Mar 18, 2020 · 44m · capital-allocators
James Aitken – Systemic Risk in a Crisis (Capital Allocators, EP.126)
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In this episode of Capital Allocators, host Ted Seides interviews macro strategist James Aitken to examine the structural fragilities, financial plumbing dislocations, and central bank liquidity interventions unfolding during market turmoil, outlining key implications for institutional investors.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 21% of the talking time here. How this is scored →
Ted as informed peer 2.4 Guest teaching 5.8 Guest disagreement 2.2 Ted pushing back 0.3
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 24:42 Aitken attacks ETF liquidity claims as propaganda
James forcefully rejects the premise that credit ETFs offer true liquidity, calling industry claims 'buy-side propaganda' and 'absolute garbage' as discount dislocations widened.
Hardest push from Ted ▶ 35:59 Ted refocuses on whether systemic integrity is secureTed politely reels James back to his core question, pressing for a direct confirmation on whether financial plumbing issues present an existential threat to system integrity.
Biggest teaching moment ▶ 20:10 Aitken breaks down basis trade dynamics and Fed rate cut shockJames gives a highly technical, step-by-step masterclass on how 40-to-50x levered basis trades broke when the Fed's emergency cut inverted the GC repo and OIS spread.
Ted holds their own ▶ 12:15 Ted synthesizes systemic risk framing across crisis episodesTed displays macro familiarity by comparing the current plumbing stress and policy interventions to the post-Lehman collapse dynamics of 2008.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| AlphaSense Sponsorship: Verifiable Source-Driven AI for Allocators | 0 | 0 | 0 | 0 | This segment is a commercial sponsorship read by the host for AlphaSense and Intap DealCloud. There is no guest present or interactive dynamic to evaluate. | |
| Admired Leadership Sponsorship: Alex AI Leadership Coaching | 3 | 6 | 2 | 1 | Ted opens the interview by asking James to lay out the macro landscape amid the onset of the March 2020 crisis. James immediately reframes the discussion to focus on pre-existing initial conditions, low interest rates, and uncapped non-bank leverage rather than just the immediate catalysts. Ted asks a clarifying follow-up on whether a reckoning was inevitable. | |
| Mechanics of Rapid Drawdowns and Volatility Scaling Failures | 2 | 7 | 3 | 0 | Ted asks why the velocity of the market drawdown was so violent compared to previous crises. James delivers a detailed lecture on the fallacy of volatility scaling, shifting correlations, and invokes Richard Dennis's 1987 'slower fool theory.' Ted listens passively as Aitken dismantles popular risk management assumptions. | |
| Central Bank Strategy: Liquidity Bridge to Fiscal Response | 3 | 6 | 2 | 0 | Ted frames the core question around systemic breakdown risks similar to Lehman in 2008 and asks about the policy response. James clarifies that central bank action is merely a liquidity bridge to fiscal policy rather than a floor on asset prices. He outlines the mechanics of the simultaneous supply and demand shocks and the critical need to restore the Treasury yield curve. | |
| Dislocation in the Treasury Basis Trade and Bond Curve | 3 | 8 | 2 | 0 | Ted asks where observers would see Treasury curve dysfunction. James breaks down the technical mechanics of the 40-to-50-times levered Treasury cash-futures basis trade and how the emergency Fed rate cut unexpectedly blew up repo-OIS relationships. Ted listens as James provides an expert masterclass on market plumbing. | |
| Ridgeline Sponsorship: Modernizing Investment Management Technology | 3 | 7 | 4 | 0 | Following a mid-roll ad, Ted asks about ETF liquidity mismatches in credit. James bluntly dismisses the concept of self-liquifying ETFs as 'buy-side propaganda' and 'absolute garbage.' He outlines upcoming distress in CLO warehouses and BWICs, while identifying a multi-year opportunity for fully funded allocators. | |
| Financial Plumbing, Dollar Intermediation, and Central Bank Operations | 3 | 6 | 3 | 1 | Ted asks about signposts and metrics that indicate whether systemic plumbing integrity remains intact. James warns listeners against social media hyperventilation and explains cross-border dollar intermediation, citing Bank of Japan operations against JGBs and upcoming ECB dollar swap lines. | |
| Evaluating Systemic Risk: Bank Resilience Versus Shadow Banking Fragility | 3 | 8 | 3 | 1 | Ted summarizes Aitken's view to confirm whether systemic plumbing will hold up. James thanks Ted for pulling him back on track, then contrasts resilient regulated banks with fragile non-bank shadow financial institutions. He explains how CDS on listed asset managers reflects counterparty anxiety and details risk management tech disparities across the buy side. | |
| Macro Takeaways: Policy Bridges and Multi-Year Allocation Strategies | 2 | 4 | 1 | 0 | Ted wraps up the interview, acknowledging that while hope is not a strategy, patience is required. James delivers final synthesis remarks on the fiscal response and advising long-term allocators to prepare multi-year investment plans. |
Statements from this episode (14)
Aitken: Low Rates and Regulation Drove Unconstrained Shadow Banking Leverage
“The cool eye of financial history might conclude that by driving interest rates to ridiculously low levels, while simultaneously driving financial intermediation out of prudentially regulated banks, We or policymakers perhaps effectively uncapped leverage in t…”
Aitken: Post-2008 Rules Restrict Bank Capacity to Intermediate Volatile Markets
“Primary dealer balance sheets and large bank balance sheets around the world are necessarily more constrained as a result of what happened in 2008. But also that does rather limit their ability to intermediate markets, even markets as volatile as the ones we'r…”
Aitken: Multi-Strategy Funds Rely Heavily on Volatility Scaling
“The past several years have been all about volatility scaling. All these gigantic multi-strategy businesses, absolute return strategies and others. It's all about volatility scaling. When implied volatility comes down, I have to increase my exposure to keep up…”
Aitken: Volatility Scaling Relies on the Fallacious 'Slower Fool Theory'
“Volatility scaling, or the assumption of volatility scaling, I think had a large hand in the disruption we've seen, and just to finish this point, there was a marvelous article written in the autumn of 1987 by an extraordinary Chicago trader called Richard Den…”
Aitken: Banks can borrow €2T from the ECB at -75bps
“Eligible banks can borrow up to two trillion euros in total from the ECB at -75 basis points.”
Aitken: Treasury curve and futures broke down during March 2020
“There were times over the past week where there was no treasury curve and the treasury futures market was not functioning.”
Aitken: Fixed Income Funds Routinely Run 40 to 50x Leverage
“And all in all, I might run that position for four or five years, 40 to 50 times levered. And I know that sounds extreme. But that's what people do.”
Aitken: Fed's surprise rate cut triggered Treasury basis trade unwind
“And then, surprisingly for a lot of people, what promulgated the colossal unwind of all these RV positions was the Fed cutting those 50 basis points the other week out of the blue.”
Aitken: Fixed Income ETF Liquidity Creation is Buy-Side Propaganda
“The idea that ETFs were ever a self-liquifying instrument, that is to say that ETFs create liquidity in their underlying reference securities was always just buy-side propaganda. Absolute garbage. And to see dozens and dozens and dozens and dozens Of credit an…”
Aitken: Leveraged Loans Appear Stable Because Illiquid Assets Cannot Be Sold
“The reason that investment grade credit has been broadly widening out is because some of it's trading. The reason that leverage loans have been broadly well behaved is because people are selling all the liquid leverage loans they have, and all the less liquid …”
Aitken: US will likely implement yield curve control and semi-permanent QE
“We're going to have interest rates at very low levels. We're probably going to have some element of yield curve control in the United States. I don't know yet, but some element of asset purchases are going to be semi-permanent from the Fed, which probably serv…”
Aitken: Large regulated banks are far better capitalized than in 2008
“Unlike 2008, every regulated financial institution and all the big ones has more liquidity, has more capital and generally less leverage. If we assume that central counterparties are robust, given all the derivatives that are now centrally cleared, the financi…”
Aitken: Financial risk has shifted from banks to non-bank institutions
“Over the past 12 years, we have, as intended, transferred all the risk to non-bank financial institutions. So the risk is now in non-bank financial institutions and often in vehicles that own illiquid assets with daily liquidity, which is absolutely absurd.”
Aitken: Trapped LPs Short Public Asset Manager Stocks to Hedge Exposures
“If I'm an allocator to a particularly large buy side firm, and I say to myself, gosh, I can't redeem, but how do I justify to my superiors that I've done my best to hedge? I start shorting that stock. And I know it's absurd, but I've actually seen it happen ov…”