00:00And we were talking about, you know, your view that you think that credit spreads have room to widen here.
00:05And interestingly to me, as an ETF reporter and the anchor of the ETF show, you're expressing that view through
00:12ETFs.
00:13And I'd love for you to expand on that a little bit. You know, why use that vehicle to make
00:18this trade?
00:19Well, that's part of how we're expressing it. We're also, I mean, we manage outside capital.
00:23So we have ISDAs and we're doing some things, OTC, but to play to play the spreads.
00:30But I mean, we're so we have put spreads in place on HYG, LQD, and that if this thesis when
00:38it starts to get priced in.
00:40So let me say one thing here is I think the markets will price this in before the job displacements
00:47occur.
00:47OK. So and I think this I do think this will be kind of a global financial crisis type fallout
00:54in the markets ultimately.
00:55And I think it's just on a much faster burning fuse than the GFC was back in 2007, 2008, because
01:03information moves much faster.
01:05So we're so we've got put spreads on those ETFs. And part of the issue that those ETFs will have
01:12is that the underlying can become almost completely illiquid in a real in a real displacement type scenario.
01:21So you'll have the APs that make the markets for the ETF probably step back.
01:27And so people will be redeeming the ETFs, but you can't get liquidity in the underlying.
01:33And that's something that's been a risk that's been pointed out for a long time for credit ETFs, especially for
01:40example.
01:41Yes. And the government had to unfreeze the the credit markets there.
01:45And it worked. I just think this is going to be a bigger issue in covid.
01:49You know covid it was clear. It's like it's a virus. At some point this passes.
01:54But when you know it's not like jobs that are going away because they've been displaced are going to come
02:01back.
02:02It's you know they're gone. So I I think this will be a good deal more profound.
02:08So at least for a moment in time, I think there'll be a real mismatch between the liquidity of the
02:14ETFs and the liquidity of the underlying.
02:16So if you're short the ETF at that point, you time it right and get some extra juice on the
02:22downside.
02:23Well, the timing, I mean, so much of what we're talking about, the timing is key, as it is with
02:27everything.
02:27You said that, you know, you think the market disruption will happen before we see that job displacement here.
02:34But you have these puts on now. So what sort of timeline do you have in mind when you're thinking
02:39about this trade?
02:40Well, the thing that's been and so so volatility has increased recently because of the Iran war.
02:47But once we're past that or nobody cares about it anymore, like these are equally probable scenarios, vol will probably
02:57die back down.
02:58So you can buy you can go long puts on these credit on these credit ETFs without paying a lot
03:06of money because without paying a lot of time value relatively because vol is so cheap.
03:12So that's one reason why I like that better than, say, doing put spreads on the S&P 500.
03:19I mean, we have some of those as well and we have some other equity trades.
03:23But, you know, in terms of timing, it's hard to say.
03:27I felt like things were moving just from conversations I started having with investors whom I consider to be smart
03:35money about beginning of February, just started having conversations.
03:41And everybody I talked to saying, yeah, my partners and I are talking about this right now.
03:46Just had a call about this. What's this going to do?
03:48And I think this was really moving quickly.
03:52But the Iran war has distracted a lot of people from thinking about this.
03:57But like I said, we either get bored of the Iran war or it ends somehow.
04:02And attention will refocus on this at some point.
04:06And then and as it percolates through the markets, then I think you will start seeing spreads widen.
04:12I mean, spreads have already widened a little bit since we put the trades on even before the Iran war.
04:16So it felt like maybe it was percolating a little bit.
04:20But vol is just especially in credit markets, it's just been too cheap.
04:24So, yeah, I think that's the opportunity.
04:27I want to pivot a little bit to coming back to kind of the notion of what AI is going
04:33to do and thinking about the names that could go public.
04:36Open AI, Anthropics, SpaceX, three massive companies.
04:39What would you make of or what do you make of some of the numbers being floated around?
04:43We've reported SpaceX wants to go public at one point seven five trillion dollars.
04:47We can only see what Open AI wants to go at.
04:49How would you handicap that and what would you benchmark that to?
04:52I mean, like I'd be curious as to how big the floats will be, you know, because I can't imagine
04:56that, you know, one point seven five trillion IPO.
04:58You're going to have a huge float.
04:59But, yeah, I mean, the numbers today are so big after years of emergency monetary policy following the GFC that
05:07I don't know.
05:08I mean, I'm almost numb to the numbers.
05:12But like I said, as the scenario plays out, everything does poorly for a while.
05:19In the aftermath, there are definitely companies you'd want to own, like you'd want to buy them in, you know,
05:24in the fallout of massive correction.
05:29And some of these are probably among the names you'd want to buy.
05:32But how would you position around to the short or long side any of these three companies, given how markets
05:38have evolved since COVID, where retail is such a big proportion of the market?
05:42I can only imagine what the chatter on a Reddit or some of these trading boards would be around the
05:47event of an IPO.
05:48And even to your point, if we only are seeing four or five percent of the shares floated.
05:52Yeah, I wouldn't be doing it.
05:54I wouldn't be long or short.
05:56I'll put it that way.
05:57I mean, we have a we have a strategy that we developed where we're long.
06:02You know, every month we rebalance.
06:04We're long 20 S&P 500 constituents.
06:06We're measuring momentum.
06:07And so, you know, if they make it into the index and they score on our and they score on
06:13our momentum strategy, then we'll be long it.
06:16And for a while, starting in 24, we were long Palantir for a number of months was our number one
06:22holding and it did very well.
06:24So through that filter, if it scores, you know, we're agnostic.
06:29Like we'll buy it even if there's, you know, even if we just can't justify the valuation.
06:33Well, I hope that we have you on to talk about that when they do go public.
06:37It's going to be an interesting time.
06:38Our thanks to Carson Block, CEO and founder of Muddy Waters Research.
Comments