WEBVTT - Waiting for the Panic 0:00:13.680 --> 0:00:16.800 Hello, and welcome to What Goes Up, a Bloomberg weekly 0:00:16.840 --> 0:00:21.520 market podcast. I'm Sarah pontecor reporter on the Cross Asset team, 0:00:21.520 --> 0:00:24.200 and I'm Mike Reagan, a senior editor on the Markets team. 0:00:24.200 --> 0:00:26.360 This week on the show, you could say the market's 0:00:26.400 --> 0:00:29.920 gone wild. Swings of three to four in the spire 0:00:30.040 --> 0:00:33.000 have become the norm. The Fed issued its first emergency 0:00:33.080 --> 0:00:35.519 rate cut since two thousand and eight, and ten year 0:00:35.560 --> 0:00:39.240 treasury yields are below one. What does it all mean? 0:00:39.479 --> 0:00:41.960 And when will it end? I don't know, Sarah? Why 0:00:41.960 --> 0:00:43.640 are you asking me? How would I possibly know that? 0:00:43.680 --> 0:00:46.720 I thought you have the answer to everything. Anyway, of course, 0:00:46.800 --> 0:00:49.559 when the episode with the craziest thing we saw in 0:00:49.640 --> 0:00:52.159 markets this week? Sorry, you know I abstained from that 0:00:52.200 --> 0:00:54.520 competition last time. You abstained last time because you're gonna 0:00:54.560 --> 0:00:58.040 have an extra extra great one that well, you know 0:00:58.400 --> 0:01:01.080 since I abstained, you know what that means? Still undefeated. 0:01:01.400 --> 0:01:03.760 I guess that's true. We'll give it to you. I'll 0:01:03.760 --> 0:01:05.399 give it to you this time because I'm feeling nice. 0:01:05.400 --> 0:01:08.000 But anyway, we've got some great guests that will hopefully 0:01:08.040 --> 0:01:11.200 tell us when will it end? No pressure here, but 0:01:11.680 --> 0:01:13.600 joining us for the first time on the show. Very 0:01:13.640 --> 0:01:16.920 happy to have him. He is the chief macro strategist 0:01:17.000 --> 0:01:21.080 at e I a all weather Alpha Partners not fullsnala. 0:01:21.200 --> 0:01:23.240 How welcome to the show. Thanks for having me. Appreciate 0:01:23.240 --> 0:01:27.000 it absolutely and also back on the show, our old friend. 0:01:27.520 --> 0:01:32.520 He's a cross set reporter. He's a Reddit aficionado. Lukawa, 0:01:32.600 --> 0:01:36.760 welcome to the show. I'm not just I am not. 0:01:37.040 --> 0:01:39.560 You're more so than the rest of us. Now that 0:01:39.600 --> 0:01:41.639 you're here, I have to I have to tell you something. Okay, 0:01:41.680 --> 0:01:44.040 you know, you know I consider you a friend. Sara 0:01:44.160 --> 0:01:47.320 is your friend. Even novels your friend. We gather do 0:01:47.440 --> 0:01:50.160 here to talk about that that white belt you've been wearing. 0:01:51.800 --> 0:01:55.120 The white belt, this is an intervention. This is an intervention. 0:01:55.240 --> 0:01:59.040 It's always in between Memorial Day and Labor Day somewhere. 0:01:59.240 --> 0:02:01.760 Is he wearing it now, Luke? Oh yeah. For listeners 0:02:01.800 --> 0:02:04.640 who don't know Luke, I will describe he You actually asked, 0:02:04.640 --> 0:02:07.600 how would you describe Luke's fashion sense? I describe it 0:02:07.640 --> 0:02:11.639 as risk on. He's sorry, he's like a lever. He's 0:02:11.680 --> 0:02:14.360 like a Leverty, triple LEVERTYTF of fact. You know how 0:02:14.440 --> 0:02:18.880 Luke described it? Loud, loud, loud, loud and cheap. Was 0:02:18.919 --> 0:02:23.520 actually the full description is it's reddy. It's a very 0:02:23.600 --> 0:02:26.359 it's hip on Reddit. Look, you know there's appropriate time 0:02:26.440 --> 0:02:28.560 to wear a white belt, you know, like you just 0:02:28.560 --> 0:02:32.600 started karate lessons, maybe where it's like a special occasion 0:02:32.639 --> 0:02:35.480 at the retirement home bingo night or something. Sara's from Florida, 0:02:35.600 --> 0:02:40.959 she knows. I'm just jealous. Anyway, I'm Luke is very 0:02:40.960 --> 0:02:43.600 progressive dresser. Michael Michael come in on Monday with a 0:02:43.600 --> 0:02:47.080 white belt. I'd be happy to give Mike my belt. 0:02:47.080 --> 0:02:53.040 He just wouldn't fit it. Cheeze Luke. All Right, you win, 0:02:53.160 --> 0:02:56.080 you win anyway, not for Let's start with you, because 0:02:57.120 --> 0:02:59.800 apart from Luke's white belt this, uh, it's just been 0:02:59.800 --> 0:03:03.640 a crazy week. I was going through one of your notes, uh, 0:03:03.919 --> 0:03:06.200 from from your hedge fund that you sent around the clients, 0:03:06.280 --> 0:03:10.320 and I was astounded because you've tallied up the number 0:03:10.639 --> 0:03:13.960 of tests being done in each country for the coronavirus, 0:03:14.040 --> 0:03:18.360 and then you obviously divided it by population. Let me 0:03:18.600 --> 0:03:23.840 read the listeners. Some numbers here, Uh, South Korea approximately 0:03:23.880 --> 0:03:26.000 test per million people, and you give sort of a 0:03:26.080 --> 0:03:30.799 league table here, Austria two thirty five per million goes 0:03:30.840 --> 0:03:34.280 on and on, Finland twenty three per million, Vietnam eighteen, 0:03:34.520 --> 0:03:38.280 all the way at the bottom. United States one test 0:03:38.360 --> 0:03:41.240 per per million people. And later in the you say 0:03:41.240 --> 0:03:43.640 obviously that the market is is very much gonna be 0:03:43.680 --> 0:03:47.240 a referendum on how well uh the government here is 0:03:47.280 --> 0:03:50.760 managing this crisis. I'm not getting much confidence from that 0:03:50.800 --> 0:03:53.280 one per million, as has the tide turned it? Although 0:03:53.320 --> 0:03:55.280 do you think they're they're starting to get out ahead 0:03:55.280 --> 0:03:58.240 of this? Obviously, Congress past this eight billion and change 0:03:58.800 --> 0:04:01.720 UH bill to to put some money into the health 0:04:01.760 --> 0:04:05.680 care system and fight this. How how concerned is the 0:04:05.720 --> 0:04:07.720 market that this is just not gonna end up well 0:04:07.760 --> 0:04:11.160 for the the US? Right? So? I think, um, you know, 0:04:11.200 --> 0:04:14.400 before before this kind of shock to the markets, the 0:04:14.480 --> 0:04:16.479 markets were kind of trying to debate whether or not 0:04:16.600 --> 0:04:18.760 this was going to be primarily kind of like a 0:04:18.839 --> 0:04:22.320 China story, a China, China only story. I think as 0:04:22.320 --> 0:04:24.200 we started to see the case counts in South Korea 0:04:24.240 --> 0:04:26.080 pick up, it became clear that, no, this is not 0:04:26.120 --> 0:04:29.320 going to be kind of isolated to China. And now 0:04:29.360 --> 0:04:31.280 that we've fallen as far as we have, I do 0:04:31.360 --> 0:04:35.200 think the market now is expecting you know, a rise 0:04:35.200 --> 0:04:39.200 in case counts as we get testing to plif rate. However, 0:04:39.520 --> 0:04:41.960 we still are quite behind the curve. So like right now, 0:04:42.040 --> 0:04:44.640 for example, the latest is that you know, we get 0:04:44.680 --> 0:04:49.200 about a million and a half testing capacity going forward 0:04:49.279 --> 0:04:51.919 over the next couple of weeks. However, because of the 0:04:52.000 --> 0:04:54.560 lab constraints, we can only do about ten k per day, 0:04:54.600 --> 0:04:57.040 which would take a while to scale up. So we 0:04:57.080 --> 0:05:00.240 would expect that, like there is an inflection in case 0:05:00.279 --> 0:05:03.080 counsel's coming, but it's probably not going to be too 0:05:03.120 --> 0:05:06.000 quickly unless a private sector really steps up. And we're 0:05:06.120 --> 0:05:08.520 quite quite down the line on the league tables, as 0:05:08.560 --> 0:05:12.039 you mentioned, so we're pretty concerned that um ultimately the 0:05:12.080 --> 0:05:14.080 markets will decide that the White House is a bit 0:05:14.080 --> 0:05:16.279 behind the curve on this threat. I remember a couple 0:05:16.279 --> 0:05:18.239 of weeks ago there was a lot of optimism building 0:05:18.320 --> 0:05:20.680 up because there are reports coming out saying that the 0:05:20.680 --> 0:05:23.080 coronavirus was speaking. Of course, a lot of this pertained 0:05:23.120 --> 0:05:26.040 to China, but now we're seeing this international spread and 0:05:26.080 --> 0:05:29.080 there's a lot of numbers data flying out there regarding 0:05:29.080 --> 0:05:32.240 the coronavirus. I mean, what actually are the factors that 0:05:32.320 --> 0:05:35.000 you guys look out to try to get a sense 0:05:35.040 --> 0:05:39.640 of how this is actually progressing, and to inform any 0:05:39.760 --> 0:05:42.360 investment decisions, if at all, because it seems like it's 0:05:42.400 --> 0:05:46.599 so difficult when there's so many UH numbers and so 0:05:46.720 --> 0:05:49.640 much data out there that kind of flies against the 0:05:49.640 --> 0:05:51.720 phase of another one. Right, These are the type of 0:05:51.839 --> 0:05:55.200 environments that me, as a macer junkie, I love, although 0:05:55.240 --> 0:05:58.599 I don't like the social implications. But the idea is that, yes, 0:05:58.760 --> 0:06:00.960 there was a case sequence show case counting clients in 0:06:01.000 --> 0:06:06.280 China after a historic quarantine, right, Um, even if we 0:06:06.320 --> 0:06:09.719 wanted to that wouldn't happen here. Um, And it did spread, 0:06:09.960 --> 0:06:13.840 and there were community spread events across the world. And 0:06:13.880 --> 0:06:16.400 so what we're looking at is we want to see 0:06:16.440 --> 0:06:18.880 folks start to migrate from the idea of we can 0:06:18.920 --> 0:06:21.360 contain this virus, which I think is a fantasy, and 0:06:21.360 --> 0:06:23.840 people are coming around to toward how do we deal 0:06:23.839 --> 0:06:26.880 with congestion and how do we deal with capacity constraints. 0:06:27.320 --> 0:06:31.840 If you do certain social isolation procedures that prevents super 0:06:31.960 --> 0:06:35.320 high congestions and hospitals and you know, just regular public 0:06:35.320 --> 0:06:38.200 health and in fact public spaces in general, well that 0:06:38.240 --> 0:06:40.400 does as slow as the virus with the capacity and 0:06:40.400 --> 0:06:44.080 the health, health care infrastructure, and biotechnology developments can catch 0:06:44.200 --> 0:06:46.520 up to the threat. So what we're focused on mostly 0:06:46.640 --> 0:06:49.880 is how quickly does the United States, in response to 0:06:50.000 --> 0:06:54.080 rising case counts, implements social isolation procedures that slows the 0:06:54.160 --> 0:06:57.640 viruses transmission and allows the health care apparatus to catch 0:06:57.720 --> 0:06:59.560 up to the threat. If you answer your phone, it's 0:06:59.600 --> 0:07:02.919 one of your fund investors, uh, and they say, you know, 0:07:03.560 --> 0:07:05.760 what are you guys doing? What's going on? You know, 0:07:05.880 --> 0:07:08.480 is it novels? Not here right now? Please leave a message? 0:07:09.000 --> 0:07:11.040 You know what what are you telling people? You know, 0:07:11.080 --> 0:07:13.160 what would you tell a client if they called and said, 0:07:13.200 --> 0:07:15.160 what do you how do you guys dealing with this? Well, 0:07:15.200 --> 0:07:19.320 if it's daring market hours then um, probably somebody else 0:07:19.560 --> 0:07:23.640 um our business will be handla um. If but you know, 0:07:23.680 --> 0:07:25.320 you get me on the phone outside of market hours, 0:07:25.360 --> 0:07:29.239 first thing I say, please wash your hands. It really 0:07:29.360 --> 0:07:32.000 it really does make a huge difference. You know, we 0:07:32.040 --> 0:07:34.440 can we can debate whether basks are helpfulness and that, 0:07:34.480 --> 0:07:36.480 but like you know, I'm sure you guys have seen 0:07:36.520 --> 0:07:40.280 what happens to the bacteria and viruses when not just 0:07:40.440 --> 0:07:43.000 virus but bacteria as well. Um, when when you wash 0:07:43.040 --> 0:07:45.600 your hands for twenty seconds. It's a. It's a. It's amazing. 0:07:45.760 --> 0:07:50.320 So what is the portfolio allocations when of washing your hands? Right? Right? Right? Yeah, 0:07:50.760 --> 0:07:53.040 no kidding, I like I like that. So, you know, 0:07:53.120 --> 0:07:56.000 we we were quite bearish around Valentine's Day, as we 0:07:56.040 --> 0:07:59.000 wrote in our past note, UM, so we were pretty 0:07:59.000 --> 0:08:02.000 well positioned going in to this shock. Um. Now what 0:08:02.080 --> 0:08:04.640 we're kind of expecting is um, you know, it takes 0:08:04.640 --> 0:08:07.000 some time for the market to digest the shock. We 0:08:07.080 --> 0:08:09.720 probably have a relatively wide and volatile range for the 0:08:09.760 --> 0:08:13.000 time being. And as we start to see the potential 0:08:13.040 --> 0:08:17.360 for social isolation procedures be implemented, then it becomes, like 0:08:17.400 --> 0:08:20.480 you said, a referendum about how behind or on the 0:08:20.520 --> 0:08:23.560 curve is the White House and to what extent um? 0:08:23.640 --> 0:08:25.680 You know, how long are we gonna have social isolation 0:08:25.720 --> 0:08:27.760 procedures to the extent we get them. If we get them, 0:08:27.840 --> 0:08:30.320 that's the biggest risk to like earning his growth and 0:08:30.800 --> 0:08:34.240 potential for job losses. And then the question becomes eight 0:08:34.280 --> 0:08:36.080 point three billion dollars is not going to move the needle. 0:08:36.160 --> 0:08:37.960 We're gonna need you know, we need to add another 0:08:38.040 --> 0:08:40.040 zero to that. If you look at like nine eleven, 0:08:40.120 --> 0:08:45.240 Hurricane Katrin, a Hurricane Sandy, billion dollars packages. So you 0:08:45.280 --> 0:08:47.760 know that we're we're nowhere near that level right now. 0:08:47.840 --> 0:08:51.280 If we see the White House and Congress suddenly catch up, 0:08:51.720 --> 0:08:54.880 perhaps you know, the lowest in based on the fact 0:08:54.920 --> 0:08:57.640 that President Trump called it the Corona flu Wednesday night, 0:08:57.960 --> 0:09:01.880 we do expect there's some risk for potential more downside, 0:09:02.000 --> 0:09:05.520 potentially new lows. Once we get to the point where, um, 0:09:05.559 --> 0:09:07.640 you know, we're starting to see kind of a little 0:09:07.679 --> 0:09:11.120 bit of panic about the effect of potential social isolation procedures. 0:09:11.440 --> 0:09:13.719 Then we start bargain hunting. And then I kind of 0:09:13.720 --> 0:09:15.720 passed the baton to my partner who runs our launch 0:09:15.720 --> 0:09:33.800 short portfolio. Gotcha, gotcha, Look, let's bring you in here. 0:09:33.840 --> 0:09:35.760 I mean, you wear that white belt, but I consider 0:09:35.800 --> 0:09:38.800 you a black belt in looking at volatility markets. Right 0:09:38.960 --> 0:09:45.080 half hots segue, what what's what? What's the volt market 0:09:45.160 --> 0:09:46.719 look like to you? I mean, unless I looked, the 0:09:46.840 --> 0:09:51.720 VIX is kind of in that thirty range, absolutely screaming. 0:09:51.800 --> 0:09:55.559 The volatility term structure is, you know, has signaling a 0:09:55.679 --> 0:09:58.760 persistent degree of alarm that you know, I haven't seen 0:09:58.840 --> 0:10:01.280 in my few years in this business. If I if 0:10:01.320 --> 0:10:04.280 I was back in I probably would have seen something 0:10:04.360 --> 0:10:07.120 like this in terms of the persistence in the magnitude 0:10:07.200 --> 0:10:10.400 of how much the ball markets are saying, be very 0:10:10.559 --> 0:10:13.040 very worried about now, but also be worried about later. 0:10:13.400 --> 0:10:15.280 That's kind of what the read and you get when 0:10:15.720 --> 0:10:18.800 the front ball month is so uh, the front futures 0:10:18.800 --> 0:10:21.719 contract is so high. Uh, there's about the second is 0:10:21.760 --> 0:10:24.360 also still so high. And one thing that's been happening 0:10:24.440 --> 0:10:28.200 is people have been getting absolutely roasted trying to short volatility. 0:10:28.600 --> 0:10:31.080 People think, you know, when VALL goes up, that means, 0:10:31.160 --> 0:10:32.599 you know, it's a it's a good short. And you know, 0:10:32.760 --> 0:10:34.920 it is true that when VALL goes up you have 0:10:35.040 --> 0:10:37.480 more kind of profit potential, more room to move just 0:10:37.640 --> 0:10:40.480 on VALL coming in. But the the structure of the 0:10:40.520 --> 0:10:44.200 market recently has been such that spot vix is actually 0:10:44.320 --> 0:10:47.800 much much much higher than the front month, and uh, 0:10:47.920 --> 0:10:50.679 that convergence is taking place more and more with the 0:10:50.760 --> 0:10:53.440 front month. So your actual investible way to short fall 0:10:53.720 --> 0:10:55.640 and you know, in an easy way short of getting 0:10:55.640 --> 0:10:58.439 the strip uh is actually converging to the upside. So 0:10:58.520 --> 0:11:01.360 people are getting uh, pretty much absolutely killed on this. 0:11:01.520 --> 0:11:04.079 And it's a reminder that you know, I got to 0:11:04.080 --> 0:11:06.520 look at the curve structure, gotta look at the term structure. Oh, 0:11:06.559 --> 0:11:09.280 when you're getting involved in this, whatsoever is that notion 0:11:09.400 --> 0:11:12.760 that you know, the market was so blatantly short vaultil 0:11:12.800 --> 0:11:15.520 you're heading into this, Is that sort of rebounding into 0:11:15.559 --> 0:11:17.640 the equity market, You think that maybe making these sell 0:11:17.679 --> 0:11:20.280 offs a little bit worse. I think somewhat. I do 0:11:20.480 --> 0:11:23.719 think there's something to the argument that the you know, 0:11:23.880 --> 0:11:28.360 the degree of euphoria we saw in January and early 0:11:28.480 --> 0:11:31.720 February has you know, the necessary every reaction has an 0:11:31.720 --> 0:11:34.320 opposite and equal reaction just means that it's a little 0:11:34.360 --> 0:11:36.920 worse on the other side. I you know, I think 0:11:37.080 --> 0:11:40.200 all the people that were h kind of flooding into 0:11:40.280 --> 0:11:43.160 single stock calls, we've seen that reverse. The equity put 0:11:43.280 --> 0:11:47.120 call actually taught actually bottomed the day of the market 0:11:47.200 --> 0:11:50.240 topped at like point five five, so many more calls 0:11:50.480 --> 0:11:53.600 training them puts. But it hasn't really risen to kind 0:11:53.640 --> 0:11:55.959 of you know, alarming level, since we're still short of 0:11:56.040 --> 0:11:59.439 like Q four team put call ratios. So you know, 0:11:59.760 --> 0:12:02.000 that could be a sense that people are just cutting 0:12:02.120 --> 0:12:05.839 risk rather than hedging risk. But the vall metrics in 0:12:06.000 --> 0:12:08.800 terms of what people are looking for, it's crazy, Like 0:12:08.880 --> 0:12:10.840 when you think about what does the thirty vix mean, 0:12:10.960 --> 0:12:14.240 it means essentially, we're expecting a near two percent move 0:12:14.480 --> 0:12:17.240 every day for a month and the SMP five hundred. 0:12:17.400 --> 0:12:20.560 But that's what we're realizing. We're realizing insanely high than 0:12:22.000 --> 0:12:24.240 So I want to get your take because what that said. 0:12:24.320 --> 0:12:28.479 So Monday we had four percent bounds, then on Tuesday 0:12:29.000 --> 0:12:32.360 we had this massive sell off. Then the next day 0:12:32.360 --> 0:12:34.839 and this was after Super Tuesday, we get another four 0:12:34.960 --> 0:12:37.400 percent balance, and we have people out there saying, oh, 0:12:37.440 --> 0:12:40.600 it's the Biden balance because Vice President Biden did better 0:12:40.640 --> 0:12:43.440 in Super Tuesday. Yet on Thursday we get another massive 0:12:43.480 --> 0:12:46.680 sell off. How much can you actually look to politics 0:12:46.760 --> 0:12:48.840 at this point in time and look at the potential 0:12:49.200 --> 0:12:51.640 Democratic nominees to say who's going to run and actually 0:12:51.760 --> 0:12:55.560 make a direct correlation to market moves in a market 0:12:55.840 --> 0:12:58.640 in which it seems like we are just moving NonStop 0:12:58.760 --> 0:13:01.880 one way or the other inmentum bets every every single day. 0:13:02.480 --> 0:13:05.079 I don't think we ever had any leftism priced into 0:13:05.120 --> 0:13:08.160 the market. Um. You know, it made sense um to 0:13:08.280 --> 0:13:11.880 me at least that on Tuesday when the Fed cut 0:13:11.920 --> 0:13:14.920 fifty BIPs, that a lot of folks, including me, would 0:13:14.960 --> 0:13:16.480 come in and say, all right, this, you know, the 0:13:16.559 --> 0:13:20.640 upside catalyst has been materialized and realized. You know, we 0:13:20.720 --> 0:13:22.719 can go ahead and dump the long risk and we 0:13:22.760 --> 0:13:25.520 can shorten this bounce, which is what happened. Then you know, 0:13:25.640 --> 0:13:28.199 you get that rally on Wednesday on Biden, and I 0:13:28.320 --> 0:13:30.760 think there is you know, the market practitioners tend to 0:13:30.840 --> 0:13:32.520 be a little bit right leaning, so there is a 0:13:32.640 --> 0:13:36.679 bit of a you know, personal kind of like you know, 0:13:37.040 --> 0:13:39.120 just feeling like a little bit more relieved. And the 0:13:39.160 --> 0:13:41.760 markets were quite volatile, so you know, these type of 0:13:41.800 --> 0:13:44.800 moves are gonna happen anyway. So that also, you know, 0:13:44.960 --> 0:13:47.439 kind of made sense to me. But that's why we 0:13:47.559 --> 0:13:50.800 were looking to fade that bounce. Um, you know, and 0:13:51.600 --> 0:13:53.520 it's it's starting to work. But but speaking to your 0:13:53.600 --> 0:13:56.360 point in Luke, you know this, you know, the folks 0:13:56.640 --> 0:13:59.400 have this recency bias of you know, by the dip 0:13:59.640 --> 0:14:01.839 or like short the spikes and volatility. This is a 0:14:02.000 --> 0:14:04.640 very different shock than our typical shocks. This is not 0:14:04.720 --> 0:14:09.160 a shock that fiscal policy and monetary policy can um 0:14:09.280 --> 0:14:13.240 by themselves handle. This is a crisis of confidence. Um, 0:14:13.360 --> 0:14:16.880 that cannot be you know, stemmed by central bank liquidity. 0:14:17.360 --> 0:14:20.080 And uh, it's kind of analogous to the nine eleven 0:14:20.400 --> 0:14:23.000 and so it really depends on the White House's response. 0:14:23.120 --> 0:14:26.080 And um, you know we're we're below Vietnam and our 0:14:26.120 --> 0:14:29.440 testing testing ratios. So and to me, the big, the 0:14:29.640 --> 0:14:33.560 big issue is what happens in the credit markets. Uh. 0:14:33.680 --> 0:14:36.640 You know we saw this sort of little known British 0:14:36.720 --> 0:14:39.880 air airline, uh fly By. I say, I hadn't heard 0:14:39.880 --> 0:14:42.960 of fly Have you heard of Never? I'm you know, 0:14:43.000 --> 0:14:47.760 I'm a greatound guy, so greatly alright, I would say, Um, 0:14:48.120 --> 0:14:51.560 but you know you see the credit false swaps on 0:14:51.840 --> 0:14:56.440 the cruise ship operators, Carnival and and Real Caribbean. At 0:14:56.520 --> 0:14:58.560 what point do you think the credit market really starts 0:14:58.600 --> 0:14:59.920 to freak out? I mean it kind of is a 0:15:00.040 --> 0:15:02.560 little bit of issuance was down, high yield issuance was 0:15:02.960 --> 0:15:05.240 sort of froze up for a few days there. It 0:15:05.360 --> 0:15:07.960 does this have the potential to to become a credit crisis? 0:15:08.000 --> 0:15:10.760 Do you think? I mean, they're the potential is there. 0:15:11.080 --> 0:15:13.520 I don't think it will happen because I do think 0:15:13.680 --> 0:15:16.960 the pressure from the equity markets will eventually necessit will 0:15:17.040 --> 0:15:21.160 eventually pressure a sufficient response, even if it's belated. Um, 0:15:21.680 --> 0:15:23.200 I'm not a credit guy, so I'm not going to 0:15:23.240 --> 0:15:25.920 pretend like I am. But from what I understand, it's 0:15:25.960 --> 0:15:28.080 been very difficult to trade right now. It's very a 0:15:28.160 --> 0:15:30.400 liquid There has been a bit of a diversion between 0:15:30.400 --> 0:15:33.320 equity and credit. So I wouldn't be surprised if, for example, 0:15:33.520 --> 0:15:35.040 like one of the things we're looking for for like 0:15:35.120 --> 0:15:38.800 a real bottom, um is a durable bottom. Is that? Okay? 0:15:38.920 --> 0:15:42.920 We we have some public health policies in place that 0:15:43.000 --> 0:15:45.960 are kind of freaking out folks about earning trajectories and 0:15:46.080 --> 0:15:49.000 like kind of commercial activity credit is starting to kind 0:15:49.040 --> 0:15:50.680 of you know, spreads are starting to wide and blah 0:15:50.680 --> 0:15:54.080 blah blah, and you know the hidie holes, the places 0:15:54.080 --> 0:15:56.280 where people are kind of hiding in, like you know, 0:15:56.480 --> 0:16:00.720 tech tech software or like utility staples, those are getting 0:16:00.760 --> 0:16:04.080 hit too, reflecting, you know, just risk constraints, position liquidation. 0:16:04.680 --> 0:16:07.480 That's where we're looking for a real bottom, and we don't. 0:16:07.480 --> 0:16:10.240 We don't really quite see that yet. So the fun 0:16:10.440 --> 0:16:13.360 credit divergence that's really crept up recently that I can 0:16:13.480 --> 0:16:16.640 comment on is, you know, I was just Thursday morning, 0:16:16.680 --> 0:16:19.120 I was running through the numbers and looking at you know, 0:16:19.200 --> 0:16:21.960 your weekly change in the SMP five d versus the 0:16:22.560 --> 0:16:26.240 weekly net move and investment grade credit of fault swaps. 0:16:26.640 --> 0:16:28.520 And you know, normally you think stock market up, that 0:16:28.680 --> 0:16:31.880 means you know, risk on our companies are getting more 0:16:31.920 --> 0:16:35.240 credit worthy, perceived risk of default going down. Uh. The 0:16:35.640 --> 0:16:39.360 combination of having stocks up at least you know, point 0:16:39.440 --> 0:16:41.360 eight on the week and at this point we were 0:16:41.440 --> 0:16:43.560 up you know, three point five on the SMP five 0:16:43.640 --> 0:16:46.520 hundred and I g C d X at least five 0:16:46.560 --> 0:16:50.480 basis points wider. Uh, that combination is incredibly rare. It's 0:16:50.840 --> 0:16:55.400 the last time it happened was the week ending eighteen, 0:16:55.480 --> 0:16:59.160 which was literally the day after the peak in the 0:17:00.200 --> 0:17:02.760 right before the route. So that's that's something I've been 0:17:02.800 --> 0:17:05.360 kind of giving my eye on his credit is um 0:17:05.720 --> 0:17:09.200 credit is saying that, you know, the bounce that we've 0:17:09.280 --> 0:17:12.359 gotten in stocks is should be treated as kind of 0:17:12.600 --> 0:17:15.280 you know, the way knofs outlined how he's treating it 0:17:15.600 --> 0:17:18.840 not your most encouraging analogy, but not also pointed out 0:17:18.880 --> 0:17:21.240 some places that investors have been hiding watching tech and 0:17:21.280 --> 0:17:24.359 the sort look you've been pointing out low volatility stocks 0:17:24.359 --> 0:17:25.879 because that was also an area that a lot of 0:17:25.920 --> 0:17:28.600 people went to hide last year. Uh, and you found 0:17:28.680 --> 0:17:31.719 that low volatility stocks have not really been living up 0:17:31.800 --> 0:17:34.080 to their name. Uh. What does that really tell you? 0:17:34.160 --> 0:17:36.439 And can you walk us through what you've actually been seeing? Yes, 0:17:36.520 --> 0:17:38.840 So this has been weird, and I think it's like Uh, 0:17:39.280 --> 0:17:43.000 I think it's a combination of a high baseline volatility 0:17:43.119 --> 0:17:46.239 environment with you know, the most defining feature we've had 0:17:46.280 --> 0:17:50.320 in the market is the relentless treasury bid that you know, 0:17:50.640 --> 0:17:54.320 has brought yields to all time lows tenure below one, etcetera, etcetera. 0:17:54.720 --> 0:17:57.359 So what we've seen is that ten day realized volatility 0:17:57.480 --> 0:18:01.240 and SMP five hunder low Volatility index actually exceeds that 0:18:01.520 --> 0:18:03.680 of the you know, of the market at large. So 0:18:03.800 --> 0:18:06.440 this happens from time to time, but this doesn't happen 0:18:06.600 --> 0:18:09.119 during spikes. The only time this has happened, you know, 0:18:09.160 --> 0:18:11.960 in the past five years, Uh, during a time when 0:18:12.080 --> 0:18:14.840 you know, realize vall is anything you could consider elevated, 0:18:15.160 --> 0:18:17.639 was in September. I believe at that time we were 0:18:17.720 --> 0:18:21.600 kind of worried about lack of central bank monetary ammunition, 0:18:21.680 --> 0:18:24.320 and at that time, you know, some Trump worries seeping 0:18:24.320 --> 0:18:26.480 into the market. There was a time when investors actually 0:18:26.520 --> 0:18:28.480 thought Trump would be the worst thing ever for the market, 0:18:28.520 --> 0:18:30.920 but before they decided the exact opposite. Uh, you know, 0:18:31.040 --> 0:18:33.080 in the course of a night. So what we found 0:18:33.119 --> 0:18:37.000 there is essentially that the outsized movements in high vall 0:18:37.160 --> 0:18:39.480 it seems to be a function of and especially this 0:18:39.680 --> 0:18:42.320 was key last week when we had you know, a 0:18:42.400 --> 0:18:46.160 correlation one sell off. Basically everything getting hit the same 0:18:46.200 --> 0:18:49.880 amount looks kind of looks like your mass equity index 0:18:50.240 --> 0:18:53.760 futures selling. So what happens in bad days? Everything goes down, 0:18:53.920 --> 0:18:56.720 everything goes down together in a big way. But then 0:18:56.840 --> 0:18:59.800 on the up days, what what are people gravitating back 0:18:59.840 --> 0:19:02.879 to something with an above average dividend yield? In something 0:19:03.440 --> 0:19:06.719 in which the company is their cash flow. Utilities and uh, 0:19:06.840 --> 0:19:10.680 I believe reads reads one of them, but utilities and 0:19:10.720 --> 0:19:14.640 consumer staples you make up SMP five low vall that's 0:19:14.680 --> 0:19:17.280 over three times the SMP five hundred those cash streams. 0:19:17.359 --> 0:19:20.160 Even in an ensignment of social distancing, you're you're still 0:19:20.280 --> 0:19:25.320 pretty reliable, especially when LSOL and Clorox exact paper is 0:19:25.400 --> 0:19:27.560 in there. Yes, so it just it just strikes me 0:19:27.680 --> 0:19:31.320 as something worth monitoring because if you, I'll get out 0:19:31.440 --> 0:19:34.320 my craziest thing I've seen this this week, you have 0:19:34.680 --> 0:19:37.760 to have SMP time. To have SMP five hundred low 0:19:37.920 --> 0:19:40.800 vall beating the market on a day when the SMP 0:19:40.960 --> 0:19:44.160 five hundred is up at least four percent, that's happened 0:19:44.160 --> 0:19:47.280 now four times, going back to early nine seventy two. 0:19:47.640 --> 0:19:51.199 Happened March sixteenth two, not a great time if you remember. 0:19:51.320 --> 0:19:54.639 October eight also not a great time if you remember, 0:19:54.920 --> 0:19:57.600 and twice this week on Monday and Wednesday. Alright, nice, 0:19:57.680 --> 0:19:59.480 I appreciate the segue because I did not have a 0:19:59.520 --> 0:20:02.000 segue influence. So we do have some voicemail. We the 0:20:02.560 --> 0:20:06.159 what goes Up hotline has been overflowing with voicemails with 0:20:06.320 --> 0:20:09.720 crazy things and other observations. Apologies that we can't play 0:20:09.800 --> 0:20:11.280 them all, but we have a couple to play, so 0:20:11.720 --> 0:20:14.960 let's let's hear him. Hey, this is a message for 0:20:15.359 --> 0:20:18.960 what goes Up? Long time listener, first time caller. This 0:20:19.240 --> 0:20:22.280 is your friend and colleague, Cameron christ I'm the craziest 0:20:22.359 --> 0:20:26.280 thing I saw in markets this week was a horrible 0:20:26.440 --> 0:20:32.479 white Nauga hide tie worn by Luke Kawa just because 0:20:32.880 --> 0:20:35.520 it seems as if markets are on trajectory to go 0:20:35.600 --> 0:20:39.040 back to nineteen seventies levels, Luke, doesn't mean you have 0:20:39.280 --> 0:20:45.120 to dress like it. Thanks guys, well you this, Thank 0:20:45.760 --> 0:20:50.040 thank you Cameron for that completely unsolicited complete Yeah, it's 0:20:50.119 --> 0:20:52.240 like I said, I refused that at your column. If 0:20:52.280 --> 0:20:56.399 you don't call bust. I told him to the belt though, 0:20:56.480 --> 0:20:58.000 but I don't know what tie he's talking about. You know, 0:20:58.280 --> 0:21:01.000 I have no idea either. All of my ties are wonderful. 0:21:01.040 --> 0:21:03.040 You must have meant to say belt, and he just 0:21:03.160 --> 0:21:06.040 went on and went and said, but I'm just jealously 0:21:06.040 --> 0:21:09.399 because I had six older brothers, I was the youngest, 0:21:09.520 --> 0:21:12.080 and the bullying all went downhill. So I I kind 0:21:12.080 --> 0:21:13.639 of look at you, was that little brother. I never 0:21:13.760 --> 0:21:16.480