MacroVoices #226 Charlie McElligott Explains the Upside Catalyst for Equity Market

Episode Summary

Executive Summary: Episode 226 centered on the tension between worsening COVID-19 headlines and resilient risk assets. Eric Townsend and Charlie McElligott argued equities were being supported by systematic, volatility-targeting and CTA flows, while Harley Bassman discussed option structures to express bullish or hedged views amid elevated volatility. The conversation linked reopening, fiscal/monetary stimulus, and positioning-driven market mechanics to near-term upside risk in stocks and bonds.

Main Topics: COVID-19 resurgence vs. market complacency (Priority: 5/5): Eric emphasized rising global case counts, U.S. records, and the lagged relationship between infections and deaths, arguing the market is too optimistic that the worst is behind us. Systematic flows and volatility targeting in equities (Priority: 5/5): Charlie explained that CTAs, vol-control funds, and other systematic strategies were buying equities as realized volatility collapsed and prior shock days rolled out of lookback windows. Economic surprise and reopening-driven reflexivity (Priority: 4/5): Charlie said U.S. data beats were extreme, creating a powerful positive impulse that, combined with fiscal stimulus and reopening, supported a rebound in risk assets. Bonds, yields, and the long-term rates outlook (Priority: 4/5): Discussion covered whether the 40-year bond bull market is ending; Charlie remained skeptical of a true secular reversal but saw tactical room for higher yields and position unwinds. Options strategies in high-volatility markets (Priority: 4/5): Harley Bassman outlined risk reversals on SPY, REIT-income trades, and calendar structures designed to own election risk while benefiting from skew, carry, and elevated implied volatility. Oil, gold, and cross-asset signals (Priority: 3/5): Eric reviewed crude inventory draws, the $40-$42 oil range, and gold pressing toward 1800, framing them as part of a broader risk-on/risk-off environment. Election, civil unrest, and tail risks (Priority: 3/5): The speakers discussed election uncertainty, potential market stress from contested results, and non-zero tail risks such as the Three Gorges Dam and other exogenous shocks.

Key Arguments: Eric argued that rising COVID-19 cases would eventually translate into higher deaths because death counts lag infections by roughly a month, so current calm in mortality data is misleading. Eric said reopening reversals were already occurring globally, citing Goldman Sachs' estimate that 40% of previously announced reopenings had been reversed or paused. Charlie argued the market strength was not mainly a judgment on the virus itself, but a mechanical consequence of volatility collapse, positive data surprises, and systematic re-risking. Charlie claimed case growth may be concentrating in younger age groups and that some early hospital data suggested lower viral loads and fatality rates, which is improving market sentiment. Charlie said CTA and vol-control strategies had reduced exposure sharply in March and now had room to buy back equities as realized volatility fell and old shock days dropped out of lookback windows. Charlie maintained that the bond bull market likely still has structural support from demographics, debt, and technology, but fiscal stimulus and reflation expectations could trigger tactical position resets. Harley Bassman argued the Fed's money printing and market support make it rational to own equity optionality rather than fight the policy backdrop. Harley said zero-cost risk reversals are an efficient way to get long beta, especially for investors already holding equity exposure, because they provide convex upside with defined downside assignment levels. Harley favored option structures with positive carry through the election, reflecting the view that implied volatility around the election was elevated but still not fully priced.

Data Points: U.S. daily new COVID cases: 51,000 - Eric said July 1 set a new U.S. record for daily new cases. Prior U.S. infection peak: about 35,000 cases/day - Eric referenced the April peak around the New York metro area. Reopenings reversed or on hold: 40% - Eric cited Goldman Sachs on the share of reopening plans already reversed or paused. Australia (confirmed cases per million): 314 - Eric contrasted Australia's low per-capita case count with harsher lockdown policy. Chile (confirmed cases per million): almost 15,000 - Eric used Chile as the opposite extreme in per-capita case burden. Three Gorges Dam height warning line: 175 meters above sea level - Eric cited the dam's design threshold and flood concerns. Three Gorges Dam electrical output: 22 gigawatts - Eric compared it to Hoover Dam and described its scale. Three Gorges Dam size vs Hoover Dam: about 20 times bigger - Eric described the Chinese dam as roughly 20x Hoover's electrical output. Global population downstream of Three Gorges: more than 400 million people - Eric highlighted the number of people potentially affected by dam failure. China GDP downstream of dam: about 30% - Eric noted the portion of national GDP produced downstream. SPX recent peak: just above 3,200 - Eric referenced the market's recent high and subsequent consolidation. WTI crude peak last week: 41.63 - Eric said crude peaked within his predicted 41-42 range. Gold round number: 1,800 - Eric noted gold printed 1800 but failed to sustain the breakout. 10-year Treasury yield: around 70 bps - Eric said yields had gravitated back up toward 0.70%. SPY risk reversal strikes: buy 350 call / sell 230 put - Harley described a zero-cost long-bias structure on a two-and-a-half-year horizon. SPY alternative strikes: sell 240 put (October) / buy 225 put (December) - Harley proposed a positive-carry election-risk trade. Fed balance sheet / money printing: 65% expansion rate - Harley said the Fed was printing money at a 65% expansion rate. Mortgage REIT yield: 10-11% dividend - Harley cited yields on agency mortgage REITs such as Annaly/AGNC. 10-year Treasury yield in REIT discussion: 0.65% - Harley contrasted mortgage REIT yields with Treasury yields. SP 60-day realized volatility: 65 to 27-28 - Charlie explained the collapse in realized volatility from mid-May to late June. SP 10-day realized volatility: 41 to low 20s - Charlie highlighted the rapid decline over a short time window. Implied equities exposure sold off from peak: almost $400 billion - Charlie estimated the peak reduction in notional equities exposure from vol-targeting strategies. Recent systematic equities re-add: about $53.5 billion - Charlie said roughly this amount had been bought back over the last three months. Two-week equities re-add: $18 billion - Charlie quantified the recent acceleration in re-risking. One-week leveraged-funds buy to cover: almost $24 billion - Charlie cited CFTC TFF data across S&P, Nasdaq, and Russell futures. One-week buy to cover in Nasdaq futures: $5 billion - Charlie described this as a 100th percentile move. One-week buy to cover in S&P futures: $16 billion - Charlie said this was a 99th percentile one-week cover. CTA equities positioning: back to 100% long in S&P; 11 of 13 global equity futures still short - Charlie described the current systematic positioning backdrop. CTA bond positioning: 100% long / near max long - Charlie said bond futures and short-term money market positions were extremely long.

Pivotal Quotes: "I think the message here, Patrick, is learning this dance and the hammer in the dance isn't easy." — Eric Townsend: Eric on why reopening is producing more infections and why simple reopen/close assumptions are too naive. "I think that what a lot of people are realizing now... is that it's probably the phase one, it's just the extension as it pushes into the country." — Charlie McElligott: Charlie explaining why rising U.S. case counts are being interpreted as a continuation of the original wave rather than a catastrophic new phase. "All indications are green. Challenger, you are go for throttle up." — Charlie McElligott: Charlie describing how vol-targeting and CTA signals are encouraging systematic investors to add equity exposure.

Implications: Near term, systematic buying and falling volatility can keep pushing equities higher even against weak virus headlines. But the setup is reflexive: if cases or deaths accelerate, the same models can flip to de-risking, creating sharp downside.