Podcast Summary
In this podcast, guest Dean Curnutt, CEO of Macro Risk Advisers, discusses the bond market’s influence on other asset classes, the shift in correlation between the stock and bond markets, and the implications for investors. He also touches on the options and derivatives market, the impact of the Federal Reserve’s policies, and the volatility in the market.
Key Takeaways
Shift in Market Correlation
- Change in Dynamics: Historically, the stock and bond markets have moved in opposite directions. However, since 2022, both markets have been moving in the same direction, indicating a shift in correlation.
- Impact on Investors: This shift has implications for investors, particularly those who follow a 60/40 portfolio allocation strategy and hedge funds that rely on the negative correlation between stocks and bonds.
State of the Bond Market
- Unhealthy State: The bond market is currently in an unhealthy state, with high levels of debt and unsustainable fiscal dynamics in the US contributing to this situation.
- Market Influence: The stock market now takes direction from the bond market, which is a concern given the current state of the bond market.
Volatility in the Market
- Low Volatility: The options and derivatives market experienced low volatility and credit implied volatility during the COVID-19 pandemic.
- Impact of Federal Reserve Policies: The Federal Reserve’s promise of low rates and forward guidance in early 2021 led to extremely low volatility.
Market Predictions and Realities
- Market Predictions: The market has priced in several cuts by the Federal Reserve, but these predictions have not always been fulfilled, indicating that the market can be wrong in its predictions.
- Impact on Stock Market: While fulfilling these predictions may be challenging, it may not necessarily lead to a big risk-off event for the stock market.
Options Trading Strategies
- Utilizing Optionality: Being tactical and thoughtful about utilizing optionality on the long side can empower buyers during market downturns.
- Importance of Sizing and Risk Management: The importance of sizing and risk management is emphasized, as both short V traders and buyers of volatility can face substantial losses.
Sentiment Analysis
- Bullish: The guest expresses a bullish sentiment towards being long volatility, citing concerns about the treasury market and the impact of long and variable still not being felt. He also mentions the sneaky impact of interest rates on option prices.
- Bearish: The guest expresses a bearish sentiment towards the current state of the bond market, highlighting the high levels of debt and unsustainable fiscal dynamics in the US.
- Neutral: The guest maintains a neutral stance on the market’s ability to predict Federal Reserve cuts, acknowledging that while the market has priced in several cuts, these predictions have not always been fulfilled.
