Hey there, OddLotss listeners. You are about to hear a very special episode of the podcast. This was recorded live at our June 26th event in New York.

We are talking with Charlie McGeligette. He is of course managing director and crossasset macro strategist for the global markets America's business over at Numora. We talked to him about volatility in the market. What else?

Yep. It's been a kind of extraordinary couple of months with stocks basically at all-time highs despite so much going on in the world. What actually explains what's happening? Charlie uh does a pretty good job. So, take a listen.

Thank you so much, Charlie, for being here. Awesome to be here. Awesome to see you guys. So, I didn't actually see where the market closed today, but like we're pretty close.

Like either we're at record highs or we're very close to it. I didn't actually see. But it's crazy to me all that's happened in 2025 and like we're sitting here at alltime highs. It's not intuitive. You have to admit it's kind of weird.

the um you know I think the message I'm trying to remember the last time I was with you guys but probably the message I was communicating at that time was the the fixation and kind of the dooming with the left tail scenarios and um as

so often is the case when people are not incentivized to see the world burn which might be debatable to some um but and you start seeing especially with regard to you know negotiating tactics and things like that where you start getting that not quite as bad as feared scenario.

oftent times there's an impact certainly with the mechanical stuff that we so often talk about and you really underpric the less bad outcome and there's a mechanical impact there's a lot of you know v distribution stuff and it creates second order impact second order flows

I think the most fascinating two points that I would say outside of the you know the the mechanical flows that we talk about and and the volatility component of this is is is two things I I think back to 2022 um where we had our first kind of inflationdriven macrobear case, right?

We just started the tightening cycle. I think there was nine or 10 months in a row of inflation upside surprises with CPI and and um you know the macro bear case

for equities at that point was this earnings recession where due to this price shock it was going to impact consumption topline sales go lower and you know so so on and so forth.

What ended up happening is ironically because of the health of the consumer and tight tight tight employment with wages at 40-year highs, you ended up actually getting a dynamic where the corporate world operates on aggregate consumption. They they operate in a nominal GDP world

and that inflation perversely for the bears was the earnings catalyst and all those folks got stopped out in 2023.

there is an element of that still to this day right now as it relates to earnings. Um even be even though like nominal GDP is is in a different place to a certain extent still kind of 5%ish.

Um but the other point too is that as it relates to the capex spending uncertainty story, right? If you know corporates don't know what they're supposed to do with their cash because of the you know the the kind of range of outcomes with regards to you know where they where these you know uh tariffs are going to end up um the sand in the gears of the global economy.

Well, the thought was of course, you know, if corporates don't know what to be spending on and um consumers are feeling that impact as well, you're going to get this eventual drag with regards to consumption. You're going to have corporates in a bad place.

You either lose the topline sales because consumers are paying through the roof or you have to absorb those costs and your margins go lower.

Um but what corporates have instead done have taken authorized buybacks to all-time highs. So we're not spending on, you know, R&D.

We're not spending on hiring or building that new plant. We're going to buy back more stock than ever before year to date.

And that, you know, if you look at corporate buyback flows as a source of demand for equities over the past 1015 year period, it's a magnitudes six, seven, eight times magnitudes largest source of demand.

Wait. So the other thing that's happened is people are back to actually selling V. So basically betting that you know things will stay relatively calm. Why is that happening? It seems like a weird time to bet against volatility.

Yeah. I I think I think selling V uh has become a new form of fixed income in a world where bonds are no longer a risk-free asset. Now that you know can go wrong so many ways.

In this case the proliferation of like premium income overwriting strategies within the ETF world, exotic structured products um and kind of you know more uh I would say you know complicated you know V selling strategies like uh dispersion things like that.

The number of V suppliers out there very shortdated. It gets dealers stuffed on gamma, I always like to say.

And in that sense, you know, particularly with the amount of shortdated volatility selling, um, you know, when dealers are stuffed on gamma, it compresses the distribution of outcomes, right?

If the market's moving higher, you're selling into that market's moving lower, you're shock absorbing.

Um, the thing that I would say back to that point about, you know, selling volatility as some sort of kind of fixed income product. back in 2022 with that tightening cycle and all the the the bare dooming um with regards to you know we're going to break something um you know such a such a powerful you know ultimately over 500 basis points of t of hikes.

Um the the trick was that okay you the Fed is telling you to be short assets. Mhm. You need to be able to sleep at night. Cash was an asset again.

So, you know, market was down 30 some percent. Bonds were down simultaneously. Still off that much. Yeah. S&P and NASDAQ was you know, you know, even bigger than that obviously because remember it was like this tech ccentric growth kind of unwind.

Um but what ended up happening was that you know the Fed was trying to create a negative wealth effect. We've talked about that before because they couldn't impact supply side disruption. They could only impact demand side.

And by telling you to be in cash, you could sleep at night. Well, guess what? the next year you missed a 50% rally in the NASDAQ.

So what really smart marketers have done is say well I'm going to give you price appreciation of equities just capped and off the back of that too we're going to sell out of the money calls against this and you get this like little premium income thing

and it's you know they're never telling you you're shorting options. The good news is with a lot of these products nowadays, like you're not shorting crash. You're not shorting downside.

But um also too, sometimes they're they're contributing to their own demise in this kind of grinding market where you're stopping into the calls that you've been selling.

There's so much going on. I totally forgot that we had such a big sell-off in 2022. I totally forgot that there was like a 50% like all of these things like oh that actually happened.

Um zooming out big picture like it seems objectively true. you've been trading a long time. Like there are so many headlines these days and they're always changing and there's just so much to talk about.

What is the trading like and how do you know does it feel different these days when there's just we're just facing this constant wall of news? Is there something that changes in the sort of complexion of how people trade?

Well, there's there's certainly different like risk appetite regimes, risk sentiment regimes, you know, where um you know, there was a period of time I remember in those early discussions on like zero DT options where generally speaking at that time coming off the back of like you know, meme coins and and that whole like yolo phenomenon,

you know, the speculative excess peak of that kind of 2021, you know, sty driven madness, that was a very different world where people were kind of like, you buying, you know, optionality, creating gamma squeezes, the redder boards, Wall Street bats, all that jazz.

Now that you're kind of settling into this world, we've been conditioned, we've been conditioned for 15 years of moral hazard, right? Central bankers intervening, obviously politicians now intervening, and this is like, you know, party agnostic with regards to the fiscal stimulus where it has become conditioned into traders both retail and institutional.

You know, this dynamic where you have to this is the expected behavior. you have to buy that dip and sell it, right? So, you're constantly trying to like kind of triangulate and kind of sanity check yourself with regards to this reflexivity.

And you know, like August 5th, August 2nd, August 5th last year were really interesting experiment cuz August 2nd, we finally got that first glimpse at what our market will eventually do. This time again, huge VAR event in, you know, within the fixed income space certainly.

Um, and then it trickled down into all asset classes from there. It was the first time that labor, it looked like labor was cracking.

Um, and we had that, you know, four zcore miss and the U rate and two and a half zcore miss and and the non-farm payroll print and that was after a week of already soft labor data.

And that was the holy moment once the consumer goes this whole, you know, economic miracle goes. And what that then created was this um, you know, was this massive dynamic where at the end of that day, everybody said, "Okay, risk is dicey right now. There's going to be a lot of the leveraging off the back of this realized volatility shock.

I want to go home and short Delta, like short the market, but I want to be short V because V squeezed. V exploded that day. That was both clients and options dealers.

The problem was because of all these second order impacts and deleveraging impacts and um was that Nikke on Sunday night opened down 12%. So that short V position was going to be so smart because we always reflexively sell that, you know,

and you've got to monetize your hedges in like two hours before people start leaning in. All that V supply, the back test says the higher V goes, the more I have to sell. And that's that sell the rip by the by the dip.

Well, those people got their arms blown off, you know, by 8 in the morning. And that was the famous like VIX index, right, which is a a theoretical calculation based on like fake bidden offers from dealers basically.

Um, you know, printed 63 or whatever it was. Um, not an actual ticking price, but then the VIX future was traded at 38, which is like realistic. But, you know, those are those scenarios where that conditioning is how things go really wrong because you think you got it figured out and you don't.

The most recent example of course has been you know this this Trump collar dynamic where the market finally figured out what was the human vivix as I call him you know who who you know the volatility the only one who calls it you're the only one I need it on my coffee mug you know I have these like Nura coffee mugs with some of my favorite sayings like human vivix would have been a good one to trademark we'll trade you an oddls mug for a human vivix no more mug that's done that is done

you're the only one I need it on my coffee mug you know I have these like Nura coffee mugs with some of my favorite sayings like human vivix would have been a good one to trademark we'll trade you an oddls mug for a human vivix no more mug that's done that is done

but like you know he has he views himself as having a mandate to disrupt the status quo of 80 years of pox americana like and that's clearly like the the approach here right?

so the prior distribution of outcomes is now out here the the quick learning from the market however after these initial series of wall shocks was that okay we found a pain point you know

market sold off to such an extent the interest rate volatility particularly in the long end not just stocks all right you know we've activated the Trump put

however upon those compromises the market rallies back it increases his you know willingness to then lean back in from a negotiating ploy. So he's basically selling the call to fund the put.

And when you have that collaring effect, you get the opposite dynamic, right? You get this realize of all compression, which is frankly a large part of what the past 2 months has been.

So, you're constantly reassessing how everybody thinks you're going to think, which is like you're anticipating the anticipators.

So Joe asked you for basically color on the complexion of the market nowadays and I know you just got back from weren't you on some sort of crazy epic travel schedule where you flew around the world. Yes. What are you hearing from clients like what kind of questions are they asking you?

People are so consensually macrobear you know on that stagflationary outcome.

Um, you know, and I think like that's that's one of the tricks like it's, you know, at first it was like, okay, you know, let's let's expect, you know, these early return like mind you, you know, Smoot Holly tariff highs like 90-year tariff highs, right?

We, you know, prior to the the, you know, Trump 2.0, the effective rate was 2.4%. We're 17.3% right now as it stands, right? So, like, you know, how does that not bleed through to this, you know, eventual price shock or margin compression, all this stuff that hits, you know, consumption?

Um, and you know, initially it was okay midsummer. I think part of what's happening right now is that, you know, from a corporate perspective as it relates to the consumer is that taco has changed their behavior too.

Like why, you know, I'm not going to blow up my topline sales and, you know, rush to, you know, price shock my clients at a time, you know. So I think there's been a lot of holding off too as far as or willingness to even absorb a little bit of that the the price you know increases that are coming through.

Um and you know so it's been getting increasingly uncomfortable. All these left tail most acute outcomes have have certainly been mitigated away and compromised away and kind of handed away.

The market starts rallying in your face. You're expecting this very bearish outcome. It's starting to hurt. You've underpriced the right tail.

get a fiscal deal seemingly close to being done even just today, right? Late in the day, section 8.99, which is this kind of like, you know, completely Tracy wrote a bunch about it. Now, it's all the revenge tax, right?

Is there anything worse than like getting a bunch of work done and then having to trash it? All I'll say is it's good for content. Yes. There we go. Yes, it is.

You talk a lot a lot about hypotheticals over the past couple months. For sure. Yeah. you know, you're you're well educated with your scenarios, but like in this case, you know, that was another, you know, this revenge tax escalation.

Well, all of a sudden now, you know, cooler heads prevail that increases the likelihood that the digital tax, you know, stuff with Europe that was an impediment for deals goes, you know, right way.

So, you've just had like left tails turn right tails and nobody has the exposure on. There's just so much chronic macro bleed.

you're having to take up your exposure, having to take up your nets after fighting it, kicking and screaming and grossly under capturing the rally. This is when it sets the table for crash.

And that's why as you're forced to get longer, you have to start hedge. You have to start hedging.

Do you think right now I mean I remember um well like right now today would you say there's still a lot there's a lot of discretionary money where people feel like they're underway at the market where they feel like they're still fighting this dynamic chasing and they're still feel like oh man every day the stock market goes up I don't have the exposure I wish I had right now

those are the classic buyers are higher yeah you know and there that's still out there but they haven't the they haven't fully capitulated yet

but It's, you know, what you're seeing with the market grinding higher every day. And by the way, through the straddle, like this is the interesting thing I always say like we can't crash until skew is steep.

Skew is a relative measure of kind of downside demand versus upside demand. You know, put skew, you know, demand for out of the money downside versus out of the money downside.

Both of those me metrics in the past week have hit 100 percentile over the past year. The past year has a lot of going on, right? So, you know, people are hedged because they are back getting long where things get spicy.

Um, that feeds into the prevailing market momentum. The lower that we go, the more, you know, spot equities you have to sell. The higher the V goes, the more volume you have to buy. Bad scenario. It's an accelerant flow in this case.

Um the trick now that's starting to happen and this is why I feel like we're probably getting closer to you know a crescendo um is that now you're getting spot the market up vault up and volivall going up and what that's telling me is that okay people are actually now being forced to chase into upside right

and right now part that's our chart for the newsletter tomorrow stocks and vol spot up vol and and what that means is that people are being forced to grab into the upside side and that's also feeding this short gamma move to the upside because dealers are short calls now

and this you know as we hit 6150 6200 things like that. Um, ultimately I always like to say when you get spot up volop in and of itself, it it, you know, creates kind of like a meltup like some sort of kind of, you know, squeezy rally on the way up that collapses under the weight of its own delta.

You know, you're finally seeing that dynamic. People are getting longer. that creates the the potential derisking flow on the way down, especially once you're talking about systematic V scaling strategies that as V goes higher, they have to just sell, you know, unemotionally.

But what would be a reasonable catalyst for that to happen? Well, I think the the near-term one has been, you know, the the fact that, you know, July 8th, the original kind of reciprocal delay that, you know, and you saw a bunch of headlines today saying like that's flexible, morally flexible.

Um, you know, I think that big surprise. Yeah. No, no, let's make a deal. I I would say that that right now that's kind of like the most obvious um you know one out there that you know there's still some element of of hard ball.

My view is that that's somewhat overstated that that is somewhat overstated because he needs to get one big beautiful bill passed first before that and then potentially you can play the game. But the fact that this 899 was removed tells me that they know that getting a deal with Europe is probably, you know, a larger, you know, u impediment to what they're trying to do.

And that there still is now this new conditioning in the market where instead of like increasing the rhetoric at the highs, you know, Trump has capitulated back into Trump 1.0, which is like, you know, run hot, right?

He's now and they are best in himself with the headlines out at the end of the day. They're they're trying to squeeze this thing higher and financial conditions are easing. The dollar is moving lower.

Long and yield has started rallying ironically because the market is sniffing, you know, a dovish turn within the Fed, you know, in including recent comments from people that I don't think would have anticipated um necessarily outside of Waller um who's auditioning for the Fed job.

Um and you know, why are they beginning to turn like that? Yes, there's a normalization dynamic with regards to where inflation is now. We think Jerome Pal is already at two dots are right, you know, for the end of the year.

And there's just this modest turn, but they're turning for a reason. They're turning cuz, you know, quits rates and claims, you know, are starting to get a little wonky.

And as I said, the whole American economic miracle goes wrong when the consumer cracks. And the consumer cracks is what, you know, becomes of, you know, the labor market. and that's starting to look um you know precarious at best.

So I think I don't think it's going to be a tariff headline necessarily. I think it's going to be you know good oldfashioned data a nasty NFP print you know that type of a thing.

Um is that an acute risk now? Probably not. Probably you know safe to say you know within by August um you know we could be getting spicy and I think there's real delta not just of like the first cut in September but you know if that happens you know it's not just going to be you know 25 bips right.

So everyone needs to keep shopping, I guess, to maintain the rally. Do your duty.

So the thing is though, this is what bothers me is everyone sees some of these dynamics. We talk about the labor market weakness all the time.

We talk about the fact that per due to the tariffs and other factors, the Fed might be a little bit gunshy or less inclined to cut like than it otherwise would have given the set of economic conditions.

And I think like Paul has sort of hinted at it before that there are conditions like we all can see this like the and yet like and yet people keep buying like it's sort of there's something intellectually unsatisfying about the entire environment.

Well, cuz like all this seems very true that all this like the stagflation risk there is going to be a cost of tariffs. There is this cyclical slowdown and yet you know it goes back to those you know kind of counterintuitive observations that we started off with you know

where you get so fixated on like the left side that you know perversely the corporate spending uncertainty becomes the biggest source of demand for stocks. Yeah. you know, um, and especially to the market structure stuff, which is just what I always come back to,

like once those puts start roasting because the worst case scenario doesn't happen and dealers got to start buying back that short delta and then people start squeezing that short delta as the market starts rallying back and start buying short dated calls and dealers get short those calls and we go short gamma the other way.

you know th those flows and you know frankly you know a world of um you know not just this market structure that feeds momentum right with leveraged ETFs um you know the prevalence of options trading the tail wagging the dog yeah

and I don't even know if I can say tail wagging the dog now I just think it is the dog um I like that that's good you know options are the dog yeah

um you know those type of real and synthetic gamma effects in the market are you know very high impact and I think at the end of the day a lot of this is just about career preservation. Yeah.

And when you've kind of missed badly on a call people it feels good and you know in the macro space like I you know I'm super sensitive to this idea you know you feel smart to make a bare call because it's rare stocks go higher.

Yeah, that's right. You know, when you run a back test, you know, and back testing, I know is like a four-letter word, but when you run a back test, you know, this if this happens and contingent on this, and you actually get negative forward returns over a series of average um you know, over a real number of sample set, um you know, it's an outlier.

The problem is like sitting in a negative stance when again goes back to that point, people are not really incentivized to see the world burn. You know, it's going to be a tough thing. So, you got to be dynamic and pragmatic I think about these things.