Waiting for the Panic

are you asking me? How would I possibly know that? I thought you have the answer to everything. Anyway, of course, when the episode with the craziest thing we saw in markets this week? Sorry, you know I abstained from that competition last time. You abstained last time because you're gonna have an extra extra great one that well, you know since I abstained, you know what that means? Still undefeated.

I guess that's true. We'll give it to you. I'll give it to you this time because I'm feeling nice. But anyway, we've got some great guests that will hopefully tell us when will it end? No pressure here, but joining us for the first time on the show. Very happy to have him. He is the chief macro strategist at e I a all weather Alpha Partners not fullsnala. How welcome to the show. Thanks for having me. Appreciate it absolutely and also back on the show, our old friend.

He's a cross set reporter. He's a Reddit aficionado. Lukawa, welcome to the show. I'm not just I am not. You're more so than the rest of us. Now that you're here, I have to I have to tell you something. Okay, you know, you know I consider you a friend. Sara is your friend. Even novels your friend. We gather do here to talk about that that white belt you've been wearing. The white belt, this is an intervention. This is an intervention. It's always in between Memorial Day and Labor Day somewhere.

Is he wearing it now, Luke? Oh yeah. For listeners who don't know Luke, I will describe he You actually asked, how would you describe Luke's fashion sense? I describe it as risk on. He's sorry, he's like a lever. He's like a Leverty, triple LEVERTYTF of fact. You know how Luke described it? Loud, loud, loud, loud and cheap. Was actually the full description is it's reddy. It's a very

it's hip on Reddit. Look, you know there's appropriate time to wear a white belt, you know, like you just started karate lessons, maybe where it's like a special occasion at the retirement home bingo night or something. Sara's from Florida, she knows. I'm just jealous. Anyway, I'm Luke is very progressive dresser. Michael Michael come in on Monday with a white belt. I'd be happy to give Mike my belt.

He just wouldn't fit it. Cheeze Luke. All Right, you win, you win anyway, not for Let's start with you, because apart from Luke's white belt this, uh, it's just been a crazy week. I was going through one of your notes, uh, from from your hedge fund that you sent around the clients, and I was astounded because you've tallied up the number of tests being done in each country for the coronavirus, and then you obviously divided it by population. Let me

read the listeners. Some numbers here, Uh, South Korea approximately test per million people, and you give sort of a league table here, Austria two thirty five per million goes on and on, Finland twenty three per million, Vietnam eighteen, all the way at the bottom. United States one test per per million people. And later in the you say obviously that the market is is very much gonna be a referendum on how well uh the government here is

managing this crisis. I'm not getting much confidence from that one per million, as has the tide turned it? Although do you think they're they're starting to get out ahead of this? Obviously, Congress past this eight billion and change UH bill to to put some money into the health care system and fight this. How how concerned is the market that this is just not gonna end up well

for the the US? Right? So? I think, um, you know, before before this kind of shock to the markets, the markets were kind of trying to debate whether or not this was going to be primarily kind of like a China story, a China, China only story. I think as we started to see the case counts in South Korea pick up, it became clear that, no, this is not going to be kind of isolated to China. And now that we've fallen as far as we have, I do think the market now is expecting you know, a rise

in case counts as we get testing to plif rate. However, we still are quite behind the curve. So like right now, for example, the latest is that you know, we get about a million and a half testing capacity going forward over the next couple of weeks. However, because of the lab constraints, we can only do about ten k per day, which would take a while to scale up. So we would expect that, like there is an inflection in case counsel's coming, but it's probably not going to be too

quickly unless a private sector really steps up. And we're quite quite down the line on the league tables, as you mentioned, so we're pretty concerned that um ultimately the markets will decide that the White House is a bit behind the curve on this threat. I remember a couple of weeks ago there was a lot of optimism building up because there are reports coming out saying that the

coronavirus was speaking. Of course, a lot of this pertained to China, but now we're seeing this international spread and there's a lot of numbers data flying out there regarding the coronavirus. I mean, what actually are the factors that you guys look out to try to get a sense of how this is actually progressing, and to inform any investment decisions, if at all, because it seems like it's so difficult when there's so many UH numbers and so much data out there that kind of flies against the

phase of another one. Right, These are the type of environments that me, as a macer junkie, I love, although I don't like the social implications. But the idea is that, yes, there was a case sequence show case counting clients in China after a historic quarantine, right, Um, even if we wanted to that wouldn't happen here. Um, And it did spread,

and there were community spread events across the world. And so what we're looking at is we want to see folks start to migrate from the idea of we can contain this virus, which I think is a fantasy, and people are coming around to toward how do we deal with congestion and how do we deal with capacity constraints.

If you do certain social isolation procedures that prevents super high congestions and hospitals and you know, just regular public health and in fact public spaces in general, well that does as slow as the virus with the capacity and the health, health care infrastructure, and biotechnology developments can catch

up to the threat. So what we're focused on mostly is how quickly does the United States, in response to rising case counts, implements social isolation procedures that slows the viruses transmission and allows the health care apparatus to catch up to the threat. If you answer your phone, it's one of your fund investors, uh, and they say, you know, what are you guys doing? What's going on? You know, is it novels? Not here right now? Please leave a message?

You know what what are you telling people? You know, what would you tell a client if they called and said, what do you how do you guys dealing with this? Well, if it's daring market hours then um, probably somebody else um our business will be handla um. If but you know, you get me on the phone outside of market hours, first thing I say, please wash your hands. It really

it really does make a huge difference. You know, we can we can debate whether basks are helpfulness and that, but like you know, I'm sure you guys have seen what happens to the bacteria and viruses when not just virus but bacteria as well. Um, when when you wash your hands for twenty seconds. It's a. It's a. It's amazing. So what is the portfolio allocations when of washing your hands? Right? Right? Right? Yeah,

no kidding, I like I like that. So, you know, we we were quite bearish around Valentine's Day, as we wrote in our past note, UM, so we were pretty well positioned going in to this shock. Um. Now what we're kind of expecting is um, you know, it takes some time for the market to digest the shock. We probably have a relatively wide and volatile range for the

time being. And as we start to see the potential for social isolation procedures be implemented, then it becomes, like you said, a referendum about how behind or on the curve is the White House and to what extent um? You know, how long are we gonna have social isolation procedures to the extent we get them. If we get them, that's the biggest risk to like earning his growth and

potential for job losses. And then the question becomes eight point three billion dollars is not going to move the needle. We're gonna need you know, we need to add another zero to that. If you look at like nine eleven, Hurricane Katrin, a Hurricane Sandy, billion dollars packages. So you know that we're we're nowhere near that level right now.

If we see the White House and Congress suddenly catch up, perhaps you know, the lowest in based on the fact that President Trump called it the Corona flu Wednesday night, we do expect there's some risk for potential more downside, potentially new lows. Once we get to the point where, um, you know, we're starting to see kind of a little bit of panic about the effect of potential social isolation procedures.

Then we start bargain hunting. And then I kind of passed the baton to my partner who runs our launch short portfolio. Gotcha, gotcha, Look, let's bring you in here. I mean, you wear that white belt, but I consider you a black belt in looking at volatility markets. Right half hots segue, what what's what? What's the volt market look like to you? I mean, unless I looked, the VIX is kind of in that thirty range, absolutely screaming.

The volatility term structure is, you know, has signaling a persistent degree of alarm that you know, I haven't seen in my few years in this business. If I if I was back in I probably would have seen something like this in terms of the persistence in the magnitude of how much the ball markets are saying, be very very worried about now, but also be worried about later. That's kind of what the read and you get when the front ball month is so uh, the front futures

contract is so high. Uh, there's about the second is also still so high. And one thing that's been happening is people have been getting absolutely roasted trying to short volatility. People think, you know, when VALL goes up, that means, you know, it's a it's a good short. And you know, it is true that when VALL goes up you have more kind of profit potential, more room to move just

on VALL coming in. But the the structure of the market recently has been such that spot vix is actually much much much higher than the front month, and uh, that convergence is taking place more and more with the front month. So your actual investible way to short fall and you know, in an easy way short of getting the strip uh is actually converging to the upside. So people are getting uh, pretty much absolutely killed on this. And it's a reminder that you know, I got to

look at the curve structure, gotta look at the term structure. Oh, when you're getting involved in this, whatsoever is that notion that you know, the market was so blatantly short vaultil you're heading into this, Is that sort of rebounding into the equity market, You think that maybe making these sell

offs a little bit worse. I think somewhat. I do think there's something to the argument that the you know, the degree of euphoria we saw in January and early February has you know, the necessary every reaction has an opposite and equal reaction just means that it's a little worse on the other side. I you know, I think all the people that were h kind of flooding into

single stock calls, we've seen that reverse. The equity put call actually taught actually bottomed the day of the market topped at like point five five, so many more calls training them puts. But it hasn't really risen to kind of you know, alarming level, since we're still short of like Q four team put call ratios. So you know, that could be a sense that people are just cutting

risk rather than hedging risk. But the vall metrics in terms of what people are looking for, it's crazy, Like when you think about what does the thirty vix mean, it means essentially, we're expecting a near two percent move every day for a month and the SMP five hundred. But that's what we're realizing. We're realizing insanely high than So I want to get your take because what that said. So Monday we had four percent bounds, then on Tuesday

we had this massive sell off. Then the next day and this was after Super Tuesday, we get another four percent balance, and we have people out there saying, oh, it's the Biden balance because Vice President Biden did better in Super Tuesday. Yet on Thursday we get another massive

sell off. How much can you actually look to politics at this point in time and look at the potential Democratic nominees to say who's going to run and actually make a direct correlation to market moves in a market in which it seems like we are just moving NonStop one way or the other inmentum bets every every single day. I don't think we ever had any leftism priced into

the market. Um. You know, it made sense um to me at least that on Tuesday when the Fed cut fifty BIPs, that a lot of folks, including me, would come in and say, all right, this, you know, the upside catalyst has been materialized and realized. You know, we can go ahead and dump the long risk and we

can shorten this bounce, which is what happened. Then you know, you get that rally on Wednesday on Biden, and I think there is you know, the market practitioners tend to be a little bit right leaning, so there is a bit of a you know, personal kind of like you know, just feeling like a little bit more relieved. And the markets were quite volatile, so you know, these type of moves are gonna happen anyway. So that also, you know, kind of made sense to me. But that's why we

were looking to fade that bounce. Um, you know, and it's it's starting to work. But but speaking to your point in Luke, you know this, you know, the folks have this recency bias of you know, by the dip or like short the spikes and volatility. This is a very different shock than our typical shocks. This is not a shock that fiscal policy and monetary policy can um by themselves handle. This is a crisis of confidence. Um, that cannot be you know, stemmed by central bank liquidity.

And uh, it's kind of analogous to the nine eleven and so it really depends on the White House's response. And um, you know we're we're below Vietnam and our testing testing ratios. So and to me, the big, the big issue is what happens in the credit markets. Uh. You know we saw this sort of little known British air airline, uh fly By. I say, I hadn't heard

of fly Have you heard of Never? I'm you know, I'm a greatound guy, so greatly alright, I would say, Um, but you know you see the credit false swaps on the cruise ship operators, Carnival and and Real Caribbean. At what point do you think the credit market really starts to freak out? I mean it kind of is a little bit of issuance was down, high yield issuance was sort of froze up for a few days there. It does this have the potential to to become a credit crisis?

Do you think? I mean, they're the potential is there. I don't think it will happen because I do think the pressure from the equity markets will eventually necessit will eventually pressure a sufficient response, even if it's belated. Um, I'm not a credit guy, so I'm not going to pretend like I am. But from what I understand, it's been very difficult to trade right now. It's very a liquid There has been a bit of a diversion between

equity and credit. So I wouldn't be surprised if, for example, like one of the things we're looking for for like a real bottom, um is a durable bottom. Is that? Okay?

We we have some public health policies in place that are kind of freaking out folks about earning trajectories and like kind of commercial activity credit is starting to kind of you know, spreads are starting to wide and blah blah blah, and you know the hidie holes, the places where people are kind of hiding in, like you know, tech tech software or like utility staples, those are getting hit too, reflecting, you know, just risk constraints, position liquidation.

That's where we're looking for a real bottom, and we don't. We don't really quite see that yet. So the fun credit divergence that's really crept up recently that I can comment on is, you know, I was just Thursday morning, I was running through the numbers and looking at you know, your weekly change in the SMP five d versus the weekly net move and investment grade credit of fault swaps. And you know, normally you think stock market up, that means you know, risk on our companies are getting more

credit worthy, perceived risk of default going down. Uh. The combination of having stocks up at least you know, point eight on the week and at this point we were up you know, three point five on the SMP five hundred and I g C d X at least five basis points wider. Uh, that combination is incredibly rare. It's the last time it happened was the week ending eighteen, which was literally the day after the peak in the

right before the route. So that's that's something I've been kind of giving my eye on his credit is um credit is saying that, you know, the bounce that we've gotten in stocks is should be treated as kind of you know, the way knofs outlined how he's treating it not your most encouraging analogy, but not also pointed out some places that investors have been hiding watching tech and the sort look you've been pointing out low volatility stocks because that was also an area that a lot of

people went to hide last year. Uh, and you found that low volatility stocks have not really been living up to their name. Uh. What does that really tell you?

And can you walk us through what you've actually been seeing? Yes, So this has been weird, and I think it's like Uh, I think it's a combination of a high baseline volatility environment with you know, the most defining feature we've had in the market is the relentless treasury bid that you know, has brought yields to all time lows tenure below one, etcetera, etcetera. So what we've seen is that ten day realized volatility and SMP five hunder low Volatility index actually exceeds that

of the you know, of the market at large. So this happens from time to time, but this doesn't happen during spikes. The only time this has happened, you know, in the past five years, Uh, during a time when you know, realize vall is anything you could consider elevated, was in September. I believe at that time we were kind of worried about lack of central bank monetary ammunition, and at that time, you know, some Trump worries seeping

into the market. There was a time when investors actually thought Trump would be the worst thing ever for the market, but before they decided the exact opposite. Uh, you know, in the course of a night. So what we found there is essentially that the outsized movements in high vall it seems to be a function of and especially this was key last week when we had you know, a correlation one sell off. Basically everything getting hit the same amount looks kind of looks like your mass equity index

futures selling. So what happens in bad days? Everything goes down, everything goes down together in a big way. But then on the up days, what what are people gravitating back to something with an above average dividend yield? In something in which the company is their cash flow. Utilities and uh, I believe reads reads one of them, but utilities and consumer staples you make up SMP five low vall that's over three times the SMP five hundred those cash streams.

Even in an ensignment of social distancing, you're you're still pretty reliable, especially when LSOL and Clorox exact paper is in there. Yes, so it just it just strikes me as something worth monitoring because if you, I'll get out my craziest thing I've seen this this week, you have to have SMP time. To have SMP five hundred low vall beating the market on a day when the SMP five hundred is up at least four percent, that's happened now four times, going back to early nine seventy two.

Happened March sixteenth two, not a great time if you remember. October eight also not a great time if you remember, and twice this week on Monday and Wednesday. Alright, nice, I appreciate the segue because I did not have a segue influence. So we do have some voicemail. We the what goes Up hotline has been overflowing with voicemails with crazy things and other observations. Apologies that we can't play them all, but we have a couple to play, so let's let's hear him. Hey, this is a message for

what goes Up? Long time listener, first time caller. This is your friend and colleague, Cameron christ I'm the craziest thing I saw in markets this week was a horrible white Nauga hide tie worn by Luke Kawa just because it seems as if markets are on trajectory to go back to nineteen seventies levels, Luke, doesn't mean you have to dress like it. Thanks guys, well you this, Thank thank you Cameron for that completely unsolicited complete Yeah, it's like I said, I refused that at your column. If

you don't call bust. I told him to the belt though, but I don't know what tie he's talking about. You know, I have no idea either. All of my ties are wonderful. You must have meant to say belt, and he just went on and went and said, but I'm just jealously because I had six older brothers, I was the youngest, and the bullying all went downhill. So I I kind of look at you, was that little brother. I never had the outlet for the bullying. I hope that's okay.

It's like I was wondering where this is going. I was expecting it to end up in some complimentary that. Yeah. Yeah, And also you owe me money. That's just how it works. Yes, Sarah, do you have a crazy thing you saw in them? Mor I do have a crazy thing, and it'll go back to the idea of a demand for consumer staples. I was looking around just for some different price dislocations that are caused by the coronavirus and people maybe going

a little bit crazy and emergency shopping. And I went on Amazon and was looking at Purell bottles because you can't really find Purell any anywhere anymore. And uh, I found a two pack of one Leader Purell bottles for three hundred and fifty dollars. It's it's crazy, I mean truly, the creer. Okay, I think you won. You might have just scored your first on that you haven't gone yet. And I also have one to the other side too,

let's hear it. Uh, there's a pretty good story on the terminal that was laying out how flights have all of a sudden becoming pretty cheap because a lot of people don't want to be flying anymore. So you can get around trip flight from New York to Miami now for fifty one dollar. So I think I'm going to have to go, Oh really, we can have the problem with that fifty flights, then you gotta buy a two bottle purealitis the hedge. Yeah, all right, I'll were joint

joint winners for this one. If you both had that one but I do have a backup. You know, I've been just staring at the screens all day, so unfortunately I haven't been able to check price line too frequently, so I guess you beat me on that one. But I think it's pretty wild. Um, And this is more earnest than been funny that we're price now for BIS for the end of the year and FED funds. What that means to me is that it's very difficult now

for bonds to short circuit any more stock weakness. And combine that with the quote unquote Corona flu that President Trump had referred to, UM, pretty pretty crazy that we're at this point right now. Um, you know people still I think, you know, they're defending that three thousand level, and you know, we're kind of we're kind of out

of firepower. I would say one thing along these lines, though, I think I think Chair Powell made the right move to move swiftly and forcefully because he just got the FED out of the way and now the pressures on the White House and Congress instead of the next two weeks being this long political debate about is the FED doing enough? And Um, so I think he made the

right move. But because of that we're at a point now where you know, the market, the markets unless they're going to price a negative rates, it's up to that's up to the White House. Now what I'm curious, so the market's prices in a realistic sense, where say the ten year could go this year? I mean, well, what would you guys say, I mean, I mean the you know,

I guess you can't right now wash your hands. My crazy thing is is similar in that in the treasury futures market, you can now buy call options on an off the run bond. I think it's like a mature ten year bond that implied negative yields, So you can now buy a call for for negative years. Yeah, and you're seeing you're seeing volume in those in those contracts, especially the euro dollar ones, a lot of flows there. But but just just the kind of offset uh Mr

Mr Cameron crisis uh Anti Luke commentary. Um, because Lucas Canadian, I would like to say that Canadian bonds have some yields. So that's that's so even you know, we we were riding long rates both in the in the in the in your all our belly contract midcurve contracts as well as the long end for a while. UM, that's less interesting to us. And now because again we're priced to I basically go to zero by the end of the year. UM, so we're much more focused on the downside and equities now.

But there's still some um, some room for the Bank of Canada to catch I don't know if it's catch up or down to the FED in those guys down in terms of it's gonna be taking that Greyhound up to Toronto to get some clips and funds. I do also have to say that I believe Luke wasn't the only one who took some heat this week on the Bloomberg Podcast hot Line. I'm pretty sure Mike took some heat as well. All Right, this is Paul Meyer from

Northern California, and I'm talking about what goes up. And I'm disappointed that recently we haven't gotten any obscure classic rock references, not since I think James can funk for you nine. So come on, Mike, give us something. Come on, Mike, give us something. That one hurts that that I feel that one because as we all know, classic obscure classic rock rock references are an integral part of financial journalism.

I feel like I've been I've been letting the readers and listeners down, and you might ask yourself, how did I get you? This is my beautiful two percent treasury. Kid's got a future. All right, I'll give you one classic rock reference. You know, everyone's talking about what song they they sing when they wash their hands. People saying birthday. I'm singing the wreco of the Edmund Fitzgerald. That's how long I'm watching where I'm not taking any chances, all right,

So there you go, no chances taken. And as a reminder, you can give us a call at our Bloomberg Podcast hotline, leave us a message and we might play it on the show. And that number is six or six three to four three for nine zero. And with that said, novel Luke, thanks so much for joining the show this week. Many thanks, thank you. What goes up. We'll be back next week. Until then, you can find us on the Bluemberg terminal, website and app or wherever you get your podcasts.

We love it if you took the time to rate interview the show on Apple podcast. Some more listeners can find us and you can find us on Twitter, follow me at at Sarah Pontzack. Mike is a ryg anonymous, lu Kawa is at l j Kwa and no ful Sinala is at no ful Sinala. You can also follow Bloomberg podcasts at podcasts. What Goes Up is produced by Toper Foreheads. The head of Bloomberg podcast is Francesca Levie. Thanks for listening, See you next time.