HUGH HENDRY: I want to say I think that it's obsessed me and it's another thing which motivated
those tweets and the reappearance of my public persona was these very, very rare events when
volatility goes up with stock prices.
As far as I believe, or I can say, it's only happened in Weimar.
The really weird stock market places like Venezuela and-- RAOUL PAL: It did happen in
'99, right?
HUGH HENDRY: I don't know if it did.
I know for sure it happened in the-- RAOUL PAL: I remember taking 100 vol equities in
'99 in the blow off, and it was extraordinary.
That's the only other time I've seen it.
HUGH HENDRY: Tell me more because that-- I don't recognize that data point.
You're saying 1999, you're saying in the midst of the tech bubble, as we were just approaching
the final surge, yield curve going up.
RAOUL PAL: Yeah.
We saw those, some of the tech names trading 100 vol, which was extraordinary.
That's fine because it was in a bear market.
HUGH HENDRY: Yeah, you're right because the 1998 to the finale was punctured with 50%,
60% peak to trough corrections in those positions, which gave.
What I want to say is they were rising with a high level of volatility, and so when they
had-- and that if you go that normalized, volatility was an average of-- the vol went
to 120 when they halved ad then it reverted when they went back up.
What I want to say to you is that actual surges in stock price is higher-- because I spent
a lot of money researching as a newt, maybe other people watching this could come back
and land any of their observations if they can, but I am pretty sure that the only time
since 1987, the crash of '87, the only time-- and maybe still in the time of the stock index
that the stock index went higher and vol surged higher at the same time was when, what's he
called, the Japanese Prime Minister, Abe.
Because he'd been Prime Minister like a long time ago and was discredited being too nationalistic
with the whole Second World War and stuff.
Then he got reinvented, they came back with this 3Rs if you remember.
The Nikkei just went boom, and vol went boom at the same time.
Now, for sure, there was some special factors because Japan being first into zero interest
rates had been the first financial society to weaponize vol into a fixed income security.
This old [?], I want to say, instruments got caught by, everything went wrong at the same
time but even over and above that, there was this remarkable moment.
We've been looking at a trade and we just-- we then put the treat on in 2013.
Just saying, okay, so it's happened and let's not see the unthinkable and there's no rule
of nature that says vol can go up with stock prices surging higher, it's just that it's
really never happened.
The only point being that Japanese experience.
The genie's out of the bottle, and we saw it with this-- and it was the most insane,
I'm going to try and flesh out the position we are doing and try and put it on Twitter
maybe today or tomorrow, but if we had-- you do the skew, puts are always-- we had out
of the money puts, and always like two times more expensive, they get holes on the indices,
but you-- and why?
Why?
Just because of the observational data that equity vol surges when prices fall so the
puts are more expensive.
If that world changes, and you can sell those out of the money puts, you can buy so much
calls, but then of course, you had to structure it whereby you couldn't make it to being wrong.
That hence the complexity.
Then there was it required a lot of carry and so we had to engineer, and we had to trade
to create the carry but if stock prices had moved 20% quickly, we had-- gold is fantastic,
but this position, rock and roll.
This is the position that really Chris Cole from Artemis, the volatility trading platform,
that he had written up.
If you want, my favorite ever independent thought piece on the stock market was Volatility
at World's End by Chris Cole.
That's what I wasted a year trading that early because, of course Japan was in the midst
of the vol regime of 2008 to last year, and of course vol just went down and so that trade.
It was a negative carry trade that just did nothing.
What if in this world, like you say, with the deflation that's coming and therefore
you know what the policy action is, does that mean that volatility just continues to just
be subdued or does this mean that we move into the new world, the new post-virus world,
is a world where just possibly volatility may lose the prejudice of people's expectations?
RAOUL PAL: Does that mean that you're suggesting that in this environment, there could be a
surprise and the fact that the equity market goes higher and not lower?
Because it ends you're owning an asset that maybe has some value perceived against the
debasement of the currency for example.