October 2023 Update

Act of God

Despite what we hear from many prominent traders like Ray Dalio and Paul Tudor Jones, we don’t believe that the events on October 7th will lead to a wider regional war. None of the big players in the region (Iran, Saudi Arabia, & Iranian proxies like Hezbollah) really want to take it there: the cost to them will be massive. The last time Iran did something to incite American retaliation was in 1988. They mined the Persian Strait, one of the mines struck a US military vessel, the US conducted Operation Praying Mantis, and in 24h, the US basically sank Iran’s entire naval fleet. The US already has many assets in the region and just put two aircraft carriers there — almost daring Iran to retaliate. So despite what we hear from the Supreme Leader of Iran and policy makers from nations around the Levant, we believe that they will walk back on their threats. Already, we see Iran calling for an oil embargo on Israel, which is vacuous. Israel doesn’t need to import oil from the Middle East. They can easily get it from the US or Canada.

Global safe haven

What is the one asset that everybody buys when something blows up? The US 10 year Treasuries (UST 10Y) and oil. After a one day rally, UST have and oil have both continued its year long slump, bringing the 10Y yield to a new high of 4.9%. What this means is that there are other things that matter more for markets.

Transcribing the Holy Scrolls

Given the war, the new highs in UST yields, and concerns by Dallas Fed Lorie Logan, we expect the Fed to take an extended pause into EOY. That should lead the Treasury to shorten the duration of issuance and to slow some of the issuance. Trump’s lead over his rivals is 30% higher than any other eventual winner in the history of the GOP primary at this point in time. People are dismissing Trump because it’s still early, but look at it this way: Unemployment is low, inflation has come down, the economy is fine. Why is Joe Biden so unpopular? Who here thinks that the US economy will get even better in the next 12 months? Keeping in mind that FOMC members are part of the establishment, what do you do when you have an anti-establishment candidate do so well in the polls? You do everything to make sure Biden wins whether people like him or not. The implication here is that the Fed is likely to be behind the curve and not raise rates no matter how strong the economy is, no matter what happens to inflation.

Outlook for End Of Year

The October 6th flows came in and macro flows (due to Oct 7th) fought them back, creating an environment of vol down market down. We are now going into a window of weakness until early November (~3rd). If we hang here or -100pts from here (4125-50), the Santa rally into EOY is still in the cards. Right as the supportive vol compression flows come in around EOY, we expect the macro flows to weaken as nobody in the establishment want to cause a recession 12 months before the elections.

Trade:

• Long gamma
• Long Feb/March 2024 calls
• Short weekly or monthly calls