The 35th annual Cboe RMC kicked off in Carlsbad, California, yesterday with one keynote and two panels. After attendees checked in, they were encouraged to pick up some Cboe swag, including phone accessories, baseball caps and Cboe RMC vests (yes, we know they run big). Our team also provided copies of new white papers at the Cboe booth. After a morning in the sunshine, conference attendees shuffled into the Grand Ballroom at the Park Hyatt Aviara for David Blitzer’s keynote speech, “Less Growth, More Uncertainty – Is Volatility Here to Stay?”
David is managing director and chairman of the Index Committee at S&P Dow Jones Indices. His remarks were the perfect start to RMC, as he provided a fantastic overview of the economy, the markets and what’s impacting both.
David dove right in with a discussion on U.S. GDP, referencing intellectual property as a long-term source of growth for the U.S. economy. He also noted that residential growth is barely keeping up with population. Many view the balance between the unemployment rate and inflation to be an indicator of economic health -- as David put it, we’re in a “sweet spot” with unemployment below 4% and the rate of inflation at about 2%. Nonetheless, he cautioned that there is always going to be another recession.
Another interesting take was David’s overview of the oil market, which is now seen as an indicator for changes in the U.S. economy. Today, the U.S. is the largest oil producer in the world because of the sourcing of shale oil. He noted that drilling oil was previously a long-term investment because of the work required to build an oil rig and maintain. Now, with shale, it is easier to get things started, but there is a much shorter lifespan, and that fluctuation in supply can be reflected in prices with David citing more gyrations going forward.
Shifting to the consumer side of the economy, David then described housing as “a little slow” and flat, with prices continuing to go but more slowly than before. Fewer families and fewer marriages combined with still-reluctant banks have made for fewer mortgage approvals. Moving on to the sale of light vehicles (family cars, not trucks), David says there is no huge growth in sight, the sector remains stable but he wouldn’t “hold his breath” for driverless cars or electric cars disrupting the market anytime soon.
So, what is the next burst of growth? While the tech sector has been a popular answer to this question, David says it is now more complex than before. Other uncertainties remain, such as a potential remodeling of antitrust regulations. He also noted that a large deficit with China remains, stating the “trade gap is the biggest, fastest-growing in the U.S. and it’s not going away.”
Moving on, David then referenced the recent Fed decision that it would not raise rates and would likely not do so for the rest of the year, which indicates the government entity is not looking for much growth in the economy any time soon. Many are concerned about European economies and, of course, Brexit. David joked: “When all else fails and you need something to worry about, go to the Federal Reserve website and you’ll find something.”
Finally, David referenced accepted wisdom that “when the yield curve reverts, we’re supposed to have a recession.” He admits there is no strong piece of economics that proves this theory, but people have started to believe it, so many now believe a recession could be due within two years. Other economic risks? Global warming, the inability to continue tax cuts and fewer IPOs.
Later in the day, Colin Bebe of Meketa Investment Group and Jon Havice of DGV Solutions discussed the impact of zero interest rates and quantitative easing on the traditional search for yield. The pair then went into volatility positioning in the options market and optionality positions in other asset classes and structures. They referenced that most client exposures come through a few strategy types: covered calls, cash-secured put-writing and rebalancing strategies among others. Colin and Jon also discussed approaches to hedging equity drawdowns and future considerations for short and long volatility. Finally, the duo answered a question posed early on, where and when will the Day of Reckoning occur? The answer: “Your guess is as good as mine.”
Cboe’s Bill Looney moderated the day’s last panel with Katherine Fogertey of Goldman Sachs, Stacey Gilbert of Susquehanna Financial Group and Mandy Xu of Credit Suisse, as they weighed in on key 2019 market factors. The trio wowed the room with their impressive expanse of knowledge and insights. Audience Q&A then ensued. There were so many questions in the room, the panel could have continued for another hour. Nonetheless, the Cboe team knew better than to keep conference attendees from their drinks and dinner, and wrapped up the panel before inviting all to enjoy a cocktail hour in the setting California sun.
Day One done, onto Day Two!
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