The Derivative - Wallstreet Bets Busts Wallstreet? WTF ^%$#

Episode Date: January 28, 2021

If you’ve been on the internet, watched TV, or talked to anyone outside of yourself in the past week and a half you can’t have missed it. GameStop stock ($GME) went from trading at a low of $3/share to +$400/share thanks to a masterful subreddit trolling from retail traders. And it’s not stopping at just GameStop, shares from Blackberry ($BB), AMC ($AMC), Express ($EXP) and Nokia ($NOK) are quickly following suit – and its leaking over into S&P futures and options. So how does this happen, why is it busting the billionaires, and how does it end? We’re joined by The Derivative veterans Cem Karsan and Kris Sidial to get the low down on all this and more in our newest WTF ^%$# installment, coving all things r/wsb, GME, gamma hedging, short squeezing, rates, AI, and even inequality. *BONUS SECTION: After the “official wrap up” we continued to riff a little, so make sure to stick around at the end for some additional Cem, Kris, and Jeff convo.* Get more information on the funds at Ambrus Group here and at Aegea Capital here. Chapters: 00:00-01:46 = Intro 01:47-15:54 = GAMMA, Risk, Flows & Squeezes 15:55-29:03 =Leverage cuts both ways 29:04-36:15 = How Does This End? More Sex? 36:16-53:24 = BIGGER, FASTER, BETTER 53:25-01:05:19 = Passive, Inequality, and Rates 01:05:20-01:21:28 = Final Thoughts Follow Kris (@Ksidiii) and Cem (@jam_croissant) on Twitter to keep up with all of this and much, much more. Check out our other WTF^%$# episodes here: No President Yet, So Market Rallies Huge What ^%$#?, Market Up/Vol Up, Market Down/Vol Down…WTF Episode, $TVIX gets Terminated – What^%$#, Crude Oil goes Negative… What^%$#. 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. There's a lot of moving parts from this that people are not understanding. Well, you have this gamma squeeze where people buy calls and then the dealer needs to hedge off the risk. And then that basically causes a reflexive dynamic of forcing the stock up.

And then from a pure Delta Oneive dynamic of forcing the stock up. And then from a pure Delta one perspective, I mean, you know, it's a short squeeze, right? These are distressed names, GME, AMC, BB, all distressed blades where people are piling in hundreds of millions of dollars shorts on these things. All right. Hello, everybody. Welcome to another one of our WTF episodes. My mom would be so proud. I just can't bring myself to use the actual F word. But we like to spin these up with only a day's notice or so to our guests. When there's something happening in the markets that really does make you think the world is insane, like crude oil going negative. And this week, it's a relatively obscure stock, GameStop, gaining thousands of percent and the mother of all short squeezes, Gamma Hedge-fueled rallies. It's

dominating traders' feeds all week, and we grabbed two of the best peeps we know to talk market maker dynamics and flow chris sidio of ambrose group and jim carson of a gia capital is it cap jim capital a gia capital sorry so we brought these guys on to answer what the actual f is going on so welcome guys thank you for having me thanks for having us. GameStop was at like 45 or whatnot, more so because you see these dynamics happen much more frequently than people understand. And, you know, this happens all the time in markets in so many different asset classes, you know, like just like crude oil, right? People underestimate the potential distribution of outcomes when we are at levels of extremity, right? So people say, oh, this now goes two sigma. There is no way this can go, you know, four sigma. So what does it do? It causes people to pile in, right? Like for example, if a stock goes 200%, people pile in short and they say, oh, it has

to go down reflexively. Now it makes it go 600%, right. So this dynamic is a constant theme in markets. And I think, you know, with the Citron news coming out, it just had a bunch of more people piling short. And when I was seeing it, I was looking at some of the price action and I was saying to myself, well, this is looking like it's just grinding up. People are consistently buying it and everybody's short and more people are piling in short. And I looked at it and I was like, yeah, I could see which way, you know, this is going to go.

And what was the Citron news? They came out with a report basically saying this, this thing's toast. Yeah, exactly. And that was only like a week ago. Right. Right. And now we're GameStop trading at 350 bucks. Right. But in that, to me to me well just getting that now so to me like and there's these guys who've made millions of dollars right but they're buying 50 000 worth of a out of the money call that has to move a hundred percent in a week right like that's the insanity

to me of like all props to those guys they've made they done well, but it's kind of an insane trade, right? Yeah, it's a, it's a real risky trade. But again, you know, I think, I think there's a lot of moving parts from this that people are not understanding. Well, you have this gamma squeeze where people buy calls and then the dealer needs to hedge off the risk. And then that basically causes a reflexive dynamic of forcing the stock up. And then from a pure Delta one perspective, I mean, you know, it's a short squeeze, right? These are distressed names, GME, AMC, BB, all distressed blades where people are piling in hundreds of millions of dollars shorts on these things, right? And when you have that and you have that dynamic of, well, here comes a gamma squeeze, here comes a single stock squeeze.

And then, which is the most interesting part about this whole thing, is the predatory type of institutional ability to take advantage of these things. It creates something that's really big like this. People think that this is all Wall Street bets. It's not. I'm looking at some of the flow coming in especially on level two we have access to some of the level three stuff as well and you see it it's like this is not only wall street bets prop guys know what they're doing certain other hedge fund guys know what they're doing they're they're bringing things up to certain levels and it's causing this let's circle back to that and i'll bring it to you jim and say right from a former

market maker standpoint like what do you think this has looked like for them? Are they, you know, going home and pop in a bottle of champagne or are they quaking in their boots? Yeah, Chris used the word predatory. I'd be a little more cautious with it. The reality is Citadel, which is now over 25% of market making volume. Yes, if they see weakness, they understand dealer positioning and how important that is for market direction. So that goes into their models. They'd be foolish not to. That's what the market's driven by to a great extent. But they're really playing the flows. In my opinion, they see these things coming there. They don't want to be run over. Not only is it bad for business, it's it's more profitable to get ahead of it. And so they see the flows coming. They're consistent, they're reliable,

they're predictable. And so they're jumping in front of them and front running them and buying it and then selling it as, as it gets bought. And this creates a cascade. Right. So hold on. You're talking about them as a market maker or as a hedge fund? As both. Right. As a market maker. But the reality is, as a market maker, you're going to to position yourself for incoming flows. If you have consistent buying of vol day after day, I'll tell you in 2008, 2009, you didn't come in short vol. You made sure you were long vol every day because you knew each day you'd come in and there'd be some crazy bid to vol somewhere that you'd want to sell.

And the second you sold it, you'd get long again, right? So the simplistic example is- To get ahead of the coming flow, you have to, because you have to be absorbing that leverage, right? You know, absorbing that flow. And so, you know, that's, you know, you can say as a market maker hedge fund, it's a very gray line, right? This was, it's kind of like when banks used to market make and they had to kind of divest themselves of that, you know, or they could market make it, or they couldn't have the positions. They still end up having the positions because they were market making. So yeah, in my opinion, there is some of this, hey, people see blood in the streets, they know where the pain points are

and they push on it. But the line of whether that's predatory or really just investing nowadays. We've talked about dealer positioning and how critical it is. This world is not a world based on fundamentals at these liquidity levels. We're given how available money is and how easy it is for people to invest. It's about where the flows are going. Companies aren't going bankrupt

because there's infinite liquidity. So at the end of the day, who's buying, who's selling? If people are more buyers than sellers, you better be buying that name. It's not a function of fundamentals. Like Chris mentioned, if you're somebody out there playing the fundamental games, it actually ends up being a disadvantage to you because you're betting on something that has nothing to do with the reality of where these prices are going. And ultimately, you end up getting short and being somebody who, you know, is playing the

wrong game. Right. You know, sorry. Sorry, real quick. Just can you explain the difference between a dealer and a market maker, if there is one, or you're just using those interchangeable? Dealer is a broad term for anybody who takes it for the street. So anybody who's taking the other side of customer flow. So it could be market makers, it could be banks, could be other entities warehousing risk. But it's essentially where the customer flow gets warehoused. Right. So different than the pure market maker who's just making a market on that option and might have to gamma hedge. So the dealer may have inventory they're trying to offload or something like that. The dealers generally hedge, right? So, because they're taking a warehousing risk and trying to manage it, you know, factor neutral.

Right. And that's an interesting point that you're making because the simplistic example that we put out on our blog and a lot of nice work out there is right of, hey, retail's buying these calls. It's a 20 Delta. The dealer has to buy, you know, 20 Deltas to hedge themselves out, gets closer to the strike. Now they have to buy 80. Now they're 90. Now they're 100. But you're saying it's even more complex than that because they know that's coming. So they might have to pre-position themselves and they're not waiting for the call option to come in. They're actually going to buy those deltas before it goes in. Yes. This isn't a world where you blindly just say, make a market and then take it and hedge it and move on. It's you have a factor model, you're feeding, you're looking at the whole market. Right.

And you're not just hedging it with underlying delta. You're doing it on a correlation basis, on a dispersion basis. The best market makers have real time models with every single factor flowing in and every factor on that factor, ball factor, skew, you know, ptosis, et cetera. And so at the end of the day, you know, as one's moving and you're getting too much inventory in that way, you have to move your model, right. To, to, to take back aggressively what you're getting short, which means ultimately you end up being a, the most aggressive buyer out there and pushing along with it. Cause you don't want to be the one caught short.

So there is that process. And obviously the more reliable the flow is, the more, you know, it's coming more predictable. It is the more aggressive you're going to be to make sure that you kind of get taken out of it. And so, yeah, you know, Citadel's making a lot of money on this, not just because the market making, because I'm sure they're, they're going with the flow, but that's what they do. It's not predatory. It's really what trading is nowadays. If you don't watch the flow, if you don't know where things are going, it's a liquidity driven world.

It's not a world where this is cheap and that's expensive based on fundamentals. It just doesn't, things don't move that way. And Chris, I cut you off. Sorry, what were you saying before? Yeah, you know, I agree with Jim. So I want to stand on this point that I think that what these guys are doing as traders is not predatory, right? But most people will look at it as it's a predatory action, right? I was on a prop desk. I know what it was like to trade prop, right? Guys have certain things that they look at on a day-to-day base where they say, hmm, where are people positioned at, right? And they have certain ways to understand the way how flow is coming in, right? And levels where everybody else is looking at. So when I say a

predatory way, right? Institutional guys know what they're doing when they're buying at certain levels and selling at certain levels. They're moving the actual underlying for a particular reason. And this is not just prop. So I don't want to single out all the prop guys. These are hedge fund guys as well. I have guys who are also buy side Delta One traders, and I know they know what they're doing in these things. And what I was saying before is that the actual flow is showing me right the flow that we are seeing and we are noticing it's very obvious to see this is not wall street bets right like i was looking at the price action on bb right you know we're tracking flow there we're seeing level two some of the prints coming through a level three and it's very clear that you know once this thing

breaks through a specific level it starts skipping up you know a buck every 30 seconds the reason for it, right, is because guys knew if they ticked it up to that level, it's going to move a specific way. And then also, you know, we track intraday correlations. So, you know, all three of these names, BB, AMC, GME, non-correlated. But if you look at some of the intraday correlations, they trade in line. At 5 a.m. this morning, I was looking at how some of these things were moving. Right. Jimmy would drop down a little bit. Then you would see the best bid on AMC drop the best bid on BB drop.

This is not a Wall Street bet guy that's in front of his screen saying, oh, yeah, Jimmy's down. I'm going to, you know, I'm going to bid a little lower. This is an algo that's coming from one of the guys that's trading it the same way that I was explaining. So I agree with Jim when he says, it's not predatory. Maybe I use that term in the wrong way. But when I say it, I mean, guys know what they're doing. This is not just those Wall Street bet kids that are playing this. There are other smart investors, smart traders who also understand this location. Sharks. Right, exactly.

The alpha predators. Yeah, you're right. I mean, it is predation in the sense that the markets are a series of the hunted and the hunter and the hunted. So I agree with that. I just I think I was more reacting to. No, I completely get it. I completely because because, you know, especially right now when you have this thing going on with everybody saying, well, you know, is it wrong that some of these Wall Street bet guys, you know, are they are they partaking in price manipulation? I don't think so. I don't. I really don't. This is a market. Right. If Jim, if I wanted to buy Apple from you at a thousand dollars, who's to say that that's the wrong price? Right.

What's the reason that's the wrong price right who what's the reason that's the wrong price yeah no i think there's you know that's this is a whole nother debate i don't know if we want to get down this this is a series of grades right once you get into to this world and i'm not going to die on either side of that that hill um you know the reality is there is a line i think we can all agree there is a line where at some point there is coordinated action, right? And it's, you know, if you had a bunch of big hedge funds teaming up together to kind of take down another fund, right, knowing their positions, that would be illegal. That would be predatory, right? And so there's a lot, you know, yes, this is how markets work. At what point is it, you know, explicit and kind of the intent is to, you know, to team up and to do something that is not free market. Do you think we'll get anyone, any senators who will go fight for Wall Street on, you know, against the retail guys? Right. I mean, this is the thing. This is the reason I don't think the SEC is going to come out

and say anything soon is because they're, you know, unless they do some blanket statement across, you know, hedge funds, everything, because there is this

sentiment that, hey, nothing's been done about this for years when the big boys do it. You know, why are they saying something now that retail is doing?

It'll feed into this whole inequality narrative and kind of be a mess. And there was an interesting, Dave Nadig, I don't know how to say his name, N-A-D-I-G, had a great post of like, this isn't about the gamut. It's not about all gamma. It's not about all that. It's social media and the algorithms they're using to serve up what you click on most. So it's almost like the gamma trade inside the social media, right? Of the more people click

on GameStop, the more content about GameStop they're going to get. And it just creates all of a sudden a herd mentality just based on that social algorithm of, you know, on TikTok, on Reddit, on all that, it gets voted up and you're going to get more of that content and it's going to drive more people to buy the calls and it's going to drive the price. So there's a little bit, it's different this time, it's his argument because of this social algorithm piece. So you guys got any thoughts on that? Yeah, I think that's part of it. I don't think that's, that's my, my personal opinion is it's, that's not the core going on. I think this was happening, something very similar,

but without derivatives, right. In, in 2000, I mean, you had chat boards and people pushing, you know, they were squeezing shorts and so expanded rooms, right? I think the leverage is different. I think that's the big difference, the amount, the adoption, and ease of trading options, call options in particular, and the gamma and leverage that's embedded in that. You know, you've basically taken, you know, retail

and given them a 10x multiplier. And so that's incredibly powerful, not just because of the leverage, but because of the profitability that comes to that. And then the added leverage that gets added, it's a, it's an exponential function, right? So I think that's, what's really different. They're a lot more powerful this time because of the cool new weapon. Yeah. And I think Ben Eifert had a nice graphic explaining that of like

$1,500 premium and Amazon and in his example, resulted in a market maker, a dealer buying $230,000 worth of stock. At the end of the day, you've seen the posts, $10K in and now they're writing a $20 million check. I mean, and they're doing that quickly because of leverage and that $20 million is now leveraged again. Right. And there's nothing that says I can't become 200 million. It's just that's the crazy game of leverage. And, you know, but at the core of it, I think that the thing we shouldn't lose sight of is what public what their positioning was. And that positioning is in these markets, which is all liquidity based, is ultimately something that that will will lead markets to go there. I mean, this is I've talked about as I call it Gary or whatever, right? The dealer positioning is ultimately what is driving the supply and demand dynamics, and particularly, particularly in derivatives, which has this embedded leverage in it and really has gotten so big that it's it's kind of dominating flows. But even in this case, it wasn't necessarily the dealer positioning. Right. But the Melvin Capital, the short sellers, like you don't know all the flow trading you guys do. You don't know when that short seller has to puke out, right? Like that's the missing piece in terms of.

You could see that though. You know, like you could, you know when the price action starts to react a certain way when somebody is just basically puking it all out, right? Like levels start to skip tremendously high, right? The market winds up at a certain point. You could spot that. I think if you're an experienced flow trader

and you know what to look for, you know when something is abnormal at that price level and with that price action. But it's in real time after the fact, right? You can't see it like flow. You can kind of tell before the fact or have a guess of where the levels are, where the hedging needs to take place. Yeah. Well, while it's taking place, you know something's abnormal. You may not know directly, oh, that's, you know, Melbourne capital or whatever, but you know something abnormal is taking place. This could be, you know, something's abnormal. You may not know directly, oh, that's, you know, Melbourne capital or whatever, but you know, something abnormal is taking place. This could be, you know, a specific fund or, you know, somebody's coming through a specific route consistently, right? They're, they're, they're coming through that route with the same type of

lot, maybe like a thousand lot, 2000 lot, you know, hits the route on VWAP, you know, every time it goes to VWAP. So you pick up on things like that and you know, okay, that's a big order there. Somebody's, you know, somebody's consistently bidding or offering at this level. So it's little things like that, you know, when, when it's abnormal, but it's interesting too, because, you know, everybody focuses on, well, everybody's talking about this Melvin capital thing. These are all distressed names. You know, many other funds are underwater. Everybody's just been piling in short on this. like i didn't take another one that came out just before we got on uh i'll pull up the name but yeah yeah like just them right right no it's not just them you know i i honestly feel bad for the guy because you know he's being

singled out on this whole thing and it's like you're gonna start hearing more names pop up i even tweeted about this last night you know like just amc alone you're gonna see amc squeeze today and like i mean anybody could have told you it's going to squeeze because, again, if you have a bunch of funds that are short distressed names and then they just gap up 100, 200 percent, you have to be like, of course, you're going to get forced liquidation. I think this is an important point. And, you know, I think we're recording this right after that big drop today, right? That's completely tied to what's going on as much as people. I mean, if you've been watching the action, you understand what's happening. Hedge funds are having to liquidate their long side of the pair trade. And a lot of these guys have been short all of this junk, right?

And they've been long stuff that they believe that had, you know, was a good, good hedge against it. And again, in a world that's all liquidity driven, has nothing to do with fundamentals. Now, all those longs have to get liquidated to make room on the sheets for the liquidation of the shorts. And those are, we're basically saying margin calls or just to keep their risk in balance or both? First margin calls, right? But then like you can't continue to stay long that stuff if you're getting killed on the other side. Plus, if you get redemptions, right? Somebody comes in and says, hey, you're down 30%. I want my $5 billion back, right?

You got to liquidate both sides of the book. Whether it's a margin call, redemption, whatever it is, that long has got to go too. And so what you're seeing today is a result of serious pain on a lot of these names. And until this is resolved, I think you'll see a little bit more of it. No, you're 100% right. Sorry to cut you off, Jeff. That is 100% right. That is exactly why we noticed a relative weakness in the market today as well. And you notice people are going to do this on the large, thick names. You're not going to do this on a small cap name or a mid cap name. Right.

If you're exiting a position, you're going to want know you could enter and exit at you know better or or or worse prices that won't be uh much more detrimental than you know if you were in like a small cap type of name right and even right let's just talk we're talking uh gamestop is mall based video game sales right basically the most antiquated business you could come up with right now right like it's all subscription based and goes online uh amc movie theaters who's going to movie theaters right now and what bb is is blackberry yeah right like who do you know with a blackberry right so like fundamentally like you're saying like these are the three stocks you would least want to own in the in the universe. And they're up hundreds of percent. And if I'm a dispersion trader or a pairs trader, right, I'm going to be long Apple and Tesla and short these names that have no future.

Right. So that's also the key of like the, that's gone way out of whack. Yeah. I mean, look, there's been a lot of talk about factors and what's wrong. Why is quantitative trading not working? Whatever it's reality is they're playing the wrong game. What's deemed quantitative trading now is based on fundamental factors, on issues that have nothing to do with supply and demand, really.

And if anything, they're counter-correlated to it because people are playing that game and it's not the game. So they're getting taken out on it. And so, you know. So why aren't, are we probably going to hear some stories about some smart hedge funds that were piling into this alongside the retail?

Yeah, I mean, yes, sorry, go ahead. My two things are like, one, AI driven funds aren't there yet, right? Because if you have the smart AI, it's identified this six months ago and has already put into the trade. So that's neither here nor there. And two, like where are the smart macro traders that are saying, hey, we need to be in these trades.

This is what's going on. Or is it worth it? Or maybe they're like, no, even though this has happened, it's such an outlier. It's not worth chasing that kind of outlier. You know, it's going to happen once every 30 years or something. There just aren't enough funds out there that have completely switched to the fundamentals don't matter. It's all about who's buying and who's selling. I mean, a lot of guys do that, but there's so much money out there playing the long, short value game.

And it's just those guys are they're at a huge disadvantage and there's a lot of money that's going to continue to you know unless they start looking at where the supply and demand is um that's going to keep preying on it this is exactly sorry to cut you off jeff i'm cutting you off today man i apologize no this this gem you hit on that perfectly you know i, I'm so outspoken on social media about these things. And also in, you know, some of the other interviews I've done, but this is why I don't believe fully quantitative models, especially in the ball space work, you need some sort of discretionary overlay because there are times like this where the

model is going to say, okay, there is a dislocation and upside skew, you know, between these two names, right? Now you're short a calendar and you're getting blown out the water, right? Like if you were short a call on GME, right? Like a week ago, it doesn't matter what strike you were short. It doesn't matter what structure you were short. It does not matter. You are blown out. Even if you were short one lot, right? I mean, the thing went from like, what was it, like 15 or something to $350. It does not matter, right? So you need that discretionary overlay. You need to be able to realize what is creating this dislocation from a supply and demand dynamic, spot that, assess it, and then make a trade. If you just have a purely

quantitative model in the vol world, right? The model, especially if you're math driven, like, you know, we are, you know, we take pride in that, but on the same accord, we use our discretion as traders to say, hold on now, what is making this dislocation? And if it's supply and demand driven, do we want to get run over? No. I have a, I agree a hundred percent with what you're saying, but I have a semantic difference that I want to, a distinction I want to make. I think you need to, you know, people who are quantitative traders need to remodel their distributions based on supply, which is basically what you're saying. Right. You know,

I don't sit here and discretionarily trade as much. I mean, it's harder on it when you're dealing with the syncretic name. So to an extent, like it's very hard to model that. But, you know, what I try and do is really model that distribution and put it into my quantitative framework so I can continue to be very quantitative in my approach. But I agree, you have to model that underlying distribution. It is not a normal distribution. It's not a set uh you know distribution that you're used to it it's whatever the supply and demand dynamics dictate that that it is but

and to me it's more like right like high frequency trading is essentially supply dynamics on a super short time frame right right like they're looking at the order book and that's where they're getting all their information and they're trading that flow right so we're just talking the same flow but over days and weeks and months um so it to me it's like that should lend itself perfectly to a quantitative approach of modeling that flow you know ignoring what you're saying chris if i model every time a thing goes three standard deviations out if i sell the vol 97.6 of the time I make money and life's good, right? That ignores that you're going to blow out on that 2.4% of the time, right? So I get that sort of the quant model is not going to work because you're going to discount where the outliers, how frequently they happen.

But it seems to me like perfectly set up for a quant model to say, I'm going to plug in all this fundamental flow info and get a model based on that info, right? If Netflix can tell me what movie I want to watch next, someone can surely model that flow. Yeah, I think he's talking more about, you know, volatility, quantitative volatility models, right? Yeah, yeah. With embedded assumptions, right?

And I think to his point, I completely agree with him. It's like those embedded assumptions, they'll kill you. You got to have other quantitative models, like you're saying, Jeff, that help you better model what actually is reality in real time. So how does this all end jeff you first right like to me right it's like the uh in uh the hunt for red october one of my favorite books slash movies where they like do the uh they turn back into the missile and it breaks up before it has time to arm. Right. And he's like, oh, that's it. That's all we got to do.

He's like, no, he's changing the settings on his torpedo right now. So like, it seems to me like, oh, this is it. You just got to look at the most shorted names and buy way out of the money calls. But for sure, someone's readjusting their torpedoes right now. Yeah. So this is, we talked about this off air before we got started here, but I think you have to step back for a second and ask yourself, okay, what's actually going on here? Why is this happening now? And, you know, the reality is it's because of people are A, at home. B, there's massive fiscal, you know, we've had now three

fiscal stimulus flow into, and it hasn't just gone to the bottom, right? If it just went to the very, very bottom, you'd have this price inflation because those people aren't really investing. But this is going to lower middle class, middle class, upper middle class, all this PPP money went to doctors, lawyers, dentists, right? You know, small business owners owners and those people are at home um you know markets are liquid there are opportunities to make money and people are taking it and um and so that fiscal wave uh has that has as was would be expected is leading to inflation but not just price inflation right it's leading to asset inflation but not the old kind that you'd expect with institutions and corporations as much as retail, you know, people at home, you know, leveraging their brokerage accounts. And you pair that with, you know, Robin Hoods of the world and all the embedded leverage now that we talked about, as well as better understanding, you know, social media, you know, we talked about on Twitter, Chris and I are out there educating people all the time. People get a better understanding of how these things work and and

what they can take advantage of and um right maybe you guys should take all the credit of like hey you shouldn't just be out there dumbly this is chris's fault like be on the long ball side jim has the big problem this is all you man no. No, but look, this makes sense. So how does it end? So if that's what's happening, how does it end? It ends with A, people going back outside and spending as opposed to sitting in front of their terminals trading all the time. It ends with retail having to pay some taxes on this potentially in March and April. You know, it ends with anything that's going to limit the flow of capital from the retail that's throwing money hand over fist into it. Either that or, you know, a market correction where these guys get washed up until that happens,

expect this to get bigger, worse, crazier. The last possible thing is if the scc or somebody comes in and and make some type of a directive that that also stymies it but i i think you know even that like there's a lot of people with a lot of money sitting at home uh now you know playing markets and and and they're going to keep trying to find ways to make money. And unless they're not sitting at home, they don't have that fiscal money flowing into their pockets, you're going to keep seeing this type of action.

Scott Galloway, I like to follow him. He was like, it's all about sex. These people are locked in their houses. They're not having enough sex. They've got all this extra money. They're replacing sex with gambling on college. might be something to that do you know like everybody expected there to be a baby boom it's actually the opposite it's the call option boom right you're getting too much of each other i don't want to see you anymore but and also you said they mean they all there's a market correction they blow out but

they might say i'm using they very loosely of this whole group like no we're buying options right how are we going to blow out like we have to lose many many many times in a row i'd counter to that of like well when you bought your whole net worth 50 000 worth on you know 200 out of the money weekly calls like if you do that 10 times you're probably not gonna and this is gambling at the end of the day yeah yeah you can you can take half of it i'll put your pocket i'm never gonna spend this again but you know the question is are these guys gonna pull that money out of their pocket when the market's down i'd wait right so it's less a correction right than just it how

many times can you do it before it it doesn't work this is what makes it super interesting too right is because these guys are winning on all these trades. So the buying power is exponentially increasing as we go along too, right? They're not losing, like they're winning. They could take that money and now, you know, theoretically just run it back. And that's what it, that's, what's been happening, right? You've had this amazing reflexive dynamic of not only from the hedging standpoint, the short interest, not only that, but when you're making money and you have not been burned, you're just going to go

with the crazy, far out the money call or just hold the position. And these guys are holding too. You look at the way some of these things are trading. AMC offered twice in the last three days. Two big offerings did not budget. Maybe dropped it a few percent, right back up. So I think the wealth. Yeah, the wealth is up like $20 million on the April calls for GameStop. Nope, holding. I'm like, what?

A lot could happen before April. Look what happened in one week, and you want to hold it three more months. Right. Like looking at fundamentals is a disadvantage, right? If you're in any way looking at fundamentals, like you would have sold 250, 300% ago. Right. But, you know, and that's the other thing, these guys that are, you know, hedge funds that are short,

like you can lose more than a hundred percent if you're short, you can lose more than 100 if you're short you can lose 200 300 400 500 percent um and that's the problem with you know being on the short side in this type of a world especially not on any uh flow analysis on fundamental like i don't know does anyone know how that works on well can you sell options on robinhood? I don't even know. I believe I have a friend that was doing that previously, not now. And I think he was able to, I don't know if they changed this, but this was like five months ago. He was selling naked on Robinhood. Yeah. My two questions are one, can you sell? And then in their platform, does it like try and auto liquidate you, right? Like, can you go? that i know that i know it does it definitely does

auto liquidate you uh because it happened to him a few times very on on very bad positions uh he was out faster uh just because they're really tight with their with their risk because i think they know that their investor base is very risk focused right but that's another argument too for the self-fulfilling prophecy right of like the auto liquidation is just going to add more buying power, which adds more, more upside. So let's talk these big, Jim, you had the comment of like, maybe this game's over because these guys are coordinating of uh citadel and 0.72 coming in

and buying a stake in uh melvin yes yes i thought um you know when when the big boys come in i my initial thought was that these guys probably passed this by the SEC before they did it. You know, that, you know, that would make sense that, you know, there's, if Melvin's having stress that, you know, they'd want that to be stabilized. I also, my also general thought was they'd be willing to, you know, not coordinate, but, but, you know, hold these values down. That having been said, I think, you know, I've done a bit of thinking since I genuinely, and the SEC,

I think we'll have a major problem coming out vocally and doing anything at least too harsh, given the, like you guys have mentioned, kind of the, the populist rhetoric around um around this this has gotten all tied into the inequality narrative right uh at this point um i think uh you know at some point if it gets bad enough they'll have to do something but i could see it going on a bit longer um without any sec kind of right well and it's upside right if it was flipped i feel like everyone would be all over it. Right?

Exactly. Very important point here, too. I made this point on Twitter at one point. And I think if at any point, and I don't see this necessarily happening anytime soon, but if this turned, right, and people started realizing you can buy puts and the market's getting really weak

and we're going to flip this and start buying puts and use the same leverage, that's incredibly more powerful than what you're seeing now. It's incredibly more dangerous because the street is short puts, right? At least here, like, you know, the citadels of the world are getting plenty of call flow in the indices and other places. It's a much more balanced trade to go buy calls. The market also has, as a whole, the market has more limited upside potential just based

on there are embedded longs in the world that at some price will sell. But, you know, I do think it's important to kind of at least give lip service to the fact that, you know, if this, this retail wave could be very, very dangerous, if it turns to the downside at any point. And there's nothing that says that it can't or won't happen. And especially if they're like disenfranchised millennials who want to blow up the system quote unquote right like i mean they're still running in the streets because the hedge fund the market gets really weak and they start saying okay this looks like this could really go the other way for you know may not be as appealing because

it's not infinite right but you could see situations where this all of a sudden this adds tremendous i mean retails% of the flow now. It used to be five, two years ago. You know, 25% of the flow all of a sudden turning and buying derivatives on the downside when the street's actually already short. I mean, that could be a structurally really dangerous problem. And I know that may sound crazy, but it's a real thing that needs to be looked at and thought about.

And so, I mean, the SEC has at least got to think about that, right. If they don't say anything now, are they going to be doing this when the market's down or something, you know, this is happening. So I don't know. There's, there's a lot of underlying questions and things to think about here. You know, this is a brave new world with, with a new player that, you know, it's a little bit crazy, right. Do anything. And they're 20 off 25 percent

of the market and that needs to be understood probably better regulated anyway i kind of digressed a bit but you know how do you know the big boys are are definitely going to try and help stabilize things i do think ken is like i think there are two different situations personally i don't know for a fact but i think stevie's probably more on the side of melvin at this point um i think uh i think citadel took this as a hedge to their core book and knew that they were getting structural edge in the business that they would have both sides of the trade um and that's what a lot of people just it feels wrong right that citadel can be the hedge fund the market maker the right they've got like all these all these different somewhat conflicting positions it's not wrong

and it's just smart right right they're not a rockefeller nobody really it's just like they are the system now they are the infrastructure you know somebody's got to be and and you know he he's bigger faster better than everybody else on the street. But how does that end? It feels like at some point that would be like they're too big. They're too big and they're too important to the system to be left to their own devices. Yeah. You're going to have to prove that. Yeah, exactly. Is it monopolistic, I guess, is your question i don't i

mean i don't think yet maybe they're they're they're really good yeah but maybe not monopolistic but just too big to fail oh they're definitely that but i think they're also probably too good to fail yeah um yeah we got to be careful talking about them here in chicago they're they're gonna come put a note on our door like, hey, stop. Stop talking about it. So how does this tie into the overall market, Chris, from what you're saying with like your dispersion trades and this is the mother of all dispersions? I wouldn't say it's I mean, there is a sense of dispersion going on. I wouldn't say it's like the mother of all dispersion. It's not your regular vanilla type of dispersion. But I think it's going to impact flows on a big level. liquidation. Apple had nothing to do with this, right? Like the large cap names, SPX had nothing to do with this, but they're going to be impacted because those large funds needed to liquidate, right? So they're going to sell off the large names to make sure that they have their capital.

I have no clue as to how this is going to finally end. I do believe that when it ends, it's going to be a big bang one way or the other. This isn't something that's just going to finally end. I do believe that when it ends, it's going to be a big bang one way or the other. This isn't something that's just going to go away into the sunset. And it's like, oh, we don't hear about them anymore. Remember those guys? Like, it's going to be something where there's going to be some sort of regulatory intervention, which the more I think about it, I just can't see that happening. Because again, imagine the SEC trying to bring these Wall Street bet guys to court. It's billionaire hedge fund managers versus the little guy. That's just a horrible image that they're going to be portrayed to the media. But as to what Jem was saying,

I do see the other side of it where if the market starts to turn, I think some of these people will start understanding, oh, wait, we could buy puts. Now everybody's buying puts when the market is down 20%. So then what is that going to do? It's going to cause it to be down 50%.

And then it's tremendously reflexive. You know, from a regulatory standpoint, the SEC has done a lot that has shifted markets. And, you know, I spoke about this in another, another interview, but since the Dodd-Frank Act, right, dealers can't inventory that same amount of risk that they once were able to. Right. So it causes this type of dealer gamma hedging. Back in the day, if you had $100 million worth of Apple and this position is going against you, you could say, hey, I'll take more Apple. Like pre-2008, if you were the trader on the desk at a large bank, you ran the show.

Now, you can't do that. Apple goes against you 10%. You're getting a tap on the shoulder from compliance to say, hey, what's going on with that position? You now need to hedge it. So you create the reflexive dynamic. And that was from the regulatory standpoint, changing the market. So what are they going to do now from a regulatory standpoint that says, okay, well, now dealer hedging impacts the direct flow of the market. Now we need to stop that. So then are you going to allow banks to take massive amount of risk that they did

pre-Dot Frank? I don't see what direction that this could potentially go, but I just don't think that it's going to end in a just easy out the door fashion. It's going to be a big ending. The law of unintended consequences rears its head again. I think I want to say one thing to Chris's point. I think this is interesting. I think Dodd-Frank has clearly played a role and, you know, the regulatory landscape has made it. So there's a bit less liquidity on one side. That said, I don't think this is a supply side issue in the sense that there aren't enough dealers or enough people who are willing to take the other side. There's a little bit of that. I think it's a much more of a demand side issue. I think vol products have

grown exponentially. The interest and understanding in them has grown exponentially. And I think it will continue to do so for several major reasons. One, we're becoming a much more quantitatively driven investing world. Everything is factor analysis or some quantitative algo model. And that has itself grown exponentially. And options and derivatives in general are the perfect tool within that framework because they allow you access to the complete distribution of outcomes. A stock is a very poor investment vehicle in the sense that it's a linear outcome of a lot of different scenarios and a lot of different information. In a world where you can glean information in real time and try and turn that into profit, you really want to be able to say, okay, this limits the chances of a 20% downside of next stock. I want to take advantage of that information, right? Not just go, okay, I'm going to go buy the stock or sell the stock.

So I think this general understanding and, you know, the flexibility and power of derivatives has entered the broad market. And it's kind of, I've said this to Twitter before, but it's kind of flipped the script where stocks, although they're still the primary investment vehicle, I think, you know, there's a long-term trend towards a much more flexible, you know, full distribution of potential outcomes, which lies within the derivatives that these things are priced, that are priced on top of this. In a sense, the derivatives themselves have become the underlying. And I think that demand flow, this market is not prepared for.

I think that's the problem. You have a structural flow towards something that is incredibly powerful, a much better product, but the world hasn't yet adapted to understanding how to manage, and the regulatory framework hasn't been built to provide the liquidity for it. So I think that's actually at the core of what's going on. I think a crisis of sorts around this will eventually lead to better regulation and better, that'll allow it to grow over time. But right now it's a problem. And, you know, the SEC is afraid to come out and say something about this, but it's because they don't have the framework or the tool or the expertise probably in-house to fully

come up with a, you know, a cogent framework to deal with what's secularly changing. And I'm on a little bit of a tangent there, but I think that's actually what's really driving. Yeah, no, and I like that. But theoretically, can the tail wag the dog, right? Like at some point you get to a point, say there's no actual stock volume and it's all the options, which is never gonna happen.

But just in that world, how can you price the index, right? Does the index just have to price at expiration you have uh embedded it within the options chain you have the underlying the underlying is one of the is a set of two derivatives long call short of put the same underlying is is the stock value um you don't need a separate stock to to price the derivative you can price it off of its own value. Right, but that's what I'm saying. It's a framework that people are really uncomfortable with in terms of thinking about it,

but there's nothing that says you need to have stock. That's just how things came about. That was the natural cause and origin of valuation because it was the idea of equity, right, in a business. But in terms of a financial know, financial market modeling, different potential distribution, probabilistic realities of an asset, it's a, it's a very poor financial asset. And ultimately, you know, the derivatives that have been developed to sit on top of that are much better real picture of reality. Right? It's almost like, let's just

create, we'll just have some random distribution on the computer and, and you can put derivatives on top of that and trade those derivatives. Like you, you know, you disconnect from that and it's, it's just like you're saying, it blows your mind. I'm like, wait, how do you, what do you mean we can trade options without the underlying stuff? But this is what's happening in the fundamental world, right? You have the ability to take advantage of all these little different things and it's a much more flexible, much more intelligent kind of framework and derivatives allow you the flexibility and to take advantage of all those different pieces and to plug directly into the model. So it's an incredibly powerful thing and for good reason. It's growing

in popularity and understanding and but again the system is not when i think we mentioned at the top of like crude oil going negative that is kind of a leftover of the old analog world and having to settle physical commodities right so like it does create problems if you have the underlying has to be settled with the options like if that's disconnected you get a more pure actual price in that case right crude is a perfect example of that. We're only talking about the listed option space. We didn't even get into the exotics, right? And the growth of structured products over the last year and a half, right? So that in itself is a massive beast that is consistently growing in a low rate environment, right? That is the theme is that everybody is trying to hunt for yield, right? As rates remain

low. And then the growth of exotic products have skyrocketed tremendously. And now we add the secondary layer of this on, right? And don't forget an example of a real quick of an exotic product. Oh, you could just go with like a regular like auto call, but or let's just say like, you know, a double leopard, double leopard barrier note. So it's like, basically basically the bank is long a way out the money put on like three year, 10 or five year, 10 or so you can have like a worst of note, which is like three names. So like, let's say Apple, Facebook, Amazon, and what it does, the worst of note tracks the worst performer. So if it gets down to let's say 25 is the you know the the barrier so 70 75 barrier

if one of those stocks is down 25 the note gets knocked in right so what i'm trying to say is that there are so many other avenues tied to this and but i'll say real quick they're selling those to retail like exactly yep yep right they're selling that to retail. Exactly. Yep. Yep. Right. They're selling that to retail. Right. So synthetically, retail is short of put. Right. That's that's basically the structure of these things. And they're receiving some sort of a yield.

But with a fixed loss. But yeah, short of a fixed loss. Yeah. So so this is a this is the thing I'm trying to say is that as people are reaching for more yield, they're partaking in more of these structured products that adds another overlay because these exotic traders need to hedge off their book. So you have another dynamic of people now having to force liquidate. But this is not from a retail standpoint. This is a massive institutional standpoint. So, you know, you have the listed option stuff and now you have the exotic stuff and you could see how this could be a very dangerous game.

And I want to circle back to that of like, how do you know where those flows are when it's kind of off book, right? Oh man. Well, we're, we don't want to talk too much. Don't give away the secret sauce, but if you're a pure flow trader, that seems like an issue. But you guys are saying not necessarily. Yeah. So, I mean, that's hard to have a good look from a flow level. You can't get that real time. You know, that's more so like seeing some of the data on stuff that printed at what level.

I think you have to track certain structures and certain names. But, you know, it's going to be hard to make a definitive model on something like that right now. printed at what level i think you have to track certain structures and certain names uh but you know i don't it's going to be hard to make a definitive model on something like that right now but you know for us just having a good understanding as to you know some of the names that we track and where's a lot of the the vega positioning at um it gives us some sort of a framework to say you know there's as i say most prime desks actually provide some level of, I mean, Chris can contest this, you know, for their customers, will provide kind of where the biggest gamma points are,

the autocobbles, where things were struck, and what the general flow is. So you can get some of that from your primes, from your dealers. A lot of that's publicly, not publicly, but generally passed around. Yeah, trade or water cooler type. A lot of that's publicly, not publicly, but generally passed around. Yeah. Water. Sorry. Trader water cooler talk.

Lastly, I wanted to talk like, do you, could this be the death of like the passive thesis? Or where do you guys see that of right of like the whole world's going into target date funds? And basically everyone except the people we've talked about is just plowing money into indices uh u.s indices mainly uh but does this become you know hey there's you should be doing more complex stuff more options you know does this start to lower the power of the passive thesis i don't think so i've talked about this i think even with you but um my green I've talked about this, I think even with you, but Mike Green and I have talked about this. The passive flows are another, just like derivatives are a secular

trend because they're a better product, right? Passive flows are a secular trend. It's an easier way for people to access the market and do it quickly. But the reality is those passive flows are currently tied to growth. Right. And that's because of massive liquidity in the system. And, you know, I won't get into all the details, but, you know, if there's free money, essentially your companies are best advantage to go for a moonshot where they can dominate the system without making cash flows, right? As opposed to getting current cash flows. So growth names are tied to passive, tied to momentum. In a world where the market declines, they're going to get taken down in the passive as well. And ultimately, the value, the thing that performs in a decline, which would generally be a value name or whatever, will eventually develop the momentum to be added into some of the passive vehicles and will ride a tide higher potentially the next time around. So I think that the passive structure is a real

trait of the markets and will only continue to grow. I believe in that. It's not the only factor. And, you know, but it will, ultimately, I think, if you get this handoff of what is in that passive pool, right? Essentially, all passive is, is a momentum vehicle. I think momentum is here to stay, but that momentum can change from one, you know, area of the, of the value or growth or some factor to another. And I think that's what passive is not going anywhere. I'll be the first to say like that, especially like as a millennial myself, I know straightforward, like passive is not going anywhere. You know, the more some of these millennials become aware to some of the products that are out there, the more enticed they are to say, oh, wow, I want a little bit of Tesla, Facebook, Amazon at the same time.

And I could be in some sort of an app that basically takes a percentage of my salary and dumps it into these on a consistent base. So passive from a millennial standpoint, right? You do have some stock pickers that are coming out the woodworks with this wall street bet dynamic and some of the other stuff, but, uh, the accessibility towards investing and the, um, the framework to it, uh, is so easy right now that passive will just continue to grow. And, you know, a lot of millennials that I know, like naturally they just want things easy, right? Like that's why, all right, fast food, you know, um, gym, whatever, like everything's easy and fast. Just give me, give me, give me a really easy. Let me click on my phone and give it to me. Right. Exactly. Exactly. Right. And it's the same thing with, with the investing thing,

right? Not a lot of people want to take the time and say, oh, I want to look into this company. Let me figure it out. It's just like, oh, yeah, I heard a friend that said Tesla's a good stock. I want to buy it. OK, so by the way, you know, this thing could put you in that that buys Tesla, Amazon, Facebook, the best names, right? The best names they call it. So it's just, you know, from a behavioral finance perspective, I cannot see that this

passive flow going away anytime soon. And especially because you look at the fact that the buying power of the economy is now shifting into the hands of the millennials, right? So millennials are inheriting money that their boomer parents had set aside for them, right? They are also becoming professionals in their field, right? So you have millennials who are now accredited lawyers, traders, right? People own businesses. So the buying power is in their hands. What'd you say? Dentists. Dentists. Yes, exactly. So, you know, the buying power is in their hands right now. It's slowly transitioning. And the way how some of the millennials think is more focused around risk,

right? We're thinking in an innovative type of way where we want growth. Like we want to be in things where I want it to grow, right? I want to make six, 700% on something, right? I want to be in something that's innovative and cool, right? So that's almost to my point of like, in theory, you're only going to get five, 6% on these, right? If you buy passive in the Indy, like this isn't enough. I need to go over to the WallStreetBets crowd. 1.8 million in that chat, whatever you call it, in the Reddit three weeks ago. Now it's at three something.

What if that's at 30 million or 300 million? How big can that get? Well, look at the art names. Look at how popular the art names have been right that's that's like a millennial type of product in in my eyes at least right that is a way that you can have some sort of passive flows into those type of products and be super speculative um so i completely agree with jim and i know mike has been behind this this this theme for a long time too. And I just can't see it going anywhere.

All right. We'll see. Yeah, I agree. But I want to see like, okay, there's 30 million people on Wall Street Bets. What are you doing, you idiot of making 5% a year over there? You can make 500 over here. I think the distinction is important that passive does not mean growth, right? These names have gotten so stretched where at the end of kind of this, you know, at some

point, the passive flows reach a point where things get so out of whack that it leads to, you know, something where things fall apart. And there's a period of underperformance of those because there's forced liquidations in all those same vehicles that everybody was long. And then eventually the thing that outperforms that becomes a bigger part of the index, then, you know, we'll lead higher. I think it's important to not lose sight of the Fed's role, liquidity's role in all of this to emphasizing, you know, and reinforcing the value of growth. And I think in a fiscal dominated world or something where value becomes more,

cashflow becomes more important because money's not free. I think the passive might latch on to a totally different product. Money is free, right? But let's- Now it's free, right? Now you don't need cashflow.

But let's talk about that real quick of just your guys' views on what does that look like? Is that how this ends? is that where the music ends of the liquidity fed provided liquidity dries up um i know jim we've talked like they're out of bullets already but now we've moved into fiscal so yeah it's not necessarily that they're out of bullets they're up against um they can manufacture bullets. They're up against people, right? Politics matters. People matter. If you're in a world where it wasn't about human beings and

you were just maximizing for GDP growth, they'd keep doing what they were doing. What they're doing is accelerated technologies. It's led to a bit of an industrial revolution, right? Corporations are doing better than ever, right? Problem is it's tearing apart at the fabric of society. Inequality is a problem. It's become on everybody's lips, right? It's been a building kind of zeitgeist and it's here front and center. Everybody's talking about it. It has been for years now. But it doesn't seem the Fed cares about it. They're not giving any lip service to it. That's not true.

They're actually very clearly coming out and making commentary, both the Fed and the Treasury in lockstep here, making very clear commentary about wanting to shift to fiscal, about wanting to help underprivileged groups, about reducing, getting the money to the people who need it. And if you watch Powell's presser today, I mean, 75% of that was. I meant more, is it, is it just lip service or do you think it's real? Oh, I think I really don't think so. I mean, Janet Yellen's first tweet,

her next five tweets were all about reducing this gap. She's tied into the administration who has made this their, the new administration, which has made this their point. And Powell has been very clear about the transition to fiscal being, you know, being time for a transition to fiscal. He's been beating that, you know, for about a year now. And that's why they're willing to take inflation. They set the inflation expectations higher. You know, I think we,. I think they want inflation of two, three plus percent, three, four percent is what they're looking for at this point. And they want to reduce inequality. I guess we'll see. I mean, nobody believes it now because after about

20 years, everybody's shaking their head saying recency bias is like, how can that ever happen? It's a different- And can they do both? Right. Like that's the big question. Can they improve the inequality by not just hammering the, you know, the 1% down, but by bringing everyone else up. Right. That's the idea of demand side economics, as opposed to supply side. Right. And look, that's going to hit mean, or it's going to, we're no longer going to be maximizing for GDP. We're going to be maximizing for median income which are very different things but wouldn't that come down

to the individual stock level in theory of like absolutely this is this is everything I mean they're not going to maximize for capital right yeah when we talk about flows you know Chris and I get talking about like the flow flowing you know into what product and passive flows and option flows and whatever. All of that is coming out of one really big pipe. And that's out of government. That's out of the Federal Reserve and the Treasury. In one way or another, that's how it gets to all these places.

And they're taking that big pipe and they'll just point it over here and they're going, it's going to change everything. I mean, that's what we're seeing. I mean, what you're seeing, back to our original point, what you're seeing with retail is a direct... That pipe just moving a little bit. Going into a different place is driving, is a major driver of what's going on right now. It's going to change a lot of things.

Right, because how much of that pipe was there? What was the amount? Two trillion? Or what was the first stimulus amount? The first one was a 1.1 or 1.2. The second was 900. And now we're in talks of 1.1 to 1.7. So, right.

I mean, people lose sight of how much money that is. You know, the New Deal in real terms was something like $600 billion. Economy was a lot. The economy was much smaller, right? So you have to kind of relative the size of the economy. The economy, it was, it was, it was a lot bigger, but you know, we just had all combined all three of these will be three, whatever trillion. And if you think that's the end of it, like no way, no way. Well, which we've talked about to me,

this is just going to get people on the basic income trail of like, maybe they don't call it that, but there's like the annual stimulus or something, right? Of just like, no, what are you doing? Look at this is great for the economy. Everything's going up. You got to keep giving these people money. Look, it's crazy. You know, 10 years ago, 11 years ago, 2010 fiscal conservatism, like the Tea Party was

kind of, you know, it seems like millennia ago. Now, now it's, you know, we're in a UBI world where, you know, there is no real cost to this. And, you know, in the short term as a dominant currency. And then you buy some Bitcoin as your hedge in case it all blows up, right? Right. That's a topic for another day cool we'll wrap up Chris you got any other last thoughts I think uh I mean we covered a lot today I think we touched on a ton of topics but I you know I think right now this is a rates game. And I think it's going to be very interesting to see how the Fed reacts when, you know, it's time to actually really raise rates. And it's going to be really interesting to see what the sentiment on the street will be like when they actually do.

You know, could it be reflexive where everybody immediately says, oh my God, they're finally raising rates. I'm buying downside puts. And here comes some of this float positioning that me and Jem always talk about where people are reaching for puts. And then that cascades of 10% move down to 25% or 30% move. That I'm not too sure. I'm honestly not too sure on. One thing that I do know in my years of trading is that when things get one-sided,

it is always better to take the other side of the trade. And right now, seeing this dynamic of this huge new participant engaging Except on GameStop. Yeah. Well, we haven't fully seen how this soap opera is going to play out. Right. So we still have to see the full the full scope of it. But, you know, I think I think this whole dynamic that's going on, I think it could continue for a longer time period than people are giving credence to. I think, you know, maybe we could see six months of just this constant price action.

But I do know when it goes away, it's going to go away hard, whether it's people losing a ton of money and, you know, a market tanking on something like this or some sort of regulatory intervention that's impacting the actual microstructure. I don't think that this is something that's just going to go off into the sunset and just be very quiet. So I think people should be focused on their book. I think they should be focused on, you know, risk parameters in their book and, you know, their true risk, right? Not their VAR that, you know, that says, oh, that's where your risk is at. And then, you know, AMC goes, you know, 100% and you're down, you know that says so that's where your risk is at and then you know amc goes you know 100 and you're down you know uh 90 won't the dealers start pushing the option prices out if they haven't already i feel like they just have to keep well yeah i mean look at look at amc amc at the money one week out was trading at a thousand ball amc the one week at the money

was trading at a thousand like what do you want to price it to you know like there's no way to price it it's impossible to widen it but people were still buying which is not a market anymore exactly people were still but exactly and that's what i'm saying like at this point the balls are irrelevant it does not matter right what is the tell me the difference between a thousand ball and 800 ball right or a thousand ball and a five thousand ball it's the same thing so yeah it's it's what does that look like that's like a hundred percent out of the money or something or 200 and they're trading for 20 bucks or something or who knows it's specific to each stock but right it's something insane right yeah i yeah i can't tell you what the implied move is off top my head but yeah it is it is insane right and they're

the traders are looking at it like well whatever i lose 20 bucks who cares um cool jam any other last thoughts um i mean i've got a lot of them but i the what i would what i would say is uh the way the way this probably ends is is in a decline in the market at some point. I think, you know, I think to Chris's point, I think we could get a lot more of this for a while and it could get very kind of 2000s on steroids, right? And a lot more that means more game shops, more AMCs. More game shops, more upside broadly to the market, more, you know, the crazier some of those names go get and more the more they get that way the more likely people are to buy the index and try and sell them and it becomes a much bigger game right that eventually unravels um i i think you paired this these goings on with you know a

what will eventually be higher rates on the back of it right if everything starts appreciating assets we reopen you know stocks are doing well they have lots more money you know no more eventually be higher rates on the back of it, right? If everything starts appreciating assets, you reopen, you know, stocks are doing well, they have lots more money, you know, no more distressed assets, right? You've got to get higher rates. And so the higher rates are ultimately what kill these things. And, you know, that's how this thing ends. It's not new, it'll be different this time, and it's veracity to the upside because of the derivatives will probably be just even worse on the downside because of the leverage and the amount of overextension that we're experiencing. And a financialization that's been accelerated by really free money for all this time is going to ultimately end with the shift to fiscal. With a monetary policy driven economy, you lead to deflation and you can do an infinite amount of it. As long as I keep giving all my money to the top 0.01%, it doesn't lead to price inflation.

You can keep rates low and create new technologies and new deflationary mechanisms, globalization. But the second this gets to everybody's hands and everybody starts buying stuff and you go to a demand side economics, if you worry about inequality at all, you can't keep doing monetary policy infinitely. The Fed has to worry about inflation. It's the one thing that puts them in the box. And so that's how this ends, ends with higher rates. Which to me is why they'll

never raise rates materially. But yeah, I think if inflation goes to 6%, they have to, 5% they have to. It's part of their directive. And so dealing with inequality will lead to inflation, which will put the Fed in the box. It's the only thing that ever does. Higher rates will be the end to this. In the penalty box, which box are they getting put into? JLCL, whatever. They can't do it anymore. They're in the penalty box. Only one way out. Hi, Jeff here. Just wanted to note we had a little bit more discussion after we ended the pod and cleaned that up a little and put it on here as a little extra bonus section. So if you listened all the way to the end, enjoy this bonus.

So I think that the firms that are getting liquidated are not big enough to completely tank the market. You know, like they're more so distressed firms. So they do have like position and, you know, like the big names or whatnot. But it's not going to be enough to really drive the market down. There will be a point where other people are going to start swooping in for value. I think like there is more forced liquidation coming, though. Right. Like I this is not it. Like this is not especially with AMC. AMC, there was a ton of funds that were short. So I think in the interim, you may see. It like seems too easy, right? Like you could, everyone could see AMC right there.

Like I could have bought it yesterday for what? For that same buck 50 or that was from a week ago. No. So we paid that. We paid for the sevens actually this week. I think, yeah, like Monday. Yeah. Yeah, we paid for the sevens on Monday.

I feel like it can't go on too long because you have – these guys are going to be forced to de-lever quickly. It's not going to be something that's like a rolling thing that happens over weeks and months. People are wise to what's going on. People are getting hurt fast. Like everybody knows, you know, they got to get out. They're stuck, you know? So I think that we're going to, we're going to feel it like this week. Yeah. And then it's going to be done. Right. Like, I mean,

the long-term trend of this stuff happening is going to continue, but it's going to continue with much smaller leverage on the opposite side, much less funds, like people realizing they can't do that because they're. Yeah, right. I agree with that. I definitely agree with that. I think you'll see more so liquidation, like completely done this week or next week, like middle of next week. I think you'll see other distressed hedge funds basically look at this and like, okay, you know, let's say we're short this name. We gotta, you know, we gotta start like covering some of the position or something like that. I don't think it's going to be like four or five weeks of this taking place.

Yeah. We're at a, just so you know, the last thing I'll say is, you know, now my, my world, uh, we're at a really, really important point here overnight, like where we closed. By the end of this week, if we don't kind of hold this area here on a closing basis, like this thing's going to roll over. This leads to, you know how this goes, right? Like we have this thing driving it. Right now we're in an okay place.

Nothing's on fire in index land, right? But given that what happened to vols today, broadly in the indices, like the position is no longer short. It's no longer long, sorry, long gamma. Like this market's much more free. And now if we kind of break these technical levels, you're going to have an unwind.

You know, vol's going to keep going higher. You're going to have risk parity selling. You're going to have trend following selling. You're going to have trend following selling. You're going to have all targeting. All this stuff is going to push the market lower if we break through this area. You see how big Vol's been? Sorry to cut you off, Jeff.

Vol's been tremendously strong over the last two weeks. Longer data. I would even say the front data stuff like we were short we were short some cat big and it was just there was no real cotango in it there was no real roll yield right the roll yield is saying the cotango rate is like seven percent like not going down at all so we're looking at the big has been strong but the the um you know the front

end is has it's stayed high like the vrp has beenP has gotten higher because the realize is really low. Yeah. Anyway, but yes, this was kind of foretold a bit by the ball curve. But anyway, I still think people aren't completely shocked here, at least in index land, right? I think people have seen this coming. People are generally prepared. We're still at a good point this is a tough place to buy the market but my gut says that this kind of resolves and this market actually just drives

right back higher well whenever we've been at vix 30 three percent off all-time highs right so it's a little crazy yeah three percent off of basically all-time highs and vix is whatever it went to today 30 something yeah yeah yeah no um when you say all-time highs what do you mean in the stock market stock indices at all oh the market all-time highs i'm sorry i thought you don't know vix at all-time highs i'm like i don't know yeah sorry i started breaking to you right a little higher yeah a little tiny bit higher. No, I got you. Yes.

Last time we were at all-time highs was at like 14, and now it's just held in those 20s. Chris, you and I were talking about this last night, but I actually think I'm much more bullish on this market in terms of flows and what this market can do to the upside. It can really shock people. This could be just the refresher it needs to now take a drive to 4,100 or so. Really get some people squeezed. The next two days are important just because we're at this

real big pivot point, which can really drive a lot of selling and other strategies. JanFab is a time where you should get a seasonally, structurally kind of a period to take a breather, to take a breather, to correct or whatever. So this is, it all makes sense right now. None of this is unhealthy as much as it may be scary to a lot of people and people like, this is crazy. This market's going to crash. Like, it's actually kind of healthy. Yeah, you needed that rotation. I completely agree. We need and people like this is crazy this market's gonna crash like it's actually kind of healthy um yeah you needed that rotate we i i completely agree we need that rotation get a few weekends out right consolidate collect and then you know make that push to that 4 000 mark uh i mean right in

like in the bigger picture right take a look at what the market's done in the last three months we're still still up there right it's trading at 370 like we're still very very safe but the strength in vix is what has me just like a little like huh like people really have been bid on vix and it's that's right man that's the right trade because for a couple reasons flow wise you you got nobody willing to sell it anymore. There's very few sellers. Exactly. You know, on the buy side, you got 25% of the public just buying calls and nonstop, you know,

you can go sell on that ball if you need to. And then you got valuations and you know, at some point this doesn't end well because of, you know, the whole narrative is there like at all um and it's honestly it's if you play it right like you can make money on the long ball side at this point it's not you know if you if you there's no bond alternative if you don't have a way to hedge your portfolio and you want to put some ball in there which there is a secular move towards that given where rates are um there are ways to do it and not lose your shirt right um and so i think that's here to stay i think you look at the late 90s like chris and i

talked about this last night i think briefly like you know there's this thing's going to move either big the upside or big to the downside before it's all over you know that's yeah usually right like it was clear then there was it's going to go one way or the other. Right. I mean the vols were pretty high before that crisis happened. Almost every time the vols go higher before you get a, an actual secular decline, but you know, you gotta watch it. Like it could be 200%, you know, what was it? 325. We said,

I was looking at 325% from October of 98 to March of 2000. That's how much the NASDAQ rallied. 325? The whole index, obviously it's a different index, but you know, that was a year and a half period at the, when people were already like 96 people or 98 people were like, this market's crazy. They were having the same conversations we're having now in late 98. And they won another 325% and crushed everybody. All right, guys. Awesome. This has been fun. We'll put where to get a hold of you, although everyone knows already,

in their show notes. And then be sure to check out. We've done a previous pod with Jem on Aegea. We've got one coming up with Chris to dig in. He's doing an Ambrose group, but he's so good on these little one-offs that we keep having him on before we get to his full stuff. I appreciate it.

I think we're sending some snow your way, Chris. We just got dumped on here in Chicago. Oh, man. I didn't even know that. Really? Yeah. We have four or five inches, maybe. Four or five inches. I got my son out shoveling for me for the first time. Oh, that's nothing for you guys. You guys are used to five feet of snow. No, we don like four or five inches, maybe. Four or five inches. I got my son out shoveling for me for the first time. Oh, that's nothing for you guys. You guys are used to like five feet of snow.

No, we don't get that. I was just telling someone that the other day, Jim. I'm like, I'm old enough now where I can send my son out to shovel. It's great. It makes me sad, but it's also great. I'm feeling the inflation at home. I had to pay him 15 bucks. Oh, don't tell mine that.

I just told him that's his job. He's got to get out there and do it. Yeah. Um, cool. Thank you guys. Thanks for having us, Jeff. Appreciate it. 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 alts and visit our website to read our blog or subscribe to our newsletter at rcm alts.com if you liked our show introduce a friend and show them how to subscribe and be sure to leave comments we'd love to hear from you