WEBVTT - Lots More With Charlie McElligott on the Sharp, Strange Selloff 0:00:02.480 --> 0:00:07.400 Bloomberg Audio Studios, podcasts, radio news. 0:00:08.320 --> 0:00:09.639 It's good. It's good. 0:00:09.760 --> 0:00:13.960 You know, markets are fun and as we said, springs. 0:00:13.520 --> 0:00:15.560 Here, Yeah, markets finally got interesting. 0:00:16.160 --> 0:00:18.440 Oh man, I mean I have so many thoughts. 0:00:18.440 --> 0:00:20.720 Oh good, all right, if you can't tell from my 0:00:20.920 --> 0:00:23.520 normal stream of consciousness operations. 0:00:23.600 --> 0:00:27.200 You know how I know it was bad, Joe go on. 0:00:27.600 --> 0:00:29.600 It was one of those weeks where we talked about 0:00:29.720 --> 0:00:32.640 negative gamma quite a lot's. 0:00:32.000 --> 0:00:33.560 Pretty interesting gamma again. 0:00:34.000 --> 0:00:37.680 Interestingly, we didn't talk that much about standard deviations, which 0:00:37.720 --> 0:00:39.920 is kind of funny. Normally those two kind of go 0:00:40.040 --> 0:00:41.600 hand in hand, but not last week. 0:00:41.680 --> 0:00:42.240 It was weird. 0:00:42.400 --> 0:00:44.960 What's gamma again? I feel so dumb because I know 0:00:45.000 --> 0:00:47.040 we've talked about gamma and it's just one of those 0:00:47.080 --> 0:00:47.720 things like what. 0:00:47.760 --> 0:00:49.640 Is it again? Should we get you a refresher? 0:00:49.800 --> 0:00:50.040 Yeah? 0:00:50.080 --> 0:00:52.800 I need one of those Guide to the Greeks books 0:00:52.920 --> 0:00:55.640 or something like a little like laminated card that I 0:00:55.640 --> 0:00:56.040 can want. 0:00:56.120 --> 0:00:57.520 Someone should do a coffee table. 0:00:57.560 --> 0:01:00.720 But yeah, yeah, guide to the Greeks like Greek stuff 0:01:00.760 --> 0:01:02.960 these days, you know, because I'm into like ancient history 0:01:03.040 --> 0:01:05.679 and everything like that. I know what alpha is, I know. 0:01:05.640 --> 0:01:06.400 What beta is. 0:01:06.440 --> 0:01:10.960 After that, I started to get a little dicey. I 0:01:11.000 --> 0:01:11.720 did a deadlist. 0:01:11.800 --> 0:01:15.319 I'm both the most popular trader and most successful trader 0:01:15.520 --> 0:01:16.240 at Citadel. 0:01:16.440 --> 0:01:17.440 That is going viral. 0:01:17.720 --> 0:01:18.480 Uh barges. 0:01:18.680 --> 0:01:20.760 This is an after school special, except. 0:01:20.440 --> 0:01:22.960 I've decided I'm going to base my entire personality going 0:01:23.000 --> 0:01:25.959 forward on campaigning for a strategic pork reserve in the. 0:01:25.959 --> 0:01:28.760 US Black Goal. These are the important question. 0:01:28.880 --> 0:01:30.520 Is it robots taking over the world? No. 0:01:30.600 --> 0:01:33.480 I think that, like in a couple of years, the 0:01:33.560 --> 0:01:35.760 AI will do a really good job of making the 0:01:35.760 --> 0:01:38.840 Odd Lots podcast. One day that person will have the 0:01:38.880 --> 0:01:39.760 mandate of Heaven. 0:01:39.959 --> 0:01:42.160 How do I get more popular and successful? 0:01:42.480 --> 0:01:43.440 We do have. 0:01:45.680 --> 0:01:48.040 You're listening to lots More, where we catch up with 0:01:48.040 --> 0:01:50.760 friends about what's going on right now, because. 0:01:50.560 --> 0:01:53.559 Even when the Odd Lots is over, there's always lots More. 0:01:53.840 --> 0:02:00.640 And we really do have the perfect best Oh the definition, 0:02:01.240 --> 0:02:05.760 I feel like I've done this before. But gamma. Gamma 0:02:05.880 --> 0:02:10.120 is the option sensitivity to the change in delta, and 0:02:10.240 --> 0:02:14.960 delta is the option sensitivity to the underlying price. So 0:02:15.080 --> 0:02:18.560 gamma is like the change of the change. It's a 0:02:18.600 --> 0:02:23.280 function of the underlying price. But it's second order, and 0:02:23.320 --> 0:02:28.120 I guess negative gamma that's when delta is the opposite 0:02:28.160 --> 0:02:31.560 direction to the stock price movement. So delta goes down 0:02:31.960 --> 0:02:35.440 if the underlying asset price is going up, and then 0:02:35.760 --> 0:02:40.040 it becomes less negative if the underlying asset price is falling. 0:02:40.800 --> 0:02:43.799 And we usually see people talk about this during market 0:02:43.880 --> 0:02:47.960 selloffs because all the options traders have to basically sell 0:02:48.080 --> 0:02:51.760 or buy stuff to hedge all that changing exposure, and 0:02:51.800 --> 0:02:55.840 the suspicion is always that that hedgeig activity are pushing 0:02:55.880 --> 0:02:59.280 the market in one way or the other. I think 0:02:59.320 --> 0:03:02.839 that's it. Okay, I did it, Charlie. You should write 0:03:02.840 --> 0:03:05.520 a book, a coffee table book on the Greek letters. 0:03:06.240 --> 0:03:11.000 I'm liking this, like Spartans versus Romans, history vibe or regard. 0:03:11.160 --> 0:03:13.440 Yeah, that's very you I feel that's very Yeah. 0:03:13.520 --> 0:03:15.360 Yeah, it resonates. 0:03:15.720 --> 0:03:17.880 It resonates. Could have something to do with the beard. 0:03:18.200 --> 0:03:20.720 Well, if you just think about it with regards to 0:03:21.080 --> 0:03:23.200 who is long and who is shortened option at a 0:03:23.200 --> 0:03:26.040 certain level. And that's so much of what we're asked 0:03:26.080 --> 0:03:27.720 to do, you know, in our job is to get 0:03:27.760 --> 0:03:31.760 a sense for where these potential acceleration points or potential 0:03:31.880 --> 0:03:35.559 gravity points are. And you're looking at the whole spectrum 0:03:35.600 --> 0:03:38.640 of strikes across the S and P index options, and 0:03:39.040 --> 0:03:41.720 you're then doing your kind of risk calculations and your 0:03:41.720 --> 0:03:44.800 Greek's calculations, and you net out all of those strikes. 0:03:44.800 --> 0:03:48.480 You have to identify calls sold, call spot puts sold, 0:03:48.480 --> 0:03:50.040 put spot, multi leg tracks. 0:03:50.080 --> 0:03:51.120 It's it's quite complex. 0:03:51.160 --> 0:03:54.000 I think in the past there's a lot of false 0:03:54.080 --> 0:03:57.320 narrative because people made kind of two core assumptions on 0:03:57.400 --> 0:04:02.840 dealer positioning before you had the actual exchange tagged data 0:04:03.040 --> 0:04:05.760 which now gives you the actuals. Those two prior assumptions 0:04:05.760 --> 0:04:08.760 are the dealers are short puts to hedges and long 0:04:08.800 --> 0:04:11.960 calls from overriders, these VRP of all sellers that you 0:04:12.000 --> 0:04:15.200 hear so much about these days, that create dynamics where 0:04:15.240 --> 0:04:18.320 the market is trapped in long gamma, right, because we're 0:04:18.320 --> 0:04:22.680 constantly dealers are constantly getting stuffed from these premium collectors. 0:04:23.200 --> 0:04:25.680 But short gamma matters because that's where you get these 0:04:25.720 --> 0:04:28.640 potential jump off points where you blow through level or 0:04:28.640 --> 0:04:31.680 a dealer is short a strike and then you get 0:04:31.680 --> 0:04:36.159 that prevailing market move is fed into so that matters. 0:04:36.320 --> 0:04:39.640 In case you can't tell, we are here with Charlie Mcalligant. 0:04:39.760 --> 0:04:42.320 He is of course, a strategist over at Nomora the 0:04:42.480 --> 0:04:45.440 person to talk to when it comes to this kind 0:04:45.480 --> 0:04:51.600 of market technicality. And we are recording this on March nineteenth. 0:04:51.920 --> 0:04:55.039 We're either stupid or brave for doing this, like right 0:04:55.080 --> 0:04:58.719 before a FED decision. I'm going to choose brave because 0:04:58.760 --> 0:05:00.000 the bar is fairly low now. 0:05:00.080 --> 0:05:02.120 Well, and like so in my view is like there's 0:05:02.160 --> 0:05:05.600 been so much volatility lately, Tracy, regardless of what happens 0:05:05.680 --> 0:05:08.440 in the forty eight hours between now and then, there's 0:05:08.600 --> 0:05:10.440 enough to talk about, Yeah for sure. 0:05:10.520 --> 0:05:13.960 Okay, So, speaking of what happened last week, you mentioned 0:05:14.040 --> 0:05:17.839 specific points at which the sell off can accelerate, and 0:05:17.920 --> 0:05:20.599 I think in your notes you had like five thousand 0:05:20.640 --> 0:05:25.279 and six fifty and five thousand and five sixty something 0:05:25.320 --> 0:05:27.080 like that as your points on the S and P 0:05:27.240 --> 0:05:31.960 five hundred at which point the sell off could accelerate. 0:05:32.480 --> 0:05:34.800 We did get to a low of like five thousand, 0:05:34.880 --> 0:05:38.599 five hundred on the Thursday, but we saw stocks recover. 0:05:39.279 --> 0:05:40.200 Why did that happen? 0:05:41.120 --> 0:05:46.240 So there was two large short gamma strikes in the 0:05:46.279 --> 0:05:50.120 S ANDP index options diaspora for dealers, and I think 0:05:50.160 --> 0:05:51.800 it was I think it was fifty six hundred and 0:05:51.800 --> 0:05:55.920 then fifty five sixty five particular level, which is part 0:05:56.000 --> 0:05:58.640 of this large listed trade in the market that is 0:05:58.680 --> 0:06:02.559 well socialized out there that at the end of this month, 0:06:02.600 --> 0:06:05.080 so not this week's options expiration, but the end of 0:06:05.120 --> 0:06:08.520 this month, the March quarterly exists and is part of 0:06:08.720 --> 0:06:12.480 something called a put spread collar where a call is 0:06:12.520 --> 0:06:15.240 sold out of the money to then help finance this 0:06:15.320 --> 0:06:18.520 put spread in the market. And that fifty five sixty 0:06:18.600 --> 0:06:23.640 five is a short strike, which means that in this 0:06:23.800 --> 0:06:26.960 case it looks like short gamma. I think the fact 0:06:27.160 --> 0:06:30.240 is about that, however, and thus this idea of well, 0:06:30.960 --> 0:06:32.520 at this point in the month, where it's still a 0:06:32.520 --> 0:06:37.960 few weeks out from happening, it could in fact potentially 0:06:37.960 --> 0:06:41.080 behave as you would think, is this acceleration point through it? 0:06:41.160 --> 0:06:43.080 Once you did, you kind of bounced around it held 0:06:43.120 --> 0:06:44.200 three or four times, and. 0:06:44.160 --> 0:06:45.080 It kind of crashed through it. 0:06:45.400 --> 0:06:47.920 The thing is is that the market knows that this 0:06:47.960 --> 0:06:52.080 trade gets rolled and rebalanced, i should say, into the 0:06:52.200 --> 0:06:54.800 next quarter's trade at the end of this month, and 0:06:55.000 --> 0:06:57.320 you know that there is going to be a ton 0:06:57.520 --> 0:07:01.680 of vega for sale as part of the and so 0:07:01.760 --> 0:07:04.760 then this strike in some ways actually ends up looking 0:07:05.120 --> 0:07:08.920 quite dissimilar from your typical idea of short gam as. 0:07:08.920 --> 0:07:10.720 This acceleration point. 0:07:10.480 --> 0:07:13.480 Depending on where the market is at the time of expiration, 0:07:14.080 --> 0:07:16.880 which will affect what the client does with those strikes 0:07:16.920 --> 0:07:19.920 and sets the new putspread collar. But I think the 0:07:20.080 --> 0:07:22.760 larger conversation that I want to have about VAW is 0:07:22.760 --> 0:07:26.120 that much of the incoming has been about why is 0:07:26.200 --> 0:07:28.640 VALL actually seemingly unresponsive? 0:07:28.800 --> 0:07:31.400 Yeah, so the VIX, Like I know, the VIX went up, 0:07:31.440 --> 0:07:34.640 but I think it went to like twenty nine, and 0:07:34.920 --> 0:07:37.080 you compare that to like it was above eighty in 0:07:37.160 --> 0:07:39.880 twenty twenty and even in twenty twenty two it was 0:07:40.000 --> 0:07:43.040 like thirty six or in the thirties. VALL was really 0:07:43.160 --> 0:07:44.360 quiet in twenty four. 0:07:44.640 --> 0:07:47.680 Yeah, August twenty twenty four got nearly four anyway. 0:07:47.760 --> 0:07:50.280 Yeah, So the last time I was in here was 0:07:50.320 --> 0:07:53.520 after that August shock, and that was it proper as 0:07:53.720 --> 0:07:55.320 as I kind of framed it at the time and 0:07:55.440 --> 0:07:59.880 still will, the world was aggregated around this soft landing 0:08:00.080 --> 0:08:02.320 viewpoint and all of a sudden in the span of 0:08:02.400 --> 0:08:04.840 one day's worth of data, but it was really even 0:08:05.000 --> 0:08:08.040 a week of data of labor data sixty five. Yeah, 0:08:08.080 --> 0:08:10.520 and that was because we repriced the left tail. All 0:08:10.560 --> 0:08:12.480 of a sudden there was a hard landing risk because 0:08:12.520 --> 0:08:14.840 the labor data shocked us. You know that U rate 0:08:14.960 --> 0:08:18.520 jump and then the NFP miss. The difference at this 0:08:18.680 --> 0:08:22.440 time around is that since the election, right, Donald Trump 0:08:22.640 --> 0:08:25.800 is the personification of a gamma agent. 0:08:26.440 --> 0:08:29.040 We are the only person I know who describes Trump 0:08:29.040 --> 0:08:30.080 as a gamma agent. 0:08:30.280 --> 0:08:34.359 Everyone knows the terms, right, but I'm a living personification again. 0:08:34.240 --> 0:08:38.640 And I think, look, his mandate is to break status quo. 0:08:39.360 --> 0:08:43.000 And we talked that last August shock about the idea 0:08:43.120 --> 0:08:45.000 that the concept of a carry trade because we were 0:08:45.000 --> 0:08:47.319 being asked about the carry online, which is kind of 0:08:47.360 --> 0:08:50.160 like this false narrative. But the idea of any sort 0:08:50.200 --> 0:08:53.720 of carry trade or positioning high sharp ratio trade right 0:08:53.880 --> 0:08:57.160 a high risk adjusted return is that you need a 0:08:57.200 --> 0:09:01.280 period of low volatility to kind of aggregate that position, 0:09:01.360 --> 0:09:04.120 to build that leverage into the trade because it keeps working, 0:09:04.400 --> 0:09:07.000 the wall is low, the price keeps working higher. That 0:09:07.080 --> 0:09:10.240 builds the leverage in the system that hence builds the risk. Right, 0:09:10.320 --> 0:09:14.960 stability breeds instability. In this case, Donald Trump, even if 0:09:15.080 --> 0:09:18.880 the market was misidentifying the macro of his policies at 0:09:18.920 --> 0:09:20.439 the time, which we should talk about, Oh. 0:09:20.400 --> 0:09:22.240 You're just never going to get that risk build up. 0:09:22.800 --> 0:09:26.679 Well, in this case, starting November, you know when it 0:09:26.760 --> 0:09:28.000 really took shape. 0:09:28.000 --> 0:09:29.000 And I think the market had. 0:09:28.920 --> 0:09:33.120 Been sensing certainly since kind of the summer skew was seepening. 0:09:33.280 --> 0:09:35.719 Skew matters, right, just as a relative measure of kind 0:09:35.720 --> 0:09:38.240 of demand for downside versus demand for upside put skew 0:09:38.760 --> 0:09:41.040 which is like deep out of the money downside relative 0:09:41.080 --> 0:09:45.200 do not the money put was jacked ninety something percentile 0:09:45.400 --> 0:09:50.520 because of all of the potential chaos agency expensive. The 0:09:50.600 --> 0:09:54.920 fall was already quite expensive going into this scenario, even 0:09:54.920 --> 0:09:57.760 if maybe the macro catalyst went wrong way and I 0:09:57.800 --> 0:10:00.680 think there's two big things that happens, So let's talk 0:10:00.679 --> 0:10:01.520 about this past. 0:10:01.400 --> 0:10:02.920 Week or really was past three weeks. 0:10:03.080 --> 0:10:08.480 Yeah, you had crowded narratives and crowded thematic positioning. 0:10:08.120 --> 0:10:10.040 With a lot of leverage. 0:10:10.320 --> 0:10:13.280 Right, that is what the prime broker's data shows and 0:10:13.320 --> 0:10:17.120 frankly still shows like gross exposure your lungs and your 0:10:17.160 --> 0:10:21.000 shorts in aggregate still kind of ninety something percentile was 0:10:21.000 --> 0:10:23.679 one hundred percent of coming into the year. Though we 0:10:23.720 --> 0:10:26.400 also had high nets, So you had a lot more 0:10:26.480 --> 0:10:29.680 long than short either way, a lot of leverage in 0:10:29.679 --> 0:10:41.760 the system. 0:10:43.880 --> 0:10:48.000 Give us like a little zoom out. Basically from mid 0:10:48.080 --> 0:10:51.480 November to as you said, about three weeks ago it 0:10:51.520 --> 0:10:54.680 started turning. I think the peak on this February nineteenth 0:10:54.760 --> 0:10:56.480 or something like that. Yes, but talk to us just 0:10:56.559 --> 0:10:59.480 about that sort of kind of an upcrash in the 0:10:59.520 --> 0:11:03.640 wake of the people loading into everything risky, from crypto 0:11:03.720 --> 0:11:07.160 to Tesla and everything. Yeah, what was going on there? 0:11:07.640 --> 0:11:09.640 And then how extreme did that get? 0:11:09.760 --> 0:11:12.160 Yeah, I mean that's the perfect segue here, because like 0:11:12.240 --> 0:11:17.520 in the sense that the post election narrative, and remember 0:11:17.640 --> 0:11:20.520 the rates sell off beginning in September, when the market 0:11:20.559 --> 0:11:23.240 really got their arms around seemingly some of this polling 0:11:23.240 --> 0:11:26.760 that was showing much more credible kind of Trump lead. Yeah, 0:11:26.840 --> 0:11:29.120 the rate sell off, meaning yields going higher, was about 0:11:29.120 --> 0:11:32.160 this idea that regardless of who won, but particularly if 0:11:32.200 --> 0:11:36.720 Trump won, that we had become both sides become economic populous, 0:11:36.760 --> 0:11:40.640 and that fiscal dominance was this overriding theme where like, 0:11:41.080 --> 0:11:43.160 we don't have a tolerance for pain as a society. 0:11:43.480 --> 0:11:48.200 We saw the kind of the steroidal impact of fiscal 0:11:48.400 --> 0:11:51.360 stimulus in the post COVID world, which kind of was 0:11:51.400 --> 0:11:53.920 the tiebreaker for finally getting an inflation shock as we 0:11:53.960 --> 0:11:56.719 all experience. So this idea that he was going to 0:11:56.760 --> 0:11:59.880 take an already strong economy and overheat it with d 0:12:00.760 --> 0:12:05.839 with tax cuts and these other stimulative measures completely had 0:12:05.840 --> 0:12:10.040 the market thinking about further extension of US exceptionalism. Right. 0:12:10.120 --> 0:12:12.400 This ability to outperform rest of the world for a 0:12:12.440 --> 0:12:14.959 whole number of reasons, which is a separate podcast, but 0:12:15.000 --> 0:12:18.960 like positioning was like long US assets, Europe was going 0:12:19.040 --> 0:12:22.560 to be cutting sooner because they were feeling the brunt 0:12:22.559 --> 0:12:25.719 of the slowdown force more so there China had all 0:12:25.760 --> 0:12:29.040 sorts of issues, right, rest of world struggling US exceptionalism 0:12:29.080 --> 0:12:31.360 and part of US exceptionalism not just kind of like 0:12:31.800 --> 0:12:36.679 global hedgemon, strongest economy, deregulation, all these stimultive measures in 0:12:36.720 --> 0:12:39.600 the pipes was also too. This idea of tech innovation 0:12:40.520 --> 0:12:43.199 and tech innovation was the story of last year, in 0:12:43.240 --> 0:12:45.320 the last two years, with the last ten years was 0:12:45.360 --> 0:12:47.160 with regards to AI, right, Yeah, it used to be 0:12:47.200 --> 0:12:49.840 fang back in the teens, right. So this idea of 0:12:49.880 --> 0:12:52.880 megacap tech, all those things that made people, you know, 0:12:52.920 --> 0:12:56.040 the completely dictated stock market last year like MAG seven, 0:12:56.120 --> 0:12:58.440 MAG eight thirty five percent of the S and P 0:12:58.520 --> 0:13:02.320 five hundred and fifty percent of the NASDAC. Concentration of 0:13:02.400 --> 0:13:04.959 all of these kind of tech and disruption themes in 0:13:05.000 --> 0:13:07.400 the market that was a big part of the US 0:13:07.440 --> 0:13:10.520 exceptionals and trade. Well, guess what those trades are really crowded, 0:13:10.880 --> 0:13:15.319 they're really loaded into And two shocks happened. The first 0:13:15.360 --> 0:13:17.880 shock was the market and this is why I started, 0:13:18.000 --> 0:13:21.120 you know, going out and talking about hedging for downside 0:13:21.200 --> 0:13:24.560 in February. Was this idea that the market I think 0:13:24.679 --> 0:13:28.040 was misunderstanding the phasing or the sequencing of a Trump 0:13:28.120 --> 0:13:32.360 economic plan, which was you've got to do the painful 0:13:32.400 --> 0:13:35.840 stuff first in order to get to the stimulative stuff later. 0:13:36.160 --> 0:13:39.160 And that's spread that time spread, you know, you had 0:13:39.160 --> 0:13:42.000 to kind of try to engineer a slowdown to then 0:13:42.080 --> 0:13:45.080 be able to get the rate cuts via the disinflation 0:13:45.200 --> 0:13:48.360 that he is trying to create, which ultimately you know, 0:13:48.400 --> 0:13:51.880 this idea of like fiscal contraction to potentially then fiscally 0:13:51.920 --> 0:13:56.160 expand and say the other shock, it's. 0:13:56.000 --> 0:13:57.000 Lost in the wash here. 0:13:57.040 --> 0:13:59.760 And this wasn't just a Trump growth scare, right, we 0:13:59.800 --> 0:14:01.880 are growth scare every Q one into Q two. 0:14:02.320 --> 0:14:04.959 That's an artifact of the post COVID at KO. Right. 0:14:04.960 --> 0:14:07.600 We had a good piece from Neil about Duo about 0:14:07.600 --> 0:14:08.239 that any. 0:14:08.240 --> 0:14:10.240 Yeah, so that matters, right, you know, that was part 0:14:10.280 --> 0:14:12.920 of my thesis, like, look and see the trajectory. We 0:14:12.960 --> 0:14:15.640 have these overheated animal spirits Q one numbers and then 0:14:15.679 --> 0:14:18.160 this seasonal adjustments kick in and we have a growth. 0:14:17.920 --> 0:14:19.720 Scare in Q two or into Q three. 0:14:19.920 --> 0:14:22.080 But the other element here was the deep seek story 0:14:22.400 --> 0:14:25.400 and tech innovation in that market concentration. And guess what, 0:14:25.560 --> 0:14:27.640 there's all sorts of those names aren't just massive parts 0:14:27.640 --> 0:14:30.760 of index and massive thematic parts Retail investors and hedge 0:14:30.760 --> 0:14:33.400 fund longs and things like that, think about their impact 0:14:33.440 --> 0:14:36.720 in the leverage GTF space, which has just absolutely grown massively. 0:14:36.760 --> 0:14:39.520 That's a source of synthetic negative gamut in the market, 0:14:39.680 --> 0:14:41.840 which you know, on the end of day rebalancing into 0:14:41.880 --> 0:14:43.880 an update, they've got a ton to buy at the 0:14:43.960 --> 0:14:46.000 end of the day. And eighty percent of those assets 0:14:46.240 --> 0:14:49.560 happened to be concentrated in kind of like concentric tech 0:14:49.640 --> 0:14:54.040 disruption circles. So you add in this massive rethink on 0:14:54.080 --> 0:14:57.480 what had been the perpetual motion machine of Ai Capex 0:14:58.440 --> 0:15:01.720 and that deep seak shock, IDIA trades down seventeen percent. 0:15:01.800 --> 0:15:04.640 Kind of after that realization that weekend of what we're 0:15:04.680 --> 0:15:08.280 looking at, all of a sudden, a massive valuation shock 0:15:08.320 --> 0:15:11.640 in an earnings repricing effectively. 0:15:11.480 --> 0:15:16.120 Tracy, did you see this from Eric Belcunis yesterday? Vista 0:15:16.160 --> 0:15:19.760 shares filing for an animal spirits ETF A and I 0:15:19.960 --> 0:15:23.840 am in a two x animal spirits ETF wild, which 0:15:23.840 --> 0:15:26.680 will hold the five fastest growing two X single stock 0:15:26.840 --> 0:15:28.280 ETFs at any given time. 0:15:28.520 --> 0:15:29.840 Isn't that just called momentum? 0:15:30.040 --> 0:15:33.200 Yeah, but that's not that momentum isn't enough. 0:15:33.240 --> 0:15:35.760 It's momentum with leverage, and guess what, there will be 0:15:35.800 --> 0:15:39.400 options on it too. So there's synthetic negative gamma and 0:15:39.680 --> 0:15:42.680 actual real negative gamma. So the final point here is 0:15:42.720 --> 0:15:45.240 you had these two shocks to what consensus was, consensus 0:15:45.240 --> 0:15:48.000 positioning and consensus narrative. Now, all of a sudden, this 0:15:48.080 --> 0:15:51.040 realization that Phase one is going to have to engineer 0:15:51.080 --> 0:15:54.040 a slowdown to get the stimulative stuff that Trump wants. 0:15:54.080 --> 0:15:56.840 Yeah, isn't that weird? Like why are we crashing economic 0:15:56.880 --> 0:15:58.600 growth to boost economic growth? 0:15:58.920 --> 0:15:59.240 Well? 0:15:59.400 --> 0:16:03.600 Because I think in this case, like there is something credible. 0:16:03.120 --> 0:16:06.400 To the idea that the deficit. 0:16:06.000 --> 0:16:08.640 Spending was a market concern, right, I mean, think about 0:16:08.680 --> 0:16:10.640 what rates were doing last year when we were talking 0:16:10.640 --> 0:16:14.480 about fiscal dominance. What's ironic here is that you then 0:16:14.520 --> 0:16:17.440 get punished for trying to address it. So look at 0:16:17.480 --> 0:16:19.320 Europe for instance, and this is like a big trade 0:16:19.360 --> 0:16:21.760 in the market right now. It's like very simplistic, but 0:16:21.800 --> 0:16:24.080 this is the way that acid allocators. 0:16:23.520 --> 0:16:24.000 Think and move. 0:16:24.120 --> 0:16:28.720 Right, who's fiscally contracting and tightening and who's fiscally expanding 0:16:28.720 --> 0:16:30.360 and stimulating Europe? 0:16:30.760 --> 0:16:30.960 Right? 0:16:31.360 --> 0:16:33.640 Trump said, Look, we might be talking about the end 0:16:33.680 --> 0:16:36.720 of Breton Woods post World War II packs Americana here, right, 0:16:37.040 --> 0:16:38.960 We're no longer going to protect you for you to 0:16:39.080 --> 0:16:44.080 buy US dollar assets and use our currency. So guess 0:16:44.080 --> 0:16:48.080 what Europe has to go out create this financing and 0:16:48.160 --> 0:16:50.760 with that, all of a sudden, now they are a 0:16:50.800 --> 0:16:53.080 fiscal expander after years of being the. 0:16:54.640 --> 0:16:55.040 Shift. 0:16:55.120 --> 0:16:58.440 It's a real potential regime shift. Even though I think 0:16:58.480 --> 0:17:02.640 this ultimately creates the conditions where if you do kind 0:17:02.680 --> 0:17:04.919 of crash the economy and you can't stick the landing 0:17:04.960 --> 0:17:09.560 on this engineered recession, then you inevitably have to fiscally expand, 0:17:09.840 --> 0:17:11.439 and that's why I think a lot of these like 0:17:11.520 --> 0:17:14.400 long Europe long China trades. 0:17:14.359 --> 0:17:17.440 Will be quick to move their feet. 0:17:17.480 --> 0:17:21.040 I can't say this is a tectonic, permanent structural shift yet, 0:17:21.280 --> 0:17:24.240 because the worst it gets for us and we get punished, 0:17:24.280 --> 0:17:26.280 and you have fiscal tightening and markets sell off and 0:17:26.320 --> 0:17:28.399 all those bad things to create a negative health effect, 0:17:28.600 --> 0:17:30.600 which in the short term help get the disinflation, to 0:17:30.600 --> 0:17:34.000 get the FED cuts right, to get the stimulus through right. 0:17:34.040 --> 0:17:36.200 This is all part of this kind of second order 0:17:36.320 --> 0:17:42.400 thinking that you need to be looking into. 0:17:51.119 --> 0:17:55.720 Okay, so we had a wild but not disorderly sell off. 0:17:56.320 --> 0:18:00.920 Sounds like my high school report card, but I imagine 0:18:00.920 --> 0:18:03.919 it was still painful for certain investors. So we just 0:18:04.000 --> 0:18:09.040 mentioned momentum like that must have been painful. Multistrats must 0:18:09.040 --> 0:18:10.880 have had a hard time because we saw a lot 0:18:10.920 --> 0:18:16.480 of the over performers underperforming and the underperformers suddenly overperforming. 0:18:16.720 --> 0:18:19.199 How was it give us some like market color? 0:18:19.680 --> 0:18:20.960 Well in some of those. 0:18:21.080 --> 0:18:23.439 I mean, you look at the biggest multistrats that have 0:18:23.600 --> 0:18:27.119 been one hundred percent of the net alternative investment or 0:18:27.160 --> 0:18:29.640 hedge fund inflow over the past X number of years. Right, 0:18:29.680 --> 0:18:32.880 So like long short isn't where it's at anymore. It's 0:18:32.880 --> 0:18:36.240 about the market neutrals, and that's just speaking to their 0:18:36.240 --> 0:18:38.800 equities components. But of course they have these other risk 0:18:38.880 --> 0:18:44.200 diversifying strategies with incredibly tight risk management tight stops, and 0:18:44.240 --> 0:18:46.399 that's how when you apply a lot of leverage to 0:18:46.480 --> 0:18:50.000 these small controlled market neutral gains, you then get these 0:18:50.040 --> 0:18:53.120 incredible annual returns that those biggest shops have been posting. 0:18:53.359 --> 0:18:57.080 But the fact of the matter is crowding happens, and 0:18:57.400 --> 0:18:59.960 leverage on top of crowding happens, and then shadow level 0:19:00.040 --> 0:19:04.320 it happens with leverageddtfs, leverage on and all control target 0:19:04.359 --> 0:19:08.199 volatility and CTAs and all that stuff is synthetic negative 0:19:08.240 --> 0:19:09.119 gamma in the market. 0:19:09.200 --> 0:19:10.960 So and even where you know. 0:19:10.880 --> 0:19:15.159 There's a very well publicized loss with regards to index are, uh, 0:19:15.240 --> 0:19:16.960 you know at one of these funds whatever, I think 0:19:16.960 --> 0:19:19.479 that was probably negatively impacted. They have to model out 0:19:19.520 --> 0:19:22.480 the flows across the diaspora of things out there at 0:19:22.480 --> 0:19:24.480 the end of the day to do their index ads 0:19:24.520 --> 0:19:27.080 and deletes. Well, they're probably getting screwed with by a 0:19:27.119 --> 0:19:28.800 lot of the leverage GTF flows the end of the 0:19:28.840 --> 0:19:31.919 day that are completely nuking and creating these big overshoots 0:19:31.960 --> 0:19:34.400 and these big negative gamma type moves. So the long 0:19:34.440 --> 0:19:37.480 story short is that for the month of February, let's say, 0:19:37.600 --> 0:19:40.200 talking with people deep in the inside, senior traders and whatnot, 0:19:40.520 --> 0:19:43.920 these were losses one month losses that people had not experienced, 0:19:43.920 --> 0:19:45.760 that have been there, you know, four or five type 0:19:45.840 --> 0:19:48.320 years in places that just don't lose money. 0:19:48.440 --> 0:19:50.520 They just stop you so effectively. 0:19:50.720 --> 0:19:53.320 Now it is a tribute to the model, however, that 0:19:53.400 --> 0:19:56.520 there's no blow ups, there's no ltcms here. I mean, yeah, 0:19:56.520 --> 0:19:58.520 they didn't make money. They might have had worst month 0:19:58.680 --> 0:20:01.080 or in the start of March with also you know, 0:20:01.480 --> 0:20:05.680 going the wrong way too, but you're not going existential here. Yeah, 0:20:05.720 --> 0:20:09.040 So that actually speaks to the model working. The bigger issue, 0:20:09.040 --> 0:20:11.760 and I think the bigger thought process takeaway here is 0:20:11.760 --> 0:20:15.440 that when you have trades over a period of time 0:20:15.560 --> 0:20:20.440 or built on the status quo of us exceptionalism, right, 0:20:20.640 --> 0:20:24.040 that is effectively a carry trade. And we had leverage 0:20:24.040 --> 0:20:26.960 built into the system for fifteen years of QE. We 0:20:27.000 --> 0:20:29.600 had leverage built in the system from modern monetary theory 0:20:29.640 --> 0:20:32.000 and the outright money drops that we've done over the show. 0:20:32.000 --> 0:20:35.600