The September Pullback One Vol Trader Sees Coming

0:00 Why on earth is the Treasury Secretary threatening everyone in in the market right now, screaming that he's the house and uh he wants everyone to come make his day? >> Yeah. Look, um if you look at a chart of uh political odds of uh you know uh you know how things are looking for the Republicans to to not get swept, right? They are moving in line with two factors, right? And this has been the case for now about six months. Uh one price of oil and two uh right the uh the the price of interest rates along the curve right so he has a major uh if he wants to if they want to win the midterms this is the key and if he wants

0:45 markets also moving back in the right direction because the market will get very freaked out if they lose both both houses. So, so this comes down to uh you know it's it's the midterms that's all that that matters now sitting out in front of us for the next two and a half months and they really really really want to get things going. And you better believe Trump is yelling at his ear today again uh you know doing whatever Trump does to Bent uh to get him to do whatever it takes. And so the the big bombastic talk, the hey try me, um is is very much trying to do whatever he can to get the market moving. I want to reiterate, there's a reason we have a h a hedge fund manager as the head of the treasury and a hedge fund manager as the head of the uh Federal Reserve. The markets are bigger than the Fed or the

1:32 Treasury. Their job is to signal and to force as best as they can the markets, but markets are way bigger than they've ever been. equity market, never mind the bond market. Bond market is about the same size as the equity market. Equity market, public and private together is $300 trillion dollars. You know, uh the 10 trillion dollars of uh QE did during COVID pales in in comparison to just a 20% move that we had up in the market not so long ago. That was a $50 trillion increase of collateral. So, the point is quite frankly, it is a signaling mechanism. He is trying to signal as best he can like don't try me. But the truth of the matter is the market is bigger. If the market tr truly tries to

2:17 throw a real tantrum, which it has not done yet, right? Um you know they have a problem. And so part of the policy and part of what Bant knows the same thing that um that Worsh knows and it's well documented they have lots of uh research at the Fed about this. You have to move proactively. the second markets start to move and you start to have a bigger problem, it is very hard to get because the Fed and Treasury quite simply aren't big enough to turn the tide without a >> I want to interrupt you there because I asked Ilia the same exact question earlier today thinking about the lessons learned from previous crises, right? Global financial crisis, we get QE1, QE2, twist, QE3, we get TARP 1, TARP 2. Clearly the drips and drabs weren't working, right? No faith, no confidence. we go to co and policy makers say we

3:04 heard you last time kitchen sink right away unlimited balance sheet why isn't Bessant going there first why is he trying to do this through job owning right now >> because it's a political nightmare and do you think he'll like what it takes to do all that can you imagine first of all the Treasury can only do so much in the short term he's going to do as much as he can but he has a limit he's not the Fed he cannot print money right and Worsh they're playing this g game of good cop bad cup. They don't want to ruin this uh you know uh before they have to. They need a crisis so that Worsh can step in and do bring out the real bazooka, right? The only thing bigger than the market is potentially the Fed because the Fed can print unlimited dollars. Now, you need a

3:51 crisis to do to roll that out. If you do that with markets proactively at all-time highs, you got a problem. And this is the real challenge. This is the real challenge. Bent can be, you know, call it bad cop. Go in there and say, "Oh, try me. I'll do, you know, I got this." But he actually is not big enough on his own. He needs the money printer if it gets out of control. But the problem is they need it to get out of control for the money printer to come online. And they don't want any of that to happen premidterms. I've said this before, post midterms, we are going to have a crisis. They are going to do bigger than you've ever seen. And it's gonna have to be Worsh coming on board. The the problem is the market seems to be front running that right now unless they can get oil prices down and and and again

4:38 controlling that long ending the curve is almost one to one dependent on on the oil market. This is why Trump just came out today. What did he just say? I think it was a couple hours ago. He said, "Ah, don't worry. The mid the the the we'll we'll reopen this trade of horror moves immediately after the midterms." They just came out and said that like it's the next taco right now. The problem is those tacos aren't working either. So the problem is the price of oil. The problem is the straightup hormuz and what that does to the lung end of the curve because they do not have the firepower unless they bring in wars, right? And we're talking about war raising rates right now. The story is like uh he's going to be the the hawk, right? because he's the and so he there's almost no way unless we get a

5:23 real crisis here that that Warf comes on board. If he does totally blows up the good cop bad cop routine completely have uh a a a bigger crisis in the sense that you lose faith in the dollar. You lose faith in any level of responsibility here >> and this is and this is what the market has been trying to >> tell you here because look you get another push from oil today. Do rate hike expectations move up? No. You get hot data last week. Do rate hike expectations move up? No. Does gold sell off? No. Does the dollar rally? No. What got the break evens to start going up? Was it the resumption of the rally in oil in July? No. It was Bessent in mid August starting to step on the long end

6:10 of the curve and the market went ah their p their policy bias is doubbish. They're going to figure out how to get into a policy bias that's doubbish. But the story here is at the long end and the stepping there upon. And so that's what's going to wake up break evens. That's why gold won't fall. It's why silver won't fall. It's why Bitcoin woke up when Bessant spoke and not before. The whole thing lines up. I would again think the reason not to throw the kitchen sink now is because looking at the 10-year bond auction and we'll look at the 30-year on Thursday. That's where they're most active. But the 10-year went swimmingly today. So people bought

6:56 it. They said, "This is an attractive yield. I want to have it." The implied message there is the market say, "You know what? I don't want to fight Bessant right here, right now. I think he'll be able to hold this for now. We're top ticking these yields. Let's lock these in. >> Yeah. I mean, at the end of the day, there's a bit of hubris here, right? The the the administration thought, ah, we got plenty of uh firepower just on the Treasury side to at least span to the midterm, right? And then we'll have a crisis won't affect us politically in that window. and that crisis will bring wars on board. This is the plan. Okay. Um the problem is for this window until

7:43 the midterms they really can't bring wars on board. And so he can you know the market will do what it wants to do. The bond market is bigger than Bent. It's not even close. Maybe not bigger than the Fed and Bent together into a crisis, right? But right now Bet can only jawbone. And the fact that the market's not listening shouldn't be a surprise because the market is bigger than besence job opening. Okay. Now market has a way of forcing the issue. The one thing I think is important here that that we haven't talked about yet is the Fed rate hikes are still the odds that are if anything going up right now amidst this which I find really interesting. I think you know there's about negative percent chance I guess I could be wrong that

8:29 Worsh is going to uh raise you know rates here right in into this we'll see um my opinion that is a mispricing they are going to want him to come across as way more dovish they're going to need his help uh and anything he can do uh and until then we have a bit of a uh you know that is one thing they can control still you know they can they can do nothing and they pro they will so that will be in that little bump in stimulus when that happens, assuming that happens. Um, and that's coming up in, you know, in a week from now um or so. So, keep a keep an eye out, you know, for that. I think that is one thing that if this thing continues to slide, which it it likely will unless you get a really really uh favorable, you know,

9:15 CPI print uh on Friday, which we need to watch very carefully. Um, >> how that happens. >> Yeah. Well, again, they have a they have a way of control. This is another thing they can do in the short term. They have things they can do in the short term, not in the long term with CPI. >> Yes. The BLS commissioner was fired. Yes. I forgot about that. Yes. >> So, yeah. I mean, uh but but at the end of the day, uh you better expect they're they're going to draw whatever they can. They're going to use whatever tools they can to get this going. And they do have the Fed meeting coming up which could be supportive here. So again, if you're asking me, uh that's the one thing that that could be a beneficial thing for markets and that could help him turn. But the truth is, um he's really really up to, you know, he he's subject to uh the market long into the curve unless

10:01 they can convince or do something meaningfully to get oil prices down and to turn the tide. >> I I love by the way that level setting, IO, where Trump says we're going to reopen this trade after the midterms. So, >> also if you don't cut rates, I'm raising tariffs on everybody. Like, if ever there was a reason for for Wor to say, well, now I have to hike. >> Now, the Fed's credibility is on the line and nothing else we've planned works if the Fed isn't credible. So, now that the president has talked me into this, Bessant better increase these buybacks so they don't echo into the long end of the curve because I have to go hike rates now. >> Yeah. Trump's threatening tariffs on the rest of us as the Fed doesn't cut next week, Jem. And now he's saying that

10:46 we're gonna get 53 more days of the straight being closed. Is he trying to stir inflation right now? I mean, what's what's the goal here? >> Oh, I want to be clear. Not before the midterms, but afterwards, I think, uh, they absolutely want inflation. They almost need inflation. uh you know markets themselves uh the debt itself none of this we've talked about this before on here is solvable without a higher level of inflation structurally uh and that's what essentially you know what is Bent doing is holding down trying to hold down the long end of the curve they're doing it with small amounts once wars comes on board they will have a hard cap of the long end of the curve and you better believe inflation is going to start trending aggressively higher um after the midterms when those numbers

11:33 are maybe allowed to be uh what they are because quite simply the straight of hormones cannot stay closed there is a lag and that that is going to feed through everything we all know that um especially now that China is coming back on board and starting to buy which which they are so um you know we are going to get inflation they want that just not yet just not yet and I think that's the critical part here they are trying to do everything they can in the short term to avoid a crisis now I am I want to be clear they are they know a crisis is coming and they are simply trying to hold it at bay and I think that's if you once you start looking at things through that lens um things become a little clear >> yeah I mean figured that out today at the 10 year auction we'll see if they figure it out for the 30-year if the 30-year auction goes really well this

12:20 week and the market goes boom we've top ticked it Bessant's going to be able to do this dance at least through the midterm which is really as long as it has to last But if that dance continues and they think it's credible, well then we've got all kinds of debasement trade ideas to continue to build upon. >> Jim, I mean I I look at that auction today and it does it is a pretty good auction. Bid to cover ratio best since April 2016. Internals are good, indirects, yada yada. If the 30-year comes out in that direction again, is it the market basically laying down in the short term saying like, "Okay, we'll play your game for a little bit." Iselia's interpretation there correct? >> Yeah, I I think so. I think the reality is I think and I've said this for a while actually before this decline

13:06 started. I said look for a decline until SEP opex or maybe mid to late September >> and then look for them to reverse it. We're getting that Jackson Hole. We talked about how they're going to talk talk up uh kind of uh uh you know discipline uh on the Fed side and that that happened. We're getting a bit of a a decline in markets. I think we need one more kind of vault expansion down something a little bit more stressful so that they can that'll allow um you know maybe CTAs need to get shorter vault targeting needs to get shorter you need a little bit more vault expansion that drives some of these monoton flows that's perfect to do right into sepx this is uh kind of textbook so far it would make sense that this thing will

13:52 find a bottom again somewhere in the next 5% down and then and then reverse and I think that could happen as soon as a week but but it might last a couple weeks but my point here is you know they are going to roll things out as much as they can to turn this they likely will they have balance of power for the most part until the midterms but um but there's uh again the markets have a way of uh again bond the bond market is bigger and if they can't turn it here in this window and seap that that's a sure sign you need to be very very careful Ilia, could I I want to do a devil's advocate to uh to Jem's point of view here that that you know the midterms are going to be the end all be all. Trump's a dealmaker. He just wants to be loved

14:37 by people very clearly. He never is loved enough by his father. It's very obvious and I say this as someone whose own grandfather used to play golf with Fred Trump over at North Hills Country Club all those years ago. So the Trumps and the Veos do know each other, however distant that may be at this point in time. Um who's to say he won't cut a deal with Democrats? Democrats are the tax and spend party. They want to spend a lot more money. Ilia Trump likes spending money. He's a maximalist for fiscal policy. Why can't a Democratic House work with the president to uh push along some spending priorities? It's not that it's impossible. It's that that the atmosphere is so toxic at this point and the president so unpopular, so historically unpopular as a matter of fact, that it doesn't pay Democrats to

15:22 play along. It pays to be the loud opposition to then set up for a bigger win two years down the road. I mean the >> the party I mean the opinion polls around the country are just I mean it doesn't matter which one you look at. You look at the right leaning ones, the left leaning ones, whatever it doesn't matter. uh the president's approval ratings largely around this war that the public doesn't like and that the president said he wouldn't engage in or things like it. Um the the inflation issue that the president said he would resolve and ran on resolving. Um, all of this stuff has people understandably asking, "Wait,

16:08 we voted for lower prices and less adventurism and we got higher prices and more adventurism. We're not happy, understandably so." And so the I think we're looking at deadlock. The the question really is typically the markets like deadlock because that means policy makers are getting out of their way. They're not complicating things and making things difficult to forecast. But that's if things are going reasonably well. Deadlock in the face of a crisis. >> Exactly. >> When there is not a coherent amount of people to get together. I mean, let's remember '08 when everything started to come down. Bush got the bald and the

16:53 beard together and they had a coherent policy response. And the Obama administration saw that it was coherent and largely kept it going as it was. And the question is, do you have a coherent policy response here? If there is a crisis amid deadlock and I think the very real fear is no, you do not. >> There's a policy response. >> Two weeks to stop the spread and two weeks of the Iran war. And >> that's right, >> 20 minutes in and out. Don't forget they had Hank Pollson come out three months ago and tell you >> Yeah. >> that you need to prepare for a Treasury crisis. >> The bald in the bald in the beard. >> Exactly. So, so they are they and and to be clear that was not a coincidence. That was a trial balloon. They are 100% preparing for this and this is what

17:40 they're kind of normalizing to with the Treasury, you know, signal with uh, you know, the buybacks and with the intervention on the yen. It's the same thing that they're showing you with the buying of Intel and taking 10% and taking up, you know, sharing empty materials and all these other firms. This is the normalization of what is coming at scale into the next crisis. We will be printing money by holding down the long end of the curve and rolling out a sovereign wealth fund. And now the required Trump accounts, they were kind of discretionary. Now it's required that everybody has to have one. this is this is where it's going. I mean, you have to prepare for this. Um, and but but the key here is you need a crisis to roll that out to be say I'm

18:26 taking 10% of this stock and this stock at scale to printing to having the Fed come out and wor being like, okay, we need to do a facility at the long end of the curve. You need a crisis. You just don't want it now. Speaking of yet, >> speaking of taking stakes in companies, as we get ready to wind this down, Sam Alman's been playing fast and loose with this uh government stake here. Last week, he promised Bernie Sanders that uh the government could take a stake in Open AI. Today, apparently, he's out on the hill talking with Republican senators, saying that there's no shot that he's going to let any government take a stake in Open AI. Better idea. uh that that the treasury should take money and buy shares from OpenAI and redistribute them to the public which listen if you're an OpenAI shareholder that sounds like a fantastic deal. Okay, >> that's what the sovereign wealth fund

19:11 is, right? So this is already the plan. I want to be clear. >> So you get to you get to that news here today and you kind of put it in this like panicon mosaic of okay, are we going towards sovereign wealth fund? Why is the head of open AI running around the country talking with senators about stakes in the company going into taxpayers pockets? because they're the same thing at the end of the day. Yeah. At the end of the day, this needs to be reframed from government or Trump buying shares to the people. This is on behalf of the people because it's we're in a very populist environment, right? So, they're reframing it so that the left can come across the aisle and say, "Yep, this is good." Bernie Sanders has already talked about we need to buy 50 50% own 50% of open AI or you know of of of AI

19:57 businesses. But the key here is you pl you you you frame it like the Norwegian sovereign wealth fund. That sovereign wealth fund pays for more than 100%. You're sort of going to start hearing more about this by the way. They're going to start talking about the Norwegian sovereign wealth fund. It pays for more than more. Yeah. >> Yeah. It it pays for more than 100% of social services right for Norway. Now, it's a much smaller country, yada yada, but that's a $2.7 trillion sovereign wealth fund. How big do you think ours is going to be? Right? Like, my point is, and what does a $5 trillion equity fund controlled by the Trump administration, but working across the aisle to also, you know, hand out favors to Democratic politicians as well to invest in the businesses that they're

20:43 that they represent, right? What do you think that's going to do? To be clear, the US equity market's 75 trillion. Five trillion is a massive amount, right? But I think that's just the tip of the, you know, the the the the tip of the surface because the the reality is that the currently the Nikkay is the Japanese central bank owns more than 8% of the Nikkay. Like this is there's precedent for this. They're going to frame it accordingly. But you better believe they're trying to also simultaneously to to you know driving strategic investments to certain businesses, supporting the the equity market which is too big to fail, right? Uh monetizing the debt by driving inflation through this process. But simultaneous to all of that, they are trying to short circuit populism or at least do this in a

21:28 popular way where instead of taxing the rich and giving the poor, they're taking 10% shares of stocks, taking you know ownership of companies on behalf of the poor. So people at least own on the bottom own stocks. So they're cheering for the same side. Now will that actually work? Will China allow this to happen? Uh yada yada, you know, a lot of question marks, but I think none of this happens and can be rolled out till you have a crisis. And that's the big the big point. >> Love this. I chat, how do you feel when when the Trump administration buys a 10% stake in MP or Intel or Dell? Do you feel like you're now a shareholder of Intel and Dell and MP? Uh Jim, this gives me a lot of uh leas vibes as it were. >> Yeah. Look, at the end of the day, they

22:13 are going to have a massive marketing campaign behind this that and this is what you're hearing from OpenAI is is the beginning of that. It is uh you know, we are doing this on behalf of the people, right? This is this is that right-wing populism that we've heard about. It's like we don't want to go to real populism, so we're going to do kind of pseudo populism where we don't really hurt the rich. We still do it through the free market channel, but we at least make the the poor feel like they have ownership or they're on the same side of the the boat. So, um, candidly, uh, you know, I'm no populism. This populism breaks the whole system. They don't really have a choice. They have to lean into, you know, the market's too big to fail. They got to compete with China in in a very, you know, confrontational situation. Too much debt. They got to monetize it. The pressures are big. This

23:00 is the only way out. But inflation for the rest of us, Ilia, that's going to be that's going to be fun. We're going to have a good time with all this inflation. Hey, uh memory chips here going up. We have inflation report coming on later this week. Gentlemen, before we close this out, uh inflation here, is this the determining factor for next week's hike, or are they just playing a game and none of this really matters? They already made the decision for us, Ilia. It seems to me that the market is paying very little attention to the actual probabilities of what happens next week and is focused much more on the tone being set by Worsh and kind of um the messaging saying look maybe we need to do some hikes in the front end. We got to keep inflation expectations anchored. But don't look at the back end. This is

23:46 not anything to extrapolate. We're going to go the other way on the back end. And the moment the Fed is allowed to go with us, they will look at what the markets didn't do. Again, with hot ISM data, hot NFP data, surging oil prices. They have not increased the odds for this Fed meeting. They have not increased the odds for December. They have not increased the odds for October. Basically, since Wars spoke at Jackson Hole, nothing has really moved. And it's because it seems like the market has decided we're right sized for that. That doesn't mean the CPI and PPI won't move things. They might move things just in getting out of the way. Event risk moves

24:32 out of the way. Market goes, okay, we don't have to speculate on that. Let's proceed with our regularly scheduled programming. What does that mean? Debasement trade ideas and maybe bonds higher. >> Yeah, the question. At the end of the day, uh, bet already told you what the line's going to be when they do not hike, and it's going to be this is a supply side problem, and raising interest rates into a supply side problem don't work. That's going to be the line. Now, they may do other things on the fringes to try and show credibility at the same time, largely kind of signals of credibility, but I do not think they are raising uh interest rates like I've said. And at the end of the day, this inflation number may, if it's if it is, I mean, the expectations for it being hot are already there. So not that hard for it to surprise to the

25:17 downside. That would be a quick easy way for them to turn it. Or an interesting thing would be if it does come come out hot, you get an acceleration of this decline like we were talking about some a little bit of vol expansion into expiration week where things could get a little interesting and then Worch comes in and and is dovish and it's beautifully best comes behind him and does some uh you know some some uh stimulation some QE soft QE himself and all of a sudden you see a reversal that starts taking us dramatically higher into the midterm. >> There you have it. He's been Jim Carson of Kai volatility in Boston. Ilas Pivc in San Francisco. I've been Chris Veio here in New York. Over times now out of time for this Wednesday. Jim joins us next Wednesday again hopefully. I think this is a recurring thing now which is great. You also can catch him here on Mondays. Tasty Crumbs with Jamal

26:03 Chandler 4 Eastern, 3 central in lie of overtime. Uh Tasty Live programming resumes tomorrow morning at 9:00 a.m. Eastern, 8 a.m. Central time. So be sure to be there. Jamal, Mike, they kick off the trading day. We're getting ready for inflation, so tune back in the next two sessions. Good luck trading and have a great night.