Awkward Pauses: Tariffs, Basis, Leverage

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Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

I'm Matt Levine, and I write the Money Stuff column for Bloomberg Opinion.

And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

I forgot for a moment.

What do I do?

Matt, it was funny.

Last week we joked about the all-tariffs episode.

Yeah.

Yeah, the monkey hand curled or whatever.

Here we are.

Here we are.

It's an all-tariff episode.

Katie, I'm going on vacation next week.

Yes, you are.

Service for the Money Stuff podcast may or may not continue uninterrupted.

But I'm going on vacation.

I mentioned that because things have been a little crazy in the financial markets.

And I do have some history of things being crazier when I'm on vacation.

Someone like did a substack report about whether financial markets are more volatile when I'm on vacation.

Certainly Elon Musk seems to be a little bit more volatile when I'm on vacation.

And one time when I was an investment banker, I went on vacation.

And it was September of 2008, and the Lehman Brothers filed for bankruptcy.

Oh,

my God.

Yeah.

So we're recording this on Wednesday.

We are.

20 minutes before we started recording, turned out that the tariffs were a joke.

I do.

I mean, I shudder to think what fresh hell awaits us next week when you are on vacation.

I know, but I think that what I'm saying is there's some chance that it's no fresh hell.

It's some chance that all of the tariff excitement was this week.

Donald Trump announced there's like a 90-day pause on the tariffs.

And like, that's so naive.

Who's going to remember any of this in 90 days?

I know, it's pretty naive, but like, still, there's some chance that next week will be less crazy than this week, and some chance it'll be much crazier.

I mean, we can only hope and pray.

But I'm glad you signposted that this is happening on Wednesday because, I mean, this podcast could be irrelevant by Friday, but at least what we know right now is that Trump said that he is pausing tariffs for 90 days on countries that didn't retaliate.

That means China.

Who knows, right?

But it seems to mean the tariffs are paused except on China.

Yes, yes.

In fact, he raised tariffs to 125%.

And by the way, the tariffs are not paused on other countries, right?

They're like 10%.

I don't understand it.

Yeah, well, let's see.

The reciprocal tariffs are who who cares?

Let's not get too deep into the details here.

But this is interesting.

We were going to talk about Walter Bloomberg, who sort of actually gave us a

relation to Bloomberg News, but kind of gave us a dry run of what we saw unfold in the markets because he sent that tweet, that headline, which turned out to be fake, but it was written in Bloomberg News style about a 90-day pause.

I believe it was on Monday.

I was, of course, on live television, as I often am during these events.

That ended up being fake, but CNBC and Reuters ran with it and then had to issue corrections.

But stocks surged after that.

They then came back after it was revealed that that was not based in reality.

And again, it was like a nice dry run.

It was a teachable moment that when there is any good news, that you're going to see markets absolutely explode.

And that's what's happening, at least for right now.

It's so weird that it was accurate two days in advance, right?

Yeah.

It'd be one thing if you're just like, oh, towers are off, but like, it's the same, it's the real thing, sort of.

Do we want to talk about where the 90-day idea came from?

Are you going to tell me where it came from?

Do I have to?

Friend of the show, Bill Ackman.

At least he was one of the, I think he's the first person I saw who floated that idea, tweeting over the weekend that Trump should do a 90-day pause because it takes a long time to negotiate deals and move manufacturing, et cetera.

Move manufacturing.

Yeah, I mean, look, sure.

To the extent anything makes sense, it makes sense.

But I do love that, like, it's not quite that Walter Bloomberg, pseudonymous Twitter account who tweets.

I want to know him so

it's not quite that he made this up.

It's like someone asked Trump advisor.

Kevin Haslitt.

This is the thing, like with the Trump administration, you can ask anything and they'd be like, yeah, maybe.

They asked Hazlitt, what about a 90-day applause?

And he said something like, no, but you could sort of read it to mean maybe.

He made a noise and then he said.

Or Bill, yeah, you know, I think that the president is going to decide what the president's going to decide.

Which is not exactly a no.

It's not a no.

It's more of a no than a yes, but you know.

But boy, it doesn't exactly translate into the headline.

You wouldn't send it all caps headline for that.

If you would, it would be like, Trump is going to do what Trump is going to do.

It's not a very new list.

But you could send it any time,

any moment.

So yeah, it doesn't exactly translate into the headline that Walter Bloomberg sent.

I love this only because, I mean, Twitter is not real life, but this is a moment where Twitter briefly became real life.

But, like, by the way, as far as I can tell, you know, we're recording this at like two o'clock on Wednesday.

As far as I can tell, the only indication that the tariffs are paused is a truth social post.

That's true.

That's true.

Actually, I saw Luttnick.

It's not like things get like, you know, it's not like there's, you know, how a bill becomes a law.

It's like, there's truth social, right?

Yeah.

Which is so weird.

I want to read you something.

I thought this was fantastic.

So, Commerce Secretary Howard Luttnick posted, Scott Bessett Bessett and I sat with the president while he wrote one of the most extraordinary truth posts of his presidency.

Most extra, not like, you know, sat down with his scroll and his quill and like penned out like this, you know, poetry, like Gettysburg address.

It was a truth social post.

So, I mean, that is where policy happens on social media now.

We're not going to end up with me just staring at my queen.

This is why it needs to be a video podcast.

Matt's eyes just sort of went cold and we stared at each other.

I mean, like, I've written.

This is not interesting, but I've written this week about how the Constitution of the United States says that all tariff power is in Congress.

And, like, the whole set of rules in the Constitution, the actual Constitution, about how revenue-raising laws need to be passed, where the House has to initiate them.

It's like a whole thing.

And like, we have twisted the world where now it's like

you sit down and you write a consequential truth social post, and that's how tax policy gets made.

It's pretty weird, man.

It's pretty weird.

It is.

This is going to be the awkward pauses episode.

I want to talk about Walter Bloomberg a little bit more.

We know that he's French.

Oh, we do.

I think at one time

he posted a screenshot that

his browser was in French or something.

And that was interesting.

I like that you pay as much attention to Walter Bloomberg as Walter Bloomberg, I'm going to assume, pays attention to Bloomberg.

I mean, I just love anyone who's so committed to the game, and he is so committed to the game.

He's just posting screenshots, or rather, just posting terminal headlines.

Right.

And one thing I was thinking about is like, what an amazing long game it would be to spend years just posting all cap terminal headlines for people who don't get the terminal and building up a following of people who want to follow Bloomberg terminal headlines in real time for years and years and years of just doing that consistently all the time.

And then one day one fake Bloomberg headline to move the market by $2.5 trillion.

What a great trade.

You can't really monetize it because it's like you're moving all of the stocks, but like, I don't know, there's something really beautiful about doing

such an enormous

stock manipulation as a harsh term, but you know, you manipulated the stocks.

Yeah.

I mean,

I'm sure you could find some way to monetize it.

Oh, sure.

You can just buy some stocks, but it's like you can't, like, you know,

you don't make $2.5 trillion by moving the market by $2.5 trillion.

Yeah.

Remember when Bitcoin spot ETFs were approved?

Yeah.

I'll never forget.

And someone tweeted a fake.

headline about them being approved.

Yeah, that was nuts.

Eight hours before they were approved.

And it's like everyone knew when the SEC was going to act.

And like someone tweeted that they got approved like a few hours earlier.

And like there's like a little spike in Bitcoin.

And it seemed to be some sort of attempt to manipulate the market, but it was so weird.

You never knew it was going to happen, and it did happen a few hours later.

This is not like that.

This was, I think,

more or less a genuine surprise when Trump really did the thing that he was rumored to do two days earlier, but I don't know.

Yeah, that's true.

I mean, you know, actually, he did say he did post on Truth Social earlier on Wednesday.

Now is a good time to buy.

That's amazing.

What an amazing thing to do.

Turns out that was the signal.

And I'm so happy that I have this time stamped because I said on TV, this raises the possibility that actually the Trump put does exist.

He's clearly watching the stock market and sees it puking right now.

And then hours later, comes out with this extremely stock market-friendly headline.

I know.

But isn't it so weird?

Because, like,

if you listen to the things that the Trump team say, they are things like the tariffs will be good for America in the long term, right?

Yeah.

And then to like pause the tariffs.

Like you would, you would think that saying this is a time to buy means because the market is incorrectly reacting to the glorious future ahead of us because of these tariffs.

But in fact, it means because I'm balking back the tariffs in a few hours.

Or maybe it doesn't mean that.

Who knows?

Who knows?

Who knows?

He did sign it, DJT, or whatever.

I can't believe we are actually doing an episode on tariffs.

It is

disappointing.

anyway.

So, Walter Bloomberg.

So, I think it's at least the New York Times, but maybe too, the Wall Street Journal, DM'd him and he answered.

And he sort of deconstructed how he got there.

He said he saw some other account tweet it.

Yeah, yeah.

The market was responding, so then he ran with it.

So, this is like this is how everything works, right?

Because, like, then like news stations were reporting it because they're like, the market is moving.

Why is the market moving?

Well, is this tweet?

So, we have to report on the tweet.

Yeah, I don't know, that's a reasonable question.

It's a daisy chain, Yeah.

Yeah.

But it's really like, it's, you know, right.

It's like this little snowball from like one person says a thing, and if the market moves on that, then someone else will say it.

Cause it's like,

it's often very hard to explain market moves.

And so people look for whatever they can.

And like one crisp tweet explaining the market move is like a useful thing.

Although here, like

here it clearly was the explanation.

Can we have Walter Bloomberg on the show?

I hope so.

I'm going to DM him.

Yeah, let's do it.

I wonder if his DMs are open.

I can find out.

I can look at my phone right now.

Should publish a terminal headline like, Walter Bloomberg, open your DMs to Katie.

I'm just going to do it in all caps and put a little asterisk ahead of it so that he'll think it's a Bloomberg headline.

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So you're saying, you know, it's hard to explain market moves.

It's nice to have something crisp to point to.

Shall we talk about what's going on in the treasury market?

I guess.

Yeah.

A really satisfying boogeyman is just pointing to the basis trade to explain why bond yields have been blowing out, even though everyone's worried about a recession.

And up until an hour ago, stock markets had been pretty much flirting with bear market correction territory.

You would expect treasuries to rally and bond yields to fall.

That's not what has been happening, Matt.

Yeah.

You can tell various like fundamental macro stories about how the tariffs would cause treasury yields to rise and stock markets to fall, right?

Like the story that I've been telling is the goal of the tariffs is to have foreigners buy more US goods and fewer US financial assets, which like you would think would lead to

losses in U.S.

financial assets such as stocks and also bonds.

But it is also the case that the basis trade exists and people do like talking about the basis trade and one reason that people like talking about the basis trades is like

I've been thinking like all week like

there's been huge moves in asset prices driven entirely by like economic fundamentals and like government policy right but like huge moves in asset prices and so every day you wake up and you're like well there's been huge moves in asset prices what hedge fund is going to blow up right because like when there are big like fundamental moves like someone blows up right and so you think a lot about contagion and deleveraging and if you think about contagion and deleveraging and you've been worrying about the basis trade for years and also know that the basis trade is run at like 100 to 1 leverage ratios, then like, you know, you might think maybe someone is blowing out of a basis trade.

Yeah.

It's natural that you would think that.

Also, I think it was Torsten Slock over at Apollo who had a note out this week saying that he estimates the basis trade, there's like $800 billion in it right now.

It makes sense why you would reach for that given all the things that you just laid out.

But I think also that people reach for it because it's hard to prove.

We haven't seen any reports of a hedge fund blowing up.

Like I really scour these reports because I'm very interested in this question.

And like there's definitely like stories like people are getting some margin calls, some hedge funds are doing some selling, but no one's like,

this fund liquidated all its positions and shut down, right?

Like there's no real dislocation.

Yeah.

Scott Besson said this morning something like, or said sometime this week, something like, this is a uncomfortable but normal deleveraging.

Yeah.

You know, you would expect him to

say that.

I know, I know, I know.

But it also seems correct so far.

Yeah.

Well, there's two trades that we're watching, right?

It's the basis trade, but also it's swaps, like what's going on with asset swaps.

There was a great piece from Edward Bolingbroke, and I kind of lumped these together.

But then I was reading a Wall Street Journal article that explained that these are two similar but different trades.

That's why.

Asset swaps.

Yeah, like the swap spreads.

Right.

They're related trades because, like, on the one side of either trade, you have like owning physical treasury bonds, and on the other hand, you have some sort of interest rate derivative.

So, like, with treasury futures, it's like the basis trade is like you buy a treasury bond and you sell the futures contract that corresponds to that treasury bond.

Swap spreads are like you sell a interest rate derivative that basically moves with SOFR, but it's, you know, it's kind of like the same.

Like, it's like an unfunded long-term interest rate contract.

And there, again,

there's been a trade there where people think

treasuries will do well relative to the derivative for whatever reason.

The reason

has to be something like people will have better funding to buy treasuries.

And so one of the reasons for the basis trade and the swaps trade is

a belief that

Trump would deregulate banks in such a way that banks would be more interested in using their balance sheet to hold actual treasuries.

And so, therefore, demand for physical treasuries would go up relative to demand for interest rate derivatives, which don't require as much balance sheet.

And so, banks would buy more treasuries.

And so,

one reason to do like a basis trade of some form is because you think treasuries will go up relative to futures.

And so you are betting on someone buying the treasuries from you.

One thing that's happened this week, until today,

is

for whatever reason, people are less interested in buying treasuries from you.

Some of that is like been baked in for several weeks: like the projections about banks buying a lot of treasuries because of regulation easing up don't seem to be coming true.

And then some of it is like whatever fundamental events went on this week where people didn't want to buy treasuries.

Yeah, I mean, the swaps trade, as I understand it, like that peaked in February.

So that's been coming off the boil for a while.

Yeah, I think the futures trade has too a little bit, but yeah.

Yeah.

The swap spreads collapsed.

Yeah, they they cratered.

I think that they hit at least a multi-year low, if not a record low.

But yeah, I don't know.

I wonder where this goes in this new world or order.

I don't know.

I don't know.

I will say that, you know, we were talking about the violent stock reaction to the upside, to the 90-day pause.

You saw short-end yields in the treasury market rise pretty sharply.

The long end didn't react.

Of course, I want to timestamp this.

We're talking on Wednesday mid-afternoon, but I don't know.

Like, I hear what you're saying that a product of these policies would just be people don't want to own U.S.

assets in general, but at least Treasuries, the long end of the Treasury curve, had the narrative that, oh my God, we're worried about the economy.

Maybe we might as well buy long end treasuries as a safe haven.

But that obviously didn't happen this week.

Aaron Powell, Jr.: Yeah, I mean, there's a lot of different

markets for it, right?

And like, yeah.

Some of the market for long-end treasuries is foreign buyers.

you could imagine less demand from them.

Yeah, I guess it was expected, though.

I mean, I've been tweeting about the treasury market all week, and I've had a lot of like tinfoil hats about this is China dumping treasuries.

We knew this was going to happen.

I guess it was just expected that that haven impulse, economic hard times, you buy treasuries, that's your muscle memory, overwhelmed any overseas selling that you would see.

Because China and Japan have been selling treasuries for years.

Yeah, I wrote about that today, like Wednesday.

Like, the muscle memory stuff is so interesting, right?

Like, in previous episodes of Problems for the Credit of the United States, people were like, better buy treasuries, right?

And, like, it's not obvious that would always last forever.

Yeah.

You might, like, have some development that made you think, well, if like the demand for U.S.

financial assets goes down, then I should sell treasuries rather than buy them.

Yeah.

I don't know.

We'll see.

Mortgage rates are still really high, so I'm sad about that.

Is there anything else to say about the basis trade at this moment?

It seems scary.

Yeah, I mean, like, there's a broader question of like,

will anyone blow up in this crazy volatility?

Yeah.

Like, I don't know, like, you know, in general, like, the theory is that banks are supposed to make money during periods of crazy volatility.

But it's like, that's like in aggregate.

And then, like, one person should blow up, right?

Because they just get the crazy volatility wrong, right?

Someone was like, oh, the market has so much further.

to go down and like they got positioned themselves really short and then like there was this huge rally on wednesday afternoon Yeah, you know, someone's got to blow up.

Come on.

I saw some stat that the basis trade is like double the size of what it was in 2020 when it blew up last.

And still haven't seen any reports of hedge fund blow-ups.

So that'll be fun.

Yeah, that'll be fun.

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Not an all-tariff episode.

We do have to talk.

About ETFs?

About ETFs.

Can we just say one thing?

This was Matt's idea.

Matt wanted to talk about leveraged ETFs this episode.

I've seen some comments on Spotify.

I read all the comments.

Someone said that this has turned into a boring ETF podcast.

It's not my fault, man.

This was Matt's idea, at least for this week.

This is not a barring ETF.

This is

the other ones were.

No, look, some of them were.

Absolutely.

This is the Defiance MicroStrategy double short hedged ETF.

Its trade is

it takes your money, it goes short

a two-time levered micro strategy ETF.

And it also goes short a two-times levered inverse micro strategy ETF.

So it is short, two levered ETFs, one long, one short.

So net, it's short, long micro strategy and short, short micro strategy, each one doubled.

So it's nothing, right?

Yeah.

It is neither long nor short microstrategy.

All it is, is it is short the weird structural feature, which we've discussed more than once on this podcast, the weird structural feature of levered ETFs, which is that they track two times the move and micro strategy each day, but if you hold them for more than one day, they fail to track two times the move and micro strategy and they get weird.

And like much of the time, the way they get weird is they have some like slippage where they get less than the expected return.

And so if you're on the other side of that, you're

getting more than the expected return, basically.

And so like this thing has like

a back test that makes like 13% or something with no market risk, no correlation to anything else, just like a weird anomaly in the ETF market.

Yeah, this is a real Frankenstein.

I mean,

as you laid out, leverage ETFs, both long and short, they are one day only funds, especially for some of the crazier ones.

That's really the only realistic holding period.

I am a little bit salty because I wrote about a similar trade in my newsletter.

It's called ETFIQ, about Rob Arnott of Research Affiliates.

You did.

does this trade

on the side.

He told me that he likes to short, both leverage long and inverse ETFs.

And he described it as a slow, boring money machine, which I find really charming because, I mean, you would think that you would have to have a strong stomach to do this, to be shorting leveraged ETFs.

But I mean, as you just said,

exactly.

You probably should have a strong stomach because, like, it's a boring money-making trade

for a reason, which is that it has some probability of blowing up in your face, right?

Yeah.

And the way it blows up in your face is, like,

basically the way these ETFs work is, like, they rebalance each day.

And so the long one, like every time the stock goes up, it has to buy more stock.

Every time the stock goes down, it has to sell more stock.

And so it is like volatility amplifying.

And if the stock bounces around a lot, then it's constantly buying high and selling low and like bleeding.

People call it like volatility decay, like they're

bleeding like value each time they buy high and sell low.

But if the stock keeps going up, you're just compounding that.

And so in fact, if the stock like goes up every day, you get more than two times the return on micro strategy because you're like, you know, you keep buying into it.

And so similarly, if you do this trade and the stock moves in one direction for a long time, like you're no longer fully hedged, right?

Like one of your legs does much better than the other leg.

So

it's a risky trade.

Yeah.

It's, you know, it's effectively a market-making trade, right?

Like these ETFs are like creating volatility.

They're like, they're trading with.

someone on the other side who is like kind of a market maker and like selling them the volatility that they're giving people.

We talk about them so much.

On this podcast?

On this podcast.

But people talk about like in general, they're sort of like a known thing that people kind of make fun of.

And so if you're like a second-level sophisticated retail investor, it's like, I know that people make fun of these like double-levered ETFs.

How do I get on the other side of that?

And it's like, well, there's an ETF for that too.

People like Rob Arnott are like, oh, how do I get on the other side of that?

And you like do the trade.

But then like someone's like, how do I package V on the other side of that and sell it to more retail investors?

It's a great trade.

Well, something that Rob and I talked about is that, yes, it's a great trade, but the borrowing costs can be pretty punishing.

He gave me some details on his returns from doing this.

And, you know, I wrote this at the end of March, so things have changed.

But he said that 2024's gain for shorting, again, both long and inversed triple leverage GTFs was around 13%.

Half of that went to borrowing costs for the short positions.

You add in about 5% for collateral, and the return was about 12%, but that's with zero beta, zero correlation to just about anything.

That's a great trick.

Not a brilliant strategy, not of costs, but fun and low risk.

So it's fun.

It's fun.

Yeah.

It's one thing for a robber not to do it.

I like the idea of like you look at the landscape of ETFs and you're like, what ETFs should people get mad about?

I'm going to do the opposite of them.

Yeah.

It's like, this is like the very arcane version of that.

But there were like, you know, anti-Kathy Wood ETFs where it was like,

what are people negative about?

I'm going to sell an ETF that packages that negativity.

This is like, people are negative about double-levered ETFs.

I'm going to find a way to make money on that.

Here's the other side.

Yeah.

I'm interested to see these launch.

It's just a filing so far.

Sure.

Rob did also say to me that anyone who buys a triple leverage ETF is crazy if they don't lend it out because he did mention that there's a relatively short supply of these leveraged ETFs that are available for lending, which is interesting.

Yeah, but like.

Everybody who buys a triple levered ETF is doing it in some sort of retail account, and some of them may not be aware that they can lend it out, or they may be their broker is lending out for them.

Probably.

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