
Speaker 4: Right.

965
00:45:18,600 --> 00:45:21,080
Speaker 2: I like that we've come full circle to the beginning

966
00:45:21,120 --> 00:45:24,359
Speaker 2: of this conversation. So I mean we could talk for

967
00:45:24,560 --> 00:45:26,600
Speaker 2: like hours and hours and hours about.

968
00:45:26,360 --> 00:45:28,600
Speaker 3: All we could just listen to you.

969
00:45:28,760 --> 00:45:32,759
Speaker 2: Yeah, well, listeners, if you are interested in hearing more

970
00:45:32,840 --> 00:45:36,280
Speaker 2: from Michael and Josh, they have their own podcast called

971
00:45:36,320 --> 00:45:39,239
Speaker 2: the Macro and Volatility Podcast, so you can.

972
00:45:39,160 --> 00:45:40,279
Speaker 3: Definitely check that out.

973
00:45:40,400 --> 00:45:43,200
Speaker 2: Yeah, exactly, Josh and Mike, thank you so much for

974
00:45:43,239 --> 00:45:44,960
Speaker 2: coming on all thoughts. Really appreciate it.

975
00:45:45,160 --> 00:45:46,200
Speaker 5: Thank you so much for having us.

976
00:45:46,320 --> 00:45:46,959
Speaker 4: Yeah, this was great.

977
00:45:46,960 --> 00:46:00,359
Speaker 3: Thanks so much, Joe.

978
00:46:00,400 --> 00:46:01,480
Speaker 2: I love that conversation.

979
00:46:01,800 --> 00:46:04,359
Speaker 3: Yeah, I did to, you know, I really liked this

980
00:46:04,520 --> 00:46:09,320
Speaker 3: idea trades becoming investment. We once was a trade, whether

981
00:46:09,320 --> 00:46:12,640
Speaker 3: it's short volatility, whether it's the dispersion trade, something that

982
00:46:12,760 --> 00:46:15,880
Speaker 3: traders put on, and in my mind I sort of think,

983
00:46:16,120 --> 00:46:18,360
Speaker 3: you know, like, yeah, it kind of makes sense. It's like,

984
00:46:18,400 --> 00:46:21,840
Speaker 3: if you're long stogs your short volatility, why not just

985
00:46:21,920 --> 00:46:24,920
Speaker 3: do the short volatility component alone and strip away all

986
00:46:24,960 --> 00:46:26,640
Speaker 3: this stuff and just get what you're at. I can

987
00:46:26,719 --> 00:46:30,239
Speaker 3: see how these things become investments over time. Absolutely.

988
00:46:30,280 --> 00:46:32,480
Speaker 2: The other thing that stuck out at me was just

989
00:46:32,640 --> 00:46:36,520
Speaker 2: the reflexivity of all these changes in markets, and I think,

990
00:46:36,680 --> 00:46:40,160
Speaker 2: I hope maybe this is wishole thinking. I hope there

991
00:46:40,200 --> 00:46:43,560
Speaker 2: is a greater recognition nowadays that you can get the

992
00:46:43,760 --> 00:46:47,120
Speaker 2: tail wagging the dog scenario that Josh described, and we

993
00:46:47,239 --> 00:46:52,000
Speaker 2: have seen various instances of it, Vollmageddon being the prime example.

994
00:46:52,440 --> 00:46:54,839
Speaker 2: And it seems like when we're talking about a sort

995
00:46:54,880 --> 00:46:59,239
Speaker 2: of opaque market activity like the dispersion trade, where we

996
00:46:59,360 --> 00:47:02,319
Speaker 2: don't really have a good sense of how big it is.

997
00:47:02,440 --> 00:47:06,120
Speaker 2: We can kind of try to triangulate it through looking

998
00:47:06,120 --> 00:47:09,640
Speaker 2: at implied volatility and things like that, but we don't

999
00:47:09,680 --> 00:47:11,840
Speaker 2: have a good sense. It feels to me like that

1000
00:47:12,000 --> 00:47:15,840
Speaker 2: is a very worthy question to ask, like how much

1001
00:47:16,160 --> 00:47:19,560
Speaker 2: would a big unwind actually end up impacting the market?

1002
00:47:19,840 --> 00:47:22,919
Speaker 3: Yeah, so we don't have an equivalent of this trait

1003
00:47:22,960 --> 00:47:25,880
Speaker 3: of XIV. There's not some ETN where you can just

1004
00:47:26,000 --> 00:47:30,480
Speaker 3: lazily go and click three letters into your robinhood or sit.

1005
00:47:30,560 --> 00:47:35,200
Speaker 2: But there is a CBOE dispersion index. So there is, Yeah,

1006
00:47:35,239 --> 00:47:37,080
Speaker 2: and I think there's a product attached to it, but

1007
00:47:37,120 --> 00:47:38,319
Speaker 2: I can't remember the exact name.

1008
00:47:38,360 --> 00:47:41,239
Speaker 3: Maybe, but oh, by the way, I'm definitely going to

1009
00:47:41,320 --> 00:47:43,640
Speaker 3: become one of those people that like, so, you know,

1010
00:47:43,640 --> 00:47:45,400
Speaker 3: i'd check the VIX everyone, so while would check the

1011
00:47:45,440 --> 00:47:48,160
Speaker 3: move et cetera. I'm going to now add the CEBO

1012
00:47:48,400 --> 00:47:51,840
Speaker 3: three month Implied Correlation Index to those things that I

1013
00:47:52,000 --> 00:47:54,279
Speaker 3: tweet from time to time and hopes so sounds like

1014
00:47:54,360 --> 00:47:57,520
Speaker 3: oh new lo in the CEBO three month applied correlation Index.

1015
00:47:57,760 --> 00:47:58,960
Speaker 3: Get a few retweets on that.

1016
00:47:59,200 --> 00:47:59,359
Speaker 6: Well.

1017
00:47:59,400 --> 00:48:01,480
Speaker 2: The other thing I I was thinking about was that

1018
00:48:01,600 --> 00:48:05,319
Speaker 2: idea of like the rerating of the AI sector what

1019
00:48:05,360 --> 00:48:07,920
Speaker 2: that would actually mean, because again I think about correlation

1020
00:48:08,080 --> 00:48:11,360
Speaker 2: and like correlation in many ways is the trickiest concept

1021
00:48:11,400 --> 00:48:13,560
Speaker 2: in all of finance, but it's also at the heart

1022
00:48:13,719 --> 00:48:15,960
Speaker 2: of all of finance, and so I guess my question

1023
00:48:16,120 --> 00:48:20,040
Speaker 2: is if investors were suddenly to become disillusioned with AI,

1024
00:48:20,280 --> 00:48:23,680
Speaker 2: or if there was a mass recognition that actually the

1025
00:48:23,719 --> 00:48:26,800
Speaker 2: profits that were expected aren't coming through to the sector,

1026
00:48:27,400 --> 00:48:30,600
Speaker 2: what would that knock on effect be? Like Josh mentioned

1027
00:48:30,800 --> 00:48:33,520
Speaker 2: investment and the idea that in the early two thousands

1028
00:48:33,560 --> 00:48:36,640
Speaker 2: everyone was investing in these new internet companies and then

1029
00:48:36,680 --> 00:48:40,760
Speaker 2: suddenly that stopped, is a similar situation with AI. Now

1030
00:48:41,280 --> 00:48:45,000
Speaker 2: what would the mass impact be if AI was rerated,

1031
00:48:45,080 --> 00:48:47,000
Speaker 2: the investment stopped, and then we get these knock on

1032
00:48:47,040 --> 00:48:48,279
Speaker 2: effects in the market as well.

1033
00:48:48,719 --> 00:48:51,240
Speaker 3: Tracy, I have a really good idea for us. Okay,

1034
00:48:51,600 --> 00:48:54,239
Speaker 3: there's a bunch of bluegrass songs. They have breakdown in

1035
00:48:54,280 --> 00:48:59,000
Speaker 3: the headline Bluegrass breakdown, Foggy Mountain breakdown, Earl's breakdown, et cetera.

1036
00:48:59,400 --> 00:49:02,000
Speaker 3: Can we write it? I saw it together called correlation breakdown, Like.

1037
00:49:02,160 --> 00:49:04,399
Speaker 2: Oh, I would love that, right, But also I really

1038
00:49:04,480 --> 00:49:06,719
Speaker 2: want you to write that other song. Yeah, I gave

1039
00:49:06,760 --> 00:49:08,839
Speaker 2: you this is a non finance song. But I had

1040
00:49:09,000 --> 00:49:12,800
Speaker 2: a brilliant country song idea, and I've sold the rights

1041
00:49:12,840 --> 00:49:13,320
Speaker 2: to Joe.

1042
00:49:13,400 --> 00:49:15,600
Speaker 3: Well, we're gonna share them. But yeah, let's write correlation

1043
00:49:15,680 --> 00:49:16,440
Speaker 3: breakdown sometimes.

1044
00:49:16,480 --> 00:49:17,080
Speaker 2: Yeah, let's do it.

1045
00:49:17,120 --> 00:49:19,239
Speaker 3: Okay, Okay, shall we leave it there? Let's leave it there.

1046
00:49:19,480 --> 00:49:22,160
Speaker 2: This has been another episode of the Odd Lots Podcast.

1047
00:49:22,280 --> 00:49:25,560
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.

1048
00:49:25,280 --> 00:49:28,160
Speaker 3: And I'm Joe Wisenthal. You can follow me at the Stalwart.

1049
00:49:28,480 --> 00:49:31,080
Speaker 3: Follow our guests. You can ping them on the terminal.

1050
00:49:31,120 --> 00:49:34,560
Speaker 3: Michael Purvis, CEO and founder of Tullback and Capital Advisors.

1051
00:49:34,880 --> 00:49:38,520
Speaker 3: Josh Silva, managing partner at CIO Passaic Partners. Look for

1052
00:49:38,600 --> 00:49:41,800
Speaker 3: that green light and say hi and follow our producers.

1053
00:49:41,840 --> 00:49:45,160
Speaker 3: Carmen Rodriguez at Carman armand Dash, Ob Bennett at Dashbot

1054
00:49:45,160 --> 00:49:48,400
Speaker 3: and Kilbrooks at Kilbrooks. Thank you to our producer, Moses Onam.

1055
00:49:48,640 --> 00:49:51,320
Speaker 3: From our Oddlots content, go to Bloomberg dot com slash

1056
00:49:51,360 --> 00:49:53,960
Speaker 3: odd Lots. We have transcripts of blog and a newsletter

1057
00:49:54,400 --> 00:49:56,640
Speaker 3: and chat about these topics twenty four to seven in

1058
00:49:56,719 --> 00:49:59,760
Speaker 3: the discord Discord dot gg slash od lots.

1059
00:50:00,080 --> 00:50:02,359
Speaker 2: And if you enjoy odd Lots, if you like it

1060
00:50:02,400 --> 00:50:06,160
Speaker 2: when we dive deep into the dispersion trade slash investment,

1061
00:50:06,200 --> 00:50:08,960
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1062
00:50:09,000 --> 00:50:12,839
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1063
00:50:12,880 --> 00:50:15,959
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1064
00:50:16,280 --> 00:50:18,520
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1065
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1066
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1067
00:50:25,760 --> 00:50:46,720
Speaker 2: for listening.