Stock Drop Bears Markings of a Flash Crash: ISI’s DeBusschere

to take a look at the infrastructure of markets. Was this a flash crash and what does that mean about markets going forward? I am very happy to bring in Dennis Debuscher. He is head of portfolio strategy at ever Core I s I and he joins us right now by phone. Dennis, thank you so much for being with us. So did we the witness a flash crash? And what was behind this? I mean people are blaming algorithms. How

how valid is that? Yeah, I mean it's tough to identify how valid it is, and we it's difficult to know what a flash crash technically is because it's a terminus defined very loosely. But I would argue as far as the vixus concern and as far as volatility is concerned, it was absolutely a flash crash. If you invert the chart, of course UM and for the markets, UM you had

elements of it. So what does that mean? The markets and certainly in a quantitative driven world optimized to certain certain conditions, and the conditions that existed was um in which led to a massive short volatility Trait either implicitly or explicitly, was that there was going to be no inflation forever, and they were by extension, no economic volatility

and no market volatility. And it now it seems like you're pricing in some level of inflation, some higher level of rates, and that started to kick in this unwind of this ultra levered I would argue short volatility bet and given that we went to a high of fifty overnight on the vix from nine just not too long and long ago, and it really accelerated course today, I would say absolutely it's a flash crash. I would say.

The one additional point here to make, and I don't think people realize, is algos make electronic trading, and electronic trading dominates all trading right now, and so orders the depth of them are not as what they used to be when used to have classic market making UM people and bank that balance. She's very very levered in ability to absorb losses. So you have very little depth. And if you have millions of orders going in one direction and you re optimize to higher volatility, it can set

off these type of crash flash crash events. Dennis, we want to just step back for a second, because as you just describe, you know, a lot of the trading, the day to day price is set by machines and algorithms, whereas investors may actually buy companies that they think are doing well or are going to actually do better um speak.

If you cannabat capital spending expenditures when it comes to companies and the tax overhaul plan and how that may in affect sort of build on the improvements that we saw in the stock market at least last year, and that we're going to see some spending when companies get their hands on all that cash not just going to

be all shared by backs. Yeah, I mean, first, thanks for talking about fundamentals, so um yes, I mean one of the things we've noticed and you can see it in the FEDS regional diffusion indices of capex plants of all accelerated meaningfully. It appears that post tax reform, atly from the confidence readings you're getting from businesses, that capital capital spending is going to increase meaningfully, which adds um.

You know another level, if you will, to GDP growth that's been entirely consumption driven for a long period of time, so companies will be spending more um that is going to create much higher relative to expectations levels of GDP growth, not only this year but next year. And so that's why you have US GDP growth trending up from two and a half to say maybe even three, and global GDP because it's not just a US phenomenon somewhere in the three to three nine range. That's a very solid backdrop.

And if you have some inflation with that and not a lot, that's a really good at backdrop for asset prices. Historically, we also have central bank policy globally that isn't going to be pushing hard against improving economic growth. I either not going to be trying to lift the unemployment rate to stop inflation. So all of that says that and that's probably why credit spreads haven't blown out, which everybody has talked about. That's why economic fundamentals are likely to

stay relatively solid. That a lot of what's happening now

is technical. The fundamentals are still there, and the market is still biased higher over time and so and it's very good obviously for earnings on a go forward basis when you're looking at one consentus for this year and one so I guess and Dennis, the question is can investors just completely ignore technical sell offs or should they pay attention, especially given the fact that some estimate that there's two trillion dollars tied to short volatility strategies right

now that really didn't move necessarily. I would never say I want to just ignore it, but I would sell you. The ability to profit from it is extremely difficult relative to history, when we used to have different measures of sentiment that you could say, like just talking to people in the street, etcetera, that they might be um um overly concerned about a market decline. I've been looking at my server all morning, and I can't tell if it's

HAPPI or sad. I can't tell if it's capitulated. So I think you have to ride out the volatility if it's technical driven, are you really trying to assess the state of mind if your computer saying I'm just saying, in this new world, you know, trying to pick these

bottoms and volatility has become to become very difficult. And to answer your question, more or less, you do have to as long as you believe in the fundamental longer term that our supporter of that, you do have to ignore a lot of this technical stuff and just have a you know, a tougher stomach stomach for it. Dennis does this as the head of portfolio strategy. It does this U sort of bring out that conversation with investors

and clients. They say they can stomach the risk, but when the day like yesterday it takes place, it turns out that maybe they can't. I mean, yes, I mean in talking with UH, talking with the investors, that's obviously a concern. But I would also say, don't forget where we came from. We're just flat on on the end of season. I mean, you're up you know, two over twofold sense of financial crisis. You've had extremely UH favorable returns in the market. So I don't think there's any

sense of panic at all from individual investors. Yes, there's concerns because on all over the TV is this low volatility unwind. But we're not out of place or anywhere close to a place where anybody thinks about Paine. Market returns have just been too strong. Thanks very much for being with us. Dennis to Busher, he is the head of portfolio Strategy for ever Core I s I, helping to manage more than eight billion dollars in a customer assets.

Before we say anything or do anything with the bond market, we always check in with Ira Jersey. He is our chief US interest rate strategist for Bloomberg Intelligence. And I got a little bit of a sell off at the long end buying at the short end. Give us an update on what's going on in the treasury market. Yeah, So in the treasury market today, it's it's actually selling just about everywhere. Um. Yesterday was you know, pretty um,

pretty correlated with the move in the VIX. If you if you look, we had one of the biggest uh, well, we certainly had the biggest rally of of treasury yields in the last couple of a couple of months where you had a fourteen basis point rally and tenure yields. And the last time you saw that was around and uh, you know other little jitters and markets and um, you know it was it was really huge moves and and

the volume that went through was astounding. In fact, you don't normally see volume at three o'clock, like the volume after you see payrolls reports or FED or FED statements and uh, and that's exactly what you had yesterday, was just this massive volume going through lots of people. Well it's hard to tell if there were lots of people buying, but certainly the volume of buying was was quite astounding. Well, I want to home in on that because I'm wondering,

do we have a sense of who's behind this. Is this real money accounts with people actually trying to liquidate some of their treasury holdings, or is this algorithmic trading that is correlated with stocks or whatever else. Uh, and is sort of moving on its own affair and we'll get at some point rectified as people reassess inflation and growth expectations. Yes, that's a good question. And you know, I talked to a lot of people yesterday and we were all kind of scratching our heads and saying like

this can't be humans. It's a little bit too fast for that. So UM, it probably was some kind of either algorithm or um. You know, people were talking about potentially risk parity strategies, rebalancing or or or something like that. But to your point, and that's a great point, is

that today's move is kind of counter to that. So we put out a note this morning um on on b I rates on your terminal and basically we discussed that Look, when you get these moves of you know, ten, fifteen, twenty basis points in ten year treasuries or across the market, you tend then to see a lower volatility day that follows, and usually some counter trend to that, and that's exactly what we're getting today, um and and in fact, over the last seven years, you tend to get these big

bouts of volatility, and they might be driven by algorithmic or or electronic trading and UM and they tend to be very short lived. And then you wind up with people saying, okay, is this justified based on the fundamentals, as anything really changed? Um And once you realize that, no, things haven't really changed. From an economic standpoint, then you can get back to kind of the the old trends

you were on. I just want to understand a little bit more about old trends and new trends, because earlier in the day we were speaking with Alberto Gallo of Algebras, and he I thought it was very, very impression when he said, people have been buying stocks for yield and bonds for capital gains. Is that about to change? Well, I think that that actually has changed. I mean, I think that changed probably two years ago when we hit the you know, one fifty yield on on tenure treasuries.

Because once you start to move back from that, it's hard to see how you get significant returns or at least returns much higher than the coupon at this point on a lot of the treasury uh UM a lot of the treasury market, whereas in equities now you you have yields that are somewhat higher than than the dividend

payouts of equities UM. And at the same time, I mean you have to look at things like Gina Martin att Are Equity Strategists, has done some great work on on things like earnings and the fundamentals are ultimately going to be the driver of of long term prospects for for equities. So within an environment like we have now we have slightly higher inflation, where you have growth prospects

that seem okay at least in the in the near term. Um, you know, the question is is there going to be you know, pressure on margins and things like that, and and that can wind up meaning that you have an equity market that is based a lot more on fundamentals than necessarily people buying it for income like you've had

over the past couple of years. Is this particular market are we already seeing jitters and uh some kind of pricing in of the debt ceiling and the possible risk there or can we expect a whole new hiccup as people start to wake up to that risk. Yeah. So, so the depth ceiling is going to show up in the in the T bill market, and there are the t buil market keeps on pricing. Uh, a problem with the depth sailing in and out and for various dates.

Because the problem with the death ceiling with analyzing where the deaths when the death sailing is going to get hit this time of year, is that starting about now? You get a lot of tax refunds that come in, and the timing of when those come in winds up being very important because the way that the Treasury Department pays out um the tax refunds is by issuing treasury bills.

And so we're at this point now where if you wind up getting a whole lot of people come in in the next two weeks, there it's possible that even in the first week of March we wind up with with the debt the death ceiling being a problem. Whereas if those are a little bit slower than they were stay last year, then you can wind up actually towards the end of March. So yeah, the market is already pricing for that. The market is pricing in and out different March t bills um as being the problem. For

for the death ceiling. We we still think it's somewhere in the second half of March. That's what our model shows, but again there's a lot of uncertainty around the inputs to that model. And uh and and that's the behavior of the taxpayer. Thank you so much, iro A Jersey. A really important time to be watching the treasury market right now. Thank you so much for being with us Jersey is an interstate strategist for Bloomberg Intelligence, coming to

us from our BI headquarters in Princeton, New Jersey. The real story of this week's turmoil really is volatility exchange traded notes and just generally the volatility and short volatility. Trained here to talk about that is Sarah Ponzack Cross, asked reporter with Bloomberg News. Uh, Sarah, thank you so much for being with us. So we did get news today that Credit Suites is liquidating, Uh, their short volatility exchange traded note. Not tiny, this had what three billion

dollars at one point in it. Who are the investors behind us? And walk us through what happened here? So the investors behind this, it's definitely a combination. So Credit Suite was the biggest holder of x i V. They actually had about thirty two of the holding. So the remaining sixty eight we can't know for sure. It can be some institutional, but it is a lot of retail investors who don't understand exactly what the risks of these

products are. I mean, I remember a couple of months back, we had stories coming about out of workers at Walmart who were making money off of buying these products trading the VIX because they just thought that it was easy money, because they thought this tranquility would stay calm forever. But they didn't understand what would actually happen if the VIX

spikes like we saw it did happen yesterday. So my question is were there advisors that were peddling these products to them in a way that they shouldn't have been. We saw that black Rock came out today demanding more regulation, especially given the fact that exchange traded notes are often conflated with exchange traded funds. Uh so what are people

saying about that exactly? So I think this is kind of a watershed moment for the e t F industry because we haven't had to deal like with something like

this yet. And what happened is, like he said, Larry, thing came out black because come out they're urging more regulation, saying that the people create these funds need to actually say and let people know what these risks actually entail and kind of separate themselves from the E t F industry because they're not vanilla e T s. And I think someone like a black Rock is really nervous that people are going to start generalizing, and this is going

to affect their products. People are going to be scared of buying their plane Vanilla A T S, buying the S and P five hundred because of what has happened with the vix. Now one was an E T N x I V, but then one of them was actually an E T F. It still operates in a similar way, but still they're basically saying that there's just been more regulations when you're not dealing with the plane Vanilla E

T F explaining what the actual risks at hand are. Well, he is not playing vanilla when it comes to anything related to the markets, and that is Corey Johnson, and

I want to bring him in. He is our anchor and editor at large for Bloomberg TV and Radio and co host with Carol Master Bloomberg Markets PM and also if you look back into his history his career history, he was also a portfolio manager previously at Kingsford Capital Management as well as Canal Capital and Corey, what do you make of this, Uh, this conversation about volatility and

volatility linked exchange traded funds. So I think what's really amazing here is this is an unprecedented This is a true black Swan event written into the structure of this x I V product. The CT this exchange traded note was a really interesting clause, and it said that it's the underlying security spiked more than it could trigger essentially a liquidation, and that it never happened before ever in

the history of the VIX. So even those people who were sophisticated and may have actually gone to the trouble of reading the perspectives and understanding what they were getting into might have looked at this and said, yeah, but when is is going to happen? And this really does get to the old saw. You know, it's different this time. It was different. This time, We've never ever seen volatility

spike more than in a given day. Um. It was also interesting to see this happen really in the late moments of the trade yesterday, when it was clear that this thing was going to become um uh, you know, this whole this whole instrument is going to disappear, and uh, the underlong one of the underlowinged instruments suddenly traded down in the last half an hour of trading. Worth noting also that we know some of the robot advisors and Vanguard were unable to deal with clients at that point.

They weren't picking up the phones, their systems weren't accepting trades. So any investors were in this through that giant brokerage House of Anger for example, couldn't get out. Um and uh, it's it's a it's a real problem. Uh. And you know,

we talked with the value of this thing. We don't know who the holders are, but if you just add up the number of holdings that we do know about, there were about college fifteen million shares out, which means that the at at the ninety nine dollar value, we've had about a one point five billion dollar valuation completely wiped out overnight. And as you mentioned, that threshold that

was reached yesterday increase for the VIX. Yeah, and certainly it is being liquidated and you have to wonder about what kind of build on effect it has. Being liquidated at a week time leaves even less value. Corey Johnson, thank you so much for joining us Bloomberg Markets co anchor, and also Sarah Ponzack Cross as reporter for Bloomberg News. Thank you both very much. The head of the Bank for International Settlements, he has really taken bitcoin to task.

He describes it as quote a combination of a bubble a Ponzi scheme, and he says due to the energy consumption required for mining it, he calls it an environmental disaster. This was quote from Augustin Carston's he is the general manager of the Bank of International Settlements. Here to give us his view is Ryan Radloff. He is the chief executive of coin Shares UK, helping to manage about a

billion dollars in crypto assets. Joining us from London, Ryan, just give you the opportunity to respond to Mr Carston's what would you say to him? Hi, thank you, thanks for having me. I mean, bitcoin is obviously a controversial topic and it's certainly not a ponzi um that we've been in a state of mania about it over the

last twelve months. But really what bitcoin is is an index measure of the dissatisfaction of the current legacy financial system, and it's no surprise that individuals that are sitting on the other side of that in the legacy system would aim to take shots at it. But if you look at what bitcoin is doing across the world from a humanitarian standpoint, um, it is enabling people to be financially free for the first time without having an account with

any bank or anywhere else. So it's serving just as much good um as any any one of those negative points that he mentioned. All Right, well, I've got to say, financial freedom isn't what I think of when I look at the star at the price of bitcoin over the past couple of weeks. Uh, it certainly is not financial freedom for the people who bought it at eighteen dollars, since it's fallen below six th latest reading in a second.

But I'm just wondering, I mean, do you really think that the people who are in bitcoin right now are people protesting the structure of the financial system actually right now, just to clarify, it's a little over seven thousand dollars um but or or rather is this people who are bored of the markets that have gotten very tranquil, not this week withstanding, and are trying to make a big buck by going in here. Well, I think it's both

without question. I mean, the early days of bitcoin, where you had technologist and early adopters, there's even this libertarian movement to it, as I mentioned. You know, in the last few months we've seen the users come into into crypto high your moment for a speculation purposes, and they're getting a hard lesson right now. UM, a lesson that many of us have learned over the last four years being in this market that this is going to correct

every quarter. Um, it's it's going to be volatile. Hold on for the ride, um and you know, but it's it's going to be increasing and user adoption, network value over a long term scale. So we look at it much more on a long term horizon. Okay, so let's let's look at a long term horizon. Where are we headed with this? Well, there's a few new fundamentals to

look at. Um. You know what what we see is bitcoin and you've heard this before, displacing the concept of of a digital gold and creating this new market for decentralized digital money, and the things that people should start paying attention to our our new things like network stability, node count, and new fundamentals of this asset class, not necessarily what technical analysis of a price is going to

start doing. Um. So I think that as the market becomes more educated, you'll start seeing and hearing things like network, node count, and distribution. And that's the things that I think users and people need to start paying attention when they're analyzing these new asset classes like Bitcoin. What is network node count? Yeah so so at coin shares, what our research team will look at is the number of

nodes that are operating and running the Bitcoin software. And the more nodes there are, the more decentralized and strong the network becomes. And those are important fundamentals and factors. And if you look at the last six months, Bitcoin's network unquestionably has gotten stronger through the second half of the year by growing and node count um and yes, we're seeing a big risk off correction throughout the market.

It's not just Bitcoin in the first half of this year, but if you look at the underlying fundamentals bitcoin, in terms of network strength, Bitcoin has never been stronger um so, so we were very excited about that. This is node count, I beg your part an N O, D E node count, that's right, it's an important that's an important factor to watch.

Almost think of as a new fundamental um and instead of looking at price to earnings ratios or or margins of a company, this is an example of what you should be looking at in terms of analyzing a new network based asset. Class like bitcoin or etherium or ripple or one of these others. You know today, UH, I know that the SEC chair is testifying in front of Congress about cryptocurrency regulation. We've heard UH from South Korean regulators.

Japanese regulators are looking into uh, particularly one of the exchanges there. I'm just wondering. I mean, you talk about financial independence and independence from the sort of traditional financial system, but you need to be connected to it in some way since, as we see, futures now of bitcoin are trading and a lot of these contracts are securities and being treated as such by the SEC. So what's the sort of comfortable intersection here of government oversight and regulation

UH and freedom or independence from traditional financial worlds. Yeah, it's it's this is a good question. It's it's a hot topic right now. And I personally I think that we need more regulations specifically around the consumer protection UM elements of what we're seeing in the I c O market. UM. We need a clear cut UM you know, report that I think comes from the crypto community almost like a code of ethos of how things are going to be done UM, and that needs to be liaison and passed,

passed through regulators from the legacy world. So it's going to be very difficult for the regulators to come up with this code of conduct if you will, on their own. UM. So, I think this needs to come from the crypto community. It needs to be brought to the regulators um and and worked on that jointly. But it's gonna be very difficult. And part of the reason why is because you have

three elements at play here. You've got, first the fact that we're dealing with monetary assets that don't require a name to be moved around. The second is that they're global, so they don't fall under new jurisdiction. And the third is that they can actually move other assets like dollars over these over these networks. So it creates a very

difficult challenge for regulators. So that's why I think it needs to come from the crypto community and then pass through and worked with the regulators to come to some code of ethos or conduct. Who who or what entity from the crypto community would be the most likely leader. Well, I think you know, if you think of it's even of where the intersection it needs to happen, Where the intersection of FIAT too, crypto occurs UM and that is on the that's those are the exchanges, so the coin

basis of the world. UM. Those are the individuals that are facilitating the process of the movement of legacy money like FIAT money into blockchain based monetary assets or cryptocurrencies. UM. So exchanges groups like us, We're gonna be working with a group out of the UK UM to work with the UK government on this. UM. We're gonna help spearhead that. And then there's other companies like coin base that are

taking leadership roles as well. UM and and that that's Those are the types of companies and the profile of where it needs to come from. Ryan Radlof, thank you so much for joining us. Really interesting and it would be great to keep in touch with you as this story unfolds. Ryan Radlof is chief executive officer of coin Shares UK, which has a billion dollars in crypto assets and it's based in London. Thanks for listening to the

Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox, I'm on Twitter at pim Fox, I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio