The Derivative - No President Yet, So Market Rallies Huge What ^%$#?

Episode Date: November 5, 2020

Votes are being counted, CNN and Fox are on 24-hour reporting cycles, and Tweets/FB Posts/Texts are still being sent out at lightening speeds. What happens if a winner isn’t announced for 2 or more days? What happens if President Trump remains in power? What happens if former Vice President Joe Biden takes over as POTUS? In today’s U.S. Election – What^%$# Episode we’re joined by Matt LaViolette, Founder & Principle at Breakout Funds, and Kris Sidial, Vice President at Ambrus Group talking about avoiding blue waves, election shell shock events, and volatility rallies. Chapters:  00:00-01:40 = Intro 01:41-21:23 = Backgrounds, Avoiding Blue Waves & Possible Shell-Shock Effects 21:24-35:38 = Are We in a World When Vol Rallies? Reflation? and Thoughts on Energy 35:39-49:09 = The Fed, Are They Out of Bullets? + Final Thoughts & Shocks Follow along with Kris Sidial on Twitter, LinkedIn, and The Ambrus Group website. Follow along with Matt LaViolette on his previous The Derivative episode, Twitter, LinkedIn, and the Breakout Funds website. And last but not least, don't forget to subscribe to The Derivative, and follow us on Twitter, or LinkedIn, and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. I think everybody was fixated on this vol move. I'm one of those guys on Twitter that's openly speaking on the fact that it's very, very difficult to get volatility to go through the roof and get that convexity when guys are pre-hedged.

All right, so you've had that bit involved this entire time and then finally we get the event and you have this ball compression and now people are kind of just looking to hedge off some of that that are that long ball wrist right so they're buying stocks Hi everyone, we are here the day after the U.S. election. I held in there watching the coverage until about 3 a.m. and then got about four hours of sleep. So if I sound or look a little disheveled, that's my excuse. But here we are towards the end of November 4th, the day after, and there's been no winner declared. There's been no concessions by either side. There's

been lawsuits and Supreme Court involvement threatened. There's likely to be recounts and runoff elections. And with all that uncertainty out there, the NASDAQ is up over 5%. What the is happening? Does the market even care who's president? What happens if a winner isn't announced for two more days? There's a lot of questions, none of which the market seems to care about. So in today's U.S. election WTF episode, we're joined by Matt Labialette, founder and principal at Breakout Funds, and Chris Sidial, vice president of Ambrose Group, to talk about all these potential outcomes in the market, fallout, slash reactions surrounding them. So welcome, guys, and let's jump in. So Matt, we've had a pod before. We'll put that in the show notes and can do your intro there.

But you want to just give a super quick background on yourself and breakout funds? Sure. So breakout funds started by myself and a gentleman named Aaron Larkin. So we were, our background is from prop trading space. So we spent, you know, 15 years trading our own accounts or, you know, our prop trading firms accounts and just sort of evolved in that space. And then 2015, we joined up again. We kind of took separate paths and joined up again to, to launch breakout. What the idea being that, you know, it's kind of our edge is that that's

the mindset we bring is, is the prop trading space of, you know, we want to be an absolute return fund where we think whatever market is there, we should be making money. You know, granted, there's some markets we make, you know, it's going to be better for us than others. But we want to be, you know, really adaptive, really be able to change with markets just like we've seen in the last, you know, 24 hours. So, you know, movement like this is what we want. It's not a guarantee that things work out, but it's at least what we look for. Awesome. And Chris, this is your first time on the derivative here. We're going to do a full pod with you somewhere down the line, but give us a quick background and what you're doing at Ambrose. Yeah, sure. So I actually started trading on the retail side during my college days.

From there, I came out and was trading on the prop desk at Chimera Securities. From there, I went to Xanthus Capital Management. It was a small buy-side equity hedge fund. From that point, I went over to work under one of the individuals that started the CBOE, one of the president of the CBOE, Market Makers Association. That's kind of where I really dove into it and learned how to trade vol, spending my time in his family office, trading with him every single day. From that point, I went to BMO on the exotics and listed options desk, spent about three

and a half years at BMO, kind of got the gist of what it was like to manage a large ball book, seeing all the little intricacies of managing the risk levels and really getting the full scope of market microstructure. And from that point on, my partner and I were constantly in talks to a point where we were backtesting things. And based on the market condition and the regime change that took place, we actually decided to branch off and do this on our own. That's where we decided to start up the Ambrose Group. And we're focused on more so relative value and dispersion trading. We are a volatility arbitrage fund. We also do carry some short ball stuff in the book where we focus on

the role yield and the VIX term structure and a few other angles on the Kurtosis side. So yeah, that's pretty much where we're at. Decided to make the leap this year and just trade relative value and vol arm. You don't look old enough to have all those names on your resume. Thank you. That's a compliment. Right. Or you jump around every three months. One or the other. It's a good thing.

Brighter pastures. So let's, I'll start with you, Chris, from that kind of market maker background. And, you know, last night, NASDAQ was up 3% or so. I think it went up as high as five and a half or something this today. What are your thoughts on what's driving that flow?

Is that retail? Is that market makers unwinding hedges? What do you think that flow is like? Yeah, so I think it's a little bit of both. I think everybody was fixated on this vol move. You know, I'm one of those guys on Twitter that's openly speaking on the fact that it's very, very difficult to get volatility

to go through the roof and get that convexity when guys are pre-hedged, right? So you had that bid involved this entire time. And then finally, we get the event and you have this vol compression. And now people are kind of just looking to hedge off some of that long vol risk, right? So they're buying stocks. So that absolutely is what you would... I know you had the famous Jim Carson on here talking about it, but no, he's, he's right. It's a, it's a little bit of that that's taking place. We're also noticing on the institutional side, there definitely is a bid on the institutional side. You know, I seen some people talking about that. This is strictly retail. This is not strictly retail. We're seeing some of the more complex products like, you know, you and I were just discussing before, before we started recording the five year high yield CDX that that's been tightening, right, we're noticing all across the street that the actual appetite is positive. And the sentiment is positive. And I think it's a

it's respected. And it's, it's true, I'm buying into it as well. Because when you have this, this potential administration change, right, the market right now, I think, as it's pricing a 75 percent chance that you have a Biden win. Couple that along with a Republican Senate and the way how people view things is this is that, OK, well, we're still going to get some type of stimulus, right? Because there's no way that they could not implement a part of a stimulus based on the resurgence of the virus and everything that's taking place. But on the same accord, the issues that would take place with taxes and capital gains, that's going to be more of a gridlock with a red Senate. So I think people are looking at this and they're basically saying like, okay, well, you know, short term, it's going to be good. And in the long run, the Democrats can't really mess this up in a sense. And then, you know, there's a few other

things too, when you talk about the capital gains changing, you also talk about potential regulations on Wall Street changing. So the fact that we avoided that blue wave per se, it's absolutely looked at as bullish and I'm kind of buying into it. So it's like on a stock side, sell the rumor, buy the news. On a vol side, buy the rumor, sell the news. In a way. Yeah. Matt, what are your first knee jerk reactions to last night, what you saw? And then again, heading into today, when you woke up? Or did you go to sleep? I did for a little bit. Yeah. I pulled a 3am or I think

was I might actually sleep a little bit today, too. We'll see. But yeah, no, I think that those are all Chris made good, good points. You know, I think, you know, for us kind of coming into this event, you know, it was all about, all the investors were asking, what's the playbook? What do we think early last week? And I just really didn't want to give an answer because it really mattered where the markets were the day before or even the night before, positioning wise. Because just like Chris was mentioning, we know, we've had a, you know,

a premium bid in November and December of all for six months, even back in the height of the crisis, they were bidding up, you know, November and December of all and the consensus has been, oh, my God, there's going to be chaos, a disputed election, which we might be getting into here, which we don't know. But just by nature unless there's you know the chaos is unimaginable that ball has to be has to come in and so you get a bit in stocks and you see what happens that's kind of why you know last night so you know spooze went down about 33 30 i'd say you know 33 30 was kind of the low um you know, mid evening, when when Biden was looking good, and then about 830 at night, Dodds switched to Trump quite heavily, futures rallied about 100

handles, vol started coming in. And, you know, and then around 11, or midnight, it started, you know, looking like it might go back towards Biden odds, you know, the probabilities kind of shifted again. And, you know, with those two press conferences odds, you know, the probabilities kind of shifted again. And, you know, with those two press conferences that, you know, with no results and, you know, it's kind of shifted back towards Biden and futures kind of came off. They actually made a new low, but vol kept was, was suppressed still. Right. So there was, there was an offer on that volatility.

And so, and then it became apparent somewhere in the middle of the night when I actually slept a couple hours that, you know, the Senate was actually probably going to hold red. And so that is like takes the worst case scenario off the table. And so with that, you know, gridlock is probably good for markets and at least it stops the, you know, maybe the crazy policy that, you know, would be really onerous tax policy and stuff like that. Yeah. For now. So what did I read the other day that Microsoft, Amazon and Apple have each added over a trillion in market cap since 2016 election.

Right. So if you're an investor in those, you're like, just, yeah, keep as much the same as possible. Right. Don't change too much don't bring on too much new regulation we've been killing it with those uh keep it going well i mean big big tech is is kind of leading the show today the rest of the you know the rest of the market's not really doing too much actually breast negative today um but just those big big cap tech is is up a lot and yeah there's probably lots of reasons for that.

They're not going to maybe try and break them up or whatever. I was going to bring that up. Yeah, the Russell futures are basically flat with the NASDAQ up four and a half, which is a pretty crazy spread there. So, Chris, bring it back to you. were you mentioned the uh the cdx trades again what were you talking about there yeah yeah so we uh we you know just going back to what we were saying before a lot of people were talking about this is this is kind of retail frenzy buying but it's not you know because on the institutional side we we noticed that tightening in the cdx and

there's a few other products too that we were noticing just going off of some of the flow that we have from some of our coverage. Talk that through for dumb futures traders like ourselves. So what is the institutional doing when they're tightening that CDX spread? Yeah. Using it as a risk proxy, essentially? Right. Essentially.

So when they're tightening that that CDX spread, what they are doing is they're basically they're basically viewing the default risk in those high yield areas as as less. All right. That's that's the way to put it, is that when that that index tightens, it's a good way to look at the actual sentiment on the street in regards to default, especially when you're talking about high yield. And in the IG side, IGCDX2 five-year was also looking pretty tight. So yeah, on the institutional side, it was definitely looking like the flows were positive. Some of the coverage that we were getting, it felt like guys were buying into this, but it kind of leads into a really good point too, because this isn't finished. And as much as we kind of feel like, okay, this is kind of done, you still have a chance where Trump could maybe come out of nowhere and take this. And that could offer a shell shock effect

where guys were already starting to pre-position and then now, okay, everything changes. And then that could add to, you know, excess volatility. So it's something- Although it seems hard to imagine there'd be a huge sell-off, even if that changed. It seems like the whole play was just focused on the Senate, not the president. Right, right. It absolutely felt that way. You know, I think the way how investors are looking at it is they were kind of balancing off two sides and seeing the extremes that could come from it. And once you kind of avoided that scenario where you just have a blue wave that's coming out of nowhere and now that that's in the back burner. Well, it's a little more of a risk on sense where guys are like, OK, we're willing to actually buy into this. And, you know, again, I think there will be some sort of added fiscal spending

under a Biden administration. I think based on where the economy is right now, you won't see too much gridlock as what the media is portraying for the Republican Senate. I think there'll be more understanding. I'm not saying they're going to go and spend as much as if you had a blue wave, but I do think that in the midst of a pandemic, they'll be a little more lenient on that front. But what they won't be lenient to is some of the capital gains taxation, some of the regulations on Wall Street, some of the tax increases.

And that's good. Right. I mean, we look at how we performed in the last four years prior to covid. If you were invested in the market, you made money, right? It was very difficult for you not to make money. So I think people have that in the back of their heads and they're thinking, okay, well, you couple that with the fact that you have a potential vaccine on the way, right? There's a few other pinpoint areas that's coming up where people could look at this and say yeah i'm willing to take the risk and buy equities here yeah it seems to me though that 75 seems still too low like once they just called wisconsin seems to me that at least on the presidential side that should be a little

higher but they just called michigan while he was talking there oh really for biden for biden yeah so right now obviously the game is Arizona. If Arizona doesn't flip to Trump, then it's sort of over. But if Arizona flips to Trump, Trump can win without Michigan or Wisconsin. He's got to hold Pennsylvania and get Nevada. Yeah. So for us, entering this event, we kind of thought this was just that, just a trading event, not really the big, you know, what really matters.

What really matters is the Fed. The Fed's tomorrow. You know, they're driving the shift of everything. You know, Trump or Biden. Red or blue. You know, four years ago, it was a different deal where, you know, coming into the to the election, you know, everyone was sort of brainwashed that Trump was going to be super crazy and negative and, you know, sold it off. And then, you know, we knew that at some point it was, people were going to realize this is probably really bullish. And we didn't know if it was that night or two days later, a week later, but we figured at some point, you know, it was that night, right? That was an insane flip. We did go limit down, you know, that night before it rallied.

So, you know, coming to this, though, you know, with the Fed, my point was, is the Fed was kind of in the background in 2016. And now they're so involved that they are the market, you know, with COVID and everything, the liquidity that's been pumped in. Right, quite literally buying corporate bonds directly. They're doing everything. They're past the point of slowing down and they can only go do more. And, you know, to the point, to the extent where the outcome of the election was negative,

it just means more is coming. And, you know, so say we got that blue Senate and Biden, and we know it for sure by now, yeah, markets probably would have sold off last night. But I would, I would say by now, or even, you know, by tomorrow's Fed announcement, they would have recovered, and we'd probably be trading the same prices. So, you know, that to me is the real game and what they're going to say tomorrow. And, you know, we've taken the worst case scenario off the table. So Senate, if Senate holds, you know, Republican, and I don't see right now anything bearish out there unless it's just a trading event. So do you think the Fed would actually be like buying and holding the markets up at those levels?

You're just saying investors would come in it, you know, if it's down and we probably would end it up at the same levels. Well, I mean, what's the point in getting out of stocks or anything if they go off 10 percent and they come in and save the day? I mean, I think you can stomach a 10 percent drawdown. So, I mean, I think that's that's what the mindset is. And so you lever up and I mean, that's not what we're doing. But that's just I think that's what, you know, participants are doing. And they feel very comfortable being long because they know that, you know, someone's coming to save the day if they're dead wrong. Now, who does either of you have any insight on who Biden would likely appoint as Fed chair and what that might do? It's way too far out for me. Yeah, that's above my pay grade.

But right. That's interesting to consider. Right. If that changes that dynamic, you know, if you've got someone super hawkish in there. But I yeah, it doesn't seem like my one opinion there would be that i think you could take someone it's more likely that with a biden fed chair you're going to get someone more on the mmt side where it's just full out money printing and really no regard to anything else and which you know that's their theory that it's if you have the reserve currency you can do that and you know i think that might be the road we're going down regardless yeah oh we'll see i mean that's what two that's two years away i think so the um yeah we'll see on that the

so speaking of currencies with any seems like currencies were nothing gold was a nothing so it seemed as our bonds were moving, rates were moving a little bit, but everything tangential to that was kind of not moving at all. Well, early in the returns last night, the dollar did get relatively strong. The yen came off quite a bit. Euro came off quite a bit, but then recovered by midnight and is sort of stuck right here you're right it's not really doing anything um chris i don't know if you guys touch currencies too much

but you know yeah relatively nothing going on there yeah so we uh we don't really play in that space um one thing that we do monitor is the uh the cross correlation between certain assets right so um one thing that we noticed today, obviously, you had that surge in bonds and surge in equities. And it's just more confirmation to us that these two asset classes are no longer acting in the same sense that they initially were, right? So you have investors who are now in 6040 portfolios. And I actually tweeted this, I was curious, I was like, I wonder how these investors are actually looking at their portfolios. If they're looking at this and they're like, wow, you know, this is, this is doing really well. Right. But when you actually

need it to do what it was meant to do, right. It's not going to be there as we've seen in the whole COVID situation where you had equities down, bonds down, gold down, the correlations just didn't hold. So it's, it's just an interesting dynamic where I think people are probably accepting of this right now that, okay, you know, the correlation, the regular correlation that everybody's used to is no longer there between some of these cross assets. And when you're going to look for it on the flip side for it to be there to protect the portfolio, when you're talking about portfolio theory, in our opinion, based on our analysis, we don't think that it's going to be there. I got a question for you, Jeff. I'm going to be the interviewer here. I got a question for you.

Yeah. All right. So this is one thing I've been talking about with investors and everybody since, you know, May and June when we kind of came off the lows and markets kind of recovered with all the... My answer is going to be four. Go ahead, finish the question. Yeah. But so I think that there's a there's one world in the markets that that, you know, I've been doing this 17 years, I haven't seen it, you know, and I think people going back 50 years haven't seen it. And that's a world where, you know, equities rally, but also volatility rallies along with it. And, you know, I think that's, that's actually what was driving all of that rally in the summer when everyone was like, oh, this is crazy. And I was like, oh, we're going to a new world where volatility is high, but also equities keep moving higher and they're going to move all over the place. You're going to have crazy two week periods where it comes off a lot, but then it's going to go higher quickly. You know, systems and, you know, billions and billions and billions, if not a trillion of dollars are managed based on the one fact that volatility comes down when equities go up. Right. And kind of what you saw in the last day. But still, you know, we're trading at 28 VIX right now, 29.50. And, you know, that's a huge number compared to what we've seen, you know, even anytime in the last 10 years. So

just curious your thoughts there. I mean, that's, you know, that that's a world where equities, even if the underlying economy is total shit, spools can trade 7000. And, you know, especially if we go to this MMT world, we're talking about the new Fed chair in a couple of years or something like that. Yeah, I was gonna ask Chris that someone similar to so we'll let Chris jump on that grenade first. Yeah, so we actually really, really believe that we're moving into a regime where that's going to be pretty consistent. I'm not saying we're going to see it every single month. But you know, the move that we've seen in late August, early September, that was primarily driven by that large buyer, right? I'm sure everybody read the stories on, on, on soft bank or whatnot. Right. So based on our

knowledge, part of that was driven on that sense, but the continuation of it, right, the actual continuation of the flow, that was still a continuation of that, that correlation break between, you know between vol and spot. And we think that in this new regime that we have come into, this is going to be a constant theme where, again, you may not see it twice in a month, but you may see it maybe twice every two months or something like that. And when these moves do take place, we think that it will be overemphasized because we think people will be so fast to try to come in and play the correlation from the other side that it's just going to

emphasize the move. And I think that that's something that we made an iteration to in our book and the way how we trade volatility arbitrage to account for that type of right tail risk. And that's what we actually view as right tail risk in a scenario like that, where you have vol up and then spot up. So I think, yeah, I think if people are, are, are look, are listening to this, that's something that they should take. They should take into account, especially when deciding what to do with their portfolio in 2021.

You look at the distribution of volatility on, you know, if we're talking equities volatility on, you know, if we're talking equities or whatever, you know, there's always this skew because people want to buy those way out of the money puts just in case, right? But they never buy those way out of the money calls. So it's just, it's mispriced, period. Absolutely.

To me, that whole concept, if it's going to stay elevated and we're going to get vol up, market up, you're going to have to have a huge portion of institutional buyers change from basically buying outright stocks and hedging with puts to buying calls instead of stocks, right? It's like call replacement, beta replacement with calls. And that's what would drive those premiums up and vol, quote unquote, vol up with the market.

And the best part about that is the is the transition from here to there, where the people actually do what you just said, Jeff, is going to be a process of lots of people losing lots of money before they decide to change their way they do things. And that's where the opportunity is in my mind. You know, it's not going to happen overnight. It's going to take six, nine months, a year, people getting their ass kicked before they change what they're doing. Yeah, that's exactly why I think it's going to be emphasized move, because I think guys will come in and look to fade that move initially. And we kind of seen it, right? I mean, I'm not gonna lie, I look at the move too. And I was just like, yeah, this doesn't really make

sense. But thankfully, we had a we had a little, a little take on what was causing the move. So yeah, I mean, i think we'll have these small events that just get blown up because people are going to try to come in and fade it and it's just going to turn into a bigger event matt are you saying the like market makers will get lose a lot of money because they're i think there's people all across the gamut that just you know based on the like i said the one the uh, principle of volatility is down as equities rally. Right. So that, you know, even if they're long equities, they start selling ball because that's supposed to be what happens. Right. Um, but it's not what's happening. It happens sometimes, but it's, you know, it's, it's, it's not what we saw all summer. And, you know, we saw,

you know, best case 26 VIX in the last, you know, since, you know, since the crisis here of COVID. So, you know, we had lots of years recently that I would have prayed for 26 VIX and we can't even get there on the downside. Right. Let's talk to that a little, Chris, what are you seeing in the VIX curve? It looks like December now is bumped up. So it's like, right, there was an October hump. Then there was a November hump. And now I pulled it up today and it looks like there's a December hump.

Yeah, yeah. So now we went into – No, it was at 2860 and Deese is at 2910. Not huge, but then the whole rest of the curve's in backwardation. Yeah, so the front part of the curve is now actually in Kotango after last night. I'm pretty sure it was in backwardation last night. Maybe it's on one of those 10 screens behind you. Yeah, but so we're noticing that.

December of walls is actually something we've been a little bit outspoken to. We think some of the election risks should have been focused on December vols for a few reasons on a few particular sectors. So thankfully, we started playing December vols a little bit earlier. So it's kind of a little bit of a free play for us at this level. But, you know, I would anticipate those vols to come in a little bit more. You kind of need a, you kind of need the market to compress the vols a little bit more, kind of get a little complacent, and then you'll have that left tail event take place, if it's a left tail event. But as of right now, as to where we're going, it's looking like

investors are more so risk on and you'll see a little bit of a continuation of ball compression, unless something comes out the woodwork. And what do you, what do you think will move us off that, you know, that curve in backwardation back to a more normal contango? Like it's got to get compressed, totally reset back to normal.

Yeah. I, I mean, not, not absolute obliteration, but I would think, you know, you would need VIX somewhere around like 25-ish

um if i'm giving a level like that you would need vvix down a little bit more um i would want to see a little bit more complacency um and for a period of time right not just for a few days but like sit there right right exactly exactly yeah not not just because we've been getting that those a few days type of moves right we've been having those where VIX does this. And then it's, it got a little bit sticky coming into the election time, which was obviously people are going to be bit on vol, but no, we would like to see a little bit more complacency. And as I was saying before,

there's a few sectors that we're looking at particularly for the holiday season, where we actually think that there will be a good amount of dispersion and then there'll be an area to actually capture some of this volatility arbitrage on a sector base. Can you share some of those sectors? Yeah, absolutely. So we've been outspoken on the banking sector. We think that there's going to be relative weakness in that sector. We actually think relative weakness in the oil sector, right? You had a lot of these oil names that were kind of on the brink of bankruptcy, but- Yeah, we got Zoom that we're on here is worth more than Exxon now, right? Yeah, yeah. That's a crazy-

That's insane. All right. So a lot of these oil companies were almost bankrupt, but they were kind of waiting for this election time to actually figure out if there would be an administration change. And now that there is, we think that you'll start to see some more of those filings pop up. But the main sector that we're actually really interested in is XRT, the retail sector. And even though we are not in a full-blown lockdown,

we think that with the added restrictions on a global level, there's going to be a little bit of a pullback for holiday sales and how people actually spend some of their money, right? So like, let's just say, for example, let's forget about the gifts. Let's just say on a regular base, during the holiday season, you would have 20 people over, maybe this, maybe this time around with the restrictions, you're only going to have 10 people over, right? So that means you're going to buy less forks, less plates, less food, right? There's less gifts going around. There's less

decorations, right? Yeah, less corporate holiday parties. Right, exactly. So there's a lot less of that. So we actually think holiday sales are going to lag a little bit. But the main reason why we're looking at the Vols and XRT is primarily because of the strength that it's recently had. If you guys check the retail sector, it's been bid the entire time, right? So we actually think a lot of those- I lost a lot of money selling, shorting Wayfair in my play account back at the, I'm like, no, it was at like 12 and it went to 300.

I'm like, how many patio furniture are people buying here? There's gotta be an upper limit to like, they're done. They've filled up the patio, right? Yeah, yeah. The strength in XRT has been tremendous. I think it was something like, I want to say like $25 to $52 within this run after COVID. So, you know, it's pretty strong. And we think coming into year end, we'll have some people who are actually looking to take some profit off the table on that. If you start seeing holiday sales lag, people will probably be like, okay, we're going q1 of 2021 let's let's reallocate this sector has done fairly well um holiday sales are lagging and i think there's a way to actually take advantage and

try to are about the vaults and that's in that base and i think to uh trading trading in relation to uh to to uh spx i think it's actually trading at like 13 percentile range when you're looking at the 30-day implied. I may be wrong on that. Don't quote me on that. I think I took a look at it yesterday. You quoted yourself. Yeah. I thought you were going to come out and say you're going to trip along mall REITs that you really love. You really think the mall is going to make a comeback. No, no, that's not me. That's not me. And so what anyone have thoughts on energy, like energy got a little bit that's perhaps because of the gridlock and Senate staying red, they're not going to get sweeping Green New Deal or whatnot pushed through. I don't know if that was ever going to happen anyway. But yeah, I mean, I think just from my point of view on that,

we're not a dig into the fundamentals. We're more of a markets price action people. So oil is reversed hard from Sunday night, traded down to $34. And it's just this whole reflation. Everyone's position is right now, especially after today, is loaded up on this reflation narrative.

And so that's what you're seeing in crude oil. It was still you can't even get up here. You know, it's thirty eight, thirty nine or six right now. And speak to that higher narrative reflation. There was basically like Fed's going to do whatever they can to keep asset prices high. Yeah. I mean, it's just it's sort of the recovery, you know, is working and, but, you know, there's also inflation kind of creeping in here, which we've seen, and that's just a function of stimulus and, you know, all the stuff the fed's doing and, you know, to the extent the dollar kind of tops out here and it gets weaker, that would, that would kind of put a bid under that

stuff. So energy is energy is kind of for me i focus on it a lot is not necessarily we don't you know trade it a lot we do we do trade crude and brent um you know here and there as opportunity kind of comes in but and you know the risk reward profile has to be right uh but it is a great indicator copper as well uh just kind of global reflation and it's just about, you know, we put it in kind of our, you know, our cocktail of what our decision making process is. And it's, you know, it's a vote, but it's a significant vote for us. Good. I like the vote talk on the day after the election. So say you put it into your voting

machine, right? Yeah, there you go. Yeah. And I mean, to think that that was a couple months ago at negative 37 right or even i can't remember even before that move it was at like 14 or something right yeah it was like 41 and then fine you know you know we were we were heavily on the deflation side early spring and and uh you know just wouldn't break 41 and finally it did and you know, it just wouldn't break $41. And finally it did. And, you know, we actually took it off in the low 30s. And then there it went to zero and beyond. Right. So there might be a little I was hearing a little bit of like Biden's probably better to get infrastructure done. Both sides of signal, they kind of want that done.

And it could be a little bit of stimulus as well for sure yeah i mean i think whoever you know i assume it's biden at this point um but i think either side stimulus is coming infrastructure is coming um they're not going to stop at this point then grains are at yearly highs too so i i reached out to some of our guys on our ag side they're like no it's because there's el nino and there's drought in brazil and argentina um no election correlation there but i'm like maybe um maybe ethanol remains remains in in play great what else we got? Any other thoughts? You know, for me, for us, it's just kind of focus on the Fed again.

So, you know, obviously markets are going to whip around based on headlines and whatever's going on with Arizona and Nevada at this point. You know, one way or the other, but the markets are where they are. You know, we rallied quite a bit today in the S&Ps and NASDAQ. I don't think, you know, like we said at the beginning, we took the worst case scenario off the table. So, you know, even if it flips to Trump, I would say that's more bullish than this now. So as far as the trading event goes, it's hard to be sure at this market right now. I think you also, to me, you took off, right?

There was a big worry, Chicago here, they're boarding up stores on Michigan Avenue. And there was some social unrest worries that there are going to be riots and whatnot, which still could come. But it seems like that's been rather tame, I guess, because no one's felt like the loser yet. So nobody wants to. Did they have the bridges up last night? I don't know that, but I know people were,

that was bubbling up in my local conversations of like, are you going out of town for the election night? Yeah. Like, no, what do you mean? Like, well, could get ugly. Yeah. Chris, were you gonna win i was gonna ask one more thing matt on on the fed of which are both of you just what are your thoughts on their um basically they're out of bullets i don't know anywhere close to out of

bullets okay i i all right i'm on the other side of that one, Matt. I'm going to win this. Yeah, no, I actually think that they, you know, I can't see. Well, first off, to take a step back, the Fed put has become like a self-fulfilling prophecy where they jump in and they actually, they buy with it. But in regards to what the Fed could actually implement, I find it very difficult to see what else they could do. I mean, I know that the next move is coming in and buying equities with rates being so low where they're already at. I can't see much more being done in regards of yield curve control. I just can't see it. It's something that I personally can't see much more being done in regards of yield curve control. I just can't see it. It's something that I personally can't imagine. And I think this boils down to the actual sentiment of the investor belief in the Fed. And what I mean by that is that if you see a scenario where the Fed is buying and the markets are actually pulling back on it, I think it's going to reaffirm the lack of

belief for current investors and the sentiment, which will shift at that point. Now, I have no idea if that's going to happen in the next year or two years or when it's going to happen. But I think with rates being so low, it's very difficult for the Fed to do much else. I mean, they're going to have to come in and support equities. But if they jump in and support equities, I mean, what are they going to do? Buy up all the equities that are they jump in and support equities i mean what are they going to do buy up all the the the equities that are out there right it has to be you you have to have that that consumer sentiment um that that belief in the fed that or they'll just buy a you know lever it up and

calls on the big tech names and i should qualify this i think that there's i don't know that whatever they're going to do is going to work yeah but i think they're going to try if they do whatever they so i mean it's just and to my and that's what i mean by that they're going to try and they'll fire every bullet every everything they can think of if they have to i agree with that just means the dollar goes down you know the dollar is still way up here compared to even a few years ago so they could devalue this dollar you know a lot before we even get to a point where people are starting to question what's going on but the trick there is europe and japan everyone else is trying to devalue their currency

right so how do you how do you all do it at the same time whoever goes biggest and first right so yeah um you know europe it's it's a hard deal for them to get that done. You know, they don't have the, you know, they're talking about those Euro bonds, but I mean, it's been nine months of talk or even longer and it can't get anything done over there. So we can devalue a dollar with anybody. So we'll see. I mean's that's the kind of the whole point if in the in the event that bad stuff happens they're going to do something else i mean we know that's going to happen now when they started the qe program 12 years ago or you know 2010 and beyond you know actually rates went higher because people were sold into the fed like chris was kind of mentioning

that maybe that's not going to work but it's's just sort of a, you know, it's another boat to devalue dollar and asset prices go higher or at least have more of a bid than they would. I don't necessarily think it adds to liquidity, like everybody says, because it kind of just gets sopped up in the system. You kind of need these stimulus packages out of Congress to get real liquidity out into the real world. And from an administration standpoint, you could maybe argue the current Trump administration was keep stock prices high at all costs. New administration might have a different mandate for the Fed, right? Of like, no, we want you to focus more on unemployment or something like that. So that could change the dynamic a bit. But my personal opinion is... Biden administration

definitely is not going to view the market as their report card like Trump did. So... Yeah. But to me, the Fed's kind of acting independently of that anyway, and just, you know, is being strings pulled by Goldman and all the rest of the, the true puppet masters. And that's, what's going to continue no matter who's, who's leading final thoughts. Anyone got any thoughts on Bitcoin back up to five-year highs, not five-year highs,

two-year highs, whatever it was. It's 19. It's back to 13 now. I think it was at 5,000 in March. I, I think I'm, I'm not a Bitcoin investor or a Bitcoin trader. So that's just this disclaimer out there.

But I think Bitcoin will have its day where it has a secondary rally. I could see that and it could come on on the Fed actually mishandling the dollar on their part. So I think Bitcoin is one of those things where in the long run, I could see it actually making a move over its highs. Now, again, disclaimer, not a Bitcoin trader. I'm just going off of some of the potential that I see. You got to own a little bit just in case it does go to $500,000. That's what I was just going to say. I'm not a Bitcoin guy at all. Me but i'm bitcoin just me too yeah um i you know i think the one thing

i'll say about the bitcoin move recently is that it sort of has decoupled from the dollar weakness or the dollar strength i guess you know we've had some you know in the last six weeks the dollar is you know grinded higher it's been arranged but moved higher a little bit, which has kind of held gold down a little bit. And, you know, Bitcoin kind of, you know, that correlation kind of went away. And it started catching a bid and kind of moved up against that correlation that you would have expected. And in turn, you've kind of seen gold catch a little bit of a bid. It's only up, you know, maybe a percent, a cent and a half since the lows down there a few weeks ago. But the volatility inside of gold has really come in.

And that's, you know, as we were talking about that, that volatility and price of an asset relationship, I think it's what Bitcoin has done here is kind of pulled the curtain back on what's probably going to happen in gold here soon. So Bitcoin is like, Bitcoin is like vol itself, right? pulled the curtain back on what's probably going to happen in gold here soon. Bitcoin is like, Bitcoin is like vol itself, right? It carries a very attractive convexity profile. So, I mean, if you're a vol trade, I could absolutely see why you would be attracted to something like that.

You are a vol trade. Let's finish up with just, you know, what would shock each of you most, like personally, over the next two days and then next year? And what would shock what you think would shock the market most, or if that's the same thing or different things? Matt, you want to go first? Sure. I don't know what would shock me the most because I feel like in the last 15 years, you've seen anything. Anytime you think something's going to happen, the exact opposite. You know, obviously at this point, the major shock would be if Trump came back and won this thing.

But again, it's going from slightly bullish event to a really bullish event. So, you know, I don't think the market's not going to fall out of the bed on that. Now, if the path to get there, where there's, you know, a big fight, or, you know, a really six week long drawn out past Christmas fight in the courts in the Supreme Court about, you know, we don't know who the leader is, or they're both claiming victory, I think that could be really bad. And the electoral votes are due, what is it, December 4th, I think? Yeah.

So I would, you know, that would be a shocking event. I think one thing that's really significant that happened today that won't be on anybody's radar is the two-year yield. You know, huge outside reversal from last night to a lower yield. It was, you know, it's been grinding higher. The curve was steepening in the last month um again on this reflation narrative and it's sort of really rejected some levels last night and if it starts grinding lower again i would put that front and center on your radar because that's going to be a huge deal ch Chris. Yeah, I I would be shocked if this goes the this this rebuttal goes on past the beginning of December.

I think it could turn into one of those events if it gets dragged and then we start seeing headlines. There is some headline risk there if the market starts to move on on biden winning as we've been seeing and then next thing you know we kind of get a headline that says that uh some of the allegations are true if that takes place i think the market will react very negatively on that because you had guys that were pre-positioning already on and on a biden administration and those are the type of events that we like to play as convexity seekers and guys that trade Volarb. We're looking for events that could potentially line up into something like that. So if we do see it get to that stage where it's in court, we'll absolutely try to play year, I would be shocked to see the market move steady

and grind steady for a year consistently. We're kind of anticipating we have another left tail event take place. We think that these things are happening much more frequently as we've seen, you know, post 2017. We've we seen it with all I'm going to get in. We seen it December of, of 2018. We seen it obviously with COVID. So we're anticipating to see more negative dealer positioning kind of get caught off guard. We kind of think the way how market microstructure has been changing, it's leading us into this,

this new regime where you'll start to see these events happen more frequently so if we have a year that is just steady and straight up that will be a little bit shocking to us but um yeah i don't put my bets on that i would agree with that i would be totally shocked if it just slowly grinded up like 2017 style yeah um that what i'm talking about what i was talking about earlier with the volatile rally, I think to get that right tail and returns profile in the equity market, you have to get what Chris just said was a deflationary event or scare of some sort. So markets down before they go way up just because of the policy response. So like down 15, up just because of the policy response. And so you can. So like down, down 15,

up 45 instead of. And you don't get the up 45 without the down 15 or, you know, to throw numbers out there. Great guys. I think my, and no, no fears of like Elizabeth Warren is named head of banking or something.

And completely no one can trade. No one can do anything. I don't think that's going to happen. Right? Those were the scariest parts of the futures tax, the financial transaction tax. At least we had the fair tax

got defeated here in Illinois. All right, guys. It's been fun. We'll put up your contact info out on the pod notes and we'll talk to you both soon

alright thanks guys it was a pleasure thank you so much for having me yup you've been listening to the derivative links from this episode will be in the episode description of this channel follow us on twitter at rcm alt and visit our website to read our blog or subscribe

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