Paul Britton, CEO of $9.5 billion derivatives firm, says the market

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The market has seen tremendous price swings this year – whether it comes to equities, fixed income, currencies, or commodities — but volatility expert Paul Britton doesn’t think it ends there. 

Britton is the founder and CEO of the $9.5 billion derivatives firm, Capstone Investment Advisors. He sat down with CNBC’s Leslie Picker to explain why he thinks investors should expect an uptick in the amount of concerning headlines, contagion worries, and volatility in the second half of the year. 

(The below has been edited for length and clarity. See above for full video.)

Leslie Picker: Let’s start out — if you could just give us a read on how all of this market volatility is factoring into the real economy. Because it seems like there is somewhat of a difference right now.

Paul Britton: I think you’re absolutely right. I think the first half of this year has really been a story of the market trying to reprice growth and understand what it means to have a 3.25, 3.5 handle on the Fed funds rate. So really, it’s been a math exercise of the market determining what it’s willing to pay for and a future cash flow position once you input a 3.5 handle when to stock valuations. So, it’s been kind of a story, what we say is of two halves. The first half has been the market determining the multiples. And it hasn’t really been an enormous amount of panic or fear within the market, obviously, outside of the events that we see in Ukraine. 

Picker: There really hasn’t been this kind of cataclysmic fallout this year, so far. Do you expect to see one as the Fed continues to raise interest rates?

Britton: If we’d had this interview at the beginning of the year, remember, when we last spoke? If you’d said to me, “Well, Paul, where would you predict the volatility markets to be based upon the broader base markets being down 15%, 17%, as much as 20%-25%?’ I would have given you a much higher level as to where they currently stand right now. So, I think that’s an interesting dynamic that’s occurred. And there’s a whole variety of reasons which are way too boring to go into great detail. But ultimately, it’s really been an exercise for the market to determine and get the equilibrium as to what it’s willing to pay, based around this extraordinary move and interest rates. And now what the market is willing to pay from a future cash flow standpoint. I think the second half of the year is a lot more interesting. I think the second half of the year is ultimately – comes to roost around balance sheets trying to determine and factor in a real, extraordinary move in interest rates. And what does that do to balance sheets? So, Capstone, we believe that that means that CFOs and ultimately, corporate balance sheets are going to determine how they’re going to fare based around a certainly a new level of interest rates that we haven’t seen for the last 10 years. And most importantly, we haven’t seen the speed of…