Awkward Pauses: Tariffs, Basis, Leverage

Summary

Money Stuff: The Podcast - Episode Summary

Title: Awkward Pauses: Tariffs, Basis, Leverage
Release Date: April 11, 2025
Hosts: Matt Levine and Katie Greifeld
Produced by: Anna Mazarakis and Moses Ondahm

---

1. Introduction to Tariffs and Market Volatility

[01:12] Matt Levine:
Matt Levine opens the episode by discussing his upcoming vacation and humorously ties it to past experiences where his absence coincided with significant market events, referencing the "Lehman Brothers bankruptcy in September 2008." This sets the tone for the episode, highlighting the unpredictability and volatility of financial markets.

[02:01] Katie Greifeld:
Katie expresses concern about Matt's vacation contributing to potential market chaos but acknowledges the possibility of decreased volatility:
"I mean, we can only hope and pray. But I'm glad you Signposted that this is happening on Wednesday because I mean, this podcast could be irrelevant by."
(02:01)

2. Walter Bloomberg and the Impact of Fake Headlines

The hosts delve into the incident involving Walter Bloomberg—a pseudonymous Twitter account mimicking Bloomberg News—which falsely reported a "90-day pause on tariffs."

[03:47] Matt Levine:
Matt remarks on the uncanny accuracy of Walter Bloomberg’s fake headline:
"It's so weird that it was accurate two days in advance, right?"
(03:47)

[05:10] Katie Greifeld:
Katie narrates the fallout from the fake headline, explaining how major news outlets like CNBC and Reuters propagated the misinformation, leading to temporary stock market surges before issuing corrections:
"They're like a nice dry run. It was a teachable moment that when there is any good news that you're going to see markets absolutely explode."
(05:10)

[09:24] Matt Levine:
Matt contemplates the mechanics behind such market manipulations:
"You can't really monetize it because it's like you're moving all the stocks. But I don't know, there's something really beautiful about doing such an enormous stock manipulation."
(09:24)

The discussion touches on the blurred lines between social media influence and real-life market movements, emphasizing the significant impact a single fake headline can have.

3. Treasury Markets: Basis Trades and Swap Spreads

The conversation shifts to the complexities within the Treasury markets, specifically focusing on basis trades and swap spreads.

[12:23] Matt Levine:
Matt explains the fundamentals of the basis trade and its implications for Treasury yields:
"The basis trade is like you buy a Treasury bond and you sell the futures contract that corresponds to that treasury bond..."
(12:23)

[14:01] Katie Greifeld:
Katie references insights from Thorsten Slack of Apollo, noting the extensive size of the basis trade market:
"There's like $800 billion in it right now."
(14:01)

[16:43] Katie Greifeld:
She further elaborates on the swap spreads, differentiating them from basis trades and discussing their recent significant declines:
"They cratered. I think that they hit at least a multi-year low, if not a record low."
(16:43)

4. Hedge Fund Exposure and Potential Blow-Ups

Matt and Katie express concerns about the high leverage ratios in basis trades and the potential for hedge fund failures amidst current market volatility.

[18:56] Matt Levine:
Matt questions the likelihood of hedge funds sustaining their positions:
"There's a broader question of like, will anyone blow up in this crazy volatility?"
(18:56)

[19:28] Katie Greifeld:
Katie highlights the massive scale of the basis trade compared to previous years, indicating heightened risk:
"I saw some stat that the basis trade is like double the size of what it was in 2020 when it blew up last and still haven't seen any reports of hedge fund blow ups."
(19:28)

This segment underscores the fragility within leveraged financial strategies and the looming threat of significant market disruptions.

5. Leveraged ETFs and Complex Financial Trades

The hosts delve into the intricacies of leveraged ETFs, explaining how certain trades can appear detached from market fundamentals yet yield consistent returns under specific conditions.

[20:03] Katie Greifeld:
Katie introduces the topic of leveraged ETFs, addressing listener feedback:
"Can we just say one thing? This was Matt's idea. Matt wanted to talk about leveraged ETFs this episode."
(20:03)

[22:35] Matt Levine:
Matt breaks down the mechanics of a specific leveraged ETF trade:
"These ETFs are creating volatility. They're trading with someone on the other side who is kind of a market maker and selling them the volatility that they're giving people."
(22:35)

[24:19] Katie Greifeld:
Katie discusses the practical challenges and costs associated with such trades, referencing insights from Rob Arnott of Research Affiliates:
"He said that 2024's gain for shorting again, both long and inverse triple leveraged ETFs was around 13%. Half of that went to borrowing costs."
(24:19)

This section highlights the sophisticated and often risky nature of leveraged financial instruments, emphasizing their potential for both high returns and significant losses.

6. Final Thoughts and Upcoming Content

As the episode concludes, Matt and Katie briefly touch upon upcoming content and the logistics of the podcast's schedule.

[25:56] Katie Greifeld:
Katie acknowledges Matt’s upcoming vacation and teases future episodes:
"But fear not, fear not."
(25:56)

[26:22] Matt Levine:
Matt mentions the availability of a Mailbag episode during his absence:
"And that was the Money Stuff podcast. I'm Matt Levine."
(26:22)

---

Notable Quotes

• Matt Levine:
  "It's so weird that it was accurate two days in advance, right?"
  (03:47)

• Katie Greifeld:
  "We can only hope and pray. But I'm glad you Signposted that this is happening on Wednesday because I mean, this podcast could be irrelevant by."
  (02:01)

• Matt Levine:
  "We have twisted the world where now it's like you sit down and you write a consequential truth social post and that's how tax policy gets made."
  (06:22)

• Katie Greifeld:
  "He described it as a slow, boring money machine, which I find really charming."
  (22:16)

• Matt Levine:
  "Someone's got to blow up."
  (19:56)

---

Key Takeaways

• Market Volatility: The episode emphasizes the inherent unpredictability of financial markets, especially in the context of political decisions like tariff adjustments.

• Influence of Social Media: Fake headlines, particularly those mimicking reputable news sources, can have significant short-term impacts on market behavior, highlighting the potent role of social media in modern finance.

• Treasury Market Complexities: Basis trades and swap spreads play a crucial role in Treasury markets, with high leverage ratios posing risks of hedge fund failures during volatile periods.

• Leveraged ETFs Risks: While leveraged ETFs offer opportunities for amplified returns, they come with intricate risks and costs, making them suitable only for sophisticated investors with a deep understanding of their mechanics.

---

Conclusion

In this episode of Money Stuff: The Podcast, Matt Levine and Katie Greifeld navigate the tumultuous waters of tariffs, market manipulations via social media, and the complexities of Treasury and leveraged ETF markets. Through insightful discussions and expert analysis, they shed light on the intricate mechanisms that drive financial markets, offering listeners a comprehensive understanding of current economic challenges and strategies.

For more in-depth analysis and future episodes, subscribe to the Money Stuff podcast wherever you listen to your favorite shows.

Transcript

[Katie Greifeld]

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[Matt Levine]

News hello and welcome to the Money Stuff podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine and I write the Money Stuff column for Bloomberg Opinion.

[Katie Greifeld]

And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

[Matt Levine]

Doing this off script, who am I?

[Katie Greifeld]

I forgot for a moment. What do I do? Matt, it was funny last week we.

[Matt Levine]

The all tariffs episode. Yeah, the monkey hand curled or whatever.

[Katie Greifeld]

Here we are.

[Matt Levine]

Here we are. It's an all tariff episode. Katie, I'm going on vacation next week.

[Katie Greifeld]

Yes, you are.

[Matt Levine]

Service for the Money Stuff podcast may or may not continue uninterrupted, but I'm going on vacation. I mention that because things have been a little crazy in the financial markets and I do have some history of things being crazier when I'm on vacation. Someone like, did a substack report about whether financial markets are more volatile when I'm on vacation. Certainly Elon Musk seems to be a little bit more volatile when I'm on vacation. And one time when I was an investment banker, I went on vacation and it was September of 2008 and the Lehman Brothers filed for bankruptcy, like first day of the year.

[Katie Greifeld]

Oh my God.

[Matt Levine]

Yeah, so we're recording this on Wednesday. We are 20 minutes before we started recording. Turned out that the tariffs were a joke.

[Katie Greifeld]

I mean, I shuddered to think what fresh hell awaits us next week when you are on vacation.

[Matt Levine]

I know, but I think that what I'm saying is there's some chance that it's no fresh hell. It's some chance that all of the tariff excitement was this week. Donald Trump announced There's like a 90 day pause on the tariffs.

[Katie Greifeld]

And like, that's so naive.

[Matt Levine]

Who's gonna remember any of this in 90 days? I know, it's pretty naive, but still, there's some chance that next week will be less crazy than this week and some chance it'll be much crazier.

[Katie Greifeld]

I mean, we can only hope and pray. But I'm glad you Signposted that this is happening on Wednesday because I mean, this podcast could be irrelevant by. But at least what we know right now is that Trump said that he is pausing tariffs for 90 days on countries that didn't retaliate. That means China, who knows, right?

[Matt Levine]

But it seems to mean the tariffs are paused. Except on China.

[Katie Greifeld]

Yes, yes. In fact, he raised tariffs to 125%.

[Matt Levine]

And by the way, tariffs are not paused on other countries. They're like 10%. I don't understand it.

[Katie Greifeld]

Yeah, well, let's.

[Matt Levine]

The reciprocal tariffs, who cares?

[Katie Greifeld]

Let's not get too deep into the details here, but this is interesting. We were going to talk about Walter Bloomberg who sort of actually gave us a. No relation to Bloomberg News, but kind of gave us a dry run of what we saw unfold in the markets because he sent that tweet, that headline, which turned out to be fake, but it was written in Bloomberg News style about a 90 day pause, I believe it was on Monday. I was of course on live television, as I often am during these events that ended up being fake, but CNBC and Reuters ran with it and then had to issue corrections. But stocks surged after that. They then came back after it was revealed that that was not based in reality. And again, it was like a nice dry run. It was a teachable moment that when there is any good news that you're going to see markets absolutely explode. And that's what's happening, at least for right now.

[Matt Levine]

It's so weird that it was accurate two days in advance, right?

[Katie Greifeld]

Yeah.

[Matt Levine]

It'd be one thing if he was like, oh, towers are off. But it's the same, it's the real thing. Sort of.

[Katie Greifeld]

Do we want to talk about where the 90 day idea came from?

[Matt Levine]

Are you going to tell me where it came from?

[Katie Greifeld]

Friend of the show, Bill Ackman. At least he was one of the. I think he's the first person I saw who floated that idea, tweeting over the weekend that Trump should do a 90 day pause because it takes a long time to negotiate deals and move manufacturing, et cetera.

[Matt Levine]

Yeah, I mean, look, sure, to the extent anything makes sense, it makes sense. But I do love that, like, it's not quite that Walter Bloomberg pseudonymous Twitter.

[Katie Greifeld]

Account who tweets, I want to know him so bad.

[Matt Levine]

It's not quite that he made this up. It's like someone asked Trump advisor Kevin Hassett, this is the thing, like with the Trump administration, you can ask anything and they'd be like, yeah, maybe. So they asked Hazlitt what about a 90 day pause? And he said something like no, but you could sort of read it to.

[Katie Greifeld]

Mean maybe he made a noise and then he said, er, Bill.

[Matt Levine]

Yeah.

[Katie Greifeld]

You know, I think that the President is going to decide what the President's.

[Matt Levine]

Going to decide, which is not exactly a no.

[Katie Greifeld]

It's not a no.

[Matt Levine]

More of a no than a yes.

[Katie Greifeld]

But, you know, but boy, it doesn't exactly translate into the headline.

[Matt Levine]

You wouldn't send an all caps headline for that. Or if you would, it would be like Trump is going to do what Trump is going to do. It's not a very newsable.

[Katie Greifeld]

Which you could send at any time at any moment. So, yeah, it doesn't exactly translate into the headline that Walter Bloomberg sent. I love this only because, I mean, Twitter is not real life. But this is a moment where Twitter briefly became real life.

[Matt Levine]

But like, by the way, as far as I can tell, you know, we're recording this at like 2:00 on Wednesday. As far as I can tell, the only indication that the tariffs are paused is a truth social post.

[Katie Greifeld]

That's true. That's true. Actually, I saw Lutnicks.

[Matt Levine]

It's not like things get like, you know, it's not like there's, you know, how a bill becomes a law. It's like there's truth social. Right?

[Katie Greifeld]

Yeah. Which is so weird. I want to read you something. I thought this was fantastic. So Commerce Secretary Howard Lutnick posted Scott Bessett and I sat with the President while he wrote one of the most extraordinary truth posts of his presidency. Most extra, not like, you know, sat down with his scroll and his quill and like penned out like this, you know, poetry, like Gettysburg Address. It was a truth social post. So, I mean, that is where policy happens on social media. Now.

[Matt Levine]

We'Re not going to edit out me just staring like Leo.

[Katie Greifeld]

This is why it needs to be a video podcast. Matt's eyes just sort of went cold and we stared at each other.

[Matt Levine]

I mean, this is not interesting, but I've written this week about how the Constitution of the United States says that all tariff power is in Congress and the whole set of rules in the Constitution, the actual Constitution, about how revenue raising laws need to be passed, where the House has to initiate them. It's like a whole thing. And we have twisted the world where now it's like you sit down and you write a consequential truth social post and that's how tax policy gets made. It's pretty weird, man. It's pretty weird.

[Katie Greifeld]

It is.

[Matt Levine]

This is going to be the awkward pauses episode of I want.

[Katie Greifeld]

To talk about Walter Bloomberg a little bit more. We know that he's French.

[Matt Levine]

Oh, we do.

[Katie Greifeld]

I think at one time he posted a screenshot that his browser was in French or something, and that was interesting.

[Matt Levine]

I like that you pay as much attention to Walter Bloomberg as Walter Bloomberg. I'm going to assume pays attention to Bloomberg.

[Katie Greifeld]

I mean, I just love anyone who is so committed to the game and he is so committed to the game, posting screenshots, or rather just posting terminal headlines.

[Matt Levine]

Right. And one thing I was thinking about is like, what an amazing long game it would be to spend years just posting all cap terminal headlines for people who don't get the terminal and building up a following of people who want to follow Bloomberg terminal headlines in real time for years and years and years of just doing that consistently all the time. And then one day, one fake Bloomberg headline to move the market by $2.5 trillion. What a great trade. You can't really monetize it because it's like you're moving all the stocks. But I don't know, there's something really beautiful about doing such a enormous stock manipulation is a harsh term, but, you know, you manipulated the stocks.

[Katie Greifeld]

Yeah. I mean, I'm sure you could find some way to monetize it.

[Matt Levine]

Oh, sure, you can just buy some stocks. But it's like you can't. Like, you know, you can make $2.5 trillion by moving the market by $2.5 trillion.

[Katie Greifeld]

Yeah.

[Matt Levine]

Remember when Bitcoin spot ETFs were approved?

[Katie Greifeld]

Yeah. I'll never forget.

[Matt Levine]

And someone tweeted a fake headline about them being approved.

[Katie Greifeld]

Yeah, that was nuts.

[Matt Levine]

Eight hours before they were approved. And it's like everyone knew when the SEC was going to act and someone tweeted that they got approved a few hours earlier and there's a little spike in Bitcoin. And it seemed to be some sort of attempt to manipulate the market, but it was so weird. You never knew it was going to happen. And it did happen a few hours later. This is not like that. This was, I think, more or less a genuine surprise when Trump really did the thing that he was rumored to do two days earlier. But I don't know.

[Katie Greifeld]

Yeah, that's true. I mean, actually he did post on Truth Social earlier on Wednesday. Now is a good time to buy what is amazing.

[Matt Levine]

What an amazing thing to do.

[Katie Greifeld]

Turns out that was the signal. And I'm so happy that I have this timestamped because I said on TV this Raises the possibility that actually the Trump put does exist. He's clearly watching the stock market and sees it puking right now. And then our hours later comes out with this extremely stock market friendly headline.

[Matt Levine]

I know, but isn't it so weird because if you listen to the things that the Trump team say, there are things like the tariffs will be good for America in the long term. Right?

[Katie Greifeld]

Yeah.

[Matt Levine]

And then to pause the tariffs, you would think that saying this is the time to buy means because the market is incorrectly reacting to the glorious future ahead of us because of these tariffs. But in fact it means because I'm walking back to tariffs in a few hours. Or maybe it doesn't mean that.

[Katie Greifeld]

Who knows, who knows, who knows? He did sign it DJT or whatever. I can't believe we are actually doing an episode on tariffs.

[Matt Levine]

It is disappointing.

[Katie Greifeld]

Anyway, so Walter Bloomberg, so I think at least the New York Times, but maybe too the Wall Street Journal, DM'd him and he answered and he sort of deconstructed how he got there. He said he saw some other account, tweeted, yeah, yeah, the market was responding. So then he ran with it.

[Matt Levine]

So this is like, this is how everything works, right? Because then news stations were reporting it because they were like, the market is moving. Why is the market moving? Well, is this tweet so we have to report on the tweet? I don't know. That's a reasonable thought.

[Katie Greifeld]

It's a daisy chain.

[Matt Levine]

Yeah. Yeah, but it's really like it's, you know, Right. It's like this little snowball from like one person says a thing and if market moves on that, then someone else will say it because it's like. Yeah, it's often very hard to explain market moves. And so people look for whatever they can. And like one crisp tweet explaining the market move is like a useful thing. Although here, like here clearly was the explanation.

[Katie Greifeld]

Can we have Walter Bloomberg on the show?

[Matt Levine]

I hope so.

[Katie Greifeld]

I'm going to DM him.

[Matt Levine]

Yeah, let's do it.

[Katie Greifeld]

I wonder if his DMs are open. I can find out. I can look at my phone right now.

[Matt Levine]

There's a terminal headline like Walter Bloomberg, open your DMs to Katie.

[Katie Greifeld]

I'm just going to fill caps and put a little asterisk ahead of it so that he'll think it's a Bloomberg headline. So you're saying it's hard to explain market moves. It's nice to have something crisp to point to. Shall we talk about what's going on in the treasury market, I guess. Yeah. A really satisfying bogeyman is just pointing to the basis trade to explain why bond yields have been blowing out even though everyone's worried about a recession. And up until an hour ago, stock markets had been pretty much flirting with bear market correction territory. You would expect Treasuries to rally and bond yields to fall. That's not what has been happening, Matt.

[Matt Levine]

Yeah. You can tell various fundamental macro stories about how the tariffs would cause treasury yields to rise and stock markets to fall. Right. The story that I've been telling is the goal of the tariffs is to have foreigners buy more U.S. goods and fewer U.S. financial assets, which you would think would lead to losses in U.S. financial assets, such as stocks and also bonds. But it is also the case that the basis trade exists and people do like talking about the basis trade. And one reason people like talking about the basis trades is I've been thinking all week there's been huge moves in asset prices driven entirely by economic fundamentals and government policy, but huge moves in asset prices. Every day you wake up and you're like, wow, there's been huge moves in asset prices. What hedge fund is going to blow up? Because when there are big fundamental moves, someone blows up. And so you think a lot about contagion and deleveraging. And if you think about contagion and deleveraging and you've been worrying about the basis trade for years and also know that the basis trade is run at like 100 to 1 leverage ratios, then you might think maybe someone is blowing out of a basis trade.

[Katie Greifeld]

Yeah, it's natural that you would think that. Also, I think it was Thorsten Slack over at Apollo who had a note out this week saying that he estimates the basis trade. There's like $800 billion in it right now. It makes sense why you would reach for that given all the things that you just laid out. But I think also that people reach for it because it's hard to prove. We haven't seen any reports of a hedge fund blowing up.

[Matt Levine]

I really scour these reports because I'm very interested in this question. And there's definitely stories like people are getting some margin calls, some hedge funds are doing some selling, but no one's like, this fund liquidated all its positions and shut down. There's no real dislocation. Scott Bessen said this morning something like. Or said sometime this week something like, this is a uncomfortable but normal deleveraging.

[Katie Greifeld]

Which you would expect him to say that.

[Matt Levine]

I know, but it also seems correct so far.

[Katie Greifeld]

Yeah, well, there's two trades that we're watching. It's the basis trade, but also it's swaps. Like what's going on with asset swaps? There was a great piece from Edward Bolingbroke and I kind of lumped these together. But then I was reading a Wall Street Journal article that explained that these are two similar but different trades. That's all I said.

[Matt Levine]

Swaps?

[Katie Greifeld]

Yeah, like swap spreads.

[Matt Levine]

Right. They're related trades because on the one side of either trade you have owning physical treasury bonds, and on the other hand you have some sort of interest rate derivative. So with treasury futures, it's like the basis trade is like you buy a Treasury bond and you sell the futures contract that corresponds to that treasury bond Swap spreads are like you sell a interest rate derivative that basically moves with sofr, but it's, you know, it's kind of like the same, like it's like an unfunded long term interest rate contract.

[Katie Greifeld]

Right.

[Matt Levine]

And there again, like, there's been a trade there where people think like Treasuries will do well relative to the derivative for whatever reason. The reason has to be something like people will have better funding to buy Treasuries. And so like one of the reasons for the basis trade and the swaps trade is like a belief that Trump would deregulate banks in such a way that banks would be more interested in using their balance sheet to hold actual Treasuries. And so therefore demand for physical Treasuries would go up relative to demand for interest rate derivatives, which don't require as much balance sheet. And so banks would buy more Treasuries. And so one reason to do a basis trademark of some form is because you think Treasuries will go up relative to futures. And so you are betting on someone buying the Treasuries from you. One thing that's happened this week until today is for whatever reason, people are less interested in buying Treasuries from you. Some of that has been baked in for several weeks of the projections about banks buying a lot of Treasuries because of regulation easing up don't seem to be coming true. And then some of it is whatever fundamental events went on this week where people didn't want to buy Treasuries.

[Katie Greifeld]

Yeah, I mean, the swaps trade, as I understand it, that peaked in February. So that's been coming off the boil for a while.

[Matt Levine]

Yeah, I think the futures trade has too, a little bit. But yeah, the swap spreads collapsed.

[Katie Greifeld]

Yeah, they cratered. I think that they hit at least A multi year low, if not a record low, but yeah, I don't know. I wonder where this goes in this new world or order.

[Matt Levine]

I don't know. I don't know.

[Katie Greifeld]

I will say that we were talking about the violent stock reaction to the upside to the 90 day pause. You saw shortened yields in the treasury market rise pretty sharply. The long end didn't react. Of course, I want to timestamp this. We're talking on Wednesday, mid afternoon. But I don't know, I hear what you're saying, that a product of these policies would just be people don't want to own US assets in general, but at least Treasuries, the long end of the treasury curve, had the narrative that, oh my God, we're worried about the economy, we might as well buy long end Treasuries as a safe haven. But that obviously didn't happen this week.

[Matt Levine]

Yeah, I mean there's a lot of different markets for it. Right. And to the extent some of the market for long end Treasuries is foreign buyers, you can imagine less demand from them.

[Katie Greifeld]

Yeah, I guess it was expected though. I mean, I've been tweeting about the treasury market all week and I've had a lot of like tinfoil hats about this is China dumping Treasuries. We knew this was going to happen. I guess it was just expected that, that haven impulse, economic hard times, you buy Treasuries, that's your muscle memory, overwhelmed any overseas selling that you would see. Because China and Japan have been selling Treasuries for years.

[Matt Levine]

Yeah, I wrote about that today, Wednesday. The muscle memory stuff is so interesting. In previous episodes of Problems for the Credit of the United States, people are like, better buy Treasuries. It's not obvious. That would always last forever. Yeah, you might like have some development that made you think, well, if like the demand for US Financial assets goes down, then I should sell Treasuries rather than buy them.

[Katie Greifeld]

Yeah, I don't know. We'll see. Mortgage rates are still really high, so I'm sad about that. Is there anything else to say about the basis trade at this moment? Seems scary.

[Matt Levine]

Yeah. I mean like, there's a broader question of like, will anyone blow up in this crazy volatility?

[Katie Greifeld]

Yeah.

[Matt Levine]

In general, the theory is that banks are supposed to make money during periods of crazy volatility, but that's in aggregate. And then one person should blow up because they just get the crazy volatility wrong. Someone was like, oh, the market is so much further to go down and they position Themselves really short. And then there was this huge rally on Wednesday afternoon. Yeah, someone's got to blow up.

[Katie Greifeld]

Come on. I saw some stat that the basis trade is like double the size of what it was in 2020 when it blew up last and still haven't seen any reports of hedge fund blow ups. So that'll be fun.

[Matt Levine]

Yeah, that'll be not an Alt Harrif episode.

[Katie Greifeld]

We do have to talk about ETFs.

[Matt Levine]

About ETFs.

[Katie Greifeld]

Can we just say one thing? This was Matt's idea. Matt wanted to talk about leveraged ETFs this episode. Seen some comments on Spotify. I read all the comments. Someone said that this has turned into a boring ETF podcast. It's not my fault, man. This was Matt's idea, at least for this week.

[Matt Levine]

This is not a boring etf. This is.

[Katie Greifeld]

The other ones were.

[Matt Levine]

No, look, some.

[Katie Greifeld]

Absolutely.

[Matt Levine]

This is the defiance Microstrategy double short hedged etf. Its trade is it takes your money, it goes short a two time levered microstrategy ETF and it also goes short a two times levered inverse microstrategy ETF. So it is short two levered ETFs, one long, one short. So net it's short long microstrategy and short short microstrategy, each one doubled. So it's nothing, right? Yeah, it is neither long nor short microstrategy. All it is is it is short. The weird structural feature which we've discussed more than once on this podcast. The weird structural feature of levered ETFs, which is that they track two times the move in microstrategy each day. But if you hold them for more than one day, they fail to track two times the move in microstrategy and they get weird. And much of the time the way they get weird is that they have some slippage where they get less than the expected return. And so if you're on the other side of that, you're getting more than the expected return, basically. And so this thing has a backtest that makes 13% or something with no market risk, no correlation to anything else. Just like a weird anomaly in the ETF market.

[Katie Greifeld]

Yeah, this is a real Frankenstein. I mean, as you laid out leverage ETFs both long and short, they are one day only funds, especially for some of the crazier ones. That's really the only realistic holding period. I am a little bit salty because I wrote about a similar trade in my newsletter. It's called ETF IQ about Rob Arnott of Research Affiliates.

[Matt Levine]

You did?

[Katie Greifeld]

He did. Does this trade in his PA on the side. He told me that he likes to short both leverage long and inverse ETFs. And he described it as a slow, boring money machine, which I find really charming because I mean, you would think that you would have to have a strong stomach to do this to be shorting leveraged ETFs. But I mean, as you just said.

[Matt Levine]

Now, if you short both sides. Exactly, you probably should have a strong stomach because it's a boring money making trade for a reason, which is that it has some probability of blowing up in your face, right?

[Katie Greifeld]

Yeah.

[Matt Levine]

And the way it blows up in your face is like, basically the way these ETFs work is like they rebalance each day. And so the long one, like every time the stock goes up, it has to buy more stock. Every time the stock goes down, it has to sell more stock. And so it is like volatility amplifying.

[Katie Greifeld]

Yeah.

[Matt Levine]

And if the stock bounces around a lot, then it's constantly buying high and selling low. And like bleeding. People call it like volatility decay. Like they're bleeding like value each time they buy high and sell low. But if the stock keeps going up, you're just compounding that. And so it's, in fact, if the stock goes up every day, you get more than two times the return on microstrategy because you keep buying into it. And so similarly, if you do this trade and the stock moves in one direction for a long time, you're no longer fully hedged. One of your legs does much better than the other leg. So it's a risky trade. It's effectively a market making trade. These ETFs are creating volatility. They're trading with someone on the other side who is kind of a market maker and selling them the volatility that they're giving people. We talk about them so much on this podcast. On this podcast, but people talk about in general. They're sort of a known thing that people kind of make fun of. And so if you're like a second level sophisticated retail investor, it's like, I know that people make fun of these double levered ETFs. How do I get on the other side of that? It's like, well, there's an ETF for that too. People like Rob Arnott are like, how do I get on the other side of that? And you do the trade. But then someone's like, how do I package be on the other side of that and sell it to more retail investors.

[Katie Greifeld]

It's a great trade. Well, something that Rob and I talked about is that yes, it's a great trade, but the borrowing costs can be pretty punishing. He gave me some details on his returns from doing this and I wrote this at the end of March. So things have changed. But he said that 2024's gain for shorting again, both long and inversed triple leveraged ETFs was around 13%. Half of that went to borrowing costs. For the short positions. You add in about 5% for collateral and the return was about 12%. But that's with zero beta, zero correlation to just about anything.

[Matt Levine]

That's a good trade.

[Katie Greifeld]

Not a brilliant strategy. Not of costs, but fun and low risk. So it's fun.

[Matt Levine]

It's fun.

[Katie Greifeld]

Yeah.

[Matt Levine]

It's one thing for rapper not to do it. I like the idea of you look at the landscape of ETFs and you're like, what ETFs should people get mad about? I'm going to do the opposite of them. It's like this is the very arcane version of that. But there were anti Cat Wood ETFs where it was like, what are people negative about? I'm going to sell an ETF that packages that negativity. This is like people are negative about double levered ETFs. I'm going to find a way to make money on that.

[Katie Greifeld]

Here's the other side. Yeah, I'm interested to see these launch. It's just a filing so far. Rob did also say to me that anyone who buys a triple leveraged ETF is crazy if they don't lend it out. Because he did mention that there's a relatively short supply of these leveraged ETFs that are available for lending. Which is interesting.

[Matt Levine]

Yeah, but like everybody who buys a triple levered ETF is doing it in some sort of retail account. And some of them may not be aware that they can lend it out or they maybe their broker is lending.

[Katie Greifeld]

It out for them, probably.

[Matt Levine]

So as I mentioned, next week I'm on vacation and so I will not be recording a money soft podcast.

[Katie Greifeld]

But fear not, fear not.

[Matt Levine]

In approximately 15 seconds we'll be recording a Mailbag episode which will air next week.

[Katie Greifeld]

Mailbag.

[Matt Levine]

And that was the Money Stuff podcast. I'm Matt Levine.

[Katie Greifeld]

And I'm Katie Greifeld.

[Matt Levine]

You can find my work by subscribing to the MoneySluff newsletter on Bloomberg.com and.

[Katie Greifeld]

You can find me on Bloomberg TV every day on open interest between 9 to 11am Eastern.

[Matt Levine]

We'd love to hear from you. You can send an email to moneypodloomburg.net Ask us a question and we might answer it on air.

[Katie Greifeld]

You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

[Matt Levine]

The Money Stuff podcast is produced by Anna Mazarakis and Moses Ondahm.

[Katie Greifeld]

Our theme music was composed by Blake.

[Matt Levine]

Maples, Brendan Francis Newnham is our executive.

[Katie Greifeld]

Producer, and Sage Bauman is Bloomberg's Head of Podcasts.

[Matt Levine]

Thanks for listening to the Money Stuff podcast. We'll be back next week with more stuff.