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- [00:00]
Charlie McElligott
This is an iHeart podcast.
- [00:05]
Tracy Alloway
At PGM. Our global perspective today unlocks investment opportunities tomorrow. Our 1400 investment professionals provide global expertise and local insights to help you navigate the complexities of a changing world. We offer a diverse range of active strategies across public and private markets to help you identify opportunities and and achieve your long term goals. PGM Our Investments shape Tomorrow Today you're doing all the right things like eating clean and staying active. But nearly all of us are still missing a key Minerals concentrate's daily mineral powder helps restore what your body's not getting, supporting mood, energy immunity and nervous system balance. It's made from ionic trace minerals your body actually absorbs and comes in three delicious flavors, Blue raspberry, Blue Hawaiian and Blue acai. Because your body can't make minerals and modern food and water don't supply enough, start with minerals, start with concentrates. Find it now@traceminerals.com join us in Seattle July 14th and 15th for Bloomberg Green two days of powerful conversations and meaningful connections. We'll explore what's next in the climate, economy, clean tech policy and greener living. Featured speakers include Jane Fonda, Brian Gellert and Vinod Khosla. The title sponsor is Amazon. Official airlines are Alaska and Hawaiian Airlines. Learn more at BloombergLive.com GreenSeattle that's BloombergLive.com GreenSeattle Bloomberg Audio Studios Podcasts Radio News hey there odd lots Listeners, you are about to hear a very special episode of the podcast. This was recorded live at our June 26 event in New York. We are talking with Charlie McElligott. He is of course Managing Director and cross Asset Macro strategist for the Global Markets Americas business over at Nomura. We talked to him about volatility in the market. What else?
- [02:21]
Joe Wiesenthal
Yep, it's been a kind of extraordinary couple of months with stocks basically at all time highs despite so much going on in the what actually explains what's happening. Charlie does a pretty good job. So take a listen. Thank you so much Charlie for being here.
- [02:36]
Charlie McElligott
Awesome to be here. Awesome to see you guys.
- [02:37]
Joe Wiesenthal
So I didn't actually see where the market closed today, but like we're pretty close. Like either we're at record highs or very close to it. I didn't actually see but it's crazy to me all that's happened in 2025 and like we're sitting here at all time highs. It's not intuitive. You have to admit.
- [02:54]
Charlie McElligott
It's kind of weird the you know, I think the message I'm trying to remember the last time I was with you guys but probably the message I was communicating at that time was the, the fixation and kind of the dooming with the left tail scenarios.
- [03:09]
Joe Wiesenthal
Yeah.
- [03:10]
Charlie McElligott
And as so often is the case when people are not incentivized to see the world burn, which might be debatable to some, sure. But and you start seeing, especially with regard to negotiating tactics and things like that, where you start getting that not quite as bad as feared scenario. Oftentimes there's an impact, certainly with the mechanical stuff that we so often talk about and you really underprice the less bad outcome. And there's a mechanical impact, there's a lot of volume distribution stuff and it creates second order impact, second order flows. I think the most fascinating two points that I would say outside of the mechanical flows that we talk about and the volatility component of this is two things. I think back to 2022 where we had our first inflation driven macro bear case. We just started the tightening cycle. I think there was nine or 10 months in a row of inflation upside surprises with CPI and you know, the macro bear case for equities at that point was this earnings recession where due to this price shock it was going to impact consumption, top line sales go lower and you know, so on and so forth. What ended up happening is ironically because of the health of the consumer and tight, tight, tight employment with wages at 40 year highs, you ended up actually getting a dynamic where the corporate world operates on aggregate consumption. They operate in a nominal GDP world and that inflation perversely for the bears, was the earnings catalyst and all those folks got stopped out in 2023. There is an element of that still to this day right now as it relates to earnings, even though nominal GDP is in a different place to a certain extent still kind of 5% ish. But the other point too is, is that as it relates to the CapEx spending uncertainty story, right? If corporates don't know what they're supposed to do with their cash because of the, you know, the, the kind of range of outcomes with regards to, you know, where they, where these, you know, tariffs are going to end up the sand in the gears of the global economy. Well, the thought was, of course, you know, if corporates don't know what to be spending on and consumers are feeling that impact as well, you're going to get this eventual drag with regards to consumption. You're going to have corporates in a bad place. You either lose the top line sales because consumers are paying through the roof or you have to absorb those Costs, your margins go lower. But what corporates have instead done have taken authorized buybacks to all time highs. So we're not spending on, you know, R and D, we're not spending on hiring or building that new plant. We're going to buy back more stock than ever before, year to date. And that, you know, if you look at corporate buyback flows as a source of demand for equities over the past 10, 15 year period, it's a magnitudes 6, 7, 8 times magnitude's largest source of demand. So you've had these two kind of unintuitive dynamics in the market that have actually kept us higher on top of all those kind of volume scaling things that we like to talk about.
- [06:22]
Tracy Alloway
All right, so the other thing that's happened is people are back to actually selling volume. So basically betting that you know, things will stay relatively calm. Why is that happening? It seems like a weird time to bet. There's so many headlines.
- [06:36]
Charlie McElligott
Yeah, I think, I think selling volume has become a new form of fixed income in a world where bonds are no longer a risk free asset. Now that can go wrong so many ways. In this case the proliferation of like premium income overriding strategies within the ETF world, exotic structured products and kind of, you know, more I would say, you know, complicated, you know, volume selling strategies like dispersion, things like that, the number of volume suppliers out there, very short dated, it gets dealers stuffed on gamma, I always like to say. And in that sense, you know, particularly with the amount of short dated volatility selling, you know, when dealers are stuffed on gamma, it compresses the distribution of outcomes. Right. If the market's moving higher, you're selling into that market's moving lower, your shock absorbing. The thing that I would say back to that point about selling volatility as some sort of kind of fixed income product back in 2022 with that tightening cycle and all the bear dooming with regards to we're going to break something such a powerful ultimately over 500 basis points of hikes. The trick was that okay, the Fed is telling you to be short assets, you need to be able to sleep at night. Cash was an asset again. So you know, market was down 30 some percent, bonds were down simultaneously 64% sell off.
- [08:05]
Joe Wiesenthal
That much.
- [08:06]
Charlie McElligott
Yeah. S and P and NASDAQ was you know, you know, even bigger than that obviously because remember it was like this tech centric growth kind of unwind. But what ended up happening was that you know, the Fed was trying to create a negative wealth effect. We've talked about that before because they couldn't impact supply side disruption, they could only impact demand side. And by telling you to be in cash, you could sleep at night. Well, guess what? The next year you missed a 50% rally in the NASDAQ. So what really smart marketers have done is say, well I'm going to give you price appreciation of equities just capped and off the back of that too, we're going to sell out of the money calls against this and you get this like little premium income thing and it's, you know, they're never telling you you're shorting options. The good news is with a lot of these products nowadays, like you're not shorting crash, you're not shorting downside. But also too sometimes they're contributing to their own demise. In this kind of grinding market where you're stopping into the calls that you've been selling, there's so much going on.
- [09:03]
Joe Wiesenthal
I totally forgot that we had such a big sell off in 2022. I totally forgot that there was like a 50% like all of these things like oh, that actually happened. Zooming out big picture like it seems objectively true. You've been trading a long time. Like there are so many headlines these days and they're always changing and there's just so much to talk about. What is the trading like and how, you know, does it feel different these days when there's just, we're just facing this constant wall of news. Is there something that changes in the sort of complexion of how people trade?
- [09:36]
Charlie McElligott
Well, there's certainly different like risk appetite regimes, risk sentiment regimes, you know, where you know, there was a period of time, I remember in those early discussions on like zero DTE options where generally speaking at that time, coming off the back of like you know, meme coins and cos and that whole like YOLO phenomenon, you know, the speculative excess peak of that kind of 2021, you know, stimmy check driven madness. That was a very different world where people were kind of like you know, buying, you know, optionality, creating gamma squeezes, the Reddit boards, Wall street bats, all that jazz. Now that you're kind of settling into this world, we've been conditioned, we a condition for 15 years of moral hazard, right? Central bankers intervening, obviously politicians now intervening. And this is like party agnostic with regards to the fiscal stimulus where it has become conditioned into traders, both retail and institutional. This dynamic where this is the expected behavior, you have to buy, the buy the debt reflex, right? So you're constantly trying to triangulate and kind of sanity check yourself with regards to this reflexivity. And August 5, August 2, August 5 last year were really interesting experiment because August 2 we finally got that first glimpse at what our market will eventually do this time again huge VAR event within the fixed income space certainly. And then trickle down into all asset classes from there. It was the first time that labor looked like labor was cracking. And we had that four Z score miss and the U rate and two and a half Z score miss and the non farm payroll print. And that was after a week of already soft labor data. And that was the one holy moment once the consumer goes, this whole economic miracle goes. And what that then created was this massive dynamic where at the end of that day everybody said, okay, risk is dicey right now. There's going to be a lot of deleveraging off the back of this realized volatility shock. I want to go home short delta, like short the market. But I want to be short volume because volume squeezed volume exploded that day. That was both clients and options dealers. The problem was because of all these second order impacts and deleveraging impacts and was that Nikkei on Sunday night opened down 12%. So that short volume position was going to be so smart because we always reflexively sell that and you've got to monetize your hedges in like two hours before people start leaning in all that volume supply. The back test says the higher volume goes, the more I have to sell and that's that. Sell the Volt by the dip. Well those people got their arms blown off, you know, by 8 in the morning. And that was the famous like Vix index, right? Which is a theoretical calculation based on like fake bid and offers from dealers. Basically, you know, printed 63 or whatever it was not an actual ticking price. But then the VIX future was traded at 38, which is like realistic. But you know, those are those scenarios where that conditioning is how things go really wrong. Because you think you got it figured out and you don't. The most recent example of course has been, you know, this, this trump collar dynamic where the market finally figured out what was the human Vivix as I call him, you know who, who you know, the volatility.
- [12:52]
Tracy Alloway
You're the only one who calls it.
- [12:53]
Joe Wiesenthal
Yeah, you're the only one.
- [12:54]
Charlie McElligott
I need it on my coffee mug. You know, I have these like Nomura coffee mugs with my favorite sayings. Like human V vics would have been a good one to trademark.
- [13:01]
Joe Wiesenthal
We'll trade you an odd lots mug for a human V Vic. Nomura that's done. That's not.
- [13:06]
Charlie McElligott
But like, you know, he hasn't. He views himself as having a mandate to disrupt the status quo of 80 years of PAX Americana. Like, and that's clearly like the approach here, right? So the prior distribution of outcomes is now out here. The quick learning from the market, however, after these initial series of volume shocks was that, okay, we found a pain point. You know, markets sold off to such an extent and the interest rate volatility, particularly in the long end, not just stocks. All right, you know, we've activated the Trump put. However, upon those compromises, the market rallies back. It increases his, you know, willingness to then lean back in from a negotiating ploy. So he's basically selling the call to fund the put. And when you have that coloring effect, you get the opposite dynamic, right? You get this realized volume compression, which is frankly a large part of what the past two months has been. So you're constantly reassessing how everybody thinks you're gonna think, which is like you're anticipating the anticipators.
- [14:20]
Tracy Alloway
The latest PJIM real estate outlook is out now.
- [14:24]
Charlie McElligott
So 2025 to be an attractive vintage year. So based on history, based on historical cycles. In fact, the opportunity for capital value growth to be stronger is obviously a key theme we're going to be focusing on over the next 12 months from a research perspective. But also investors need to adapt to changing market conditions.
- [14:41]
Tracy Alloway
Explore the report at www.pgim. realestate.com globaloutlook tired of losing weight only to gain it all back? The weight loss experts@slimrank.com have done the research. Slimrank.com ranks the safest, most effective GLP1 programs that get and keep the weight off for good. Stop watching the scale go up and down. Go to slimrank.com and pick America's number one weight loss program today. Slimrank.com that's S L I M R A N K.com your dream body is just a few months away.
- [15:20]
Charlie McElligott
Slimrank.com join us in Atlanta or via livestream on August 12th for Bloomberg's Business Value of AI event and networking reception. This event will gather business and technology executives to share their experiences and provide insight into how to best use data to optimize the customer experience. You'll also learn how companies have successfully implemented AI agents that have led to improved productivity and profitability. This program is proudly sponsored by IBM. Register@BloombergLive.com AI Atlanta so Joe asked you.
- [15:53]
Tracy Alloway
For basically color on the complexion of the market nowadays and I know you just got Back from. Weren't you on some sort of crazy epic travel schedule where you flew around the world?
- [16:03]
Charlie McElligott
Yes.
- [16:03]
Tracy Alloway
What are you hearing from clients like what kind of questions are they asking you?
- [16:07]
Charlie McElligott
People are so consensually macro bare on that stagflationary outcome. And I think that's one of the tricks. At first it was like, okay, let's expect these early return, mind you. Smoot Hawley tariff highs like 90 year tariff highs. Prior to the Trump 2.0, the effective rate was 2.4%. We're 17.3% right now as it stands. So how does that not bleed through to this eventual price shock or margin compression, all this stuff that hits consumption and you know, initially it was okay mid summer. I think part of what's happening right now is that, you know, from a corporate perspective as it relates to the consumer is that Taco has changed their behavior too. Like why? You know, I'm not going to blow up my top line sales and you know, rush to, you know, price shock my clients at a time. Yeah. So I think there's been a lot of holding off too as far as or willingness to even absorb a little bit of that the price increases that are coming through. And so it's been getting increasingly uncomfortable. All these left tail, most acute outcomes have certainly been mitigated away and compromised away and kind of handed away. The market starts rallying in your face, you're expecting this very bearish outcome. It's starting to hurt. You've underpriced the right tail. You get a fiscal deal seemingly close to being done. Even just today, late in the day. Section 899, which is this kind of like completely.
- [17:37]
Joe Wiesenthal
Tracy wrote a bunch about it. Now it's all gone.
- [17:40]
Tracy Alloway
Now it's gone.
- [17:40]
Charlie McElligott
The revenge tax. I mean, is there anything worse than like getting a bunch of work done and then having to trash it?
- [17:45]
Tracy Alloway
All I'll say is it's good for content. Yes, there we go.
- [17:48]
Charlie McElligott
Yes, it is.
- [17:49]
Tracy Alloway
You talk a lot, a lot about hypotheticals over the past couple of months for sure.
- [17:53]
Charlie McElligott
Yeah. You know, you're well educated with your scenario. But like in this case, you know, that was another, you know, this revenge tax escalation. Well, all of a sudden now, you know, cooler heads prevail. That increases the likelihood that the digital tax, you know, stuff with Europe that was an impediment for deals goes, you know, right way. So you've just had like left tails, turn right tails and nobody has the exposure on. There's just so much chronic macrobility now perversely you're seeing it with stocks. People are getting stopped in, you're buying the highs, you're having to take up your exposure, having to take up your nets after fighting it kicking and screaming and grossly under capturing the rally. This is when it sets the table for crash. And that's why as you're forced to get longer, you have to start hedge, you have to start hedging.
- [18:36]
Joe Wiesenthal
Do you think right now, I mean, I remember well, like right now, today, would you say there's still a lot, there's a lot of discretionary money where people feel like they're underweight. The market where they feel like they're still fighting this dynamic they're chasing and they're still feeling. Every day the stock market goes up. I don't have the exposure I wish I had.
- [18:57]
Charlie McElligott
Those are, those are the classic buyers are higher.
- [18:59]
Joe Wiesenthal
Yeah, you know, and that's a lot there. But they haven't, they haven't fully capitulated yet.
- [19:05]
Charlie McElligott
But it's, you know, what you're seeing with the market grinding higher every day and by the way, through the straddle like this is the interesting thing I always say, like we can't crash until skew is steep. Skew is a relative measure of kind of downside, demand versus upside demand. You know, put skewed, you know, demand for out of the money downside versus at the money downside. Both of those metrics in the past week of it, 100 percentile over the past year. The past year's going on. Right. So you know, people are hedged because they are back getting long where things get spicy. And when you're hedged, that means dealers are short downside. They're going to be short Gamma and short Vega into a sell off. That's accelerant flow. That feeds into the prevailing market momentum. The lower that we go, the more spot equities you have to sell, the higher the volume goes, the more volume you have to buy. Bad scenario. It's an accelerant flow in this case. The trick now that's starting to happen and this is why I feel like we're probably getting closer to, you know, a crescendo is that now you're getting spot the market up, volume up and Volvo going up. And what that's telling me is that, okay, people are actually now being forced to chase into upside. Right. And right now part of our chart.
- [20:15]
Joe Wiesenthal
For the newsletter tomorrow, yeah, stocks spot.
- [20:17]
Charlie McElligott
Up, Volvo spot up, volume up, V volup. And what that means is that people are being forced to Grab into the upside. And that's also feeding this short gamma move to the upside. Because dealers are short calls now. And this, you know, as we hit 6150, 6200, things like, like that ultimately I always like to say when you get spot up volume up in and of itself, you know, creates kind of like a melt up, like some sort of kind of, you know, squeezy rally on the way up that collapses under the weight of its own delta, like collapses under the weight of the mechanical buying on the way up, the mechanical dealer hedging on the way up. Because you need to keep fulfilling that need and demand. People are getting longer, you know, you're finally seeing that dynamic. People are getting longer. That creates the potential de risking flow on the way down. Especially once you're talking about systematic volume scaling strategies that as volume goes higher they have to just sell, you know, unemotionally.
- [21:12]
Tracy Alloway
But what would be a reasonable catalyst for that to happen?
- [21:15]
Charlie McElligott
Well, I think the near term one has been, you know, the fact that, you know, July eight, the original kind of reciprocal delay that, you know, and you saw a bunch of headlines today saying like that's flexible, morally flexible. You know, I think that big surprise. Yeah, let's make a deal. I would say that, that right now that's kind of like the most obvious, you know, one out there that, you know, there's still some element of hardball. My view is that that's somewhat overstated, that that is somewhat overstated because he needs to get one big beautiful bill passed first before that and then potentially you can play the game. But the fact that this 899 was removed tells me that they know that getting a deal with Europe is probably a larger impediment to what they're trying to do. And that there still is now this new conditioning in the market where instead of increasing the rhetoric at the highs, Trump has capitulated back into Trump 1.0, which is run hot he's now. And they are best in himself with the headlines out. At the end of the day, they're trying to squeeze this thing higher and financial conditions are easing, the dollar is moving lower long and yields have started rallying, ironically, because the market is sniffing, you know, a dovish turn within the Fed, you know, including recent comments from people that I don't think would have anticipated necessarily outside of Waller who's auditioning for the Fed job. And you know, why are they beginning to turn like that? Yes, there's a normalization dynamic with regards to where inflation is now we think Jerome Powell is already at two dots for the end of the year and there's just this modest turn. But they're turning for a reason. They're turning because, you know, quits rates and claims, you know, are starting to get a little wonky. And as I said, the whole American economic miracle goes wrong when the consumer cracks. And the consumer cracks is what becomes of, you know, the labor market. And that's starting to look, you know, precarious at best. So I think, I don't think it's going to be a tariff headline necessarily. I think it's going to be, you know, good old fashioned data, a nasty NFP print, that type of a thing. Is that an acute risk now? Probably not. Probably, you know, safe to say, you know, within by August, you know, we could be getting spicy. And I think there's real Delta, not just of like the first cut in September, but you know, if that happens, you know, it's not just going to be, you know, 25 bips. Right.
- [23:37]
Tracy Alloway
So everyone needs to keep shopping, I guess.
- [23:40]
Joe Wiesenthal
Yeah.
- [23:41]
Charlie McElligott
To maintain the rally, do your duty.
- [23:43]
Joe Wiesenthal
So the thing is though, this is what bothers me is everyone sees some of these dynamics. We talk about the labor market weakness all the time. We talk about the fact that due to the tariffs and other factors, the Fed might be a little bit gun shy or less inclined to cut like than it otherwise would have given the set of economic conditions. And I think like Powell has sort of hinted at it before that there are conditions like we all can see this, like, and yet, like, and yet people keep buying like it's sort of, there's something intellectually unsatisfying about the entire environment. Well, because like, all this seems very true. All this like the stagflation risk. There is going to be a cost of tariffs, there is this cyclical slowdown.
- [24:25]
Charlie McElligott
And yet, you know, it goes back to those, you know, kind of counterintuitive observations that we started off with, you know, where you get so fixated on like the left side that, you know, perversely the corporate spending uncertainty becomes the biggest source of demand for stocks.
- [24:41]
Joe Wiesenthal
Yeah.
- [24:41]
Charlie McElligott
You know. Right. And especially to the market structure stuff, which is just what I always come back to once those puts start roasting because the worst case scenario doesn't happen. And dealers got to start buying back that short delta and then people start squeezing that short delta as the market starts rallying back, start buying short dated calls and dealers get short those calls. When we go short gamma the other way, those flows and frankly a world of not just this market structure that feeds momentum. Right. With leveraged ETFs, the prevalence of options trading, the tail wagging the dog. And I don't even know if I can say tail wagging the dog now. I just think it is the dog.
- [25:20]
Joe Wiesenthal
I like that. That's good.
- [25:22]
Charlie McElligott
Options are the dog. Those type of real and synthetic gamma effects in the market are very high impact. And I think at the end of the day a lot of this is just about career preservation.
- [25:35]
Joe Wiesenthal
Yeah.
- [25:35]
Charlie McElligott
And when you've kind of missed badly on a call people, it feels good. And you know, in the macro space like I, you know, I'm super sensitive to this idea, you know, you feel smart to make a bear call because it's rare. Stocks go higher. Yeah, that's you know, when you run a backtest, you know and backtesting I know is like a four letter word. But when you run a backtest, you know this, if this happens and contingent on this and you actually get negative forward returns over a series of average, you know, over a real number of sample set, you know, it's an outlier. The problem is like sitting in a negative stance. When again goes back to that point, people are not really incentivized to see the world burn. You know, it's going to be a tough thing. So you got to be dynamic and pragmatic. I think about these things.
- [26:20]
Tracy Alloway
All right, well Charlie, let me just say thank you for giving us a couple of swear words to bleep out. It really helps keep our producers on their toes. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
- [26:45]
Joe Wiesenthal
And I'm Jill Wiesenthal. You can follow me at thestalwart. Follow our producers, Carmen Rodriguez Ermenarman, Dashiell Bennett at dashbot and Kale Brooks Alebrooks. For more Odd Lots content go to bloomberg.com oddlots where we have a daily newsletter and all of our episodes and and you can chat about these topics 24. 7 in our Discord Discord GG oddlots.
- [27:06]
Tracy Alloway
And if you enjoy Odd Lots, if you like it when we do these live recordings, then please leave us a positive review on your favorite podcast platform. Thanks for listening. Join us in Seattle July 14th and 15th for Bloomberg Green. Two days of powerful conversations and meaningful connections. We'll explore what's next in the climate, economy, clean tech policy and greener living. Featured speakers include Jane Fonda, Brian Gellert and Vinod Khosla. The title sponsor is Amazon official airlines are Alaska and Hawaiian Airlines. Learn more@bloomberglive.com GreenSeattle that's bloomberglive.com GreenSeattle this.
- [28:02]
Charlie McElligott
Is an iHeart podcast.