UGO01: Reflexive Markets, Real-Time Risk: The Dawn of the 0DTE Era ft. Mike Green

Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:07):
Welcome to U Got Options, anexciting series right here on Top

(00:32):
Traders Unplugged, hosted bynone other than Cem Karsan, one of

(00:54):
the sharpest minds when itcomes to understanding what's really

(01:14):
driving market moves beneaththe surface. Inthis series, Cem
brings his deep expertise andunique perspective, honed from years
of experience on the tradingfloor, to candid conversations with
some of the brightest minds inthe industry. Together, they unpack
the shifting tides andunderlying forces that move markets
and the opportunities theycreate. Aquickreminder before we
dive in, U Got Options is forinformational and educational purposes
only. None of the discussionsyou're about to hear should be considered
investment advice. As always,please do your own research and consult
with a professional advisorbefore making any investment decisions.
Now,what makes this seriestruly special is that it's recorded
right from the heart of theaction on the trading floor of the
CBOE. That means you mightcatch a little background buzz, phones
ringing, traders shouting asCem and his guests unpack real world
insights in real time. Wewouldn't have it any other way because
this is as authentic as itgets. And with that, it's time to
hear from those who live andbreathe this complex corner of the
markets. Here is your host,Cem Karsan.
Welcome to the first episodeof U Got Options. Here we are at

(01:53):
the heart of the CBOE tradingfloor, and for our first episode

(02:16):
we get no other than MikeGreen. Mikeand I sit down and talk
about 0DTE, its changes inmarket structure and how the 60%
volume is playing a role, thereflexivity of the space and, importantly,
dispersion and the role it'splaying not only in this market sell-off,
but likely in the year or twoahead, and lastly, a bunch of wonderful
anecdotes drawing from ourrich history of experience. I hope
you enjoy the episode.HeyMike, thank you for joining us.
Excited to have you here forthe first episode of U Got Options.
Icouldn'tthink of a betterperson to get started with because
I know you and I share kind ofa background, kind of starting here,
kind of in the belly of thebeast. I'd love to kind of get the
listeners a little bit ofinsight into kind of how you started
in the business to start withand go from there.
Well, it literally was thebelly of the beast, although in New
York. So, when I was anundergrad at the University of Pennsylvania,

(02:37):
I actually had the opportunityto work on Wall Street, for Spear,
Leeds & Kellogg, as a marketmaker on the New York Mercantile
Exchange trading crude oilfutures. We were talking about this
before, this was 1989. I wastrading crude oil futures to offset
primarily house option andmarket making positions for Spear,
Leeds & Kellogg, and I'msitting there, in the summer of 1989,

(02:57):
and Saddam Hussein invadesKuwait, and in the oil markets it
was an absolutely astonishing experience.
And how many years in were youat that point?
Literally, I started thatsummer originally as a clerk. And
on day two of being in thesummer intern program, my boss got
fired. The guy running theprogram turned around and said, you
know, hey, do you think youcould pass the clerk test tomorrow?
And I'm like, give me a nightto study. Sure, I can. And next thing
you know, I'm headed towardstrading on the exchange.

(03:31):
Mine was, ‘98, ‘99. So, it wasliterally a year before the tech
bubble.
Yeah, exactly. Well,you werealso trading financial products,
and I was trading the physicalproducts which had the unique qualification
that I brought to the tablethere was that that was giant, right?
I was, on the New YorkMercantile Exchange, relatively small.

(03:55):
We've talked about thisbefore, but that was also a super
formative experience becauseI'm trading crude oil futures in
the New York MercantileExchange, and about two days into
it, I realized I'm bored.Andwhat I want to be is upstairs
with the guys who are saying,what's going to happen next week,
not what's the execution thathappens today? And so, it was super
formative for me, but it'sbeen a long time since I've been
sucked back into the belly ofthe beast.
But it's fascinating, right,especially with derivatives and options
now becoming so, I won’t saydominant, but much more critical

(04:18):
to the outcomes of things. Youand I end up talking a lot about
those effects, right?
Well, absolutely. And again,going back to that time period, when
I went upstairs, it was totalk about OEX options, not to talk
about S&P options.
When I started, the OEX wasjust as big as the SBX.
That's exactly right. And partof that, we forget, that a lot of

(04:44):
this is about the latency andthe calculations in order to do options
trading on the New YorkMercantile Exchange. I literally
had to install a mathcoprocessor into an intel, what is

(05:09):
it, 8088 microprocessor. Youhad to install extra RAM, which you
picked up at PC Richards. So,you went and bought it retail. Youhad
to print out sheets, and thereally crazy part, for me, that I
will never forget about that,is the way I learned that Saddam
Hussein invaded Kuwait. Itwas, it was 4:30 in the morning and
I'm walking through WTC 5 andI happen to see the headline on the
newspaper. There were nosmartphones, there was no Internet,
it was all completely analog.And the thought that went through
my mind was, I better run theoption sheets extra wide.
It's funny you mentioned that.2001, right. We have, you know, the

(05:32):
planes at the buildings in theWorld Trade Center. I come down to
the trading floor, and we seeit happen on the screen. My first
response is not to run fromthe building.
Yeah.
First response is to runupstairs to the computer to print
out your sheets.
Yeah.
To get ready for the day. Andthey ended up shutting it down for
four or five days. And youknow, we actually evacuated, had

(05:53):
to run. I don’t want to getinto all of the emotional stuff from
that time but you're right. Atthat time it's like you'd see something
and then you're like, I got toget my sheets back in order.
Yeah.
But yeah, this whole pit wasbasically everyone standing with
sheets and every time futureswould move, you'd be switching it.
And to your point, I was 5’11”, you're much bigger than I am,
among 6’ foot 3” guys justtrying to get to an order. Things

(06:17):
have changed quite a bit.
Well, the guy that stood nextto me in the pit was 6’ 8,” and a
former Cornell basketballplayer. At one point he lost his
temper and went like that andliterally sent guys flying out of
the pit. So, you know, even atmy size, I was relatively small in
some situations.
I was glancing on shouldersfor sure at that point. But things
have changed, You know, weused to really focus on quarterly.

(06:37):
When I started in the businessthere were only quarterly options
expirations, and only in the indexes.
Right.
Think about that. And by theway, strikes were 25 points wide
with an index at 400. So veryilliquid, dispersion wasn't even
a thing yet. Right? I didn'thave a sophisticated option chain,
if they even existed at all.And so, now we have daily expirations,
we have 0DTE, which is I thinknow 60%...

(07:11):
By far the most successfulproduct launch I've ever seen.
Ever.
It's just absolutely incredible.
And a huge component to what'shappening in markets writ large on

(07:52):
a daily basis.Dispersion,which we often talk about
because it really does affectthe single stock movement and also,
kind of depending on what volis doing, how things are moving away
from each other. And I thinkwe'll get to this a little bit later
but it is particularlypertinent to what's happening in
this sell-off, in this marketright now. ButI really want to dive
in today and think a lot about0DTE and how that's changed the landscape,
in your view. How are thesethings interconnected? As I mentioned,
60% of option volume is now0DTE. It's not 30 day vol in the
VIX, it's definitely not oneyear out, et cetera. And why do you
think that is? Let's starre.
Well, so, I think that thereare a couple of factors that ultimately

(08:41):
have played in. I mean, youremember two years ago, or three

(09:17):
years ago when 0DTE reallybecame common, there was a ton of

(09:53):
focus on like, this is goingto cause the end of the world. Andyou
and I both looked at it andwe're like, yeah, actually I think
this is largely a riskreducing phenomenon because by far
the largest users of 0DTE arethese guys. They are using it to
hedge exposures in ways thatare far more efficient. It allows
them to stay on this exchangeas compared to the futures exchange.
So, there's not the need tomove off platform, there's lower

(10:25):
transaction cost for them.Thesecond component is because it
is, itself, a convex product.It radically changes delta hedging
characteristics and that'ssuper important. It plays through
in a lot of the otherphenomenon that we see. Butif you
think back to those 30-day, or60-day, or (God forbid) quarterly
options that we used to haveto deal with, as you approached expiry
on those, your delta hedging,your offsetting the futures became
incredibly frantic. And thequadruple witching days were just
these unbelievable events inwhich you would basically have to
decide, I'm going to print myoption sheets extra wide. Alotof
that goes away when I have aconvex instrument that allows me
to conduct my hedge withanother option. And so, that's been
a really critical innovation.At the same time, it has opened up
a lot of markets that had beenclosed for a while. So,actually,
the interesting thing aboutdispersion trading was it existed,
but it existed as an esotericoff-floor activity, back in the 1990s,
that was largely aboutexploiting the unique idiosyncratic
volatility of some of the dotcom stocks. Firms like Pimco and
a couple of others actuallyhad very successful businesses built
around the dispersion trading.Itwas a much slower business back
then. Now it's actually biggerand faster but it actually, I think,
has a lot of the sameunderlying characteristics with the
rise of idiosyncraticvolatility tied to many of these
super large single stocknames. What we colloquially refer
to as the Mag 7 but kind ofextends out to anything that's kind
of 500 billion or above orthat has levered products associated
with it, that has significantoptions volume associated with it.
Tesla was one that was a clearcomponent there, et cetera. It's
the same stuff coming back,just in slightly different form.
And you're getting to see alot of the impacts that, in many
ways, look an awful lot likewhat we saw in that time period.
Yeah, I agree. Ithinkpart ofthe success of 0DTE, in my mind,

(10:46):
if not the biggest part in mymind, is actually the removal of
the implied vol correlationissue. A lot of your average traders

(11:14):
want the optionality ofoptions. They want to be able to
bet on the distribution ofoutcomes and hence not take the whole

(11:41):
risk of the underlying. Whichis, I think, the biggest thing driving
actually growth in optionswrit large. Butit's being concentrated
in 0DDTE because too manypeople have bet on hedges that have
underperformed over the years.They may overperform, they may underperform
but is much less predictablefor the average entity. AndI think
0DTE, because it's pure gammaessentially, really allows that distribution
of outcomes to be realized onthat daily basis in a much more direct
way. And I think that's been abig driver of this. Options,we've
talked about this before, butin my mind are a much better way
to bet on any outcome. Peoplethink of them as hedges or risk management
tools, but they reallyrepresent the full distribution of
outcomes. And anybody who hasa piece of information and wants
to kind of choose an outcomeand really have that information
be expressed properly isbetter off going and choosing that
point of the distribution thanthey are betting on the whole expected
value of the underlying.

(12:02):
Well, what you're highlightingis, by going to the zero day, you're

(12:28):
reducing the vega componentsso dramatically. It's effectively
a coin flip. Is the marketgoing to go up? Is the market going

(13:16):
to go down? And that opens upa range of distributions. Andtoday
was a perfect example of that.We had extremely elevated implied
volatility going into the CPIreport, which of course turned out
to be relatively nothing inits underlying framework. I often
use the expression a hedgedpot rarely boils. So, if everybody
is out there protectingthemselves against the event, what
you need to be worried aboutis the event actually being either
far greater than everyone wasworried about or simply that everyone's

(13:36):
wasted their money. Ifyou hadused a 30-day option to hedge against
an event like today, what youwould have actually seen was a compression
of your volatility, after theevent, that meant that there was
almost no way to win in thetrade. Whereas the zero data expiry
actually kind of went in bothdirections. You went up and then
you went down in terms of theresponse function to it. Andso,
I agree that that is a driverof it. I do think that the completeness
factor, right, we talk aboutthe idea of completeness in markets.
The introduction of 0DTEs hasdramatically enhanced completeness
and that, I think, is actuallyone of their key components. Younow
are seeing attempts to bringother markets in here. We were talking
about the Russell or the VIXet cetera. Some of these are weird.
What does a zero data expiryVIX mean when it's a 30-day forward
contract? I'm not sure that ithas the same relevance. But this
idea of completeness inmarkets, particularly on exchange,
is certainly something thatI'm generally in favor of.
I think it is important,particularly for risk management
and expressing directoutcomes, more specifically. There

(13:58):
is a question, we do think,and we've talked about this. I can
speak for you on this, that itprobably reduces bigger tail long-term

(14:27):
outcomes, because if morepeople are playing the 0DTE, that
expires today, and that riskis now off the table. Thething it
does most likely increase isone day move potential. Because it's
so hard to hedge a 0DTE,without 0DTE, it's a bit of a closed
loop. And that's why I thinkoften, most times, it's very balanced
in here. Market makers gohome. There’s pretty flat vol, pretty
flat gamma. There's been a lotof data behind that. Butthere is
the issue of, if there is acascade, and everybody needs a hedge
in the 0DTE, that the thingcan be a reflexive thing. So, these
options are, quite frankly,just like anything else, they're
reflexive to theirconstruction. And a 30-day option
is reflexive to 30-day vegaand implied vol. 0DTE is very reflexive
to gamma and short-term gamma.

(14:51):
So, I mentioned when I startedmy career at Spear, Leeds & Kellogg,
which was primarily aspecialist on the New York and American
stock exchanges. Their primaryrole was playing a specialist. The
market making activities onthe New York Mercantile Exchange,
we were a little bit of abackwater. Oneof the unique features
of the specialist system wasthat you actually had a contractual
relationship with a companywhose shares you were making markets
in. That meant that you werewilling to lose money. And when you
look at high frequency tradingtoday, the focus is all about I never
lose money. It's an optionalmarket participation. Tome, one
of the most interesting thingsthat happened in the last 12 months
was August 5th with thedispersion unwind. Speaking of that
trade, a lot of peoplecolloquially talk about it as the
yen carry unwind, et cetera. Ithink from our perspective, it was
all about a dispersion unwind.

(15:41):
Right.
And you saw this incrediblebid that emerged for index volatility
or index options in theimmediate aftermath of some of those

(16:15):
portfolio unwinds. An impliedcorrelation (I actually shared this
on Twitter the other day), itwent to 240% before the market opened.
Nowmost people would look atimplied correlation and say, well,
how could it possibly go above100? That's just telling you there's
basis risk between the two.(And excitement. There we go.) Thepoint
that I would emphasize aboutwhat happened on August 5 is exactly
what you said. We have becomedependent on these systems for risk
management. And market makershere don't have that obligation.
Theyhave an obligation totheir P and L. They have an obligation
to their family. They have anobligation to their friends that
they've made a relationship ora trade with. They might be there
for that, but they steppedaway that morning. So, I often liken

(16:42):
it a little bit like GPS.Youknow, when GPS first came out,
we would make fun of peoplewho would drive off, you know, a
road without understandingthat they were following something
that was incomplete. I'd saythe vast majority of us today would
do exactly that because wejust follow the GPS. We're dependent
on it.
And that's why these pitsstill exist. Some people are like,

(17:23):
why the pit in this day andage? Because exactly for that reason,

(18:03):
when markets do break down,this is the fallback. And here there's

(18:40):
a different approach.Yes,they are going to offset risk
but you are also willing tostand in and do something. And it
is a system that still works.Haven't been hit by a cyber attack,
haven't been, you know, anynumber of things. This group of guys
and girls really look atmarkets and hey, we're willing to
take X risk at this point,step in and do to support the market.
So, I think that's important.Togo back a little bit to what you
were saying about 0DTE and voland particularly dispersion on August
5th. I think it's reallyinteresting that if we look back
at recent history, let's goback 10 years, August 2015, we get
Yuan devaluation, massive volevent. Then we get February 16th,
oil blowout, low vol, marketdown event. We'vetalked about this
before, together, and the sinecurve of what happened. I think after
Covid, right, we had 22, whichwas a vol similar to what we're seeing
now - market down, vol downtype event. And we were set up for
a vol event. Ifinditinteresting that that happened so
quickly in August. I thought,we thought maybe it might be a bigger
event. And you had thishistoric kind of vol dispersion kind
of breakdown. And here we areright back to that other market down,
vol down. Wewashed out allthe sellers of vol, all the short
convexity. People are back tohedging. And this also played into
the fact that, you know,largely well communicated by the
administration and others aswell. ButI do see us now in this
kind of period where impliedvol might not work for a while. And
I think that's also pushingmore and more people again to 0DTE
because that is working. And Ithink that fear of 22 again or you
know, vol not performing againhas really driving a continued increase
there.
Well, I mean we are seeingthis. So, you know, quantitative
investment strategies, QIS,colloquially as it's referred to,

(19:07):
many of these strategies willhave protection mechanisms that are
built on a VIX response. So, Iactually was just looking at one

(19:28):
the other day that has so farfailed to deliver the protection
response because it'seffectively an S&P delta trade against
a VIX delta trade.Thosestrategies, as people become
reliant upon them and theyfail to perform, it causes a lot
of the stuff that we'reseeing, which is portfolio unwinds.
And a lot of the behavior thatwe're watching right now, this kind
of vacillation where one groupof stocks is leading one day and
another group of stocks isleading another day, in both directions,
up and down, you and Irecognize as de-grossing. That's
somebody taking down, that'sbooks being forced to be taken down,
etc. That is absolutelyplaying out here. Butit's happening
with a lack of vol responsethat I would suggest because you
don't hedge the unwind amarket neutral book with 30-day options.

(19:52):
I want to unpack that a bitbecause I think this is a perfect
time to do it. You don't getmany better opportunities than what's
happening right now. And Iwant this to be evergreen. But like

(20:17):
let's use this as an example.We'vehad a real breakdown between
implied vol correlation tounderlying move. Right. Market's
down 10%ish as of today. TheVIX still is still trading at a very
muted level right now.Interestingly though, we have a lot
of stress under the hood. Notin the vol markets. Butunder the
hood. And can't really namenames here, but there are several
really big hedge funds thatare having, for them, four or five
sigma losses this month. Andwhen you talk to them or you listen
to kind of what's happening,it's really idiosyncratic. It'slong/short
equity, a lot of pairs justblowing out. And there's a lot of
hand wringing kind ofscratching the head like, why are
we getting a four or fivesigma event in that space? But to
you and I, it makes a lot ofsense. It ties into this volatility
dynamic and that vol is verywell compressed. Almostby definition
you have to get vol (and youstill have idiosyncratic risk, mind
you), you have to have thingsmoving more away from each other.
So, the stress ends up beingthe pairs and the entities moving
away from each other causingthe stress. Nowironically, last
thing I’ll say, ironically, asthat happens, if the losses are big
enough, that'll beself-perpetuating because movement
away from each other begetsmore losses, begets more deleveraging.
And the only factor there isnot real true factor, it's positioning.
Yep.
Much like the positioning inthe vol markets are driving the kind

(21:32):
of vol compression. Andso, Ifind it incredibly fascinating that
then there's this feedbackloop that, eventually, that de-grossing
can cause stress in marketsand push markets down, ironically,
because deleveraging generallywill force a full deleveraging across
the market. Butthat it mayactually re-emphasize the short vol
trade on the way down. So,it's almost this reverse loop where
vol selling can beget more volselling can be got more breakdown
and correlation. And oftenit's the logical trade that everybody's
taking because it seemsobvious that then, because it's all
the same positioning, pusheseverything away from each other.
And I think it's really whatwe're seeing right now.

(22:15):
I completely agree with that.So, to use that example of the strategy
that I just highlighted. So,there you are short a put, or put
spread on the S&P, and you arelong a VIX call or call spread.
Yep.
Right. Ifyour VIX does notrespond, for all the reasons we've

(22:39):
highlighted. People havechosen to use zero data expiry options
to hedge as compared to30-day, for example, breaking with

(22:59):
historical patterns. And allof this stuff is built off of historical
patterns because that's theonly thing we have. Wemay say the
future is not representativeof the past, but that's what we have
to work with. And so, when youbuild these types of models, now
imagine unwinding thatposition because it failed to work.
I am short a put spread on theS&P. I am long a call spread on the
VIX. The offset to thatposition is a dealer has gone out,
or a broker has gone out andbought effectively calls on the VIX
to protect themselves againstthat scenario. And they have simultaneously
recognized that I have soldthem a put on the S&P. And so, the
unwind of that involves,actually, the position blowing out
even further. So,thisabsolutely plays through. We see
this type of dynamic thatoccurs when stress occurs. But the
other thing to remember isthat the people that we're talking
about, to do this, do it withleverage. And so, losses are magnification
vehicles. And once you realizethose losses, unless somebody is
willing to step in and provideyou with a new line of credit and
new capital, you're now animpaired player. Andso, we tend
to see these componentspersist for a while, as we did after
August 5th, which wasn'tparticularly extreme, but that unwind
of that renewed positioningand hedging, et cetera, really characterized
what a lot of people treatedas effectively a Trump rally. Whether
it was tied to Trumpsentiment, whether it was tied to
underlying components in termsof the volatility surface, we'll
never know, but the simplereality is, we lean in that direction.
But,on the flip side of it,we are actually starting to see some
meaningful flows that areplaying through, which tends to be
the area that I focus a lot onwhere, because of the political dynamics,
we're suddenly seeingEuropeans take their ball and go
home, take their money andreturn it to Europe. This is causing
US Dollar weakness at the sametime that we're seeing relative outperformance
of European stock marketsversus the United States. Theseare
factors that we've talkedabout before. The unwind of everybody
crowding into the US and theTINA framework of US Technology stocks
runs a very real risk that ithas much larger macroeconomic implications.
And I think part of what we'realso seeing is a dramatic rise in
political uncertainty as we'rewatching various events play out
on the political stage thatthen turn to markets for validation.
Dowe really want to do this?Maybe we should put tariffs on, maybe
we should take them off.What's going to end up happening
is it's a little bit like theanecdotes that we hear from the 1930s
about Roosevelt setting theprice of gold from sitting in his
bed.

(25:21):
And I think, ultimately, we'veknown that that volatility is coming
from this administration.That's not new. We saw it before
last time around. I think it'sthe mix. It's a mix of those factors
paired with a structural setof other things in the vol market.
The amount of leverage we'veseen, the amount of positioning that

(25:41):
is net long now, coming intothis from retail and passive, which
you talk a lot about.
Yeah. Andthe key point thatI think I would emphasize on that
is that we went through aperiod of relative stability, the
growth of option dominance,passive flows, et cetera, all of
that is facilitated by acomplex that exists around it. This

(26:05):
helps facilitate the optionscomponent. There's a tremendous amount
of leverage that is built inhere. None of these guys are… There
might be one or two here inChicago that are operating in the
nine-figure club, but thereality is that most of these firms
are accessing lines of creditto allow them to do large trades

(26:30):
with relatively small marginfor error. And they're incredibly
good at what they do. Butwhenthe uncertainty rises and you're
forced to degross portfolios,whether that is a hedge fund that
is running a long/short factorportfolio or whether it is a market
maker, that's where the stressstarts to show up.
I think your averagelong/short fund, which are a lot
of ones that are havingstress, have 2 1/2 to 3x leverage.
Absolutely.
And to your point, thesethings are diversified enough, you
know, maybe they have 200, 300pods, that you would think that there

(26:53):
wouldn't be an issue with theleverage. But what happens, ultimately,
is the market is veryefficient and if that much leverage
cannot be absorbed, and thereare, again, a lot of different funds
that have been launched doinglong/short in a similar way, from

(27:15):
a lot of the same entities,that have increased that leverage.
Andso, when liquidity becomesa problem, that leverage matters.
I've called it a sumo market.Things can sit like this for a while.
Because you have all thisleverage, but you do have a ton of
potential energy. And just alittle shift sometimes can cause
much more pain.
I love that description ofpotential energy relative to kinetic
energy. Those sumo wrestlerslocked against each other; there's
a ton of potential energy thatcan be released the minute that hold
breaks.
Right.
I think that's a very good wayto think about what's going on. Theother
component of what you'redescribing, there was a headline,

(27:37):
I think it was in the WallStreet Journal or Bloomberg today,
that was highlighting thegrowth of J.P. Morgan's business
around effectivelyreplication, or factor replication.
They've built a hundredbillion dollar machine around this.
Well, I'm known for saying,why are you reading this now? The

(28:01):
point that I would emphasizeis that we all see the same price
signals. These are the thingsthat are universal. Andso, the ability
to figure out something trulyunique and truly divergent is pretty
low. And it tends to basicallyboil down to having a cast iron stomach
when other people don't.
Agreed.
But when you're thinking aboutthe behavior that we're seeing, and
we talked about this a littlebit before we went on air, this just
reminds me so much of therisks in the quant quake from the

(28:23):
summer of 2007.
Completely.
In which people had crowdedinto factor trades that they knew
worked because the factorsmade sense. The value factor, the
size factor, all the stuffthat we now laugh at and kind of
say, well, you know, it'sawfully cute that you're talking
about it, maybe it'lleventually come back. But the simple
reality is that everybody hasaccess to those same factor models.

(28:45):
Everybody sees the same thing.And when you go through a period
of relative market stability,people crowd into these components
because they work. And themcrowding into it reinforces their
working until you suddenlydiscover that positioning is out
over its skis.
Yeah. Andthe great irony,when you think about this… I mean,
I already kind of referencedit, but I really want to highlight

(29:07):
it. When something is obvious,logical, this doesn't make sense.
This thing is valued here,this thing is valued here, and they
are identical otherwise.Ironically, those things are sometimes
the biggest risk.
Yeah.
Because ultimately that'scorrelated with positioning. If everybody
knows something to be true,then everybody's going to be willing
to take risk with leverageinto that trade. And then the real
factor is positioning. Andthat's why dealer positioning, which
we talk a lot about, is sopredictive these days. Thesystem
has gotten so leveraged, sofinancialized, and yet the whole
system is very much offsettingrisk with leverage in real time.
And so that leverage, as youmentioned, can be the ultimate driver,
particularly when dealerpositioning gets really big.

(29:51):
I absolutely agree with that.Theother thing that I would emphasize,
or try to maybe take aslightly different wrinkle on it,
is that when you think aboutthe behavior that is occurring, my

(30:14):
putting on a position requiresyou to sell me that position. If
you are unwilling to sell thatto me, and I have a fiduciary obligation
to put that position onbecause my factors tell me it's going

(30:43):
to work. I'm going to causeprices to move in a pretty meaningful
way. And I think that is areally critical component. Imean,a
lot of my work around marketstructure and the growth of passive
is really about this idea ofidentifying increasingly inelastic
behavior. The ultimateexpression of inelasticity is somebody
saying, I don't actually carewhat's going on. I'm investing into
an index fund. Just buy methis stuff in proportion to the index.
Isit a good deal? Is it a baddeal? That didn't enter the equation.
What's the forward expectedreturn? Well, I'm not actually even
thinking about that. I'm in atarget date fund, et cetera. Alotof
these systematic rebalancings,a lot of these components contribute
to all the phenomenon thatwe're talking about. And when those
waves enter or leave, theybecome magnified by that inelasticity.

(31:06):
I wonder how ultimately… We'vetalked about this. I think we'd be
doing our listeners adisservice if we don't mention passive
a little bit and talk abouthow you think, if that ever kind
of unwinds, what that lookslike. Does that have any correlation
to volatility? How do youthink the volatility space plays
into it? Do you have anythoughts about that? I know that's…

(31:27):
Yeah, I know, it's a hard question.
Like you said before, it'llkeep going until it doesn't and then
it'll end spectacularly. ButI'd love to hear your thoughts on
that.
Well, I'll give you a reallysimple example. And it's one of these

(31:50):
things where my interpretationevents may be slightly different
than yours. So, you mentionedthe Chinese devaluation in August
of 2015. Well, interestinglyenough, the Chinese devaluation occurred

(32:20):
on August 12th and themeltdown occurred on August 24th.
So, part of my joke is, like,wait a second, did like the news

(32:45):
of this travel on a slow boatfrom China? You know, we live in
a world of instantaneousinformation transfer. Was there something

(33:09):
else that actually happenedthere? Andon August 24, 2015, Vanguard
rebalanced their target datefunds and all hell broke loose. Now
since then they've moved awayfrom a five-year rebalance point
to a continuous glide paththat is rebalanced on a monthly basis,
et cetera. And so, they'veworked very hard to reduce the impact.
But the complex has alsoroughly tripled in size. So, all
of these factors can playthrough. How does it look when it
unwinds? Imeanthe reallysimple answer is, you know what an
order book looks like wheneffectively it becomes overwhelmed
in one direction or another.You gap down and you're looking for
that next component. Theimmediate reaction and volatility
surfaces to a gap down in adiscontinuous market is you have
to explode. And so, I dothink, ultimately, that there is
a volatility component to it.Butman, like I'm actually trying
to imagine a 1987, which can'toccur because they just shut the
market. We didn't institutecircuit breakers first. But can you
imagine being the guy who soldthe 3% out of the money zero day
to expiry put option on theS&P on a 10% decline day? Like, I
mean, you're gone.
And that's a case for usingthem actively, for hedging actually.
And I think that's, that'swhat a lot of people are doing. Getting
that convexity in an ultimategamma type product is truly valuable,
particularly in an environmentwhere you have headlines every minute

(33:31):
that could drive a major change.
Well, and to be fair to theseguys. I mean, what is more likely
to occur in that scenario isthat they will have actually sold
a put spread.
Yeah.
Financed that tail from, let'scall it a Canadian pension plan that
is saying, well we're pickingup free money by selling these tails.

(33:56):
Now again that's harder in theaftermath of 2020, but 2020 feels
like forever in financialmarkets. So,I guarantee you that
people are stacked back intouncapped variance type exposures
that are going to get superinteresting at some point.
I agree, I agree. There isgoing to be some interesting one-day
move.
Yeah.
I will say sometime in thenext year, I would say, especially
if…
A completely unremarkableforecast by the way.

(34:17):
No, no, but I mean in thesense that like is historic one of
the top…
You can smell it, you cansmell something out there. There's,
there is a disturbance in theforce. August 5th was an example.
Some of the events that we'reseeing now, or all these warning

(34:37):
signs, it's telling you thatthe system is over levered, over
specified, and when that goesaway you're playing with, basically,
a bad position in chess.
And I think the other thing isoptions are, in my mind, a superior
way to position. We talkedabout this. It allows you to manage

(35:04):
risk relative to your return,very specifically to the exposure
you want, not just taking thewhole distribution. So, I think without
understanding that or knowingthat a lot of people are using them

(35:24):
because they are getting thebetter risk adjusted returns as a
function of using them.Thatsaid, I think the industry is
still going so quicklyrelative to the infrastructure, relative
to the liquidity, given theleverage, that I think it's only
natural to have these kind ofshocks that then kind of help the
infrastructure evolve and movefrom there.
Well, I think what you'rehitting on is a really important
point. It is in stress that weactually create new approaches, we

(35:45):
identify new issues, we expandour body of knowledge, use the world
of AI for it. Our trainingmodels increased dramatically with
the global financial crisis.Our training model has increased
with August 5th. So, newinsights emerge and oftentimes those
show up as reduced risk takingcapacity which tends to feed into

(36:10):
the next stage of the cycle.People are quicker to back away.
Butat the same time, it isabsolutely an adaptive system. It's
one of the most, you know,interesting and robust environments.
And it is exactly why, like wewere talking earlier, it's part of
the reason you and I gravitateto it. Because there's always something
new to learn.
I think it's always, in 2008the vol markets were incredibly important
because of variance. We saw10-year vol, prior to the crisis,

(36:35):
trading at 16 vols, which thelong-term average is 17.5. So, that
doesn't sound so low. Butthereality is 10-year vol, having the
tail, being able to be hedgedfor a credit essentially, is pretty
insane. Importantly, where didit trade? Do you remember? Do you
know where it traded in 2009on the bottom, what was the max?
Actually, the peak was in2012, believe it or not, around the
euro crisis. It hit as high as47 on 10-years.
Well, no, it traded 60. Thevariance of the 10-year variance

(36:56):
swap traded 60. Very briefly,very, very briefly, I want to be
clear, it was I think a day.
If you blinked, you missed it.
If you blinked, you missed it.But it traded 60 in 2009 on the bottom.
Got it.
But again, obviously insane.Like 10-year vol trading at 60.

(38:45):
So that's a perfectillustration. So,the origin of those
long-dated variance contractswas an academic insight that emerged
in 2005 from a couple ofacademics at NYU who identified that
there was a higher returnpotential associated with selling
variants that looked exactlylike being long equities. Andso,
the demand to offer thisproduct emerged before anyone was
actually interested in hedgingout there, which then forces the
price, effectively, below whatis the actual historical level at
which those returns weregenerated. And of course nobody stops
to say, well, is this still agood idea? No,now I've got people
who are paying me to executethis strategy, I have to do it. So,
all of a sudden into thatthere emerges an actual need for
it, which was a revision tothe variable annuity space. And the
demand for these productsbegan to emerge. And famously Warren
Buffett became the clearingparty on the other side of the table.
Whenhe stepped away in 2008and failed to emerge, the pricing
on those contracts explodedbecause suddenly the demand was actually
from entities, variableannuity providers, who had to hedge.
And all of a sudden the risktaking capacity on the other side
was gone. Andit's tough toexplain to people What a variance
of 47 or a VIX of 47 means. Wewere literally pricing 10-year contracts,
as you say, at 60 for a fewminutes. We had an extended period
in that euro crisis in whichyou could have sold these things
at 42 and above, whichbasically implies every day for the
next 10 years looks like thethree days after 9/11.
Yeah, never mind the techbubble and stocks trading at a 40
P/E, that is a structuralstatistical thing that can't hold.
It literally just cannot. It'snot possible.
Absolutely.
For 10 years, so, markets canget very inefficient. And again,

(39:20):
I think there's an echo herein things that we've been talking

(39:45):
about. Thinkabout long-termcapital management. It’s not too
different. Theoretically,absolutely correct - long dated skew
is theoretically dramaticallyovervalued relative to short dated
skew. Not only is it upwardsloping and there's more skew in
it, all the things we know,but short-term volatility tends to
be higher than low term. So,it's a, you know, Scholes was right.
But there's reality, andreality is positioning. It's supply
and it's demand at the end ofthe day. Andif you take your eye,
for any period shorter than ayear or two, off of where the rubber
meets the road, that's a goodway to go bankrupt.
Well, it's an easy way to endyour career. But the point that I
would make on this is that weoften think about prices as conveying
information. What prices arereally telling you is where transactions

(40:05):
occur. And what you actuallyare saying, when you look at something
like a long-term capitalmanagement, is what is the price
of somebody taking you out ofyour position in the worst possible
circumstances? Samethingoccurring in 2008, 2009 or during
the euro crisis when Frenchbanks, which were the leaders in
selling these long-termvariance contracts, are suddenly
saying, you know, ‘merde’, I'mdone. I'm being tapped on the shoulder.
I can no longer have any risktaking capacity.
AVAR doesn't work in those cases.
AVAR doesn't work.
That's the problem.

(40:25):
Nor does a normal distributionor anything else. Yeah, all those

(40:46):
things tend to break down intothose conditions. And that is part

(41:09):
of what I think ultimately isthe really key takeaway. Iusethe
analogy of, you know, GPS. Webecome dependent on these systems
functioning. The idea thatlong dated variance would continue
to function as a theoreticalframework where it's obviously less
risky than short-term. Thereare some real advantages when I think
about zero data expiry optionsrelative to a 10-year variance contract.
Witha 10-year variancecontract I'm locking myself into,
basically, term financing.Silicon Valley Bank did something
very similar in 2021 throughearly 2023. In the case of zero data
expiry, I'm not worried aboutthese guys. I'm worried about guys
like me or others who aredependent on them being there. That's
the August 5th experience.Whenthey back away, suddenly nothing
can get done. My GPS no longerworks. I can't figure out how to
get home. Those are thechallenges that I think are going
to be interesting.
We highlighted variance swaps,and we highlighted long-term capital

(41:31):
management, all those have themore long-term in them. And that's
kind of why 0DTE, again, isprobably more stable in some ways.
I think, as a product, it'sdramatically more stable because
people have used the phrasederivatives or weapons of mass destruction,
0DTE is more like a game ofRussian roulette. You either survive
or you don't. But yourprospect of a mass killing with Russian

(41:54):
roulette is actually really low.
It's not mark to market at theend of the day. At the end of the
day it is…
You're either dead or alive.One of the two.
I agree, and I think that's abig reason why people have moved
to it. I will say though, notto paint all the positives, when
you're at the end of adistribution where you can't hedge
the product as well. There isalso a risk there. Thinkabout GME
and AMC. You can’t hedge GMEor AMC with anything other than GME
and AMC. They're a liquiditylittle bubble. And that can lead
to cascades. And it happenedwith the long term of the distribution
of variance and long-termcapital management. But it can also
happen at the front of thedistribution, I think. And I think
that's the other thing youhave to be mindful of. That can be

(42:14):
reflexive.

(42:44):
I totally agree.
In terms of a loop onunderlying the market.
I actually had not thought ofit in that context before. Iusedto
work for Peter Thiel. AndPeter has a very famous approach
which is. it happened this waylast time, therefore the opposite

(43:12):
will happen next time. Rightnow, it's obviously not quite that
formulaic, but a really goodexample is, World War I, the solution

(43:35):
to it was, let's build theMaginot line. So, World War II involves,
well, let's actually dosomething really clever like go around

(43:57):
it. 2008was all about longterm exposures. It was those 10-year
variance contracts. It wasmortgages that suddenly became very
short in duration, and highcredit risk after having not been
credit risk for so many years.AAA securities that broke down because
the waterfall models did notproperly calculate the correlations
over long periods of time.Mygut tells me that this cycle is
going to look a lot more likeAugust 5th, and it's going to be
much more focused on thatshort term. Again, my key fear is,
we turn on our car, GPSdoesn't work, and we're suddenly
like, man, how do I get to theoffice, how do I get home, how do
I do all the things that I'mused to doing in a normal basis?
We'll eventually figure it outand we'll build band aids around
it. But boy, that's disruptivethat first day.
Yeah, I think this dispersiontrade which has gotten so big, there's
a lot of really interestingfeedback loops that are really going
to play out here in the nextyear or two, particularly as it relates

(44:21):
to vol markets. By the way,we’ve had twice the volume of structured
products than we had two yearsago. To give you a sense. I think
that's only going to increasemore with core market performance

(44:43):
because people are looking formore non-correlated ways to invest
which then, ironically, has avolume compression loop.
Yep.
And if that's happening into adecline because, ultimately, people
are moving away from equities,a market down, vol down, but an exaggerated
form of it could then lead todispersion blowout, which then continues
to push things down. So, itcould be a very unique, different
type of move this time around.Particularly because the amount of
leverage that we're seeing.
Yeah, and again, I would justemphasize, anytime you start introducing

(45:07):
things like zero day expirysbecause they're very small dollar
value, if I sell a 10-yearvariance contract, there's a large

(45:31):
dollar value associated withit. If it's a very small one, my
temptation to lever that,because of the high predictability

(45:55):
of it, the repeating componentof it, et cetera, is very, very high.
It does open up some risksthat haven't existed historically.
Theother thing that I wouldjust emphasize, in exactly the framework
that you're hitting on withthe dispersion component, part of
the reason for the dispersiontrade is because of the relative
size differential. So, the bidfor Apple, Microsoft, and Tesla,
and having taken them to thepoint that they're now 30% of US
equity markets, US equitymarkets are 55% to 60% of global
equity markets, you're talkingabout a very small number of companies
that make up a giant fractionof overall market volatility. Iffor
any reason that changes. Andlet's just imagine a scenario in
which AI turns out to be trulydisruptive and disintermediates and
turns Microsoft or Nvidia intothe intel of yesteryear, or the Cisco
in the networking space. Thatactually changes the character of
that behavior and means thatmany of those trades become a lot
harder. And so, imagining thatforward space is, I think, pretty
interesting and, candidly,challenging in this environment.

(46:21):
Agreed, and you mentioned AI,but I think we've seen these… The
reflexivity is why guys likeSoros, some of these guys, have really
been so successful over theyears. The contrarian idea that reflexivity
is probably more importantthan the actual logic of the trade,
to begin with. It’s an oldidea, but it's really embodied by

(46:42):
a lot of these mechanicalfeatures we're talking about.
Well, it's funny. So, you andI both know Kyla Scanlon, on Twitter,

(47:41):
and she's written about thevibe session. And vibe session is

(48:29):
just another way of sayingreflexivity. Weall feel terrible
about the economy, thereforewe all behave in a certain way, therefore
the economy reflects that.This has been talked about forever.
Right. John Maynard Keynes,the market can remain irrational
far longer than you can remainsolvent. Isaac Newton, I can explain
the movement of the bodies ofheaven, but not the madness of men's
minds. Right. All of thesecomponents play through. Andat the
end of the day, again, I thinkit's fascinating that you highlight
that the reason that thisphysical exchange still exists is
as a backup. It's the humanconnection that ultimately is there.
Isometimestell the storyaround the crash of 1987. As I began
to build a lot of my tradingtechniques and styles in the aftermath
of the global financialcrisis. I recognized how disconnected
the derivatives markets hadgotten particularly in these longer
dated variance contracts. AndI reached out to Mark Rubinstein,
of the Cox Rubinstein model,Leland O'Brien Rubinstein portfolio,
insurance, et cetera, andtalked to him about some of the distributions
and shapes that I was seeing.And I'm like, Mark, I just need you
to… He's like, I don't do thisanymore. Heactually left finance
for a while and became atheology professor at Berkeley. And
he looked at it, he's like,yeah, you're right, this is really
a mess. He's like, but let metell you a story. Andso, he shared
with me the actual story ofhis trading activities in the crash
of 1987. And exactly like wewere talking about earlier, the model
is, well, when events likethat happen, you run your derivative
sheets extra wide. He wasrunning it in reverse. He was effectively
delta hedging off thosepositions as compared to pricing

(48:52):
options. Andthe system wasspitting out orders, and the orders
get bigger, and bigger, andbigger. And finally, he hands one
to his trader and his traderturns to him, he goes, Mark, if we
try to send this to the floor,the entire thing's going to zero.
And Mark said, well, thendon't send it. Andso, actually like
a critical component ofstopping the crash of ‘87 was Mark
Rubenstein, at Leland O'BrienRubinstein, saying, we're going to
take the loss.
I wonder how much that's goingon right now.
I think there's a fair amountof that happening. Certainly, it's
more of a tapping on theshoulder at this point, where people
who don't really have agencyare being told, take off risk. Butthat
is absolutely…
I'm sure they're very muchthinking about liquidity in that

(49:13):
process. And I think that's,you know, off the record here, kind
of just… I think that's whythis is kind of a slow-motion train
wreck as well.
I totally agree with that.Andthe point that I would emphasize
on that is that everybodybelieves in their position. Everybody
wants to hold it. The peoplewho really last tend to be people
who actually cut thosepositions, recognizing the reflexivity

(49:36):
component. As Scott Besson,now our Treasury Secretary, taught
me long ago, if you're goingto panic, panic first.
100%. Yeah. AndI think it'sactually pretty interesting too,
that if you look at vol inmarkets that decline when vol is
lower, they can actually cutmuch deeper.
Yeah.
I mean, again, we talked aboutthat August 15th was not that big

(49:58):
a move. February 16th was worse.
Yeah.
With a much lower vol.Volpocalypse, February 18th, was
only 9%, 10%.
Huge vol drawdown, fourthquarter, 2018.
Yeah, 20% 19% in markets, withalmost no vol. And part of that's
because you don't get thatresponse of that critical last move
that expands vol, brings inall those Vanna and Charm flows that
I talk so much about.

(50:24):
Absolutely.
And the decay of that skew.
The mechanical component ofthis, I mean, you've done a phenomenal
job of educating people, Vannaand Charm, et cetera but the other
thing to remember is that asvol rises, delta doesn't rise proportionately.
If basically the outcome is, Ihave no idea, then what is my delta

(50:51):
hedge? It's actually prettylow. You price it in the form of
Vega. Inthe form of thevolatility price, it gets compared
to a directional hedgecomponent to it, when you don't get
that volume response. Now, allof a sudden, what do I need to do?
I need to sell more of my position.
That's exactly right. If theirhedges aren't working, that's actually
more painful for those who are...
Instead of my puts picking updelta, I have to reduce the delta
in my portfolio and thatbecomes that feedback loop.
A lot of the world is longstock trying to hedge with puts.

(51:12):
So that's, kind of, almost aworse outcome for markets.
Well, it's one of the things Ilaugh about because I tend to orient
towards a long volatilitystrategy because I see typically
greater opportunities in termsof the mispricing. It's a terrible
strategy if you want to becomea billionaire, by the way. The solution

(51:33):
to becoming a billionaire isactually selling volatility and kind
of being in the process.No,that's exactly what I mean. By
definition, if you're aninsurance company, you have sold
volatility.
It’s one of the biggestsellers or was one of the biggest
sellers of long dated putssince time incarnated.
Yes, absolutely. Andso, whenyou think about that underlying framework
though, that long volatilitybias, it tends to lead you to think

(51:55):
in terms of what are thepossible extreme movements? What's
happening right now is notanything resembling panic, or extreme,
or we're just not seeing thevol response bigger component going
back to the dispersion trade.Like we're still pricing implied

(52:17):
correlation for wingy puts atlevels that you and I used to think
of as floors in dispersion.You know, in terms of implied correlation.
So,there's no sign yet of thepanic component that's going to break
in. Will it hit in this cycle?We're getting down to levels that
there is definitely someexposure, to say the least.
Well, and if you get thesebigger entities that are to some

(52:38):
extent the glue that's keepingeverything together and if you get
them stepping away.
Yeah.
Now there's just lessliquidity next time around, and maybe
you don't get the same type ofblowouts, but maybe you just have

(53:11):
less liquidity in general andthat's an important factor.
Well, yeah, we're only down,give or take, 10% off the all-time
highs - slightly more thanthat, I guess right now. And if I
look back at some of thosehistorical responses to this, the
front of book liquidity in theEBONYs has evaporated. It's down
to a couple million bucks. Iwould guess it's under 2 million
bucks today based on the priceaction that we're seeing. Wedidn't
see that until we were down15%, almost 20% in Q4, 2018. And
then it becomes, again, aquestion of how wounded are the players
in the game? Can they actuallyefficiently make markets that can
cause an extraordinaryrebound? It can also cause continuation
to the downside. So, the funpart is figuring out where that next
step is going to play out.
That's where you watch theflows. Right. We talked about this,
February into March being anissue. We're lucky enough to get

(53:33):
it.
I will tell you one morefunny, quick anecdote, which is 1991,
I'm on the floor of the NewYork Mercantile Exchange and a reporter
comes through and he's talkingto people, and he says, you know,
one of the things that's mybig takeaway is like, nobody here
is really trustworthy. We'relike, what are you talking about?
Everybody is like, incrediblytrustworthy. Your word is your bond
on this floor. Andwhat he wasactually reacting to is the fact
that we don't make eyecontact. You and I are looking at
the screens over our heads andtrying to take in information while
we're carrying out a conversation.

(54:00):
The screens right here, by theway, we're both watching as we're
talking.
You don't notice it untilyou've been off the floor for a really
long time. I'm watching youand I'm like, holy shit, I'm doing
the exact (excuse mylanguage), I'm doing the exact same
thing that you're doing, whichis looking away and trying to incorporate
what’s going on. It’s oldhabits of standing down. Absolutely.

(54:21):
Last of all, I kind of want totouch a little bit on, you mentioned
something today when we, whenwe first caught up, about some things

(54:50):
going on in Europe andpotential wealth taxes, you know,
or at least the inkling of it.We talk sometimes about passive,

(55:14):
and how important that is, butalso try and educate a little bit
on how illiquid marketsactually are relative to perception.
I'vehighlighted this before,but, you know, the US equity market,
give or take, $50, $60trillion dollars, the global international
equity market is similar, $50,$60 trillion dollars. And then all
kinds of products, whetherit's private equity or other things
that are tied to that equitymarket, you know, wave your hands
at it. $200 trillion, $150trillion of long assets - long equity

(55:37):
assets. Yetthe daily volumethat's incremental, that moves markets,
is somewhere around $100billion, give or take. You can judge
that in different ways. Maybeyou say it's $150. Either way, if
it's $200 billion. $200billion relative to a $200 trillion
dollar market. I mean, peopletalk about venture capital deals
where the float is, oh,there's only 5% of the float trading.
This is 0.1% of the float incrementally.
On any given day.
On any given day, and so yourpassive kind of argument is so critical,
because the amount of flows,if that that kicks off, is dramatic
relative to the average dailyliquidity. But what happens if you
start to pull off some ofthose passive flows? And I think
that's an interesting kind of…
Well, I mean, to your point,on any given day, there's somewhere

(56:14):
in the neighborhood of $100 to$150 billion that is actively traded.
The imbalance on that day,meaning the net flows, is typically

(56:49):
only about $1 billion to about$1.5 billion dollars. So,there's
the old adage, you know, forevery buyer there's a seller. That,
of course, is true in settledmarkets, but the way I obtain additional
sellers is by driving pricehigher, or theoretically by driving
price lower, enforcingleverage selling. But that type of
imbalance is actually evenmore incredible when you think about
that net order flow dynamic.Andthat's where it becomes really
interesting on the passiveframework, because passive, at its
core, relies on the market'sfunctioning, and those transactions,
and that liquidity. And whenwe start looking at the net flows
that enter firms like Vanguardor BlackRock, you're talking those
firms individually are takingin $1 billion dollars a day at this
point. So, if they ever shiftto an outflow, that suggests that
imbalance could move in apretty significant direction.
Policy could play a big rolein that. Like, we're talking about
Europe, you know, these arethings that we don't think about.
We assume that things work ina certain way, but those things can

(57:10):
change very quickly based on ashift in policy.
Yeah, I mean, that was part ofthe way we got into the conversation
is that increasingly I'm doingthings like using ChatGPT to explore
some of these concepts becausenobody else in their right mind would
have a conversation with meabout what are the implications of
collectivism versus individuality.
By the way, you know, when Ifirst walked up to Mike today, he

(57:32):
was sitting on chat GBT askingit these existential kind of questions?
Well, the framework is… Nobodyelse will talk to me about these
things. But no, the frameworkthat I would just encourage people

(57:58):
to recognize is that our nearhistory is one of intense individualism.
We think about my 401k even aswe talk collectively about, oh, we're

(58:21):
all invested in the S&P 500,or in the Total Market index, or
whatever. We've never had morecollectivist outcomes in terms of

(58:43):
aggregate potential forextreme events. Weall talk about
national politics, we don'ttalk about our local politics. We
all talk about geopoliticalevents, as compared to, did Bill
get his horse shoed recently?Is the cow still delivering milk?
We'vemoved into these realmsin which we have to admit that we're
increasingly collectivist innature and yet we all imagine that
we are individually empoweredin this framework. What tends to
break those cycles, this cycleof collectivism versus individuality
is either a breakdown of thecollectivism or breakdown of the
mirage that we areindividually capable of protecting
ourselves. Andall my weightseems to be headed in the direction
of, yeah, we're fantasizingabout how much we control this and
we control our individual outcomes.
Completely, and things likesocial media, education, even like
this, can have huge effectsthat I think are way quicker than
people expect.
Absolutely. We arecontributing to the tipping point
by introducing some of the discussion.
Full circle reflexivity,right? Once these things start to

(59:06):
unwind, given the leverage,sometimes the door's not big enough.
And all that matters is thepositioning. That Mag 7, passive
investing, I can't think of abigger, more leveraged, one-sided
positioning.
It was a super popularconcert. But, you know, now we're
all trapped inside the stadium.
Yeah, I'm done with theconcert. I'm ready for the next show.

(59:28):
As am I. And so, I spend anawful lot of time criticizing crypto,
et cetera. It's actuallyinteresting when I run the scenarios
with ChatGPT, it highlightscrypto as an individualistic trait
and the potential foreffectively concealing your wealth
from the group, et cetera. Andthose are all factors that I think
are important. It's one of thereasons I actually became interested

(59:49):
in bitcoin super early. But,the challenge becomes, can we allow
the old world to die beforethe new one is born? And I'm not
sure.
Not when the worldisstillincharge,atleast.Youwouldthink there'dbesomelevelofcollectiveself-preservation
thatwedrive....
That is actually the fight.Right. I mean, it is institutional

(01:00:15):
self-preservation. The USGovernment's not going to go down
without a fight. Europe is notgoing to go down without a fight.
Theheadline you are actuallyreferring to is a statement that
there is potential for $10trillion of European wealth to be
taxed and confiscated to payfor Europe's new need for defense.
Man, we think about this as,like this is some brand new concept,
but just imagine it's theAmerican Revolutionary War and the
red coat coats, or therevolutionary soldiers, are going
door to door and saying, hey,we need your blankets. You're like,
those are my blankets.

(01:00:36):
Well, we've talked about, youknow, structured politically, the
move from taking from therich, giving to the poor during a
populist period. That candrive secular inflation, which can
be very disruptive to markets.We are doing the opposite here, currently,

(01:01:01):
with the Trump administration.Partially because I think they see
that it's a structural problemin the short term and they need to
deal with that. Butwhat ifthe inflation comes from Europe?
What if the inflation comesfrom other places where the populism
is embedded? And clearly, ifthey need to raise money, that's
not coming from their populacein a socially democratic…
It's a different type ofpopulism and it has a different framework

(01:01:24):
to it. And so, economicnationalism, or regionalism, which
we're clearly seeing rise of,that disrupts trading networks. It
reduces the potential for aframework in which we're using a
Ricardian principle tomaximize the benefits that we're

(01:01:49):
all experiencing from it. TheWest is not unique in breaking this
down. Chinahas beenexploiting it for an extended period
of time. They've been using itto enhance the power of central authorities,
effectively, in China, buyingwealth and influence by exporting
to the rest of the world. It'sunderstandable that the West needs
to break that cycle or wantsto break that cycle. But that doesn't
mean it's going to be easy.
Yeah. And the people may notwant to.
And people may not want toeither. That's the problem.
Mike, what an incredible conversation.
Thanks. So much fun.
Thanks for coming out for thefirst one. I really appreciate it
and I look forward to many more.

(01:02:09):
I look forward to it as well.And I'm honored to have been your
first. Thanks.
Thanks for listening to TopTraders Unplugged. If you feel you

(01:02:30):
learned something of valuefrom today's episode the best way
to stay updated is to go onover to your favorite podcast platform

(01:03:01):
and follow the show so thatyou'll be sure to get all the new
episodes as they're released.We have some amazing guests lined

(01:03:33):
up for you, and to ensure ourshow continues to grow, please leave
us an honest rating andreview. Itonly takes a minute and
it's the best way to show usyou love the podcast. We'll see you
next time on Top TradersUnplugged. Butbefore we go, we just
need to remind you that thispodcast expresses the view of Kynexis,
LLC, and the guests appearingon the podcast as of the date of
its recording, and such viewsare subject to change without notice.
Kynexis LLC and Top TradersUnplugged do not have any duty or
obligation to update theinformation contained herein. Furthermore,Kynexis,
LLC and Top Traders Unpluggedmake no representation to its accuracy
and it shall not be assumedthat past investment performance
is an indication of futureresults. Moreover, wherever there
is a potential for profit,there is also the possibility of

(01:03:56):
loss. Thiscontent is madeavailable for educational purposes
only and should not be usedfor any other purpose. Theinformation
contained in this podcast doesnot constitute and should not be
construed as investment adviceor an offering of advisory services,
or an offer to sell or asolicitation to buy any securities
or related financialinstruments in any jurisdiction.
Certaininformation containedherein concerning economic trends,
performance and other data isbased on or derived from information
provided by independentthird-party sources. Kynexis LLC
and Top Traders Unplugged maybelieve that the sources from which
such information are obtainedare reliable. However,each of Kynexis
LLC and Top Traders Unpluggedcannot guarantee the accuracy of
such information and has notindependently verified the accuracy
or completeness of suchinformation or the assumptions on
which such information isbased. Thispodcast, including the
information contained herein,may not be reproduced, copied, republished
or posted in whole or in partin any form without the prior written
consent of Kynexis LLC and TopTraders Unplugged.

All Episodes

Episode Transcript

Popular Podcasts

Dateline NBC

24/7 News: The Latest

Therapy Gecko

.css-15opob5{left:0;position:absolute;top:0.8rem;} All Episodes

.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}UGO01: Reflexive Markets, Real-Time Risk: The Dawn of the 0DTE Era ft. Mike Green

Episode Transcript

Popular Podcasts

.css-r6mb8g{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:1;overflow:hidden;}Dateline NBC

24/7 News: The Latest

Therapy Gecko

All Episodes

UGO01: Reflexive Markets, Real-Time Risk: The Dawn of the 0DTE Era ft. Mike Green

Dateline NBC