Charts referenced in most recent pod: “The Market Disregards Correlation” Apple: podcasts.apple.com/us/podcas… Spotify: open.spotify.com/episode/772…

hooray for unch'd?

new quant indicator: mortgage rate + gallon of gas

Here's the latest episode of the podcast, a discussion with Brij Khurana, portfolio manager at Wellington. Brij authored a piece in the FT recently that caught my eye. He argued that the Fed's tools, always inexact, are especially so today amidst record wealth in stock markets and so much demand for capital to fund the AI buildout. We also discuss where he sees value in his "go anywhere" portfolio, pointing to bond markets like Australia where the impact of higher policy rates is greater given that higher rates pass through to the economy more directly there. axpod.com/podcast/brij-khura…

some context on the increase in 10 yields over the last 3 months... since 2000. table excludes any days that land within 3 months of another day. today's ranks 8th. also interesting is that the increase in the MOVE is second only to that during the 2013 Taper Tantrum.

Rule of 72 tells us to divide 72 by the rate and that's how long it takes your money to double. Using current 30 year yield of 5.6%, that would take 12.9 years. 5 years ago at this time, it would have taken 40 years, with the 30 year at 1.8%.

We've got an exciting upcoming schedule for the podcast axpod.com/wp-content/uploads…

The chart below shows the (common) upward slope to the SPX implied vol termstructure. The same is shown for the TLT, a near mirror image, and downward sloping. Inverted termstructures, like inverted yield curves, don't last for that long. They are associated with high levels of realized vol, which fund the purchase of gamma, most prominent in short-dated options. In plainer terms, inverted termstructures reflect disequilibrium. All of the major macro vol events have featured curve inversions. The process of finding equilibrium is about normalizing and disinverting that curve. Second chart shows just how joined at the hip the SPX and TLT are. The second chart suggests that the first chart should look different. By this account, either TLT vol is too high or SPX vol is too low. That spread ought to narrow. I'd argue that things getting worse for the bond market could be at a tipping point of making things considerably worse for the SPX.

diversifier no longer...but... "the cure for higher rates is higher rates"

The TVIX was the 2x levered ETF that effectively went bankrupt well before the Feb'18 XIV implosion. It experienced the death of 1,000 cuts, rolling VIX futures into contango during the lean vol years of 2013-2016. To its credit, the TVIX had language that read, "the long term expected value of the ETNs is zero." It went on to warn that, "after 20 years the indicative value is likely to be near zero, and no investor is expected to hold from inception to maturity." That is some language in a sales document. But the Anthropic S1 makes the TVIX warning look gentle. The company says that its technology poses “catastrophic or existential risks to humanity” in its prospectus. IS THAT ALL? My goodness.

Pretty balanced view on what could go wrong.

Existential Risk…is that bad?

"I see the Bad MOVE a risin'.... I see trouble on the way..." rate vol wasn't a thing in 1969, but I couldn't help but riff on the Creedence Clearwater Revival classic. have a listen, what a song. piped.video/watch?v=tKJwvQfr…

Let's pre-suppose the VIX went to 30 sometime before year-end... what's your best guess on what happened?

One of my sayings: “you learn the most about markets by studying episodes when things go horribly wrong.” 25 years ago: Enron 20 years ago: Amaranth 15 years ago: MF Global The unwind of a financial firm is especially hectic and complicated. These are all worth reading.

largely missing from the discussion on the uncomfortable move higher in backend yields has been rate vol. we were hovering around 75bps in the $MOVE for 5 months (April-Sept)...mostly because rates themselves were quite rangebound. the MOVE is up a fair amount recently. I'd argue it's not yet sending the kind of signal that ought to be alarming, but it's not that far off. think about the MOVE as a precision measure. Low MOVE means the market sees a tight distribution of future rate outcomes. when the MOVE rises, it's the market telling us that the probability distribution is wider and its capacity to handicap where rates will land is weaker. here's a scatter that creates 4 quadrants to map the relationship between $VIX and MOVE. plenty of noise, but the two "big ones" (GFC and Covid) are easy to see high VIX but low rate vol is common post a crisis as the Fed made strong promise to keep rates low (and to protect credit markets) as the equity market was left on its own (late 2020)

MTATA

big believer in financial innovation and the freedom to create and choose. at the same time, frustrated with the current state, which is more alchemy than innovation. as the kids would say, these products coming to market are "NTB". 2x leveraged ETFs on crypto treasury companies, autocallable ETFs with fantastic embedded margin for the seller... products that simply do not serve the end user. The latest is that Robinhood is creating 15 minutes(!!!!) contracts on Bitcoin.

Good am. It certainly doesn't feel like a realized volatility environment where 2 week is 12 and 1m is 11 on the SPX. It's difficult not to stare at 10's and 30's all day long. Lots of takes on the “why” of the long-end sell-off. Attribution is a most popular sport on Wall Street. Let’s see….in no order and probably not complete… 1. Fiscal irresponsibility premium 2. (Related) never-ending supply 3. Inflation above target for 65 months 4. Short rates moving higher in response to onset of tightening cycle 5. #2 but inclusive of AI related issuance 6. #3 focused on the war and crude 7. Strength of economic growth 8. The trend is simply for higher yields globally. On this last point, the average yield on government debt worldwide sits just shy of 4%, the highest since 2007 That’s a lot of reasons, none of which should be ruled out. In combination, it’s easy to justify the move, with the potential for more to come. There are many takes as well on whether we are on the precipice of a crisis. We can at least agree that the circumstance is fragile, I hope. The correlation between stock and bond returns is at or near a record high. The back-end is the main threat to the equity market. Resharing this chart from yesterday which I really think nails the two incredible outliers in correlation. Stock to Bond: 100th percentile Stock to Stock: 0th percentile The correlation among risky assets is considerably LOWER than the correlation between risky and risk-free assets. The case for options-based insurance is easy to make, it's just about stomaching the challenging carry.

Because risk management would be nearly impossible without this