MacroVoices #368 Charlie McElligott: Banking Crisis, FOMC, 0DTE, CTAs & more

Episode Summary

Executive Summary: Macro Voices Episode 368 features Nomura's Charlie McElligott analyzing the formative banking crisis, monetary policy implications of the Fed's 25 bps hike, and market internals. Key themes include structural bank profitability issues driving deposit flight to 'too big to fail' banks, the Fed being 'damned if they do, damned if they don't' on tightening, gold's breakout amid dovish expectations, the abysmal performance of trend-following CTAs in 2023, and the growing role of zero-day options as institutional tools rather than retail lottery tickets.

Main Topics: Banking Crisis Analysis (Priority: 5/5): The US regional bank crisis is an idiosyncratic symptom of a long-term structural bank profitability crisis becoming a solvency crisis, driven by flat yield curves, higher cost of capital, and deposit flight from low deposit rates to higher-yielding money market funds/bills. This leads to a 'two-tiered banking system' where big banks (G-SIBs) benefit while regional banks suffer. Monetary Policy Implications (Priority: 5/5): The Fed is trapped between fighting inflation and avoiding financial instability. The 25 bps hike on March 23, 2023, into the crisis signals a likely end to the hiking cycle, but the market prices aggressive cuts ahead. The Fed is 'buying time' hoping inflation resolves, as further tightening risks breaking more parts of the financial system. Market Implications and Trade Ideas (Priority: 4/5): The crisis acts as a massive financial conditions tightener, leading to a recession escalation trade: bull steepening of the yield curve, crude oil decline, and a rotation into defensive/long-duration assets (megacap tech, gold, bond proxies) while shorting cyclical value and leveraged companies. Gold benefits from a dovish pivot, while CTAs suffer from whipsaw. Zero-Day Expiration Options (0DTE) (Priority: 4/5): Over 50% of SPY options daily are now 0DTE. They are used predominantly by customers (institutional + retail) buying out-of-the-money calls/puts, while electronic market makers sell gamma short straddles/strangles. These instruments amplify intraday moves but compress close-to-close volatility, and regulators are scrutinizing them. Crisis of CTA/Trend-Following Strategies (Priority: 3/5): After a generational run in 2022 (up ~30%), CTAs have been 'absolutely chopped up' in 2023 by violent two-way reversals (January disinflation rally reversed in February on hot data, then banking crisis reversed that). Their largest and most profitable trade—short front-end rates—was stopped out by a VAR shock.

Key Arguments: The regional bank failures (SVB, Signature, Credit Suisse) are not isolated but symptoms of a systemic bank profitability crisis built on zero-interest rate models. Deposit flight from regional banks to too-big-to-fail banks is self-reinforcing and rational, as there's 'no edge' provided by smaller banks. The recent Fed liquidity facilities (BTFP) are not QE—they are interbank lending that does not transmit to the real economy, as banks tighten lending standards. The Fed is 'damned if they do, damned if they don't': raising rates fights inflation but breaks banks; pausing risks inflation persistence. Gold is a clear beneficiary of a dovish pivot and flight to safety, with 2000 resistance as a key level. CTAs are being whipsawed by rapid macro regime shifts (disinflation, reflation, crisis), making trend-following unprofitable in 2023. 0DTE options are predominantly used by customers to create gamma squeezes and hedge one-day event risk, while market makers profit from selling gamma. The Fed will need to cut 'large and fast' once the labor market cracks, but they are buying time until inflation resolves. Commercial real estate (67% of loans from small/medium banks) is a massive dead weight that will hit bank balance sheets. The market is pricing a recession through a bull steepener and defensive rotation, ignoring the Fed's higher-for-longer dot plot.

Data Points: S&P 500 weekly change: +1.1% - Close at 3970, sharp reversal post-FOMC US Dollar Index weekly change: -2.1% - Close at 102.53, key breakdown on Powell comments Gold weekly change: +2.5% - Close at $1979, key 2000 resistance overhead WTI Crude Oil weekly change: +4.7% - Close at $70.90, after testing 55-month MA at $64.59 US 10-Year Treasury Yield weekly change: -2 bps - Close at 343 bps, low end of 2023 range Regional bank share of US CRE loans: 67% - Small/medium lenders outside top 25 hold 67% of commercial real estate loans Regional bank share of all US loans: 38% - Outside top 25 banks, they handle 38% of all outstanding loans CTA trend fund returns 2022: ~+30% - Generational tailwind environment, now reversed in 2023 SPY 0DTE options as % of daily volume: ~50% - Over 1 in 2 SPY options is now zero days to expiration EIA crude inventory build: +1.1M barrels - Only build on the board; gasoline drew -6.4M barrels

Pivotal Quotes: "There is, honest to God, no justification at this point. There is no edge that they provide... The emperor has no clothes and the tide goes out." — Charlie McElligott: On why deposit flight from regional banks is rational and unstoppable "The Fed is damned if they do, damned if they don't. If they fight inflation, they break banks; if they pause, inflation persists. They are buying time." — Eric Townsend (from interview setup): Summarizing the central bank's policy trap "The bank failures are all idiosyncratic symptoms of a larger bank profitability crisis becoming a solvency crisis." — Charlie McElligott: On the structural nature of the banking crisis beyond just SVB/Credit Suisse

Implications: Listeners should expect continued volatility, a potential hard landing as credit tightens, and defensive positioning favoring gold, long-duration bonds, and megacap tech. The Fed's loss of control may lead to aggressive future cuts, but only after economic damage. Regional banks face structural headwinds; G-SIBs are relative safe havens. Trend-following strategies are unreliable in the current regime.