WEBVTT - Yesterday's Event is a VIX Event, Curnutt Says 0:00:00.080 --> 0:00:13.800 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jailey. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:35.200 Bloomberg dot Com, and of course on the Bloomberg John Farrell, 0:00:35.280 --> 0:00:37.680 you have the story out from Credit Suitets and basically 0:00:37.720 --> 0:00:41.080 what this is about is a E t N a 0:00:41.280 --> 0:00:45.680 VIX product moving from a hundred and ten to fifteen. Yeah, 0:00:45.680 --> 0:00:49.199 it's a short volatility products. So basically Credit Suite has 0:00:49.200 --> 0:00:51.640 two of these exchange traded notes that basically mirror the 0:00:51.680 --> 0:00:54.520 inverse performance of the of the volatility index what we 0:00:54.600 --> 0:00:56.639 call the VIX TOMPs. So quite clearly, as the VIX 0:00:56.640 --> 0:01:00.160 has exploded from like eight in January to fifty on 0:01:00.200 --> 0:01:02.960 the screen at the moment, these exchange traded notes have 0:01:03.040 --> 0:01:06.480 been absolutely hammered. The big question now is whether they 0:01:06.520 --> 0:01:09.600 actually consider a redemption of the volatility note. And what 0:01:09.640 --> 0:01:12.440 we understand, according to a person familiar with the situation, 0:01:12.760 --> 0:01:15.600 is that Credit Swa are indeed doing that, which is 0:01:15.600 --> 0:01:17.320 why I'm really happy to say that din Kerne is 0:01:17.360 --> 0:01:19.600 with us credit sway to stock down like almost four 0:01:19.600 --> 0:01:21.480 percent on my screen was as low as eight and 0:01:21.480 --> 0:01:24.040 a half percent. There is some sixth serious concern out 0:01:24.040 --> 0:01:26.320 there about what this means. So let's drain some of 0:01:26.360 --> 0:01:29.240 the drama, Dean, and help us understand what a redemption 0:01:29.680 --> 0:01:33.119 of this volatility note actually means. The mechanics of it. Well, 0:01:33.240 --> 0:01:35.040 I think the first thing to note is that the 0:01:35.120 --> 0:01:38.360 losses that people experienced in being let's say long the 0:01:38.520 --> 0:01:40.679 x I V at a price of a hundred and ten, 0:01:40.920 --> 0:01:45.039 whether the note is redeemed or not, those losses nearly 0:01:45.040 --> 0:01:49.240 a percent will be materialized. So again, if it if 0:01:49.280 --> 0:01:52.600 the note goes away and it effectively is unwounded zero 0:01:52.680 --> 0:01:55.920 or close to zero, obviously you have a hundred percent loss. 0:01:55.960 --> 0:01:58.560 But whether or not the note hangs on and they 0:01:58.640 --> 0:02:00.800 choose not to redeem it, you're going to have a 0:02:00.840 --> 0:02:04.920 price that is so low in a exposure to volatility 0:02:05.040 --> 0:02:07.480 that is so small that the losses are going to 0:02:07.600 --> 0:02:11.200 be near Anyway, Dan, if we got an idea of 0:02:11.240 --> 0:02:13.120 the size of the short vaald trade, how big it 0:02:13.160 --> 0:02:16.560 actually got through last year, it rewarded you handsomely like 0:02:16.680 --> 0:02:18.959 returns north of a hundred percent, and the flows into 0:02:18.960 --> 0:02:22.800 these exchange traded notes even through January were huge. They 0:02:22.800 --> 0:02:26.120 were record months for some of these individuals, particular funds. 0:02:26.160 --> 0:02:28.560 How big is this trade? Yeah? This is the thing 0:02:28.560 --> 0:02:33.400 about markets is that winning trades attract sponsorship, they attract attention, uh, 0:02:33.480 --> 0:02:36.320 and they get crowded. Uh and Uh. No trade has 0:02:36.360 --> 0:02:39.519 delivered a better sharp ratio in previous periods than the 0:02:39.880 --> 0:02:42.320 short vall trade. Uh. And so I think a lot 0:02:42.360 --> 0:02:45.840 of folks got involved the the the vega. So the 0:02:45.880 --> 0:02:48.600 exposure to volatility that the x I, V and the 0:02:48.600 --> 0:02:51.080 other product s v x Y had was on the 0:02:51.200 --> 0:02:54.840 order of two million UH dollars. So to just to 0:02:54.880 --> 0:02:57.160 put that in context, when when long term capital blew 0:02:57.200 --> 0:03:00.320 up in we learned after the fact that it had 0:03:00.320 --> 0:03:04.239 a short volatility position that was equivalent to eighty million 0:03:04.280 --> 0:03:08.919 dollars of exposure per volatility point um. This one right 0:03:08.960 --> 0:03:13.080 now had exposure of two million dollars per points. So 0:03:13.120 --> 0:03:16.720 when when the VIX spikes fifteen points or so, um 0:03:16.800 --> 0:03:20.320 it you lose three But I translate that that not 0:03:20.720 --> 0:03:25.280 inflation adjusted, it's three times bigger than the size of 0:03:25.440 --> 0:03:28.080 the LTC. I'm compare. You're doing right, And I think, 0:03:28.160 --> 0:03:31.440 what's again, what's so prominent about this particular blow up 0:03:31.520 --> 0:03:34.600 is that the the selling of volatility was very very 0:03:34.680 --> 0:03:38.520 much concentrated in very short term selling. So they were 0:03:38.520 --> 0:03:42.280 selling one month options which can be very profitable when 0:03:42.320 --> 0:03:45.800 realized volatilities very low, but also, as we have seen, 0:03:46.160 --> 0:03:49.360 can be unwound in violent fashion repair. And maybe Bruce, 0:03:49.400 --> 0:03:51.320 you could help out here as well, but didn't heard it. 0:03:51.440 --> 0:03:55.360 Compare the drug of the new product, the short vault 0:03:55.360 --> 0:03:58.640 trade with a drug of portfolio insurance, which we all 0:03:58.680 --> 0:04:02.680 studied or lived in seven Is it just, you know, 0:04:02.880 --> 0:04:07.480 different products, same dynamics. I would just say that there's 0:04:07.520 --> 0:04:12.120 a lot of similarity. Uh. The portfolio insurance was marketed 0:04:12.160 --> 0:04:17.200 as a product in which you could effectively ensure UH stocks, 0:04:17.240 --> 0:04:19.719 but you didn't have to pay a premium UH for 0:04:19.839 --> 0:04:23.040 doing so. UH. And what was portfolio insurance was a 0:04:23.120 --> 0:04:28.239 dynamic strategy where folks convinced investors that they could sell 0:04:28.360 --> 0:04:32.159 futures as the market fell in order to get a 0:04:32.240 --> 0:04:35.440 larger and larger short position to hedge the portfolio. And 0:04:35.520 --> 0:04:37.840 so what that does is it creates a pile on 0:04:37.920 --> 0:04:41.680 effect as the market falls. This is back to the 0:04:41.680 --> 0:04:45.280 portfolio insurers found themselves selling more and more UM. In 0:04:45.320 --> 0:04:48.719 this case, As the VIX rose, the VIX E TPS 0:04:48.800 --> 0:04:51.599 the x I V for example, had to buy more 0:04:51.600 --> 0:04:55.520 and more vixed futures to deliver this inverse daily return. 0:04:56.000 --> 0:05:00.000 And so it was a spiraling effect, more rising volatility 0:05:00.000 --> 0:05:04.240 to beget more demand for vixed futures, which further increased 0:05:04.480 --> 0:05:07.640 the level of the VIX, which further created more demand 0:05:07.680 --> 0:05:10.040 for vixed futures. It was a spiral higher, higher evolve 0:05:10.120 --> 0:05:12.680 begets higher evolved futures coming off the lows. It's worth 0:05:12.680 --> 0:05:16.359 pointing out down futures now down one seventy sp futures 0:05:16.640 --> 0:05:18.240 negative nine. So a couple of questions I've got for 0:05:18.240 --> 0:05:20.080 your Dean. One, can we officially say that the short 0:05:20.160 --> 0:05:23.320 vault trade has blown up? And two? And this is 0:05:23.400 --> 0:05:25.360 terribly difficult to get your hands around at this point. 0:05:25.440 --> 0:05:27.599 It could take months, even years to understand what's happening 0:05:27.640 --> 0:05:30.600 in the cash open this morning and through the equity 0:05:30.640 --> 0:05:33.720 market session yesterday. But how much of what we're seeing 0:05:33.760 --> 0:05:36.800 on the screen is forced selling from a short vault 0:05:36.800 --> 0:05:40.240 trade blowing up a tremendous amount. I think this yesterday's 0:05:40.279 --> 0:05:43.440 event is truly a VIX event. Uh. It is a 0:05:43.560 --> 0:05:48.640 very very specific technical unwind of something that was vastly crowded. Uh, 0:05:48.680 --> 0:05:53.159 pretty misunderstood by a lot of retail investors unfortunately. So 0:05:53.160 --> 0:05:55.680 so it is pretty concentrated. So so the VIX event 0:05:55.680 --> 0:05:58.560 has occurred. Um. I think a big question Jonathan is 0:05:58.960 --> 0:06:03.599 um there are many other trades that have characteristics similar 0:06:03.640 --> 0:06:07.440 to the VIX. They make money in stable, quiet markets. Right. 0:06:07.760 --> 0:06:10.520 There are effect strategies their bonds strategy like this. Uh. 0:06:10.560 --> 0:06:12.440 And so the VIX event has occurred, but there could 0:06:12.480 --> 0:06:15.640 be larger market implications. Dean Karnitt will stay with us. 0:06:15.640 --> 0:06:18.320 Bruce Casmin, thank you so much, thanks to JP Morgan 0:06:18.400 --> 0:06:20.719 for letting you free for two hours. To Bruce Casmin 0:06:21.120 --> 0:06:37.000 is the chief economist of JP Morgan. If you believe, 0:06:37.120 --> 0:06:40.680 as you have heard every interview this morning, that the 0:06:40.720 --> 0:06:45.400 pros are watching bonds, this is, without question the interview 0:06:45.520 --> 0:06:48.960 of the day. Stephen Major is an HSBC. He has 0:06:49.000 --> 0:06:53.280 been brilliant on saying no, rates aren't going up, aren't 0:06:53.279 --> 0:06:57.599 going up? Aren't going up? Yes, sometimes he's perfect, sometimes 0:06:57.640 --> 0:07:01.240 he's almost perfect. But he's been dead and about the 0:07:01.400 --> 0:07:04.800 rates lower call he joins us down from London with 0:07:05.000 --> 0:07:08.080 hs BC. Stephen, wonderful to have you earned away from 0:07:08.080 --> 0:07:10.920 your clients and his two mild Do you have any 0:07:11.000 --> 0:07:16.320 sense of adjustment where you would suggest rates could move higher. Well, 0:07:16.640 --> 0:07:20.080 I'm following the forward rates, Tom, and I think the 0:07:20.200 --> 0:07:23.520 US five year rate in five years time got above 0:07:23.640 --> 0:07:27.840 three percent recently, which is basically saying the bond market 0:07:27.920 --> 0:07:31.680 was pricing the FED going all the way to its 0:07:31.760 --> 0:07:35.560 long term dot of two sev. So bonds have got 0:07:35.640 --> 0:07:38.240 cheap at the end of last week. UM, So that 0:07:38.400 --> 0:07:42.120 was the time to start considering bonds as an insurance 0:07:42.160 --> 0:07:46.960 policy against something going wrong, and something went wrong this week. 0:07:47.280 --> 0:07:52.000 We're seeing risk assets free price. And you've mentioned the vix. 0:07:52.440 --> 0:07:55.280 I mean for me, the shoe is on the other foot. 0:07:55.680 --> 0:07:58.240 What does that mean a couple of months, Well, we've 0:07:58.240 --> 0:08:01.400 had a couple of months of people in the equity 0:08:01.440 --> 0:08:05.360 markets and credit markets looking at rates and saying that 0:08:05.520 --> 0:08:07.960 rates are higher and they're going to keep going higher. 0:08:08.560 --> 0:08:12.920 Um And actually I'm wondering what happens when equities go 0:08:13.080 --> 0:08:17.160 down two sovereign bonds and we're seeing that now, we're 0:08:17.200 --> 0:08:21.480 actually seeing risk gus that's repriced something more reasonable, having 0:08:21.520 --> 0:08:24.760 been overboard for some time, and I think bonds get bid. 0:08:25.160 --> 0:08:28.480 So we probably have seen the near term highs the 0:08:28.520 --> 0:08:32.120 bond yields. Now, I know it's not very fashionable to say, 0:08:32.200 --> 0:08:36.280 but you're supposed to own bonds, especially long term bonds. 0:08:36.600 --> 0:08:39.280 I can't imagine that the thirty year bond is going 0:08:39.280 --> 0:08:42.640 to sustain a move above three pc. And like I said, 0:08:42.679 --> 0:08:44.760 when you look at the forwards, the five year, five 0:08:44.840 --> 0:08:47.640 year forward, anything near to three percent for that one 0:08:47.760 --> 0:08:50.120 is a bye. So there's two things going on here, Stephen. 0:08:50.120 --> 0:08:52.319 You mentioned the FED ability to get to its long 0:08:52.440 --> 0:08:55.280 term dot one and then two you talk about this 0:08:55.360 --> 0:08:57.679 safety bid that comes back into Treasury. So let's talk 0:08:57.720 --> 0:08:59.880 about the second point first, and then we'll get to 0:08:59.920 --> 0:09:02.679 the federal reserve point. On the second point, we've had 0:09:02.679 --> 0:09:06.960 this regime where bonds and equity have moved simultaneously, yields lower, 0:09:07.000 --> 0:09:10.280 equity prices up. Are you saying that regime is done 0:09:10.480 --> 0:09:13.520 and we're moving to something else. Well, it looks like 0:09:13.559 --> 0:09:17.160 we're going to have to go through a period of transition, John, 0:09:17.640 --> 0:09:20.560 And it's it's not obvious to me that we have 0:09:20.679 --> 0:09:24.560 to have any kind of correlation because why why should 0:09:24.600 --> 0:09:27.760 it be so easy? It's it seems to me that 0:09:27.800 --> 0:09:30.800 we've had several months of a one way street. So 0:09:31.080 --> 0:09:34.000 bond deals going up and equity is rallying, But of 0:09:34.000 --> 0:09:36.840 course something is broken here, and I think that we 0:09:36.920 --> 0:09:41.000 are seeing a repricing of risk conversus risk free. People 0:09:41.040 --> 0:09:44.320 talk about the risk parity trade, et cetera. For me, 0:09:44.440 --> 0:09:47.640 it makes sense to own some bonds as an insurance 0:09:47.640 --> 0:09:50.680 against something going wrong, as we have just seen. So 0:09:50.679 --> 0:09:53.320 so I think the correlations are breaking down, and what's 0:09:53.320 --> 0:09:57.600 happening to the VIX must be quite scary because that 0:09:57.640 --> 0:10:00.840 has to be input into all the models. People now 0:10:00.920 --> 0:10:04.720 have to reappraise their assumptions about credit. For example, what 0:10:04.800 --> 0:10:07.719 does this mean for high yield credit? I wonder, And 0:10:07.800 --> 0:10:10.720 we'll start asking questions about some of the emerging markets 0:10:10.720 --> 0:10:14.120 as well. So so it's the read across to other 0:10:14.160 --> 0:10:17.720 athletic classes that really matter from the move in the 0:10:17.760 --> 0:10:20.680 bond yield. So let's talk about that reevaluation of risk 0:10:20.720 --> 0:10:24.280 assets versus the risk free asset, Steve. So far, the 0:10:24.280 --> 0:10:28.319 only risk asset that's repriced dramatically is equity. We haven't 0:10:28.320 --> 0:10:30.200 seen it a high yield credit. We've seen it a 0:10:30.240 --> 0:10:32.880 little bit spread a wider, but not in a significant way. 0:10:32.920 --> 0:10:35.280 Are you suggesting that we can see in the coming days, 0:10:35.320 --> 0:10:40.920 the coming weeks. It started in European high yield this morning. Obviously, 0:10:41.320 --> 0:10:45.640 investment grade is protected by a central bank buying in 0:10:45.679 --> 0:10:48.360 the euro Zone, so it's it's difficult for I G. 0:10:48.559 --> 0:10:51.679 Credit to set off aggressively when you've got central bank buying. 0:10:51.960 --> 0:10:55.400 But it's the high yield part that isn't so well protected. 0:10:55.440 --> 0:10:59.720 So let's watch what happens when we endured higher volatility 0:11:00.200 --> 0:11:04.120 to spread markets where the spreads too tied steven the 0:11:04.200 --> 0:11:06.480 time that we have with you this morning, I want 0:11:06.520 --> 0:11:09.640 to get to something as basic, as basic as we 0:11:09.679 --> 0:11:13.640 can get. You're suggesting that we can have stable yields 0:11:13.720 --> 0:11:17.480 or even lower yields with higher full faith and credit 0:11:17.559 --> 0:11:22.360 prices and still have risk assets like stocks go down. 0:11:22.840 --> 0:11:26.560 They can be that separate. Well, yes, I think that 0:11:26.640 --> 0:11:30.280 we could go through a period of decorelation. And and 0:11:30.400 --> 0:11:34.200 to me, we're probably over simplifying if we think that 0:11:34.240 --> 0:11:37.559 there has to be a stable correlation between his passes. 0:11:37.600 --> 0:11:39.800 I mean, if it was so easy, we'll be making 0:11:39.840 --> 0:11:41.720 loads of money, wouldn't we There have to be harder 0:11:42.640 --> 0:11:44.719 and and I'll come back to the first point I 0:11:44.800 --> 0:11:47.320 made today about the FED. The FED is at one 0:11:47.360 --> 0:11:50.480 point five on io E R. They're telling us that 0:11:50.520 --> 0:11:53.080 they're going to go to two point seven five over 0:11:53.120 --> 0:11:56.560 the next few years. That's a long way from here. Well, 0:11:56.600 --> 0:11:59.679 but critically, Steve, this is critical. You have been more 0:11:59.679 --> 0:12:02.160 than anyone I know you and Gary Shilling, I'll give 0:12:02.280 --> 0:12:05.880 doctor Shilling good morning, doctor Shilling as well. You more 0:12:05.920 --> 0:12:09.040 than anyone at any major house. Steve Major have said 0:12:09.080 --> 0:12:12.000 that path of the FED is a difficult assumption. You 0:12:12.120 --> 0:12:15.040 stand by that, right, Yeah. I've taken a lot of 0:12:15.040 --> 0:12:17.360 heat for that in the last few months, and and 0:12:17.360 --> 0:12:20.000 and the point the point is is that people don't 0:12:20.040 --> 0:12:22.880 want to believe it. But I think we're oversimplifying if 0:12:23.040 --> 0:12:25.199 we think that the FED just carries on with its 0:12:25.240 --> 0:12:28.040 eyes closed and arrived at two seventy five. Because you've 0:12:28.040 --> 0:12:32.240 got this huge debt overhang, and with with this massive debt, 0:12:32.800 --> 0:12:35.560 each basis point means much more than it did in 0:12:35.600 --> 0:12:37.720 the past. I mean, I would estimate that one hundred 0:12:37.720 --> 0:12:41.080 basis points increase on the ten year today like we 0:12:41.160 --> 0:12:45.040 have seen since last summer, is worth about three hundred 0:12:45.040 --> 0:12:48.560 basis points in the in the regime of twenty years ago. 0:12:49.320 --> 0:12:51.520 So the point is, with this very high duration and 0:12:51.600 --> 0:12:55.000 highest stock of private sector debt around the world, by 0:12:55.040 --> 0:12:58.800 the way, not just in the US. Stuff happens. Stuff 0:12:58.840 --> 0:13:01.640 happens because people can fall to service the debt and 0:13:01.720 --> 0:13:05.800 it affects their consumption and investment. So, you know, the 0:13:05.800 --> 0:13:09.840 assumptions about g d P based on some kind of 0:13:09.880 --> 0:13:14.640 model that set the path of rates seemed to be 0:13:14.760 --> 0:13:17.320 missing the overhang of debt. And I think that the 0:13:17.400 --> 0:13:21.920 FEDS models have historically been a fault there because they 0:13:21.960 --> 0:13:25.199 haven't they haven't taken accounts of the debt, and then 0:13:25.200 --> 0:13:29.000 we would overlay the impact of demographics and technology, all 0:13:29.040 --> 0:13:32.640 of which are weighing down on inflation. That's why bonds 0:13:32.760 --> 0:13:35.960 are in better shape. So, Steve, your essential point here 0:13:36.320 --> 0:13:38.480 is that this economy, the global economy for that matter, 0:13:38.559 --> 0:13:40.800 just does not have the tolerance for the kind of 0:13:40.920 --> 0:13:43.679 rates that some people are suggesting will get to the 0:13:43.720 --> 0:13:45.880 Federal Reserve. My basic question at this point is the 0:13:45.920 --> 0:13:48.400 feder is carried on hiking even though inflation through much 0:13:48.400 --> 0:13:51.440 of last year trended lower. So what's the bite point 0:13:51.520 --> 0:13:53.640 for the Federal Reserve to sit back and say we're 0:13:53.640 --> 0:13:57.640 doing too much. Well, that's the interesting one. We're sort 0:13:57.640 --> 0:14:02.040 of finding out, aren't we um. The debt servicing costs 0:14:02.080 --> 0:14:05.520 that we look at are based on the forwards and 0:14:05.600 --> 0:14:09.360 some assumption on the credit spreads. It strikes me that 0:14:09.880 --> 0:14:14.160 credit spreads have been very tired, so it would be 0:14:14.240 --> 0:14:16.120 dangerous to assume that they're going to stay there. If 0:14:16.160 --> 0:14:18.160 you if you look at an average, which will be 0:14:18.280 --> 0:14:21.800 credit spreads, they're much wider. Can we afford the debt 0:14:21.840 --> 0:14:26.120 servicing costs that a mean version of credit spreads would imply? 0:14:26.400 --> 0:14:29.600 And the answer I think I probably no. Steve. We've 0:14:29.600 --> 0:14:31.720 got to leave it there for you to get under 0:14:31.760 --> 0:14:34.480 your busy Dyer the just BC. We greatly appreciate the 0:14:34.520 --> 0:14:37.040 time this morning, Mr Major, first head of all of 0:14:37.160 --> 0:14:40.680 strategy with HSBC, and of course he is someone who 0:14:40.760 --> 0:14:44.600 has adamantly said higher interest rates will be a challenge 0:14:44.880 --> 0:14:58.760 to get to. Last night, my world stopped at seven 0:14:58.880 --> 0:15:01.400 thirty while I wait it on the Bloomberg terminal for 0:15:01.440 --> 0:15:06.360 exclusive use by our terminal customers of a Ponza Kawa jewel. 0:15:07.080 --> 0:15:09.760 On all that David Wilson has just talked about, Sarah 0:15:09.800 --> 0:15:15.920 Ponzac summarized perfectly what's going on in this vixed derivative market. Sarah, 0:15:16.400 --> 0:15:19.200 our our E t F team this morning, says it's 0:15:19.320 --> 0:15:21.640 a value of two to three billion. Let's take the 0:15:21.640 --> 0:15:25.120 top ticks three billion dollars x number of weeks ago 0:15:25.640 --> 0:15:28.760 and all this short volatility stuff. Do you and Luke 0:15:28.800 --> 0:15:32.080 Kawa just assume that's all evaporated in the space of 0:15:32.120 --> 0:15:36.040 three or four days? Sadly yes. I mean there's someone 0:15:36.080 --> 0:15:38.440 who's at Macro Risk Advisors, is an analyst, and he 0:15:38.480 --> 0:15:41.520 says that pretty much everything in these funds is blown up. 0:15:41.560 --> 0:15:44.680 There's maybe five per cent of it left. Who takes 0:15:44.800 --> 0:15:48.440 that loss? Who takes that loss? Well, the investors are 0:15:48.440 --> 0:15:50.240 going to take the loss, but it also depends on 0:15:50.320 --> 0:15:53.120 what happens with the redemption. So right now credit sue. 0:15:53.120 --> 0:15:54.960 So we don't have the final answer, but we're trying 0:15:54.960 --> 0:15:56.920 to figure out if they're going to take on the 0:15:57.000 --> 0:16:00.400 risk um. So right now they're saying that this is 0:16:00.440 --> 0:16:03.280 what happened, and this isn't too much of an implication 0:16:03.360 --> 0:16:04.720 for them, But I mean, they haven't come out with 0:16:04.760 --> 0:16:06.960 the statement. It seems a little bit dodgy. We're trying 0:16:06.960 --> 0:16:09.840 to figure out exactly what's going to happen here damage wise. 0:16:10.600 --> 0:16:12.680 Sarah I wondering if you could just define for people 0:16:12.840 --> 0:16:16.800 exactly what these products are supposed to do and how 0:16:17.200 --> 0:16:21.960 new are they in terms of their availability to investors. 0:16:22.040 --> 0:16:24.760 So think about these products. In the past couple of years, 0:16:24.760 --> 0:16:27.560 we've had crazy calm in the market. So what these 0:16:27.600 --> 0:16:31.200 products do is you can bet on that train quility 0:16:31.240 --> 0:16:34.520 staying prevailing. So if you believe that markets are going 0:16:34.560 --> 0:16:36.920 to stay calm, they're not going to bounce around a lot, 0:16:37.200 --> 0:16:40.600 then you would you would buy these products, and you 0:16:40.800 --> 0:16:44.280 meant money along the way, right, Like, how much along 0:16:44.320 --> 0:16:46.880 the way? If it's a so called carry trade, did 0:16:46.880 --> 0:16:50.360 you beautifully describe what's the lay up amount you make 0:16:50.400 --> 0:16:53.480 every year? Given? I love the word train quility. So 0:16:53.720 --> 0:16:57.480 the the x I V actually returned a hundred eight 0:16:57.680 --> 0:17:01.000 seven percent in the past year. So depending on how 0:17:01.080 --> 0:17:05.160 much money you put into that product, you return to hunt. Right. 0:17:05.280 --> 0:17:08.840 It's absolutely astounding. But also something that's so amazing is 0:17:08.880 --> 0:17:11.800 how much new money is in these products that had 0:17:11.880 --> 0:17:15.360 to experience this since the beginning of the year. Actually 0:17:15.359 --> 0:17:17.840 over two billion dollars has been put into x I V. 0:17:18.200 --> 0:17:21.960 And then also the pro shares UH retail or is 0:17:22.000 --> 0:17:25.440 it institutionally it's it's a combination of both, but it 0:17:25.560 --> 0:17:28.439 is a lot of retail money because a lot of 0:17:28.480 --> 0:17:31.320 people have just been told that if you put money 0:17:31.359 --> 0:17:33.399 into these shares it's free money, you're you're going to 0:17:33.480 --> 0:17:35.240 make money, and people have bought it, and people have 0:17:35.240 --> 0:17:37.199 thought it's a really easy trade. I actually spoke to 0:17:37.200 --> 0:17:39.280 an investor I remember a couple of months ago, and 0:17:39.320 --> 0:17:41.359 he said that how he loved the trade and he 0:17:41.400 --> 0:17:43.720 would never let go of it. PIM yields up the 0:17:43.800 --> 0:17:46.640 new high six basis points in the tenure yield two 0:17:46.640 --> 0:17:51.000 point seven six. SMP futures have improved negative eight. Down 0:17:51.040 --> 0:17:54.840 futures have improved negative one seventy three. Right now, Sarah, 0:17:55.160 --> 0:17:58.760 when you talk about volatility, just explain how it works 0:17:58.800 --> 0:18:02.840 in terms of how volatility can be get more volatility, 0:18:02.920 --> 0:18:06.880 because when you have market turbulence, you're describing a whole 0:18:06.920 --> 0:18:10.960 set of investors who have been betting against that happening exactly. 0:18:11.080 --> 0:18:14.520 So what happens is when you explain the volatility or 0:18:14.640 --> 0:18:18.280 explain the vix it's basically the amount of movement that's 0:18:18.320 --> 0:18:21.639 going on up or down within the stock market. So 0:18:21.680 --> 0:18:25.120 what happens is when the SMP five hundreds starts selling off, 0:18:25.400 --> 0:18:28.600 people start realizing, Okay, there's more volatility coming into the market, 0:18:28.720 --> 0:18:30.760 people start selling more of their shares in the SMP 0:18:30.840 --> 0:18:33.800 five hundred or as we saw yesterday, people were talking 0:18:33.800 --> 0:18:37.560 about a flash crash. Algorithms start sharing sharing, there's more movement, 0:18:37.640 --> 0:18:41.280 Volatility goes up, people want to unwind their short volatility trades, 0:18:41.280 --> 0:18:44.160 and it just becomes a completely exacerbated and then there's 0:18:44.200 --> 0:18:45.720 no one on the other side of the trade, at 0:18:45.760 --> 0:18:47.600 least on the price that you would like to get out, 0:18:47.720 --> 0:18:51.520 just as it creates a negative feedback loop because you 0:18:51.640 --> 0:18:54.200 keep trying to find the price that someone else will 0:18:54.240 --> 0:18:57.720 pay for your at least at that moment. Poor investment exactly, 0:18:57.720 --> 0:18:59.600 there aren't many people on the other side of the trade. So, 0:18:59.640 --> 0:19:01.560 like I said, said they were about two billion dollars 0:19:01.600 --> 0:19:04.440 that went into the store volatility trades just this year. 0:19:04.640 --> 0:19:06.400 If you compare that to how many people went long 0:19:06.480 --> 0:19:08.480 volatility towards the start of the year, that was just 0:19:08.520 --> 0:19:11.560 about a million, So that's a huge difference. And it's 0:19:11.600 --> 0:19:16.400 also sometimes sold as a way to mitigate risk, right, 0:19:16.440 --> 0:19:19.560 so it can be sold in a fashion that makes 0:19:19.560 --> 0:19:23.119 sense when markets are complacent, but when they turn the 0:19:23.119 --> 0:19:25.760 other way, not so much. We gotta leave it there 0:19:25.760 --> 0:19:28.280 Sarah Pounds, Thank you so much, greatly appreciate, thank you 0:19:28.359 --> 0:19:31.080 this morning and congratulations look forward to your next work. 0:19:42.640 --> 0:19:45.000 We are speaking with Alberto Gallo. He is the head 0:19:45.000 --> 0:19:49.560 of macro Strategies at Algebras. Alberto as one of the 0:19:49.600 --> 0:19:53.880 managers of the Algebras Macro Credit Fund. Wanting if there 0:19:53.960 --> 0:19:56.399 is an opportunity for you in terms of what you 0:19:56.480 --> 0:19:59.360 might be looking to purchase as a result of all 0:19:59.359 --> 0:20:02.560 of this dis location. What kinds of investments would you 0:20:02.560 --> 0:20:05.360 be looking to to add or even to sell from 0:20:05.400 --> 0:20:10.280 the fund. Well, I would say that the biggest dislocation 0:20:10.400 --> 0:20:13.920 is in volatility. So of the funds that have been 0:20:13.960 --> 0:20:16.960 selling volatily betting on the world would stay the same, 0:20:17.960 --> 0:20:22.960 have been um compressing bulletically to really really low levels 0:20:22.960 --> 0:20:25.199 in the last few months. Today what we saw as 0:20:25.240 --> 0:20:29.360 an unwind of these strategies today and yesterday, bringing volletic 0:20:29.680 --> 0:20:34.879 levels to record highest. So this is an opportunity. Obviously 0:20:35.480 --> 0:20:37.720 one has to be careful because we don't know how 0:20:37.800 --> 0:20:42.520 much of the of these strategies are still still need 0:20:42.560 --> 0:20:46.280 to be unmound um Across the rest of the space, 0:20:46.400 --> 0:20:50.280 we saw some declining equities, some declining corporate bonds, but 0:20:50.359 --> 0:20:53.479 we're not at levels where one wants to spend all 0:20:53.520 --> 0:20:58.239 the ammunition. We have a small correction, UM, but you know, 0:20:58.280 --> 0:21:01.160 we could see more, especially the corporate bond world has 0:21:01.200 --> 0:21:04.520 been extremely stable this time around. Well, just looking at 0:21:04.560 --> 0:21:07.320 the VIX right now, thank you John Tucker. The VIX 0:21:07.400 --> 0:21:13.400 is a lower thirty five. It's down thirteen point one eighteen. Alberto. 0:21:13.560 --> 0:21:17.639 If you look across Europe, what has been the response 0:21:17.840 --> 0:21:20.959 in Europe, at least in investors terms, to what has 0:21:21.000 --> 0:21:24.880 happened in the United States, I would say the European 0:21:24.960 --> 0:21:28.920 market is more stable. UM. This is perhaps one of 0:21:28.960 --> 0:21:32.359 the few times where Europe is not as volatile, and 0:21:32.440 --> 0:21:35.440 I think the reason is that much of this financial 0:21:35.520 --> 0:21:42.320 leverage UM was absent from European markets. The the presence 0:21:42.440 --> 0:21:46.359 of leverage strategies of on vix, on on other types 0:21:46.400 --> 0:21:52.040 of short buttive it is much lower here in Europe UM, 0:21:52.200 --> 0:21:58.680 and therefore the unlined effect, this self fulfilling feedback loop, 0:21:59.480 --> 0:22:02.600 we haven't seen it as much. And as far as 0:22:02.840 --> 0:22:07.080 specific country debt, I noticed in the fun big holdings 0:22:07.240 --> 0:22:11.960 in the Kingdom of Spain is that for any specific 0:22:12.200 --> 0:22:14.600 reason other than this was what was available at the 0:22:14.680 --> 0:22:16.800 yield that you could get, or what was the reason 0:22:16.880 --> 0:22:21.800 for adding so much from Spain. Well, we're still positive 0:22:21.960 --> 0:22:28.200 on UM. We're being positive on the European perry free Spain, Italy, Greece, Portugal. 0:22:28.680 --> 0:22:32.200 I would say that UM today we are most positive 0:22:32.240 --> 0:22:35.359 on Greece. We continue to see a path to upgrades 0:22:35.720 --> 0:22:38.360 when it comes to Spain and Portugal, these are more 0:22:38.520 --> 0:22:42.600 established growth stories, you know, both growing over two percent 0:22:42.720 --> 0:22:46.720 this year, getting upgraded by rating agencies, but lower yields. 0:22:46.720 --> 0:22:50.080 The two allowed countries in Europe are Greece and Italy. 0:22:50.720 --> 0:22:54.119 Uh and they are They've been lagging on reforms and growth, 0:22:54.200 --> 0:22:56.880 but this year Greece is growing over two point five 0:22:56.920 --> 0:23:00.680 percent real GDP and Italy is growing at over one 0:23:00.680 --> 0:23:04.919 point five UM. So with some reforms, with some fiscal 0:23:05.000 --> 0:23:08.560 stimulus with Marco and mccron and France and Germany, I 0:23:08.640 --> 0:23:10.960 think the backdrop is positive. These are one of some 0:23:11.080 --> 0:23:13.040 of the few places to hide in the debt market. 0:23:13.480 --> 0:23:16.680 What are you doing this morning? I mean I've got 0:23:16.760 --> 0:23:21.200 yields round trip from lower yields by two or three 0:23:21.240 --> 0:23:24.719 basis points to now up a solid seven basis points 0:23:24.880 --> 0:23:29.800