Forward Note - 20260802

The price of credibility

“Credibility has to be earned, and spent very wisely” will certainly be the motto for this week, and not just because of the wild swings in the equity market: the SP500 closing almost flat, adding a little more than a quarter of a percent, while the Nasdaq also closed almost flat, losing a little more than a quarter of a percent, shouldn’t fool you about how this week “felt”.

Cross-asset performance for the week ending August 1. USO led the wild ride, swinging from -7% to +0.89% by the close, while the VIX ended right back at 16 after briefly touching above 20 midweek.

At one point on Wednesday, the picture was pretty ugly: the Nasdaq was down 3.5%, the SP500 1.5%, and the VIX closed above 20. Yet 48 hours later, all was forgotten, and we ended the week right on VIX 16.

So what exactly happened? Let’s start with the most pressing question: what was going through Chairman Warsh’s mind heading into the post-FOMC press conference on Wednesday? And what went through his mind when he saw the reversal happening, as the market was clearly testing… his credibility?

Let’s rewind: inflation is high, well above target, and Chairman Warsh has never hidden the fact that he did not like that. In fact, not at all. He is of the opinion that his predecessor was way too lenient with the target, and even more with the market, cajoling it with forward guidance and not being data-driven enough in the end (sic…). So rates will rise. Ok.

But when? When they will. Ok. But why not now, then? Inflation is high, the war in the Middle East is still raging, and oil volatility gave us another ride, moving from -7% back up to flat by the end of the week. So why not now? Because right now we are observing the market, and they got our memo.

Ok. Stupor and silence in the conference room. Even the Bloomberg journalists lost their traditional reserve and ended up calling BS on what the Chairman had been delivering, with the skilled sleazy tongue of a McKinsey consultant. And the market did not like it either. After an initial relief during the presser, it turned violently, and rates finished the week materially higher than where they started.

Your bluff is called, Mr. Chairman — see you in Jackson Hole.

If you only trade the equity market though, you may be thinking that the Chairman did not matter much: 200 points later in the SP500, helped by strong earnings from Amazon and “softer” (wink wink) inflation numbers on Thursday morning, and all is forgiven, right?

Almost. Let’s have a look at some numbers.

SPY and QQQ realized volatility since the start of the year. QQQ has climbed back near 28% while SPY sits at a more modest 16% — the tech/broad-market gap our forecasts have been flagging all month.

When picturing realized volatility over the last 10 days, the number gets up to 16% in the SP500. It’s not small, but it’s also far from the wildest situations observed this year, especially in March and April and during the month of June, when some sector rotation was happening. It’s pretty much mid-range.

For the tech sector, though, it is still quite high, and one should definitely be careful, especially with short-dated options. We have been pretty adamant over the last month about drawing your attention to the risk in the tech sector, and the VRP term structure is still showing the same thing.

QQQ’s VRP term structure as of July 31. The front of the curve is still deeply negative — you’d rather be long options than short them in the very short expiries.

The edge is not there at the moment, and in fact, you would likely be better off being long options in these super-short expiries than the other way around. Gaps up or down are legion these days in the tech sector, whether because of earnings, news from Asia, or whatever hedge fund liquidation is happening (more on that in a second), and you do not have to be the counterparty of a market running on fumes.

QQQ’s 30-day regime timeline over the past year. Implied volatility has settled back near 25%, its lowest level since early June, though the regime is still reading Post-Stress rather than Calm.

That said, implied volatility got nicely crushed in QQQ at the end of the week, as many important earnings are now behind us, with different fortunes, but without creating any major panic or fuelling investor concerns about the AI hype. We will need full confirmation from the semiconductor results over the next few weeks, starting with AMD and NVDA later in the month. But at 25% IV in the Nasdaq, we are at the lowest level observed since early June. Could this be the beginning of a normalization in the tech sector?

Quite frankly, we have no idea, and we may be a little skeptical about it: we’ll believe it when we see it. And for now, we’re still in the camp that there are much easier ways to make money if you trade volatility, one of them being… oil.

USO’s 30-day regime timeline. Implied volatility has climbed back into the mid-60s, and the signal has flipped from Calm to Positive VRP as the Hormuz and Bab-el-Mandeb headlines keep coming.

Sure, realized volatility is on the rise, and it climbed last week from 41% to 47%, helped by the usual headlines about a peace deal not being so far off, but just as close as the next “beating.” Heard that one before? So did we.

The good thing about situations where all forms of credibility have been lost is that you can rely almost exclusively on numbers and ignore the headlines: after another volteface, it looks like the beating may be postponed, after all.

That is a perfect condition for VRP harvesting: you have about 15 points right now, as implied volatility is stable around 60%, and considering the back-and-forth between hot and cold, it should probably stay here for a bit.

Last week we presented a way to do it while being long the underlying and selling a covered call. We think this approach is still valuable: one just has to be mindful that nothing is bulletproof against volatility. Being short the front-month calendar exposes you to any good news, like that 7% drop last Monday after a relatively calm weekend. Let’s see how oil futures open in a few hours.

In other news

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You have it? Probably not. Decoded with the right key (SHA-256), this translates to: “Leopold Aschenbrenner has terrible instincts and he will eventually fail spectacularly.” A remarkably prophetic call from Agustin Lebron, the author of The Laws of Trading and, more recently, a researcher at an AI hedge fund that has been performing extremely well.

His fund, Situational Awareness, had reportedly been up more than 1000% since inception before… the debacle: a last-minute phone call with Kenny G, who ended up sweeping up almost the entirety of the fund’s public equity book at a distressed price. The fund’s assets shrank from roughly $45 billion to about $10 billion in a matter of days — Leopold got to keep his roughly $5 billion Anthropic stake, at least.

So what happened to the one named, not so long ago, the Nostradamus of AI, after his 165-page paper spread like wildfire in 2024? Well, unfortunately, the usual story in finance. Leverage and beta. In hindsight nothing to be excited about and despite having finance professionals around him to help manage the fund, there is always an intolerable level of pain that will make you fold despite being right… long term. A story retail traders know extremely well.

What is astonishing, if you ask us, is not so much the margin call — it is still the fact that finance still commits two cardinal sins: having a soft spot for geniuses, those who could transform silicon into gold despite no real finance credibility, and giving them vast amounts of money.

The other is to still think that wearing a suit and a jacket makes you well-intentioned. Wasn’t Citadel crying wolf about a potential rate cut in July, with obvious consequences for tech stocks already in flames at the time? Isn’t that being both the firefighter and the arsonist? Not unlike Ackman in the summer of 2023, calling bonds overbought and shorting them all summer long.

Don’t feel too bad for Leopold, we are sure he will come out of this much stronger (and with a few hundred million in his bank account anyway), but next time someone this young is front-page news in the FT, he may unfortunately be one step closer to a major career setback. And next time one of the big guys is using the media to put oil on the fire… you may want to find where the real interest lies…

Thank you for staying with us until the end, as usual, here are two great stories from last week:

• If you have not read the Situational Awareness paper, it is absolutely worth your time, especially two years after the fact: it is surprisingly accurate, especially now that GPT-5.6 Sol is all over social media, replacing… mathematicians.

• Whatever your skill set, you never know when a black swan can hit. As a relatively decent amateur athlete ourselves, we were moved a few years ago by the 14 Peaks documentary, picturing Nirmal Purja climbing all 14 peaks above 8,000 meters in just over six months. The documentary is absolutely fascinating, and you should watch it. We learned this week, unfortunately, that he was caught in an avalanche on Broad Peak in Pakistan along with nine fellow climbers. All ten, including Purja, have since been confirmed dead. May he remain a major source of inspiration for humankind.

That is it for us this week, we wish you a great (NFP + AMD) week ahead, and as usual, happy trading.

Ksander