Bloomberg's Tracy Alloway explains the basis trade blowup and why this market chaos is uniquely scary

And here she is. She's in the studio. Welcome to the show, Tracy. Thank you so much for having me. It's been a wild week. It's hard to It's hard to uh imagine it's it's just been seven days since Liberation Day. Yeah, it's crazy. And uh I was I was uh messaging you about this.

Uh I really appreciate you coming on in the midst of the chaos because I think it makes for a better conversation. But also uh is your when the markets are crazy, is your job crazier? Are you doing more episodes, more research, more blog posting?

I mean, I'm reading or or in some way is the job easier because there's just so much attention. Yeah. Yeah. You don't have to come up with a wild story. Hey, let me take you on this really obscure deep dive that you've never heard about. Yeah. What what's it been like at the on the work front? Yeah.

We definitely don't have to scramble for content at the at the moment. It's been a fire hose of content. We've been rushing out episodes. The great thing about OddLots is, you know, as you mentioned, we span this wide range of finance, markets, and economic subjects.

We did a lot of supply chain and trade episodes back in the 2020 pandemic when there were all these disruptions.

Now we can just tap our previous guests, you know, all all the logistics experts, the truck drivers, shipping companies, small and big companies, and ask them like what's going on and what impact is this actually going to have on your business? Yeah.

Um, I want to start by asking you to explain the basis trade to me, but like I'm a VC. So similar to explaining, you know, maybe like a child, like a child, like I'm 5 years old, but to a VC that, you know, considers themselves a macro expert, but maybe isn't. Yeah.

What will this look like in the form of a of a X thread in in three months or or a memo that's hastily written to every entrepreneur in the portfolio in two weeks from now? Break it down. Oh man. Uh it's going to be hard putting it in language for a VC.

What I would say most simply basically the basis trade is arbitrageing the difference between a cash treasury and a futures contract on that treasury and historically this has been a really safe trade. the spread or the difference between them has been pretty rangebound. Uh very very tiny.

Because it's been tiny, investors like hedge funds and active funds, what they do is they go out in the market in something called the repo market, the overnight funding markets, wholesale markets, whatever you want to call it, and they borrow from banks, from broker dealers.

And this leverage allows them to amplify the returns they're getting from this arbitrage between the cash and the futures. Now, the problem, and we've seen this a couple times now, is when the entire financial system starts de-risking all at once, suddenly investors can't really roll over these trades.

They can't necessarily sell the cash treasury bond in order to close out the trade because the broker dealers, they do not have the space on their balance sheets to actually absorb those extra bonds. That's the big difference. We saw it in the pandemic and we're seeing it now in 2025.

The thing to remember is really, you know, the financial system isn't built to handle like a 10% decline in the S&P 500 and a simultaneous surge in bond yields. It just isn't. There are supposed to be hedges that banks can tap to uh manage their risk, their capital.

Instead, they're de-risking all at once, and that has consequences. So, uh who's hurting the most? I've been joking that this is a bull market for short sellers.

It's a golden age in the VIX, but uh with regard specifically to uh the basis trade, is this putting more pressure on banks, hedge funds, will this actually affect the VCs that we were joking about or can they just kind of ride it out because they have LP agreements that date out like 12 years?

Yeah, definitely a good question. Who's hurting most? I mean, obviously hedge funds that had the basis trade on. Active fund managers, by the way, are are really big players in all of this, and we've heard anecdotally in the markets that they've been selling quite a lot, too.

Banks probably are not having a fun time at the moment. But on the topic of VCs, I mean, I think we have to step back a little bit from the basis trade and talk about just those surging bond yields in general. So, you know, bonds are supposed to be boring. They're not supposed to be moving around that much.

They're not supposed to be uh talked about as much as they are in general news over the past couple of days. And the reason is bonds are the benchmark benchmark borrowing cost against which all other loans are basically judged and measured. You know, refinancing for mortgages, refinancing for corporates and companies.

And this is where it comes in for VCs, right? Over the past few years, VCs have been showered in money. I know there have been breaks in that trend, but in general, showered with money. Cost of financing has been going up. That would seem to be an issue at least for a lot of VCs.

And then the one other thing I would add here is uncertainty in the market doesn't look like it's going to go away. So, yes, we had the pause on tariffs just announced today. We still don't know what's going to happen with China and the US.

Trump has basically destabilized every form of capital out there, stocks, bonds, domestic, international. It's not clear whether or not he's going to be able to put the tariff threat toothpaste back in the tube now. So, I think that uncertainty is going to stick around.

And what that means is less capital willing and available potentially to actually fund a lot of risky activities like VC, like tech. Uh I have this narrative and I want you to tell me if it's cope or not.

Uh somebody was uh I was talking to a friend and they were saying like this feels as bad as the COVID draw down or the SVB crisis and the interest rate hike that caused a lot of turmoil in markets.

Uh and I was saying like yes the magnitude of the move is significant and the economic indicators are significant but this is fundamentally different potentially because that toothpaste can kind of go back in the tube because it's within the president's uh like remit to just say hey everything is going back to exactly the day before liberation day that was a weird you know fever dream we're back to what it was before and markets might respond to that whereas during in 2020 20 no one could ever say, "Oh, actually like COVID cases are non-existent now.

It was not within the within the purview of the president. " Uh, is that a ridiculous narrative or is there something there? I mean, I think some investors would probably say in in certain ways it's scarier right now and I think you need to remember, you know, the experience of Monday.

So we have one person, the president, who's effectively controlling this entire narrative, this entire story.

As you mentioned, at any one time, he could have issued a statement announcing a softening in the position or maybe just saying something other than be cool to markets, something comforting and realistic for them. He chose not to do that.

And in fact, whenever there seemed to be a positive headline on the horizon, whenever people seem to be talking about like maybe things are going to start to calm down, the administration really seemed to rush out to bat those away.

And the big example was we saw that mistaken headline on Monday about a potential pause and the the White House was out, you know, from the other Bloomberg. Yeah. That's right. From Mr. Bloomberg. Yeah. They were out within minutes to uh slap that down. And this is the difference, right?

In previous crises, 2008 being a really good example of this. We knew that policy makers were basically all pulling in the same direction. They were trying to rescue the financial system and as part of that, they were probably wanting asset prices to go up.

I don't think that's been certain at all over the past seven days. Um, yeah. three. Yeah. What uh how do you rate the admin's spin on the announcement today? Like you know you you had said earlier that they just they blinked, right?

A lot of people um you know uh Trump supporters historically have just said like oh it's 70 chess like this was the plan all along, right? And so your your position generally was like no, he blinked, you know, that the tenure was like ripping in the wrong direction and like they basically needed to do something.

Uh is that is that correct? I think that's right. Um the thing to remember here is Okay, the great thing about 4D chess, 14D chess, whatever. We're so past 3D chess, which I think is the original metaphor. It's like those Gillette razors, right? We just keep adding blades.

I saw someone posted a picture of of one-dimensional chess, it's just one line. I thought that was pretty funny, right? Okay. So, when you have this 14dimensional chest or whatever, you have a great tool to basically spin whatever happens the way you want it.

And you know, I think it's very clear that Trump supporters are seeing this in a different way and Trump critics are seeing it in a different way. I would say the one thing to look at is the administration's own scorecard.

They've been pretty explicit that part of what they wanted to do on the US economy was to bring rates down, bring bond yields down. They want to make it cheaper for people to get mortgages. They want to make it easier for companies to refinance their debt.

They want that booming market in the US, a booming economy, all that manufacturing to be built which necessitates quite a lot of capital and that has to be secured and financed as well. And instead we saw bond yields ripping right like touching 4. 5% this morning.

So I think by that measure by the administration's own scorecard this has been a miss. Are there any other uh levers that the administration could potentially pull to bring down bond yields? What do you think's at the top of their tool chest right now?

Yeah, I mean the 90-day pause alone is having a pretty big effect and this has been the story of certainly today, probably the past three days is the whiplash in markets. So, you know, stocks plunge, stocks rise. I think the last time I looked at the S&P 500, it was up like eight or nine%.

Um, you have to keep your eye on it at all times on this day because it moves around so much. Same thing for bond yields. So, after the announcement, we saw the 10-year I think it went down to like 4. 36% something like that. That's a a pretty big drop.

And then just to give you an idea of what the mood has been like on Wall Street and how whiplashy everything has been, Goldman Sachs actually put out a note this morning saying that their baseline forecast for the US economy was now a recession because of tariffs.

About an hour later, we had the the tariff pause announcement and they had to send out another note saying that they were rescending their forecast. Wow. And no US recession was on the table. What percentage of Truth Social's users do you think are finance bros like trying not to miss the next trade?

Like I have to imagine like there has to be some edge in being you know in the first hundred people to see one of these now is a great time to buy. Is there is there do you think there's high frequency truthing where you know people are trying to get near the basically get going in somewhere.

Um, but yeah, how do how do you um uh what what's your I mean I I don't I don't even know. I was gonna I was going to ask like we don't even need to go there. It's going to get too political. Um what do you what do you got, John?

Uh, I I mean I guess I want to know um I was kicking around this idea with with with Jordy earlier on the show that um there are a lot of ways to evaluate these new policies and new regimes and there's been a lot of discussion of like this isn't just a slight change in trade policy.

This is like a complete flipping of the board, a complete re reevaluation and it seems like uh the most cautiously optimistic folks are like maybe this is short-term pain for long-term gain.

Um but there's been a little bit of squirminess amongst supporters to say oh well I was joking uh earlier that you know well you know the 10-year is yielding more so it's the best it's a better time than ever to give your money to America and you'll earn more money on that money and so maybe that's good for that type of person.

Uh and you can kind of spin any of these economic indicators in a positive sense uh if you try hard enough. But the the measure that I use uh is one that I go back to the Trump one presidency and I look at the original tariffs on China and those were not rolled back by the Biden administration.

And so it's it's what I'm calling like eventually bipartisan.

And so I'm I'm wondering if it's like I I don't know if I can really withhold judgment for I don't know it might be eight years or four years or however long it's going to take but uh if if this policy if we look back on it and we say okay yes like it stuck around it eventually became bipartisan is that a win or do we need to just look at it through an economic lens in the short medium and long term?

I mean that's a really good question. I don't know if you watched the uh the Trump press conference that was just on a few minutes ago, but he was talking about how Biden left the US economy in a terrible position and wasn't able to strike good deals with China.

That I mean, I would say the Biden administration kept a lot of the restrictions on strategic exports to China over the past four years and in some ways actually went harder on China technology as well.

So, I just don't know how a bipartisan deal would actually be interpreted and viewed by not just politicians, but the general public. It's really hard to tell. Everyone seems to be on their own little plane of reality at the moment. So, who knows? Uh, who are you tracking?

I mean, you mentioned that you went through uh the logistics and the shipping folks and the ones that are most impacted like they have iPhones on planes right now. Uh, that's the most immediate impact.

uh what do you think the second and third order industries that are most important to uh track in order to understand the impact of the tariffs as they evolve? Yeah, I mean oil is a really big one and in fact we had a really interesting survey from the Dallas Fed.

I think it was last week or two weeks, I can't remember because so much is happening. But they're basically in charge of the oil patch, right?

They're they're down in Texas um monitoring what's going on with energy businesses and they put out this survey where they basically go to a bunch of oil companies, you know, drillers, suppliers, and they ask them, "Hey, what's going on? How do you feel about things at the moment?

" And the replies are all anecdotal, but you know, the respondents, they talk about how how they feel and they put like little numbers on it. They they grade the vibes um as you might put it, but they also get to write written comments. And again, they're anonymous.

But if you look at what was in the survey one or two weeks ago, those written comments were dire. I mean, people people were talking about how the threat of tariffs, and again, this was before the tariffs were actually unveiled, how bad the threat of tariffs actually was for their business.

And I remember there was one quote in there. It was a supplier for energy companies saying that he had gotten a call from a customer in Canada asking them if they could move production to Canada because they were worried about the tariffs. That is the opposite of the, you know, presumably intended effect of all of this.

Yeah. I I saw actually Mr. Beast of all people commenting on the tariffs. said, "Ironically, because of all the new tariffs, it is now way cheaper to make our chocolate bars that we sell globally, not in America, because other countries don't have a 20% tariff on our cogs, which I never thought I'd see Mr.

Beast use the word cogs, but he's in the business now. " You know, things are wild when Mr. Beast is making uh coherent, you know, tariff commentary. Yeah. No, and it makes sense. Like, he does shel globally. He has a massive global audience and he makes everything in America now and then he sells it all over the world.

But it makes sense that he would take some other stuff offshore. Where do where do you look for signal? Right. You obviously have your Bloomberg terminal.

Uh I feel like Joe shares more screenshots of that than than you do probably, but where do you look for signal in a world where everybody is conflicted in a different way, right? Like some people are, you know, fun some of the loudest people of the last week are fund managers who have big positions on the line.

Um, and everybody's got some conflicts, but I I'm curious how you try to sort of like see through all the noise. Both Joe and I are glued to the Bloomberg terminals and uh Twitter X interfaces at all times.

One of the things I I've kind of enjoyed doing over the past week is just uh basically looking at what the hosts of the All-In podcast are saying online and then assuming that the exact opposite is going to happen. So, you know, we had David Saxs, for instance, talk about like, oh, the crash is over.

Then we saw stocks plunge again. We saw Chimoth. He was he was very much in favor of the tariffs. He was kind of cheering them on. And he was also criticizing stock investors who were, you know, complaining about their losses. I think he had a David Lappel quote basically saying to, you know, shut up about those losses.

Yeah. And then at the same time he starts talking about how he's buying uh credit risk, credit risk insurance through CDS. So effectively betting against corporate America at the same time he's talking about like how good these tariffs are going to be. Yeah.

Uh how do you think about reading into the the insider commentary that's happening?

There's there is that take that it's like oh like they're wrong and you do the opposite but at the same time like proximity to power is a valuable source of information uh that you have to imagine that there's real information that's being disseminated even if it's just like oh this is the vibe and and and I'm passing that along.

Uh how do you balance those two things? Yeah, I think you're absolutely right.

like VCs are very good at interpreting the vibes and in fact I remember we had Jason Calakanis on the show a few years ago and one of the important things we learned from him is that the emphasis on the vibe shift so you know back in 2020 a lot of technology companies made money hand over fist um but a lot of them didn't right and and the criticism was if you cannot make money in this extraordinary time period when rates are really low and people are scrambling for all these different tech services because they're stuck at home, then there's a real problem with the business model.

That was like that was one of the narratives. But the point Jason made was that some of this made sense because investors at that time, they were not demanding that companies actually make money, right? they were very satisfied if companies were just spending to grow their market share.

So I think that's really interesting and you know something to watch like what are investors actually going to start asking for here? Um sorry. No, I had a I'm curious.

So we we spent the beginning of the show talking about Apple specifically and the position that a you know Apple basically has like a China problem and that like you know if your supply chain is dependent on China and China invades Taiwan at some point like you're probably not going to get uh certainly not get as many iPhones or components out of there.

Then they also have a Trump problem and that they're just sort of like probably also internally refreshing Truth Social, you know, wondering uh what what uh Trump's going to do to their business next. But um Bill Aman had a post. This was uh right around when we started the call. He said, "Time is not China's friend.

Every US company that sources products in China is in the process of finding alternative suppliers. Supply chains are timeconuming and can be expensive and challenging to move. But once they're moved, they are sticky. Tick- tock.

" I look at this and I'm like, if we have a three-month pause on tariffs and, you know, the Chinese tariffs are still happening, like sure, you know, it's hard for me to see, you know, for for these big multinational firms like Apple or Nike, it's not like like yes, they're starting to make moves, but I'm not sure that of course time isn't their friend, but I I I don't know.

I'm not sure I I sort of broadly agree with this take yet. I'm curious how how um how you think Apple should just be like responding to this in general because it feels like it's going to be this sort of like dark cloud, you know, over the the sort of share price for basically potentially a decade, right?

The sort of big China problem. Yeah. So, a couple things on the China problem. So, number one, the 90-day pause on tariffs on pretty much every country except China opens up a pretty big window for companies to actually start arbitrageing, you know, manufacturing costs between China and the rest of the world.

We saw that in the first round of Trump tariffs back in 2018. a lot of Chinese production just moved across the border to Vietnam or it moved to Mexico and effectively, you know, these were Chinese goods that were just being shipped somewhere else before they were shipped into America in order to avoid the tariffs.

That's a real possibility now, especially if Trump sticks with those higher rates um on tariffs, the ones he threatened earlier today. And then the other thing I would say on China, you know, the the thing to remember is China is in a really interesting place right now and obviously so is the US.

The Chinese economy has been slowing and as part of an effort to reverse that. Policy makers are really trying to to revamp the whole structure of the system and increase consumption domestically. They want people within China to be buying more goods.

At the same time, the US seems to not want people to buy a lot of goods or at least not foreign goods. And we're all about manufacturing. Um the the roles have reversed, right? The the US wants to be a manufacturing powerhouse and China wants to be a consumption powerhouse.

It's very weird in many ways, but the big question is going to be like how successful is China in transforming its economy? Because if it manages to do that, it it never really has before, but if it manages to do that this time, that could be a pretty decent buffer for, you know, some of the the economic uh impact.

Yeah, the grass is always greener on the other side, I guess. Uh I want to talk about the penguins. Uh, you know, I saw that there there are tariffs on the penguin island. Uh, everyone was laughing at it.

But it it seems like, you know, entrepreneurs are so enterprising that if I needed to do final assembly on some penguin inhabited island to avoid a 200% tariff on my Chinese good. Like, there is an economic equation where I would actually do that.

Was it that crazy or do you think there's some theory to the Penguin Island getting tariffed? You're going to ask the penguins to put together your uh your iPhones. I mean, probably like bring in people and set up a basic assembly.

I mean, it like it has a high cost because you got to get there and get back, but at a certain point, it maybe makes sense. I don't know. Is it completely crazy? I mean, look, I think moving production around is definitely a possibility. Are we going to move it to tiny islands somehow? I doubt it.

And this kind of like this opens up the question about why the US is doing this in the first place. So for instance, one of the tariffs that Trump unveiled last week was I think it was like a 30% reciprocal tariff on the island of Nu. Like this is a tiny island. It primarily exports like pig meat and sausages to the US.

It's like a million dollars of pig meat a year. So, what exactly do we want to get from an, you know, a place like Naru? I I don't think they're going to be buying Ford cars when they have like basically 12 miles worth of road. Yeah. Uh I want to talk about uh Tik Tok a little bit.

It's it's been odd to me that the tick the progress on any any news around Tik Tok has been so slow and yet the tariffs have been so fast and aggressive. Is there some underlying thesis there?

Is Tik Tok one of the chips in a larger discussion or do you think it's just like h it's just low priority relative to everything else? And I really don't know. It's it's very hard for me to tell what the administration is prioritizing at the moment.

And I got to say, you know, on the same day we saw Trump make this huge announcement, Howard Lutnik said it was one of the most important truth social posts ever written. The same time he announced the 90-day pause, he also signed an executive order to uh increase water pressure in showers. Oh, yeah.

Like this actually happened. You know, he he signed the order. There are stories out there where he's saying no longer will American showers be be weak with low water pressure. I mean, I don't know.

With everything going on in trade and markets, I I might not take the time to to fight against low water pressure, but you know, the president is idiosyncratic in that way. He loves a good headline. He loves starting a news cycle. I think if it doesn't happen in a single day, it's a failure.

He's like uh trying to distract the panic by giving them, you know, uh uh you know, more water pressure. That's his strategy, maybe. Yeah. Yeah. I mean, so, so I mean, you've obviously been following this very closely.

Uh, we'll we'll let you go in like two minutes, but uh just general like predictions for where this goes or how people should be thinking about this more holistically. Uh because if this is what it's going to be like for the next four years, it's going to be uh full employment for us.

Uh but a lot of chaos for everyone else that's maybe listening. Um uh where do you think this goes and what what are your big takeaways from from the last week? Yeah. content for us, but uh bad news for a lot of other people for sure. I mean, I think it goes back to that uncertainty element.

So, the first thing you learn in financial markets is investors hate uncertainty. What we've seen over the past week has been in many ways unprecedented. Like a single man, the president controlling this entire narrative around trade. We've seen fake headlines that have had a really big impact on markets.

The reason they're able to have such a big impact on markets is because investors are hanging on every single word from the president. And so if they think the president has said, "Oh, there's a 90-day pause," they react to it, right?

That is really weird where we have this like single source of information um that the market is focused on and that's not going away like the threat of the tariff as I mentioned like the the threat the tariff threat toothpaste not going back in the tube and I think even if we see countries really rush to strike some trade deals which they might they might actually do the threat of tariffs is going to be hanging around in the background.

around for the next four years. People are going to be wondering about what exactly America is trying to do here. It seems very clear that Trump thinks, you know, America's special status in the financial system, the dollar's status as a reserve currency is a burden rather than exorbitant privilege.

A lot of people would say America benefits from this. Trump doesn't seem to see it that way.

I doubt he's gonna change that particular world view over the next four years, but you know, maybe he starts listening to some adviserss um and he tones things down a bit, but I I really think the uncertainty is is here to stay for sure. Well, let's hope we get some certainty. Uh prediction, more uncertainty.

I think that's a we can lean we can lean on we can lean on that at least that is certain. Yeah. Well, thanks so much for joining us. This was a fun conversation. Thank you. fun hopping on. Uh, have a great good luck with everything. We'll be following along. We'll talk to you later. Cheers. Bye.

And next up, we have Bass Power coming into the studio. We got Justin Lobas from Bass Power announcing a massive round. Get the size ready. I had no idea how big this round was. He told me he was announcing like a series B and I assumed, oh, Series B, 20 million, 30 million. It's 200 million. It's 200 million.

He's going to break it down for us, explaining what they're going to do. Uh let's read through their announcement uh while we wait for Justin to join.

He says, "We're excited to announce that Bass Power has raised $200 million in series B funding co-led by Addition, Andre, Lightseed, Valor with support from Thrive Capital, Altimter, Trust Ventures, and Terrain Capital. Additions Lee Fixel joins the board alongside Antonio Gracias of Valor Equity Partners.

" What a stacked board. And we'll have to ask Justin about it. He's here in the studio. Welcome to the show, Justin. How you doing? Congratulations. Congratulations. Absolutely phenomenal series B announcement. Uh, how are you doing today? Can you hear us? He's locked in. He's locked in. He's building.

He's putting the 200 million to work already. How you doing? Nothing. I'll keep reading. Power demand is soaring and the grid must evolve to meet the challenge. We're accelerating an energy abundant future through distributed battery storage and investing in American manufacturing capabilities needed to make it real.

Another company that's focused on American manufacturing. We've talked to a few of them. All major beneficiaries of the tariff chaos to some degree, although I'm sure that there's deeper supply chain stuff that we'll get into and try and understand uh where all that goes.

In under a year since launching, Bass has become the fastest growing one of the fastest growing battery storage developers in the US. More importantly, we've assembled a talent-dense team of engineers and operators all focused on modernizing the grid to make more power more reliable and affordable. And let's