Awkward Pauses: Tariffs, Basis, Leverage
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Bloomberg Audio Studios, podcasts, radio, news. 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. Between this off script, who am I? 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-time opposite. Kitty, 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 mention 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 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. So we're recording this on Wednesday. We are. 20 minutes before we started recording, it turned out that the tariffs were a joke.

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. Yeah.

And like... That's so naive. Who's going to remember any of this in 90 days? I know, it's pretty naive. But still, there's some chance that next week will be less crazy than this week. And sometimes 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 me 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— The reciprocal tariffs? Who cares? Let's not get too deep into the details here. But this is interesting. We were going to talk about Walter Bloomberg earlier.

We were. Who sort of actually gave us a dry run. No relation. No 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 he was 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? 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. 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 bad.

It's not quite that he made this up. It's like someone asked Trump advisor. Kevin Hassett. This is the thing, like with the Trump administration, you can ask anything and they'd be like, yeah, maybe. So they asked Hassett, what about a 90-day pause? And he said something like, no, but you could sort of read it to mean maybe. He made a noise. And then he said, no.

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. More of a no than a yes. But, you know. But boy, it doesn't exactly translate into the headline. You wouldn't send an all caps headline for that. No. If you would, it would be like, Trump is going to do what Trump is going to do. Yeah. Which is not a very newsworthy headline. Which you could send at any time, at any moment. So, yeah, it doesn't exactly translate into the headline that Walter Bloomberg wrote.

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 Twitter.

A truth social post. That's true. That's true. Actually, I saw Lutnick's- 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 Lutnick posted, "'Scott Bessett and I sat with the president while he wrote one of the most extraordinary truth posts of his presidency.'"

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 edit out me just staring. 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 read...

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 the whole set of rules in the Constitution, in 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 we have twisted the world, where now it's like...

You sit down and you read a consequential truth social post, and that's how tax policy gets made. It's pretty weird, man. It's pretty weird. It is. I don't know. 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. 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 is so committed to the game, and he is so committed to the game of 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 the game.

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 the stocks. But like, I don't know. There's something really beautiful about doing such an enormous amount

Stock manipulation is 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 can'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 ETF.

headline about them being approved. Yeah, that was nuts. Like, 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 know, everyone 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 yeah, that's true. I mean, you know, actually, he did say

He did post on Truth Social earlier on Wednesday. Oh, yes. Now is a good time to buy. It's amazing. What an amazing thing to do. Turns out that was the signal. And I'm so happy that I have this timestamped 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 like the Trump team say, there 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 the 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 blocking back the tariffs in a few hours. Well, maybe it doesn't mean that. Who knows? Who knows?

Who knows? He did sign at 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 to the Wall Street Journal, DMed him and he answered and he sort of deconstructed how he got there. He said he saw some other account tweeted. 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. That's a reasonable thought process. 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 you market moves on that, then someone else will say it because 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. You should publish a terminal headline like, Walter Bloomberg, open your DMs to Katie. I'm just going to tweet in all caps and put a little asterisk ahead of it so that he'll think it's a Bloomberg headline.

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 trends.

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 fundamental macro stories about how the tariffs would cause treasury yields to rise and stock markets to fall, right? The story that I've been telling is the goal of the tariffs is to have foreigners buy more U.S. goods and fewer U.S. financial assets, which 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 people like talking about the basis trade is, I've been thinking all week, there's been huge moves in asset prices, driven entirely by economic fundamentals and government policy, right? But huge moves in asset prices. And so every day you wake up and you're like, wow, there's been huge moves in asset prices

what hedge fund is going to blow up, right? Because when they're big, like fundamental moves, 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 100 to 1 leverage ratios, then 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 Slack 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. I'm 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. There's no...

real dislocation. Scott Besson said this morning something like, or said sometime this week something like, "This is an uncomfortable but normal deleveraging." Which seems right. You would expect him to say that. 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.

Asset swaps? Yeah, like swap spreads. Right. They're related trades because on the one side of either trade you have owning physical treasury bonds and on the other hand you have some sort of interest rate derivative. So with treasury futures, the basis trade is 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 kind of like the same. 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 have better funding to buy treasuries. And so like one of the reasons for the basis trade and the swap trade is like 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 a basis trade would

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. And 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 has been baked in for several weeks of 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 whatever fundamental events went on this week where people didn't want to buy Treasuries. Yeah. I mean, the SOPS trade, as I understand it, 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. But those swap spreads...

Yeah, 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 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. 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 long-end.

a safe haven, but that obviously didn't happen this week. Yeah, I mean, there's a lot of different

markets for it, right? And like the extent you sum up the market for long-end treasuries as foreign buyers, you can 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, says 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

for years. Yeah. I wrote about that today, like Wednesday. Like the muscle memory stuff is like 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, there's a broader question of will anyone blow up in this crazy volatility? Yeah. In general, the theory is that banks are supposed to make money during periods of crazy volatility, but that's in aggregate, and then one person should blow up because they just get the crazy volatility wrong. Someone was like,

Oh, the market is so much further to go down and they position themselves really short and then there's this huge rally on Wednesday afternoon. Yeah. Someone's got to blow up. Come on. 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. Yeah.

Not an Alt-Haref 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. But this is not a boring ETF. This is... The other ones were, but this one is not. 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 MicroStrategy ETF. And it also goes short a two-times levered inverse MicroStrategy ETF.

So it is short two levered ETFs, one long, one short. So net, it's short-long MicroStrategy and short-short MicroStrategy, each one doubled. So it's nothing, right? 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 in MicroStrategy.

each day, but if you hold them for more than one day, they fail to track two times the move in macro 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, you know, 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 pattern.

anomaly in the ETF market. Yeah, this is a real Frankenstein. I mean, as you laid out, leveraged 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 ETF IQ, about Robert Knott of Research Affiliates. You did. He does...

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- Now you're short both sides. Exactly. I mean, you probably should have a strong stomach because it's a boring money-making trade.

for a reason, which is that it has some probability of blowing up in your face. And the way it blows up in your face is like, basically the way these ETFs work is they rebalance each day. And so the long one, 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

People call it volatility decay. They're bleeding value each time they buy high and sell low. But if the stock keeps going up, you're just compounding that. In fact, if the stock goes up every day, you get more than two times the return on micro-strategy because you keep buying into it. Similarly, if you do this trade and the stock moves in one direction for a long time, you're no longer fully hedged. One of your legs does much better than the other leg.

So, it's a risky trade. It's effectively a market-making trade. These ETFs are creating volatility. They're trading with

someone on the other side who is kind of a market maker and 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, in general, there's sort of a known thing that people kind of make fun of. And so if you're a second-level, sophisticated retail investor, it's like, I know that people make fun of these double-levered ETFs.

how do I get on the other side of that? It's like, well, there's an ETF for that, too. People like Rob or not are like, oh, how do I get on the other side of that? And you do the trade. But then someone's like, how do I package being 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 ETFs 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%. That's with zero beta, zero correlation to just about anything. That's a good trick. Not a brilliant strategy, none of costs, but fun and low risk. So it's fun. It's fun. Yeah. Here's one thing for Robert not to do. 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. It's like, this is like the very like 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 leveraged 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 leveraged 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 maybe their broker is lending it out for them. Probably. Yeah.

So as I mentioned, next week I'm on vacation, and so I will not be recording a Money Stuff podcast. But fear not. Fear not. In approximately 15 seconds, we'll be recording a Mailbag episode, which will air next week. Mailbag. Mailbag.

And that was the Money Stuff podcast. I'm Matt Levine. And I'm Katie Greifeld. You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com. And you can find me on Bloomberg TV every day on open interest between 9 to 11 a.m. Eastern. We'd love to hear from you. You can send an email to moneypod at Bloomberg.net. Ask us a question and we might answer it on air. You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

The Money Stuff Podcast is produced by Anna Masarakis and Moses Andam. Our theme music was composed by Blake Maples. Brendan Francis Noonan is our executive producer. And Sage Bauman is Bloomberg's head of podcasts. Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.