Forward Guidance: The AI Unwind Is Forcing A Historic Market Rotation | Weekly Roundup

Sourced by podcast-ingest on 2026-07-17. Auto-transcribed via AssemblyAI (universal-2, en). Speakers identified by AssemblyAI Speaker Identification using the per-podcast host/regulars hints; the resulting label→name mapping is in the frontmatter. Duration: 53m. Episode page: (not provided). Audio: https://traffic.megaphone.fm/BWG4560020429.mp3.

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The market’s most crowded trade is beginning to crack, but where the fallout spreads next remains unclear.

This week, we dig into the violent momentum unwind and mounting pressure across the AI trade.

We explore the damage of leveraged ETFs, Korea’s retail reckoning, a potential value revival, renewed Iran oil risks, and why Quinn is bullish real estate in the right places. Enjoy!

TIMESTAMPS:

00:00 Intro

02:01 The Momentum Trade Unravels

06:22 Leveraged ETFs Are Breaking Markets

12:07 Has The AI Boom Hit Its Limits?

16:05 Cheap Models Threatening The AI Trade

19:52 Hyperscalers Facing A Credit Squeeze

23:27 The Fed’s Forward Guidance Failure

29:38 Global Carry Trade Risk?

35:29 Can Value Finally Win?

40:44 Iran Reignites Oil Risk

48:00 Housing Policy Vs Property Rights

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Transcript

Jack Farley: Nothing said on for guidance is a recommendation to buy or sell any investments or products. This podcast is for informational purposes only, and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks. Our hosts, guests, and the Blockworks team may hold positions in the company's funds or projects discussed. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. All right, what's going on, everybody? Welcome back to another episode for guidance Roundup edition. Good to have the crew back together. We. Yeah, couldn't quite make the scheduling work last week, so we off last week and then Tyler yelled the previous week for the fourth, so whole crew back together. Here we are. What's going on, guys?

Tyler: Quiet.

Felix: I missed you. Miss you guys, man.

Jack Farley: Yeah, like,

Felix: what's cooking?

Tyler: How was. Did you go to any more soccer games?

Jack Farley: No, no soccer games. And it's just been. Just been heartbreak for me in that world over the last week. France. France didn't make it. England didn't make it. Canada didn't make it. So, yeah. Argentina, Spain. It's. Yeah. I mean, it'll be a good final, but, yeah, none. None of my teams made it.

Tyler: See there? $30,000 per ticket or something.

Felix: Wow.

Tyler: Have you heard that?

Jack Farley: Yeah, I was cheering.

Felix: I was hoping for Argentina, Spain final. So I'm. I'm pretty chuffed.

Tyler: Nice.

Jack Farley: There you go. Yeah, you're just a messy bandwagoner.

Felix: I mean, he's just.

Jack Farley: No, he's. Dude, he's. He's amazing. Like, they fully.

Felix: Spain. Like, Spain made France look the worst. They, like, they looked like D3. I mean, in France made everybody else look like that. It was. It's been some awesome games.

Jack Farley: Yeah.

Tyler: Kind of what Felix does to you every week, dude.

Jack Farley: Okay, guys, let's talk about markets. There is. Yeah, it's not a quiet summer. Definitely. I thought it was going to be the doldrum summer. It is not the Doldrum Summer. We are having the. The mother of all factored rotation market structure. Unwinds. Everything in the kitchen sink going on. Yes. To start, I want to look at just how severe these rotations have been. So this is a great free website factor watch. You can just look at the different factor rotations. So you can just see, like, over the past. Yeah. Over the past 20 days, like, momentum has had, like, a 2.3 standard deviation unwind and then even more aggressive. Yeah. Last three days, 3.33 standard deviations. So just like a total high beta momentum online at the Same time that you have seen some, some pretty steady rotations into more value plays. Like I was looking at the, the charts today, QQQ is down almost 2% while equal weight S&P is up almost a percent. So yeah, man, there's a lot to dive in here. Who wants to take the lead here on how you're thinking about it? What's going on? Tyler, you probably have some sweet charts. What's, what are you thinking?

Tyler: Yeah, I don't want to get too derivative too early, but we might as well let's go go to Slide 35 and we'll, we'll talk just about, you know, think Morgan Stanley. Everyone's heard this stat by now, but this has been the worst momentum sell off in 27 years. And this just kind of quantifies the standard deviations relative to the last. I don't know what is this back to 2007. So you can kind of see the red line on the, the graph below. You can see how drastic the, the drawdown has been. There's a couple really interesting things and this is way different than every other drawdown we've had. To me this feels a lot more like 2001 where you had the tech bubble unwind and that that money rotated into like smaller cap stocks. We're seeing a lot of the same sort of things. But check this out. You would expect this is largely an equity phenomenon. And, and if you look at the fixed income market go to slide 36. This is the Vix of the TLT which is the volatility of the TLT which is at lows. Now you'd expect with this unwind in momentum you have some cross asset V. Nope, not at all. Not at all. Not a little sniff. Then if you go to the next one, this is JP Morgan currency index. Again no, no volatility across currencies too, which is wild to me as well that you'd have this momentum unwind and you know, there's no cross currency volunteer. And then if you go to the, the next one and I'm sure all three of us have this chart but this is the one month implied correlation. And when this is low, you know, you have, it's a stock pickers market. There's a lot of different, you know, sectors doing different things. So this money is moving out of, of AI and AI infrastructure and going into different sectors. I mean and then we can kind of talk about just if you go to like 40, you can kind of see where it's going. This is the kre, you know financials have been on fire. They've been the beneficiary of a lot of this capital raising and capex. Then if you go to the next one industrials building out the data centers, you know, steady slow growth and then RSP is another one. But I didn't put it in here. But this is, that's an equal weight S and P. And what we're seeing is just we, this market was so centralized, it was so centrally planned. It was like, I think it was all the phenomenon of cutting costs and then robo advisors basically getting you to put money into like market cap weighted things. And I think, I think that's starting to really unwind here. But one of the last things that I am really nervous about is because go to slide 39. This is A. We, we have broken markets is is the truth is like this is largely a market structure thing. And we had I think it's like 60 billion of levered ETFs now that whip around on single stocks which has created this phenomenon. We're looking at the single stock volatility versus the index volatility. So VIX EQ is single stock volatility and then you know, versus the vix. And if you look at the spread between the two you can see that like single stock volatility is just absolutely ripping. And what makes me nervous about this AI drawdown is like so much money has piled in from the retail investors for months and months and months. We saw basically a gamma squeeze and because of all the inflows. So you have the inflows. Mike Green just talked about this on a recent podcast. But these products have grown immensely and then you get this extra gamma from the inflows which works in reverse on the outflows. And so this is exactly what we're seeing. The problem is when something hits like a, I think it's like a 120 implied volume which is a lot of these stocks. I just plugged this in but this is simple, simple math. But at 120 implied volume your daily implied move is plus or minus 7.6%. During the week it's plus or minus 16.6%. During a month it's plus or minus 34.6%. So try. You can't hold a stock that, that's volatile. That, that, that is that volatile. In a, a diversified portfolio it messes up all your correlations. It just, it messes up all your beta. And so as that volume sees through you have to de lever your portfolio so you end up selling Your, your. If, if you're looking at market structure in a lot of these like long short funds, you have to sell the really, really high volume when it's going against you and then you cover other, other sectors and, and eventually I think how this ends is you see single stock volatility has to drop here and then fundamentals have to come back to play. But the effect of all these double and triple levered ETFs and the embedded leverage in the system is the retail investor inevitably gets wiped out. And Jane street and Citadel centralize more and that we're just, it's a really, really funky concoction but it's all, everything fundamentals have just gone out the door and I'm hoping they're coming back. As you know, things rotate into real actively managed sectors. I think that's happening. But in certain, once you get the gamma squeeze in a certain sector, it's really the only winners after that are the market makers and they just monetize all the volatility at that point. And so if you see like Jane street on your, your top holders list or Citadel or Susquehanna get out, you know, like it's just, it's, you know, at that point that you're just kind of screwed because they're just going to be delta hedging and the fundamentals don't matter anymore.

Jack Farley: Yeah.

Tyler: And so but this is the here in the lies, the market structure is such a problem. It's like they're, they're now market makers are supposed to be kind of, they should be just non participants in the market and they are increasingly making more and more and more and more money and in their end, like over a long, long period of time, you hollow out the middle class. And, and that's, that's the name of the game. Whether you're looking at prediction markets. Everything kind of centralizes more and more. Our only hope really is if you get that rotation out into like real businesses again and you have productivity and growth and everything. So that's what I'm hoping for. Maybe this is just naturally decentralizing, but there's a lot, a lot of these things have yet to be played out. And those are just some of my macro thoughts here. But it's kind of scary.

Jack Farley: Yeah, I love that. I mean it just makes me think the other week I put up this tweet because it was all over the timeline about how all the big alpha this year has been in the pod shops like Millennium and their index rebalancing pods. That's where all the big money is being made right now and it's just like, man, we have some of the smartest people in the world. I was looking at the LinkedIn of this millennium portfolio manager and he was studying biological engineering. Like he was probably on a fast track to like fucking curing cancer or something. And now he's a PM for like index rebalancing, arbitrage and like that's, that's where all, that's where the big brains are at now. It's just like, man, I don't know, it's, it's, it's, it's a bit sad. Yeah.

Tyler: Is that a, is that a misallocation of capital there? I mean we, dude, yeah, you could save humanity instead you arb everything.

Jack Farley: I mean, I get it, but man, it's tough.

Felix: I think it's by design though, like these, all these actors are just doing what the rules of the game say to do to maximize for your outcome. So my beef with it, if I were to have one, would be. Tyler, you mentioned some stat like it's the craziest pullback in momentum in 20 plus years. Well, it was also the craziest run up in momentum in the same period and it was by design with the manipulation in the market. That's what happens when you stimulate. You give tariff refunds at the same time that you intervene in the oil and treasury markets to suppress volatility and you abnormally pump stocks, which we've been covering here for weeks. And then there's ramifications and everyone gets pulled up at the top. The market as we were talking about for weeks now, was way beyond fundamentals, moving 5% a day in semiconductors just because the leverage ETF flow. So if it's a really 1% move, it's amplified three, four times because of all the AUM that's grown in there. And, and this is what happens. Like it's unsustainable. And so I think what's really interesting is how negative the news flow continues to be for the whole tech sector. I mean it started with Mag 7, the hyperscalers. They've, you know, again, we've been covering this for ages. They've been the laggards and they're shelling out cash flow, they're levering up their cost of capital, cost of financing is rising, their spreads are widening. And you know, all that money's been flowing to these memory chip, et cetera, who now printing 80% margins, those are going to get eaten. But it's spreading to the, to the rest of the supply chain and now you're running into the open source competition, you're reaching an upper bound of how much capex these guys can do. They're already negative free cash flow already levering up. You can't just continue that infinitely and like you know things are coming home to roost. And what I find really funny or interesting I guess about this most recent rotation because for the last two months you know it's really been a rotation game. The Nasdaq and the indices really are flat since since early May. So you know this most recent rotation has been. You can just see the hedges have been short the mag seven the capex spenders and long the receivers Korea, Taiwan memory etc and that's just gotten squeezed

Jack Farley: chart of it just looking at the memory versus Mags and yeah it's, it's this complete reversal from the past couple

Felix: months but what I would warn here is I see a lot of reading into this as idiosyncratic strength due to some reason behind the hyperscalers which definitely has some truth to it particularly if you dive down into a single name basis. But a lot of this I would attribute to the rotational mechanical flows of the, of a. Of a positioning unwind and square crowded squeeze less so you know thinking mags has a reason to be back to year to day highs given all the structural issues. We just got anthropic IPO slated for October, we have SpaceX unlocks coming, we have a huge supply problem of of equity issuance still flowing out from the the Mag 7 and just overall it's a prisoner's dilemma. They either cut their capex spending to stop their share price decline and appease investors but then that kills a bunch of their balance sheets because a number of them are receiving income and balance sheet bolstering from their stakes in these privately marked up labs. OpenAI Microsoft anthropic for Google. So it's very circular and that's where this comes into play because you kind of have to chop off one arm to save the other. And that's why I think this correlation thing is interesting too because once that does unpin whenever it happens it's very rare that the market all rises together as correlations go from 0 to 1. It's very much more common to be a down move and yeah, I mean the Fed support isn't there. They're back to meddling in Iran. There's a lot to not like about this setup right here for risk.

Jack Farley: Yeah, I'm quite concerned about the exposure to the AI trade right Now, I mean, the last episode we did, we kind of started to walk through some of the cracks coming to the surface and it just feels like they're accelerating. Now obviously the big runners have been the DRAM trade and the memory trade. And you're starting to see Chinese supplies start to come on. You're starting to see substitution effects start to come on. More efficiency from the inference providers. And then, um, now add on top of that is, I don't know if you guys saw, but today there was a new Chinese open model that just came out, Quinn 3 and its capabilities are right up there with the frontier models. Like encoding this, this Chinese open weight model at a fraction of the cost is similar capabilities of Fable 5. So that is like, it's great for the consumer. You know, it's actually, it's really interesting when you just look at where this is going. It seems like a lot of companies, you know, you hear about a couple of months ago, there's a whole token maxing thing. All these companies are just spending like crazy on tokens and then they realize they're spending too much money. And then now a lot of these companies are starting to use these open weight models and then maybe they just use the frontier model for orchestration. But if you suddenly have like, okay, I can get 80% of the capability of Fable 5, but in this open model that costs 10%, that starts to put at question the entire proposition that the NASDAQ is, is built on right now. And, and, and just that interplay between the, the receivers and the pairs that you're talking about. So I don't know, it feels like some of those aspects are coming to roost at like a pretty interesting time. Just one chart that I found interest because, you know, we always talk about here's the market structure and what's going on there and then here's this fundamental story and like how do you piece those two together? When do they come together? This is an interesting one. Just looking at seasonality of momentum and I didn't quite realize that the five year average seasonality momentum is like always really bad in July for momentum. Obviously this one's like way worse than normal. But it's just always so interesting how the fundamentals start to happen at the same time as like the market structure. And it's like suddenly that seasonal momentum reversion happens at the same time that you're starting to see more memory supply come online. This questioning of the value proposition of frontier models and it's just sort of all arriving at once right now we

Felix: got to hand it to the crypto Twitter traders who topped like their sixth asset class of the year. It started with metals, then I went into oil and you know, now, now you know you get the binance and all these listings of micron except and, and the memory in April though, dude,

Tyler: you know, it was the greatest sign ever.

Jack Farley: I don't know.

Tyler: You guys remember this? It was probably like a month or two ago I mentioned, I sat next to a dinner of this, this orthodontist and he was just bragging to me how he's gonna fire his wealth manager. He's making so much money. And I was like, I was like your, your antenna goes up. It's like the mother in law indicator. But you, you know, as soon as you get one of those. That was like, you know that was, that was close to the top. Really close.

Jack Farley: Or, or there's been a lot. I saw, I saw a tweet of like a doctor who is like 27 patients today. And in between I'm rotating from like soxl triple levered semiconductors. Yeah, I mean it's, it's at least time for. I'm not, I'm not throwing in the towel on the, on the secular like fundamental thesis like oh, a couple weeks ago. But it's just like dude, like I mean we went through the momentum charts the last episode too. Like you gotta let this heal itself before you get excited again. I tried to catch the knife a couple days ago and I was stopped out within like a day. Like it's just, I'm, I'm like, I'm waiting now.

Felix: You know what, look at these other ones that have done this. Like it takes a long time to digest. There's a lot of positioning that needs rinse. Metals still haven't even digested their move and that's seven months ago. Yeah.

Tyler: Go to slide 34. This is also interesting to keep in mind is you know, I think we were bearish the hyperscalers. And this is the Goldman Sachs large cap mega tech index versus non profitable tech basket. And this is you know, moving up through its 50 day moving average and stuff like Apple's hitting an all time high. You know you could see a squeeze here in a lot of the hyperscalers particularly like like you said Felix, one of the interesting things is you know if you do have these models that are way cheaper then maybe the build out isn't as, you know, expensive and Capex goes down and you know it changes the whole game. So you could see all the Draconian scenarios for hyperscalers. Maybe their spending goes down, their stock squeeze here. So that's kind of a potential thing. And what's the last thing people would expect would be the hyperscaler squeeze. But yeah, this does. The other thing is the spreads. I think I might have posted that.

Jack Farley: But yeah, I put this one in. But again it's so funny how often all our. Because we kind of do this all individually and come together and do it live. I don't know if people know this and sometimes our charts like yeah, all three of us had an implied correlation chart for this week.

Felix: Yeah.

Jack Farley: Anyway, credits credit spreads is on the lookout right now. Hyperscaler spreads are breaking out higher. It's, yeah, there's questions to be answered

Tyler: right now in the market and at some point, you know, if it's this, it's, it's not advantageous to raise debt. There was chatter today that like Amazon was doing an atm, you know, Google I think has an atm. There's so there's just at some point maybe it just takes a little breather you take, you kick out the duration of this until especially with one of the more macro things is you know, oils up here, the two year and the 10 year the Fed has been overly hawkish on the nominal rates. Oh this is what I wanted to show too. This is the last thing that's like macro wise check out slide 42. And I know everyone's like oh we, the break even market is stupid, blah blah blah. But it's, it's actually been a better indicator of like forward Fed expectations in my opinion where if you look at this is one year forward inflation break evens, it's saying 1% inflation. And like the last time that happened the Fed was you know, easing rates. And then if you go to the next one, this is the two year which is below 2%. So like Warsh doesn't like forward guidance but the markets are kind of saying, and this is even in the face of oil going back up, that inflation's coming back down. And I think they're overly hawkish which is constricting a little bit of credit in certain pockets of the market. At the end of the day, AI like Trump tweeted the other day, it's a national security imperative. I have to imagine that like trumps everything at some point they can't let this derail. They need the debt markets to provide capital for this stuff. So that's sort of what I'm watching is like when does, when does the liquidity come back? Because Right now we're, we're tightening financial conditions and it's going to other, other sectors that have better growth.

Jack Farley: Yeah, actually we should talk a bit about, I want to talk about this Wallard speech and Gwen, you wrote a tweet that just like absolutely nailed it. So yeah, rolling out the red carpet, like explain your, your thought process here because I thought it was awesome.

Felix: I mean after this, after this exact instance, every day this week there's been another Fed speech. I had another one today that I tweeted. It's like Governor Jeffrey Schmidt from St. Louis, I think he is. And he's like, inflation is way too high for way too long and we cannot be advocating for rate, you know, taking hikes off the table. And, and then you go back and search his history. He said that for every year basically. And they've been 63 months over target. So like get a grip dude. Like, you know you. And also there's ones of him flip flopping in 2024. It's just a joke. But this Waller thing exemplified why forward guidance is a problem. And then everybody getting in the comments of this tweet is like, you don't understand forward guidance. Like there's a difference between the reaction function and forward guidance. I just group it all together. I do understand that communication is good, it's not bad. But when they communicate based on backward looking way expired data, it goes to the same problem as the dot plots it puts root of it is not the forward guidance, the communication or the dot plots. The root of it is the fact that the most powerful financial institution in the world has horrific forecasting and data. Like there is dozens of private forecasters, models and providers that forecast this stuff a million times better with very high accuracy and it is possible to create. And that's what Borsch is saying. He's saying, look guys, the last three years we've pivoted dovish at, at the, the top of the, you know, the exact wrong times. We pivoted hawkish when the economy and inflation and growth were peaking. Like it's not necessary. And then that creates an communication problem because you're always communicating to the market the wrong things. And Waller's speech, lo and behold topped the two year. It topped the rates complex in the same way that the day before the Iran war the two year was 90 bips lower and they were talking about, you know, cutting because jobs market, they just have no ability to actually provide true forward guidance. So they need to of the beast though.

Tyler: Like it's kind of like A reporter that reports on stories is like, you get the most amount of clicks. Like they go tell reporters, they're always contraindicators.

Felix: Right. It's, it's kind of nature guiding the most, the most powerful thing is financial.

Jack Farley: Yeah, the bond market moves. Like my issue with it was that he was saying okay, if this happens tomorrow, I'm going for a hike in July. And okay, if the bond market stayed flat on that reaction and then waited to react, but the bond market's like okay, this is a Fed governor talking, I'm going to react. So the two year sells off. I don't know how much it was, but it's a good chunk. Puts in the yield, puts in a new high for the year and then the CPI print comes out and it's like oh, it was actually ice cold. And then we completely reversed. So like okay, cool. By trying to stiphen volatility, we actually just created more variance in the two year yield. What did that really provide for us? Why didn't we just wait until the CPI print came out and then Waller could have a speech and say oh, it was actually really not that bad at all. So I'm going to keep advocating for a hold instead of dangling these carrots and actually increasing volatility. This is the whole thing. You try to suppress volatility, you just transfer the volatility elsewhere.

Felix: The point is that in all occasions the two year yield has front run the Fed every single time, basically forever. And the two year is not doing that because they're listening off, just Fed. Yes, it's involved but the two year and front end rates market is doing that because of participants ability to read the data, understand the data, forecast the data and, and imply what that means going forward. And it just, it's like this vying for attention and relevance for these, these Fed members and it's just, it's just not needed and it's not helpful because it, it makes the other thing. That's Warsh's point too, which anybody who's ever shared a view publicly in the markets, except I guess the Fed doesn't understand this. But if you have money at play, you're running other people's money. You're, you're, you're, you're putting a view on the line. Everybody knows about the anchoring bias that takes place when you become labeled as doves or hawks or any camp or any view. You inherently as human beings refuse information that might challenge your opinion and cause you to change your mind. And you're constantly fighting that in order to be open minded and you, you want to stick to your guns. And, and so that's what Warsh also talked about this week in his testimony is saying you're, you become much more biased and unable to, to pivot and update your views with new information when you anchor yourself. No, I'm the hawk. You know, inflation's a problem or on the other side growth is a problem. Like I'm not open minded to things. And then you have egg on your face if you're wrong, which they're wrong literally every time they talk. So like, you know, they just need to stop.

Tyler: What happens to so many podcasters too? We might flip flop, but we are intellectually malleable.

Felix: I mean you have to be like semis were up 30% and not down 30. I mean July 3rd, our last podcast, the title was is the AI Trade Peaked and then everything shit the bed.

Tyler: So I got to give you guys credit. You nailed that one. That's great.

Jack Farley: Yeah, I did say I was going to try to catch the knives and I did try to catch them. So I was yeah, once again intellectually consistent. But yeah, Quinn probably nailed it better than I did.

Felix: I mean I didn't touch anything on the way up.

Jack Farley: So. Yeah, but yeah, okay, I'll say I'm still, I'm still way in the green because of running it up and managing the mostly get out.

Felix: You know the thing.

Tyler: What do you guys think of this? I wanted to ask you on this. So every day the Japanese two year yield seems to just, you know, grind higher. You had the bank of Korea raised rates which caused, because there's, everyone's making so much money there, there's inflation over there. When is there going to be one of those carry trade unwinds? Because that's what I'm actually a little bit nervous of. Where these imbalances are so big and you have rate volume and FX volume so low, you'd expect an unwind of momentum like this to have some global destabilizing things. And it's, there's not even a sniff of it. It's like yields are high, I think, I think mortgage rates even hit like a new high today. And I'm surprised that maybe there's a back the political thing where it's like you can't repatriate your money anymore or else we're going to bomb you. It is like there's some. That that could be it. But I would be a little bit more nervous with all these imbalances in margin calls. Global margin calls that something would unwind there. What are your thoughts on that happening?

Felix: I think you have to wait till after options expiration and then you'll see maybe where the cracks arise. But I totally agree. I mean the, the JAP Japan situation headline that, that went under the radar was their talk about getting large asset managers to repatriate capital. This came out like last week or the week before and it just totally flew under. It caused the USD JPY to fall as yen strengthened and it caused a massive drop in Japanese yield. So nobody in policy wants to create volatility, they all want to stifle it, but they also are looking out for their best interest and they have to act. So I mean Korea, Japan, like maybe Korea just laid the pavement for Japan the BOJ to hike at the end of this month and that in tandem with this recent repatriation headline, flows back into Japan and strengthens the yen, weakens the dollar. And I mean tech's kind of saying there's some bigger problems here at play and that would hit the NASDAQ the hardest. So I totally agree with you. I'm not buying volume here. I'm just playing everything via futures and spot. But I would rather be a buyer than a seller of volume for sure.

Jack Farley: Yeah. I mean, yeah, you could just make the argument that maybe we're just in the early innings of this and obviously the first thing that's going to hit is the people most levered. I don't think it's a coincidence that most of the pain has been in the Korean retail traders that are just getting liquidated every night right now. And when you look again at the, at the chart of implied correlation, this is the three month implied correlation. And you can see like the last time we were in this regime was in the summer 2024 also around the time where there was like some yen volatility and you saw the resolution as implied correlation went higher. We're still sub 10. So you know, maybe the argument is just that we're in the early innings of it. I'm surprised too. Like I don't know, it's just. Yeah, maybe it's just the options expert type of thing. But yeah, maybe you just make the argument that we just, it hasn't fully resolved yet.

Felix: I don't know. We need to keep. You need to keep your head on a swivel one, with this correlation stat that as you mentioned, historical analogs aren't, aren't good for risk. But two, all of these unwinds tend to tend to Follow each other and there's, there's, you know, some consistency between them. If you remember back in October of last year, you had the renaissance. I think they lost like 10 or 15% in a week. There's a big momentum fall issue for the market. Neutral pods and then they kind of rolled through different complexes. Crypto got nailed, bunch of different things. And you're kind of seeing that now. It started with Mag 7, now it's semis and now Korea. And those are all just signs of bad liquidity and there's not enough capital to support everything. And so you're getting these huge rotations. So I'd be very careful because there's a lot that could set it off. And oftentimes when there's one crazy thing going on, like Korea situation, everyone's just glued there and it's like, oh my God, look at this elephant in the room. Meanwhile, there's like three other elephants that you're not, you're not thinking about, which is the yen and you know, Iran and all these other things. And so I think there is real risk of spillover because the, the underlying internals are just not positive. And when you get something ran up a pole so hard, like semis, momentum, I mean all of the levered ETFs, every hot stock now gets a 2x3x levered ETF within a week because. And again, like Korea, okay, we're, we're fixing this, we're going to hike and we're going to ban this. Like you guys let it happen in the first place. Like why are you letting your population just day trade triple levered things? Like obviously it's going to end in misery. But yeah, when you get these things ran up the pole, they don't just pull back 5, 10% and the dip buyers come in and no, like the last like 30, 40% of these moves was probably all levered retail. So the value buyers still have a long ways to go before they actually step in. It's not just like a routine pullback usually. So I don't know. There's also a lot of incentive to try and keep things elevated in the midterms. But there's also a world where they just know they, I mean, we'll hear from Trump tonight to see whatever bullshit he's going to spew about elections. But you know, maybe they just concede the house and try to front load the pain. I doubt it. But yeah, it's going to be a wild next few months for sure.

Tyler: I wanted to talk about this. This is going to be the last chart in there. It's slide 44. You see it? Okay, so the Morgan Stanley value index. And part of me keeps going back to, you know, value's been dead for God knows how long. And I'm just thinking if this is like all these market structure things have been, it's been an imbalance of probably 20 years of like cutting fees, cutting commissions, getting retail to buy your Robin Hood, then yoloing, yoloing into like leverage, gamma squeezes, options. And what if this is the end of how it, how all that leverage ends is like these poor guys, these active managers that have been buying value stocks for years finally, like this is the, where all that super high growth unwinds and value businesses come back into play. And then you get all the passive, you know, ETFs, chasing all these things that have been beaten up for, I don't know, 20 years. It's like, what are your thoughts? There is value dead in this world. What if, if this AI and cheap, you know, models and what if, what if the, the models get cheaper and cheaper and now value businesses actually can grow margins and it, it switches the game. That's sort of what I'm thinking about here. It's kind of, I don't think anyone's really talking about that, but yeah, I

Jack Farley: like that a lot. I mean if, yeah, if we're going towards a regime where knowledge is abundant and efficiency actually starts to trickle through, like right now there's a difficulty in seeing that margin gain because the frontier models are so expensive for like actual intelligence and like, if you use the cheaper models are still kind of useless and hallucinate like crazy. Yeah, if you get to a world where it's actually like margin positive, you could totally see it start to trickle through. And then, I don't know, I mean, you start to bring up the questions of like, obviously the analog here is during the telecom boom and everything and like the Internet, all the, you know, all the companies that were laying the groundwork all went bankrupt. But then everything that was built on top of it was. That's where the value got captured. And you know, obviously that's been talked about ad nauseam. Don't need to get too deep into it. But I think it's a, it's a decent enough a bet. Obviously it was a much better bet a couple weeks ago if you were, you know, long momentum to rotate in the value. But I don't know, I've also been burned too many times of thinking, here comes the value rotation. And then it's just like the local toss. Yeah, I mean look at this chart. It's just like every, I mean if you zoom out to the last 20 years. It's insane.

Tyler: Oh yeah, I know. We're at the lows of 2000 like 1999. Well this is interesting. It almost looks like it like a double. You know there's the in. In 2020 there was a test and then you get the retest now and now it's coming out of here. It's kind of. If you zoom out here, I can send a longer term chart here.

Felix: The thing that you'll notice about this chart if you were to plot it, it's growth divided by value is, is extremely correlated to, to the stock market indices. So what you'll notice is these big rips in value relative to growth are very often correlated to down downward moves in the indices which is a function too of. Yeah, that's awesome. Yeah, it's. I mean there's a million and two sign like other indicators that say we're near kind of pre Covid and.com levels of speculation. So this makes a ton of sense. And yeah, I think that it's very correlated because of the concentration and The S&P 500 is 40 some percent Mag 7 and 20%. Semiconductors is not representative of a real Main street kind of real life economy. It's all tech now. So that's a problem. When we talk about all of these problems plaguing every aspect of the supply chain. You have hyperscalers, cash flow problems and, and return on capital questions. Then you have the semiconductors in memory who are printing 80% margins, who you know are going to face severe competition. Like when we talk about that it's not just tech anymore, you know, it's. It's why this bubble is different than 2000 is. In 2000 it was a huge boom and you had this like maybe slightly more speculatively widespread made mania. But in this instance the bubble is more material and larger in magnitude because of the concentration that these companies have grown to become as part of the indices. And so it's more sort of contagious if you will in that way for the broader equity market because of how much they represent. So every bubble looks different. But there are some characteristics like this one you point out on the growth versus value that tend to rhyme.

Jack Farley: M. I want to finish off by talking about the Iran situation that's coming up again. Straits close again, blockades are back, bombs are dropping again.

Felix: They want a deal so bad though.

Jack Farley: But they want a deal, but. They want to deal. They want a deal. Yeah, yeah, they want a deal. But I think it's worth mentioning that this time around that we're back here, this is where total global oil inventory is going into this round and we're back to almost zero on the straight of hormones in terms of traffic again with inventories actually drawn down this time. So I don't really know the plan here. Obviously oil's already 10 bucks above the lows. But if, if this is, if we're back to this regime again with inventories where they're at and like, you know, it seems like the big thing all the smart oil analysts missed was that China had already stockpiled a ton of oil and had stopped importing during that phase. And that sort of kept them safe in terms of like oil prices. Don't know if that's going to happen again. But when I just look at inventories and I look at this, I don't know, it feels like, feels like a lot more treacherous this time, right as when everybody's like, I, I don't want to see like oil's not going to be 200 bucks. I've already been burned on that trade over the last few months. Feel sketchy. I don't know how you guys are thinking about it.

Felix: There's still ample reserves actually to draw down. Not saying as a government you should do what they might do, but if you're a pumper in chief looking to manipulate markets and trying to sustain things into midterms, there is still functionally reserves to be drained that would support risk and keep a lid on oil. That said, the other thing about this crisis is that it's becoming actually multi pronged because of Ukraine's success against Russia. They are now hitting refining, transportation and logistics for assets for oil and gas at a increasing rate that we have not seen yet in this whole multi year, four year conflict. And that's having real ramifications because obviously Russia is a massive top three supplier of refined products and oil and gas to the rest of the world. So you have things like Venezuela ramping and other parts that are sort of helping to buffer. I don't have any positions in oil. I lean towards Trump going to Taco and needing to do something here to not let things get out of control this close in proximity to the midterms. But I don't know, I mean, I think, I think he's in the business right now because of all the cracks everywhere else in the market. I think he's sort of in the business here, of manufacturing volatility to try and control the potential weakness coming in stocks. And the reason I say that is you, you can't control it if it's out of your, if you didn't create it. You know, if the market's selling off because of this narrative and earnings and blow up of AI and all these things, you can't control that. If you create the volatility via Iran, you notice like he's, you keep saying tons of things and no one's listening. The market hasn't cared. It's sort of like a problem for him, I thought, I think this is, you know, in a way to kind of drum up that ball again to then suppress it in a couple weeks. But it, it does seem like, I mean, I think we're on like the seventh straight day of attacks. Like it's definitely a war. And I don't know, I don't have any good insights or trades here. I think oil, you got the easy squeeze money out of it. Yeah, I would probably bet lower if I had to pick in the short term, but it's not something I'm, I'm betting on.

Jack Farley: Yeah, I think it's more like a political issue now, it seems, I mean, they're just stuck in this, I don't know, like. Yeah. In this war.

Felix: And I mean there's no way to end it unless you go, you have to have boots on the ground. Regime change. So I don't, We've seen that a million times, even against stronger and weaker opponents than Iran, I mean, or weaker opponents than Iran, you know, doesn't end.

Tyler: Yeah, this is, I, I, I don't know what to make of all that. I think the first time around, Trump really threaded a needle. And I don't know if you can, I thought he could play the Hegemon, you know, ruler you guy. But this one, I feel like he's kind of does not want this to happen and he's reluctantly doing it now, which is not a, a place of power. I mean, you got J.D. vance basically going on Joe Rogan talking, you know, the opposite side of, of, of Trump now, and it's not, not a good look. And I just, I think it's not a popular war. And there's, I don't know how you put the genie back in this bottle and you just got to watch credit spreads because they'll, they'll tell you what's really going on. And if you get, if you get the 10 year spiking along this, this could End really badly.

Jack Farley: Yeah.

Tyler: Now's the time for conservation of capital and being, being places that are less volatile is. Is the way I see it. Until, until you get a sign that implied volume is, is kind of coming down. I don't think you can play. If you want to trade this thing, you buy the dips, sell the rips. I'm sure we're gonna have a vicious squeeze which is so bear market in momentum here in like a day or two. Everything's fine, you know, and then you just get your face ripped off because Jane street and Citadel just whip the Deltas back and forth.

Jack Farley: Books are still thin. Yeah.

Felix: I mean, yeah, it's, it's fascinating on, on the, the J.D. vance thing. It's. It's basically like Trump listens to everybody but Bessant as long as things. As long as he can. And then when he, when they all it up too far, then he has to listen to Bessant and then they like revert and try to like make up for all this stuff. But I mean, I wouldn't put it past the situation. Right. There's humans involved here. And that assassination thing out of Turkey, you know, those clearly freaked him out. Yeah, yeah. And I mean it. Don't put it past any human to like take out, you know, be pissed and sort of revenge tactic. You'd think like a level headed leader wouldn't do that. You also wouldn't think I was shocked when he, when they started their next incursion while he was in Turkey. I was like, that's crazy. Like he's one country over and he's blowing them up. I couldn't believe it. And then you saw these things about, you know, switching the planes and it's a, it's a, it's a complicated time out there right now. I mean.

Jack Farley: Yeah, we're in the fog of war. Who the hell. Yeah, I don't know.

Tyler: Can, can I bring this up? Because this is another. I mean we usually end with like a generational thing. And I watched. Yeah. Two things happened, which is Mamdani had some housing thing and he, he had this woman speak and basically said they called it the violence of eviction. And like, if you're a. You know, listen, I'm all for, you know, rents being okay for people to live and everything, but like if you don't, if you don't pay your rent, I think you should be evicted. And I've also like there's. I just don't think the system works if you don't have that. And I I guess what I'm wondering is, like, everything that New York is doing, you know, I try to keep an open mind from him. Donnie is like, I don't know, maybe, like, you know, we're in a productivity boom, and. But now they're just crucifying New York. And this is someone who grew up outside New York where, like, Kathy Hochul put on a data center ban. Now, now all the data centers are going to come to Texas. Texas is going to have. Instead of a $30 billion surplus, we're going to have $50 billion surplus. And then, you know, they're doing all these things in these states, and it's like, I just don't know how people survive there. It's almost the opposite of what you should do. And I just. What do you guys think of this, like, America? I just don't see how America stays together when the politics are so, like, polarized.

Felix: I'm unbelievably bullish on real estate. In the right places. I am. The migration Covid was like. If you ask me, Covid, it was like training wheels of what the migration flows will look like into the future because of what all the things you're pointing out. I mean, as you're. As a business owner, you can't. You. That's basically eliminating property rights. Like, it's saying eviction is violence is saying, like, oh, it's not. You don't actually own that apartment building. You know, like, yeah, you know, they. They can live there and they don't have to pay you. Like, property rights were the. One of the. If not the most fundamental thing to making America and, you know, differentiated and what it is, you know, that lays the groundwork for.

Jack Farley: You don't even want to know what's going up here in Canada. Then there is. There is discussion on whether you have any property rights at all of houses you own, because whether it's on First Nation land. And there's, like, back and forth on that right now. Like, the house. The land that your house is on. Do you own that land? That is a question that is being discussed right now.

Tyler: Why would you ever own anything?

Felix: I mean, that's why you. That's why you have to by. That's why. That's what I just said. I mean, it's just a giant arb, right?

Tyler: Like, you end up going. It's why people left England and went across the ocean to go settle a new land. And like, that's. That actually is the history of the world is like, you get.

Felix: Yes, yes.

Tyler: I just don't you know, like, it's kind of sad to say, like, those states that we grew up in, the massive fiscal problems, and they're doing the exact opposite things like you had, you had. And I thought the pain would get bad enough where, you know, they would be forced to change, where it's like, all right, we got to cut regulation and just like build stuff because we need growth to pay for this stuff. And I don't think it's happening. In fact, it's like, it's actually. The vice is getting tighter and tighter and the only people that can survive it are kind of like boomers that have a low, low cost of capital and don't need, you know, to pay for child care. I don't understand how families survive there.

Felix: I mean, we're good looking at you. Gotta go, Felix.

Jack Farley: I thought you have a hard stop.

Felix: I do, but last thing, I was just looking at.

Jack Farley: Yeah, I was. I was stopping for you. You go.

Tyler: Thanks, bro.

Felix: Last thing is, I was just looking. It's one degree cooler in Miami than New York and LA right now, both. And there's no wildfires here. There's ocean, there's tons of start. I mean, there's going to be a point where for all these reasons you guys mentioned, it's just like, it just becomes an absolute no brainer. I mean, it's.

Jack Farley: You guys have hurricanes and like, isn't Miami just like underwater in 20 years?

Felix: That's all.

Tyler: No, there's a new company, dude.

Felix: They said that 20 years ago.

Tyler: Yeah,

Jack Farley: I'm following. I'm falling for the Canadian propaganda fear. Clearly.

Felix: They tell you that, then they take your home, bro. They don't want you to own stuff.

Jack Farley: Yeah, exactly. It's.

Felix: You can own a home here and we won't bother you.

Jack Farley: You can even shoot people.

Tyler: I just want to. Things are going to get weirder and weirder and weirder until, you know, there's some sort of revolution. I think that's basically what we're getting to the ball. The ball's going to get transmuted somewhere.

Felix: Mad Money is training wheels for like, you know, you know, it's not the. It's not him that is Bad Bunny or Mad Money,

Tyler: bro.

Felix: Mad Manny. Yeah.

Jack Farley: Mad Max.

Tyler: Anyways, but like, if you're starting a company, would you ever start a company there?

Felix: No.

Tyler: Like, who's innovating there?

Jack Farley: No, that's why. Yeah. Everything's in Austin, dude. With you?

Felix: Yeah. All right. Now I do have to go.

Jack Farley: Okay. All right, let's go. Always a pleasure, guys.

Felix: See you boys have a good one.