Volatility.
It’s the word of the year.
Even before this year started, I predicted we’d see persistent volatility in 2026, and that the we should be profiting from the market’s constant back-and-forth with short-term options trades.
Well, fellow Moneyballers, it turns out we weren’t alone.
Because it seems like some of Wall Street’s biggest firms and hedge funds have not only been cashing in on these massive market swings — but also stoking the flames of volatility and uncertainty to drive their profits even higher.
Get the full story in today’s video below:
Video transcript:
Welcome to Moneyball Economics. I’m your host, Andrew Zatlin.
For some time now, I’ve been sharing with you my expectation that the markets are going to be super volatile.
In fact, that volatility is going to ramp up until we get past the midterm elections.
A lot of reasons for this market volatility, but the primary one is that we expect to see interest rate hikes, but we just don’t know when. We know they’re out there on the horizon. We know that it’s measured in months when it’s going to happen, but we just don’t know. And as a result, a lot of players in this market are very nervous. There’s a lot of uncertainty and a lot of reaction.
For example, every time a macroeconomic data point comes out, it could solve that question. Jobless claims come out last week. They’re super low. Oh, that means the labor market is strong.
That’s one of the two dual mandates the Fed has. Strong labor market, that means we’re going to get a rate hike sooner. And then just as suddenly the payrolls come out and they’re super weak. Again, job market looking weak this time.
Well, that means that the rate hike is further out and it’s on and on and on. It’s going to continue until we get clarity. In fact, this week, Wednesday, expect some market volatility because the inflation comes out. CPI, I happen to think it’s going to come out soft. I think the market’s going to like that. I think we’re going to see the stock market go up.
But you get the idea that I’m sharing with you that markets are very reactive. Well, what if I told you that some of the stuff that’s going out on out there, some of the stuff that looks like market volatility is actually arson?
That is, I think there are some hedge funds out there that are seeing the market’s reactivity, are seeing that nervousness, and they’re playing it by starting many fires and buying assets at fire sale prices.
Let me give you a case in point…
Go back a few weeks ago. AI-linked companies saw their stock prices collapse almost overnight. Just a steady, steady, steady drop, and then it stopped. Let me explain to you what I think was going on.
And before I do this, disclaimer, I can’t prove this, but boy, is the circumstantial evidence super strong.
To understand what was going on, we have to start with a guy who left OpenAI back in 2024 to start a hedge fund. His name is Leopold, I’m going to mispronounce his name, Aschenberger. 25-year-old kid. He knows what’s going on with AI, and he knows that a lot of CapEx spending is going to take place.
He builds a hedge fund and he starts buying AI linked CapEx stocks, Micron, Nvidia, you name it. He almost overnight is given $45 billion to play with. And boy, does he concentrate it on his AI bets, and not just the 45 billion, he leverages up.
And let’s go back and make sure we understand what happens when you leverage up. You’ve borrowed a lot of money to buy stocks. As long as those stocks are going up, feels great. You’re making money. As soon as those stocks come down, however, you’ve got to deal with that leverage. You’ve got to give money back to your lenders.
What if the stock prices continue to come down? Well, now you’ve got to sell even more assets and give them to your lenders and so on and so on and so on. If that was a standalone event, okay, but what if everybody else was in a similar position?
What if everyone else had leveraged up and focused on AI stocks? If you trigger a bubble popping, you’re going to see fire selling like you haven’t seen in a long time. And I think that’s what happened. I believe that the bubble in prices in these AI companies surged last year because he was just throwing money out there and more money attracted more money until finally we got into the earlier part of this year. And these AI stocks seem just unlimited, invincible.
Now suppose that you are a seasoned hedge fund player, not like this 25-year-old kid, but you see something very interesting. On the one hand, you see the market reactivity, you see the nervousness. On the other hand, you see the degree of over-leveraging that’s going along with these AI companies. And you think to yourself, I could make money if I can pop this AI bubble.
I can make money on the way down. But not just that, maybe I can make money on the way up, especially if I know when that bubble popping stops and I can buy assets at fire sale prices. I believe that’s what happened.
I believe we saw some arson. I believe that a fire sale was triggered by a deep pocket hedge fund that went out there and basically shorted all these companies until it got to a point where the prices started to go down.
And once they went down, it was like an avalanche. You started getting margin calls of basic players as well as this guy, Leopold. You get more selling, which triggered more stock prices going down, which triggered more margin calls and so on and so on.
Now, why did this stop? Why did the prices suddenly start to flatten? Well, you could argue it’s because people were able to meet the margin calls and things settled.
And that’s probably a lot of what happened.
But you could also argue that whoever triggered that bubble popping stopped. It’s interesting that Leopold had to sell all of his assets almost to a hedge fund named Citadel. Citadel, world’s fourth largest hedge fund, manages about $70 billion, and that’s before they leverage up.
They are easily capable of popping a bubble in the short term. They’re famous for playing games, for example, with GameStop. Easily triggered that bubble popping. They bought all of Leopold’s assets almost at fire sale prices. And you know what happens? If this was an artificial event, if this was arson, well, once the flames are put out, or rather once a hedge fund stops creating that fire, things settle down.
Well, now they’ve got assets at fire sale prices. They’re not going to sit on it. They’re going to try to push stock prices back up, which is why I’m fairly bullish about a lot of the AI CapEx spending.
But that’s not the only example of where I think we’ve seen market volatility taking advantage of market nervousness, of it being arson and not really related to the natural volatility of the stock of interest rate hikes.
A second though is tied to interest rate hikes. And not coincidentally, it does lead back to Citadel.
In this case, before we had the Fed meeting a couple of weeks ago, expectations of a rate hike were pretty low, around 10%. And then suddenly Citadel comes out and says, “You know what? We actually strongly believe that there is going to be a rate hike at this meeting.” Suddenly, the probability goes from 10% to 30%. What does that mean? It’s not some random bet on Kalshi or Polymarket. That means that big hedge funds are now taking positions and putting money down to protect themselves from a rate hike. Well, who are they betting with?
Who’s the other party to this bet?
I don’t know, but I bet it’s Citadel. It’s totally legal for someone in a hedge fund to say, “I think this is going to happen.” And then for that same hedge fund to take the positions that are going to be made, basically they made a market in playing around with everyone’s nervousness around the rate hikes.
And I think this is going to continue month in, month out. You’re going to have players come in and say, “The sky is falling. The sky is falling. Henny Penny.” And then saying to their clients, “If you want, I’ll give you the opportunity to invest as if it’s going to happen,” knowing for well that they created this agitation.
Doesn’t matter the source.
There’s a lot of market volatility out there, but it does help to differentiate so that you can distinguish when there is a little active arson and you can take advantage of it, like buying AI stocks. I don’t know if that’s the right move or not. I don’t know if Citadel did that or not. Disclaimer after disclaimer after disclaimer.
But I will say that some of the market volatility seems invented and not a natural outcome. Play the volatility. Play the volatility. It’s going to be here for a while and you are in it to win it and so am I. Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics