MacroVoices #368 Charlie McElligott: Banking Crisis, FOMC, 0DTE, CTAs & more
Charlie McElligot from Nomura discusses the banking crisis, Fed policy implications, and market dynamics. He argues that regional banks face structural profitability issues due to changed monetary conditions, while the Fed is now constrained in fighting inflation due to banking sector vulnerabilities.
Summary
Charlie McElligot provides an in-depth analysis of the current banking crisis, which he views as a structural shift rather than a temporary issue. He explains that regional banks built their profitability models for an era of zero interest rates and are now facing a solvency crisis due to flat yield curves, higher funding costs, and deposit flight to money market funds offering better rates. McElligot argues this creates a two-tiered banking system where there's no rational justification for staying with regional banks over 'too big to fail' institutions. He emphasizes that smaller banks handle significant portions of U.S. lending (67% of commercial real estate, 38% of all loans), making their potential failure a major threat to economic growth. Regarding monetary policy, McElligot contends the Fed is now in a 'damned if you do, damned if you don't' position where they cannot fight inflation as aggressively without exacerbating the banking crisis. He discusses how recent Fed liquidity facilities are not true QE since the money stays within the interbank system rather than flowing to the real economy. On market dynamics, he explains that zero-day-to-expiration options have become institutional tools rather than retail lottery tickets, with market makers typically selling gamma while customers buy it for day-specific hedging needs. McElligot also addresses why CTAs have struggled in 2023, attributing their poor performance to constant theme reversals that have disrupted clear trending environments. The conversation covers how VIX had been signaling potential problems before the banking crisis materialized, and discusses various trading opportunities in gold, bonds, and equity markets given the current environment.
About this episode
MacroVoices Erik Townsend welcomes Nomura’s Charlie McElligott to the show to discuss the formative banking crisis, monetary policy including yesterday’s 25 bps hike into the banking crisis, how to trade the Fed boxing itself into a corner, 0DTE options, abysmal performance of Commodity Trend funds in 2023, and much more. https://bit.ly/3K4aFal Download Big Picture Trading chartbook 📈📉https://bit.ly/3z0u7ON ✅Sign up for a FREE 14-day trial at Big Picture Trading: https://bit.ly/2JjZR7J Check out Nick's YouTube channel: https://www.youtube.com/c/Optionfinity Join OptionFinity discord: https://discord.gg/Rvnsv6Y Please visit our website https://www.macrovoices.com to register your free account to gain access to supporting materials
Key Insights
- McElligot argues that regional banks face a structural profitability crisis because their business models were built for zero interest rates and large-scale asset purchases
- He contends there is no rational justification for customers to remain with regional banks instead of moving to 'too big to fail' institutions
- McElligot explains that smaller banks outside the top 25 handle 67% of commercial real estate loans and 38% of all U.S. outstanding loans, making their health critical to economic function
- He argues the Fed is now in a constrained position where aggressive inflation fighting would exacerbate the banking crisis
- McElligot claims that recent Fed liquidity facilities are not true QE because the money remains trapped in the interbank system rather than flowing to the real economy
- He explains that zero-day-to-expiration options have evolved into institutional hedging tools rather than retail speculation vehicles
- McElligot describes how market makers typically sell gamma in zero-DTE options while institutional customers are net buyers for event-specific hedging
- He argues that CTAs have suffered in 2023 due to constant theme reversals that prevent clear trending environments from developing
- McElligot suggests that VIX upside buying in recent months was signaling potential market stress before the banking crisis became apparent
- He contends that the banking crisis will force banks into 'zombie mode' at best, severely restricting credit flow to the economy
- McElligot argues that anything built for the era of easy money policy - including private equity, unprofitable tech, and commercial real estate - is now under severe pressure
- He explains that the recent banking crisis has accelerated market positioning toward a 'hard landing' scenario with defensive sectors outperforming cyclicals
Topics
Transcript
Thank you. Eric Townsend and Patrick Ceresna. Macrovoices episode 368 was produced on March 23rd, 2023. I'm Eric Townsend. This episode of Macrovoices was made possible by Respect Energy, a leading European trader of renewable energy and a one-stop shop for all green energy investors. Nomura's Charlie McElligot returns as this week's feature interview guest. We'll discuss the formative banking process, crisis, monetary policy, including yesterday's 25 basis point hike into the formative banking crisis, how to trade the Fed boxing itself into a corner, zero-day-to-expiration options, abysmal performance of commodity trend funds in 2023, and much more. Macrovoices will be released a day early next week on Wednesday, March 29th, to accommodate travel schedules. So be sure to tune…
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