July 3, 2025 • 24 mins
Stocks plunged after the April 2 "Liberation Day," in one of the worst drawdowns in the market's history. Since then, however, we're basically back to all-time highs and things have been pretty calm in the market. On this episode, recorded live onstage at our June 26 event in New York, we speak to Nomura cross-asset strategist Charlie McElligott, about what's been driving the rally. He says he's seen "relentless" selling of volatility as investors who sold back in April chase the rally. That's culminated in some weird market dynamics. The question, of course, is how long this can continue and what it would take to unsettle things from here.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hey, there odd lots listeners. You are about to hear
a very special episode of the podcast. This was recorded
live at our June twenty sixth event in New York.
We were talking with Charlie mcgelligate. He is, of course,
managing director and cross Asset macro strategist for the Global
Markets America's business over at Nomora. We talked to him
about volatility in the market.
Speaker 3 (00:39):
What else, Yep, it's been a kind of extraordinary couple
of months with stocks basically at all time highs despite
so much going on in the world. What actually explains
what's happening. Charlie does a pretty good job, So take
a listen.
Speaker 4 (00:53):
Thank you so much Charlie for being here.
Speaker 5 (00:55):
Awesome to be here, Awesome to see you guys.
Speaker 3 (00:56):
So I didn't actually see where the market closed today,
but like we're pretty close, like either a record highs
or very.
Speaker 4 (01:03):
Close to it. I didn't actually see.
Speaker 3 (01:04):
But it's crazy to me all that's happened in twenty
twenty five and like we're sitting here at all time highs.
Speaker 4 (01:11):
It's not intuitive. You have to admit, it's kind of weird.
Speaker 5 (01:14):
The you know, I think the message I'm trying to
remember the last time I was with you guys, but
probably the message that I was communicating at that time
was the fixation and kind of the dooming with the
left tail scenarios. Yea. And as so often is the
case when people are not incentivized to see the world burn,
(01:36):
which might be debatable to some sure, but and you
start seeing, especially with regard to you know, negotiating tactics
and things like that, where you start getting that not
quite as bad as feared scenario. Oftentimes there's an impact,
certainly with the mechanical stuff that we so often talk about,
and you really underprice the less bad outcome, and there's
(01:59):
a mechanical imp there's a lot of you know, vault
distribution stuff, and it creates second order impact, second order flows.
I think the most fascinating two points that I would say,
outside of the you know, the mechanical flows that we
talk about and the volatility component of this is two things.
I think back to twenty twenty two where we had
(02:22):
our first kind of inflation driven macro bear case, right
it just started the tightening cycle. I think there was
nine or ten months in a row of inflation upside
surprises with CPI, and you know, the macro bear case
for equities at that point was this earnings recession where
due to this price shock, it was going to impact consumption,
(02:42):
top line sales go lower, and you know, so on
and so forth. What ended up happening is ironically, because
of the health of the consumer and tight, tight, tight
employment with wages at forty year highs, you ended up
actually getting a dynamic where the corporate world operates on
aggregate consumption, they operate in the nominal GDP world, and
(03:03):
that inflation, perversely for the bears was the earnings catalyst
and all those folks got stopped out in twenty twenty three.
There is an element of that still to this day
right now as it relates to earnings, even even though
like nominal GDP is is in a different place to
a certain extent, still kind of five percentage. But the
(03:26):
other point too is that as it relates to the
capex spending uncertainty story, right if corporates don't know what
they're supposed to do with their cash because of the
you know, the the kind of range of outcomes with
regards to you know, where they were these you know, uh,
tariffs are gonna end up the stand in the gears
of the global economy. Well, the thought was, of course,
(03:47):
you know, if corporates don't know what to be spending
on and consumers are feeling that impact as well, you're
gonna get this eventual drag with regards to consumption. You're
gonna have corporates in a bad place. You either lose
the top line, say because consumers are paying through the roof,
or you have to absorb those costs and your margins
go lower. But what corporates have instead done have taken
(04:09):
authorized buybacks all time highs. So we're not spending on
you know, R and D, we're not spending on hiring
or building that new plant. We're going to buy back
more stock than ever before a year to date. And
that you know, if you look at corporate buyback flows
as a source of demand for equities over the past
ten to fifteen year period, it's a magnitudes six seven
(04:29):
eight times magnitudes largest source of demand. So you've had
these two kind of unintuitive dynamics in the market that
have actually kept us higher. On top of all those
kind of vall scaling things that we like to talk about.
Speaker 2 (04:41):
Wait, so the other thing that's happened is people are
back to actually selling valls, so basically betting that, you know,
things will stay relatively calm. Why is that happening. It
seems like a weird time to bet for so many Yeah.
Speaker 5 (04:56):
I think selling vall has become a new form of
fixed income in a world where bonds are no longer
a risk. Create asset now that you know can go
wrong so many ways. In this case, the proliferation of
like premium income overriding strategies within the ETHF world, exotic
(05:17):
structured products, and kind of you know more, I would say,
you know, complicated you know, vall selling strategies like dispersion,
things like that. The number of val suppliers out there
very short dated. It gets dealers stuffed on gamma, I
always like to say. And in that sense, you know,
particularly with the amount of short dated volatility selling, you know,
(05:41):
when dealers are stuffed on gamma, it compresses the distribution
of outcomes. Right, if market's moving higher, you're selling into
that market's moving lower. Your shock absorbing. The thing that
I would say back to that point about you know,
selling volatility is some sort of kind of fixed income
product back in twenty twenty two with that tightening cycle
and all the bear dooming with regards to you know,
we're going to break something, you know, such a such
(06:04):
a powerful you know, ultimately over five hundred base points
of tyke of hikes. The trick was that, okay, you
the FED is telling you to be short assets. You
need to be able to sleep at night. Cash was
an asset again, so you know, MARKO was down thirty percent,
bonds were down simultaneously. Yeah, deck was you know, you know,
(06:27):
even bigger than that, obviously, because remember it was like
this tech centric growth kind of unwined. But what ended
up happening was that, you know, the FED was trying
to create a negative wealth effect. We've talked about that
before because they couldn't impact supply side disruption, they could
only impact demand side. And by telling you to be
in cash you could sleep at night. Well, guess what
the next year you missed a fifty percent rally in
(06:48):
the NASDAC. So what really smart marketers have done is say, well,
I'm going to give you price appreciation of equities just capped,
and off the back of that too, we're going to
sell out of the money calls against this, and you
get this like little premium income thing and it's you know,
they're never telling you you're shorting options. The good news
is with a lot of these products nowadays, like you're
(07:10):
not shorting crash, you're not shorting downside. But also too
sometimes they're contributing to their own demise in this kind
of grinding market where you're stopping into the calls that
you've been selling.
Speaker 4 (07:21):
There's so much going on.
Speaker 3 (07:22):
I totally forgot that we had such a big sell
off in twenty twenty two. I totally forgot that there
was like a fifty percent like all of these things like,
oh that actually happened, zooming out big picture like it
seems objectively true. You've been trading a long time, Like
there are so many headlines these days, and they're always
changing and.
Speaker 4 (07:41):
There's just so much to talk about.
Speaker 3 (07:42):
What is the trading like and how do you know
does it feel different these days when there's just we're
just facing this constant wall of news. Is there something
that changes in the sort of complexion of how people trade.
Speaker 5 (07:55):
Well, there's there's certainly different like risk appetite regimes, risks
and regimes, you know where you know, there was a
period of time I remember, and those early discussions on
like zero DT options where generally speaking at that time,
coming off the back of like you know, meme coins
and coos and that whole like yolo phenomenon. Yea, you know,
(08:15):
the speculative xs peak of that kind of twenty twenty one,
you know, STiMi check driven madness. That was a very
different world where people were kind of like you know,
buying you know, optionality, creating gamma squeezes, the rediboards, Wall
Street bats, all that jazz. Now that you're kind of
settling into this world, we've been conditioned. We've been conditioned
for fifteen years of moral hazard, right, central bankers intervening obviously,
(08:39):
politicians now intervening. And this is like you know, party
agnostic with regards to the fiscal stimulus, where it has
become conditioned into traders both retail and institutional. You know
this dynamic where you have to this is the expected behavior,
you have to buy that, right, So you're constantly trying
to like kind of triangular and kind of sanity check
(09:01):
yourself with regards to this reflexivity. And you know, like
August fifth, August second, August fifth last year were a
really interesting experiment because August second, we finally got that
first glimpse at what our market will eventually do. This
time again huge var event and you know, within the
fixed income space certainly, and then trickled down to all
asset classes from there. It was the first time that
(09:23):
labor looked like labor was cracking. And we had that
you know four Z score miss and the U rate
and two and AS score miss and the non farm
payroll print and that was after a week of already
soft labor data. And that was the holy moment. Once
the consumer goes, this whole you know, economic miracle goes.
And what that then created was this, you know, was
(09:44):
this massive dynamic where at the end of that day,
everybody said, Okay, risk is dicey right now, there's going
to be a lot of leveraging off the back of
this realized volatility shock. I want to go home short delta,
like short the market, but it'll be short ball because
vall squeezed ball exploded that day. That was both clients
and options dealers. The problem was because of all these
(10:06):
second order impacts and deleveraging impacts, and was that Nick
On Sunday night opened down twelve percent. So that short
ball position that was going to be so smart because
we always reflexively sell that, you know, and you've got
to monetize your hedges in like two hours before people
start leaning in all that VALL supply. The back test says,
the higher VALL goes, the more I have to sell,
(10:27):
and that's that sell the ball rip by the dip. Well,
those people got their arms blown off, you know, by
eight in the morning. And that was the famous like
VIX index, right, which is a theoretical calculation based on
like fake bidden offers from dealers. Basically you know, printed
sixty three or whatever. It was not an actual ticking price.
But then the vic's future was traded at thirty eight,
(10:50):
which is like realistic. But you know, those are those
scenarios where that conditioning is how things go really wrong
because you think you got it figured out, you don't.
The most recent example, of course, has been you know
this this Trump collar dynamic, where the market finally figured
out what was the human vvix as I call him.
You know who k who? You know the volatility.
Speaker 4 (11:10):
You're the only.
Speaker 5 (11:11):
One who one I need it on my coffee mug.
You know, I have these like nomur coffee mugs with
some of my favorite sayings, like human vvix would have
been a good one to trademark.
Speaker 4 (11:20):
We'll trade you an odd mug for a human vivix.
That's done.
Speaker 5 (11:25):
But like you know, he hasn't. He views himself as
having a mandate to disrupt the status quo of eighty
years of pox Americana. Like and that's clearly like the
the approach here, right, so the prior distribution of outcomes
is now out here. The quick learning from the market, however,
after these initial series of ball shocks, was that, okay,
we found a pain point. You know, markets sold off
(11:45):
to such an extent, the interest rate volatility, particularly in
the long end, not just stocks, all right, you know,
we've activated the Trump put. However, upon those compromises, the
market rallies back. It increases his you know, willingness to
then lean back in from a negotiating ploy. So he's
basically selling the call to fund the put. And when
you have that coloring effect, you get the opposite dynamic, right,
(12:08):
you get this realize of all compression, which is frankly
a large part of what the past two months has
been so you're constantly reassessing how everybody thinks you're going
to think, which is like you're anticipating the anticipators.
Speaker 2 (12:39):
So Joe asked you for basically color on the complexion
of the market nowadays. And I know you just got
back from weren't you on some sort of crazy epic
travel schedule where you flew around the world. What are
you hearing from clients? Like what kind of questions are
they asking you?
Speaker 5 (12:54):
People are so consensually macro bear, you know, on that
stagflation an area outcome, you know, and I think, like
that's that's one of the tricks, Like it's you know,
at first, it was like okay, you know, let's let's
expect you know, these early returns like mind you you know,
Smoot Hawley terrifies, like ninety years terrifies, right we you know,
(13:14):
prior to the Trump two point zero the effective rate
was two point four percent. We're seventeen point three percent
right now as it stands, right, So, like, you know,
how does that not bleed through to this you know,
eventual price shock or margin compression, all this stuff that
hits you know, consumption, And you know, initially it was okay, midsummer.
I think part of what's happening right now is that,
(13:35):
you know, from a corporate perspective as it relates to
the consumer, is that Taco has changed their behavior too,
like why, you know, I'm not going to blow up
my top line sales and you know rush to you know,
price shock my clients at a time.
Speaker 4 (13:50):
You know so, I think.
Speaker 5 (13:51):
There's been a lot of holding off too as far
as or willingness to even absorb a little bit of
that the price you know increases that are coming through,
and you know, so it's been getting increasingly uncomfortable. All
these left tail most acute outcomes have have certainly been
mitigated away and compromised away and kind of handed away.
The market starts rallying in your face. You're expecting this
(14:12):
very barish outcome. It's starting to hurt. You've underpriced the
right tail. You get a fiscal deal seemingly close to
being done even just today, right late in the day,
section eight ninety nine, which is this kind of like
you know, completely.
Speaker 4 (14:24):
Wrote a bunch about it.
Speaker 5 (14:25):
No, yeah, the revenge tax, right, is there anything worse
than like getting a bunch of work done and then having.
Speaker 2 (14:31):
A trash it all I'll say is it's good for content.
Speaker 4 (14:34):
Yes, there we go, Yes it is.
Speaker 2 (14:35):
You talk a lot about hypotheticals over the past couple
of months.
Speaker 5 (14:39):
Sure, yeah, you know, you're you're well educated with your scenarios.
But like in this case, you know that was another
you know, this revenge tax escalation. Well, all of a sudden,
now you know cooler heads prevail. That increases the likelihood
that the digital tax, you know, stuff with Europe that
was an impediment for deals goes, you know, right way.
So you've just had like left tails turned right tails
(15:00):
and nobody has the exposure on. There's just so much
chronic macability. Now perversely, you're seeing it with stocks. People
are getting stopped in, you're buying the highs. You're having
to take up your exposure. I having to take up
your nets after fighting it, kicking and screaming and grossly
under capturing the rally. This is when it sets the
table for crash. And that's why as you're forced to
get longer, you have to start hedge, you have to
(15:22):
start head.
Speaker 3 (15:22):
Do you think right now? I mean I remember, well,
like right now today, would you say there's still a
lot there's a lot of discretionary money where people feel
like they're underweight at the market, where they feel like
they're still fighting this dynamics and they're still feeling every
day the stock market goes up, I don't have the
exposure I wish I had.
Speaker 5 (15:43):
Those are the classic buyers are higher.
Speaker 3 (15:46):
Yeah, that's still lot, but they haven't they haven't fully
capitulated yet.
Speaker 5 (15:51):
But it's you know what you're seeing with the market
grinding higher every day and by the way through the
straddle like this is the interesting thing. I always say,
we can't crash until skew is steep. SKW is a
relative measure of kind of downside demand versus upside demand.
You know, put skewed demand for out of the money
downside versus out the money downside, both of those metrics
(16:12):
in the past week of it one hundred percentile over
the past year. The past year is how it is
going on. Right, So you know people are hedged because
they are back getting long where things get spicy. And
when you're hedged, I means dealers are you know short downside,
they're going to be short gamma and short vega into
a sellof that's accelerant flow that feeds into the prevailing
mark and momentum. The lower that we go, the more
(16:34):
you know, spot equities you have to sell. The higher
the vall goes, the more of all you have to buy.
Bad scenario. It's an accelerant flow in this case the trick.
Now that's starting to happen, and this is why I
feel like we're probably getting closer to you know, a crescendo.
Is that now you're getting spot the market up, vault up,
ball of all going up. And what that's telling me
(16:56):
is that, Okay, people are actually now being forced to
chase into upside right and right now.
Speaker 3 (17:01):
Part of our for the newsletter tomorrow, yeahs, spot up,
spot up, all up, vv all up.
Speaker 5 (17:07):
And what that means is that people are being forced
to grab into the upside. And that's also feeding this
short gamma move to the upside because dealers are short
calls now and this, you know, as we hit sixty
one fifty sixty two hundred, things like that. Ultimately, I
always like to say, when you get spot up all
up in and of itself, it creates kind of like
a melt up, like some sort of kind of you know,
(17:29):
squeezy rally on the way up that collapses under the
weight of its own delta like collapses under the weight
of the mechanical buying on the way up, the mechanical
dealer hedging on the way up, because you need to
keep fulfilling that need and demand. People are getting longer,
you know, you're finally seeing that dynamic people are getting longer.
That creates the potential de risking flow on the way down,
(17:50):
especially once you're talking about systematic VALL scaling strategies that
as VALL goes higher, they have to just sell, you know, unemotionally.
Speaker 2 (17:58):
But what would be a reasonable catalyst for that to happen.
Speaker 5 (18:02):
Well, I think the the near term one has been
you know, the fact that you know, July eighth, the
original kind of reciprocal delay that you know, and you
saw a bunch of headlines today saying like that's flexible,
morally flexible, you know. I think that big surprise, Yeah,
let's make a deal. I would say that that right now,
that's kind of like the most obvious you know one
(18:23):
out there that you know, there's still some element of hardball.
My view is that that's somewhat overstated, that that is
somewhat overstated because he needs to get one big beautiful
bill passed first before that, and then potentially you can
play the game. But the fact that this eight ninety
nine was removed tells me that they know that getting
a deal with Europe is probably you know, a larger
(18:45):
you know, impediment to what they're trying to do, and
that there still is now this new conditioning in the
market where instead of like increasing the rhetoric at the highs,
you know, Trump is capitulated back into Trump one point zero,
which is like, you know, run hot, right, he's now
and they are best in himself with the headlines out
at the end of the day, they're they're trying to
(19:06):
squeeze this thing higher, and financial conditions are easing. The
dollar is moving lower. Long in deals started rallying, ironically
because the market is sniffing, you know, a dubvish turn
within the Fed, you know, and including recent comments from
people that I don't think would have anticipated necessarily outside
of Waller who's auditioning for the FED job. And you know,
(19:26):
why are they beginning to turn like that? Yes, there's
a normalization dynamic with regards to wear inflation is now
we think Jerome Powell is already at two dots ur
you know, for the end of the year, and there's
just this modest turn, but they're turning for a reason.
They're turning because you know, quits rates and claims, you know,
are starting to get a little wonky. And as I said,
the whole American economic miracle goes wrong when the consumer cracks,
(19:50):
and the consumer cracks is what you know becomes of
you know, the labor market, and that's starting to look
you know, precarious about. So I think I don't think
it's going to be a teariff head line necessarily. I
think it's going to be you know, good old fashioned
data and nasty NFP print. Now that type of a thing.
Is that an acute risk?
Speaker 2 (20:08):
Now?
Speaker 5 (20:08):
Probably not, probably, you know safe to say, you know,
within by August, you know, we could be getting spicy.
And I think there's real delta, not just of like
the first cut in September. But you know, if that happens,
you know, it's not just going to be you know,
twenty five BIPs, right.
Speaker 2 (20:24):
So everyone needs to keep shopping.
Speaker 4 (20:27):
I guess, yeah, do your duty.
Speaker 3 (20:30):
So the thing is, though, this is what bothers me
is everyone sees some of these dynamics. We talk about
the labor market weakness all the time. We talk about
the fact that due to the tariffs and other factors,
the FED might be a little bit gun shy or
less inclined to cut like than it otherwise would have
given the set of economic conditions. And I think, like
(20:51):
Powell has sort of hinted at it before, that they're
conditions like we all could see this like and yet
like and yet people keep like it's sort of there's
something intellectually unsatisfying about.
Speaker 4 (21:03):
The entire environments.
Speaker 3 (21:04):
Well because like all this seems very true. They're all
this like this tagflation risk, there is going to be
a cost of tariff, there is this cyclical slowdown.
Speaker 5 (21:12):
And yet you know, it goes back to those you know,
kind of counterintuitive observations that we started off with, you know,
where you get so fixated on the like the left
side that you know, perversely, the corporate spending uncertainty becomes
the biggest source of demand for stocks. Yeah, you know,
and especially to the market structure stuff, which is just
(21:32):
what I always come back to, like once those puts
start roasting, because the worst case scenario doesn't happen, and
dealers got to start buying back that short delta, and
then people start squeezing that short delta's the market starts
rallying back, start buying short data calls, and dealers get
short those calls and we go short gammed the other way.
You know those flows, and you know, frankly, you know
a world of you know, not just this market structure
(21:55):
that feeds momentum right with leverage dt afs. You know
the prevalence of options trading and the tail wagging the dog.
And I don't even know if I can say tail
wagging the dog now, I just think it is the dog.
Speaker 4 (22:07):
I like that. That's good. You know, options are the dog.
Speaker 5 (22:11):
You know, those type of real and synthetic gamma effects
in the market are you know, very high impact. And
I think at the end of the day, a lot
of this is just about career preservation. And when you've
kind of missed badly on a call people, it feels good,
you know, in the macro space, like I, you know,
I'm super sensitive to this idea. You know, you feel
(22:32):
smart to make a bear call because it's rare still higher,
you know, when you run a back test, you know,
and back testing, I know it is like a four
letter word. But when you run a back test, you
know this this happens and contingent on this, and you
actually get negative forward returns over a series of average
you know, a real number of sample set. You know
(22:54):
it's an outlier. The problem is like sitting in a
negative stance. When again goes back to that point, people
are not really incentivized to see the world burn. You
know it's gonna be a tough thing, so you got
to be dynamic and pragmatic. I think about these things
all right.
Speaker 2 (23:07):
Well, Charlie, let me just say thank you for giving
us a couple of square words to bleep out. It
really helps keep our producers on their toes. This has
been another episode at the Audlots podcast. I'm Tracy Alloway.
(23:30):
You can follow me at Tracy Alloway and.
Speaker 3 (23:32):
I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carmen Erman, dash Oll
Bennett at Dashbot, and kill Brooks at Kilbrooks. For more
odd Loots content, go to bloomberg dot com slash odd Lots,
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Speaker 2 (23:52):
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Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hey, there odd lots listeners. You are about to hear
a very special episode of the podcast. This was recorded
live at our June twenty sixth event in New York.
We were talking with Charlie mcgelligate. He is, of course,
managing director and cross Asset macro strategist for the Global
Markets America's business over at Nomora. We talked to him
about volatility in the market.
Speaker 3 (00:39):
What else, Yep, it's been a kind of extraordinary couple
of months with stocks basically at all time highs despite
so much going on in the world. What actually explains
what's happening. Charlie does a pretty good job, So take
a listen.
Speaker 4 (00:53):
Thank you so much Charlie for being here.
Speaker 5 (00:55):
Awesome to be here, Awesome to see you guys.
Speaker 3 (00:56):
So I didn't actually see where the market closed today,
but like we're pretty close, like either a record highs
or very.
Speaker 4 (01:03):
Close to it. I didn't actually see.
Speaker 3 (01:04):
But it's crazy to me all that's happened in twenty
twenty five and like we're sitting here at all time highs.
Speaker 4 (01:11):
It's not intuitive. You have to admit, it's kind of weird.
Speaker 5 (01:14):
The you know, I think the message I'm trying to
remember the last time I was with you guys, but
probably the message that I was communicating at that time
was the fixation and kind of the dooming with the
left tail scenarios. Yea. And as so often is the
case when people are not incentivized to see the world burn,
(01:36):
which might be debatable to some sure, but and you
start seeing, especially with regard to you know, negotiating tactics
and things like that, where you start getting that not
quite as bad as feared scenario. Oftentimes there's an impact,
certainly with the mechanical stuff that we so often talk about,
and you really underprice the less bad outcome, and there's
(01:59):
a mechanical imp there's a lot of you know, vault
distribution stuff, and it creates second order impact, second order flows.
I think the most fascinating two points that I would say,
outside of the you know, the mechanical flows that we
talk about and the volatility component of this is two things.
I think back to twenty twenty two where we had
(02:22):
our first kind of inflation driven macro bear case, right
it just started the tightening cycle. I think there was
nine or ten months in a row of inflation upside
surprises with CPI, and you know, the macro bear case
for equities at that point was this earnings recession where
due to this price shock, it was going to impact consumption,
(02:42):
top line sales go lower, and you know, so on
and so forth. What ended up happening is ironically, because
of the health of the consumer and tight, tight, tight
employment with wages at forty year highs, you ended up
actually getting a dynamic where the corporate world operates on
aggregate consumption, they operate in the nominal GDP world, and
(03:03):
that inflation, perversely for the bears was the earnings catalyst
and all those folks got stopped out in twenty twenty three.
There is an element of that still to this day
right now as it relates to earnings, even even though
like nominal GDP is is in a different place to
a certain extent, still kind of five percentage. But the
(03:26):
other point too is that as it relates to the
capex spending uncertainty story, right if corporates don't know what
they're supposed to do with their cash because of the
you know, the the kind of range of outcomes with
regards to you know, where they were these you know, uh,
tariffs are gonna end up the stand in the gears
of the global economy. Well, the thought was, of course,
(03:47):
you know, if corporates don't know what to be spending
on and consumers are feeling that impact as well, you're
gonna get this eventual drag with regards to consumption. You're
gonna have corporates in a bad place. You either lose
the top line, say because consumers are paying through the roof,
or you have to absorb those costs and your margins
go lower. But what corporates have instead done have taken
(04:09):
authorized buybacks all time highs. So we're not spending on
you know, R and D, we're not spending on hiring
or building that new plant. We're going to buy back
more stock than ever before a year to date. And
that you know, if you look at corporate buyback flows
as a source of demand for equities over the past
ten to fifteen year period, it's a magnitudes six seven
(04:29):
eight times magnitudes largest source of demand. So you've had
these two kind of unintuitive dynamics in the market that
have actually kept us higher. On top of all those
kind of vall scaling things that we like to talk about.
Speaker 2 (04:41):
Wait, so the other thing that's happened is people are
back to actually selling valls, so basically betting that, you know,
things will stay relatively calm. Why is that happening. It
seems like a weird time to bet for so many Yeah.
Speaker 5 (04:56):
I think selling vall has become a new form of
fixed income in a world where bonds are no longer
a risk. Create asset now that you know can go
wrong so many ways. In this case, the proliferation of
like premium income overriding strategies within the ETHF world, exotic
(05:17):
structured products, and kind of you know more, I would say,
you know, complicated you know, vall selling strategies like dispersion,
things like that. The number of val suppliers out there
very short dated. It gets dealers stuffed on gamma, I
always like to say. And in that sense, you know,
particularly with the amount of short dated volatility selling, you know,
(05:41):
when dealers are stuffed on gamma, it compresses the distribution
of outcomes. Right, if market's moving higher, you're selling into
that market's moving lower. Your shock absorbing. The thing that
I would say back to that point about you know,
selling volatility is some sort of kind of fixed income
product back in twenty twenty two with that tightening cycle
and all the bear dooming with regards to you know,
we're going to break something, you know, such a such
(06:04):
a powerful you know, ultimately over five hundred base points
of tyke of hikes. The trick was that, okay, you
the FED is telling you to be short assets. You
need to be able to sleep at night. Cash was
an asset again, so you know, MARKO was down thirty percent,
bonds were down simultaneously. Yeah, deck was you know, you know,
(06:27):
even bigger than that, obviously, because remember it was like
this tech centric growth kind of unwined. But what ended
up happening was that, you know, the FED was trying
to create a negative wealth effect. We've talked about that
before because they couldn't impact supply side disruption, they could
only impact demand side. And by telling you to be
in cash you could sleep at night. Well, guess what
the next year you missed a fifty percent rally in
(06:48):
the NASDAC. So what really smart marketers have done is say, well,
I'm going to give you price appreciation of equities just capped,
and off the back of that too, we're going to
sell out of the money calls against this, and you
get this like little premium income thing and it's you know,
they're never telling you you're shorting options. The good news
is with a lot of these products nowadays, like you're
(07:10):
not shorting crash, you're not shorting downside. But also too
sometimes they're contributing to their own demise in this kind
of grinding market where you're stopping into the calls that
you've been selling.
Speaker 4 (07:21):
There's so much going on.
Speaker 3 (07:22):
I totally forgot that we had such a big sell
off in twenty twenty two. I totally forgot that there
was like a fifty percent like all of these things like,
oh that actually happened, zooming out big picture like it
seems objectively true. You've been trading a long time, Like
there are so many headlines these days, and they're always
changing and.
Speaker 4 (07:41):
There's just so much to talk about.
Speaker 3 (07:42):
What is the trading like and how do you know
does it feel different these days when there's just we're
just facing this constant wall of news. Is there something
that changes in the sort of complexion of how people trade.
Speaker 5 (07:55):
Well, there's there's certainly different like risk appetite regimes, risks
and regimes, you know where you know, there was a
period of time I remember, and those early discussions on
like zero DT options where generally speaking at that time,
coming off the back of like you know, meme coins
and coos and that whole like yolo phenomenon. Yea, you know,
(08:15):
the speculative xs peak of that kind of twenty twenty one,
you know, STiMi check driven madness. That was a very
different world where people were kind of like you know,
buying you know, optionality, creating gamma squeezes, the rediboards, Wall
Street bats, all that jazz. Now that you're kind of
settling into this world, we've been conditioned. We've been conditioned
for fifteen years of moral hazard, right, central bankers intervening obviously,
(08:39):
politicians now intervening. And this is like you know, party
agnostic with regards to the fiscal stimulus, where it has
become conditioned into traders both retail and institutional. You know
this dynamic where you have to this is the expected behavior,
you have to buy that, right, So you're constantly trying
to like kind of triangular and kind of sanity check
(09:01):
yourself with regards to this reflexivity. And you know, like
August fifth, August second, August fifth last year were a
really interesting experiment because August second, we finally got that
first glimpse at what our market will eventually do. This
time again huge var event and you know, within the
fixed income space certainly, and then trickled down to all
asset classes from there. It was the first time that
(09:23):
labor looked like labor was cracking. And we had that
you know four Z score miss and the U rate
and two and AS score miss and the non farm
payroll print and that was after a week of already
soft labor data. And that was the holy moment. Once
the consumer goes, this whole you know, economic miracle goes.
And what that then created was this, you know, was
(09:44):
this massive dynamic where at the end of that day,
everybody said, Okay, risk is dicey right now, there's going
to be a lot of leveraging off the back of
this realized volatility shock. I want to go home short delta,
like short the market, but it'll be short ball because
vall squeezed ball exploded that day. That was both clients
and options dealers. The problem was because of all these
(10:06):
second order impacts and deleveraging impacts, and was that Nick
On Sunday night opened down twelve percent. So that short
ball position that was going to be so smart because
we always reflexively sell that, you know, and you've got
to monetize your hedges in like two hours before people
start leaning in all that VALL supply. The back test says,
the higher VALL goes, the more I have to sell,
(10:27):
and that's that sell the ball rip by the dip. Well,
those people got their arms blown off, you know, by
eight in the morning. And that was the famous like
VIX index, right, which is a theoretical calculation based on
like fake bidden offers from dealers. Basically you know, printed
sixty three or whatever. It was not an actual ticking price.
But then the vic's future was traded at thirty eight,
(10:50):
which is like realistic. But you know, those are those
scenarios where that conditioning is how things go really wrong
because you think you got it figured out, you don't.
The most recent example, of course, has been you know
this this Trump collar dynamic, where the market finally figured
out what was the human vvix as I call him.
You know who k who? You know the volatility.
Speaker 4 (11:10):
You're the only.
Speaker 5 (11:11):
One who one I need it on my coffee mug.
You know, I have these like nomur coffee mugs with
some of my favorite sayings, like human vvix would have
been a good one to trademark.
Speaker 4 (11:20):
We'll trade you an odd mug for a human vivix.
That's done.
Speaker 5 (11:25):
But like you know, he hasn't. He views himself as
having a mandate to disrupt the status quo of eighty
years of pox Americana. Like and that's clearly like the
the approach here, right, so the prior distribution of outcomes
is now out here. The quick learning from the market, however,
after these initial series of ball shocks, was that, okay,
we found a pain point. You know, markets sold off
(11:45):
to such an extent, the interest rate volatility, particularly in
the long end, not just stocks, all right, you know,
we've activated the Trump put. However, upon those compromises, the
market rallies back. It increases his you know, willingness to
then lean back in from a negotiating ploy. So he's
basically selling the call to fund the put. And when
you have that coloring effect, you get the opposite dynamic, right,
(12:08):
you get this realize of all compression, which is frankly
a large part of what the past two months has
been so you're constantly reassessing how everybody thinks you're going
to think, which is like you're anticipating the anticipators.
Speaker 2 (12:39):
So Joe asked you for basically color on the complexion
of the market nowadays. And I know you just got
back from weren't you on some sort of crazy epic
travel schedule where you flew around the world. What are
you hearing from clients? Like what kind of questions are
they asking you?
Speaker 5 (12:54):
People are so consensually macro bear, you know, on that
stagflation an area outcome, you know, and I think, like
that's that's one of the tricks, Like it's you know,
at first, it was like okay, you know, let's let's
expect you know, these early returns like mind you you know,
Smoot Hawley terrifies, like ninety years terrifies, right we you know,
(13:14):
prior to the Trump two point zero the effective rate
was two point four percent. We're seventeen point three percent
right now as it stands, right, So, like, you know,
how does that not bleed through to this you know,
eventual price shock or margin compression, all this stuff that
hits you know, consumption, And you know, initially it was okay, midsummer.
I think part of what's happening right now is that,
(13:35):
you know, from a corporate perspective as it relates to
the consumer, is that Taco has changed their behavior too,
like why, you know, I'm not going to blow up
my top line sales and you know rush to you know,
price shock my clients at a time.
Speaker 4 (13:50):
You know so, I think.
Speaker 5 (13:51):
There's been a lot of holding off too as far
as or willingness to even absorb a little bit of
that the price you know increases that are coming through,
and you know, so it's been getting increasingly uncomfortable. All
these left tail most acute outcomes have have certainly been
mitigated away and compromised away and kind of handed away.
The market starts rallying in your face. You're expecting this
(14:12):
very barish outcome. It's starting to hurt. You've underpriced the
right tail. You get a fiscal deal seemingly close to
being done even just today, right late in the day,
section eight ninety nine, which is this kind of like
you know, completely.
Speaker 4 (14:24):
Wrote a bunch about it.
Speaker 5 (14:25):
No, yeah, the revenge tax, right, is there anything worse
than like getting a bunch of work done and then having.
Speaker 2 (14:31):
A trash it all I'll say is it's good for content.
Speaker 4 (14:34):
Yes, there we go, Yes it is.
Speaker 2 (14:35):
You talk a lot about hypotheticals over the past couple
of months.
Speaker 5 (14:39):
Sure, yeah, you know, you're you're well educated with your scenarios.
But like in this case, you know that was another
you know, this revenge tax escalation. Well, all of a sudden,
now you know cooler heads prevail. That increases the likelihood
that the digital tax, you know, stuff with Europe that
was an impediment for deals goes, you know, right way.
So you've just had like left tails turned right tails
(15:00):
and nobody has the exposure on. There's just so much
chronic macability. Now perversely, you're seeing it with stocks. People
are getting stopped in, you're buying the highs. You're having
to take up your exposure. I having to take up
your nets after fighting it, kicking and screaming and grossly
under capturing the rally. This is when it sets the
table for crash. And that's why as you're forced to
get longer, you have to start hedge, you have to
(15:22):
start head.
Speaker 3 (15:22):
Do you think right now? I mean I remember, well,
like right now today, would you say there's still a
lot there's a lot of discretionary money where people feel
like they're underweight at the market, where they feel like
they're still fighting this dynamics and they're still feeling every
day the stock market goes up, I don't have the
exposure I wish I had.
Speaker 5 (15:43):
Those are the classic buyers are higher.
Speaker 3 (15:46):
Yeah, that's still lot, but they haven't they haven't fully
capitulated yet.
Speaker 5 (15:51):
But it's you know what you're seeing with the market
grinding higher every day and by the way through the
straddle like this is the interesting thing. I always say,
we can't crash until skew is steep. SKW is a
relative measure of kind of downside demand versus upside demand.
You know, put skewed demand for out of the money
downside versus out the money downside, both of those metrics
(16:12):
in the past week of it one hundred percentile over
the past year. The past year is how it is
going on. Right, So you know people are hedged because
they are back getting long where things get spicy. And
when you're hedged, I means dealers are you know short downside,
they're going to be short gamma and short vega into
a sellof that's accelerant flow that feeds into the prevailing
mark and momentum. The lower that we go, the more
(16:34):
you know, spot equities you have to sell. The higher
the vall goes, the more of all you have to buy.
Bad scenario. It's an accelerant flow in this case the trick.
Now that's starting to happen, and this is why I
feel like we're probably getting closer to you know, a crescendo.
Is that now you're getting spot the market up, vault up,
ball of all going up. And what that's telling me
(16:56):
is that, Okay, people are actually now being forced to
chase into upside right and right now.
Speaker 3 (17:01):
Part of our for the newsletter tomorrow, yeahs, spot up,
spot up, all up, vv all up.
Speaker 5 (17:07):
And what that means is that people are being forced
to grab into the upside. And that's also feeding this
short gamma move to the upside because dealers are short
calls now and this, you know, as we hit sixty
one fifty sixty two hundred, things like that. Ultimately, I
always like to say, when you get spot up all
up in and of itself, it creates kind of like
a melt up, like some sort of kind of you know,
(17:29):
squeezy rally on the way up that collapses under the
weight of its own delta like collapses under the weight
of the mechanical buying on the way up, the mechanical
dealer hedging on the way up, because you need to
keep fulfilling that need and demand. People are getting longer,
you know, you're finally seeing that dynamic people are getting longer.
That creates the potential de risking flow on the way down,
(17:50):
especially once you're talking about systematic VALL scaling strategies that
as VALL goes higher, they have to just sell, you know, unemotionally.
Speaker 2 (17:58):
But what would be a reasonable catalyst for that to happen.
Speaker 5 (18:02):
Well, I think the the near term one has been
you know, the fact that you know, July eighth, the
original kind of reciprocal delay that you know, and you
saw a bunch of headlines today saying like that's flexible,
morally flexible, you know. I think that big surprise, Yeah,
let's make a deal. I would say that that right now,
that's kind of like the most obvious you know one
(18:23):
out there that you know, there's still some element of hardball.
My view is that that's somewhat overstated, that that is
somewhat overstated because he needs to get one big beautiful
bill passed first before that, and then potentially you can
play the game. But the fact that this eight ninety
nine was removed tells me that they know that getting
a deal with Europe is probably you know, a larger
(18:45):
you know, impediment to what they're trying to do, and
that there still is now this new conditioning in the
market where instead of like increasing the rhetoric at the highs,
you know, Trump is capitulated back into Trump one point zero,
which is like, you know, run hot, right, he's now
and they are best in himself with the headlines out
at the end of the day, they're they're trying to
(19:06):
squeeze this thing higher, and financial conditions are easing. The
dollar is moving lower. Long in deals started rallying, ironically
because the market is sniffing, you know, a dubvish turn
within the Fed, you know, and including recent comments from
people that I don't think would have anticipated necessarily outside
of Waller who's auditioning for the FED job. And you know,
(19:26):
why are they beginning to turn like that? Yes, there's
a normalization dynamic with regards to wear inflation is now
we think Jerome Powell is already at two dots ur
you know, for the end of the year, and there's
just this modest turn, but they're turning for a reason.
They're turning because you know, quits rates and claims, you know,
are starting to get a little wonky. And as I said,
the whole American economic miracle goes wrong when the consumer cracks,
(19:50):
and the consumer cracks is what you know becomes of
you know, the labor market, and that's starting to look
you know, precarious about. So I think I don't think
it's going to be a teariff head line necessarily. I
think it's going to be you know, good old fashioned
data and nasty NFP print. Now that type of a thing.
Is that an acute risk?
Speaker 2 (20:08):
Now?
Speaker 5 (20:08):
Probably not, probably, you know safe to say, you know,
within by August, you know, we could be getting spicy.
And I think there's real delta, not just of like
the first cut in September. But you know, if that happens,
you know, it's not just going to be you know,
twenty five BIPs, right.
Speaker 2 (20:24):
So everyone needs to keep shopping.
Speaker 4 (20:27):
I guess, yeah, do your duty.
Speaker 3 (20:30):
So the thing is, though, this is what bothers me
is everyone sees some of these dynamics. We talk about
the labor market weakness all the time. We talk about
the fact that due to the tariffs and other factors,
the FED might be a little bit gun shy or
less inclined to cut like than it otherwise would have
given the set of economic conditions. And I think, like
(20:51):
Powell has sort of hinted at it before, that they're
conditions like we all could see this like and yet
like and yet people keep like it's sort of there's
something intellectually unsatisfying about.
Speaker 4 (21:03):
The entire environments.
Speaker 3 (21:04):
Well because like all this seems very true. They're all
this like this tagflation risk, there is going to be
a cost of tariff, there is this cyclical slowdown.
Speaker 5 (21:12):
And yet you know, it goes back to those you know,
kind of counterintuitive observations that we started off with, you know,
where you get so fixated on the like the left
side that you know, perversely, the corporate spending uncertainty becomes
the biggest source of demand for stocks. Yeah, you know,
and especially to the market structure stuff, which is just
(21:32):
what I always come back to, like once those puts
start roasting, because the worst case scenario doesn't happen, and
dealers got to start buying back that short delta, and
then people start squeezing that short delta's the market starts
rallying back, start buying short data calls, and dealers get
short those calls and we go short gammed the other way.
You know those flows, and you know, frankly, you know
a world of you know, not just this market structure
(21:55):
that feeds momentum right with leverage dt afs. You know
the prevalence of options trading and the tail wagging the dog.
And I don't even know if I can say tail
wagging the dog now, I just think it is the dog.
Speaker 4 (22:07):
I like that. That's good. You know, options are the dog.
Speaker 5 (22:11):
You know, those type of real and synthetic gamma effects
in the market are you know, very high impact. And
I think at the end of the day, a lot
of this is just about career preservation. And when you've
kind of missed badly on a call people, it feels good,
you know, in the macro space, like I, you know,
I'm super sensitive to this idea. You know, you feel
(22:32):
smart to make a bear call because it's rare still higher,
you know, when you run a back test, you know,
and back testing, I know it is like a four
letter word. But when you run a back test, you
know this this happens and contingent on this, and you
actually get negative forward returns over a series of average
you know, a real number of sample set. You know
(22:54):
it's an outlier. The problem is like sitting in a
negative stance. When again goes back to that point, people
are not really incentivized to see the world burn. You
know it's gonna be a tough thing, so you got
to be dynamic and pragmatic. I think about these things
all right.
Speaker 2 (23:07):
Well, Charlie, let me just say thank you for giving
us a couple of square words to bleep out. It
really helps keep our producers on their toes. This has
been another episode at the Audlots podcast. I'm Tracy Alloway.
(23:30):
You can follow me at Tracy Alloway and.
Speaker 3 (23:32):
I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carmen Erman, dash Oll
Bennett at Dashbot, and kill Brooks at Kilbrooks. For more
odd Loots content, go to bloomberg dot com slash odd Lots,
where we have a daily newsletter and all of our
episodes and you can chat about these topics twenty four
to seven in our discord discord dot gg slash.
Speaker 2 (23:52):
Odlines and if you enjoy Odd Lots, if you like
it when we do these live recordings, then please leave
us a positive review on your favorite podcast platform. Thanks
for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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