The Macro Trading Floor transcript – 12 August 2024

Alf: Welcome back to the Macro Trading Floor. Alf speaking, as always, with me, my friend, Brent Donnelly. How are you, Brent?

Brent: I’m good. What a week for markets. All I’ve been doing this week is markets and playing Magic the Gathering with my son. That’s basically the only two things I did this week.

Alf: You split your time 50 50, I hope.

Otherwise too much market. Okay, so, so we have had a storm going through here. Just to give you the size of the storm, which is interesting. So, a lot of people talk about carry trades, so the beauty of markets is how much herd behavior we see, like, I think if you asked a month ago, any random person involved in markets, can you please define four sources of carry trades cross asset, they would barely be able to define exactly what a carry trade is and where you can find them.

But now, because we’ve had Quote, unquote, the biggest carry unwind of all time and more to come, and it’s 20 trillion and it’s going to destroy the world, now everybody talks about carry. I mean, it’s, it’s beautiful. I love it. But okay. To give a perspective of people of the magnitude of the carry unwind, which has been pretty large I run a series which tracks an equal weight basket of carry trades across many asset classes.

FX carry, credit spreads, rates, commodity rolldown, a bunch of stuff, okay? And we track the Sharpe ratio of that, so basically the risk adjusted returns of being long carry. And the unwind in that carry basket over the last few weeks is the 97th percentile magnitude unwind over the last 20 years. So there have been only 3 percent episodes where there has been an unwind faster in carry trades over the last 20 years than what we have seen last week.

So yes, it has been pretty large.

Brent: And the amazing thing is, if you follow financial Twitter, FinTwit, you would have seen when Dollar Yen was at 158, 160, a lot of things about the Yen is in crisis, Japan’s in crisis, Dollar Yen to 200 Japan has lost control, MOF is a joke. That was kind of the theme. And then, I aggregated all the things this week of here’s a five minute explainer on the yen carry trade. And obviously all those things are happening at 140. When all the stuff about the yen crisis was happening at 160, it’s interesting how, how that happens. And sometimes you can pick up the vibe from when things start to become a meme like the yen carry trade explainers were essentially becoming a meme.

That’s often a reverse indicator of something. It’s like the magazine cover when something is fully memefied. Then obviously the narrative is very well known and everyone understands what’s going on. And, then of course, after that, we saw a huge bounce in dollar yen.

Alf: I think there is positive expected value in tracking the mimification of things, Brent, but I still have to figure out how to properly track it like statistically consistent, but I think there is so much value.

So there was a while where I used to do polls on Twitter and I used them as a fantastic contrarian indicator. So hear me out, hear me out. I have, I don’t know, like a bazillion, gazillion followers on Twitter. So then the, the sample size is very large. And so what you can do is you ask people, hello guys, spot 10 year treasuries is whatever, four and a half percent, okay? Then, Brent, you go back and you look, what is like a one standard deviation event over a month? I don’t know, in treasuries it’s gonna be like 25 basis points, okay?

So then you’re gonna give people three options. You’re gonna ask, where is 10 year treasury a month from now? Is it going to be like around where it is today? Is it going to be one plus sigma higher or one sigma or more lower? Okay. So you’re drawing for them three options across the distribution, like, you know, mean, and then one standard deviation positive, one standard deviation negative events.

Brent: Right.

Alf: And every time that Twitter votes with the distribution of votes, that is when they take one sigma or more option, let’s say treasuries are below 4 percent or above five, like a big answer, and they give like a 30 percent odd to that tail, which should be like 15 percent or so, you can do the opposite. Six months later, the excess return of that thing is amazing. I have only like six polls out. The hit rate is six out of six, believe me or not six out of six. So I thought at some point with the team, we should roll this out as a hedge fund strategy.

Brent: Yeah. So as, as things get more and more extreme on any metric like that, I find the hit ratio tends to be insane. And then the only sort of downside with that stuff is that you just don’t get very many signals. So another example like that is if you look at RSI, when it goes to like, it hasn’t been here in five years kind of levels, like New Zealand against the Japanese yen Kiwi yen, the RSI hit like 11 this week.

And when you get RSI that low, I mean, essentially what that means is it’s down 13 out of 14 days or whatever. Those tend to be great signals, but you just don’t get the signals very often, but they can be extremely powerful signals. And you made a good point I think earlier about systematizing it because the problem with these anecdotes is that if you have a bias, you can kind of find anecdotes that, that will always kind of support your, your thesis.

Like if you’re bearish tech stocks, you can always find some ridiculous reason or some ridiculous headline that, you know, somebody signing a boob or whatever that will make you want to be bearish. But the tricky thing is, avoiding cherry picking and confirmation bias with those things. You can sometimes find signals if you’re looking for them, but yeah, the dream is to systematize it.

Like I did with the economist cover where you actually back tested over 20 years and you see, the results. And you know, with the economist cover, it works.

Alf: I was thinking about how to code up in a thing. If CEO of a large tech company signs a boob of a fan during an event, please ping me a signal.

I mean, okay. But now becoming serious again. Twitter, I think is the incarnation of herd behavior, or it does a lot of connotations of herd behavior. And seriously, herd behavior is a big thing in markets, right? I mean I am wrong 50 percent of the times. Which means I’m also right 50 percent of the times.

And another episode you shared last week, which is quite interesting was at the peak of the panic on Monday if you would put up a trade for clients, right, then, or you would trade it and you would communicate to someone and you would say stuff like I think the yen is overdone. I’m going to fade it. I’m going to go long dollar JPY. They would come back to you and say, are you, are you nuts? Are you kidding? This is the biggest carry unwind of all times, and it’s going to eat you alive and you’re going to die. You’re not only going to be stopped out, you’re going to die if you short the JPY here.

And that’s why when you get this kind of feedback, funnily enough, it tells you how people are concentrated on the other direction. And again, you need to systematize these things. And we’re going to talk a little bit about. a framework later, right? Trying to act in periods of complete mayhem, right? And the importance of having a framework to respect, almost having a flowchart of your decision making during these periods, because if you make it an emotional decision making process during these five Sigma events, you are going to probably make stupid decisions.

Brent: Yeah. And I do have a lot of experience in that. So we can talk about that after, but first I want to talk about the the U S economic data, because I’m confused. So, and I haven’t talked to you in a bit, so I want to find out what you think, but the issue – so we had this collapse, right?

Which was monetary tightening in Japan, peak AI narrative, kind of Harris beating Trump in the polls and now in the gambling odds. Volmageddon. So this big vol explosion, EM carry unwind. And a lot of that started with non farm payrolls and ISM manufacturing looking really weak, like looking recessionary.

And so we went, you know, massive change in fed pricing, but then all of a sudden this week, now you got, then you had services ISM, which is 80 percent of the economy looked actually pretty decent. The employment number was decent. Claims came in okay. And then now people are talking about 436, 000 people reported that they could not report to work because of bad weather in the July employment report. That’s the household survey.

So, you know, that could chop 0. 2 off the unemployment rate. So it’s a bit confusing here. It looked like maybe finally we were kind of tip tip tipping over. And now, I don’t know, I’m not so sure. And then Atlanta fed GDP now, which has been the best tracker of GDP over the last like 20 quarters is still at 2. 9%.

And I think that’s been a really useful indicator because generally economists have just been way too pessimistic for the last three years. And so, I don’t know, it’s, it’s very hard to reconcile the Sahm rule triggering, unemployment shooting higher, and 2. 9 percent GDP growth. But then maybe, you know, that’s the last good quarter and we are tanking and, and I don’t know, what do you think?

Alf: Well, I think that you have mentioned several indicators, and I think that the recent track record of some of them is much better than others. So ISM manufacturing, for example, not a fantastic track record, but in general, a soft data, I would say, not a great track record of late over the last two to three years.

So when you look at the hard data instead. You made that fantastic chart on Twitter where you post the VIX spike on data. And then there was slightly softer payrolls, boom, 40 VIX. And that was fun. So look, the three month moving average of private job creation in the U. S. is one hundred and fifty thousand.

So if you smooth that one data and then you say, okay, let me take the average of the last three months. Okay. And let me roll this three, three months moving average. The answer is 150, 000 jobs a month on average in the private sector in the U S over the last three months, 150, 000. How bad is that? Well, It’s pretty much okay.

I mean, the U S needs to create a hundred, 120, 000 jobs a month to break even on unemployment. And the reason why an employment rate is going up Brent, even though we are creating 150, 000 jobs, well, it’s because the supply of labor has gone completely nuts. And this is something we discussed about right immigration.

And if the supply of labor comes in aggressively, you need to create a ton of demand of labor to offset that, or otherwise you’re going to have, well, unemployed people. Right. And so we discussed that and I think demand is clearly slowing down. I don’t want to say that demand isn’t demand is slowing down, but I think if you put everything in an equation and you look at the hard data with the best, with the best track record of late, so Atlanta fed GDP is a great track record of late, right? And it shows we’re doing fine.

The hard data of previous quarter GDP, if you look at domestic sales to private purchasers, which is like a proxy for consumption, basically, it also looks pretty much fine. And we can always say, yeah, we’re going to have big revisions because that’s what happened in 2001 on 2008.

The GDP was 2 percent and then they revised it a year later and it was minus one. And, but we’re going to know that in a year from now, or in six months, we’re going to see signs. For now I would say the main thesis should be – nominal growth is slowing down, but the price action was different. The price action was like, the world is falling apart right now.

And so I think that price action, your chart was amazing. Like the big spike against a slightly weak payroll. So that’s fantastic.

Brent: Yeah. I got a lot of likes on that chart, which I actually ripped off the idea from one of my clients, but he did say it was okay for me to tweet it. Cause he doesn’t, he’s not on Twitter.

But the chart showed all the VIX spikes and it was like biggest pandemic in a hundred years, global financial crisis, China deval, whatever, and then slightly weak payrolls. And I made it more as a comment of like saying a single variable explanation for any move in financial markets is kind of dumb.

But I think the reason people found it funny is that it did feel like that was the catalyst, but really underlying all that was like, everyone was long FX carry. Everyone was long Japan, Nikkei topics. Everyone was long momentum mag seven AI short vol, long crypto. So like everyone had all the same positions.

And then you kind of got this perfect storm of like BOJ tightening and all that. But it is, it does go to the idea of, it’s sometimes very hard to explain moves, especially large magnitude moves. Like they don’t always make sense. It just doesn’t always have to make sense. And it reminds me of December 2018 and early January 2019, you had a pretty aggressive stock market sell off and it just like, Things weren’t that bad at that time.

Things were, the economy was slowing very similar to now. The Fed had tightened a lot. At that time, Powell made a big communication mistake and said, we’re a long way from neutral, which was empirically false. But but so the financial conditions were a little, or, or monetary conditions were a little bit different, but it was very similar.

And that’s the thing is that a lot of times you get these huge sell offs And sure, there’s some fundamental catalysts, but really it, the magnitude is just driven by the position unwinds because it turns into a VARshock where people just have to de gross. And the thing is though, is that then you get the wicked bounce, like we saw now, and then, then you got to assess, okay, well, was that the start of something or was it just BS because like something like the flash crash in 2010 was just really an algorithmic situation that was, had nothing to do with macro.

Whereas this, okay yeah, it obviously was massively exaggerated by the position unwind, but also there’s some reality to it too. It’s not just like it was a completely random thing. It did look like US was slowing and Japan is hiking. And if you look at the history of bank of Japan hikes, it’s pretty mind numbing. Like the, the prior bank of Japan hikes, the Nikkei’s dropped like 50 percent after.

So in the, in the eighties, obviously they hiked. And Nikkei dropped whatever, 85 percent after in 2000 they hiked and Nikkei dropped 50%. In 06, 07, they hiked, Nikkei dropped 50%. So they have been really good at timing the peak of the cycle. Just, I mean, it’s a sample size of three basically, but I think that is part of why you also saw a little bit of an exaggerated move is that people kind of have this memory of bank of Japan hiking, and then the entire world collapsing because it happened three times in a row.

And I think actually the bank of Japan is more worried about that than anyone else. So. After the, everything cratered about 48 hours later, Uchida came out and kind of tried to spread some dovish, you know, dovish spice on the whole thing just to make things look a little bit less dramatic.

Alf: Massive speech. I mean, at least I found it – I never seen a speech like that, from when Draghi was basically saying, I’m gonna do whatever it takes. I mean, please go and take a read at what’s, Deputy Governor Uchida. He basically said, and sorry, I’m paraphrasing a bit, but he basically said well, you know, if stocks go down, we’re not going to hike anymore because, you know, stonks need to go up for Japan needs to do well and stonks up objective one stonks up, we’re not going to hike anymore. Forget about it.

I’m like, what, what did you just say? And he actually says something along the line of stock prices are very important for financial conditions, which is basically central bank jargon for we really want stocks to do fine. We are not going to hike the Nikkei into a hole.

And this is quite interesting. It really says something about our central bankers are aware of their perfect contrarian timing. I mean these guys could get a job at a fund really, and I think that would be great.

Brent: Yeah. And it’s tricky for them with the feedback loops because they feel like a dynamic economy requires some normalization of rates.

But a dynamic economy also requires a stock market that’s not collapsing. So they’re trying to play this kind of difficult game where their actions are tightening financial conditions, but they don’t really want dramatically tighter financial conditions. What they actually want is normal interest rates, but not tighter financial conditions.

And so, you know, they’re, they’re entering a very challenging phase. One interesting tidbit in the discussion of that Bank of Japan meeting was that one of the members was saying that they wanted to get to 1 percent at some point in like late 2025, which is a very long way off of what’s priced and, and where they are now.

Alf: Yeah. Hey the other thing that happened is that the bond market went completely ballistic. At some point we were pricing, hear me out, 5. 5 cuts by the Federal Reserve over the next three meetings. So basically 50, 50, 25 for sure. We gave 50 percent odds of 50 50 50 for September, November, and December.

So, like, the Fed was gonna do and do 50 basis point cuts every time, you know, like, like, we’re basically being invaded by aliens, so I don’t know what the problem is. But, so to give you a reference, in 2007, with clear cracks in the housing market already, late 2007, the Fed said, oh, oh, oh, we need to cut rates, rates are too high.

And we were literally going to have the biggest financial crisis ever after the second world war after. So ex-post, it was pretty big. And all the feds started with was 50 and then 25 and 25. In 2001.

Brent: Yea, there was a strange thing this, when this happened that, that some people were calling for emergency cuts and things like that. And it’s just like, there’s this disconnect between whether monetary policy is for the economy or for the financial markets. And obviously the financial markets are so connected that we really have more like financial cycles than economic cycles now. But at some point you still have to disconnect them a little bit.

And honestly, I think. Like the commentary of like that one guy that was calling for emergency 75 basis point cut was, I mean, to me it was kind of ridiculous, but to their credit, the Fed actually didn’t go that direction at all. They, they came out and said, you know, it’s one number, chill out. And so I would definitely give the Fed credit since I don’t know, it’s easy to criticize the Fed. And that’s generally what people always do.

I would say they deserve credit for just, Being rational and saying, Hey, listen, it’s one number. There could be distortions from the hurricane, just chill out. And, and I think that’s actually a more supportive response than saying like, we have eyes on market. We are ready to provide liquidity. That’s actually scarier than just saying like, listen, dude, 2. 9 percent GDP chill out.

Alf: But if there is one guy who likes to critique the Fed, especially this week, it’s Mr. Trump. He says that he has a better gut feeling about what interest rates should be. then people at the Fed or even the chairman himself and the president should definitely have a say about what interest rates should be.

So, you know, people like to critique the Fed, even potentially the new president. Now, the fun stuff is that you pointed out very correctly. So then another herd behavior indicator where a few weeks ago, everybody was talking about the Republican sweep. Not even Trump being the president, but like it was almost a done deal that the Republicans are going to win the house and the Senate.

All of a sudden the odds seem to be 50 50 now of even Trump being the president. And that changes a lot of things, huh?

Brent: Yeah, that’s super interesting. And I think. There was a, that thing that you mentioned about Trump saying that he should have some authority over interest rates… the market, or even like the media, didn’t react as much to that as they did to the business week article that had come out a few weeks earlier. And I think it’s interesting that people are just, Not seeing the, the Trump chatter as being as relevant as his odds go down.

So there was this kind of assumption that he was going to win the presidency for sure. He was like 67 percent odds or something in the gambling odds. And now it’s almost like the media is not taking him as seriously or taking his, his utterances as seriously.

Because I mean, the president setting interest rates like that’s the model in Turkey. And I mean, there’s obviously a lot of differences, but generally independent central banks are something that markets like, and if they actually thought that the fed was going to lose its independence, the, you know, there might’ve been a reaction to markets, but the market didn’t react to that at all, which.

Again, like you said, it’s just like this herd behavior of like, Oh, Trump’s got it locked up. And then now everyone’s like, Oh, the Harris and Walz is the ticket that’s going to bring joy back to politics or whatever. And people just like keep running back and forth from one side of the boat to the other side of the boat.

Alf: So talking about bond market pricing for a second, because September is a discussion we had before, which is quite interesting, right? I mean, so at some point. Let me open the series here. The market implied probability for the Fed cutting in September went to, let me say, so the max we saw was a fantastic 2. 5 cuts priced in for September.

So, 50 basis point cuts for sure was priced at some point and also almost 50 50 odds of an intra meeting cut over a jumbo cut of 75 was like big panic. Okay. On Monday. But right now we’re pricing 1. 6 cuts, which means roughly, you can say 60 percent odds of a 50 basis point cut and 40 percent odds of a 25 So we’re almost 50 50 Brent.

Like the market isn’t even sure anymore the Fed’s gonna do 50. So what happens in September?

Brent: Yeah, well, I mean, I think that makes it really interesting from a trading point of view, because now you’ve got, I think you can pretty much ignore what the feds saying, like what the individuals are saying. I think it’s just a lot more going to come down to the payrolls number.

And for the last couple of years, we kind of went away from caring about jobs as much because we just knew the jobs market’s tight, jobs market jobs growth is strong, and no one really cared all that much about payrolls. In fact, sometimes treasury auctions were, there were periods where treasury auctions had a bigger impact on the market than nonfarm payrolls for a year or so.

And then CPI was obviously the big thing that mattered because that was the marginal, you know, variable that was going to change policy. And now we’re back to watching jobs more. So the September jobs report obviously will be huge. And then keeping an eye on claims and all that other stuff because the aggregate jobs market definitely has been slowing, but maybe we’re just in the same place we were six months ago, which is things have cooled off and excess savings have been run down, but we’re just in an okay economy like 2018, 2019.

Even though something looked much worse than that suddenly for about three days.

Alf: And then we figure out that if that is the outcome, then the drawdown in, in the NASDAQ was a gigantic buying opportunity, right? Because if the world looks okay, like nominal growth is low, but the recession never arrives and the Fed actually normalizes rates back to two and a half or 3%, well, that’s not great for me starting a macro hedge fund, but in general, you can just go and buy the NASDAQ and go to sleep, right? I mean, it’s, it’s what it is, but you need to be prepared as well for all possibilities.

Hey, and talking about being prepared for all possibilities, I think we should spend the last 10 minutes, Brent, talking about the importance of having frameworks so that when Monday the 5th of August happens again, You don’t have to panic decide on something, but you already have a framework in place that helps you, not helps you, that almost guides you to make certain decisions in an emotionless way.

Because if you apply emotions, In a moment where everybody’s telling you that the Japanese yen carry trade unwind is going to eat the world alive, there is a good chance that your emotions aren’t going to lead you to positive expected value decisions. But you wrote a book about it. So why don’t you tell me what you think?

Brent: Sure. Well, yeah, I think the, the time to make the most money as in, I’m talking about trading, not investing, is when things are wild, right? You just generally always want volatility as a trader. And there’s this famous quote about war. It’s from world war one that says modern warfare is months of boredom punctuated by moments of extreme terror.

And markets are kind of like that too, right? It’s like VIX is 11, VIX is 11, VIX is 60. And in those times when, when the shit’s hitting the fan, there’s sort of these common mistakes that people make. And that I made, I mean, I learned all these from making the mistakes myself. But the biggest one is not having a proper framework on position sizing and stop losses.

So people just generally, when things are going crazy, don’t adjust their position size correctly for volatility. So like, say you’re an FX trader at a bank and you’re just used to always trading like 20 or 30 million euros or dollar Yen or whatever. And then all this stuff happens and you’re still trading 20 or 30 Dollar yen.

Well, you’re going to notice that your P and L is moving like three times faster and you’re getting stopped out at the highs and lows all the time. I remember in 2008, my normal size in like dollar Mex was like between say 30 and 50 million. And in 2008 in October, I remember putting it in my, in my spreadsheet, like calculating, okay, what’s like, if I’m risking X amount of P and L what’s the correct position size and the correct position size was 3 million dollar Mex.

And, and it was still scary. It was still scary sometimes.

Alf: It’s fantastic because. What you said, I put it in my spreadsheet and it spit out the amount of notional I’m supposed to trade in that. Hear, hear. If you don’t have that spreadsheet, build a freaking spreadsheet.

Because really, the objective number one is not to say, Brent and I have the best sizing framework. We don’t. We do have a sizing framework, which you will be surprised, it’s actually a, not a very common thing. Even amongst people doing this professionally, a lot of people will underestimate the importance of having the sizing framework.

And it’s crucial.

Brent: When you have a lot of experience, actually, you can fall into the trap even more because you just get so used to certain position sizes. So someone will just be used to trading, you know, 600 S&Ps or whatever. And that’s just like their normal position, but that makes absolutely no sense to have a fixed position size.

Like your position size should always be based on the volatility of the instrument that you’re trading. And then a similar kind of thing is that in that same spreadsheet, you need to be able to calculate what’s a reasonable stop loss, because there could be times in dollar yen where like a fair stop is 30 pips away.

And then there could be times when the fair stop is 250 points away because it should be related to how volatile dollar yen is at any given moment. So it’s not moving or it’s been in a 14 pip range for three weeks, your stop loss parameters obviously should be completely different.

And again, it’s just something that either people who are new to trading tend to not do because they don’t understand it or very experienced people don’t do it properly because they get lazy and they, they have like a finger in the air or like a gut feel of what the right position is. And because of the non linearity of volatility, Your gut feel’s just going to be wrong a lot.

Like I was saying that thing with the 3 million dollar Mex, I mean, there’s no way I would have thought the number would be that small, but you know, when the, when VIX goes from 12 to 50, it’s like doing Black-Scholes in your head. Like, yeah, okay. I can, I could probably calculate pretty well what an option price is if vol goes from nine to 12. But if vol goes to 56, it’s going to be hard for me to do Black-Scholes in my head and know exactly what the right position size or stop loss is.

Alf: I mean, don’t scare me man, Black-Scholes in your head. I mean, just come on man. Best I can do in my head is some calculations on how much flour I need for my pizza versus the water. You talk about doing Black-Scholes in your head. You’re scary guy.

Okay. You don’t need to do Black-Scholes in your head guys. Only Brent can and a few more, but you need to have a spreadsheet. Yes. You need to have a sizing framework. It’s very important. Jokes aside, to have a way to standardize the amount of risk you are taking on each position and know exactly how much you’re going to lose and how much notional should you risk and all that.

I’m bringing it one step forward. Just spoke a few days ago to a very large allocator. And I had an interview, you know, he wants to know about my framework and my risk in the macro fund. And he said at the end of the interview, you know, when I talk to someone and all he wants to talk about is how fantastic his macro forecasts are and his models and how beautiful of this idea he has, I discard him immediately because he might be wrong, he might be right on an idea.

But if I find a guy that spends all the time talking about the framework. sizing, correlations, stops, and all that beautiful stuff, then I’m very interested. So this is a guy that allocates a ton of money for a living.

And that’s what he cares about. Not you being right or wrong. He cares about you having a spreadsheet. So do you have a spreadsheet? That’s the question. Question of the day. Do you have a spreadsheet?

Brent: And I think that whole concept applies in life too. Like ideas are just a dime a dozen. It’s really always, always about execution.

And so, I mean, that’s why I wrote alpha trader was because I felt like there’s so many books about trade ideas and macro and fundamentals and all that stuff. But there aren’t as many that go into just like, what is the process for, for trading? There are books obviously, but not as, not nearly as many people spend a lot more time talking about ideas than they do about tactics and execution.

And like, so same thing in, in the arts, right? Like everyone’s got an idea for a novel, but can you actually execute it? Everyone’s got a video game idea, but like actually making the video game and making it fun, that’s the hard part, not coming up with ideas. And I think it’s the same thing in trading and investing is that the ideas are not actually really that hard to come up with, like sometimes there’s plenty of times where obvious trades will work, but then the problem is you can be right and lose money and that’s the worst kind of way to lose money.

Alf: I agree. I agree. Okay. So after these words of wisdom, I would say that I don’t know. I don’t have anything more to add. I don’t have, I mean, I have one trade idea that I could share with people. It’s let me do it like this. I think that it’s going to be very hard for equities to quickly rally to all time highs again, because the damage that we have done on value at risk shocks and people being stopped and books being degrossed and de-leveraged, then You know, the pain has been pretty real, so I don’t think you’re going to easily see equities zoom to all time highs, but you’re seeing already the stabilization of carry trades, right?

You’re seeing vol coming in, equities are trading in ranges, the bond market isn’t ridiculously priced anymore, and I think that’s the first positive sign if you want to be long risk, right? You want vol to stabilize, and vol is stabilizing. And so my, my biggest bet is that stock markets are going to rally back a little bit more, do fine, and But not really back to new all time highs.

And now there are ways you can express this with options. And let’s say that because it’s a trade that can last five or six weeks, and we have already bombarded people with 40 minutes of macro blabbering, I am going to leave the option structuring to the next meeting. Do you have any, any tactical ideas you want to share?

Brent: I do agree with that, and I think like looking at the a hundred day and the 200 day and the Nasdaq is a good start, like buying the dips and to the 200 day and selling the rallies to the a hundred day, because I do agree, I think this isn’t just like a completely random thing, like the flash crash. I do think that people are kind of now reassessing how much carry they want, how much exposure they want, gross.

And also what about the valuations and how is AI going to actually make money? I think all those things are still in the psychology of the market. So I agree with you that there, obviously we overshot to the downside and that’s easy to say now, but I don’t think that we’re going to rip through to new all time highs.

I think people are going to be selling rallies.

Alf: Okay. So now the most important thing, right? So people want to talk to Mr. Donnelly. They really like Mr. Donnelly. They want to know how he calculates Black-Scholes in his head. Now they really want to know. So where do they find you?

Brent: So spectramarkets. com is the easiest, or just ping me on Bloomberg if if you have Bloomberg.

Alf: Okay. And if you want to know how much flour to put in your Neapolitan pizza recipe, you can ping me on Bloomberg. And, you know, when you do, you have to train your Italian spelling. You have to really spell Alfonso. That’s easy, but then Peccatiello. Can you spell that? If you can’t, I’m going to put it in the description below.

So you don’t miss my name and surname. You ping me on a Bloomberg. and I’m going to share whatever you want me to share with you. Thanks you guys for listening to us. It’s great to know that we’re not speaking to ourself. Thank you.

Brent: All right. Thanks Alf. Thanks everybody. Have a good weekend.

Alf: Ciao.