Why Hedge Funds Are Deleveraging and Stocks Are Still Overvalued

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This is not like, oh hey, let's go up into the right. This is not that kind of environment. Uh you know, what I saw in the markets most of last week, what felt more like VWAP sell orders. It was just consistent, orderly selling. So, uh yeah, I don't I don't I don't like that. There there opportunities that will open up and emerge. I think it's kind of remarkable that the S&P is only down five points from all-time highs given the the trauma of news that's hit markets from multiple angles.

I mean, a question that I will ask on that is how much of this selling is people like, call it voluntarily de-risking versus involuntarily de-risking after the whipsawing in oil. Like, there are rumors running around the street that several of the major hedge funds are down like billions of dollars on some of these oil trades. So, I'm wondering if what you were seeing last week, Ram, was people being forced out of positions, deleveraging, debalancing, right? These sorts of things versus, call it, people who are otherwise liquid, have no margin concerns.

>> Yeah. Well, there's deleveraging happening, right? We had that deleveraging event start in crypto around 10 10 of last year, but pick an asset class. Private credit's deleveraging. Uh look at the gross leverage exposure that hedge funds have. They hit peak levels about a month ago. They're still in excess. So, they're deleveraging. And good names are being sold off because they're deleveraging. It's not about the name. The hedge fund has too much risk on. They have to deleverage. The quant funds and their factors aren't working. They're deleveraging.

Fundamental long short, they're deleveraging. The only players that are releveraging are the hyperscalers that are issuing boatloads of debt, like Meta and Amazon, including Oracle, to go go buy more data center GPU compute from Nvidia, who expects a trillion revenue between now and end of 2027. So, a question on that front then. If we're seeing everything sort of selling off in the manner that you're speaking, Ram, are we at the point now where people should just step back and let that go by? Are there sectors where you're starting to see value where you would step in and start lifting things?

Like, where where are we in this cycle? Cuz I I agree with you. We're seeing things like private credit starting to turn. You know, the the valuations are are extended. You know, like I'm looking at industrials, which is a major component of the S&P, and you've got names like Caterpillar and John Deere uh that are like 30 35 times PE and GE Vernova and Teradyne. Like it like many many like industrials are a bubble. They're a bubble. It's not only a bubble. Bubbles are great. They're a great way to make money.

You want to ride the bubble up and then get out when the bubble pops. But the bubbles also pop. We're on the right shoulder of the bubble. So, there's some value maybe in homebuilders if you believe mortgage rates come down, but at the same time the 10-year is going up cuz inflation hurts stocks and bonds. They hurt stocks and bonds. You don't get the diversification benefit. So, I think this is a time to get smaller in terms of your risk exposures and uh wait for a a real capitulation. We actually haven't had that yet. Haven't had a real capitulation.

Uh or where value really uh emerges. Where are you on crypto, Ram? I was going to last speaking last Monday we were a bullish. You say we were all Last Monday we were all bullish, right? For those three days score at home, right? And now I work at B4K. I believe all of us said if we were buyers we'd be buyers of Bitcoin there. That's right. >> We were right then. I You're at a key level. You're at a very key level. Getting some resistance. Where are you Where are you at Bitcoin now? So, this is 74 right now. I was just looking up. My my view is that Bitcoin is running on MicroStrategy's, or I guess it's Strategies STR C issuance.

That is keeping the machine going. And they are doing a great job marketing STR C. It's attracting new flows. They had record volumes last Friday. So, when that marketing process starts to slow, then I believe the bid for Bitcoin will slow. So, I would take chips off the table now. Okay, but then that's not Is that driving into alts, too? I mean, we're seeing of all the darlings, ETH is materially outperforming. So, what's that correlation? Is that Is that just Is that just Tom Lee or retail saying, "Wait a second, Bitcoin this this correlation between gold and Bitcoin, which we've constantly seen Bitcoin always trails gold, and the catch-up trade is now on. We've been watching uh uh BTC to gold ratios that's starting It

looks like it's it's it's uh it's bottomed, it's coming back. And then ETH pops up. And he's like, "Hey, remember me? Uh Yeah. outperforming it all." That's just correlation, right? China created the bid in gold, and other commodities followed suit. China's not buying other commodities. Something to note, the commodities are showing weakness now, too. Look at the DBC ETF. Look at gold, silver, or copper. It's an unusual state of affairs that we have right now in markets. You have you know, uh you know, this is this is a a higher volatility, higher risk market.

Better to wait for the fat pitch that it'll present itself at some point. >> Look, I I I I still think that there's opportunity here on the crypto side because, to your point, with the dollar decoupling, uh a lot of sovereigns bought gold. And when they bought gold, gold went way up, and Bitcoin didn't move. And then the Bitcoin maxis were like, "Oh, no. Uh my store value, what happened?" Like, it this whole digital gold narrative is breaking down, right? When it never did. And now that things are settling, they're like, "Wait a second. Now gold's Now Bitcoin's starting to get a bid. BTC to gold ratio is coming back. Wait, maybe the narrative never broke down in the first place." And I do think that's

a tailwind. On the ETH side, like, it's just again the fundamentals. The fundamentals of an institutional crypto market with a really weird a delightfully weird asset. It's infrastructure. It's a tech company. And it pays yield. And it's ultra-sound money. And they're starting to get their head around that a little bit. And so, I do think that that's that's going to be the tailwind on on the ETH side going forward. Of course, we're having Austin and I are arguing over the role the ETH going forward, which I we can talk about in a little bit, but I don't know. I I feel like it's it's still a decent setup for for crypto. I said it last week, I was right. Uh But it sounds like you're neutral now, Ram. You're coming You're pulling back.

You're pulling back >> I'm more bearish than neutral. You're bearish. Okay. Bearish. >> I also I also want to throw a dart at this one that I think is maybe something we don't see very effectively through the US markets lens, which is to say, one of the things that you've got to think about from a non-US person's perspective with Bitcoin is that this is your way to get your money somewhere that is not exposed to your current system. If we're seeing increased geopolitical shocks out of places like Iran, which could bleed into Russia or bleed into China, and you're somebody who's there, this is about the time when you're supposed to start buying Bitcoin if you believe that thesis. And Tether.

And Tether. Actually, yeah, Tether supply expanding would be another thing to keep your eye on. Like, if I think about this, you should see Bitcoin price going up, but also Tether supply expanding. Yeah. >> But I I would be watching for those signs as a countervailing factor to US market forces here. Yeah, I would look at US dollar also. Like, US dollar strength and if you have a flight to safety towards US assets, then that doesn't help digital assets. We'll see. You know, it's it's going to turn on facts on the ground around Iran.

That's what the whole thing turns on. >> Yeah, 100%. >> And it's reading what Trump's plans and goals are. I'm saying that on the margin, it looks like a conflict will last longer based on his comments. What would Wurst do in this situation? Let's just say we had Wurst instead of Powell. What do you think would happen? That's an interesting question. I mean, in this situation for the United States, you're going to expect energy prices to go up. But the problem is cutting rates doesn't really help you the same way to supply shock. That was kind of the lesson of the Federal Reserve in the '70s, right? You got to make sure not to cause even more inflation by doing that.

To be honest, this feels kind of like the situation where the Fed sits on their hands. Right? Cuz they're like, "We can't cut our way to more oil. We don't want to cause inflation elsewhere." The thing that I actually I think would contraindicate that stance is the job market starts cratering. It is a you know, it is a great point though, Chris. Like, it has been strong and resilient. It's It's like a change of character. There's no doubt about it, right? So, like, it's hard to have conviction, I would say, one way or the other. Um I I think that I think if Wurst is in the seat, it would be different. It wouldn't be, "I'm Jerome Powell, I'm on an island." It would be, "Uh Secretary Yellen, let's put our heads together.

What do you have? What do I have?" And I think maybe there's some of that going on already, maybe not. Um but I think it'll be much more coordinated approach. Which should in the end be beneficial for the economy, I think.