The Late-Cycle Contrarian

Published on
August 29th, 2019
Duration
43 minutes

The Late-Cycle Contrarian

Investment Ideas ·
Featuring Charlie McElligott

Published on: August 29th, 2019 • Duration: 43 minutes

Charlie McElligott, managing director of cross-asset strategy at Nomura Holdings, sits down with Ed Harrison to examine the recent equity market volatility. He argues that both hedge funds and pension funds are crowding into an end-of-cycle-trade — anticipating that U.S. interest rates going to zero. McElligott runs down the contrarian bet and looks at the other side of the crowded trade, specifically mentioning Treasuries duration, and out-of-the-money options. McElligott also talks about a potential September equities drawdown. Filmed on August 26, 2019 in New York.

Comments

Transcript

  • DC
    Dan C.
    6 September 2019 @ 05:59
    I’d love to watch this but I don’t want CM destroying my short everything bias LOL.
  • JG
    Jose G.
    3 September 2019 @ 18:23
    Can someone explain when he says "dont be caught short gamma in August", hes saying there is a risk of the assets to go up and screw you right? But is he talking about shorting put options ot shorting calls, or both?
    • PP
      Peter P.
      4 September 2019 @ 22:05
      I believe Charlie is speaking from the shoes of an options dealer....imagine you write puts and calls on Apple as a dealer.....You are short calls and puts at many different strikes and at expiry normally things quiet down & if left solely to the dealers - the dealers will look to move/pin the option expiry at the strike/share level that makes them the most money (leaves the most options held by those long options puts & calls as worthless) - now imagine at expiry shares In Apple swing wildly up & down and the owners of calls who were bullish sell at a profit as the shares soar, and then shares reverse go down and the owners of the puts also unexpectedly make money....the dealer loses across the board short gamma (the change in the change of the value of the option for a change in price of the stock. So to answer your question both calls & puts. Best example ever (I believe) was Sep 2008 a Wall Street bulge supposedly made 10 figures+ long an uncapped variance swap on several indices just in the week of options expiry (and that was a firm on the verge of death even with that payoff)
  • JO
    Johnny O.
    3 September 2019 @ 07:33
    Bonds and the famous Eurodollars certainly seem now to be struggling to creep higher, despite the consensus that they must. Good to hear this contrarian view.
  • PG
    Paco G.
    2 September 2019 @ 14:01
    Derivatives are really the tail that wags the dog of the equity market. Very similar to mortgages waging the treasury market with the delta hedging strategies to combat negative convexity circa 2008/09 Last fall we extend fixed portfolio and bought long high quality munis for income. Unfortunately could not buy anything without calls. Looking at now in retrospect, I should have gone for duration instead of income. RV’s recession watch video’s really got me thinking. We are all going Japanese if the markets will allow. Raoul’s meme “buy bonds wear diamonds “, Convinced me to add duration via Cash 30yr Tbonds@2.19% As a contrarian by nature, it was a tough to do after the rally we have seen over the last year. Charles pointed out the adding duration is the most crowded trade in the world. I found it really interesting that he is mentioning Out of the money puts on bonds. For a retail investor with no futures account or OTC agreements. What would be the best way to buy some insurance? Puts on TLT or calls on TBT?
    • DS
      David S.
      2 September 2019 @ 15:55
      It still seems to me that politics and derivatives are the dog for now and the markets are the tail. Someday hopefully it will reverse as it should be. DLS
  • AU
    Alex U.
    1 September 2019 @ 12:54
    One more video confirming that duration is perfectly priced. Any data point/event pointing to “no recession” will make yields raise. Unless we have an advanced version of Armageddon very very soon, yields should not go lower.
  • JW
    Joe W.
    1 September 2019 @ 03:50
    Excellent interview.
  • SB
    Steve B.
    31 August 2019 @ 13:52
    Great interview. Has anyone seen anything more written about the put bomber he mentions? Hadn't heard of that flow.
  • tc
    t c.
    31 August 2019 @ 09:22
    strange coincidence long yields up last few days and 2yr down. Hmmm
  • BM
    Beat M.
    31 August 2019 @ 07:42
    What a marvelous beard! I am jealous.
  • ml
    michael l.
    31 August 2019 @ 02:19
    That was an excellent interview. Super insightful, educational and practical. Please have Charlie on again soon.
  • BS
    Bevyn S.
    30 August 2019 @ 22:44
    Love the quant side of the market... Still have a lot to learn. Recommend RV have an educational series on all the Greek variables & options math.. I think you could knock it out of the park!
  • MT
    Michael T.
    30 August 2019 @ 19:16
    Great interview and conversation. Thanks guys!
  • PB
    Pieter B.
    30 August 2019 @ 17:25
    Haha this conversation is above my pay grade! Very interesting though! Thanks you!
  • PC
    Philip C.
    30 August 2019 @ 15:58
    No disrespect to Ed but would be interesting to have McElligott sit down with Mike Green. Vol guy to vol guy. Met Charlie at a Nomura conference in SG this year. Top bloke, chatted for an hour about long duration crowd.
    • DH
      Daniel H.
      4 September 2019 @ 06:35
      Yes you would get a different interview. But would you get a better interview? I doubt it. But I would like to see the Greene interview too.
  • RD
    Ryan D.
    30 August 2019 @ 15:15
    Cool view. Like the crowded narrative thinking. Dude's beard is long Gamma like a Bartender Viking.
  • JC
    Joe C.
    30 August 2019 @ 14:36
    The most thought-provoking tactically bond-bearish argument I have heard since the run started a year ago. Nothing has even come close to making me rethink my long bond position (at least through the next 2-4 weeks). Must rewatch again. Please have Charlie back as often as possible!
  • TM
    The-First-James M.
    30 August 2019 @ 12:42
    I found Charile's comments about the return of the "50 Cent" options buyer this year of observational interest. Back in 2017, this was rumoured to be a London firm by the name of "Ruffer Investment Management", although they never actually confirmed: https://citywire.co.uk/funds-insider/news/ruffer-named-as-mystery-50-cent-buyer-of-fear-options/a1013712 I found it interesting to read the following quarterly review from Ruffer: https://www.ruffer.co.uk/en/About/Investment-review ... and the following paragraph in the review to be of high circumstantial interest, following Charlie's comments: "We come at it (potential illiquidity) with a shield and a sword. The shield is to ensure liquidity considerations are a central part of our investment process. This has been the work of ten years, developing both the process and the culture. But illiquidity can be used as a sword – the conditions which cause a buyers’ strike in the market driving prices frighteningly down, are also the conditions which create demand elsewhere. In our protection portfolio we hold the insurance asset that investors will be forced to buy when they are frightened and can’t sell the assets they hold." I've often thought it would be interesting if Realvision could coax out either Jonathan Ruffer or Henry Maxey for an interview. I should state here my interest is personal - I hold investments in a couple of Ruffer funds, including RICA, and I've also parked some of my Mother's money in their Total Return OEIC fund. My reasoning at the time is that they were one of a minority of London Firms to end 2008 with a substantial positive return.
    • MO
      Michael O.
      31 August 2019 @ 07:46
      Thanks for the heads up on Ruffer, they look like someone that offers that bellwether portfolio that Ray Dalio goes on about.
  • DS
    David S.
    30 August 2019 @ 09:01
    The derivative market and financial engineering are now the dog and the stock market is the tail. Just like mortgage backed securities. Be careful of your liquidity and counterparty risk. DLS
  • DH
    David H.
    30 August 2019 @ 07:51
    Awesome guest and meaningful insight. Among the best RV interviews for immediate tactical considerations. Been following his quotes from Heisenberg for a long while now. Good to see the head behind the words. With most of RV long bonds (and wearing diamonds), the "just in case" option idea was on point. Would be good to explore it from a specific instrument practical perspective in future episodes. Thanks.
  • WC
    William C.
    30 August 2019 @ 02:42
    a far more cerebral examination of the market than what I could say I completely understood, however, I enjoyed the discussion considerably. As a tape watcher, I tend to believe his contrarian view of a reflationary trade is more right than not, albeit there appears to be a cap on how high bond yields can really go up to given the increasing amount of debt issued at lower interest rates.
    • WC
      William C.
      30 August 2019 @ 02:44
      Also, as a subscriber of about 6 months, I find it fascinating to listen to the same interviewees periodically and see how their views have evolved.
  • RP
    Raoul P. | Founder
    30 August 2019 @ 01:52
    Exceptional piece. Nice job, Ed.
    • AR
      Anthony R.
      30 August 2019 @ 02:21
      What is Ed's background? He did an amazing job. Will have to watch this one a couple times over.
  • JC
    Jon C.
    30 August 2019 @ 01:04
    Enjoyed McElligott's thoughts. Harrison did well asking the right questions and guiding the discussion. On a different note, I really appreciated Vol Week with Mike Green. Would love more derivatives content in general.
  • SS
    Stephen S.
    30 August 2019 @ 00:58
    Need a 10hr Michael Green and Charlie Mcelligott special...
  • RA
    Robert A.
    30 August 2019 @ 00:26
    Another great job by Ed Harrison. The last 10 minutes of this interview was worth the entire year subscription cost. Will definitely be rewatching this one.
  • GS
    Greg S.
    30 August 2019 @ 00:13
    This stuff is so short term it’s largely useless unless you’re a dealer. At least he touched on the TGA liquidity withdrawal in September-October.
  • MN
    Maverick N.
    29 August 2019 @ 23:26
    A discussion on VIX is never complete without getting Chris Cole (of Artemis). Please bring him on.
  • AS
    Anthony S.
    29 August 2019 @ 23:24
    This is an awesome interview, I'd like to see Charlie on again and talk more about gamma exposure and how it works in up and down markets.
  • MN
    Maverick N.
    29 August 2019 @ 23:23
    Spectacular! I will be watching this a few times.... Charlie McEligott reminded me of Mike Green with his superior fundamental and technical prowess. Ed is a star! I can imagine the work he must have put in to be able to ask the right questions to turn this into a fascinating discussion it became. This is why RealVision is such a gamechanger!.
    • DS
      David S.
      5 September 2019 @ 18:38
      Do not sell Mr. Green short. Both are great! DLS
  • CD
    Christine D.
    29 August 2019 @ 22:28
    Would be so great to have an educational video attached to all videos explaining technical terms used during the conversation
  • ME
    Michael E.
    29 August 2019 @ 22:02
    By the way, I retired at 48, this gentleman is so so bright, how come still working???? He should use his complex formulas & make billions from Naples, FL. HE CAN BE MY GUEST AND I CAN LEARN HOW TO GET RICH FAST.
    • MN
      Maverick N.
      29 August 2019 @ 23:25
      There is no get rich quick scheme, Mike. It is someone trying to get rich off of you. Don't mean to preach but there's no way to financial freedom without doing the hard and smart work and undertaking risk.
    • ME
      Michael E.
      30 August 2019 @ 08:15
      We are very very close to the top. Thank you very much.
  • ME
    Michael E.
    29 August 2019 @ 21:59
    There 2 ways to get rich. Honest , hard work and save. You will never become very wealthy in the long run doing Ponzi & all the complex formula, etc. Hard work, save. I’m not buffet, gates & those exceptional guys. But I know how to work & save. Create jobs & run a company. These fancy Wall Street guys soon will be knocking on the doors and offering more complex Ponzi products. HARD WORK. SAVE
    • DS
      David S.
      30 August 2019 @ 07:23
      I understand your concerns, but these dealers work extraordinary hard and they do save. These trades seem to have very little to do with the underlying market. The major benefit I get from this interview is the realization of how good they are. It is impossible for me to play in this glass bead game. My major concern is the counterparty risk in this market will tank the stock/bond market. DLS
  • AS
    Angelika S.
    29 August 2019 @ 21:33
    this is eye opening and needs more discussion. thank you
  • KB
    Kirk B.
    29 August 2019 @ 20:30
    Fascinating look under the hood of underlying market dynamics. However, as a "retail" investor and a retiree, I am most concerned with making ongoing wise risk-reward asset allocation decisions, with an emphasis on controlling draw-down risks. I am not interested in making gamma, volatility, leverage, or short trades, where skillful execution and timing are critically essential. The most likely outcome of my attempting to make such trades would be to have my head returned to me on a platter. Nevertheless, there were a number of valuable take-aways to a non-trader from this excellent interview: 1. In early September, I should consider lighting up somewhat in equities, reinvesting on a pull-back. 2. Having shifted some funds over the past 6 months into longer duration treasuries, resulting in great returns, I should not invest further into longer duration treasuries, and should be prepared to shorten the duration of my treasury investments in the months ahead. 3. Increase purchases of precious metals upon any pullback.
  • CT
    Christopher T.
    29 August 2019 @ 19:51
    Did Ed just finish a run before the interview?
  • SA
    Stephen A.
    29 August 2019 @ 18:01
    Unlike the other interviews on the VIX on this platform, this guy actually knows what he is talking about.
    • CB
      Cyprian B.
      29 August 2019 @ 22:07
      As an ex-vol trader for IBs & Hi-freq companies, I couldn't agree more: this guy lives & breathes tactical derivatives market analysis. "Gamma is the tail that wags the dog."
  • LM
    Leighan M.
    29 August 2019 @ 17:00
    The statement around 22 mins in, about the whipsaws in the current markets NOT being about actual trade optimism but mostly, releveraging and hedging going at full speed, alongside quick monetization...my GOD that info is priceless!!!! Finally, i've found my answer. I just couldn't accept institutions/people could be silly enough to buy on positive tariff news and sell on negative - a total 180 everytime a comment is made. So i knew it had to be something else. But at last i understand why that is reflected in the price anyway and appears that way..
    • MW
      Mike W.
      30 August 2019 @ 17:46
      Bloody hell - i wish i understood that video and your comment above...the video looks like its full of great content but a little to complicated for little old me!
    • LM
      Leighan M.
      4 September 2019 @ 23:22
      What I meant Mike is that, Charlie's saying the reason markets are playing silly beggars at the moment is because algorithmic trading is getting set off on different moves, which is exaggerating rallies and downside moves. Not just that, but options dealers need to hedge massively against current positions etc, so rallies to the upside have tailwinds and the markets going up simply because billions of money is going into covering themselves.
  • MT
    Mike T.
    29 August 2019 @ 16:59
    I'm going to read this again, to make sure I got it, but wanted to post one immediate comment. For all you short premium option traders out there ( not many judging by the typical commentary I see on this forum) one very simple way to minimise Gamma risk is never let a short premium position get close to expiry. To implement, be mechanical and at 21 days to DTE if premiums are still relatively elevated in a position (IV Rank at least 20 or more) roll out in time to next monthly cycle. For those that drink the same 'coolade' as me will recognise where this approach comes from. I personally find the mathmatics and statistical backtest evidence of 10's of thousands of trades (from the same source) most persuasive such that Gamma risk is not something I fixate on. The only issue with such an adjustment per position management technique described being, with the exception of just one that I know of, most brokers make it less than easy to implement in practice.
    • st
      steven t.
      29 August 2019 @ 18:17
      Can you explain why the 21 day point was chosen over say the 14 day point to roll the contract? Also, can you link the source that you mentioned? Would love to learn more about properly implementing this type of strategy.
    • MT
      Mike T.
      29 August 2019 @ 18:37
      Steven, I'm happy to do that, but not on this forum. Ask Milton for my contact details and I'll respond forthwith.
    • AM
      A M.
      1 September 2019 @ 18:43
      You are clearly a disciple of Tom Sosnoff at Tastytrade!
    • MT
      Mike T.
      2 September 2019 @ 10:38
      A. M. yes well spotted I am a 100% committed disciple of the TastyTrade methodology i.e. sell premium in highly liquid options only, with strong preference for 'non directional' undefined risk strategies, optimum time frame 45 days, profit target keep 25% of collected premiums, stick to monthly cycles. Fyi, at first it took me a long time to grow my confidence in the mathmatics behind the aformentioned approach, initially I was deeply skeptical and have often said to people it took me 3 months of total immersion in the subject, not to get competent, far from it, but three months of all day every day to understand the potential opportunities available if I carried on with even more learning with over an extended period of time e.g. at least another year of everyday effort. The benefit of TastyTrade in particular, it's free to access, and if when first starting out, if skeptical, for US folks there are plenty of weekend 'events' up and down the country from 101 stuff through to really deep geeky stuff where it's possible to meet the people face to face and form your own opinion of their authenticity. I've never previously stated on this particular forum, my preference for the TastyTrade approach as many of the speakers on RV are of course selling something and its most certainly NOT short premium option trading. For Steven T, for 21 DTE position management start here https://www.tastytrade.com/tt/shows/market-measures/episodes/managing-winners-by-managing-earlier-09-09-2016
  • NN
    Ninh N.
    29 August 2019 @ 16:47
    more volatility talks like this please :)
  • OS
    Oliver S.
    29 August 2019 @ 16:30
    A fascinating insight into the market mechanics.
  • dm
    david m.
    29 August 2019 @ 16:19
    Conor McGregor of finance.
    • PC
      Peter C.
      29 August 2019 @ 19:10
      HAHA
  • KA
    Kevin A.
    29 August 2019 @ 16:16
    Good interview. I miss being a sellside trader - he encapsulated the pain and joy well.
  • RM
    Rafael M.
    29 August 2019 @ 16:16
    One of the best interviews on RV. So useful and engaging!
  • VS
    Valtteri S.
    29 August 2019 @ 16:02
    That guy is aces in my book.
  • WB
    Wes B.
    29 August 2019 @ 15:34
    Loved that. I was a market maker trading index options for almost 20 years. On that side of the business you learn how mechanical most moves in the market really are. He has a better seat than I ever had but all that he said makes a ton of sense. Can you bing him back once a month??
    • JR
      Jay R.
      29 August 2019 @ 16:21
      I love hearing Charlie's views and his occasional CTA levels that are periodically provided on various retail websites. I would agree out of all the folks RV brings out, he is by far one of the few who really understands the market plumbing and current dynamics. I agree that getting either monthly or at least quarterly updates would be very useful.
    • LM
      Leighan M.
      29 August 2019 @ 16:46
      Hi Wes - by mechanical moves are you meaning, say, a shift in X causing reallocation to Y (like the example in the vid of deleveraging at certain volatility %s?). Interested in learning more about this if you know of any resources.
    • GS
      Gordon S.
      29 August 2019 @ 17:43
      @Leighan M.: McElligott's newsletter is dissected regularly by @zerohedge, so just try to find those articles, c.f. the latest one here: https://www.zerohedge.com/news/2019-08-28/watch-out-below-ctas-just-triggered-short-sp-puke-follows-close-below-2789
  • TS
    Taranvir S.
    29 August 2019 @ 14:21
    There's so much stuff here that I have no idea of; so much learning to do!
    • EN
      Eric N.
      29 August 2019 @ 16:07
      And Charlie helped the viewer using a range of synonyms including the abbreviations, for one to bridge the known terminology with the unknown. I was glued to this video, great job also by Ed, who knew what his guest was about, steered the interview with a theme in mind and really gave Charlie the opportunity to share his thoughts.
  • LA
    Linda A.
    29 August 2019 @ 14:18
    wow just over my head. One bad, huge trade can make a hedge fund blow up. How is it that HYG is at all tie highs if this ETF is somewhat illiquid?
  • TT
    Tokyo T.
    29 August 2019 @ 12:23
    Mindblowing to learn what is going on behind closed doors.
  • RI
    R I.
    29 August 2019 @ 12:14
    This was so much more insightful than the stuff you see from Roaul (eg “look at this chart of EU banks; it’s the chart of death” LOL!).
    • US
      Ursha S.
      29 August 2019 @ 16:08
      The title itself clearly explains, he did Raoul's work first. These are the mechanics of the trade based on late-cycle thesis.
  • Av
    Arthur v.
    29 August 2019 @ 12:11
    Wow this is pretty hard core. I like the contrarian play of 12 month short treasury options. As a hedge for MMT or reflated economy after severe monetary tightening.
    • Av
      Arthur v.
      29 August 2019 @ 12:11
      I mean monetary expansion.
  • SG
    Sven G.
    29 August 2019 @ 12:03
    the conversation makes me want to learn more about options so I can better understand the conversation :D The parts I did understand were very interesting. Thanks guys!
  • ME
    Michael E.
    29 August 2019 @ 11:21
    Ask this guy, can you start a small company to produce a product and employ 50 people. Real product and real job. Answer. No.
    • DG
      Dan G.
      29 August 2019 @ 12:06
      With all due respect if it’s so “easy” to trade these Ponzi schemes rather than start a business, why are you paying for RV?
    • ME
      Michael E.
      29 August 2019 @ 21:49
      Always keep your friends close & fools closers. Don’t worry, soon this part will be over and you should remember this conversation. Don’t blame it on bad luck.
    • ME
      Michael E.
      29 August 2019 @ 21:54
      I would been happier with 20 thumbs dow, it shows, debt/deflation is here. Remember.....told you so...... I remember 2000 & 2007. Same story over & over again. Don’t believe read the sentiment in 2000 & 2007. Anyone talk about recession they are to shoot you. I know it is close. Thanks for the feed back.
    • JC
      Joe C.
      30 August 2019 @ 14:37
      Sir this is a Wendy's.
    • MC
      Minum C.
      30 August 2019 @ 15:04
      I don't personally know the man with the spectacular beard, but I bet his chances of starting a small company, producing a product, and employing 50 people is much higher than average. You have to at least admit that beard is just awesome.
  • ME
    Michael E.
    29 August 2019 @ 11:11
    We need to wake up soon, a lots of our very smart people are involved gambling in Ponzi schemes. We forgot the true capitalism, save, put savings in local banks, get interest, local bank find the best ROI businesses and deploy the capital. It is that simple. We have a made I t so so complex, people don’t know what they are buying or selling... chosen people invented the paper $$$$ to fool the public and they have done it in such a brilliant way, people still don’t realize what’s going?????
    • DS
      David S.
      5 September 2019 @ 18:57
      This is the new world whether we like it or not. There is a game on the gridiron and massive gaming in the stands. This will not change. Bets are cheaper and payouts, if you are correct, are multiple times. It is a zero sum game, I assume, but instant reward or failure. Our day is "Gone With The Wind". Times change. DLS
  • SS
    Shanthi S.
    29 August 2019 @ 07:59
    So good!!!