Speaker 1: Hello, and welcome to another edition of the Odd Thoughts podcast.
Speaker 1: I'm Tracy Allaway. My co host Joe Wisenthal is not
Speaker 1: with me today. Mr Wisenthal has gone off to Washington
Speaker 1: to do some very important Bloomberg related things, which means
Speaker 1: he's going to miss out on an episode that I
Speaker 1: am personally very excited about. Today. We are going to
Speaker 1: talk to one of my all time favorite analysts. And
Speaker 1: the reason he became one of my all time favorite
Speaker 1: analysts is because he wrote some very very interesting research
Speaker 1: in the run up to the financial crisis. You know,
Speaker 1: I think it was a few days or a week
Speaker 1: or two before Lehman Brothers collapsed, he basically wrote a
Speaker 1: note called are the Broker's Broken? Pointing out some weaknesses
Speaker 1: in the fun ending of US financial institutions. And since
Speaker 1: then he's gone on to write more broadly about the markets. Specifically,
Speaker 1: he's written about how markets have been functioning in the
Speaker 1: era of central bank liquidity. And as you all know,
Speaker 1: this is a hot topic because the Federal Reserve is
Speaker 1: in the process of tightening monetary policy reducing its balance sheet,
Speaker 1: which puts a giant question mark over the fate of markets.
Speaker 1: Are they going to be able to stand on their
Speaker 1: own two feet without the support of the FED and
Speaker 1: potentially some other central banks. So I won't keep you
Speaker 1: in suspense for any longer. Let's bring in Matt King.
Speaker 1: He is the global head of credit strategy at City Group. Matt,
Speaker 1: thanks for joining us, my pleasure. What a flattering introduction. Yes,
Speaker 1: I tried. I'm trying to make up for the fact
Speaker 1: that Joe isn't here, So this is my compensation. Let's
Speaker 1: start at the very beginning of how we actually got
Speaker 1: to know each other and how you became one of
Speaker 1: my favorite analysts. Two thousand and eight. You're at City
Speaker 1: I think you are covering the banks. Then I assume, no, oh,
Speaker 1: you weren't. So I was doing credit strategy then, kind
Speaker 1: of similar to what I'm doing now. But I guess
Speaker 1: the approach that we have always taken is to try
Speaker 1: and focus on whatever it is that really seems to
Speaker 1: be driving the market. But what we don't do is say, well,
Speaker 1: here's what the economists say about the outlook, and therefore
Speaker 1: here's what it means for our market. We always try
Speaker 1: and say, what is it really it's really driving the world,
Speaker 1: And so in O seven, I sort of had to.
Speaker 1: You know, we used to look at credit fundamentals of companies,
Speaker 1: but then in O seven we had to drop everything
Speaker 1: and suddenly start looking at sieves and conduits and structure credit.
Speaker 1: And then in two thousand and eight it seemed to
Speaker 1: me that repo financing and broker dealers were a critical issue,
Speaker 1: and so I spent a long time looking at them.
Speaker 1: And then in more recent years it's been things like
Speaker 1: the you know, with the European sovereigns, or it's been
Speaker 1: about China and credit creation more broadly. And then the
Speaker 1: dominant theme more than anything else for us at the moment,
Speaker 1: it's just about central banks and central bank liquidity. So
Speaker 1: I love that in two thousand and eight you managed
Speaker 1: to sort of out analyze the actual banking analysts then,
Speaker 1: and that was one of the things I liked about
Speaker 1: the crisis as a financial journalist is the fact that
Speaker 1: everyone was kind of learning at the same time. You know,
Speaker 1: no one had a really good grasp of the intricacies.
Speaker 1: Just before we move on to more contemporary topics, I
Speaker 1: want to press you on that note. So you're at
Speaker 1: City in September two eight, What were you feeling when
Speaker 1: you push the button on a research piece that basically said, hey,
Speaker 1: there's a massive funding issue at the U S. Pinks
Speaker 1: and specifically Leaman. I could feel at the time it
Speaker 1: was probably the most significant piece that I had written,
Speaker 1: And while couldn't say we predict that Lehman will go under,
Speaker 1: there was a chart in there that made it pretty obvious,
Speaker 1: and indeed we basically predicted that all of the brokers
Speaker 1: would have to change their models, and you know, and
Speaker 1: then Lehman happened two weeks later. I guess what was
Speaker 1: slightly surprising, and it to take me a long time
Speaker 1: to do, was that there was no particular immediate market reaction,
Speaker 1: in part because Freddie had just been rescued literally that weekend.
Speaker 1: And so while I did get quite a lot of attention,
Speaker 1: most of the attention actually came after Lehman, when people
Speaker 1: like you kind of went back and said, hey, actually
Speaker 1: this was really significant. Look, this guy spotted it at
Speaker 1: the time, so I knew it was important, and I
Speaker 1: made a big song and dance about it internally. But
Speaker 1: even then, you know, we couldn't see all of the repercussions.
Speaker 1: More broadly, Okay, if anyone wants to know more about
Speaker 1: what we're talking about just Google, are the Broker's broken?
Speaker 1: The pdf is still floating around on the Internet. It's
Speaker 1: a really good read, even more than ten years after
Speaker 1: the fact. Now, Matt, you mentioned muted market reaction when
Speaker 1: Lehman Brothers actually went under, and muted has kind of
Speaker 1: come to characterize the markets ever since, let's say, early
Speaker 1: two thousand nine, when the Fed first announced its big
Speaker 1: round of q E. Walk us through what changed in
Speaker 1: two thousand nine, So clearly and correctly at the time,
Speaker 1: the Central Bank stepped in with extraordinary facilities and liquidity,
Speaker 1: and to begin with this was undoubtedly a good thing.
Speaker 1: We needed to be rescued from a sort of self
Speaker 1: fulfilling loot to the to the downside. But gradually, and
Speaker 1: I would say from two thousand and eleven or so onwards,
Speaker 1: what we started finding was we went from rescuing the
Speaker 1: system and helping fundamentals to improve to a point where
Speaker 1: almost all of my favorite fundamental valuation frameworks in credit
Speaker 1: or inequities, or just more broadly basically started breaking down.
Speaker 1: Markets became expensive and carried on getting more expensive when
Speaker 1: previously they would have been reverted, and this prompted lots
Speaker 1: of soul searching on our side as to say, well,
Speaker 1: what's changed, what's driving things? Instead? Uh, and again I
Speaker 1: can take you through these the same At the same time,
Speaker 1: volatility again decoupled from metrics like some of the policy
Speaker 1: uncertainty in disease that are out there um and carried
Speaker 1: on getting lower instead. And so we we had to
Speaker 1: embark on this long hunt for what was driving everything,
Speaker 1: and all lines of inquiry led back to just one place,
Speaker 1: and that's the central banks. Wait, so walk us through
Speaker 1: the specific sort of I guess indicators that you're talking
Speaker 1: about here, What is it exactly that you're looking at
Speaker 1: in terms of something that would give you knowledge of
Speaker 1: valuations or potentially portender correction. So it's basically this is
Speaker 1: really hard to do on a radio show. You know,
Speaker 1: the relationships that we had tracked four years or decades
Speaker 1: which broke down. So, for example, I mentioned the VIX
Speaker 1: against policy uncertainty correlates beautifully until two thousand and two
Speaker 1: thousand and twelve, and then the VIX goes lower and
Speaker 1: uncertainty goes up. Credit spreads against corporate leverage. It used
Speaker 1: to be that when companies have lots of debt, spreads
Speaker 1: were wide and companies had not much debt spreads were
Speaker 1: tight Again works quite nicely over cycles, and then round
Speaker 1: about two thousand and eleven two thousand and twelve, corporates
Speaker 1: globally but especially US corporate started leveraging up, but credit spreads,
Speaker 1: rather than widening out with them, just decoupled and tightened
Speaker 1: in or, to take another one, credit spreads against inflation expectations.
Speaker 1: It used to be when there's a slightly higher inflation expectations,
Speaker 1: it was taken as a sign of kind of cyclical growth. Uh.
Speaker 1: And again that relationship has has sort of continued to track,
Speaker 1: but there's a break in the series in two thousand
Speaker 1: and eleven, two thousand and twelve. Or in equities, my
Speaker 1: favorite relationship was always earnings revisions, so the change in
Speaker 1: consensus earnings expectations, and again in every market we look
Speaker 1: at across multiple cycles, consensus goes up, the market ally's
Speaker 1: consensus goes down, market sells off, and around about two
Speaker 1: thousand eleven two tho twelve, earnings expectations were revised duly
Speaker 1: lower by analysts across the street for basically the next
Speaker 1: five years, and instead of selling off, markets rallied, so
Speaker 1: all of these breakdowns and all of them more or
Speaker 1: less at the same time. So isn't the counter argument
Speaker 1: to that just low interest rates? So, for instance, when
Speaker 1: you have increasing corporate leverage but credit spreads that are
Speaker 1: still tightening. The thing I always hear from analysts, from
Speaker 1: bullish analysts as well, you know, they can be more
Speaker 1: indebted because ultimately the debt burden will be less in
Speaker 1: an era of low rates. So that's a good argument,
Speaker 1: but I think it only gets us so far. So
Speaker 1: specifically on corporates, Yes, there is an argument that maybe
Speaker 1: we should be looking at interest coverage rather than net
Speaker 1: debt to EBITDA. Let's say, even though it was actually
Speaker 1: net debt to EBITDA that always correlated well historically, and yes,
Speaker 1: interest coverage, So firstly, yeah, the better historical correlation is
Speaker 1: with leverage. But secondly, interest coverage, although it did improve
Speaker 1: steadily for several years as interest rates were falling, actually
Speaker 1: that started deteriorating round about two thousand and fifteen. And
Speaker 1: again credit spreads did do some widening then, but it's
Speaker 1: not like that's an obviously better series that that that
Speaker 1: helps explain everything. Or again, if we take volatility for example,
Speaker 1: again it's not obvious why volatility in markets should be
Speaker 1: lower just because interest rates are lower, or again, for me,
Speaker 1: it almost fits with the anecdotal evidence as I go
Speaker 1: round and I visit investors. I mean, the way I
Speaker 1: put it is, frankly, it's been years since I went
Speaker 1: to see any investor in any asset class who was
Speaker 1: buying things because the analyst was telling the portfolio manager, Hey,
Speaker 1: I've got this really cheap asset, we should go and
Speaker 1: buy it. It's always the PM telling the analyst where
Speaker 1: we've got to put the money somewhere, And so for
Speaker 1: me or again, all of those things fit fit together.
Speaker 1: In addition, if interest rates have so much to do
Speaker 1: with it, you know, maybe you can make this argument,
Speaker 1: but you know, why aren't pees on Japanese equity so
Speaker 1: much higher than everywhere else in the world, If if
Speaker 1: it's low interest rates that allows us to do a rerating,
Speaker 1: or if Japan is a special case, and you could
Speaker 1: make that argument, why areps in Switzerland much higher than
Speaker 1: everywhere else and so, or why in periods when the
Speaker 1: looks as though we might have broken out from this
Speaker 1: low rate regime and yields have been backing up, has
Speaker 1: that not been associated with a D rating, and so
Speaker 1: again I think that is part of the explanation, but
Speaker 1: relative to some of the other things we look at,
Speaker 1: I find it an unsatisfying explanation. So is the simple
Speaker 1: corollary of this just that valuations don't matter anymore? Well, certainly,
Speaker 1: if you're a professional investor and you're a slave to
Speaker 1: near term performance and you're worried that if you underperform
Speaker 1: then the money will be taken away and given to
Speaker 1: to an e t F, then that seems to be
Speaker 1: the conclusion that people are drawing. And you can see
Speaker 1: David Einhorn and an others you're making references to this,
Speaker 1: and I guess this, for me is one of the
Speaker 1: disturbing thing um from a market's perspective. It's to see
Speaker 1: investors giving up, just capitulating and saying, I know it's expensive,
Speaker 1: but it's all because of the the inflows or or
Speaker 1: the foreign money coming in, or whatever the explanation is,
Speaker 1: and then just capitulating and feeling like they have to
Speaker 1: buy anyway. And I think what we know more broadly
Speaker 1: is that that valuations do matter. They're indeed the most
Speaker 1: important factor, but only over the long term, and it
Speaker 1: often takes some sort of catalyst or or change in
Speaker 1: the technical for investors to return to those valuations um
Speaker 1: and again for me, it's it's this valuation is not mattering.
Speaker 1: You always say that at your peril. So how do
Speaker 1: you think the real economy factors into market behavior right now?
Speaker 1: Because again it's getting late in the year, which means
Speaker 1: we have all the cell side analysts now releasing their
Speaker 1: two thousand eighteen outlooks, and one of the consensus themes
Speaker 1: that is emerging is that we're unlikely to get a
Speaker 1: big market correction unless we really see the economy take
Speaker 1: a hit and we see a recession, and most people
Speaker 1: think that's unlikely. So how are you viewing the actual
Speaker 1: economy at the moment. So it's hard to argue against
Speaker 1: all of the good data that's out there, the upward
Speaker 1: divisions to people's growth expectations. Similarly on the earnings front,
Speaker 1: and so I do sympathize when people say we don't
Speaker 1: see fundamentally whether shop comes from. The natural thing is
Speaker 1: to extrapolate the good performance that we've had this year.
Speaker 1: At the same time, I think you have to think
Speaker 1: back to that the indicators are always at their best,
Speaker 1: just before you hit a down town, whether it's two
Speaker 1: thousand and six sven or whether it and what's more,
Speaker 1: and so that doesn't mean that just because things are good,
Speaker 1: there's gonna be a sudden deterioration. But I think the
Speaker 1: specific way I put it is, are we sure that
Speaker 1: it's the economy which is driving the market rather than
Speaker 1: the market which risks driving the economy. I mean, one
Speaker 1: of the so that the obvious examples are think back to.
Speaker 1: It's not that the economy tanks and drags down the
Speaker 1: equity market. It's the market moving first, economy following later.
Speaker 1: Same thing in No. Seven oh eight. It's not the
Speaker 1: economy driving the real estate market. It's the real estate
Speaker 1: market driving the economy. And even with the more recent
Speaker 1: wobbles from European sovereign debt or emerging markets and oil
Speaker 1: in again, one of the striking things is that market
Speaker 1: movements which at least in theory should not have been destabilizing,
Speaker 1: did turn out to be destabilizing. Now that still doesn't
Speaker 1: necessarily pin down the exact timing of this, but I'm
Speaker 1: much given again these expensive valuations across the board and
Speaker 1: what we think are driving them, I'm much more cautious
Speaker 1: than most people are from simply extrapolating this economic strength
Speaker 1: and then and saying okay, and therefore we're bullish on
Speaker 1: markets even if they look a bit expensive. I feel
Speaker 1: like this is a really fundamental thing that we should
Speaker 1: know at this point, like our markets following the economy,
Speaker 1: or does the economy follow markets? Why? Why is there
Speaker 1: even a question mark over that? It's always hard to disentangle,
Speaker 1: and especially at the moment. I can see why people
Speaker 1: will make a case for the fundamentals driving markets because
Speaker 1: you can see all this good data across the board.
Speaker 1: It's almost it's more in twenty eleven to sixteen, when
Speaker 1: earnings growth was much weaker and when GDP growth was
Speaker 1: much weaker and markets were rallying anyway, that some of
Speaker 1: the other relationships that I look at do a better
Speaker 1: job effectively or are more obviously the only driver. So
Speaker 1: for me, the main reasons why again I'm so convinced
Speaker 1: about central bank related distortions driving things is because it's
Speaker 1: not that there's no improvement in the fundamentals, but when
Speaker 1: we look at when we look at the patterns of
Speaker 1: market movements, it's a bit less that we're following the
Speaker 1: areas where earnings expectations are being revised upwards, and it's
Speaker 1: a bit more like an indiscriminate rally and everything. And
Speaker 1: what's more, when we do actually almost embarrassingly simple things
Speaker 1: like just plotting what the global central banks are buying
Speaker 1: each month and plotting that against the change in equity
Speaker 1: prices or the change in credit spreads, we come out
Speaker 1: with these really really good relationships without looking at any
Speaker 1: fundamentals whatsoever. And so especially in the year like this,
Speaker 1: it's hard to tell, but at a minimum, I think
Speaker 1: this year, both the fundamentals and the central bank purchases
Speaker 1: have been a big driver of markets. And next year
Speaker 1: the central banks are significantly pulling back and the fundamentals
Speaker 1: really have to stand on their own. Yeah, so I
Speaker 1: wanted to press you on this point. Um. A lot
Speaker 1: of people are talking about Janet Yellen's legacy now that
Speaker 1: she's set to depart from the FED, and one thing
Speaker 1: that keeps coming up as well, Actually, she's done a
Speaker 1: pretty good job of beginning the navigation of the exit.
Speaker 1: She's raised interest rates, and the Fed has embarked on
Speaker 1: its tightening of its balance sheet or the reduction of
Speaker 1: the balance sheet. Are you implying that this is nothing
Speaker 1: and that the real test is going to be um
Speaker 1: later on, maybe when we start to see places like
Speaker 1: the e c B or the b o J actually
Speaker 1: withdrawal liquidity. So firstly, full credit to her. It's not nothing.
Speaker 1: She's already got significantly further than I previously thought would
Speaker 1: be possible. But I think there is it's it's absolutely
Speaker 1: it's maybe unsurprising that there still disagreement about how QUI
Speaker 1: affects the economy. What's amazing to me is that after
Speaker 1: eight years into the crisis, there's still so much disagreement
Speaker 1: about how quee affects markets. And for me, a lot
Speaker 1: of the reason the FED has been able to get
Speaker 1: this far is because of the e c B and
Speaker 1: the b o J having ramped up their purchases and
Speaker 1: and so this is one of the sources of disagreement.
Speaker 1: It's is are the effects local as the central banks
Speaker 1: like to think, if only because it's convenient for them,
Speaker 1: or are they global? Which is what all the correlations
Speaker 1: in markets that we find point to. We get much
Speaker 1: better explanations for US credit spreads or U S equities
Speaker 1: if we look at global que and same thing when
Speaker 1: we're looking at European credit spreads in European equities. It's
Speaker 1: that global pattern that fits, and that in a in
Speaker 1: a funny sense, is actually the smallest of disagreements. The
Speaker 1: bigger disagreement is between whether there are a couple more.
Speaker 1: But but is it flow or is it stock? The
Speaker 1: central bank the central banks think that markets should not
Speaker 1: be destabilized because their policies are still super accommodative, and
Speaker 1: because in the Fed's case, it would argue the market
Speaker 1: has discounted things ahead of time because markets are reasonably efficient,
Speaker 1: and therefore they've told us about the balance sheet reduction,
Speaker 1: and that's why it can run in the background as
Speaker 1: just a little technical detail that nobody needs to to
Speaker 1: worry about. Again, though, as we look at what has
Speaker 1: correlated in the past, what we find is that actually
Speaker 1: it's very clearly the flow that matters are not the stock,
Speaker 1: and that even if the e c B is reducing
Speaker 1: its purchases, into its mind, is still easing. Nevertheless, that
Speaker 1: reduction in the flow, at least at a global level,
Speaker 1: has historically been associated with periods of weakness in risk assets,
Speaker 1: and so again for us, what significant is Bank of
Speaker 1: Japan purchases have already harved with the shift away from
Speaker 1: QUEI or pure que to yield targeting, and so you've
Speaker 1: got the B O J kind of having moved, and
Speaker 1: then you've got the E C B moving and the
Speaker 1: FED moving all at the same time. And it's that combination,
Speaker 1: which again we think is potentially destabilizing or at a
Speaker 1: minimum makes it much harder than the FED would have
Speaker 1: thought from just looking at history in the U S alone. Okay,
Speaker 1: but here's my other question. If it is so easy
Speaker 1: to show that it's all about the flow of that
Speaker 1: liquidity rather than the absolute level, then why don't central
Speaker 1: bankers realize that? Why are you the only one sort
Speaker 1: of pounding the table on this, Because while you are
Speaker 1: one of my favorite analysts, I'm sure people like Janet
Speaker 1: Yellen or Mario Droggy have a whole team of smart
Speaker 1: people who are examining exactly this kind of thing. Why
Speaker 1: aren't they coming up with the same conclusions that you are.
Speaker 1: So I don't think I'm the only Lots of people
Speaker 1: in the market will tell you it's the flow, and
Speaker 1: it's kind of obvious to them that it's the flow,
Speaker 1: and it's obvious that it's dominating. But it's almost embarrassing
Speaker 1: to say, because we do say the same thing to
Speaker 1: the central banks, but to quote one of them that
Speaker 1: I met recently, the somehow they look at the correlations,
Speaker 1: but then they're dismissive of them. And the reason they're
Speaker 1: dismissive is because it doesn't fit with theory. It's not
Speaker 1: it doesn't fit their model of how the world is
Speaker 1: supposed to work. And one of my colleagues cheekily said,
Speaker 1: these are doubtless the same models that have have been protecting
Speaker 1: inflation would pick up for several years now, and we're
Speaker 1: predicting that wage goes would be much higher. That's really harsh,
Speaker 1: but I think there is this. It's it's I've always
Speaker 1: I'm a strategist, not an economist, and so I don't
Speaker 1: start from the theory. I just start from what correlates
Speaker 1: in the market, and then I see if there's a
Speaker 1: plausible explanation. And when we get a these staggeringly good
Speaker 1: correlations with the flow and be there's an associated plausible explanation,
Speaker 1: which is look at the net supply number. Central bank
Speaker 1: have basically bought all of the available net supply of
Speaker 1: securities across global markets. In seventeen, which is a big
Speaker 1: difference from say, two thousand and six, two thousand and seven,
Speaker 1: and that creates an imbalance where people are still saving,
Speaker 1: there's still demand, but there's no supply, and so what
Speaker 1: do you get, But you get markets where prices go up.
Speaker 1: And that's exactly what we've had in every asset class
Speaker 1: on any given week. Unless there's something to panic about,
Speaker 1: the price has been going up. Next year that doesn't
Speaker 1: fall apart entirely the the as the ECB and the
Speaker 1: and the and the FED pool back, there's about a
Speaker 1: trillion dollars more of global net supply, and we think
Speaker 1: that will make for more balanced markets. So in one sense,
Speaker 1: they should be looking more closely, and it's it's their
Speaker 1: own effect, it's the portfolio balance effect, and it's just
Speaker 1: worked way more strongly than than they imagined. But in
Speaker 1: another sense, yes, I think they're almost completely blind to
Speaker 1: it because it's just convenient for them to continue to
Speaker 1: toe out the same theory and and it's just in
Speaker 1: the same way as they think that the super low
Speaker 1: level of rates should have been really really similated for
Speaker 1: a time now, and then every so often they're confronted
Speaker 1: by how markets actually behave, and and they're disappointed that
Speaker 1: relatively minor changes on their part produce outsize movements in markets.
Speaker 1: And I think there's at a minimum significant risk that
Speaker 1: that is what we get again, and the outlook is
Speaker 1: not nearly so straightforward as as they would like to think. Okay,
Speaker 1: on the outlook point, we did see a sell off
Speaker 1: in markets this month in November. It got a lot
Speaker 1: of attention, but in the end, I think it only
Speaker 1: ended up being like one five percent or something like that,
Speaker 1: which historically, you know, before the crisis, would have been
Speaker 1: relatively muted. Are we just going to have to get
Speaker 1: used to the return of volatility and the idea that
Speaker 1: asset prices can go down as well as up. Is
Speaker 1: that in our near future? I certainly hope so, because
Speaker 1: I think a more balanced market is a much more
Speaker 1: resilient market. And I do worry that what's happened at
Speaker 1: the moment is that we the central banks have effectively
Speaker 1: created one way markets that grind higher with very low
Speaker 1: volatility and then are at risk of of large amounts
Speaker 1: of volatility. I mean, one of the other topics I've
Speaker 1: done work on over the years is liquidity, and we've
Speaker 1: always said, and it's actually Kevin Walsh's definition, but a
Speaker 1: liquid market is one with a myriad set of participants
Speaker 1: looking at different factors, having different views, you know, the
Speaker 1: bottom up analysts, the top down portfolio manager, the long term,
Speaker 1: the short term, the value oriented, the momentum or entered,
Speaker 1: and so on. And unfortunately, if you were a bottom
Speaker 1: up fundamental value oriented analyst or manager, you went out
Speaker 1: of business a long time ago as everything got expensive
Speaker 1: and carried on getting more expensive. And so what we
Speaker 1: think has happened today is investors, through a mixture of
Speaker 1: regulation and above all the central bank distortions, have been
Speaker 1: forced into the same sets of trades, forced into buying
Speaker 1: risky assets which they don't really believe the valuations of,
Speaker 1: with a close eye on the global central bags and
Speaker 1: on the other investors in case, actually it's time to
Speaker 1: run for the exits. And and that gives us this.
Speaker 1: It's not just that volatility is low, it's that volatility
Speaker 1: has bifurcated. You get extended periods of very very low volatility.
Speaker 1: But when everyone is the same way around, you're vulnerable
Speaker 1: to a you know, are much more aggressive pull back.
Speaker 1: You don't get one of two standard deviation movements, it
Speaker 1: is either zero or sixteen. Now, on the one hand,
Speaker 1: I am impressed that the little wobble that we had
Speaker 1: last week does look to have stabilized. But on the
Speaker 1: other hand, yes, I do think that the major factor
Speaker 1: driving this has been central bank squashing all of this volatility,
Speaker 1: and that as they pull back, hopefully smoothly, we get
Speaker 1: much more two way markets with yes, significantly higher degrees
Speaker 1: of volatility or day to day volatility than we've been
Speaker 1: having at the moment. And you can see that investors.
Speaker 1: And one of the other reasons why it's not just
Speaker 1: fundamentals is it's while day to day volatility is low,
Speaker 1: skew or or the price of out of the money
Speaker 1: options is actually very high relative to at the money options.
Speaker 1: In fact, it's at all time highs. And so again,
Speaker 1: if it were just a question of fundamental improvement, you
Speaker 1: could you have thought that the skew would have collapsed
Speaker 1: as well, and it simply hasn't. And that against suggest
Speaker 1: to me that the risk of being suppressed rather than
Speaker 1: not being there at all. All Right, we actually managed
Speaker 1: to completely square the circle of our conversation because, of course,
Speaker 1: one of the reasons that liquidity is said to have
Speaker 1: deteriorated in the market is regulation. As you pointed out
Speaker 1: in that regulation came about because we had a bunch
Speaker 1: of banks that sort of teetered near the brink in
Speaker 1: two thousand eight, and of course Lehman Brothers did go
Speaker 1: over the edge, as you rightly predicted in your notes.
Speaker 1: So well done to us for for coming full circle.
Speaker 1: I'm kind of impressed. Matt King, Global head of Credit
Speaker 1: Strategy at City, thank you so much for joining. It's
Speaker 1: been a pleasure. I always feel like we go to
Speaker 1: a more pessimistic place when Joe isn't around, so I'm
Speaker 1: looking forward to having him back next week. But that
Speaker 1: is it for this solo hosted edition of the Odd
Speaker 1: Thoughts podcast. You can follow me on Twitter at Tracy Allaway.
Speaker 1: Matt King is not on Twitter, but if you want
Speaker 1: to take a look at some of his notes, just
Speaker 1: google his name again. That two eight note we were
Speaker 1: talking about is called argue Broker's Broken. And finally, you
Speaker 1: can follow our producer, Sarah Patterson at Sarah pat with
Speaker 1: two t s. Thanks for listening.