From $500,000 To $170 Million In A Few Months: The Next "Subprime Trade" Emerges

Tyler Durden's picture

Ever since a few far-sighted, contrarian traders made a killing by betting on the collapse of subprime in 2005 and 2006 - and by implication on the implosion of the capital markets - a trade famously resurrected in the latest Wall Street movie The Big Short (whose Michael Burry recently warned that "The Little Guy Will Pay" For The Next Crisis, again) everyone has been dreaming to uncover the next "subprime" - a trade that has a 20-to-1 upside to downside ratio, which can be put on in massive size, and which would lead to a quick and lucrative retirement.

So far the next "subprime trade" remains elusive, with global capital markets continuing to grind ever higher thanks to constant central bank manipulation, as first called out on this website many years ago, and as admitted recently even by such "serious" legacy institutions banks as Bank of America which in an attempt to explain market instability

Central bank’s risk manipulation well explains local tails


A good way to explain why we have seen local tail risks arise so frequently since central banks began to heavily manipulate asset prices is with the following analogy, illustrated in Exhibit 1. Essentially central banks, by unfairly inflating asset prices have compressed risk like a spring to unfairly tight levels. Unfortunately, the market is aware the price of risk is not correct, but they can’t fight it, and everyone is forced to crowd into the same trade. By manipulating markets they have also reduced investors’ inherent conviction by rendering fundamentals less relevant.


This then creates a highly unstable (fragile) situation that breaks violently when a sufficient catalyst causes risk to rise – overly crowded positioning meets a market with little conviction.

The above explanation leads to a critical line of thought: perhaps the next "subprime" trade is not shorting a mispriced asset at all?

After all, all assets are mispriced as a result of central bank intervention.

As BofA admits "the market is aware the price of risk is not correct, but they can’t fight it, and everyone is forced to crowd into the same trade", which is logical: after all why should one fight the Fed when any time there is even a 5% drop in the S&P500, the Fed can and will either jawbone and threaten to cut rates or launch QE4 or NIRP, or just do it? In doing so, of course, the Fed merely "kicks the can" and with every failed attempt at reprice risk and bring back some trace of price discovery, guarantees that the next market crash will be the most epic ever, one which will wipe out not only the Fed's credibility but the bedrock of the modern financial and economic system, a monetarist system based on neo-Keynesian rules. Frankly, the devastation can not come fast enough.

But first, why not make some money?

And if one is limited from generating 20-1 returns in a market of suppressed volatility due to a global central bank puts, perhaps the next "subprime" trade has to do with the process of actually putting the trade on.

A process which involves ETFs.

To be sure, we - and many others - had issued many warnings about the very nature of ETFs in recent years, especially during 2015. Here is a brief chronology of the countless warnings we have issued on this topic in the past year alone:

All of these warnings became realized on August 24, the day of the infamous ETFlash Crash which even the SEC remarked on in the last week of December with an 88-page note on "Equity Market Volatility on August 24, 2015."  What the SEC essentially said is that it is generally concerned with plumbing and exchange regulation, with an emphasis on ETFs.

To be sure the story of broken markets as a result of the epic proliferation of Exchange Traded Funds continued after August, with stories such as:

Is it possible that "the next subprime trade" was so obvious that it was staring everyone in the face for the past year?

A trade which involved betting on the collapse not of the central-bank supported market, but the death of the instrument which allows this unprecedented global central bank "put" to prop up markets, and which like the infamous coiled spring in the Bank of America "revelation" is just waiting for a catalyst to snap: in other words, betting against ETFs?

Actually the answer is yes, and for some, the "next subprime trade" is already happening.

Meet David Miller and his Catalyst Macro Strategist Fund (ticker: MCXCX). The introduction, provided by WaPo reads like something straight out of a Michael Lewis book:

The Michigan-native is betting against one of the most popular investment vehicles for mom-and-pop investors: exchange-traded funds. The bets have paid off, turning Miller’s little known Catalyst Mutual Funds into one of Wall Street’s most successful players in 2015.

It sure sounds like a story about one of the lucky few who correctly predicted in 2006 what would happen to not just subprime, but the overall market just a few years later... and would retired filthy rich.

The comparisons between Miller's story and the "Michael Burry's" of the subprime era don't end there, because the young asset manager has not only figured out what to bet against, but how to make a lot of money in the process: ever since it started making complicated bets against some leveraged ETFs, Miller’s Catalyst Macro Strategies Funds has since grown from $500,000 in assets at the start of the year to about $170 million. It achieved a more than 50 percent return this year, placing it far ahead of its competitors.

In a year in which virtually not one hedge fund generated notable returns, and most were an embarrassment, it is surprising that not all financial media outlets are talking about Catalyst's performance, which as shown below, is quite impressive. Behold the 2015 performance of the Catalyst Macro Strategy Fund, which according to Morningstar held a total of $169.5 million in assets most recently.


Miller's initial target in the broken sector: leveraged ETFs: "Our goal is to identify poorly designed financial vehicles,” said Miller, Catalyst’s senior portfolio manager. “The strategy has certainly worked out well for us."

While still a tiny part of the market, the growth of leveraged ETFs has been explosive. Nearly nonexistent in 2005, the market has grown to more than $20 billion this year, according to data from Lipper. The market has doubled since 2011.

The regulators have, as usual, been asleep at the wheel, making such debacles as August 24 a recurring reality, and allowing people like Miller to make outrageous profits by betting against the broken market:

[A]s the industry has grown, so have concerns around whether investors understand the risks. The Securities and Exchange Commission proposed rules in December to rein in these type of funds. And the Financial Industry Regulatory Authority, also known as FINRA, has cracked down on brokers who have sold complicated ETFs they didn’t understand.


“The SEC and FINRA have been coming down on them, and they still have not gone away,” Miller said. “Money keeps coming into them despite their poor performance.”

But if leveraged ETFs are the "BBB" CDO tranches in the subprime analogy, then regular, and just as broken ETFs, will be the A, AAs and higher which will be the next to flame out: "Even traditional ETFs aren’t immune from market volatility. Over the summer, the price of some ETFs dropped off a cliff, then bounced back within minutes. Investors who automatically sold as their value plunged, faced heavy losses."

Catalyst may have been the first, but many more are coming, looking to profit from problematic ETFs. New York hedge fund Hilltop Park has employed complicated trades to bet against some ETFs, according to The Wall Street Journal.

Perhaps the final analogy to the subprime crisis is the infamous straw that broke the camel's back: back then, just like now, the fulcrum security was safe... until enough bets had been made against it (infamously by such as Goldman itself, which via Abacus and others, was selling exposure to CDOs only to short them at the same time), at which point the bubble bursts.

And while 10 years ago it was the subprime bubble, this time it will be the ETFs that go first as more and more bets against them proliferate, and when they do, it will be all up to the central banks to preserve the last artificial asset prices in "markets" which over the past eight years forgot how to discount reality, and merely reflect the intentions of a few clueless economist hacks.

To help accelerate this process, we present Catalyst Macro Strategy's latest prospectus, with hopes more modern "Michael Burrys" emerge and take on what the fulcrum security of today's broken markets.

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38BWD22's picture



Yeah, this is all really going to end great.  Really!

God's picture

Look at this guy, huh. Mr Bigshot investor.

max2205's picture

I vote 7 year auto loan bonds

Tijuana Donkey Show's picture

Why should you leave 9 years out, and title loans?

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) Tijuana Donkey Show Jan 2, 2016 10:28 PM

Meh! 'TITLE LOANS' are only 4 the chumps who take out 7 year loans & miss the first payment... OH WAIT!

JRobby's picture

Call me when they are pumping title loans in mass for borrowers who don't hold title. OH WAIT!!!!

Karlus's picture

Looks like they do two strategies.


1) Reversion to the mean on VIX - Dangerous as a extended crash makes you homeless while you wait for your ship to come in


2) Shorting both sides of the leveraged ETF (A quick check of their holdings reveals vol insturmentss)


I think #2 is prob a better bet, IF you can get the options to work right. Problem is when TSHF, the spreads go retarded and you cant get out until options expire

Escrava Isaura's picture



38BWD22: Yeah, this is all really going to end great.  Really!


Exact. These so called investors/gamblers refuse to understand that they are not in charge.

Second: That there is no more growth on the real economy beside intervention.

Third: That we’re, and will be under state capitalism until financial collapse. Just look at Japan, Russia, China, South Korea….. and the list is long.

Fourth: That, after financial collapse, we will be facing commerce collapse and shortages’.

Fifth: Then, these nations will be facing civil disorder. If/when these governments lose control, these nations will be facing societal collapse.


These will be all in full view next decade. But not to worry, the propagandist/indoctrinated will be telling the masses that: “It came from nowhere. Nobody saw it coming.”




38BWD22's picture



Mm hmm, some good thoughts there, Escravita.

Yes, "No one saw it coming.", the same as always.

"Be prepared."  It may be the old Boy Scouts motto, but there is truth there.  Nobody else (well, maybe family or friends) will be looking after you, especially .gov or banks...


Oldwood's picture

Those "prepared" will be blamed. With every financial crisis we see our leaders telling us to SPEND and BORROW to sustain the American Dream, which they have perverted into a nightmare. Those who conserve, who limit their financial exposure and especially those who speak of what we face....WILL BE BLAMED. They are the TRUE terrorists by the definition of our "leaders".

NidStyles's picture

Guns & Ammo, and I don't mean the magazine. 

hungrydweller's picture

Now we see why the BOJ is carefully buying up the entire Japanese ETF "market".

Oldwood's picture

It is about maintaining control by maintaining the illusion.

JRobby's picture

They chased the bubbles around. Here, there, everywhere!

Mr Pink's picture

I can't wait til The Big Short II

May I suggest that Taylor Swift and Neal Degrasse Tyson explain how the banks fucked us this time

Steroid's picture

Your payout depends upon whether the other side gets a bail out.

Even Burry wouldn't have had anything without that.

Occident Mortal's picture

Do you doubt there will be bail outs?

Who are the shareholders of the Federal Reserve?

Who casts the votes to elect the Ferderal Reserve Governors?

The Federal Reserve is quite openly owned and operated by the big corporate banks.

The Fed was created by the banks, to protect the banks. This isn't a conspiracy, this is how the Fed describes the situation itself.

The central purpose of the Federal Reserve is to pursue greater financial inequality. To monopolise the wealth and power of the nation.

If the Fed had any other purpose whatsoever, it would not be owned and operated by the big banks.

Steroid's picture

I am aware of the role of the FED, even that of the Federal Government to double the debt in every presidential cycle.

However, there are mathematical limits.

Not to mention the 400 million guns vs. the threat of the tanks on the streets.

Will see how many times they can do it.(Fool me twice, ...)

JRobby's picture

"However, there are mathematical limits." (Laugh Track Deafening)

Reality ignored = Delusional


Reality Ignored: How Milton Friedman and Chicago Economics Undermined American Institutions and Endangered the Global Economy
Fred Hayek's picture

Neil deGrasse Tyson couldn't figure out how to determine how much the pressure in a football would go down going from 70 degrees F to 40 degrees F. The explanation might be beyond him.

Mr Pink's picture

I'm sure Taylor can help him out


Bif Naked needs the gig more than Swift does IMHO. Plus Swift would probably just start singing Shake It Off instead of being forthcoming and explaining the rationale.

Kirk2NCC1701's picture

What... deflate the balls like a Patriot? 

Tall Tom's picture

Neil deGrasse Tyson couldn't figure out how to determine how much the pressure in a football would go down going from 70 degrees F to 40 degrees F. The explanation might be beyond him.


Oh bullshit...


I am certain that he knows the Ideal Gas Law, that


1)   PV = nRT




2)  Delta(PV) = nR[Delta(T)]


Now it is established that...From


3)   Delta(V)/V = av[(Delta(T)]


where av is the Expansion coefficient, a known and measured quantity for most materials known to man.


If the Expansion Coefficient is not known then it can easily be Empirically Measured, thus deduced, by any competently staffed Materials Science Laboratory.


The rest of the Delta(PV) is due to the declining pressure to to the Delta(T).


Delta(T) is a MEASURED QUANTITY. since the claim that the ball lost Pressure due to the Temperatuure and we know the difference between the Outdoor Temperature and the Room Temperature of the Locker Room then the difference of those Temperatures is Delta(T)


Now considering that if w = PV, in this case then we know fundamentally that


4)   Delta(W) = Delta(PV) = [d(PV)/dP][Delta(P)] + [d(PV)/dv][Delta(V)]


where d(w) is understood as a Partial Derivative in this case as I am restricted from the limited characters allowed here on this website.


(The particular application of eq 6 in the Wiki entry,, is the form which I applied in this analysis. I believe that the curve is flattened sufficiently.)


Simplifying Equation 4 is really not too demanding.


5)   Delta(PV) = V[Delta(P)] + P[Delta(V)]


Solving Eq 5) for Delta(V) yields


6)   Delta(V) = {Delta(PV) - V[Dellta(P)]}/P


Substituting Eq 2 into Eq 6 yields


7)  Delta(V) = {nR[Delta(T)] - V[Delta(P)]}/P


This is the result of the Change in Volume due to the change in Temperature of the Football.


where V is the initial Volume of the Football at temperature T and P is the initial Pressure of the Football at temperature T.


Now as to the Change of Pressure with respect to the Temperature...


Eq. 3 can also be restated as


8)   Delta(V) = avV[Delta(T)]


So..hmmm...we need Delta(P)


Solving Eq. 7 for Delta(P) yields...


9)    Delta(P) = {nR(Delta(T) - P[Delta(V)]}/V


Substituting Eq. 8 into Eq. 9 yields...


10)   Delta(P) = [Delta(T)/V][nR - PavV] 


which is the change in pressure due to the change in Temperature.




If Neil deGrasse Tyson claimed not to be able to do this...THEN HE IS LYING.



Kirk2NCC1701's picture

Or, using Occam's Razor, he went to Columbia or Ha'va'd.

You know, da same place where bro' Barak went.

sleigher's picture

"I can't wait til The Big Short II"

I know you zhers probably didn't like that movie, likely because most of you understood what was happening back when it was actually happening.  The reason the movie is good is because people that didn't understand what was happening might get a clue now.  And next time around (there is a next time and it is probably close) maybe more will happen than idiots in tents yelling at rich people.  A critical mass of sorts?  Maybe I am just hoping a little too much...

Escrava Isaura's picture



I watched 5 clips on Youtube, say about 15 minutes and agree with you that for a Hedger that should had been pretty bad—kind of predictable scenes and too rehearsed and not genuine, in my opinion –however, it doesn’t seeing that way, because I read enthusiastic comments here from old Hedgers.


Anyway, it got good reviews and should help the masses. But I am going to take pass on this movie. And probably on The Big Short ll as well.



Sit down and watch the whole movie with a couple of reefers, a bag of popcorn, and some beer. Some of the tunes are good, and a few of the scenes are good. I give the movie a 8. Further, get a copy of Killing Them Softly which is another good movie that I rate about 8.

imaginalis's picture

"Wild Things" is a better movie, as is "The Intouchables" (not "The Untouchables"). 


Thanks for the movie references. I am a movie junkie and always appreciate moar titles to download and watch.

trader1's picture

"It's a Disaster" is a funny film.  

FreedomGuy's picture

I just saw the movie this evening. I was skeptical because everything in Hollywood comes through a leftist lens. However, they did a very good job and were very accurate on the things they covered.

What they left out was the government role in all this. They even sort of excused the SEC with "underfunding". No mention of Freddie, Fannie, Barney Frank or the Community Redevelopment Act and even Acorn.

What was encouraging was that the theater was full. A lot of people were interested. A 20-ish gal walking out stated that it made her want to vote for Bernie Sanders. I wanted to yell out or jump in but no point.

I will give it high marks, though. I actually did a presentation at an economics group on this topic and I remarked how it seemed impossible that no one did the very basic homework you saw these firms do that lead to their shorting the market. The other possibility is that they did do it and covered it up.

algol_dog's picture

There is nothing new in this strategy. There are many algorithms strategies available for shorting leverage vol products. Been a great trade with QE & ZIRP active, but who knows where it's heading now.

algol_dog's picture

There is nothing new in this strategy. There are many algorithms strategies available for shorting leverage vol products. Been a great trade with QE & ZIRP active, but who knows where it's heading now.

RadioFlyer's picture
RadioFlyer (not verified) Hopeless for Change Jan 3, 2016 8:31 AM


ZH Snob's picture

170 million or 170 billion doesn't really matter any more.  the important thing is to take those $'s and turn them into REAL ASSETS now, before the whole thing blows up and your fund is left with a glorious pile of worthlessness.

but of course they won't.  their business is in finding weaknesses in the system and exploiting them for profit, not in understanding the high risk and inherent weakness of their own strategy.

just as everything else is the financial inverse, the game now is to build a huge paper profit like Catalyst to eventually become the biggest loser.


" Hold my beer, and watch this. "

Tits up, yields down, money gone, oops.

When it becomes public, that's peak yield.

All the rest is the muppets getting piled on to the toboggan for the ride down the ski hill part of the yield return.

" We sheepled some folks. "

Boris Badenov's picture

Great! Didn't see the tiny print, "Past performance may...." If you don't know by now, Goldman is -180 degrees off for a very specific reason, then go ahead and have a Happy 2016! I'll look for you on YouTube.


pndr4495's picture

" Poorly Designed Financial Vehicles " - hmmm sounds a lot like what has developed in the commodity futures industry - when one needs the liquidity to stabilize a market, well presto changeo, it is NOT there, and instead of TRUE price discovery one gets predatory order slippage and FALSE price discovery. 

Boris Badenov's picture

The brakes didn't work, and the steering wheel came off!  Defective financial vehicle...good thing there's discounted rates for Central Banksterz.

Yen Cross's picture

  What insanity hath ZIRP wrought[ beaten out or shaped by hammering] on us?

 These kids have very limited understanding of the financial markets, and they're going to get burned hard, when they go to cash out their casino chips.


DipshitMiddleClassWhiteKid's picture

so mister yen cross..what will you do when SHFT?


think oanda will stay liquid and let you trade?

Yen Cross's picture

 I think it's an good idea to be diversified.

 Oanda is probably the best of the retail trading F/X operations.

Fortunately, I own land overseas, and have offshore access.

 Yes, I think Oanda would keep their doors open... They certainly did after the SNB debacle, and sucked up all the loses.

 FWIW, Oanda is Canadian based, and registered with the CFTC.

Mr. Schmilkies's picture

MCXCX  3% expense ratio, seems to be worth it.

BullyBearish's picture

Save the 3% and go all in XIV anytime the VIX hits 20...