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- [00:00]
UKG Announcer
Ukg. Their hr, pay and workforce management tools help business leaders empower their people. Because when work works, everything works. Learn more@ukg.com work you need to make.
- [00:13]
Adobe Acrobat Promoter
A huge presentation in an hour. Luckily, Adobe Acrobat Studio uses AI to take all your documents and generate a presentation with a single click, building slides faster than ever before. So if you need a last minute pitch deck, do that with Acrobat. Need to level up your presentation design? Do that with acrobat. You have 30 plus documents that need to be simplified into a proposal. Do that with Acrobat. Learn more@adobe.com dothatwith acrobat so have you.
- [00:43]
CVS Caremark Representative
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- [00:54]
Tracy Alloway
Good.
- [00:54]
CVS Caremark Representative
Go to CMK Co Stories to learn how CBS Caremark helps members save just by being members. That's CMK Co Stories.
- [01:09]
Joe Weisenthal
Bloomberg Audio Studios Podcasts Radio News I.
- [01:14]
Tracy Alloway
Think there's a chance you might have to re record an intro. Or at least the intro might be out of date by the time the episode comes out.
- [01:21]
Joe Weisenthal
That's how you know.
- [01:22]
Tracy Alloway
That's how you know it's bad. That and when people start waving around standard deviations.
- [01:27]
Joe Weisenthal
Standard deviations.
- [01:28]
Tracy Alloway
And also when people start saying it's a healthy correction in the market, although I haven't seen that much of that.
- [01:33]
Joe Weisenthal
It's pretty gnarly. Also when we don't just say the date that we're recording, but we say the minute. We are recording this at 7:04am on February 6, 2026. All the signs are back.
- [01:49]
Tracy Alloway
Joe. I want a T shirt that says Ruthless Utility Maximizer.
- [01:52]
Joe Weisenthal
Black Gold.
- [01:53]
Tracy Alloway
Let's talk about losers.
- [01:55]
Charlie McElligott
Who cares?
- [01:55]
Tracy Alloway
I've decided I'm going to base my ENT personality going forward on campaigning for a strategic pork reserve in the us Skulls Unlimited. Ooh, what's the ticker for that?
- [02:04]
Joe Weisenthal
No, I think that like in a couple years the AI will do a really good job of making the Odd Lots podcast.
- [02:10]
Tracy Alloway
How do I get more popular and successful?
- [02:13]
Joe Weisenthal
One day that person will have the mandate of heaven. We do have the perfect guest. Welcome to Lots More where we catch up with friends about what's going on right now.
- [02:24]
Tracy Alloway
Because even when Odd Lots is over, there's always Lots More.
- [02:27]
Joe Weisenthal
And we really do have a perfect guest. But it is weird, isn't it? Because it's, you know, it's a little different.
- [02:38]
Tracy Alloway
It's been a little strange.
- [02:39]
Joe Weisenthal
It's a surreal. It's a surreal type of market environment, especially over the last week.
- [02:44]
Tracy Alloway
Right. So if you've been living under a rock, markets have been tanking. There have been a bunch of different things going on, but first of all, gold and silver and the metals complex started plunging and then you had like, basically a slaughter in software stocks.
- [03:00]
CVS Caremark Representative
What else?
- [03:01]
Tracy Alloway
There is one.
- [03:01]
Joe Weisenthal
Oh, and crypto.
- [03:02]
Tracy Alloway
Crypto. Crypto's a big one. So bitcoin has like down to 66,000, something like that.
- [03:09]
Joe Weisenthal
Yeah, I think it hit 60,000.
- [03:11]
Tracy Alloway
Oh, wow. And that's the thing. I can't keep up anymore. And also there's concern about private credit because private credit has so much exposure to software and they basically lent all the money at the top of the valuation cycle, which I wrote about in the newsletter yesterday. But anyway, there's a lot to talk about in markets. Who do we call when markets are moving? That's right.
- [03:34]
Joe Weisenthal
Sup, Charlie?
- [03:34]
Charlie McElligott
You guys are amazing.
- [03:36]
Tracy Alloway
So this is Charlie McElligott, of course. He is the cross asset macro strategist over at Nomura. I'm going to start with the. The simple question, maybe it's not an easy question, but what was the proximate catalyst for all of this? Because you have a bunch of different things going on, including, by the way, the nomination of Marsh at the Fed.
- [03:56]
Joe Weisenthal
So.
- [03:56]
Charlie McElligott
Absolutely part of the feedback loop. But these things are never singular input, you know, in a world of thousands of macro factor variables in this case. And, you know, I'm an ambulance chaser. That's kind of what my gig is. A grave robber, a carpet bagger, you know, all those things. I try to reverse engineer car accidents. Yeah. And kind of the qualitative starting point of that is to locate consensus positions that tend to then crowd in positioning when trend trades develop. That's usually accompanied or requirement. Requirement being low volatility to accumulate those kind of smooth trends. So, point being, I think there were a number of market narratives that got a little lazy. You know, for instance, Q4 of last year, as we recall. I think there was, you know, somewhere three to four months ago, there was still a fair bit of concern with regards to this idea of like, labor cracking, you know, and there was still a lot of feedback with regards to Liberation Day and the policy volatility dynamics, you know, before things really got hot with policy volatility most recently. But. And that was leading to some, you know, some skepticism and as it relates to kind of the equities world, what did you do? You just stuck in the stuff that kept working. And that was that same dynamic we spoke about a number of times last year. You know, that crowding into secular growth, mega cap, tech, AI, they just keep growing earnings, profitability, all of those metrics. And they took up this massive part of the market that's part of this positioning, that set. You know, at some point Q4 run hot starts happening, you start seeing data upside surprising again. Right? He starts openly and more recently transitioning into January, talking openly advocating his weak dollar policy. Europe's playing along. Trump, Trump, right. You know, so you start having these things where people were really accumulating around effectively a lot of short dollar trades. And when I'm sitting there and I'm seeing like how do these narratives go wrong? How does this crowding go wrong? And I'm seeing gold and silver being attributed to this debasement narrative or this de dollarization narrative. There's credibility in those arguments. But I'm also a skeptic with regards to the flows and the actual singular catalyst of those. But I start seeing those positionings really overshoot. We're not talking like linear projections, like bending off the curve type of price performance. Of late I see em equities crowding, I see cyclical equities because everybody owns secular growth and nobody had enough economic sensitivity. So I start seeing these kind of positioning overshoots. You know, that's all the work that we do internally. And it just said if the dollar starts agitating and it stops going lower and you start losing these short term trend windows and then you get maybe a little bit of wow, we didn't get the max dovish Hassett trade, right? Oh, we start seeing upside surprise data when everybody's short dollar and thinking rest of world growth and actually us is maybe leading to the upside again or re accelerating dollar starts performing, people start monetizing and you start taking money out of these trades and that turns into a bigger de risking.
- [07:28]
Joe Weisenthal
Obviously we want to get into like we got got to get into everything including like the software sell off and its connection to silver, etc. You know, it occurs to me, speaking of the software thing, and I'm glad you brought up a liberation day, one of the memes of 2025 was just this idea that, well look, we don't really know what tariffs are going to do. We're not really sure what effect they're going to have on the economy. But one thing we could be pretty sure of is that it's only going to affect the sort of physical goods economy and not the digital economy. And so tariffs in a way Sort of seem to embolden the software, maybe crypto digital trade, because it's like this stuff is borderless, it's not going to get held up in customs. So let's lean into this and then, so it's interesting to hear, you know, then you get this big reversal. Can we measure it? When you talk about like how leveraged and how consensus these trades were, whether we're talking about software or whatever, can we measure how crowded those trades were, how levered these trades were?
- [08:25]
Charlie McElligott
Absolutely. I mean I'll look across, you know, we, we have internal money that we run within qis businesses where there's billions of dollars behind, you know, very sophisticated, not like naive toy models from trend to risk parity, you know, volume control, target volatility. So I look at where those gross exposures are and like period point blank grosses were too big, right? If you look at a snapshot of a model risk parity portfolio, four assets, long only using leverage to allocate your volatility, right? Long only in equities, bonds, credit, commodities, different weightings based on different economic scenarios, like very kind of generic risk parity we're seeing on a, let's say a five year look back, 99 spot 7 percentile gross exposure. It just so happens, right? You know, Goldman Sachs prime brokerage data with regards to equity hedge fund grosses as of last Friday, 100 percentile on a five year look back, these are synonymous. Now gross exposure is not purely a function of trailing realized volatility. Different strategies deploy different leverage. Different strategies will try to amplify a market neutral versus a net lean or a directional lean. But by and large the grosses were too damn big. It's like the guy that used to run for mayor. And when you see grosses being that big and you see prices bending off the curve and you see the thesis behind it, and this is where I'm pumped to tie in. Like the bitcoin read, right?
- [10:06]
Joe Weisenthal
Yeah.
- [10:07]
Charlie McElligott
If debasement was actually what people are saying it was, right? This idea that in de dollarization, you know, moving away from Fiat, you know, U.S. policy volatility, U.S. fiscal deficit, which by the way, okay, like same with Europe, same with Japan now, you know, with their little trust moment, you know, Europe has taken the austerity break off, that's a global phenomenon with fiat currency. So like, okay, I can get with that to a certain extent. But like why didn't bitcoin participate? That's what people kind of claim is, you know, bitcoin's a shapeshifter as is gold. But you know, my story, in my skepticism with regards to that debasement or that de dollarization was the way that Bitcoin absolutely did not participate when it was gold and silver. And look, you know, I sit in an options business, I see just outrageous call skews and demand for upside. And people, you know, keep putting on, keep reloading into these, you know, the call spreads and upside trades in SLV and gld. The options volumes are massive. It became a speculative, macro, tourist, retail type of a trade on top of all this. But bitcoin kept going lower and I started seeing one. If people are grabbing, people clearly have this preference for real assets, you know, physical assets. Right now in this world of debasement, of fiat, of fiscal deficit, spend, perpetual issuance, all those things, Bitcoin is trading like software, it's trading like SaaS, which is going through an existential crisis right now for really justified reasons, especially with regards to valuation. Right. And the funny thing is when we were talking about how AI was actually going to, I was making the point kind of Q4, start of Q4 last year. There's two major tailwinds for equities that become potential headwinds in 2026. They're very well socialized, but they still ring true. Ironically, we kind of got a backdoor on A1 was that the CapEx spending with regard to AI, you know, was burning your cash and you're moving through the cash so fast, right. And the cash that made these companies so preferred so, you know, screening is quality and profitability and all these great things, they're liquid, they're big, you can move in and out of them, they only go higher, you know, and they.
- [12:20]
Tracy Alloway
Did a bunch of buybacks.
- [12:21]
Charlie McElligott
Well, that's the trick, right? So like you aggregate kind of like the Mag 7 or like, you know, maybe the 12 biggest kind of like AI contingent types of players. You're talking like 20 to 30% of the overall S&P 500 buyback. So that's a huge point for me because I've made this before. Buybacks are like 7 to 8x, the largest source of demand for equities over the past 15 years.
- [12:41]
Joe Weisenthal
Wow.
- [12:42]
Charlie McElligott
And it's a volume suppressor. Yeah, right. I mean you are a bit. You're a massive bid under the market on a VW UP order or more importantly, when there is a drawdown, that's when they get most active. So it's like long gamut, it's like synthetic long gamma market. So one you're Burning through your cash and you're no longer doing that. Two, you're burning through your cash and you're no longer buying back stock as this volume shock absorber and passive been into the market from kind of sort of a quarter to a third of the Overall S&P's buyback that you're then too having to take on this new debt, you take on new loans, you know, to a certain extent you're trying to lever the balance sheet. But you know, more importantly, what does that mean for credit? Credit has been this perpetual kind of vault bleeding.
- [13:23]
Tracy Alloway
Yeah.
- [13:23]
Charlie McElligott
Because spreads are so tight, credit people.
- [13:26]
Tracy Alloway
Have been issuing to fund buybacks as well.
- [13:28]
Charlie McElligott
Yeah, 100%. I mean ironically that's probably a separate podcast, but remember we used to kick and scream like oh qe, this is crazy. Like this mal investment. Like they're bringing debt for buybacks and they're not doing, you know, R and D and they're not spending capex, they're not building plans. Well, here you go. You know, Druck said something like this, you know, many years ago in an interview. He's like, actually when you start to see, you know, the cash turn into capex spend, there's usually kind of a point of agitation and it's not always in the right direction for equities, let's say. Right. And in this case I think we're starting, obviously we're starting to get that. But the credit point is critical because the pace of the capex kind of prisoner dilemma that we're still seeing right now, like yesterday's earnings releases, the magnitude of that supply in the investment grade market is simply going to widen spreads. Tech is a big part of that. Now. This is the punchline, bringing it back to software, bringing it back to Bitcoin. As we were all kind of watching this potential for, you know, the credit markets to become a headwind, not in a shock, not in a freeze, you know, not in anything close to a systemic dynamic. Just too much supply with spreads too tight, you're not being compensated for it. So like there was kind of this general shortened credit because guess what, the whole world is watching one in like baby footsteps. Can Oracle get their funding done? That was the one day we had a sigh of relief. This week, by the way, they got 25 billion of investment grade done plus converts with like 129 billion of demand. The market, huge exhale. But guess what, OpenAI is still in the background somewhere. We're like kind of sort of in the next two months they got to come up with like anywhere from 100 to 200 billion bucks. And that is still a major point of skepticism.
- [15:10]
Tracy Alloway
It's not a funny punchline, is it?
- [15:12]
Charlie McElligott
No, it's not. It doesn't make you feel really good. But here's the thing, as Anthropic has done their thing and I mean, bang, you guys are in, in it right now with regards to Claude and the implications of vibe coding and you know, a whole reset with regards to certain industries and taking out, even if it's just the basic level of like legal compliance documentation. And we've seen it start to hit bottom lines with regards to earnings mentions and things like that. That is happening so fast that software is going through this existential crisis. And here's the deal, those dudes are stuffed on restricted shares. They're stuffed on RSU. And the concentric circles of VC boys and tech boys and SaaS bros. And Bitcoin bros. Has a lot of overlap.
- [15:59]
Tracy Alloway
It's all the boys and bros.
- [16:01]
Joe Weisenthal
It's not a Venn diagram, it's just a circle.
- [16:03]
Charlie McElligott
It's kind of like straight up overlap. And you know, in this sense you can't sell. You're kind of being haircut 10%. It feels like every week right now with regards to do I have a job? What are the prospects, where is this industry going and what do you have to sell? You know, and I think that that's why it is trading tick for tick year to date with SaaS software. And it's quite remarkable. And that to me, as I step back to this larger conversation, it's not really about the basement, right? This is a digital phenomenon. This is a liquidity crunch with regards to this. The idiosyncratics of that sector really coming under attack. And by the way, now it's also become a backdoor credit story where it's not simply the spread widening from the hyperscalers, it's people worrying now about private credit exposure. The BDC guys, which are sitting on a lot of this stuff with really tricky valuations and not a lot of buffer room with gross covenants and things like that. You know, it's become a huge macro story. They kind of did the end around with regards to where we thought it was going to come, but we can handle a couple things at once. You know, you all of a sudden you get a little bit of a surprise with regards to the Fed chair dollar stabilizes. You already had people in all these short dollar trades. People start taking money out of, you know, gold upside, silver upside. They start taking off some em upside. And at that point, like last Thursday, I'm looking at grosses. I'm looking at our CTA trend net exposures and commodities and metals 98th percentile. I'm looking at our net short dollar exposure zero percentile. Look at our net equities exposure 97th percentile. I'm saying these are the qualitative things. I need to see where profit taking and monetization turns into a risk management exercise.
- [18:04]
UKG Announcer
UKG Their HR pay and workforce management tools help business leaders empower their people. Because when work works, everything works. Learn more@ukg.com work support for the show.
- [18:17]
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- [19:06]
Public.com Legal Disclaimer
Investing Brokerage Services by Open to the Public Investing Inc. Member FINRA and SIPC Advisory Services by Public Advisors llc SEC Registered Advisor Generated Assets is an interactive analysis tool. Output is for informational purposes only and is not an investment recommendation or advice. Complete disclosures available@public.com disclosures you need to.
- [19:26]
Adobe Acrobat Promoter
Make a huge presentation in an hour. Luckily, Adobe Acrobat Studio uses AI to take all your documents and generate a presentation with a single click, building slides faster than ever before. So if you need a last minute pitch deck, do that with Acrobat. Need to level up your presentation design? Do that with acrobat. You have 30 plus documents that need to be simplified into a proposal. Do that with Acrobat. Learn more@adobe.com do that with Acrobat So.
- [19:56]
Tracy Alloway
Speaking of selling what you can and not necessarily what you want, one of the reasons that yesterday, February 5th I guess was so painful is because we started to see the places, the few places where people were able to hide start to go down. So consumer staples for instance. It wasn't a big drop, but still they'd been surging earlier in the year as people sort of switched out of software and into consumer goods. But now it's not quite clear where they're going to go. So correlation seems to be picking up. Right? Like in a market crash, correlation goes to one. But at the same time I can't figure out what's going on with implied correlation because if I look that up it's still pretty low.
- [20:41]
Charlie McElligott
So this is, you know, absolutely topical and it's something that you know, we continue to get questions on over the last few years. You know, that generic like why is volume so low?
- [20:50]
Public.com Legal Disclaimer
Right.
- [20:50]
Charlie McElligott
You know, and low vol or high volume is incredibly subjective. It's about the, you know, the volume surface, it's about skew, it's about where the starting point was, where you've moved from, how quickly, you know, it's, it's art plus science. The part of the problem with volume in general certainly being sticky and I think it comes down to where the money has flowed with regards to the hedge fund space is that you know, maybe 10, 15 years ago, the long short universe, you know, running net exposure was, I don't want to say, you know, necessarily dollar for dollar, like axed or necessarily larger than, you know, the multi strats at the time. But like they ran net and they would lever up positions or they would hedge their longs and there were, you know, generally speaking there was buyers volatility with those guys to a certain extent. You know, if you look back kind of on the sort of, let's say five out ten years of dollar flows into the hedge fund space with regards to all new flows, multi strats are conservatively 80 cents of every dollar in. And then if you actually include outflows from other strategies, you're legitimately through $1. So the point I'm making here, and multi strats are unbelievable with regards to their low volatility with regards to the consistency of their returns, with regards to the disciplined risk management, the tight stops model, the non correlated returns, which is the whole story why people keep allocating into them. They've proven to be such an absolutely undeniable force, hence all this dollar flow. But think about it like this. We don't see the core ones anymore.
- [22:34]
Joe Weisenthal
And this is like core ones, core.
- [22:36]
Charlie McElligott
Ones meaning like when things shock everything. Correlations together or down together.
- [22:41]
Joe Weisenthal
Right.
- [22:42]
Charlie McElligott
And that was kind of the old state of the world. But now what we tend to see, and this is exactly what we saw earlier this week when you had, you know, and of course financial market returns are not on a normal distribution but.
- [22:53]
Tracy Alloway
For, you know, I hate people that point that out.
- [22:55]
Joe Weisenthal
It's like, it's like, like something in a pharmaceutical ad.
- [22:59]
Tracy Alloway
Yeah. Like you have to include it because otherwise someone annoying don't take this drug.
- [23:03]
Charlie McElligott
If you're allergic to this drug. Yeah. So the point here being that you know, you would see kind of like a risk on, risk off type of core one phenomenon, you know, in past era. Part of what is happening now in my mind, you know, with these, you know, little bit of fragmented, you know, bullet points, you know, triangulating here is the fact that the dollars and the leverage controlled by the market neutral multi strat equity space are so overwhelming in the sense that when you get, when you are forced to de risk or de gross, you know, the tilts go wrong, that you have the offsetting short on the other end. Right. It's not just you stop out of your net longs or your crowded longs. Right. It's that you're also, you know, theoretically an equal dollar amount on the short side being covered. And what ended up happening on like the two big down days this week it was like 250 stocks were up. 250 stocks were down. Yeah. So you're getting this like reverse dispersion.
- [24:07]
Tracy Alloway
Yeah, right.
- [24:09]
Charlie McElligott
Very much the opposite of what last year was, which is this crazy concentration of like top decile, bottom decile just spread 99th percentile, like a 10 year basis. Which feeds into why people are loaded into momentum. Right. The higher stuff keeps going higher. It's human nature. This is like fama and french. This is factor alpha, you know, commoditize alpha. So these things, I think due to this kind of where the dollar flows have been, the market neutrality, the fact that there's always this offset against it, you're not getting core shocks. And when you don't get core shocks necessarily, at least initially because volume did not really react until just like two days ago and yesterday Volvol got a little tricky too. But point being you need correlation as an input to higher volume to sustain and you're just not getting that you still have low core. Now the trick is to your point, Tracy is very interesting. You mentioned the defensives, right. The reversal that we saw when people said look, I'm, I'm too much exposure in secular growth mega cap tech AI, which gives you a lot of momentum exposure, a lot of, you know, you know, unintended kind of exposures that when people said I need more economic sensitivity, I'm taking up my cyclicality, right. The three best performing sectors kind of year to date for most of the year have been like energy materials industrials. Right, right. Stuff that people have kind of been underweighted for the longest time in the absence of a hot economic cycle, you know. But also too when you started seeing defensives joining that rotation, like it was this massive value over growth trade. And that's the 3, 4, 5 Z score types of moves that you're talking about where people didn't have that stuff on and your longs go against you and your shorts go against you. And that is also amplifying, you know, these kind of moves. Because look, it's not just the market neutrals, like they're not boogeyman here. They're unbelievable. They barely lose money ever on a monthly basis. They just have very disciplined tight stops to get out of these liens and tilts hard and fast, unemotionally and. But guess what, it's you know, retail, it's all the story stocks, all these themes. That's why I pointed out for the last two years of the boom in leveraged ETFs like 82% of the assets and leveraged ETFs which act like synthetic negative gamma. Right. The higher you go, the more you have to buy. At the end of the day, the lower you go, the more you have to sell. You know, massive pool of aum. Now because of like retail tilted speculative leverage behavior are tied into that concentric circle of AI, mega cap tech, semis, you know, disruptor, crypto. So we're super overweighted, super over indexed to that stuff which amplifies when you have the tight market neutral stop outs, you know, with all that leverage, with all that aum, you know, to get their factors right. Because at the end of the day those guys are not trying to make factor bets. There's scenarios where you maybe run even though the little net if there's like a big, you know, economic reacceleration trade or something like that. But generally speaking the idea is like we don't want beta to the S and P. That's the point. That's why people pay us. Stop comparing us to S and P returns. So all these things are part of this like backdrop plus the narrative overshoots.
- [27:06]
Joe Weisenthal
To me that was fantastic and it's very intuitive. I mean there is already good theoretical ideas for thinking that the multi strats were huge drivers of all this. And then when you add in the fact that the staples like the sort of under loved areas or energy materials are the winners. Very intuitive. To your point on software, you know, no one really knows obviously the degree to which AI is going to obliterate these business, obviate these businesses. No one really knows. But like, from the perspective you mentioned, the tight stops that each manager has within these firms, can you give us like some sense of how much is it? Like, look, I just want to keep my job here and this is the ugly stuff that's going on. And so I'm just going to sell now and ask questions later. Like, how much does that play into on a week like this?
- [27:56]
Charlie McElligott
Well, we're talking about wide swaths of strategies and active, you know, systematic versus you know, feel directional trading. And you know, you know, tight stops are, you know, typically that, you know, down 2%, kind of down one and a half percent, maybe even in some cases. But you know, that's why it is managed so microscopically. And you're extracting these, you know, basis points of alpha in your longs and shorts and then, you know, using leverage like a, you know, a market neutral is probably 200, 300% gross by and large. Like long, short was always kind of like 50 net, 150 gross, something to, to that extent. But they're just not as big of a player anymore. But you know, that's the trick here. Like when I start seeing. I always love the systematic stuff because it's so tied in. It kind of looks a lot like the options market and market structure by and large feeds momentum. Now, right? You're not scaling out of positions the more they trend, you're loading into them. So like whether it's target volatility or CTA or you assign an exposure target, you know, a leverage target, and if the volatility is 5 and your volume target is 10, you got to lever that 2 times or 12, you know, like, and that is ironically, the lower volume goes, the more you need to add leverage onto that position. Right. To match your target. And that's why, that's the problem we create crashes because all of modern anybody who's like on a VAR model is actually a momentum trader. Right? You have to deleverage when volume goes higher, by and large. Now of course, if you have a high conviction bet and volume goes higher, that's actually going to be part of your potential return profile. You know, that's great. And God knows people have learned to like, you know, sell rich volume and buy, you know, buy dips. It's become conditioned. These time horizons are like hours at this point.
- [29:46]
Tracy Alloway
But like some people have made an entire career out of doing it once.
- [29:50]
Charlie McElligott
Yeah, for sure. And I mean you got to have a Titanium stomach. Like I've been talking to a buddy all week at a multi, you know, this absolute madman and there's many others like him. You know, he's been shorting silver the last two weeks. I'm like, how you been sleeping, dude? You know, he's like a little better now, but you know, there's.
- [30:05]
Joe Weisenthal
The silver moves are unbelievable. Yesterday was like 16. I mean these. I've seen two people I've spoken to say that the Silver move specifically may have been one of the craziest moves.
- [30:16]
Charlie McElligott
They'Ve seen their entire career. It's crowding plus the trend, plus the optionality, plus the leveraged etf. You know, the optionality is leverage in and of itself and it's high beta, you know, as is to regular, you know, big brother gold. So these moves are, you know, wild. But we know that in the era of the speculative era, people seek the movement. That's the opportunity. You are not going to retire 4% in cash. You know, that's just the way this world works right now. Now, you know, do you necessarily need to be like shorting Vol or things like that? That's not the way to do this. But people yolo. It's that financial nihilism that we've spoken about, you know, many, many times. You seek out the movement you want, the stuff that's moving. And generally speaking, and this is where it's so interesting, like you try to press moves by and large, certainly like the retail cohort, the world is not built the vast majority of the time for mean reversion anymore. Value is mean reversion. Like something is rich, something is cheap. It's this counter, kind of like a gamma type of flow, you know, long gamma type flow. We feed moves now because of the risk management dynamics and especially too just like market structure, how much trend there is built into the market, leveraged ETFs, options, things like that, you know, particularly the way that people tend to use them, which is tend to feed into prevailing moves. So all of this kind of changes the behavior and the expected outcomes where, you know, momentum has been, you know, this remarkable factor for, you know, academic history, studying these things because of like greed and fear and things like that. And moves can extend longer than you think. Just because a trade is crowded doesn't mean it's the wrong trade. But when you start to layer in, as I said, the positioning data, the overall leverage data, the kind of, the conversational, qualitative, how many people are buying into this. But then you see, you know, some like divots here and there. And like the story, it doesn't actually make sense. And actually this thing is starting to stall. And now I got people taking money out of this thing and I got trend this loaded into it. This is going to unwind hard. And I sent that note Thursday, you know, started unwinding hard. Friday, doors got blown off and guess what? It waterfalls. So other crowded trades go Cosby. Everybody was like, you know, no brainer into that Japanese bank longs, right? Which are a short JGB proxy macro tourism. Like people start coming out of these trades because they're non core, but they were high sharp, right?
- [32:37]
Tracy Alloway
So flows before pros, but now the pros are chasing flows and that's hurting the bros. Thanks. Okay, so you just touched on this. But what stops the bleed?
- [32:52]
Charlie McElligott
I think you're, you know, you're getting certainly some relief here. I mean, look, people will say, you know, at some point on a smaller gross, you don't really have to do anymore. You don't have to reach for hedges which get dealer short gamma, right, because you're, you don't, you know, have as much exposure anymore. That's the first step. People then have to monetize their hedges. So where all of these reversals happen, you take off your hedges or you take off your directional stuff. Whether you're shorting futures against the moves or you're buying downside puts, you're buying vix calls, you start to unwind that. And guess what? Like now the dealer's got to take off their stuff and you got delta to buy. And then some people say, oh, everybody's taking their hedges off around the street market's starting to rally off these lows. I'm going to buy some zero DTE calls. And you know, then we create more delta to buy.
- [33:36]
Joe Weisenthal
We're back to the races.
- [33:37]
Charlie McElligott
And volume starts, you know, volume starts rolling over. And guess what? Then the systematic, the volume supply people come out of the woodwork and they feel comfortable to come back in, lean into this and that's de facto buy the dip, right? So this is the cycle in the world that we live in, there's too many assets. A final point that may be tangential here, but with regards to how these dynamics end, it's not necessarily about like back in the days, like Warren Buffett steps in, you know, provides some, you know, financing line or you know, Thoma Bravo stepping in, doing some like deal.
- [34:07]
Joe Weisenthal
Toshi Nakamoto is calling up Warren Buffett.
- [34:10]
Tracy Alloway
Yeah, I don't know if that's calling up David Sacks.
- [34:12]
Charlie McElligott
Offering 10% of it's more about, you know, these flows kind of stopping the bleeding. But you know, this is the other thing too. Like the volume flows are so important with regards to the, like the hedge unwinds and creating the turn in the market, the inflection, especially with the conditioning by the dip sell the ball rip that like fixed income has been trash for five years since the tightening cycle, since, you know, poor inflation still running too hot, right? So people said, look, this thing doesn't work for me, it's not helping my portfolio. My 6040 is awful, right? But I can't just be long equities. But I need some yield. I'm a boomer, I'm old. I need some, you know, some enhancement. But I want equities upside down. And we've talked about this so many times and it's true, you know, because the assets keep growing. All these yield enhancement vehicles, all these income vehicles, they're selling equity optionality. So you're long underlying equities, you cap that upside to a certain extent, but you're generating yield by selling options. That's the new fixed income. And those flows matter because those flows that when the kind of the coast is clear, they just come in and it's just Vegas supply and it just smashes volume back down.
- [35:17]
Tracy Alloway
Thank you so much for, for coming on at short notice at seven in the morning. Seven in the morning. Thank you very much. Yeah, midday. Yeah, your day's over, right?
- [35:28]
Joe Weisenthal
Lots More is produced by Dashiell Bennett, Kerman Rodriguez and Kayl Brooks.
- [35:32]
Tracy Alloway
Please rate, review and subscribe to ODD Lots and lots more on your favorite podcast platforms.
- [35:37]
Joe Weisenthal
And for even more beyond Lots more, go to bloomberg.comoddlots and chat with fellow listeners in our Discord Discord GG oddlots.
- [35:46]
Tracy Alloway
And don't forget that Bloomberg subscribers can listen to all of our podcast absolutely ad free. All you have to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.
- [35:59]
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- [36:24]
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