The Korean Levered ETFs Shaking Markets All Around the World

Summary

Odd Lots Podcast Summary

Episode: The Korean Levered ETFs Shaking Markets All Around the World

Hosts: Joe Weisenthal & Tracy Alloway (Bloomberg)
Guest: Alex Altman (Global Head of Equities Tactical Strategies, Barclays)
Date: July 10, 2026

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Episode Overview

This episode dives into the explosive growth of single stock levered ETFs—especially in Korea—and how these products are affecting markets globally. Joe and Tracy are joined by Alex Altman, a derivatives and equity strategy expert from Barclays, who unpacks the scale, mechanics, and market implications of these powerful investment tools.

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Key Discussion Points and Insights

1. Korea as the Global Market Mover (01:49–03:29)

• Recent US macro events seem to have little market impact—heightened focus is shifting overseas, especially to Korea.
• Korean chip stocks (Samsung, SK Hynix) and the launch of new Korean levered ETFs are now significant drivers of global financial activity.
• Korean markets have become accustomed to wild daily moves (up to 5%), now seen as “normal.”

2. What Are Levered Single Stock ETFs and Why Are They Big News? (03:29–04:06)

• Levered single stock ETFs—products that offer two or three times the gains (or losses) of an underlying stock—are growing fast in Korea and globally.
• The effect of these products has spilled over into underlying share prices themselves.
• Quote:
  “The one thing I'm missing is some leverage here…people love it.” – Joe (03:38)

3. Market Mechanics and Product Growth: Terrifying Scale (04:27–08:56)

• Alex Altman explains the scale:
  • Global levered ETF AUM: $250–$270bn, with Asia-Pacific growing from ~$12-13bn to ~$50–55bn just this year
  • US levered ETF AUM has surged from ~$120bn in April to north of $200bn at recent peaks.
  • In the US, AUM growth has been mainly from price performance; in Korea, both share creation and price gains are driving the increase.
• Impact: The rapid growth in AUM means larger, mechanical daily rebalancing flows—which exert a "short gamma" effect on underlying markets, intensifying volatility.
• Quote:
  “Leverage has an impact on you…leverage is interested in you.” – Tracy and Joe (04:00, 04:03)

4. The Nuts and Bolts: How Levered ETFs Are Built (08:59–12:32)

• Creating a levered ETF is structurally similar to other ETFs, but leverage is obtained through banks/prime brokers, often via swaps.
• There’s debate about whether levered ETFs are tightening bank balance sheets and raising financing costs, but the guest says the single largest factor is rising asset values, not just ETF mechanics.
• Quote:
  “Bank balance sheets have become tighter because…markets have gone up…that has been the biggest reason for financing rates rocketing.” – Alex (11:11)

5. Retail Investors: Korea’s Unmatched Appetite (15:27–19:19)

• Retail investors dominate levered ETF ownership in Korea (93%), notably higher than the US (75%).
• Retail’s outsized presence amplifies market moves and wealth effects—contributing to a feedback loop of momentum and further inflows.
• Korea is “ground zero” for retail trading intensity.
• Notable stat: 34% of US household wealth is now in equities (vs 26% in real estate).
• Quotes:
  “Levitt ETFs have made retail an awful lot of money…there are plenty of guys driving around in McLarens…” – Alex (16:27, 17:08)
  “The stock market is the economy now.” – Alex (19:06)

6. Feedback Loops: AI, Momentum, and Market Bubbles (19:19–23:06)

• AI and semiconductor names are the biggest drivers in levered ETF AUM.
• The momentum trade—stocks rising and attracting yet more flows—feeds on itself, and levered ETF structures can reinforce explosive moves (and crashes).
• AI is now entangled with the stock market and thus the economy—suggesting a form of “AI wealth effect.”
• Moment:
  “AI is the stock market and therefore AI is the economy as well.” – Tracy (19:19)

7. Quantifying Excess, Market Timing, and Investor Behavior (22:39–28:09)

• Barclays’ “Betty” (Barclays Equity Timing Indicator) model uses 19 quantifiable inputs—no “feels or seems”—to gauge market risk.
• Betty has flashed “speculative/bubbly” warnings for a record length, due to crowded momentum.
• Model currently suggests poor asymmetry for S&P returns over the next 2 months, advising caution but not outright disaster.
• Quote:
  “If you can’t quantify it, you don’t have the right to talk about it. Using the word ‘feels’ or ‘seems’ is banned.” – Alex (23:18, 23:46)

8. Market Valuation and Structural Risks (28:40–30:56)

• S&P 500’s forward earnings multiples are historically high given today’s real yields.
• In similar post-GFC conditions, S&P multiples averaged 14–15x vs current ~20x (suggesting a 10% contraction risk).
• Valuation disconnects open risk for sharp wealth drawdowns—a major policy and consumption risk.
• Quote:
  “Margins should map into higher multiples...But it’s a much higher S&P multiple than what’s historically justified.” – Alex (30:30)

9. The Rise of Quant/Derivatives vs Fundamentals (31:32–37:44)

• Equity derivatives and quant-driven strategies are now critical to understanding markets; specialization and data science matter more than ever.
• The evolution from generalist analysis to multi-dimensional quant expertise is paralleling changes in both finance and the broader media landscape.
• Quote:
  “Everyone can now have infinite knowledge, but it doesn’t mean they have wisdom.” – Alex (37:10)

10. AI in Quantitative Finance: How Useful Is It—Really? (38:32–42:40)

• AI is useful for identifying candidate securities for baskets/hedging, but lacks the deeper judgment and optimal weighting skills required for robust finance applications.
• Most AI-derived recommendations still need human oversight and vetting.
• Quote:
  “Where AI is most powerful is when you are giving it very identifiable data parameters...Where it's less good is if you give it unstructured parameters." – Alex (41:34)

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Notable Quotes & Memorable Moments

• “Leverage is interested in you.” – Joe Weisenthal (04:00)
• “Levitt ETFs have made retail an awful lot of money...there are plenty of guys driving around in McLarens…” – Alex Altman (16:27, 17:08)
• “The stock market is the economy now.” – Alex Altman (19:06)
• “If you can’t quantify it, you don’t have the right to talk about it.” – Alex Altman (23:18)
• “Momentum is the everything; it’s the most successful factor strategy in history.” – Alex Altman (20:33)
• “Everyone can now have infinite knowledge, but it doesn’t mean they have wisdom.” – Alex Altman (37:10)
• “AI is the stock market and therefore AI is the economy as well.” – Tracy Alloway (19:19)

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Key Timestamps

• Korean market’s global significance: 01:49–04:06
• Leverage ETFs scale & mechanics: 04:27–08:56
• ETF construction & balance sheet impacts: 08:59–14:30
• Retail’s market dominance: 15:27–19:19
• Momentum, AI, & ETF feedback loops: 19:19–23:06
• Barclays “Betty” risk indicator: 22:39–28:09
• Market historical valuation risks: 28:40–30:56
• Role of quant/derivative strategies: 31:32–37:44
• AI’s role in quant finance today: 38:32–42:40

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Final Reflections (43:10–44:57)

• The explosive growth in levered ETFs—especially among Korean retail—has produced formidable new feedback loops in global equities and made mechanical flows more decisive than ever before.
• There’s increasing structural risk as household wealth becomes concentrated in equities, amplified by leverage and AI momentum.
• Valuations are stretched by almost every historical measure, raising the stakes for market downturns.
• The hosts emphasize the need for further investigation and plan to bring Alex Altman back for future discussions.

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For those not familiar with levered ETFs and their explosive influence (especially in Korea!), this episode cuts through the complexity with clear analogies, quantitative insights, and real-world implications. A must-listen (or read) for anyone wanting to understand the new drivers of global markets.

Transcript

[Joe Weisenthal]

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[Joe Weisenthal]

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[Tracy Alloway]

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal.

[Tracy Alloway]

Jo When I think about the big market events that this week, this week we're recording, this July 9th, July 9th, macro doesn't feel like it matters that much anymore. Like so we had renewed hostilities between Iran and the US Markets, at least as of Thursday morning, don't seem to care too much. You know, we've had some Fed minutes. They didn't really change things that much. The big stories this week, unusually for the US Market, have all stemmed from Korea.

[Joe Weisenthal]

Yeah, no, it's true. I mean, look, the chips trade, which then becomes the Korea trade, and all of these things is like the big thing in the entire world. And I agree, I do not think people are going to focus on much of this other stuff as long as this thing is so crazy and you know, the Korean market, like we've just come to get used to this major, you know, pretty big market in the grand scheme of things, moving 5% a day. And we've suddenly all become sort of normalized to. Yeah, this is the big thing.

[Tracy Alloway]

Yeah. So the two big Korea events this week, we had Samsung earnings already and then today, which means we're recording this podcast either at the best or the worst time because we don't know how things are going to shake out. But we have a US listing from SK Hynix. And the reason Korean stocks are so interesting right now is it's not just that the US market is kind of like playing off them as well, but it's because you have all these new products in the Korean market, all these things called single stock levered ETFs, which seem to be having an impact on the overall movement of the underlying shares.

[Joe Weisenthal]

It's so funny to me, you look at again, the performance of some of these chip companies, some of them up

[Tracy Alloway]

like 10x40% is not enough. We need.

[Joe Weisenthal]

Yeah, exactly. It's like, you know what? I look at this chart, you know what? The one thing I'm missing is some leverage here. This is always also funny to me. When people were like trading crypto on leverage, it's like, what, you're not getting enough? You need like 20x it's. But people love it. And so.

[Tracy Alloway]

Yeah, but even. Here's the thing, even if you personally don't love leverage, leverage has an impact on you.

[Joe Weisenthal]

Totally.

[Tracy Alloway]

If you're in that market, you may

[Joe Weisenthal]

not be interested in leverage, but. But leverage is interested in you.

[Tracy Alloway]

Exactly.

[Joe Weisenthal]

One of those guys said, all right,

[Tracy Alloway]

so we should talk about all these products. You know, I can't resist a product tail wagging underlying share price dog. So we really do have the perfect guest. We're going to be speaking with Alex Altman, AKA Alti. He is of course the global head of equities Tactical Strategies over at Barclays. So, Alti, Alex, thanks so much for coming on.

[Alex Altman]

Thank you very much for having me.

[Tracy Alloway]

So I believe in one note I read from you and the reason I wanted to get you on is you specifically use the word terrifying to describe the amount of notional exposure coming from levered ETFs. Can you give us a little bit of context about how big this market actually is?

[Alex Altman]

Now, I think that the. I'll give you the numbers straight away. And as you highlighted, markets are moving really quickly. So these numbers change a lot every day. And I think at the time when we wrote about that, it was the local highs of the AUM and it was globally around about 250, $270 billion. The number itself is actually not enormously terrifying at all. I would just say the, the asymptotic of the AUM over the past few months has been somewhat sensational or just, it's just meteoric. So just to put some numbers behind that, if we look at say the Korean market which you guys highlighted at the beginning of the year, APAC AUM, so Asia Pacific AUM was somewhere around about 12 or 13 billion. That's now around about 50.

[Joe Weisenthal]

Sorry, just the AUM within these lever details of levered products, of levered products

[Alex Altman]

in Asia they are now around about 50 to 55 billion dollars. So talking about a threefold increase or plus over a relatively short period of time. And here in the US if you take the beginning of April. Yeah, beginning of April, which was of course the local lows for the market, we were talking around about 120 odd billion here in the US and that's now increased. I think at its peak it was north of, just north of 200 billion. So. So these numbers can move extremely quickly. And what's really interesting is that if you look at the US market, it's not like you seen significant inflows and share creation in that space. Most of it of that AUM growth has been because of price performance.

[Joe Weisenthal]

Oh, interesting.

[Alex Altman]

Whereas in Korea you've actually seen the opposite. Not the opposite, but you've seen huge share creation on top of meteoric rises in the share prices as well.

[Joe Weisenthal]

That's super interesting.

[Tracy Alloway]

But just to be clear, for the Korean products, as the underlying share price goes up, the AUM also tends to go up. Right. So that, and then when the underlying goes down it collapses. And so that's why you get these big spikes in aum.

[Alex Altman]

Yes. So I think it's worth just like expanding on the mechanics of it just for a second because I think that's really important to debunk and why they've become such a relevant product in the market. So if you just take, we just actually put some numbers behind this, let's say you had one underlier, whatever it was and it was an AUM of call it $30 billion just, just to make the numbers simple. And let's say it was triple levered. So now they're going to basically go out and get a load of exposure for another $60 billion. That exposure is typically done through swap agreements. Right. So so they can actually sort of have this synthetic exposure through prime brokerages and so on and so forth. And so now you've got $90 billion exposure. Now let's say the stock goes down 10%. So $90 billion, 10% drop. So that's going to be $9 billion drop. So you're down to an $81 billion of exposure now, but you've lost $9 billion of your AUM, which was only remember, 30 billion. So the 30 goes down to 21. And then if you multiply that back by three to maintain your triple levered exposure, you're going to be at 63, but you've got 81. So you need to reduce down your exposure mechanically by over $10 billion in order to sort of maintain what you've kind of put in your prospectus as you know, your, your triple leverage against that underlay. And that's what's creating these mechanical adjustments on a daily basis, whether it's down obviously on on down days and then up on up days. So effectively you're creating a new short gamma dimension in the market that was relatively small only a couple of years ago. And I think really importantly is that there's a lot of dynamics that are moving non discretionary flows in the market. So obviously in the ETF world you've got a lot of overwriting ETFs that are doing the opposite. They're effectively selling volume to the market which is creating a long gamma process. And that would typically have netted off against a lot of these levered ETFs. But because these levered ETFs have become so large in their rebalancing, that now net gamma profile is effectively becoming more negative.

[Tracy Alloway]

Yeah, a bigger role in the market.

[Alex Altman]

Yes, exactly.

[Joe Weisenthal]

Can you actually just maybe take a step backward? Can you just walk us through the basic. I don't know if it's like the business or the simple mechanics of setting up a levered etf. So I have a company I want to, okay, I'm a upstart ETF provider.

[Tracy Alloway]

I want to do the odd lots three times.

[Joe Weisenthal]

Yeah, the odd lots three times Micron etf, whatever it is. So it's like who is providing the leverage? Just talk to us about how this product, you know, it's originally conceived of, setting aside market impact and all that stuff for now. Show how the product works.

[Alex Altman]

The product, I mean the product is very straightforward. It's really no different to any other fund provider in the ETF space. So effectively, if you're creating an ETF and you typically go and get some kind of anchor investor or some kind of co sponsor who's effectively going to create the initial amount of AUM for you. And then obviously because you need critical mass. Yeah, there are, as I'm sure you guys have talked about, there's more ETFs in the world than there are single securities here in the US So creating the ETF and the fund is not complicated. It all obviously has to go through SEC regulation. And I think that's an important point to highlight when it comes to all these levered ETFs is whatever your opinion on them may be, the fact is that the sec, the regulator has approved all of these. So in the same way these funds will then get approved. And from there, of course, the question is where do you get the leverage? So typically the leverage will come from a banking partner, so through a prime channel that they will effectively seek to get that exposure synthetically through the bank. And that in turn obviously will effectively create the balance of, of their notional exposure. Now from a bank's perspective, that goes through the prime balance. And the interesting thing about the, about that is, is that some market participants have been talking about an increase in financing rates that has been driven by, by these Levitt ETFs. I think we need to debunk that for a hot second.

[Tracy Alloway]

Okay.

[Alex Altman]

Because I know I've kind of a little bit off topic, but it is still very much.

[Joe Weisenthal]

No, I actually had a. Recently someone wanted us to talk about equity financing costs. So I'm glad you brought that up.

[Alex Altman]

So it is perhaps a contributor. You have to acknowledge the fact that if you've got north of $200 billion of AUM that has materialized in relatively short order or grown exponentially recently, and you're obviously putting over two times leverage on that, you're creating an additional 400 billion plus of stuff that's being bought and put on balance sheets in swap format. It's going to create a degree of tightness in bank balance sheets that's not in isolation. True. The fact of the matter is that bank balance sheets have become tighter because primary reason is markets have gone up and as market's gone up, the price of stuff has gone up. And so that has been without a doubt the biggest reason for financing rates rocketing is the fact that spot levels are higher. This has been a contributing factor, but we shouldn't overlook the fact that if you just look at the biggest driver of AUM growth within the hedge fund community, it's the multi manager platform we're talking about. Those guys are effectively a trillion dollars of AUM now that's essentially tripled since COVID And obviously those guys are deploying a huge amount of risk on A long and a short side. So again, that's using balance sheet as well. So it's not really so much just the Levitt ETFs that are going out and asking the banks for balance sheet. That's causing financing rates to squeeze higher. It's one of many.

[Joe Weisenthal]

But balance sheet capacity is scarce.

[Alex Altman]

Balance sheet capacity is scarce and it will remain scarce so long as S P's trading at 75,7600 ye.

[Tracy Alloway]

Well, just on a related note, okay, balance sheet is scarce from the dealers. And it is true that like If a levered ETF comes to you and says I have two times leverage and now I need like $40 billion worth of exposure, you're not going to want to extend like that much credit to a single counterparty if you're a dealer. And so one of the things I've heard in the market is that maybe some of the levered ETFs are going out and sourcing leverage not just through swaps with dealers, but through the options market. Have you heard this?

[Alex Altman]

So that was documented, I believe in the press as well, and I believe that was specific to one particular fund out in Asia rather than specifically anything that's happened here in the US So I think that you can open a bit of a can of worms when you start talking about the availability of this leverage and to certain counterparties. And I don't think that's specific necessarily even just to just to the Levitt ETF market. I think you can really open that up in any counterparty risk. When you think about does a bank really want to have bank will be very careful in Barclays, I would say are pretty conservative and extremely diligent about how they choose their counterparties who they want to partner with. And so as a general rule of thumb, you have to always keep that in mind. Just we're in the business of risk management at the end of the day. And so yes, this is sort of a, I wouldn't even say a new tool. It's not a new shiny part of the market, but it's it. We would treat it exactly the same way as we would any other counterparty.

[Tracy Alloway]

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[Joe Weisenthal]

You mentioned in the beginning that there's levered single stock ETFs in Korea. There's leverage single stock ETFs in the U.S. the difference is that in Korea, so much more of the aum growth has come in through new money rather than the underlying asset values going up. So one thing I think about the Korean market, people talk about incredible retail interest that probably dwarfs the US on some sort of per capita basis. How does that matter? Does that have implications in terms of the tail wagging, the dog, the spillover effect, this fact that there is just a lot of interest in these products beyond just the products going up?

[Alex Altman]

I think that the retail channel in general is one of the most important dynamics for global equities in the world today. Right. Could we make the case that Korea in particular is kind of ground zero for that retail cohort? Probably.

[Joe Weisenthal]

Okay.

[Alex Altman]

You know, so for example, 93% of Levitt ETFs in Korea are owned by the retail investor, whereas that number is lower in the US it's approximately 75%. Still. Still high, but, but, but not as high. Right. And some may say, well, only 75%. So why is it not higher? And also I think we should probably just be very clear, like Levitt ETFs have made retail an awful lot of money. Right. So, you know, there are plenty of guys driving around in McLarens because of their return they've generated in Levitf. So, you know, I think we sort of need to balance out in sort

[Joe Weisenthal]

of no judgment here. We're just trying to, we're just trying to learn how it works. But I don't judge anyone for making money.

[Alex Altman]

On balance, a lot of money has actually got asked this morning, have you actually calculated how much money's been made? And I said no, but on balance, a lot. Yeah, quite a bit. So going back to the the point on retail, take the U.S. for example. The U.S. it's a phenomenon of our lifetimes. 34% of U.S. household wealth is now in equities. Right. It's the highest on record. It's higher than dot com. I think what's even more amazing about that stat is if you take the next largest component of household wealth in the US is real estate, and that is around about 26%. So the 8 percentage point difference between those two sort of assets, so to speak, is also the widest on record. We as a society have never been this over indexed or overexposed to equities. And so I think that what you've seen within, say the levered ETF space is really just another small part of that broader ecosystem that has contributed to this enormous wealth creation. And one of the things that we think about a lot as a team, people ask us, what keeps you awake at night? It's not Levitt ETFs that keep me awake at night. What keeps me awake at night is that you have a structural impairment to equities that effectively no economist on the planet has a cell in their econometric model that says 20% impairment to the S and P. That basically destroys, let's just call it around about $16 trillion of wealth. So let's just say that's half of US GDP, right? And that is an instant impairment to US consumption. It's your recession straight out the gate. I don't want to get all sort of bearish or anything, but I think it's just important to highlight within the broader context that retail investors have a huge amount of exposure and therefore in turn the US government has a huge amount of incentive to try and not do anything too disorderly that could, that could completely derail. I mean, my, my big stat is, is that people used to say the economy is not the stock market or stock market's not the economy.

[Tracy Alloway]

This has been said many times on the podcast.

[Alex Altman]

Yeah, I just think the stock market is the economy now. Not in the traditional sense of like, oh, the stock market is going up, therefore the economy is doing great. But yeah, a 20 impairment to the stock market is kind of of. I think it will trigger a meaningful downturn in U.S. consumption.

[Tracy Alloway]

The thing that worries me now is it's not just the stock market is the economy. It's like AI is the stock market and therefore AI is the economy as well. Like we know it's been driving, not just macro growth, but if it's also driving stocks and we're getting a wealth effect and it's also driving consumption, then I don't know, it's like an AI impact squared.

[Alex Altman]

Right? And look again, just to talk about facts, the the bulk of levered ETF AUM has grown within that cohort as well. The largest AUMs are all within either NASDAQ rated products or semis conductors or single names, most of which are. I mean the largest single name levered ETF in the US is Micron. Right. So that kind of tells you the largest single name levered ETF in the world is Hynix. So these dynamics do play an important role and especially when you start thinking about tail wagging the dog and price dictates narrative. Right. So people see prices going up, that gives them a confirmation bias about, oh, that means we maybe we can spend more money on CapEx. Or that means that the AI story is alive and well. And that's not necessarily not true. But how much of that is getting distorted by these sort of these non discretionary flows that are pushing prices up

[Tracy Alloway]

or indeed, or just general momentum. Right, like momentum attracting more flows.

[Alex Altman]

Correct. I mean, let's face it, momentum is the everything. It's the most successful factor strategy in history. Right. You know, S and p goes up 78% of the time. Therefore by definition, investors generally want to be long momentum. They want to be long stuff that goes up and they want to be short the stuff that goes down. If they do indeed short the muu,

[Joe Weisenthal]

the triple levered, I think it's triple levered, whatever it is, that was trading at 23 a year ago and it recently hit a peak of over 1200. So that'll get you a lot of McLaren's, won't it?

[Alex Altman]

Yeah, look, I mean again, this is the thing for as a team, our

[Joe Weisenthal]

main, I'm sorry, it's 2x, it's a 2x ETF.

[Alex Altman]

It's a 2x ETF. That's okay.

[Joe Weisenthal]

But actually, can I ask you a question about this? So you mentioned that all of these products like they go through the regulatory process and you know, we have the sec. I don't know what Korea's equivalent is, but I assume they have some sort of similar body. What is like the SEC's bar? Is it just do you have 100 times levered ETF? Yeah. Like what is like what? No, seriously. Or like, you know, 10x. What is the point? Is it just like, okay, this checks a certain set of boxes because clearly it's not about like, I doubt it should be, you know, it's like, oh, is this product good or bad? Right. That's not really the question. Does this product meet a criteria or doesn't? What is the criteria? And why don't we have 10x ETF,

[Alex Altman]

so there's actually an anecdote. There was a time, if I'm not mistaken, relatively recently during the government shutdown, where there was an attempt to try and list and shelf some. I don't think it was 10x, but there was, I believe, some 5x levered ETFs. And effectively the regulator, I believe at that point just kind of made. Made it abundantly clear that, that there are limitations to. To leverage. Just from a. To your beginning point, you may not be interested in leverage. Leverage is probably interested in you. And again, I'm not privy to those conversations in any way, shape or form, but I do know and understand that there are limitations to what a regulator would deem acceptable from a leverage perspective. Quite reasonably as well.

[Bloomberg Announcer]

Sure.

[Tracy Alloway]

Just going back to the momentum trade more broadly. So Barclays, you have this index product. I can't remember the exact name, but it's like the market timing product.

[Alex Altman]

Betty.

[Tracy Alloway]

Yeah, Betty.

[Joe Weisenthal]

Betty.

[Alex Altman]

Barclays Equity Timing Indicator.

[Tracy Alloway]

Yeah. And that has been like in. I don't know if you use the specific term overbought, but like it's basically been in sort of bubbly, speculative territory for some time now. Like a record amount of time, right?

[Alex Altman]

Yep, that's right. Yeah.

[Tracy Alloway]

Okay. What should investors do with this information?

[Bloomberg Daybreak Host]

Sure.

[Tracy Alloway]

Because I feel like all the surveys right now show everyone's super bullish, everyone thinks stocks are overvalued. And. And it's like, so what if the trade is momentum? Then you just keep going.

[Alex Altman]

Yeah. So Betty. Yeah, we love Betty. So this index was created shortly after I joined Barclays, but it was. The first iteration was created back in 2018. So there's a reason. Amount of out of sample data around this framework, it's got 19 inputs, none of those inputs. We have a mantra on my team. I tell everyone this in my team every week, which is if you can't quantify it, you don't have the right to talk about it. And using the word feels and seems are banned. If you use the word feels and seems, you're fired.

[Tracy Alloway]

I think we'd be in trouble, Joe.

[Joe Weisenthal]

Yeah, but it's a good rule.

[Alex Altman]

But the idea is it's a very simple rule, which is we just want to try and really deep root the team in quantifiable data. Right. You know, and just to take a step back, when Scott and Ronnie, who run the equity business, when they sort of effectively were hired into Barclays to kind of really revamp as an ascendant equity business, one of their main priorities was like we need content at the center of the mindshare in order to sort of like really partner and hold hand with our clients. And so that's when they brought me in and because we wanted to focus on quant quantifiable content as opposed to it. So that's the backstory as to why Betty was created because we wanted to have a market timing model that removed feels and seams. And, and, and so it's got 19 inputs. It's got everything ranging from real yields to spot volume correlation to looking at discretionary flows. Like what are mutual fund beaters, what are hedge fund beaters, what are CTAs doing, what are volume control doing, what level ETFs doing what. So everything from the discretionary and non discretionary vertical, from the volume vertical, from the, from positioning. We just, the only thing we didn't include was sentiment indicators. We weren't interested in feels and seams. So there's no AI bull bear index or anything like that. And so your question was it's been in this record sort of warning territory now. Yes, it has been in record warning territory and effectively that's been driven by primarily momentum crowding. Now as you know, at the time of recording we had a big momentum pullback over the past couple of weeks. So that's actually sort of been a relatively healthy and resetting that real yields problematic if you're competing for capital at the same time as the between the equity market obviously record year for issuance. Possibly this year government going to be record year of issuance. IG record year of issuance.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

This is the other big market story is like a blockbuster summer for IG bond issuance.

[Alex Altman]

Absolutely. So if you think about what real yields effectively represent, that dynamic of that competition of capital versus equities. If you just generally look at where real yields are today in say a post GFC environment or a post Covid environment and benchmark it against where equity multiples are. Equity multiples shouldn't be this high. Right. So we can get into a bigger debate about oh.com. real yields were very high and equity multiples skyrocketed. I'm like yeah, but the government wasn't asking you cap in hand for tons of money. So.

[Joe Weisenthal]

So that didn't end great.

[Alex Altman]

Yes, but, but hell of a ride it was in the build up to that. So. But so Betty effectively is taking all of these inputs and what is it telling you right now? It's just telling you that the forward return profile of the S P from an asymmetry perspective on a tactical two month time horizon is just not great. Right now we're looking at if you were to pick a random day in time and say, all right, I'm going to buy the S and P, I'm going to hold it for two months, 42 trading days, the average return would be around about 190 bips. Not bad, right? And your hit rate of making money is about 73%. So Betty, when it is in this kind of territory, so 6, 7, it was high as sort of 10 or 11 it was telling you that you only had around about a 35% chance or even lower of making money in the S P over that same time horizon and your average return was basically negative. So it's not so much necessarily that it's telling you oh my gosh, the market's going to crater. It's really just an illustration of a bunch of quantitative inputs that are telling you actually the asymmetry is not great. And that's exactly what we've seen. The model first flashed as a warning signal late May. S&P's kind of gone nothing since then. And so maybe in anticipation of some big correction in the equity market isn't forthcoming. And that's okay. I still take a lot of validation in the model that is kind of telling you that to just sort of pump the brakes a bit, let some of this froth in the equity market come out and actually get a reset which then actually sets us up better. I mean ultimately earnings are still good, right? We're still driving AI in the economy and we can get into a debate about whether that's sustainable or not. And then we've also got to work off the assumption we're still running a massive fiscal deficit and whilst that environment is happening, it's quite hard to create any kind of fundamental economic downturn.

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[Joe Weisenthal]

aside market timing and what's going to happen in the next two or three months, etc. Just on the sort of like bigger question, the combination of market valuations, however you want to measure them all the classical ratios that people like versus the increase in real yields. How historically expensive is this market?

[Alex Altman]

Right now all Right. So if we take the post GFC environment, the challenge is always going to be that S and P margins were much lower for a long period after the GFC than where they are today. And we have to acknowledge that higher margins should map into higher multiples. But we'll do the full comparison. So post gfc, because there's not that many periods where real yields are this high. Real yields today on a 10 year basis are running about the 95th percentile and they're around about I think 230, give or take. So with that being said, if you take what the average S and P multiple when you real yields were this high or higher, it's a scary low number. The S and P multiple would be around about 14 to 15 times and we're currently trading on around about 20.2, 20.3. If you take the post Covid environment, which I think is probably a better representation of what S and P operating margins look like today, we're still low, it's around about 18 and a half times. So you're still talking about basically a 10% multiple contraction versus where the very

[Joe Weisenthal]

simple question, why are margins a more important factor here than expected growth or expected earnings growth? I mean like in my mind I would pay higher multiples because I think that the earnings are going to have a faster growth rate than they used to have. That seems intuitive to me. Why is margins the lever here that we're looking at?

[Alex Altman]

It's a good question. Well, it's not exclusive, just margins. You can sort of measure it as ROE as well. There's different ways you can do it, but effectively businesses are becoming more profitable. If it's a more profitable business, it's going to be working off the assumption to a degree it may not necessarily be accurate, but that effectively that has a bigger moat. It's more, it's a more high quality business and therefore you'll put that on a higher, so to speak.

[Tracy Alloway]

Can I ask a slightly personal question, which is I used to joke that I wanted to be reincarnated as an equity derivative strategist because then I could just find a number to like justify anything that's happening in markets. But does it feel like people take you more seriously now versus say 20 years ago when people were still talking about like fundamentals in stocks. Now you have this environment where flows are super important. You have all these mechanical things happening. You have the multi strats, as you pointed out, volume targeting, CTAs, all of this stuff is getting bigger. Does it feel like equity derivatives are more important now.

[Alex Altman]

Oh, I thought you were going to say, well, it's my British accent that makes me sound.

[Tracy Alloway]

Well, that too.

[Alex Altman]

People take me more seriously because I'm.

[Tracy Alloway]

I will say we get higher listenership on episodes when our guest has a British accent.

[Joe Weisenthal]

It's crazy because like everyone knows how much Americans love a British accent. But what's annoying is the Brits know it too and exploit that just like you, like, know, like you know what you're doing.

[Alex Altman]

It's a reason why I stayed here for 10 years. I married an American, you know, living. Living the American dream.

[Joe Weisenthal]

Yeah, sorry, you know what you're doing.

[Alex Altman]

I'll get, I'll get back to the, the actual question at hand. So is there increased validation from having a, a more, more quantifiable worlds that we operate in? Yes, but, but on a person, if you're asking a personal question. I don't think that's a personal question. If I was to give a personal answer. My career wasn't always like that. I started my career as a fundamental single stock analyst and I actually started my career actually as a generalist sales on at JP Morgan in 2004. But I then became a general generalist analyst, so to speak, on the buy side. And I did that within the event driven world for several years. And then when I went to back to the sell side I had to pivot, I had to change my investment approach because of the fact that the industry was becoming increasingly specialized and as a generalist I was struggling to make an impact on clients that were becoming much more sophisticated in the weeds on their particular sectors and areas of granularity that I just couldn't compete with with. And so at the time I was working at Citi and Citi has a very good, had a very good quant business. And I was like what's all this quantum factor stuff? What is all that? And I genuinely didn't know. This is 2012, to be clear, 2013. And so I took on a personal crusade to understand the post mortem of my portfolio management experience prior understanding why was my P L doing certain things which I didn't understand at the time. And as it turned out I was just a value investor. But the concept of being a value investor other than sort of the Ben Graham or Warren Buffett model was a bit as in value from a factor perspective. Now it's ubiquitous sort of 14 years ago. But back then it was really novel that you were going to customers, discretionary customers, generalists or just long short guys who weren't quant guys and explaining to them this quant phenomenon in layman parlance basically. And that was the start of a pivot into a much more sort of quantity derivative knowledge experiment. And it just ballooned from there.

[Tracy Alloway]

Yeah, this is kind of what I'm getting at. Right. Like it has become more important in the market. I remember speaking of 2012, do you remember Joe, the headlines where like people would talk about CTA flows or something?

[Joe Weisenthal]

Oh yeah, of course.

[Tracy Alloway]

And it would be like a mysterious force in markets now everyone knows now

[Joe Weisenthal]

that's what has become. Yeah, and it's interesting to think too like if you, if I just think in my mind about one of these platform shops, multi strategy, whatever the understanding of the comp of you know, the companies that they, that POD invests in like they must on the buy side must be orders of magnitude greater than it was in the sort of heyday of like the sell side analysts who would like oh we're going to issue a, a buy rating on GE Vernova or whatever like that. Those investors know that company insanely well.

[Alex Altman]

Oh totally. And look to put some anecdote around that, Barclays as a bank, as an equity business, as a research house, again ascendant equity business, we've been working really hard over the past three years to hold our clients hands and make them aware that we are a really prime and tier one equity franchise. A lot of that is about corporate access. Right. So actually having more research coverage and having more access to more companies which in turn we can roadshow and actually give our customers access to those companies because it is that important to them. To your point? Exactly Joe. Like they have so much granularity and detail in their forensic modeling now that if you're a generalist it's very, very hard to compete on such a granular level. So yes, I pivoted away completely and focused on different mantra was if you think about the verticals of equity investment, the way I see it is that you've got fundamentals, which is obviously what we talked about. You've got economics, you've got cross assets macro, you've got quant, which I would include factors. You've got derivatives, you've got positioning and then you've probably got some other stuff as well. But my view is the way that I run the tactical strategies team is that we don't need to be a 10 out of 10 in all of these. I'd love to be but it's just, I just don't think it's possible in the World of AI, we can obviously augment some of our game in certain verticals, but the aim of, of our game is if we can be like a 7 or an 8 in all of these, and some of them we, you know, will be less and some of them will be more. Some of them will be in nines or tens and others will be like fives or sixes. It basically means that what we can do is we can go into any customer, any client, any investor and say, hey, there's something about the market that I'm sure I can help you on that you're not as aware of. And that's where I think that the evolution of that kind of education, investor education has come to now, rather than just focusing on just one vertical.

[Tracy Alloway]

Yeah, I don't mean to get all media navel gazing here, but I think we are seeing a similar story in media where, like the niche subject matter experts are becoming much more important, much more popular, versus the sort of generalized news platforms. I think that you don't have to comment on that, by the way.

[Alex Altman]

No, but. But it does parlay back into the world of finance and the world of AI because in the world of AI, everyone can have an army of quants in their pockets now of questionable accuracy. But the point is you can crunch orders of magnitude more data. So where's the real value? I'm a big believer that the value, I see it kind of think about it as knowledge and wisdom. Right. Everyone can now have access, infinite knowledge, but it doesn't necessarily mean that they've got wisdom. I mean, the old saying is that knowledge is knowing that tomato is a fruit, but wisdom is knowing that.

[Joe Weisenthal]

You know, this came up on another episode and by the way, Tracy, I just want to say I meant to send you this. I saw someone with one of these viral froyo places that are like. No, they put little cherry tomatoes, actually.

[Tracy Alloway]

That could be good.

[Joe Weisenthal]

Yeah, that's what I'm saying. Tomato is a fruit.

[Tracy Alloway]

Not to get wildly off topic, but my tomatoes so far this year are freaking amazing.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

And come later this month in August, you're going to have like.

[Joe Weisenthal]

No, this is my take, actually.

[Tracy Alloway]

Boxes full.

[Joe Weisenthal]

I love the saying knowledge, wisdom, tomatoes, et cetera. But I actually think some tomatoes actually do cut to make it into a fruit salad. This is my only point, but I understand, I understand the point.

[Alex Altman]

Yeah. And so I think it's the same when it comes to sort of data and the world of finance. Yeah, you can be incredibly granular and specialized, but. But sometimes you're Going to miss the forest for the trees.

[Joe Weisenthal]

Can I just ask, not to turn this into just another AI conversation, but you must actually have some insight on the question on some of these things. Let's say you want to construct an index or some new thing. How good are the models right now at really reliably being able to do quantitative work? I noticed you can get a lot of the way there and even someone like me can, like, hack together or something. But, like, to the standards that you have, like, how much do they still like? No, this is nowhere near something that I would like. Then be ready to turn into a chart and send to a client.

[Alex Altman]

Yeah, I think that's a great question because we're doing that all the time. So, you know, we'll have a customer come in and let's say they've got a particular security, a single name item. They want to hedge that item, and they want to hedge it with a basket. Right? That's one of our most common kind of business problems that we face off with. And so we need to build a universe of securities that effectively replicates that particular instrument without using that instrument, of course. And as a consequence of that, we're effectively running a what is essentially a giant pairwise correlation model. And then we've got to optimize the inputs depending on what individual correlations against that underlying instrument are.

[Tracy Alloway]

Are.

[Alex Altman]

It's relatively straightforward if you've got a really cool optimizer. If you ask AI to do it, what it's okay at is selecting what instruments you should. So let's say you're like, I need. All right, this is a household consumer product. Actually, you know what, let's do it in AI. Let's make it more New Economy. So we've got. All right, we've got a particular AI vertical. Let's say it's a NEO cloud. All right? We need to hedge that NEO cloud with something else. All right, so AI is quite good at selecting. Let's go and get all the other NEO clouds that are listed, and then let's find a whole bunch of other companies that most of which you'll be aware of, maybe some you're not aware of, that actually have a reasonably high correlation to that instrument that you're trying to hedge. That's kind of where it ends. It's not very good at telling you. All right, what about the liquidity considerations?

[Joe Weisenthal]

But it can roughly sort of determine the first, the ingredients. Right. Like you're making. Emanuel Dermen in his book talked about, like, the job of the tray is to make a. It's weird, we're going back to the fruit salad question. But you have a bunch of wholesale fruit and then you slice it up in a certain way. It could, it can identify the ingredients and then it's your job to figure out the optimal. Like it can't do the proper slicing and allocation.

[Alex Altman]

Exactly. So it's, it's. Yeah, it's pretty good. It's pretty good at identifying what my universe is meant to look like because I get these.

[Joe Weisenthal]

Sometimes I see these notes and I have never tried this but like from, I don't know, somehow I get, I got on like, like JP Morgan's like trading desk thing and they're like, oh, by that we think it's time to go long this basket of you know, energy related companies and short this basket of like whatever it is. And I've been curious, I've never tried it. It's like could I get a model to like back out what these ingredients are if I gave the model a line and a theme?

[Alex Altman]

Yeah. So again I would, I mean get this real credit to the, to Barclaysic just in terms of. We've been pretty leading edge in experimenting and adopting as much AI as we can. And so we have copilot, we've got Claude licenses, we're working with other partners to sort of build in house stuff either using external models or our own internal models. But the point being is that we've had plenty of time to operate in the sandbox now. And I'd say where AI is without a doubt most powerful is when you are giving it very identifiable data parameters. Right. So whether it's structured or unstructured data and say hey, I need to try and figure out whatever my parameters are, that's the data. Where it's still less good is if you're basically giving it unstructured parameters to say just can you think about an ethereal topic and sort of come back to me with an answer? And it will come back with a pretty comprehensive answer but most of the time it needs to be fact checked and, or annotated or just tested to and scrutinized.

[Tracy Alloway]

Joe, you've successfully turned this into another AI conversation.

[Joe Weisenthal]

Well, how can you talk about quantitative identify, you know, how can you talk about this stuff?

[Tracy Alloway]

Yeah, we were doing pretty good for 40 minutes, so. All right, Alex, thank you so much for coming on odd lots. Really appreciate it. Truly the perfect guest.

[Alex Altman]

Thank you so much.

[Tracy Alloway]

So Joe, that was a fantastic conversation. A couple things stand out. So first of all, it does seem like with the growth of all these products, the explosion, especially in Asia, that we have products who are sort of like more important marginal buyers and sellers in the market at a minimum. The other thing I was thinking about is like, okay, a regulator isn't necessarily going to approve a 5 times levered product or 100 times levered product, but is there a point at which the aggregate number of all these products actually becomes more of a concern?

[Joe Weisenthal]

Totally. I mean, there's two things. One, you have to take seriously where we are in terms of balance sheet capacity and how much balance sheet is being allocated to this leverage. And what happens those two bank balance sheets in the event like some major downturn. And then I thought like the, just the idea of like I had not realized how big that gap has grown between household equity exposure and household real estate exposure. I still feel like that's probably like a pretty, at least to me, like a pretty eye opening stand because they're just. I know there's a lot of equity exposure and it's become important and no one needs to like argue with me. It's like, like the stock market is the economy. But in my mind I'm like, oh, it's still like real estate is the core of like people's holdings. And not only is it not the core, at least in the aggregate, I'm sure the median household is still way more exposed to their house than the stock market. But in overall, it's pretty staggering how much we're. And then you start wondering, is geared to the stock market.

[Tracy Alloway]

Geared to the stock market. How much of the stock market is now geared towards leverage and then how much of it is also geared towards AI? It's. Yeah, it's a lot.

[Joe Weisenthal]

No, it's a lot. And he really spelled it out well.

[Tracy Alloway]

Yeah, we have to have him back on.

[Joe Weisenthal]

Definitely.

[Tracy Alloway]

Shall we leave it there for now?

[Joe Weisenthal]

Yeah, let's leave it there.

[Tracy Alloway]

This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Eisenthal. You can follow me at the Stalwart, follow our producers, Carmen Rodriguez at CarmenArman, Dashiell Bennett at Dashbot, Kale Brooks at Kale Brooks and Kevin Lozano at Kevin Lloyd Lozano. And for more odd lots content creation to bloomberg.comoddlots for the daily newsletter and all of our episodes. And you can chat about all of these topics 24. 7 in our Discord, Discord, GG Oddlauts.

[Tracy Alloway]

And if you enjoy odd lots, if you like it when we talk about single stock levered ETFs, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.

[Bloomberg Announcer]

The Bloomberg this Weekend Podcast News analysis and the lighter side of Bloomberg, including our weekly news quiz.

[Joe Weisenthal]

Mattel reported higher than expected first quarter revenue thanks to the demand for which toy car brand?

[Alex Altman]

Hot Wheels.

[Joe Weisenthal]

Hot Wheels, Hot Wheels, yes. Are those still a thing? I've stepped on many of those with my children when those are not very much on bare feet.

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