Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: I think there's a chance you might have to re
Speaker 2: record an intro, or at least the intro might be
Speaker 2: out of date by the time the episode comes out.
Speaker 3: That's how you know.
Speaker 2: That's how you know it's bad. That and when people
Speaker 2: start waving around standard deviations standard V. And also when
Speaker 2: people start saying it's a healthy correction in the market,
Speaker 2: although I haven't seen.
Speaker 3: That much, it's pretty gnarly.
Speaker 4: Also when we don't just say the date that we're recording,
Speaker 4: what we say the minute we're recording. This At seven
Speaker 4: oh four am on February sixth, twenty twenty six, all
Speaker 4: the signs are back, Joe, I.
Speaker 2: Want a T shirt that says ruthless utility maximizer black gold.
Speaker 2: Let's talk about losers, Hooker. I've decided I'm going to
Speaker 2: base my entire personality going forward on campaigning for a
Speaker 2: strategic pork reserve in the US.
Speaker 3: Skull's unlimited.
Speaker 2: What's the ticker for that?
Speaker 1: No.
Speaker 4: I think that like in a couple years, the AI
Speaker 4: will do a really good job of making the odd
Speaker 4: launch podcast.
Speaker 2: How do I get more popular and successful?
Speaker 3: One day that person will have the Mandate of Heaven.
Speaker 1: We do have the.
Speaker 4: Welcome to lots More, where we catch up with friends
Speaker 4: about what's going on right now.
Speaker 2: Because even when Oddlots is over, there's always lots More
Speaker 2: and we.
Speaker 4: Really do have a perfect guest. But it is weird,
Speaker 4: isn't it, because it's you know, it's a little different.
Speaker 2: It's been very strong.
Speaker 4: It's a surreal it's a surreal type of market environment,
Speaker 4: especially over the last week.
Speaker 2: Right so if you've been living under a rock, markets
Speaker 2: have been tanking. There have been a bunch of different
Speaker 2: things going on. But first of all, gold and silver
Speaker 2: and the metals complex started plunging, and then you had
Speaker 2: like basically a slaughter in software socks. What else there
Speaker 2: is one?
Speaker 3: Oh, crypto Crypto.
Speaker 2: Crypto is a big one. So bitcoin has like down
Speaker 2: to sixty six thousand something like that. Yeah, six oh wow,
Speaker 2: And that's the thing. I can't keep up anymore. And
Speaker 2: also there's concern about private credit because private credit has
Speaker 2: so much exposure to software and they basically lent all
Speaker 2: the money at the top of the valuation cycle, which
Speaker 2: I wrote about in the newsletter yesterday. But anyway, there's
Speaker 2: a lot to talk about in markets who do we
Speaker 2: call when markets are moving?
Speaker 3: That's right, So Charlie, you guys are amazing.
Speaker 2: So this is Charlie mcgallighan. Of course, he is the
Speaker 2: cross asset macro strategist over at Nomora. I'm gonna start
Speaker 2: with the simple question. Maybe it's not an easy question,
Speaker 2: but what was the proximate catalyst for all of this?
Speaker 2: Because you have a bunch of different things going on, including,
Speaker 2: by the way, the nomination of worsh at the FED.
Speaker 1: So absolutely part of the feedback loop. But these things
Speaker 1: are never singular input, you know, in a world of
Speaker 1: thousands of macro factoriariable in this case, and you know,
Speaker 1: I'm an ambulance chaser. That's kind of what my gig is.
Speaker 1: A grave robber, a carpetbagger, you know, all those things.
Speaker 1: I try to reverse engineer car accidents. Yeah, And kind
Speaker 1: of the qualitative starting point of that is to locate
Speaker 1: consensus positions that tend to then crowd in positioning when
Speaker 1: trend trades develop. That's usually accompanied or requirement or requirement
Speaker 1: being low volatility to accumulate those kind of smooth trends.
Speaker 1: So point being, I think there were a number of
Speaker 1: market narratives that got a little lazy. You know, for instance,
Speaker 1: Q four of last year, as we recall, I think
Speaker 1: there was you know, somewhere three to four months ago,
Speaker 1: there was still a fair bit of concern with regards
Speaker 1: to this idea of like labor cracking, you know, and
Speaker 1: there was still a lot of feedback with regards to
Speaker 1: Liberation Day and the policy volatility dynamics. You know, before
Speaker 1: things really got hot with policy volatility most recently. But
Speaker 1: and that was leading to some you know, some skepticism.
Speaker 1: And as it relates to kind of the equities world,
Speaker 1: what did you do? You just stuck in the stuff
Speaker 1: that kept working, And that was that same dynamic we
Speaker 1: spoke about a number of times last year, you know,
Speaker 1: that crowding into secular growth, megacap tech AI. They just
Speaker 1: keep growing earnings, profitability, all of those metrics, and they
Speaker 1: took up this massive part of the market. That's part
Speaker 1: of this positioning that set. You know, at some point
Speaker 1: Q four run hot starts happening. You start seeing data
Speaker 1: upside surprising again. Right, he starts openly and more recently
Speaker 1: transitioning into January talking openly advocating his week dollar policy. Right,
Speaker 1: you know, so you start having these things where people
Speaker 1: were really accumulating around effectively a lot of short dollar trades.
Speaker 1: And when I'm sitting there and I'm seeing like, how
Speaker 1: do these narratives go wrong? How does this crowding go wrong?
Speaker 1: And I'm seeing you know, gold and silver being attributed
Speaker 1: to this debasement narrative or this de dollarization narrative. There's
Speaker 1: credibility in those arguments, but I'm also a skeptic with
Speaker 1: regards to the flows and the actual like singular catalyst
Speaker 1: of those. But I start seeing those positionings really overshoot.
Speaker 1: We're not talking like linear projections like bending off the
Speaker 1: curve type of you know, price performance of late I
Speaker 1: see em equities crowding. I see cyclical equities because everybody
Speaker 1: owned secular growth and nobody had enough economic sensitivity. So
Speaker 1: I start seeing these kind of positioning overshoots. You know,
Speaker 1: that's all the work that we do internally. And it
Speaker 1: just said, if the dollar starts agitating and it stops
Speaker 1: going lower and you start losing these short term trend windows,
Speaker 1: and then you get maybe a little bit of wow,
Speaker 1: we didn't get the max dubbish hasset trade, right, Oh,
Speaker 1: we start seeing upside surprise data when everybody's short dollar
Speaker 1: and thinking rest of world growth and actually US is
Speaker 1: maybe leading to the upside again and reaccelerating dollars starts performing,
Speaker 1: people start monetizing, and you start taking money out of
Speaker 1: these trades, and that turns into a bigger de risking.
Speaker 4: Obviously, we want to get into, like got to get
Speaker 4: into everything, including like the software sell off and its
Speaker 4: connection to silver, et cetera. You know, it occurs to
Speaker 4: me speaking of the software.
Speaker 3: Thing, and I'm glad you brought up a liberation day.
Speaker 3: One of the memes of twenty twenty.
Speaker 4: Five was just this idea that, well, look, we don't
Speaker 4: really know what tariffs are going to do. We're not
Speaker 4: really sure what effect they're going to have on the economy,
Speaker 4: but one thing we could be pretty sure of is
Speaker 4: that it's totally gonna affect the sort of physical goods
Speaker 4: economy and not the digital economy. And so tariffs in
Speaker 4: away sort of seemed to embolden the software maybe crypto
Speaker 4: digital trade because it's like this stuff is borderless, it
Speaker 4: does and it's not going to get held up in customs,
Speaker 4: so let's lean into this. And then so it's interesting
Speaker 4: to hear. You know, then you get this bigger reversal.
Speaker 4: Can we measure it when you talk about like how
Speaker 4: leverage and how consensus these trades were, whether we're talking
Speaker 4: about software or whatever, can we measure how crowded those
Speaker 4: trades were, how levered these trades were.
Speaker 1: Absolutely, I mean, I'll look across you know, we we
Speaker 1: we have internal money that we were on within QIS
Speaker 1: businesses where there's billions of dollars behind, you know, very sophisticated,
Speaker 1: not like naive toy models from trend to risk parity,
Speaker 1: you know, vaull control target volatility. So I look at
Speaker 1: where those gross exposures are, and like period point blank
Speaker 1: grosses were too big. Right if you look at a
Speaker 1: snapshot of a model risk parity portfolio, four assets long
Speaker 1: only using leverage to allocate your volatility right, long only, inequities, bonds, credit, commodities,
Speaker 1: different waitings based on different economic scenarios, like a very
Speaker 1: kind of generic versu parity. We're seeing on a let's
Speaker 1: say a five year look back ninety nine spot seven
Speaker 1: percentile gross exposure. It just so happens, right, you know.
Speaker 1: Goldman Sachs Prime brokerage data with regards to equity hedge
Speaker 1: fund grosses as of last Friday one hundred percentile on
Speaker 1: a five year look back. So like these are these
Speaker 1: are synonymous. Now, Now, gross exposure is not purely a
Speaker 1: function of trailing realized volatility. Right, Different strategies deployed, different leverage,
Speaker 1: different strategies, you know, will try to amplify a market
Speaker 1: neutral versus a net lean or a directional lean. But
Speaker 1: by and large, the grosses were too damn big. It's
Speaker 1: like the guy that used to run for air. And
Speaker 1: when you see grosses being that big, and you see
Speaker 1: prices bending off the curve, and you see the thesis
Speaker 1: behind it, and this is where I'm pumped to tie in.
Speaker 1: Like the bitcoin read right, if debasement was actually what
Speaker 1: people are saying it was, right, this idea that in dedollarization,
Speaker 1: you know, moving away from fiat you know, US policy volatility,
Speaker 1: US fiscal deficit, which, by the way, okay, like same
Speaker 1: with Europe, same with Japan. Now you know with their
Speaker 1: little trust moment, you know, Europe is taking the austerity
Speaker 1: break off. That's a global phenomenon with fiat currency. So like, okay,
Speaker 1: I can get with that to a certain extent. But
Speaker 1: like why didn't bitcoin participate if that's what people kind
Speaker 1: of claim, as you know, bitcoin's a shape shifter, as
Speaker 1: is gold. But you know, my story, in my skepticism
Speaker 1: with regards to that debasement or that dedollarization, was the
Speaker 1: way that bitcoin absolutely did not participate when it was
Speaker 1: gold and silver. And look, you know, I sit in
Speaker 1: an options business. I see just outrageous call skews and
Speaker 1: demand for upside and people, you know, keep putting on,
Speaker 1: keep reloading into these, you know, the call spreads and
Speaker 1: upside trades and SLV and GLD. The options volumes are massive.
Speaker 1: It became a s aculative macro tourist retail type of
Speaker 1: a trade on top of all this, but Bitcoin kept
Speaker 1: going lower and I started seeing one, if people are grabbing,
Speaker 1: people clearly have this preference for real assets, you know,
Speaker 1: physical assets. Right now, in this world of debasement, of FIAT,
Speaker 1: of fiscal deficits, spend, perpetual issuance, all those things, Bitcoin
Speaker 1: is trading like software. It's trading like SaaS, which is
Speaker 1: going through an existential crisis right now for really justified reasons,
Speaker 1: especially with regards to valuation. Right And the funny thing is,
Speaker 1: when we were talking about you know how AI was
Speaker 1: actually going to I was making the point kind of
Speaker 1: Q four start of Q four last year, there's two
Speaker 1: major tailwinds for equities that become potential headwinds in twenty
Speaker 1: twenty six. They're very well socialized, but they still ring true. Ironically,
Speaker 1: we kind of got a backdoor on one. Was that
Speaker 1: the CAPEC spending with regard to AI, you know, was
Speaker 1: burning your cash when you're moving through the cash so fast, right,
Speaker 1: and the cash that made these companies so preferred, so
Speaker 1: you know, screening is quality and profitability and all these
Speaker 1: great things. They're liquid, they're big, you can move in
Speaker 1: and out of them. They only go higher, you know.
Speaker 2: And they did a bunch of buybacks.
Speaker 1: Well that's the trick, right, So like you aggregate kind
Speaker 1: of like the mag seven or like you know, maybe
Speaker 1: the twelve biggest kind of like AI contingent types of players.
Speaker 1: You're talking like twenty to thirty percent of the overall
Speaker 1: S and P five hundred buy back. So that's a
Speaker 1: huge point for me because I've made this before. Buybacks
Speaker 1: are like seven to eight x the largest source of
Speaker 1: demand for equities over the past fifteen years. Wow, And
Speaker 1: it's a val suppressor yep, right, I mean you are
Speaker 1: a bigger if you're a passive bin under the market
Speaker 1: on a view up order, or more importantly, when there
Speaker 1: is a draw down, that's when they get most active.
Speaker 1: So it's like long gamut. It's like synthetical long gam in
Speaker 1: the market. So one you're burning through your cash and
Speaker 1: you're no longer doing that. Two you're burning through your
Speaker 1: cash and you're no longer buying back stock. Is this
Speaker 1: vall shock absorber and passive bin into the market fromkin
Speaker 1: of sort of a quarter to a third of the
Speaker 1: overall S and p's buyback that you're then too having
Speaker 1: to take on this new debt, you take on new loans.
Speaker 1: You know, to a certain extent, you're trying to lever
Speaker 1: the bow sheet. But you know, more importantly, what does
Speaker 1: that mean for credit? Credit has been this perpetual kind
Speaker 1: of vauld bleed. Yeah, because spreads are so tight credit.
Speaker 2: People have been issuing to fund buybacks as well.
Speaker 1: Yeah, one hundred percent. I mean, ironically that's probably a
Speaker 1: separate podcast. But remember we used to kick and scream
Speaker 1: like ah kiuie, this is crazy, like this malinvestment, Like
Speaker 1: they're bringing debt for buybacks and they're not doing you know,
Speaker 1: R and D, and they're not spending capex, they're not
Speaker 1: building plans. Well, here you go. You know, Drug said
Speaker 1: something like this, you know, many years ago in an interview.
Speaker 1: He's like, actually, when you start to see you know,
Speaker 1: the cash turn into capex spend, there's usually kind of
Speaker 1: a point of agitation. It's not always in the right direction.
Speaker 1: For equities, let's say, right, and in this case, I
Speaker 1: think we're starting obviously we're starting to get that. But
Speaker 1: the credit point is critical because the pace of the
Speaker 1: capex kind of prisoner dilemma that we're still seeing right
Speaker 1: now with like yesterday's earnings releases, the magnitude of that
Speaker 1: supply in the investment grade market is simply going to
Speaker 1: widen spreads. Tech is a big part of that. Now,
Speaker 1: this is the punchline, bringing it back to software, bringing
Speaker 1: it back to bitcoin. As we were all kind of
Speaker 1: watching this potential for you know, the credit markets to
Speaker 1: become a headwind, not in a shock, not in a freeze,
Speaker 1: you know, not in anything close to a systemic dynamic.
Speaker 1: Just too much supply with spreads too tight, you're not
Speaker 1: being compensated for it so like there was kind of
Speaker 1: this general shortened credit because guess what, the whole world
Speaker 1: is watching one in like baby footsteps. Can Oracle get
Speaker 1: their funding done? That was the one day we had
Speaker 1: a sigh of relief. This week, by the way, they
Speaker 1: got twenty five billion of investment grade done plus converts
Speaker 1: with like one hundred and twenty nine billion of demand
Speaker 1: the market. Huge extail. But guess what, open Ai is
Speaker 1: still in the background somewhere. We're like kind of sort
Speaker 1: of in the next two months, they got to come
Speaker 1: up with like anywhere from one hundred to two hundred
Speaker 1: billion bucks. And that is still a major point of skepticism.
Speaker 2: It's not a funny punchline, is it.
Speaker 1: No, it's not. It doesn't make you feel really good.
Speaker 1: But here's the thing. As Anthropic has done their thing,
Speaker 1: and I mean, bang, you guys are in it right
Speaker 1: now with regards to Claude and the implications of vibe coding,
Speaker 1: and you know, a whole reset with regards to certain
Speaker 1: industries and taking out even if it's just the basic
Speaker 1: level of like legal compliance documentation, and we've seen it
Speaker 1: start to hit bottom lines with regards to earnings, mentions
Speaker 1: and things like that that is happening so fast that
Speaker 1: software is going through this ex centric crisis. And here's
Speaker 1: the deal. Those dudes are stuffed on restricted shares. There's
Speaker 1: stuffed on RSUs and the concentric circles of VC boys
Speaker 1: and tech boys in SaaS Bros and Bitcoin Bros. Has
Speaker 1: a lot of overlap of.
Speaker 2: Boys and bross.
Speaker 3: Not a Venn diagram, it's just a circle.
Speaker 1: It's kind of like straight up overlap. And you know,
Speaker 1: in in a sense you can't sell, you're kind of
Speaker 1: being haircut ten percent. It feels like every week right
Speaker 1: now with regards to do I have a job, what
Speaker 1: are the prospects, where is this industry going? And what
Speaker 1: do you have to sell? You know? And I think
Speaker 1: that that's why it is trading tick for tick. You're
Speaker 1: to date with SaaS software and it's quite remarkable. And
Speaker 1: that to me, as I step back to this large conversation,
Speaker 1: it's not really about debasement, right, this is a digital phenomenon.
Speaker 1: This is a liquidity crunch. With regards to this, the
Speaker 1: idiosyncratics of that sector really coming under attack. And by
Speaker 1: the way, now it's also become a backdoor credit story
Speaker 1: where it's not simply the spread widening from the hyperscalers.
Speaker 1: It's people worrying now about private credit. Actually the BDC guys,
Speaker 1: which are you know, sitting on a lot of this
Speaker 1: stuff with you know, really tricky evaluations and not a
Speaker 1: lot of like buffer room and you know, with covenants
Speaker 1: and things like that. So you know, it's become a
Speaker 1: huge macro story. They kind of did the end around
Speaker 1: with regards to where we thought it was going to come.
Speaker 1: But we can handle a couple things at once, you know,
Speaker 1: you know, all of a sudden you get a little
Speaker 1: bit of a surprise with regards to the Fed chair
Speaker 1: dollar stabilizes. You've already had people in all these short
Speaker 1: dollar trades. People start taking money out of you know,
Speaker 1: gold upside, silver upside, They start taking off some em upside.
Speaker 1: And at that point, like last Thursday, I'm looking at grosses.
Speaker 1: I'm looking at our CTA trend net exposures and commodities
Speaker 1: and metals ninety eight percentile. I'm looking at our net
Speaker 1: short dollar exposure zero percentile. Look at our net equities
Speaker 1: exposure ninety seven percentile. I'm saying, these are the qualitative
Speaker 1: things I need to see where profit taking and monetization
Speaker 1: turns into a risk management.
Speaker 2: Exercise, so speaking of selling what you can and not
Speaker 2: necessarily what you want. One of the reasons that yesterday
Speaker 2: February fifth, I guess was so painful is because we
Speaker 2: started to see the places, the few places where people
Speaker 2: were able to hide start to go down. So consumer staples,
Speaker 2: for instance, it wasn't a big drop, but still they'd
Speaker 2: been surging earlier in the year as people sort of
Speaker 2: switched out of software and into consumer goods. But now
Speaker 2: it's not quite clear where they're going to go. So
Speaker 2: correlation seems to be picking up right like in a
Speaker 2: market crash, correlation goes to one. But at the same time,
Speaker 2: I can't figure out what's going on with implied correlation
Speaker 2: because if I look that up, it's still pretty low.
Speaker 1: So this is, you know, absolutely topical, and it's something
Speaker 1: that you know, we continue to get questions over the
Speaker 1: last few years, you know that generic like why is
Speaker 1: all so low? Right? You know? And low VALL or
Speaker 1: high vall is incredibly subjective. It's about the you know,
Speaker 1: the wall service, it's about skew It's about where the
Speaker 1: starting point was, where you've moved from, how quickly you know,
Speaker 1: it's it's art plus science. The part of the problem
Speaker 1: with vall in general certainly being sticky, and I think
Speaker 1: it comes down to where the money has flowed with
Speaker 1: regards to the hedge fund space is that, you know,
Speaker 1: maybe ten fifteen years ago, the long short universe, you know,
Speaker 1: running net exposure was I don't want to say, you know,
Speaker 1: necessarily dollar for dollar like acts or necessarily larger than
Speaker 1: you know, the multi strats at the time, but like
Speaker 1: they ran net and they would lever up positions or
Speaker 1: they would hedge their longs, and they were you know,
Speaker 1: generally speaking, there was buyers volatility with those guys to
Speaker 1: a certain extent. You know, if you look back kind
Speaker 1: of on the sort of let's say five a ten
Speaker 1: years of dollar flows into the hedge fund space. With
Speaker 1: regards to all new flows, multistrats are conservatively eighty cents
Speaker 1: of every dollar in, and then if you actually include
Speaker 1: outflows from other strategies, you're legitimately through one dollar of
Speaker 1: So the point I'm making here and multi strats are
Speaker 1: unbelievable with regards to their low volatility, with regards to
Speaker 1: the consistency of their returns with regards to the the
Speaker 1: disciplined risk management, the tight stops model, the non correlated returns,
Speaker 1: which is the whole story why people keep allocating into them.
Speaker 1: They've proven to be such an absolutely undeniable force, hence
Speaker 1: all this dollar flow. But think about it like this,
Speaker 1: we don't see the core ones anymore. And this is
Speaker 1: like core ones core ones meaning like when things shock,
Speaker 1: everything together or down together, right, And that was kind
Speaker 1: of the old state of the world. But now what
Speaker 1: we tend to see and this is exactly what we
Speaker 1: saw earlier this week when you had you know, of
Speaker 1: course financial market returns are not on a normal distribution,
Speaker 1: but for you know.
Speaker 4: It's like it's like like something get a pharmaceutical, yeah.
Speaker 2: Like you have to include it because otherwise someone annoying,
Speaker 2: don't take this drug.
Speaker 1: If you're this drug. Yeah. So the point here being
Speaker 1: that you know, you would see kind of like a
Speaker 1: risk on, risk off type of core one phenomenon you know,
Speaker 1: in past era. Part of what is happening now in
Speaker 1: my mind, you know, with these you know a little
Speaker 1: bit of fragmented you know, bullet points, you know, triangulating.
Speaker 1: Here is the fact that the dollars and the leverage
Speaker 1: controlled by the market neutral multi strat equity space are
Speaker 1: so overwhelming in the sense that when you get when
Speaker 1: you are forced to de risk or degross, you know,
Speaker 1: the tilts go wrong, that you have the offsetting short
Speaker 1: on the other end. Right, It's not just you stop
Speaker 1: out of your net longs or your crowded lungs, right,
Speaker 1: It's that you're also you know, theoretically an equal dollar
Speaker 1: amount on the short side being covered. And what ends
Speaker 1: up happening on like the two big down days this week,
Speaker 1: it was like two hundred and fifty stocks were up,
Speaker 1: two hundred fifty stocks were down. Yeah, so you're getting
Speaker 1: this like reverse dispersion right, very much the opposite of
Speaker 1: what last year was, which is this crazy concentration of
Speaker 1: like top decile, bottom decile just spread ninety nine percentile
Speaker 1: like a ten year basis, which feeds into why people
Speaker 1: are loaded into momentum. Right, the higher stuff keeps going higher.
Speaker 1: It's human nature. This is like fom in France. This
Speaker 1: is factor alpha, you know, commoditized alpha. So these things
Speaker 1: I think due to this kind of where the dollar
Speaker 1: flows have been, the market neutrality, the fact that there's
Speaker 1: always this offset against it, you're not getting core shocks
Speaker 1: and when you don't get core shocks necessarily, at least initially,
Speaker 1: because VAUL did not really react until just like two
Speaker 1: days ago and yesterday iv all ive all got a
Speaker 1: little tricky too. But you know, point being, you need
Speaker 1: correlation as an input to higher vault to like sustain,
Speaker 1: and you're just not getting that. You still have low
Speaker 1: core now. The trick is to your point, it's crazy.
Speaker 1: It's very interesting. You mentioned the defensives, right, the reversal
Speaker 1: that we saw when people said, look, I'm too much
Speaker 1: exposure and secular growth metacap tac AI, which gives you
Speaker 1: a lot of momentum exposure, a lot of you know,
Speaker 1: you know, unintended kind of exposures that when people said
Speaker 1: I need more economic sensitivity, I'm taking up my cyclicality. Right,
Speaker 1: The three best performing sectors kind of year to date
Speaker 1: for most of the year have been like energy, materials, industrials, right, right,
Speaker 1: stuff that people have kind of been underweted for the
Speaker 1: longest time in the absence of a hot economic cycle,
Speaker 1: you know. But also too, when you started seeing defensives
Speaker 1: joining that rotation, like it was this massive value over
Speaker 1: growth trade and that's the three four or five z
Speaker 1: score types of moves that you're talking about where people
Speaker 1: didn't have that stuff on and your lungs go against
Speaker 1: you and your shorts go against you, and and that
Speaker 1: is also amplifying, you know, these kinds of moves because look,
Speaker 1: it's not just the market neutrals, like they're not Boogeyman here.
Speaker 1: They're unbelievable. They barely lose money ever on a monthly basis.
Speaker 1: They just have very disciplined it stops to get out
Speaker 1: of these lians and tilts hard and fast, unemotionally. But
Speaker 1: guess what it's you know, retail, it's all the story stocks,
Speaker 1: all these themes. That's why I pointed out for the
Speaker 1: last two years of the boom and leverage gtfs like
Speaker 1: eighty two percent of the assets, and leverage gtfs which
Speaker 1: act like synthetic negative gamma. Right, the higher you go,
Speaker 1: the more you have to buy at the end of
Speaker 1: the day, the lower you go, the more you have
Speaker 1: to sell. You know, massive pool of AUM now because
Speaker 1: of like retail, you know, tilted speculative leverage behavior are
Speaker 1: tied into that concentric circle of AI, megacap, tech, semis,
Speaker 1: you know, disruptor or crypto. So we're super overweighted, super
Speaker 1: over index to that stuff, which amplifies when you have
Speaker 1: the tight market neutral stop outs, you know, with all
Speaker 1: that leverage, with all that AUM, you know, to get
Speaker 1: their factors right, because at the end of the day,
Speaker 1: those guys are not trying to make factor bets. There's
Speaker 1: scenarios where you maybe run even the little net if
Speaker 1: there's like a big you know, economic reacceleration trade or
Speaker 1: something like that. But generally speaking, the ideas like we
Speaker 1: don't want beta to the S and P. That's the point.
Speaker 1: That's why people pass. Stop comparing us to S and
Speaker 1: P returns. So all these things are part of this
Speaker 1: like backdrop plus the narrative overshoots.
Speaker 3: To me, that was fantastic and it's very intuitive.
Speaker 4: I mean, there is already good theoretical ideas for thinking
Speaker 4: that the multi streats were huge drivers of all this,
Speaker 4: and then when you add in the fact that the
Speaker 4: staples like the sort of underloved areas or energy materials
Speaker 4: are the winners.
Speaker 3: Very intuitive to your point on software.
Speaker 4: You know, no one really knows obviously, the degree to
Speaker 4: which AI is going to obliterate these business obviate these businesses.
Speaker 3: No one really knows.
Speaker 4: But like from the perspective you mentioned the tight stops
Speaker 4: that each manager has within these firms, can you give
Speaker 4: us like some sense of how much is it? Like, look,
Speaker 4: I just want to keep my job here and this
Speaker 4: is the ugly stuff that's going on, and so I'm
Speaker 4: just gonna sell now and ask questions later, like how
Speaker 4: much does that play into on a week like this?
Speaker 1: Well, we're talking about wide swaths of strategies and active
Speaker 1: you know, systematic versus you know, field directional trading, and
Speaker 1: you know, you know, tight stops are you know typically
Speaker 1: that you know, down two percent, kind of down one
Speaker 1: and a half percent, maybe even in some cases, but
Speaker 1: you know that's why it has managed so microscopically, and
Speaker 1: you're extracting these you know basis points of alpha and
Speaker 1: your lungs and shorts, and then you know, using leverage
Speaker 1: like a you know, a market neutral is probably two
Speaker 1: hundred three hundred percent gross buy and large like long
Speaker 1: short was always kind of like fifty net one fifty
Speaker 1: gross something to that extent. But they're just not as
Speaker 1: big of a player anymore. But you know that's the
Speaker 1: trick here, Like when I start seeing it, I always
Speaker 1: love the systematic stuff because it's so tied in. It
Speaker 1: kind of looks a lot like the options market and
Speaker 1: market structure. Buying large feeds momentum now, right, you're not
Speaker 1: scaling out of positions. The more they trend, you're loading
Speaker 1: into them. So like whether it's target volatility or CTA,
Speaker 1: or you assign an exposure target, you know, a leverage target,
Speaker 1: and if the volatility is five and your vault target
Speaker 1: is ten, you got to lever that two times or twelve,
Speaker 1: you know, like, and that is ironically, the lower vault goes,
Speaker 1: the more you need to add leverage onto that position,
Speaker 1: right to match your target. And that's why that's the
Speaker 1: problem we create crashes because all of modern anybody who's
Speaker 1: like on a var model is actually a momentum trader. Right,
Speaker 1: you have to deleverage when VAUL goes higher, by and large. Now,
Speaker 1: of course, if you have a high conviction bet and
Speaker 1: VALL goes higher, that's actually going to be part of
Speaker 1: your potential return profile. You know, it's great, and God knows,
Speaker 1: people have learned to like you know, sell rich vall
Speaker 1: and by you know, by dips it's become conditioned. These
Speaker 1: time horizons are like hours at this point, but like.
Speaker 2: Some people have made an entire career out of doing
Speaker 2: it once.
Speaker 1: Yeah, for sure. And I mean you gotta have a
Speaker 1: titanium stomach. Like I've been talking to a buddy all
Speaker 1: week at a multi you know, this apps mad Man,
Speaker 1: and there's many others like him. You know, he's been
Speaker 1: shorting Silver the last two weeks. I'm like, how you've
Speaker 1: been sleeping, dude. You know, it's like a little better now.
Speaker 1: But you know there's the Silver moves are unbelievable. Yesterday
Speaker 1: was like sixteen.
Speaker 4: I mean these I've seen two people I've spoken to
Speaker 4: say that the Silver moves specifically may have been the
Speaker 4: crazy one of the craziest moves that they've you know.
Speaker 1: It's crowding plus the trend, plus the optionality plus the
Speaker 1: leverage DTF. You know, the optionality is leverage in and
Speaker 1: of itself, and it's high beta, you know, as is
Speaker 1: to regular you know, big brother Gold. So these moves
Speaker 1: are you know, wild, but we know that in the
Speaker 1: era of the speculative era, you know, people seek the movement.
Speaker 1: That's the opportunity. You are not going to retire four
Speaker 1: percent in cash, you know, that's just the way this
Speaker 1: world works right now, now, you know, do you necessarily
Speaker 1: need to be like shorting vall or things like that.
Speaker 1: That's not the way to do this. But people, yolo,
Speaker 1: it's the financial nihilism that we've spoken about. You know
Speaker 1: many many times you seek out the movement, you want
Speaker 1: the stuff that's moving and generally speaking, and this is
Speaker 1: where it's so interesting, like you try to press moves
Speaker 1: by and large, certainly like the retail cohort, the world
Speaker 1: is not built the vast majority of the time for
Speaker 1: mean reversion anymore. Value is mean reversion, like something is rich,
Speaker 1: something is cheap. It's this counter kind of like a
Speaker 1: gamma type of flow, you know, long gamma type flow.
Speaker 1: We feed moves now because of the risk management dynamics
Speaker 1: and especially too, just like market structure, how much trend
Speaker 1: there is built into the market leverage, DTFS, options, things
Speaker 1: like that, you know, particularly the way that people tend
Speaker 1: to use them, which is tend of to feed into
Speaker 1: prevailing moves. So all of this kind of changes the
Speaker 1: behavior and the expected outcomes where you know, momentum has
Speaker 1: been you know, this remarkable factor for you know, academic
Speaker 1: history studying these things because of like greed and fear
Speaker 1: and things like that, and moves can extend longer than
Speaker 1: you think. Just because a trade is crowded doesn't mean
Speaker 1: it's the wrong trade. But when you start to layer in,
Speaker 1: as they said, the positioning data, the overall leverage data,
Speaker 1: the kind of the conversational quality ative, how many people
Speaker 1: are buying into this? But then you see you know,
Speaker 1: some like divots here and there and like the stories
Speaker 1: that doesn't actually make sense. And actually this thing is
Speaker 1: starting to stall. And now I got people taking money
Speaker 1: out of this thing, and I got trend this loaded
Speaker 1: into it. This is going to unwind hard. And I
Speaker 1: sent that note Thursday, you know, started unwinding hard. Friday
Speaker 1: doors got blown off and guess what it waterfalls. So
Speaker 1: other crowded trades go cospy. Everybody's like, you know, no
Speaker 1: brainer into that Japanese bank longs, right, which are a
Speaker 1: short JGB proxy macro tourism. Like, people start coming out
Speaker 1: of these trades because they're non core, but they were.
Speaker 2: High sharp right, so flows before pros, But now the
Speaker 2: pros are chasing flows and that's hurting the brokess. Okay,
Speaker 2: so you just touched on this, but what stops the bleed.
Speaker 1: I think you're you know, you're getting certainly some relief here.
Speaker 1: I mean, look, people will say, you know, at some
Speaker 1: point on a smaller gross, you don't really have to
Speaker 1: do anymore. You don't have to reach for hedges, which
Speaker 1: get dealer shirt gamma right, because you're you don't you
Speaker 1: have as much exposure anymore. That's the first step. People
Speaker 1: then have to monetize their hedges. So all of these
Speaker 1: reversals happen. You take off your hedges, or you take
Speaker 1: off your directional stuff, whether you're shorting futures against the
Speaker 1: moves or you're buying downside puts, you're buying vixed calls.
Speaker 1: You start to unwind that and guess what, Like now
Speaker 1: the dealer's got to take off their stuff, and you
Speaker 1: got delta a by and then some people say, oh,
Speaker 1: everybody's taking their hedges off around the street, and market's
Speaker 1: starting to rally off these lows. I'm going to buy
Speaker 1: some zero DT calls and you know, then you create
Speaker 1: more delta to buy back to the races, and VALL starts.
Speaker 1: You know, if VALL starts rolling over, and guess what,
Speaker 1: then the systematic the VALL supply people come out of
Speaker 1: the woodwork and they feel comfortable to come back and
Speaker 1: lean into this and that's the facto by the dip. Right,
Speaker 1: So this is the cycle in the world do we
Speaker 1: live and there's too many asks. This is a final
Speaker 1: point that may be tangential here, But with regards to
Speaker 1: how these dynamics end, it's not necessarily about like back
Speaker 1: in the day, it's like Warren Buffett steps in, you know,
Speaker 1: provides some you know, financing line or you know Toma
Speaker 1: Bravo stepping in doing some like deal is calling up Warren. Yeah,
Speaker 1: I don't know if it's more about you know, these
Speaker 1: flows kind of stopping the bleeding. But you know, this
Speaker 1: is the other thing too, like the vall flows are
Speaker 1: so important with regards to the like the hedge on
Speaker 1: lines and creating the turn in the market, the inflection,
Speaker 1: especially with the conditioning by the dip cell. The ball
Speaker 1: rip that like fixed income has been trash for five
Speaker 1: years since the tightening cycle since you know, poor inflation
Speaker 1: is still running too hot. Right, so people said, look,
Speaker 1: this thing doesn't work for me. It's not helping my
Speaker 1: portfolio with my sixty forty is awful, right, but I
Speaker 1: can't just be long equities, but I need some yield.
Speaker 1: I'm I'm boomer, I'm old. I need some you know,
Speaker 1: some enhancement. But I want equities upside. And we've talked
Speaker 1: about this so many times, and it's true, you know,
Speaker 1: because the assets keep growing, all the yield enhancement vehicles,
Speaker 1: all these income vehicles, they're selling equity optionality. So your
Speaker 1: long underlying equities, you cap that upside to a certain extent,
Speaker 1: but you're generating yield by selling options. That's the new
Speaker 1: fixed income. And those flows matter because those flows that
Speaker 1: when the kind of the coast is clear, they just
Speaker 1: come in and it's just vegas supply and it just
Speaker 1: smashes it all back down.
Speaker 2: Thank you so much for coming on at short notice.
Speaker 2: It's seven in the morning, seven in the morning. Thank
Speaker 2: you very much. Yeah, yeah, your day's over right.
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