The Market Is Mispricing A Correlation Shock | Dean Curnutt

Jack Farley (0:00)

Nothing said on Forward Guidance is a recommendation to buy or sell any investments or products.

All right, everybody, welcome back to another episode of Forward Guidance. And I'm super excited today to be joined by Dean Curnutt, CEO of Macro Risk Advisors, as well as the host of the Alpha Exchange podcast. Dean, you're last on the show a couple of years ago, back in 2024 So it was wildly overdue to get you back on. There's a ton that we're going to talk about in terms of nerning out on derivatives, market structure, options, tail hedging, all that stuff. But yeah, super excited to have you on the show. For those that don't know, you would just love to hear a bit about your background and one, what was your career path like? What did you mostly focus on in the derivative landscape? And also a bit about why you decided to start a fellow Markets and Macro and Derivatives podcast. I'd love to hear about that too.

Dean Curnutt (0:56)

Excellent. Well, it is a pleasure to be back on. I'm a big fan of Forward Guidance, not just a great podcast, but also a very topical conversation in markets with Worch taking the helm. I've been doing this a long, long time, three plus decades. So I'm happy to still be standing and find honestly great joy in just thinking about risk in markets and uncertainty. And I think that's, I would say if I were to really boil down my craft, my area of study, my fascination with markets, it is in trying to think through uncertainty and whether uncertainty is properly priced by way of derivatives.

So my career path is I started Ednamora in the early 90s, got on the desk, a fixed income research desk in 1991, with an eight and a half percent tenure, a gigantic term premium. And I'll just remember I was working for the chief economist and the entirety of the kind of research was around the Fed trying to win bond market credibility and to lower that term premium. So that was a long time ago, but as we talk about, term premium now is so much higher than it was maybe a decade ago, there have been periods where it was much higher than it is now as well.

I did two years of business school after Namora. I got just fascinated with options. The theory of option pricing. And that's really been my career. I was at Lehman in the late 90s, sorry, B of A from 2000 to 2008 When the financial crisis hit, I just had this opportunity to start my own company, Macro Risk Advisors. And it was really a, I think it was a couple of things. One is folks were so blindsided by the financial crisis. We all talk about the big short and Michael Burry and Greg Lidman. So yeah, a couple of people saw it. There was widespread discussion of the housing bubble, but with regard to how the cracking of that bubble manifested itself in terms of option premiums and the surge in metrics like the VIX, credit spreads and so forth, the likes of which we'd never seen before, I felt like investors were really unprepared for it. And in my last kind of year or so at B of A, I spent a ton of time with people in credit markets. And by mid 2007, I was very convinced that they were seeing a worldview that the equity market had no idea, which that was really happening. And it kind of flies in the face of market efficiency to think that the credit market knows something that the equity market doesn't. By October of 2007, the equity market was at an all-time high. So I would say that asset classes can respond to things at different speeds.

And I also say that by early 2008, it was very clear that the banks were kind of compromised in their ability to service their client base because they had legacy positions that they were just trying to defend and risk manage. They were in trades at very much the wrong prices. And so to be able to really speak independently, I felt like it was a big advantage at that point. And that led to the creation of Macro Risk Advisors, an independent broker dealer focused on risk management and options. 18 years later, we're kind of doing the same thing.

And again, I'm really glad to have this conversation because with all the time I've been doing this, this to me is one of those times where the intersection of so many things is just really a fascinating time to be studying risk.