Forward Guidance: The Market Is Mispricing A Correlation Shock | Dean Curnutt

Sourced by podcast-ingest on 2026-09-17. 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: 54m. Episode page: (not provided). Audio: https://traffic.megaphone.fm/BWG6335776921.mp3.

Show notes (from RSS)

Historically low volatility may be masking a meaningful shift in market risk and the AI trade.

This week, Macro Risk Advisors CEO and Alpha Exchange Host Dean Curnutt explains why unusually low stock correlations make tail hedging increasingly compelling.

We explore volatility pricing, crowded correlation trades, the Treasury market stress, why AI stocks could suddenly move together, and whether the Fed can calm markets. Enjoy!

TIMESTAMPS:

00:00 Intro

05:08 Why Stock Correlation Collapsed

10:49 What’s Driving The Dispersion Trade?

18:45 Ads (Token 2049, Avalanche Summit)

20:21 Could Volmageddon Happen Again?

27:16 Why Tail Hedging Looks Attractive

35:35 Can Portfolio Insurance Ever Be Free?

39:55 Systematic Or Discretionary Hedging?

42:33 Where Could Market Risk Emerge?

47:27 Can The Fed Calm Markets?

53:22 Closing Thoughts

FOLLOW GUEST

› X – https://x.com/Dcurnutt

› LinkedIn – https://www.linkedin.com/in/dean-curnutt-4060157/

› Macro Risk Advisors – https://www.macroriskadvisors.com/

› Alpha Exchange – https://www.axpod.com/

FOLLOW THE SHOW

› Forward Guidance – https://x.com/ForwardGuidance

› Felix – https://x.com/fejau_inc

› Telegram – https://t.me/+CAoZQpC-i6BjYTEx

› Blockworks – https://x.com/Blockworks

EVENTS

› Join us at Digital Asset Summit 2026 Asia October 7th & Digital Asset 2026 London November 10-11th

https://blockworks.com/events

› Avalanche Summit NYC lands Sept. 16–17. Save 15% with code BLOCKWORKS15: avalanchesummit.com/registration

DISCLAIMER

Nothing said on Forward Guidance is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only. Any views expressed are opinions, not financial advice. Hosts and guests may hold positions in the companies, funds, or projects discussed.

Transcript

Jack Farley: Nothing said on For Guidance is a recommendation to buy or sell any investments or products. All right everybody, welcome back to another episode of Forward Guidance. And I'm super excited today to be joined by Dean Kerna, CEO of Macro Risk Advisors, as well as the host of the Alpha Exchange podcast. Dean, you're last on the show a couple years ago back in 2024. So it, it was wildly overdue to get you back on. There's a ton that we're going to talk about in terms of nerding out on derivatives, market structure, options, tail hedging, all that stuff. But yeah, super excited to have you on the show. For those that don't know you would just love to hear a bit about your background. And one, what was your career path like? What did you mostly focus on in the derivative landscape? And also a bit about why you decided to start a fellow markets and macro and derivatives podcast. I'd love to hear about that too.

Dean Curnutt: Excellent. Well, it is a pleasure to be back on. I'm a big fan of Forward Guidance. Not just a great podcast, but also a very topical conversation in markets with Warsh taking the helm. I've been doing this a long, long time, three plus decades. So I'm happy to still be standing and find honestly great joy in just thinking about risk and markets and uncertainty. And I think that's would say if I were to really boil down my craft, my area of study, my fascination with markets, it is in trying to think through uncertainty and whether uncertainty is properly priced by way of derivatives. So my career path is I started Ed Nomura in the early 90s, got on the desk, a fixed income research desk in 1991 with an 8.5% tenure, a gigantic term premium. And I'll just remember I was working for the chief economist and the entirety of the research was around the Fed trying to win bond market credibility and to lower that term premium. So that was a long time ago. But you know, as we talk about term premium now is so much higher than it was maybe a decade ago. There have been periods where it was much higher than it is now as well. I did two years at business school after Nomura, I got just fascinated with options, the theory of option pricing. And that's really been my career. I was at Lehman in the late 90s, sorry, B of A. From 2000 to 2008 when the financial crisis hit, I just had this opportunity to start my own company, Macro Risk Advisors. And it was really a, I think it was a couple things. One is folks were so blindsided by the financial crisis. We all talk about the big short and Michael Burry and Greg Lidman. So yeah, a couple people saw it. There was widespread discussion of the housing bubble. But with regard to how the cracking of that bubble manifested itself in terms of option premiums and the surge in metrics like the VIX credit spreads and so forth, the likes of which we'd never seen before, I felt like investors were really unprepared for it. And in my last kind of year or so at B of A, I spent a ton of time with people in credit markets. And by mid-2007 I was very convinced that they were seeing a worldview that the equity market had no idea that was really happening. And it kind of flies in the face of market efficiency to think that the credit market knows something that the equity market doesn't. By October of 2007, the equity market was at an all time high. So you know, I would say that asset classes can respond to things at different speeds. And I also say that, you know, by early 2008 it was very clear that the banks were kind of compromised in their ability to service their client base because they had legacy positions that they were just trying to defend and risk manage. They were in trades at very much the wrong prices. And so to be able to really speak independently, I felt like was a big advantage at that point. And that led to the creation of Macro Risk Advisors, an independent broker dealer focused on risk management and options. Eighteen years later, we're kind of doing the same thing. And again, I'm really glad to have this conversation because we, with all the time I've been doing this, this to me is one of those times where the intersection of so many things is just really a fascinating time to be studying risk 100%.

Jack Farley: All right, so you've been writing a lot recently about the proposition and the merits of tail hedging and using options and that sort of thing, which we'll get plenty into in a minute. But I think it's useful to characterize the market as it stands today. And, and, and for why it's so compelling to consider these, these alternative strategies. And I, I would say like one of the most interesting aspects right now of markets is this, you know, just lower implied correlation regime that we're in, which is really interesting to compare to say the 2010s where it felt like, you know, correlation was, was much higher and volatility was, you know, just always constantly grinding lower and lower leading to. In 2018, I think we saw sub 10 Vix and that sort of thing. So obviously quite a different regime that we're in today. We'd just love to hear about. How do you characterize. We'll get into the macro side of things, I'm sure, but just the market structure as it stands, how do you characterize it?

Dean Curnutt: Right. You hit the nail on the head that we live in this environment in which the correlation among stocks is. We've never seen anything like it. There's no comp. You can't go back five years or 10 years or 20 years. You can only go back one month or three months or a year. So it's been with us for I would say about, about a year and a half. And that is that the realized correlation among the stocks in the S and P is trending kind of 10 to 15%. You'll have periods where it goes close to zero. You'll have periods, very short lived periods where it does spike up. So the tariff tantrum of last year, it got high for a short period of time and then Trump, you know, effectively undid the worst case scenarios of that risk event got a little high during the early stages of the energy shock in March and April of this year. But for the most part you're seeing the correlation of stocks in the S and P in the realm of 5 to 15%. And it's really difficult for me to express how unusually low these numbers are. So I'll just give you some history and then we could talk about things like the dispersion trade because folks are, you know, seeking to monetize the carry component of this in a benign market. Historically the correlation of stocks was probably 35, 40% in a benign market in a kind of crisis event. So you could put LTCM in that category. You can put certainly the GFC. You're going to see correlations on the order of 75 to 90%. The sovereign debt crisis, which kind of coincided with the US debt ceiling crisis of 2011, correlations of 85, 90%. So these are companies moving kind of in lockstep with each other. Now how does it manifest itself in terms of price action? If you're having stocks that are 85% to 90% correlated, it means that, you know, let's just pick the top 10 stocks from 15 years ago. I don't know, Exxon, Pfizer, Microsoft, JP Morgan. Pick kind of a cross as cross sector and industry group comparison. Right. If each of them moves down one and a half to 2% that on a given day, it means that the S and P is moving about the same. Right. So the stock moves and the index moves are very close to each other. Another way of saying is that is that you're getting no offset from a low level of correlation. The moves are all the same way. And so the stock moves manifest almost entirely to the index move. Fast forward to today, let's say 15 years from 2011. And we had a period a month ago where and I just, I created a Bloomberg index to calculate this. The one month realized volatility of the top 10 stocks in the S&P was 45%. The one month realized volatility of the S and p index was seven and a half percent. So it's basically a 40 volume spread of the single stocks to the index. And it is because, you know, to cherry pick a number, the correlation of Microsoft to the, you know, other six in the mag seven was actually negative for that period of time. And again, it's just hard to even, it's hard to overstate how unusually low these numbers are. It's a windfall for people that own the index. It's a wonderful thing, right? I mean, literally, you haven't put all your eggs in one basket. They're not only not in one basket, they're not even in the same neighborhood. Right. There's so much diversification happening. And so that is stealing volatility at the index level, which is a great thing, but it's also risky in the sense that we think, think that things that have happened for three months to a year are just going to continue to happen and we build trades around the expectation that that will continue.

Jack Farley: Yeah. You mentioned in there, this dispersion trade which has been heavily popularized by the pod shops, where you look between the, you know, the index and correlation compared to the single stock components of it, and it makes me wonder, I'm curious about what you think has been the, the primary causal driver of this decrease in correlation. Is it something like that where just the heavy activity from these pod shops are driving that lower, or is it more of a fundamental component where obviously for years the only trade in town was basically the mag sevens and then you just had that passive investing flywheel into large market cap begets large market cap and it would just drive further and now suddenly it feels like there's a lot more opportunities. Is it that fundamental driver or is it something like just the market struct the positioning, the popularity of these dispersion trades from pod shops?

Dean Curnutt: It's a great question and you hit on the two areas to explore. One is, is there something that is driving it from an economic basis. And then the second part is, is it the market itself? Is it positions in the market that sell correlation that essentially create guardrails that keep it low and push it down? Both of those are live and interesting questions if you think about the more financial cause of it. First and a big part of my own risk philosophy is to think about market risk as endogenous to the market. It's created by the trades themselves. If you go back to the GFC, we go back 20 years ago in the pre GFC period, the expansion of mortgage credit, which was all the rage, the growth of mortgage credit was itself a part of the pushing down of credit spreads. There were structures, derivative structures that were created where the delta hedge was to sell credit risk. And they were bigger and bigger and bigger. And so you get this kind of tail wagging the dog sort of trade. And you know, tragically in some ways even the fed, even the IMF, they misread the Vix of 10 in late 2006 as this sign of safety. While it was everything related to a sign of danger, right? It was that the system of leverage was getting bigger and bigger by selling the vix, selling credit spreads. And it was a self reinforcing mechanism that created carry that just got reinvested into the same trade. So fast forward and today I do think there's some version of that. There's a significant product set within bank desks called QIs, Quantitative Investment Strategies. These are trades that you see in the listed options market. They're very complicated, they're very large. They are the packaging of derivative strategies into complex risks. Complex risks that could be a pension fund, could be even a hedge fund. You just flip a switch and you say to the bank, I want to be short correlation. And the banks have got all this stuff teed up to deliver via basically a total return swap. Very complicated risk exposures. And if you talk to people who are in that product, who are clients of that product, they'll tell you that short correlation lives and breathes in most of these structures. It's a carry trade that has done well. Why, you know why is implied correlation low? It's because realized correlation is low. Is it? Is realized correlation low? Because these products are sort of forcing it lower. It's so difficult to disentangle, it's hard to know. But I will say that the, a significant amount of these trades in qis, our short correlation. So there is a, there is a substantial take up of these trades largely because they've been successful. Okay, so that's, that's one thing we should think about. Hard to answer, really hard to disentangle. But I think it's worth considering. The first part of your question was around the economic, you know, components to it. So look, realized volume, realized correlation and things like realized volatility of GDP all kind of wind up in the same category as well. When you see periods of the economy where things are basically stable and that's, you know, certainly post the 2022 tightening cycle, once that, you know, kind of found it, found its ending point. Right. Maybe early 2023, we've had this period of pretty stable growth. Economic data has been pretty stable. And so those tend to coincide with low volatility and reasonably low correlation as well. We've had a couple of blips. Of course the tariff tantrum was short but strong in terms of an unwind. And you saw a correlation spike again. The oil shock this year, same thing. Okay, so we live in a backdrop of relatively stable economic statistics. What else might be going on there? Why is Microsoft so uncorrelated to everything else? Well, some people will say there's an AI component to the S and P and then a non AI component. Okay, I, I get that. I think that makes some sense. But even within the AI space these stocks are uncorrelated. And then people will say okay, well even within the AI space there's the picks and shovels, then there's the hyperscalers. Right. There's been some excellent charts. I want to say B of A has put one together that's got like hyperscaler cap X and free cash flow going totally the opposite way. Right. And you know, Nvidia is basically the picks and shovels on the other side of that. Okay, that's interesting. It still doesn't explain the degree we are talking about. As I said earlier, 35, 40% is benign correlation. In a benign market, that's correlation. And in a kind of crisis period it goes to 7580. I mean even in our short lived crisis episodes, you take the, and I wouldn't call this earlier this year a crisis, but realized correlation might have gotten to 35. So the high during a financial market shock is really what the average was during the benign period. So something structurally has changed. It's so hard to know. I just can't really explain it. I can, I do know what it's done and by virtue of carry, it's pushed the spread between stock volatility and index volatility to all time wides and it's forcing the folks chasing carry on the dispersion trade to put the trade on at levels that really have no margin of safety. And that would just be what I think is one of the forward looking risks, which is the setup, the, the risks that people already have on their sheets has been put on at kind of thin margins of error.

Jack Farley: Welcome to Token 2049 Token 2049 Singapore is back October 7th and 8th, bringing together 25,000 attendees, 300 speakers and 500 exhibitors for the world's largest crypto event. Token 2049 will be happening at the same time and in partnership with our own Digital Asset Summit Asia. So come check out both conferences during the summer same week across token 2049 week. Specifically there'll be more than 1000 side events culminating with after 2049 and the Formula One weekend. And the speaker lineup is stacked across the board. Shane Coplin of Polymarket, Jeff Yan of Hyperliquid, Arthur Hayes Balaji, Nasdaq CEO Adena Friedman and many more Join us in Singapore this October for token 2049 and the digital Asset Summit Asia. Avalanche Summit is coming to New York City September 16th to 17th. Join the Business and technology leaders building the next generation of financial products, enterprise systems and consumer applications on chain. Learn how blockchain is enabling faster settlement, more efficient markets and new business models at Avalanche Summit NYC. Register for Avalanche Summit and use promo code BLOCKWORKS15. And ahead of the Summit, you can track Avalanche tokenized equities alongside tokenized Treasuries and their growing footprint on Avalanche. See the data for yourself with Blockworks Research's Avalanche Dashboard. And don't forget to join us in New York City for Avalanche Summit. Is the 2018 episode of Like Volmageddon. A useful anecdote here because obviously you know, you just had this drive lower, drive lower, short volume, short volume and then suddenly you wake up one day and XIV got zeroed out on that day. Is that sort of the useful anecdote here? What do you think?

Dean Curnutt: I think yes and no. So the XIV is a instructive, very unique case where the reaction function of those two ETFs and I think their capital was three and a half billion in aggregate. I think at the high something like that, maybe 4. But the reaction function is so specific, it's 2x the daily move on something where everybody's leaning so far into it and the starting point is a front month Vix future of around 12, right? So the math was so unmistakable. 12 to 18, right? 2x a 50% move is 100%. So we all knew that the Vix, the front blended front month VIX feature had to go from 12 to 18 in a day. The problem for people was that we spent all of 20, 20, 2017 watching it just bleed lower and the XIV delivered a 50 odd percent return to people that were long it in 2017. So that was very specific. And again, the reaction function in terms of the number of VIX futures that had to turn over in a day, it was on paper, it was more than the market really could have handled. And yet the carry was so bad for people betting on it, betting for it to happen, and so good for folks betting that it wouldn't happen, that it kind of set this thing up for a showdown, you know, in February 18th. Where is it, where is it relevant? It is relevant in the sense that correlation carry is the same as volume carry. So there is a, you know, there's a trading strategy out there, it's been around forever and it's kind of the basis for most investing, which I would just say is the volume risk premium. Right? We are all in some version of taking in carry for people that will pay it to us. The entirety of the insurance model. Forget financial market insurance, but Geico, Allstate, Swiss Re, the reinsurers, they're all in the business of, you know, longevity insurance, mortality risk, all that stuff is based on effectively selling tail risk, right? And you know, that tail risk is, doesn't happen that often, but when it does happen, the insurer is going to have to pay out a lot of money. That's the basis of it, right? And so financial market insurance, the volume risk premium is the same sort of trade. You make money most all the time and then you have a skewness to it, a negative skewness that means that the payout against you is going to be significant. And it's okay to sell financial market insurance, you want to get paid the right amount. To do so, you also need critically to size your trade so that inevitably when that risk event does happen and you need a payout, you're still there to effectively reinvest at a higher vix, right? So you gotta, you have to size it carefully such that you can live to fight another day. So critical it did not happen to people in 2018, at least in that type of insurance. It certainly didn't happen in a lot for a lot of people in 2020 they were short the wrong type of tails. But if you could have survived 2020, you're sitting there selling the Vix at 83 and you have the government on your side. Right? That's the other part is most of these real tail events necessitate government response. And the government at some point its only objective is to get the VIX down. It's almost fighting a financial war, not an economic war. And that was the case in 2008 and certainly the case in 2020 as well. So the best times to sell volume become when it's peaked and you just have to have the capital to be able to do it. Correlation is kind of similar. There's a correlation risk premium just like a volume risk premium. So if you run implied correlation versus subsequently realized correlation, you're going to see something very similar to implied volume versus subsequently realized volume. There is a premium, it's pretty consistent. And then occasionally you'll see a spike in realized where the seller evolve got hit potentially very hard. You will see a spike in realized correlation in the same way that you know, it exceeds the the buffer that was there to sell implied correlation. What do we know about implied volume over time? It just follows realize volume. You want to just understand where implied volume is. Your first starting point should always be okay, what's realized volume? Because the price setter of implied volume is not someone that is betting that the market's going up or down. The price setter is simply a Jane street quant or a Citadel quant. They are reproducing the VIX by trading in the underlying. They're trading, you know, the gamma of the S P, the swings. And when the swings are very high, the VIX should be high because the cost of replicating the VIX is producing a lot of benefit by re hedging up and down. When realized volume goes really low as it's been, it's very hard for the VIX to go up because the benefits to owning that hedging portfolio and trading the underlying is is just not there. And it's the same thing for correlation. Implied correlation really can't be very high when realized correlation is this low. So you know, it's another way of saying that you can sell implied correlation at very low levels if realized correlation is even lower. And that I would say is the kind of framing right now is that this, this correlation carry trade is on. It's still successful, but it's on at levels we haven't seen before because realized correlation is at levels we've never seen before as well.

Jack Farley: Awesome. That's great. That dynamic between implied and realized, I think that's a good segue into the value Proposition around, potential for. For tail hedging as a strategy here. Yeah. Realized volume has been pretty low and therefore implied has also been low. So you're coming forth with this proposition, which sounds like you. I don't know if it's a discretionary view or just a ripe opportunity for some sort of phase shift to be potentially on the horizon here in terms of a change in that realized volatility. So we just love to hear your framework and why you think that this is a great opportunity to start to think about tail hedging as a strategy.

Dean Curnutt: Yeah, well, let's go back to the origin of the term tail hedging, because it's not all that. That term is somewhat new in the lexicon. And that's really, I would say it's certainly an outcome of the GFC, but even more so, it's an outcome of the 2011. Again, I just say it's the sovereign crisis and the US debt ceiling crisis in tandem. It was the. Okay, wow. The tails are not just a global financial crisis. There's other things that can happen here. And so by 2012, there was the advent of the tail risk hedge fund. The tail risk fund. And the fund had a very simple objective spend premium that we are an overlay against your long risk profile investments and we are going to save you from the potential for another 2011. You know, what's interesting is that the growth of these came home almost at exactly the wrong time. That happens a lot, right? You know, you get an event and then you get the CIOs of endowments, the boards of, you know, various state funds, look at their risk profiles and say, we can't ever let this happen again. It takes them six to nine months to pass something and then they've now got the ability to allocate to this. They go through a bake off and six months later, in 2013, now they're allocating. And 2013, 14, 15, 16, 17, these are some of the lowest volume years we've seen in a long time. And so as a standalone business, you don't see a lot of pure tail hedging hedge funds anymore. To me, tail hedging is. It's a trade. You have to find the timing of this. And I'm not big on the capacity, the time markets. I think timing markets is very difficult, but you've got to try to find things or instances where you see the price of risk as reflected by optionality. So that's your cost relative to the set of risks in the marketplace. And I would Say there's basically three ways to evaluate the attractiveness of options and I'll just say it's past, present and future. So the past is. I'm just going to score. Let's just use the VIX as an example. And there's look, there's all kinds of cross asset proxies. There's the move index, the C vix, right? That's the currency vix. There's VXTLT or swap shinval. I mean there's so many ways to slice and dice this thing. Bitcoin's got its own, you know, its own VIX now. Right. So what we're going to do is basically just put the VIX in a percentile of the past. So we know the VIX has been between nine and a half and 83. I'm not going to count the 145 it hit during the crash of 87. So let's maybe we'll start in 1993 when the Vix, you know, became a thing from nine from as low as nine to as high as 83. Boy, that's a big range. Right? So as low as 9 is the 2017 period we were just talking about it was ended this summer at like 14 and a half and boy that's really low. Okay, in the, in the context of history, certainly in the last five years of history, that's going to be like 15th percentile. That's one way to measure it. The VIX is a very short, dated measure. You know, probably the better way is to look at something like three month S&P volume also again, very, very low 15th type percentile. In the context of the last five years I like to look at it post the 2022 tightening cycle. That's kind of one of my windows. I tend to look at a bunch of different windows and when you do this, you really have to be sensitive to the window you look back on is going to inform what your percentile looks like. So you know, you just want to just look at the data very carefully. But it's no doubt that not just the VIX is low, but all of its cross asset proxies are low. Under the Alpha Exchange podcast I post on Twitter, I posted a index of percentiles of 5 year vols, Vix TLT, Vix CVIX. So those are a bunch of metrics associated. Oh and then credit spreads and credit volume. So those are my five metrics. And you were in like the 10th percentile of these things. So a blend of vols across different asset classes. So that's the past. So I can tell you definitively that relative to its own history, volume is low. Okay, now the present, and I've said this, this is what I was saying before, is that the marginal price setter Vol is the quant who is just responding to how the options carry. You could tell me a incredible doomsday story. We just heard one this weekend. 10% chance of humanity's extinction. Boy, that doesn't sound good. Right? The volume markets aren't going to price that in. You could say 20% chance the volume market's still not going to price it in what the volume market prices is carrying. How do these things carry in real time? And that's very much a function of realized volatility. If realized volume is high, the VIX is going to be high. If realized volume is low, the VIX is going to be low. It's the same thing in the treasury market. You know, Scott Besants opened up a front against the bond market. He's willing to maybe defend price a little bit. Things are getting unwieldy at the back end. Okay, that doesn't sound good. But if realized volume continues to be relatively benign, people aren't going to bid up the price that much of treasury bond options. It's all about carry and how realized volume carries. And so even as I tell you first that realized volume or sorry that implied volume is low relative to its own history, I'm telling you that the carry realize implied vols, there's nothing low about it at all. The Vix is at 16 and a half or so, 17 real one month, realized volume is 9. That's a big spread. In fact you could argue that the VIX is too high relative to realized. So that's the past. Where implied volume is low relative to its own history, the present says it's fair at best. And then I could talk to you a little bit about the future, which I have no crystal ball on, but I do tend to do a little bit of reading on markets and I think there's a strong argument to be made that the totality of uncertainty is significant right now and that there's a lot of things that could potentially, I don't say things that could go wrong, but there are uncertainty inducers in markets that, you know, can rear their head.

Jack Farley: Yeah, let's, let's go into that. Second, I, I have two questions around just the, the structuring of these trades because oftentimes, you know, the, the first moment that we start talking about tail hedging, you know, you're inherently long volatility, which oftentimes comes, you know, most of the time paired with being long vega and having to pay for carry. And then very quickly the first question comes up is, okay, well, how you do. How do I put this into my portfolio without having to pay carry? And that often is where things land in terms of the holy grail of tail hedging. A long volume. This the stuff that Nassim Taleb and Mark Spitznagel have spent years trying to figure out. How do I get paid for my carry while being long volatility? So, yeah, first question is just, is such a holy grail, does it even exist?

Dean Curnutt: Yeah, My own little sarcastic phrases. If you bought a house and the bank's telling you that, okay, we'll give you a mortgage, but just you got to show proof of homeowners insurance. So you call your neighborhood homeowner, homeowner's insurance outfit, and you say, hey, I'm looking to insure my house. You know, can you just send me your rates? What's the premium for a year? And they go, no premium, nothing. You'd probably hang up the phone because it just can't be real. There's no way you could buy insurance for free. And it's the same in financial markets. There are clever things that you can do that sometimes create mispricings. You know, I had Alec Litowitz, the founder of Magnetar, on the podcast a couple weeks ago. And from my own perspective, the Magnetar trade as it was done in 2006. So what he spotted was a mispricing between Super Senior CDS protection and the equity tranche. He literally did buy protection for free. John Paulson, right. The greatest trade ever. He bought Super Senior Protection. He paid for it. He bought it at a price that turned out to be way too low, but he did pay for it. Alec literally found a way to, in some ways buy a straddle and get paid in the process. That's incredibly rare. Financial market insurance is almost never. It shouldn't. It's not free. The bond market in some ways, and I think this is a. Something Ben Bernanke caused and I think has not gotten the right kind of criticism for which is post crisis, QE 2011, 12, 13, 14, on and on, you know, with the market doing quite well and him still saying, look, you know, core PCE is 1.5%, we got to get it to 2%, let's buy the country's bonds. Right? So that QE, I think, suppressed rates quite a bit. And it led to this incredible negative correlation between the S and P and let's call the TLT or the, you know, US Government bond market. So for years, owning government bonds was a positive carry hedge. I'm putting hedge in quotes because a hedge is a guaranteed payout. Right. We know that for the most part, the bond market rallied during risk offs. That's the original. That's what I call the classic risk off the bond. The stock market gets hit, the bond market rallies on a plate flight to safety. You own Treasuries, you get paid some yield, and this thing is a reliable risk off instrument. Beautiful. Incredible. Unfortunately, we lost that. We certainly lost it. In the 2022 tapering episode. Both the stock and bond market fell by. I think the TLT fell 20%, the S&P fell 19%. So that joint drawdown tells you that that true positive carry hedge doesn't really exist. So insurance you got to pay for. What I spend my time doing is trying to add alpha to the process of finding what to buy. A little bit of when to buy it, but how to structure it as well. I think that's a, that's a key nuance to putting in place tail hedges.

Jack Farley: Yeah, very well explained. Okay, so the second question was just around this decision between going at it in a systematic approach where say, you know, every month you buy, yeah like a 10 Delta Vix calls and you just roll them every month and you just embrace the fact that you're going to be paying for those. Or a more discretionary approach. You mentioned using something like call spreads on vix. When you see those as like a positive value there, how do you, how do you decide how to spread those apart between discretionary and systematic?

Dean Curnutt: So, so the first part is again, and this is just, you know, one person who's been doing this a long time, but been shouting from the rooftops on this for a bit now. I think optionality, especially on the equity market side and more broadly, rate volume is out of step too low relative to the uncertainties. And I think that's, I have a very strong conviction there. I can't really time it. But what I'm trying to push people to do is say, look, if you've been long, the S and P and most people have some version of that in their portfolio, you got a 22% compounded return for the past three and a half, almost four years. For the past decade you got a 15 plus percent compounded return. And that includes Covid. That includes a just vicious drawdown during COVID So boy, there are some gains to be had, you know, that, that are in these portfolios. To me, you know, insurance is about losing money, right? You're, you, you kind of are rooting against your insurance. You don't want something to happen to your house, but you want to own flood insurance at the right price, right. And so my first contention is that the pricing sets up very well because number one, because of this incredibly low level of correlation that is doing so much of the heavy lifting on bringing down realized volume, the S and P. So my connection is realized volume via carry is holding down realized Vol. The S and P, and that's holding down the vix. Right? So, so the realized volume via carry holds down the implied volume. What's holding down realized Vol. Is as we were saying at the top of the call, never seen before levels of realized correlation, right. Why are those stocks so uncorrelated? Boy, I just, I just don't know. I wish I did, but I can say definitively what that's doing. So then I step back and I just look at what's happening in the world. So what do I see? I see a geopolitical environment which, you know, geopolitics are always more bark than bite. We seem to make it past these events all the time. We've been talking about Russia, Ukraine, we've been talking about Iran, talking about China, geostrategic risk for a long time. Market just keeps going up. So I agree. I put that in a special case where now the geopolitics are impacting an asset that has made its way directly into the monetary policy conversation. And that's crude, right? You know, crude is this asset that's got so many knock on effects, plastics, fertilizer, I mean there's so many things that this asset has an impact on. I'm no economist, I don't know a ton about how the supply chain works in terms of pass through inflation, but I know enough to know that gas prices are up and so forth. And so we're in this war that we're trying to end that I think our adversary doesn't want to end. Pretty sure about that. And it's definitely leading to a struggle and being passed through to inflation at a time where we were trying to get monetary policy to go the other way. That's just kind of on the monetary policy uncertainty. My bigger issue on the rate side is the back end. And I had referenced Besant's front against the bond market. I think Scott Besant, he's a brilliant guy, hedge fund manager. I find his rhetoric recently to be incredibly unsettling. I mean, to take the. To take Bessants op, to take Druckenmiller's op ed written by Claude or not, and just kind of toss it aside and say, you know, I think Stan lost money that day is flippant at best.

Jack Farley: Yeah.

Dean Curnutt: You know, this is the bond market telling you to be careful and you're, you know, telling us you have inside information. I think that Besson's rhetoric almost becomes a front page story again at the wrong time. We're not talking about the back end of the Yoko for no reason. We're talking about it because in four months the US racked up $860 billion in new debt in four months. And that's in peacetime with a 4% unemployment rate and a record stock market. I just. So, you know, this is the, the economics of this are what has caused the bond market to get worried. And so that's a kind of a second area where I just like, okay, you know, risk on, risk off. Right. Says that the bond market rallies when the stock market sells off. We are in a completely inverted risk environment where the bond market is the source of risk to the stock market. So people say the S and P is the risk asset. I said the 10 year note is the risk asset. And it's just not behaving well at a time when the politics of deficits are intractable and you have a Treasury secretary that just seems to have, you know, kind of unearned bravado is how I would frame it.

Jack Farley: Yeah.

Dean Curnutt: What's that?

Jack Farley: I was just saying. Yeah, and the Bloomberg Bros. Thing, like it's just. Yeah, it's bewildering. But go ahead. What you're going to say?

Dean Curnutt: Yeah, yeah, no, I was just going to say that's. That itself is, you know, you get yourself into a peer, you know, into a, a little bit of a back and forth with the bond market. And then let's just suppose you get a day where for no reason at all, the 10 year goes up 15 basis points. Now, you are the guy that said you would defend price. And then the bond market is basically saying, okay, go ahead, what are you going to. What's next? I just find it to be dangerous. And I would say also, look, the folks that are betting on higher yields also have to be very careful because you're betting he is correct, you are betting against the House. But they may be calling him out to do something that would be not a great thing to have to come in. So over the top. It would have longer lasting implications for the integrity of, of pricing if he had to do something that just is an over the top type moment.

Jack Farley: Yeah, yeah. It's insane. Okay, so we're obviously recording here on Monday, September 14th. We just had the 10 year hit 5%. We've got the Fed meeting this week and yeah, my final question for you is just what do you think the market wants? What do you think? Obviously, a hike is mostly priced at this point, but to see the long end settle down, what do you think it wants? Do you think it wants a hike? And that would sort of tame things down or perhaps, you know, a pause, like, what would you see happen there? Like, yeah, what, what does it want?

Dean Curnutt: Right. And you know, so, so I know Kevin woods very well. He's spoken at my events. He's been on my own podcast and he said. So, you know, and I'm a big fan of his moving away back to your show from forward guidance.

Jack Farley: I am too. Even though it's the name.

Dean Curnutt: Yeah. What I say is you can't go from forward guidance to nowhere guidance. You can't say nothing. And so I think his first press conference was fine. His second one was not good because you got to set, you got to give us a little bit more. Right. You got to give us some roadmap. And so I think where the market is trying to figure out is one, what is the commitment to slowing inflation? He said, look, monetary policy or he said inflation is a choice and it's a choice of monetary policy. I just don't think that's correct in light of what I just said about the debt and the deficits. He's fighting with two hands behind his back. If the US Fiscal side can't do something that's more credible, I think what would be credible would be some, you know, Simpson Bowles type of plan. Create a commission, bipartisan, that says we get it and we're going to work on this. Put out some guidelines from, you know, our elected officials. Now, by the way, none of this is even close to happening. There's no space in US Politics for deficit reduction. But I think you'd need some help from the fiscal side. Now, Warsh has also said, again, by implying it's a choice, okay, it could be a choice in the sense that you want to lower inflation, make the fed funds rate 10% tomorrow. That'll work. That's just not reasonable. Right. So I think implied in what he's saying is it's a reasonable choice. And I don't think The Fed has a reasonable set of things that it can do without some help from the fiscal side. One of the issues that's also, again this is where I think is such a conundrum is the cost of credit, right? So when Wersch again, he gave his first press conference, which I thought was fine, he said, look, there are some aspects of monetary policy where I do see restrictiveness. When I look at the mortgage market I see restrictiveness. I think that's right. A 7% mortgage rate doesn't feel like a great deal right now. But 7% or 6% funding for Meta, that's a joke to Meta. That's the cheapest option Meta has bought in a long time. And again, that's my other point is that where this is going to be so tricky is that the voracious demand, let's just say it's from hyperscalers, it's from others in the AI ecosystem, but from hyperscalers for credit. The cost of that credit is too low for them. They are using that credit to buy an option to invest in capex which could have such a right tail outcome for them that money's cheap. So this is the tricky part, right, is you're making credit expensive for the mortgage market, but it's not expensive enough. And so to slow inflation and to slow the economy maybe means slowing the capex trade, but boy, that might mean you might need much higher rates from here. And this is back to my strong view that hedging is something that people really ought to think about. I would make a very strong case that these companies in the hyperscaler space and in the AI ecosystem, they're so uncorrelated now on a daily return basis. I think we are setting up for a correlation event where they prove to be very correlated after the fact. And you know, because these top seven or eight stocks are 35 plus percent of the S and P, if they have a correlation event and it's a correlation event where stocks go down simultaneously, that's clearly going to make its way into the S and P just by the arithmetic of it being so top heavy and by virtue of their correlations being so unpriced right now. That's why I just like owning S and P volume and I like VIX calls, VIX call spreads. My call for doing it systematically was listen, just don't wake up one day and fire some premium at a trade. Put it on till further notice because I see enough things that can go wrong. And again it also, it just comes back to this idea that correlation is being really mispriced, that these stocks will prove very correlated after the fact. And look again, as you said, we're recording this on the weekend after the CEO of a soon to be public $2 trillion entity has called for the whole space to slow down. Right. Anthropic CEO and then others joining him. What a weird juxtaposition. We're about to see an ipo, a gigantic ipo, and the CEO is saying, you know, I want to slow this company down. That's a really unique set of, you know, a unique fact pattern.

Jack Farley: Yeah. 100. All right, Dean. Well, I think we can leave it there. That's a great rationale and exposition of. Yeah, there's certainly plenty of landmines out there over the next few months. And yeah, very compelling to think about tail hedging within that respect. So appreciate you coming on that. That hour flew by and appreciate you coming on. Definitely. Check out his Dean's podcast, Alpha Exchange. I'm a regular listener. You always get some very smart derivatives folks on there, so really good. Listen, Dean, appreciate you coming on.

Dean Curnutt: Felix, thanks for the time. Keep up the great work.