What’s the “pain trade” in US assets going forward?
If you read “The ‘Less-Bad’ Thesis For Stocks Ahead Of ‘Liberation Day’” you know part of the answer.
It wouldn’t be accurate to suggest market participants are short stocks. The juxtaposition between lackluster “soft” data for the US economy and still-sturdy hard data is mirrored on the market side by the somewhat awkward pairing of gloomy sentiment polling for both individual investors and fund managers, and enormous inflows to equity-focused ETFs.
That said, several key systematic cohorts de-leveraged meaningfully into the correction, hedge funds were caught in a rough drawdown for the mega-cap leadership and asset managers more generally trimmed longs, while the US rates space repriced bullishly as growth worries proliferated, manifesting in a pretty significant drop in benchmark US yields.
The end result wasn’t an overtly bearish market, per se, but one that, in light of the potential growth pitfalls associated with the Trump administration’s policy mix, and mounting concerns about the ROI for hundreds of billions in hyper-scaler AI capex, doesn’t see much in the way of crash-up “risk,” which is to say there’s very little interest in right-tail exposure.
The figures above show call skew for the S&P, the Qs, as well as for Nvidia and Tesla. As the annotation, from Nomura’s Charlie McElligott, notes, there’s a “bear market in right-tail hedges.” No one’s betting on, or paying up for exposure to, a new melt-up via out-of-the-money calls.
“This [is] coming at a time when rates are primarily focused on economic left-tail hedging, setting up what [c]ould hypothetically [be] a ‘max pain trade’ of US Treasurys sell[ing] off and equities rallying in the period after the April 2 [tariff] announcement,” Charlie added.
He went on to describe macro investors as “rightfully” focused on the longer-term growth implications of the Trump administration’s reset efforts, and suggested tight risk budgets could leave the fundamental discretionary crowd reluctant to jump aboard any nascent rally in stocks or selloff in bonds.
Of course, systematics would jump aboard mechanically if the trend and vol demands it, and that could help “self-fulfill” any squeeze in equities and/or bearish reversal in Treasurys, making things all the more painful for slow-moving, carbon-based investors.
I appreciate the coverage of both the Bull and Bear perspectives. Given that Trump needs the tariffs to pay for the tax cuts, I do not understand why he is using threats and headfakes instead of just enacting the tariffs and getting it over with.
Great discussion, which goes to show how many ways this market can be parsed. Thanks
Does anyone reading news of Lord Donald of the Tiny Hands actually know how much of our food is imported from tariff targets? Mexico (nearly all our seasonal vegetables, fruits and many specialty products), Australia and New Zealand (lamb, farm products, fish) Canada (grain, meat, fish, specialty products), Europe (cheese, wine, fish, meat, specialty products), China (meat, canned goods; China has ownership of some of the largest meat packers in the US). The list goes. Envision all that food missing next time you go the the market. Also, take all the foreign parts from our cars. None will be driveable when those parts are all gone. Liberation cannot arrive, especially without our imports and sufficient immigration.