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Speaker 1: M. This is Mesters in Business with Very Results on

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Speaker 1: Bloomberg Radio. This week on the podcast, I have an

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Speaker 1: extra special guest and a funny story about how this

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Speaker 1: podcast came about. I interviewed Boas Weinstein back in May

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Speaker 1: of two. It was one of the most popular podcast

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Speaker 1: we did this year. And when the folks over at

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Speaker 1: the Bloomberg invest conference came to me and said, Hey,

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Speaker 1: we're looking for somebody who's a little out of the

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Speaker 1: box snanker and kind of interesting. Um, who might you

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Speaker 1: suggest as a interviewee? That was easy. I said, we

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Speaker 1: just did this interview with Boaz six months ago. Everybody

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Speaker 1: seemed to really like it. He's very much an outside

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Speaker 1: the box sninker. Covers everything from credit derivatives, two spacks,

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Speaker 1: two stocks, and bonds, but from an unusual perspective, not

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Speaker 1: your typical investor. For for example, he's been an investor

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Speaker 1: in spacks because he looks at it as a guaranteed

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Speaker 1: uh fixed income return in a in a time of

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Speaker 1: zero with potential upside. Uh. So he's done that really

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Speaker 1: really successful. He's one of the five largest spack investors

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Speaker 1: in the world. He's the person in case you don't

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Speaker 1: know who boas Weinstein is of Saba Capital. He's the

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Speaker 1: person who made the bet against the London whale and

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Speaker 1: then went to uh JP Morgan Chase and presented at

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Speaker 1: one of their conferences and said, by the way, you guys,

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Speaker 1: you have this person in London that's sucking up all

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Speaker 1: of the energy options. It's a wildly lopsided bet and

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Speaker 1: it's gonna blow up. Oh nps, I've bet against him

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Speaker 1: and lo and behold when the London whale blows up.

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Speaker 1: Six months later, Saba Capital nets three or four hundred

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Speaker 1: million dollars on the trade. Just an amazing story and

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Speaker 1: incredible ability to look at risk and figure out when

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Speaker 1: it's a fair bet or when it's an asymmetrical bet,

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Speaker 1: where hey, if we lose, we lose a little bit,

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Speaker 1: but if we win, it's a giant home run. Uh So,

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Speaker 1: he's really an intriguing person. We did the interview at

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Speaker 1: the Bloomberg invest conference. So when you hear the audio

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Speaker 1: of this, it's a live event. You'll hear the you'll

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Speaker 1: hear the audience, You'll hear um people rustling papers. It's

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Speaker 1: not the usual. Hey, we're in a studio that's pristine

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Speaker 1: and you don't hear anything other than the two of

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Speaker 1: us speaking and breathing. Uh. So this was a live event,

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Speaker 1: but it was so well received and it was so interesting,

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Speaker 1: and he just is such a fascinating investor. We thought

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Speaker 1: it would be perfect, uh for the holiday weekend. So,

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Speaker 1: with no further ado, here is my live interview with

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Speaker 1: Sabbath Capitals Boas Weinstein at the Bloomberg invest Live Conference.

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Speaker 1: So this is the first time I'm wearing a suit

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Speaker 1: and tie, and I don't know how long. Um, and

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Speaker 1: I'm dead. He didn't tell me about the tie, sorry, guys. So, um,

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Speaker 1: so we previously had a conversation. Um was it earlier

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Speaker 1: this year? Last year? I can't even tell anymore. And

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Speaker 1: there were a lot of really interesting things that that

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Speaker 1: came up. I think this audience would love to hear

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Speaker 1: an update on what's happened since then. But but I

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Speaker 1: have to start by asking. You were a highly ranked

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Speaker 1: chess player as a young kid. You have your reputation

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Speaker 1: as a killer poker player and a dangerous blackjack player.

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Speaker 1: These involve making probabilistic assessments about an inherently unknowable future. Um,

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Speaker 1: seems like you've been setting yourself up for tail risk

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Speaker 1: and derivatives and trading since you were a kid. You're

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Speaker 1: giving me a lot of credit for having planned everything

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Speaker 1: since I was I I think the only tail risk

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Speaker 1: I was thinking about when I was five was was

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Speaker 1: pinned the tail on the donkey to be to be

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Speaker 1: quite honest, So you know, really I am. I enjoy

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Speaker 1: games of strategy, and it turns out that Wall Street

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Speaker 1: is the ultimate puzzle and challenge and and so. Yeah.

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Speaker 1: So I've been working on Wall Street since I was fifteen,

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Speaker 1: and I think, um, at a young age, I've already

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Speaker 1: seen a lot. So let's let's talk about what's going

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Speaker 1: on right now. We've discussed and you've brought up how

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Speaker 1: different this bear market has been from from recent bear markets.

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Speaker 1: What are the similarities, what are the differences? What makes

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Speaker 1: so unique? Yeah, So when you think about not only

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Speaker 1: what's happened, but even the investor behavior that it that

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Speaker 1: it um in genders um A lot of the tail

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Speaker 1: events that I've lived through. I was trading while nine

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Speaker 1: eleven happened. I was at the New York Fed the

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Speaker 1: weekend that Lehman was failing. A lot of those events,

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Speaker 1: not all of them, but a lot of them were

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Speaker 1: bolts from the blue COVID. You kind of had a

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Speaker 1: month from when people knew is a thing before the

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Speaker 1: market started falling, But they were bolts from the blue,

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Speaker 1: and if you had not done anything about it, you

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Speaker 1: had plenty of air cover to say, who who knew?

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Speaker 1: Who knew this would happen? What could I have done

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Speaker 1: in advance? Whereas this one has been so telegraphed when

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Speaker 1: it at least the initial part of it about inflation

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Speaker 1: being transitory and then transitory, and then transitory and then

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Speaker 1: not transitory, So there was a lot of time to

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Speaker 1: get worried and very little places to hide to say, um,

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Speaker 1: you know, it was not reasonable to have thought, what

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Speaker 1: if this forty year bowl market in bonds not only

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Speaker 1: comes to an end but does a sharp reversal. Those

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Speaker 1: were things that we and other managers we're talking about,

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Speaker 1: where the the sixty forty plans that we're using treasuries

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Speaker 1: as there, you know, as their antidote to a sell off.

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Speaker 1: It turns out the treasuries were the poison, and so

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Speaker 1: you know, this is this has been different in that respect.

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Speaker 1: It's also been different because you have so many different

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Speaker 1: problems swirling around some of them in conflict with each other,

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Speaker 1: so solve one at the expense of the other. And

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Speaker 1: then the number of new things showing up, whether it's

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Speaker 1: you know, um maybe untoward rumors about credit sweets or

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Speaker 1: what's happening in the u K. Guilt market, um is,

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Speaker 1: it just makes the number of balls in the air

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Speaker 1: enormous in terms of things non unknowns that could really

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Speaker 1: cause more than a sell off, but more like a crash.

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Speaker 1: So so let's talk about that. You've discussed multiple problems

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Speaker 1: and multiple areas taking place at the same time. How

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Speaker 1: do you distinguish between what's a genuine risk, what's unknown risk,

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Speaker 1: and what's truly an unknown unknown? So usually you have

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Speaker 1: your your known unknown like something is bad, we just

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Speaker 1: don't know how bad, and you can respond to it. So,

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Speaker 1: you know, nine eleven happens, it's not a good time

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Speaker 1: to buy airline stocks. You know, COVID happens, not a

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Speaker 1: good time to buy airline stocks. Oh eight happens. Probably

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Speaker 1: you should de risk from financials, even like the moment

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Speaker 1: after it happened. And here you just don't know exactly

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Speaker 1: what to do. So normally, for example, European investment grade

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Speaker 1: trades five basis points lower than US investment grade. Now

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Speaker 1: it trades thirty basis points higher, twenty five basis points higher.

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Speaker 1: Is that enough Europe is going to have a much

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Speaker 1: more severe recession according to those that that that motificate

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Speaker 1: and uh, And so whether or not you underweight or

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Speaker 1: overweight Europe is all about what do you think happens

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Speaker 1: with with Ukraine? Does it? Is there a chance it

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Speaker 1: gets asymmetric? What can be done to mitigate? And then

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Speaker 1: at the same time you have these other theaters, whether

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Speaker 1: it's zero COVID policy in China maybe extending well past

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Speaker 1: the party congress um, continuing to cause disruption in the economy.

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Speaker 1: So so really what's happened is people just feel risk

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Speaker 1: all over. They felt it now for ten months, and

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Speaker 1: they're de risking the things that are in their book.

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Speaker 1: And that has led to some things that are I

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Speaker 1: don't view as particularly risky blowing out as much as

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Speaker 1: things that I do view as risky. And that's that's

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Speaker 1: created some interesting distortions, interesting opportunities. So let's talk about

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Speaker 1: those opportunities. What has been overly d risks, What are

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Speaker 1: are looking attractive after investors throw the baby out with

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Speaker 1: the bath water, right, So not knowing where to focus

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Speaker 1: your arrows and instead of focusing on de risking and

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Speaker 1: the comments that Jamie Diamond made about bracing for a

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Speaker 1: hurricane and another sea Yo said bracing for a tornado,

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Speaker 1: and someone else mentioned some other weather weather disaster. You know, like,

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Speaker 1: what do they actually mean when they do that? How

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Speaker 1: do they actually brace other than like, you know, other

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Speaker 1: than a physical brace. What are they doing? They're a bank,

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Speaker 1: they have loans. They go to their loan portfolio hedging

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Speaker 1: group and they say, please increase the amount of hedging.

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Speaker 1: So what does the bank do. It looks at the

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Speaker 1: loans that it's made, often to the best companies in

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Speaker 1: America or in the world, and d risks where the

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Speaker 1: risk is. And so we did a number of trades

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Speaker 1: with banks where they're coming to us to say, in

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Speaker 1: the middle of all this, we want to buy protection

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Speaker 1: on Coca Cola, on Johnson Johnson, on Home deepo, Walmart,

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Speaker 1: you know, a T and T, Verizon, these big companies

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Speaker 1: that have a lot of dat outstanding in terms of

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Speaker 1: revolvers and and not relative to their their balance sheet,

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Speaker 1: but but relative to just the quantity of debt. And

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Speaker 1: so there are a bunch of names. In fact, I

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Speaker 1: think everyone I mentioned where if you look at where

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Speaker 1: it is today, it's above the worst day of COVID.

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Speaker 1: So those names that are not even candidates for discuss

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Speaker 1: us and about could the run into trouble as credits

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Speaker 1: are above their worst day of COVID, whereas the index

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Speaker 1: that they sit in UM is only trading at two

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Speaker 1: thirds of the worst day of COVID. Why would those

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Speaker 1: names be worse? Why would they be at the wide

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Speaker 1: the widest levels and the average be only a two thirds.

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Speaker 1: It's because of this technical in the market. And I

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Speaker 1: think technicals are the biggest force in the credit market now,

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Speaker 1: much more than fundamentals, much more than any time in

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Speaker 1: my career, where if somebody has something to do, which

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Speaker 1: is to buy billions of dollars of Verizon one year

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Speaker 1: or two year CDs, that's going to move the price

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Speaker 1: to levels that just doesn't make sense from a fundamental

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Speaker 1: point of view. And so what we've been doing is

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Speaker 1: going along those names, selling that insurance to fund protection

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Speaker 1: on companies with a history of blowing out if actually

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Speaker 1: there is a real recession or some other kind of

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Speaker 1: crisis and UM and so that that would be found

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Speaker 1: usually in consumer finance companies, UM, economically sensitive company cyclicals,

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Speaker 1: steel shipping, paper and UM. And so we've found it

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Speaker 1: very interesting in the middle of this this problem to

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Speaker 1: be able to find attractive long short trades because of

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Speaker 1: the technical distortion. So so are you looking at the

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Speaker 1: fundamentals of these equities? Are you looking at the technicals

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Speaker 1: of how they're trading, or you looking at the credit

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Speaker 1: spreads and saying, hey, people away too frightened beyond what

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Speaker 1: they should be. Yeah. So we, probably more than most

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Speaker 1: on the credit side, do look at equities for clues.

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Speaker 1: And sometimes there is one market above faster or slower

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Speaker 1: than the other. But we're we're sourcing the tail protection

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Speaker 1: that we provide our investors, which is one of the

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Speaker 1: main things we do UM through the credit market. And

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Speaker 1: we'll get to that, I'm sure. And we're paying for

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Speaker 1: it because there are many investors that want it paid for.

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Speaker 1: They don't want to just bleed the negative carry through

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Speaker 1: Some of these I view as ultra low risk trades

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Speaker 1: in verising or Coca cola. Do we want to get

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Speaker 1: more specific? Is it strictly an equity bed or is

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Speaker 1: it equity combined with some derivative how you put intogether

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Speaker 1: these paired traits. So you could look at the history

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Speaker 1: and first you could use common sense and say, is

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Speaker 1: this the kind of company that could run into trouble?

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Speaker 1: Is it not? And and the price is not efficient

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Speaker 1: um compared to the past, where fundamentals were the biggest driver.

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Speaker 1: We're looking at the credit a little bit about the fundamentals,

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Speaker 1: but the fundamentals are sort of not in question. On

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Speaker 1: the long side, it's really have these served us well

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Speaker 1: and investor as well as tail hedges in the past.

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Speaker 1: We look at oh eight and two thousand twenty, two

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Speaker 1: thousand and twelve and say, is this the kind of

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Speaker 1: company that regularly blows out from a hundred basis points

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Speaker 1: to foreigner basis points? Um. Take General Motors for example,

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Speaker 1: they defaulted you know, eight problems with the U A

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Speaker 1: W behind them. They've still been enormously vulable as a credit,

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Speaker 1: as a as a as a company super exposed to

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Speaker 1: the U. S economy and the global economy and the pressures.

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Speaker 1: The credit in two thousand twenty went from a hundred

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Speaker 1: to seven hundred back to a hundred, and it's had

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Speaker 1: that of roller coaster, and so we look at and

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Speaker 1: said that's a really volatile credit and when it's low,

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Speaker 1: that's really asymmetric. You could buy protection and if things change,

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Speaker 1: it might move out a lot. Right now it's at

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Speaker 1: two fifty. It has moved out a lot more than

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Speaker 1: the index. And so we're looking at at like at

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Speaker 1: histories to give us a clue. We're looking at forward

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Speaker 1: looking UM models, equity voll Um fundamentals. But what we're

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Speaker 1: at the end also doing. I should make sure I

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Speaker 1: say this is we're providing liquidity to the banks that needed.

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Speaker 1: And if they come and say they want to buy

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Speaker 1: protection on PEPSI or LVMH or Nestley, that's amazing. You've

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Speaker 1: now given me UM the the ammunition I needed to

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Speaker 1: go and fund protection on companies that really may run

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Speaker 1: into trouble. So so let's talk a little bit about history.

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Speaker 1: You mentioned away, Uh, we can also mention two thousand

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Speaker 1: in the same sentence, UH, that we're fairly rapid and

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Speaker 1: disorderly dislocations maybe might be the exception, and this you've

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Speaker 1: described as sort of a slow motion implosion, and yet

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Speaker 1: it's still been very orderly. What makes this year so

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Speaker 1: unusual compared to UM previous collapses that really seemed to

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Speaker 1: to make a bottom and snap back pretty abruptly. Yeah.

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Speaker 1: So so first, um, there's the market is still trying

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Speaker 1: to figure out what it should most worry about. Uh

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Speaker 1: and and so you know, it's like just when you

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Speaker 1: think something, maybe we're at peak inflation, past us, maybe um,

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Speaker 1: the supply chain problems are coming down, but then you

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Speaker 1: have new things. And so there's just been this this um,

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Speaker 1: this sell off that continues to find new rationale. And

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Speaker 1: then you have the FED um leaning on the market. Actually,

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Speaker 1: and when when Powell sounded too devish, you know, first

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Speaker 1: all of his peers came out to say, no, no,

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Speaker 1: you know, the market we're gonna keep going. And they've

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Speaker 1: continued to say that, Kashkari most recently. So, so you

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Speaker 1: have the FED kind of um intent on showing that

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Speaker 1: they mean what they say and uh and so and

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Speaker 1: it probably liking that the market is going down on

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Speaker 1: an orderly way, even if it's created some disorder in

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Speaker 1: other markets. Look what's happening in the UK. And so

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Speaker 1: I'm used to and we're we're all used to sell

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Speaker 1: offs that are fairly quick that we know, even though

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Speaker 1: eight was five or six months from Lehman to the

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Speaker 1: lows of March oh nine, where at the end of

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Speaker 1: it you can kind of wonder, is there an all

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Speaker 1: clear sign? We have the Fed behind us quantitative easing.

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Speaker 1: Now we don't really know who the savior is because

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Speaker 1: at the end of all of this, we're it's still

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Speaker 1: going to have quantitative tightening and shrinking the balance sheet,

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Speaker 1: and so whereas a lot of sell offs, we're just

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Speaker 1: a prelude to a to a bowl market one or

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Speaker 1: six months later. You know, this has the feeling to

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Speaker 1: me like we're going to be worried about some number

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Speaker 1: of these things or new things for potentially quarters and

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Speaker 1: maybe even years to come. So no capitulation yet no

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Speaker 1: flush which gives us that all clear signal. How much

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Speaker 1: of that is based on truly not knowing what the

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Speaker 1: Fed is gonna do or is it We don't know

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Speaker 1: which potential problem is real and which is fake news.

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Speaker 1: I these things are so hard to predict. I even

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Speaker 1: want to be cautious about, you know, um opining too

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Speaker 1: much because it's just such a confusing market and there

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Speaker 1: hasn't been a single thing to say, Okay, this is

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Speaker 1: why the market is not enough. It should be forty.

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Speaker 1: Let's take inflation. If if you look at UM forward inflation,

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Speaker 1: it's expected to come down a lot. So you could

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Speaker 1: look at tomorrow's CPI print if it comes in a

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Speaker 1: tent or below or high, and get excited about it.

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Speaker 1: But the market is still telling you inflation is not

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Speaker 1: going to be the problem that it is one year

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Speaker 1: from now. Now. If a few months from now that

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Speaker 1: conviction is shaken, then we're gonna have a real strong

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Speaker 1: sell off. If somehow Russia haven't forbid becomes more asymmetric,

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Speaker 1: we're gonna have a real problem. And so we just

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Speaker 1: don't know. We're in a fog, and we should not

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Speaker 1: rely on the lessons that people learn, maybe incorrectly for

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Speaker 1: this environment that we're good between oh eight and twenty

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Speaker 1: and two thousand twenty two, which was UM the Fed

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Speaker 1: is your put, don't fight the Fed, and UM dips

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Speaker 1: should all be bought, and UH being short is is

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Speaker 1: fighting the Fed. You know this, this really UH does

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Speaker 1: not feel like that environment in particular because of where

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Speaker 1: the central banks are versus then so, but the one

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Speaker 1: lesson that should carry through sounds like continue not to

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Speaker 1: fighting the Fed when the Fed reverses their position I'm

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Speaker 1: glad you said that, Barry, because because about nine years

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Speaker 1: ago I had a prospective investor in my office where

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Speaker 1: Long Invall funds. One of our main products is long volatility.

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Speaker 1: And I don't know if he didn't quite know that,

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Speaker 1: because he kind of wagged his finger at me and said,

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Speaker 1: didn't you know It's like, Sonny, didn't someone ever tell

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Speaker 1: you don't fight the Fed just to be long volatility?

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Speaker 1: When Mario drag said, trust me, I'll do whatever it takes.

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Speaker 1: That's a and uh and that. But that that psychology

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Speaker 1: of don't fight the Fed, don't be short is, in

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Speaker 1: my opinion, a lazy person's way of saying, let's always

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Speaker 1: belong Because if you if that person were around today,

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Speaker 1: I don't exactly remember who even was to to make

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Speaker 1: that call back, I'd say, if you really believe and

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Speaker 1: don't fight the Fed, how much of your risk did

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Speaker 1: did you take down when the Fed said that they

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Speaker 1: really meant business and we're going to be selling ussets

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Speaker 1: for years to come, and plus all of these problems

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Speaker 1: that when you add up the number of problems in

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Speaker 1: different theaters, I I can't think of a corollary that

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Speaker 1: you know, it's it's to me, it does feel worse

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Speaker 1: in many respects than than any other experience in the

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Speaker 1: market I've haund So you hinted at UK guilt and

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Speaker 1: what's going on over in London. Um, the strength of

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Speaker 1: the dollar is another factor. How do you think about

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Speaker 1: those when you're considering tail risk and volatility. So we're

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Speaker 1: not experts in UH in foreign exchange, but I look

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Speaker 1: at the guilt market, for example, and you see, like

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Speaker 1: the UK half a percent bond of two thousand sixty one.

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Speaker 1: Somebody you know in two one bought a four to

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Speaker 1: year bond that was gonna pay not someone, a lot

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Speaker 1: of people, It's gonna pay half a percent a year

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Speaker 1: for forty years. And at the end of all that,

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Speaker 1: the most you could possibly make was half a percent

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Speaker 1: times forty minus some inflation and UH and that's so

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Speaker 1: that would be twenty points without discounting. Without inflation, the

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Speaker 1: things down seventy three points. So when you when you

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Speaker 1: think about boundary conditions, you know, and I what I

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Speaker 1: like to do and in the dirt of markets is

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Speaker 1: look at boundary conditions to say how much can I make,

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Speaker 1: how much can I lose? And where is there semisymmetry.

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Speaker 1: And by the way, we were not sure at any

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Speaker 1: any UK bonds to be clear, but there are a

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Speaker 1: lot of trades that looked like this kind of I

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Speaker 1: can only lose a little bit, but just in case

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Speaker 1: it's not transitory, or just in case there's an unknown

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Speaker 1: known that is really problematic, you might be able to

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Speaker 1: make eight to ten or twenty times what you might

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Speaker 1: have lost and to see this move and it may

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Speaker 1: continue of higher rates, whether it's the U S or Europe,

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Speaker 1: where the investor loses three or four times what they

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Speaker 1: could possibly make at the end of the day with bonds.

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Speaker 1: I think it it reminds me of how investors don't

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Speaker 1: really think about um fixed income and equities in the

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Speaker 1: way that that I do, which is, you know, equities

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Speaker 1: gives you this unbounded upside. It could be Tesla, it

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Speaker 1: could it could be uh, it could be uh Faraday

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Speaker 1: Future or Fisker. But you know your your minus a

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Speaker 1: hundred and your plus twenty and and that's and that's

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Speaker 1: the range. But in fixed income often there's so little

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Speaker 1: to earn that when I see my peers talk about

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Speaker 1: high yield at five percent is amazing because it used

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Speaker 1: to be a three percent. I feel like, wait a second,

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Speaker 1: how many defaults do we expect this year? There's a

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Speaker 1: lot of companies in that index that are going to

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Speaker 1: run into trouble. So what are we really how excited

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Speaker 1: can we really get just because high yield is you know,

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Speaker 1: has widened by two percentage points and so so I

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Speaker 1: think fixed income can end up effectively being an option,

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Speaker 1: but people don't look at it as an option, and

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Speaker 1: I view it often as asymmetric, as an asymmetric short.

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Speaker 1: And that's one of the guiding principles of our tailheade strategy.

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Speaker 1: So so let's talk about another UM credit related issue.

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Speaker 1: A couple of weekends ago, people were talking about the

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Speaker 1: winding credit defaults on Credit Swiss um and surprisingly you

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Speaker 1: came out and said, everybody, catch your breath. Credit Swiss

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Speaker 1: isn't isn't Lehman brothers. Just look it at various ratios.

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Speaker 1: What made that so attractive to shorts and and what

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Speaker 1: led you to the conclusion that Credit Swiss was more

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Speaker 1: or less Okay? Yeah, I didn't start out thinking I

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Speaker 1: want to say something public. I basically have zero Twitter

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Speaker 1: followers before this, and then all of a sudden, Um,

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Speaker 1: you know, it became a thing. I noticed that people

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Speaker 1: with hundreds of thousands of followers were saying credit swite

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Speaker 1: spreads are out their decade high. It's an imminent bankruptcy. UH,

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Speaker 1: imminent default according to secret sources. And when you see

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Speaker 1: like people with a hundred followers thing that find but

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Speaker 1: we have kind of at the same time almost this

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Speaker 1: you could almost read that it was the same person

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Speaker 1: sending it from accounts or team with with hundreds of

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Speaker 1: thousands of followers, that this sounds like scare mongering. It

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Speaker 1: sounds like someone trying to make something of about it.

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Speaker 1: And well, what do I know. I know that this

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00:21:03,119 --> 00:21:06,800
Speaker 1: quote it's at decade a decade high, you know, can

402
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Speaker 1: be used as fake news to say therefore it's going

403
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Speaker 1: to default. But if you look at the spread at

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Speaker 1: the time, the five year credit spread of cs was

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Speaker 1: two and a half percent. Now, if it defaulted back

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Speaker 1: to our boundary conditions, it could go to zero, it

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Speaker 1: could go to fifty. It would be like two and

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Speaker 1: a half to lose or make to make or lose

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Speaker 1: fifty to a hundred. It's still priced like to one right,

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Speaker 1: um and UH low probability, very low probability. But it's

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Speaker 1: discussed as something that's about to happen, and so I

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Speaker 1: kind of took offense to it. I I'm supposed to

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Speaker 1: know a thing or two about CDs, so I wrote

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Speaker 1: a little bit about it, and then I posted, um,

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Speaker 1: Coca Cola, by the way, also at decade high is

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Speaker 1: better stock up on Coca Cola? And we had, you know,

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Speaker 1: articles come out saying that I was saying Coca Cola

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Speaker 1: they go to business, which you know, reminded me about

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Speaker 1: sarcasm and how it doesn't necessarily translate to to at

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Speaker 1: least some of the users. But this point of you know,

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Speaker 1: some things at a decade widest level there for a crisis. Um,

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Speaker 1: I I just I felt took offense to it, and

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Speaker 1: I UM, I don't have any special connection to Credit Suite,

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Speaker 1: but I felt like weighing in and and so far

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Speaker 1: Credit Swiss still hanging around right has has yet to default.

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Speaker 1: I did get some very nice messages from the fine

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Speaker 1: folk a Credit Suite. So yeah, so since we're talking

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Speaker 1: about tail risks, let's talk a little bit about that

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Speaker 1: and hedges. Um, why have equity puts or vixed calls

430
00:22:25,560 --> 00:22:30,919
Speaker 1: so disappointed this year? As insurance that's that's a brutal

431
00:22:31,000 --> 00:22:33,240
Speaker 1: question actually, because there are people, you know. It's like

432
00:22:33,240 --> 00:22:35,200
Speaker 1: if you say, look, I didn't study hard for the test.

433
00:22:35,240 --> 00:22:37,520
Speaker 1: I didn't do on the test. Okay, Mom, dad, whatever,

434
00:22:37,680 --> 00:22:39,440
Speaker 1: study harder. But when you when you study hard and

435
00:22:39,480 --> 00:22:42,120
Speaker 1: you say I'm gonna be prudent, I'm gonna buy tell protection.

436
00:22:42,480 --> 00:22:44,400
Speaker 1: I was there, I was there in January to buy it,

437
00:22:44,640 --> 00:22:47,560
Speaker 1: and then it doesn't work. It's like, you know, it's

438
00:22:47,560 --> 00:22:50,399
Speaker 1: a it's tailhedges have to be reliable because they serve

439
00:22:50,440 --> 00:22:52,920
Speaker 1: a greater purpose. It's not just how did this manager

440
00:22:53,000 --> 00:22:55,800
Speaker 1: do unto themselves, it's I was counting on this tailhedge

441
00:22:55,800 --> 00:22:58,959
Speaker 1: to do to do me some great service in my portfolio.

442
00:22:59,200 --> 00:23:01,439
Speaker 1: And I think the real interesting thing is that the

443
00:23:01,440 --> 00:23:03,920
Speaker 1: the VIX is cited all the time as the barometer

444
00:23:04,000 --> 00:23:06,800
Speaker 1: of fear. Well, so I remember and probably many of

445
00:23:06,880 --> 00:23:12,160
Speaker 1: you remember that in the period let's say we even

446
00:23:12,200 --> 00:23:14,600
Speaker 1: talked about there was a single digit day for the VIX,

447
00:23:14,680 --> 00:23:17,280
Speaker 1: it went below ten. It was often between ten and

448
00:23:17,320 --> 00:23:22,440
Speaker 1: twelve in good times. But something happened after two thousand twenty,

449
00:23:22,480 --> 00:23:25,639
Speaker 1: which is, you know, we had COVID and that enormous volatility.

450
00:23:25,680 --> 00:23:29,040
Speaker 1: It actually destroyed the people picking up Nichols in front

451
00:23:29,080 --> 00:23:31,720
Speaker 1: of the steam roller a k. The short volatility crowd.

452
00:23:31,920 --> 00:23:35,640
Speaker 1: They were no longer there after March UM and then

453
00:23:35,760 --> 00:23:40,080
Speaker 1: came a new breed of investor that love to buy options, UM,

454
00:23:40,119 --> 00:23:42,240
Speaker 1: whether it was options on meme stocks, and you saw

455
00:23:42,240 --> 00:23:44,879
Speaker 1: the volatilities go nuts there. Soft Bank set up a

456
00:23:44,920 --> 00:23:48,520
Speaker 1: unit to buy options on short you know, on tech stocks,

457
00:23:48,560 --> 00:23:51,760
Speaker 1: and culturally I think in this country, UM. On the

458
00:23:51,800 --> 00:23:54,920
Speaker 1: investing side, things became fast. Think about you know when

459
00:23:54,960 --> 00:23:57,440
Speaker 1: someone when your friend, because it wasn't me, would you

460
00:23:57,520 --> 00:23:59,520
Speaker 1: would tell you that, um, some n f T went

461
00:23:59,560 --> 00:24:01,800
Speaker 1: up by x and you'd say ten X, I would

462
00:24:01,800 --> 00:24:03,760
Speaker 1: like one X in five years. I'd be really excited

463
00:24:03,760 --> 00:24:06,520
Speaker 1: about that. And everything became fast, and options are way

464
00:24:06,560 --> 00:24:09,359
Speaker 1: to get there fast. So the long winded way to say,

465
00:24:09,440 --> 00:24:11,960
Speaker 1: when we came into two thousand twenty two, the VIX,

466
00:24:12,359 --> 00:24:16,520
Speaker 1: by prior measures was already at a forelarmed fire, we

467
00:24:16,520 --> 00:24:18,200
Speaker 1: were at like twenty two to twenty eight on the

468
00:24:18,280 --> 00:24:20,639
Speaker 1: VIX and that kind of number would have been a

469
00:24:20,640 --> 00:24:24,119
Speaker 1: bear market the prior decade. But um, but we were

470
00:24:24,160 --> 00:24:26,680
Speaker 1: at the peak for the SMP. So that so tail

471
00:24:26,720 --> 00:24:31,439
Speaker 1: protection through equity options was incredibly expensive and it has

472
00:24:31,480 --> 00:24:35,359
Speaker 1: served investors very poorly. Whereas credit spreads came into the

473
00:24:35,440 --> 00:24:38,080
Speaker 1: year near the lows that they were pre COVID, they've

474
00:24:38,080 --> 00:24:40,560
Speaker 1: widened and they've done their job, even if there's still

475
00:24:40,560 --> 00:24:43,280
Speaker 1: a lot of widening potentially to come. So let's dive

476
00:24:43,280 --> 00:24:47,440
Speaker 1: a little deeper into that. So the end of people

477
00:24:47,640 --> 00:24:52,160
Speaker 1: market and the VIX very very high. So how are

478
00:24:52,280 --> 00:24:55,000
Speaker 1: investors supposed to put two and two together? What? What

479
00:24:55,080 --> 00:24:58,320
Speaker 1: did that signify? It meant that if you said I'm

480
00:24:58,320 --> 00:25:00,080
Speaker 1: going to spend a certain amount of premium, like you

481
00:25:00,080 --> 00:25:02,800
Speaker 1: think about with your car insurance or home insurance, Say

482
00:25:02,840 --> 00:25:04,800
Speaker 1: I have this much premium, I'm gonna buy it, put

483
00:25:04,880 --> 00:25:07,320
Speaker 1: struck five percent out of the money or ten percent

484
00:25:07,480 --> 00:25:09,720
Speaker 1: of the money if I'm right, If this insurance was

485
00:25:09,720 --> 00:25:12,280
Speaker 1: good to buy, what kind of payoff profile would I get?

486
00:25:12,440 --> 00:25:14,679
Speaker 1: And you were getting nothing like you would get, not

487
00:25:14,760 --> 00:25:17,120
Speaker 1: just pre COVID. But you know, over the past let's

488
00:25:17,119 --> 00:25:20,800
Speaker 1: say twenty years, you were getting pretty miserable payouts for

489
00:25:20,800 --> 00:25:23,040
Speaker 1: for a blowe market. When times are rough and vall

490
00:25:23,160 --> 00:25:24,800
Speaker 1: is high, you understand why you have to pay a lot.

491
00:25:24,840 --> 00:25:29,199
Speaker 1: But but coming into this year, um volved was stubbornly high,

492
00:25:29,400 --> 00:25:33,800
Speaker 1: and so equity options were extremely expensive. We did a

493
00:25:33,840 --> 00:25:38,560
Speaker 1: webinar for our clients where we showed that basically across assets,

494
00:25:39,119 --> 00:25:41,720
Speaker 1: Bank Bank America put out some neat research that had

495
00:25:41,720 --> 00:25:44,560
Speaker 1: the SNP and the NASTAC has literally, out of fifty assets,

496
00:25:44,800 --> 00:25:47,919
Speaker 1: the two worst you could get interesting payouts from. And

497
00:25:47,960 --> 00:25:51,879
Speaker 1: so those things are not necessarily undecipherable. But credit. In

498
00:25:51,960 --> 00:25:55,720
Speaker 1: every sell off, credit has blown out. Whether it's the

499
00:25:55,720 --> 00:25:58,720
Speaker 1: credit crisis, of course, but even the flash crash. I

500
00:25:58,440 --> 00:26:01,720
Speaker 1: I remember being surprised that the flash I was trading

501
00:26:01,800 --> 00:26:04,680
Speaker 1: during the flash crash made two ten. Maybe I'll get

502
00:26:04,680 --> 00:26:08,119
Speaker 1: the date wrong by a little bit and uh. And

503
00:26:08,920 --> 00:26:11,440
Speaker 1: credit spreads because of a glitch on the New York

504
00:26:11,440 --> 00:26:14,119
Speaker 1: Stock Exchange moved that day almost as much as they

505
00:26:14,119 --> 00:26:17,320
Speaker 1: did the day of nine eleven. So credit is an option.

506
00:26:17,520 --> 00:26:19,439
Speaker 1: This low spread thing can move a lot. You can

507
00:26:19,480 --> 00:26:22,480
Speaker 1: get an option like pay out being short or be

508
00:26:22,520 --> 00:26:25,359
Speaker 1: exposed to the loss being long. Um and it is

509
00:26:25,440 --> 00:26:27,919
Speaker 1: in my view of much more reliable tailhage that's been

510
00:26:27,960 --> 00:26:30,879
Speaker 1: backed up in in academic research and UM and it

511
00:26:30,880 --> 00:26:34,200
Speaker 1: also stands to reason that UM, you know, the credit

512
00:26:34,200 --> 00:26:35,560
Speaker 1: is an option, whether you look at it a Merton

513
00:26:35,640 --> 00:26:38,160
Speaker 1: model or you just think about I'm taking this little

514
00:26:38,200 --> 00:26:42,359
Speaker 1: spread in return for exposing myself to a wider credit

515
00:26:42,359 --> 00:26:46,000
Speaker 1: spread environment or defaults. And this is um. Uh, this

516
00:26:46,080 --> 00:26:48,600
Speaker 1: is why I feel very fortunate that my sandbox where

517
00:26:48,640 --> 00:26:50,800
Speaker 1: I grew up in the credit sort of market, you know,

518
00:26:51,000 --> 00:26:54,440
Speaker 1: is UM is a really viable forum for tail edging.

519
00:26:54,640 --> 00:26:57,080
Speaker 1: So so I have a last question before we go

520
00:26:57,160 --> 00:27:02,240
Speaker 1: to audience questions in the last few minutes. Um, given

521
00:27:02,280 --> 00:27:08,040
Speaker 1: where we are, how wide have um credit spreads gone?

522
00:27:08,760 --> 00:27:13,639
Speaker 1: And if the put side wasn't attractive on equities at

523
00:27:13,720 --> 00:27:16,399
Speaker 1: the top of the market, how does the call side

524
00:27:16,440 --> 00:27:22,639
Speaker 1: look on equities today? Um? So the so credit spreads

525
00:27:22,680 --> 00:27:29,000
Speaker 1: today are like in in absolute terms there slightly elevated.

526
00:27:29,359 --> 00:27:33,000
Speaker 1: Like let's say it this way. Remember December two thousand eighteen. Uh,

527
00:27:33,240 --> 00:27:36,199
Speaker 1: Trump and she were having a skirmish. The Fed was

528
00:27:36,480 --> 00:27:39,640
Speaker 1: you know, being uh it was was was being tough

529
00:27:39,680 --> 00:27:42,320
Speaker 1: on the market while while growth was was faltering. That

530
00:27:42,359 --> 00:27:44,240
Speaker 1: seems like a walk in the park compared to now.

531
00:27:44,400 --> 00:27:47,280
Speaker 1: And credit spreads then were roughly the same as they

532
00:27:47,320 --> 00:27:49,359
Speaker 1: are today. So so maybe they shouldn't have been that

533
00:27:49,359 --> 00:27:51,679
Speaker 1: wide then, or maybe they're too low now. But but

534
00:27:51,800 --> 00:27:55,240
Speaker 1: spreads now are elevated, but in my view, nowhere near

535
00:27:55,800 --> 00:28:00,000
Speaker 1: Um what what the risks the hidden risks and observed

536
00:28:00,119 --> 00:28:03,760
Speaker 1: drisks are are in the marketplace now? Um In terms

537
00:28:03,800 --> 00:28:08,439
Speaker 1: of call options, you know, Um, there's moments where credit

538
00:28:08,480 --> 00:28:11,360
Speaker 1: falls enough that it isn't asymmetric, that it's symmetric, or

539
00:28:11,520 --> 00:28:13,720
Speaker 1: it looks like if you locked it away in a box,

540
00:28:13,720 --> 00:28:16,840
Speaker 1: you're gonna get a high return compared to defaults. We're

541
00:28:16,880 --> 00:28:20,240
Speaker 1: not near that yet, and I still believe equities are

542
00:28:20,320 --> 00:28:23,720
Speaker 1: much more attractive long even though there's going to be

543
00:28:23,760 --> 00:28:26,720
Speaker 1: this sort of technical of people looking with loving eyes

544
00:28:26,840 --> 00:28:29,440
Speaker 1: at a you know, five percent yield or six percent yield,

545
00:28:29,440 --> 00:28:32,120
Speaker 1: and you can find in some investment grade corporates seven

546
00:28:32,200 --> 00:28:34,200
Speaker 1: or eight percent yields if you go out far enough

547
00:28:34,240 --> 00:28:36,800
Speaker 1: on the curve and um, and so there will be

548
00:28:36,880 --> 00:28:39,560
Speaker 1: probably some people saying, I want the certainty of that yield,

549
00:28:40,160 --> 00:28:43,320
Speaker 1: but um, you know, but that also comes with plenty

550
00:28:43,320 --> 00:28:45,680
Speaker 1: of interest rate risk, to say the very least. All Right,

551
00:28:45,960 --> 00:28:49,240
Speaker 1: a couple of questions from the audience, starting with where

552
00:28:49,240 --> 00:28:52,280
Speaker 1: do you see the largest realignments of capital coming in

553
00:28:52,320 --> 00:28:55,000
Speaker 1: the next five to ten years. I don't know if

554
00:28:55,040 --> 00:28:57,200
Speaker 1: that's really your sort of question. But I don't even

555
00:28:57,200 --> 00:28:59,320
Speaker 1: know what's gonna happen in the next five months, so

556
00:28:59,320 --> 00:29:03,320
Speaker 1: so five years with with with respect, I am I really,

557
00:29:03,400 --> 00:29:05,680
Speaker 1: I really don't know. But what I do believe is

558
00:29:05,720 --> 00:29:09,239
Speaker 1: that the QT world, when all this is behind us,

559
00:29:09,240 --> 00:29:11,600
Speaker 1: there's still a giant balance sheet, there's a head wind

560
00:29:11,640 --> 00:29:14,480
Speaker 1: to the market is going to be really brutal for

561
00:29:14,520 --> 00:29:18,560
Speaker 1: investors that have survived, meaning for trillion in fed assets

562
00:29:18,560 --> 00:29:20,680
Speaker 1: that have to come off the balance sheets just in

563
00:29:20,720 --> 00:29:23,200
Speaker 1: the US. And maybe they'll go slow or less slow,

564
00:29:23,520 --> 00:29:27,080
Speaker 1: but um, but I think, um uh, this is going

565
00:29:27,160 --> 00:29:30,600
Speaker 1: to be a period of much higher volatility than than

566
00:29:30,640 --> 00:29:34,160
Speaker 1: the last decade was. So future volatility is going to increase,

567
00:29:34,200 --> 00:29:38,600
Speaker 1: whereas it was modest but not low over the past decade. Yeah,

568
00:29:38,600 --> 00:29:41,560
Speaker 1: there were there were punctuated moments, but there was a

569
00:29:41,560 --> 00:29:46,080
Speaker 1: long period of very low volatility. And and it seems like, um,

570
00:29:46,120 --> 00:29:48,280
Speaker 1: that may be behind us, because even if some of

571
00:29:48,320 --> 00:29:50,600
Speaker 1: the problems go away, you still have the undoing of QUI,

572
00:29:50,960 --> 00:29:54,000
Speaker 1: which is more than just no qui, it's the opposite

573
00:29:54,000 --> 00:29:58,720
Speaker 1: of QUI. Is is I think a really underrated continuous headwind.

574
00:29:59,360 --> 00:30:04,440
Speaker 1: And final question, and I'm gonna modify this. Given where

575
00:30:04,440 --> 00:30:08,200
Speaker 1: tenure treasury reels are today, what does that mean for

576
00:30:08,320 --> 00:30:11,920
Speaker 1: future GDP growth? What does that mean for the possibility

577
00:30:12,080 --> 00:30:17,959
Speaker 1: of a recession either mild or more significant? So, uh,

578
00:30:18,160 --> 00:30:20,920
Speaker 1: you know, until March there really weren't any any banks,

579
00:30:21,160 --> 00:30:24,320
Speaker 1: um calling for a recession as as the most likely

580
00:30:24,360 --> 00:30:26,680
Speaker 1: case it was. Around then maybe one or two banks,

581
00:30:26,720 --> 00:30:29,920
Speaker 1: obviously Larry Summers and others did speak out. Um, I

582
00:30:29,960 --> 00:30:33,560
Speaker 1: think that, um, these kinds of forecasts are are really folly.

583
00:30:33,640 --> 00:30:37,000
Speaker 1: Literally we're standing in a thick fog trying to like

584
00:30:37,040 --> 00:30:38,880
Speaker 1: play tennis and we can't even see the ball. So

585
00:30:38,880 --> 00:30:41,320
Speaker 1: so like when I hear people and by the way,

586
00:30:41,360 --> 00:30:43,200
Speaker 1: that's a great question you asked, but like when people

587
00:30:43,240 --> 00:30:44,960
Speaker 1: answer it, I kind of shut her. So I'm going

588
00:30:45,000 --> 00:30:48,880
Speaker 1: to try to not shut her at myself and say say,

589
00:30:48,960 --> 00:30:50,760
Speaker 1: who knows. But what I know is that we should

590
00:30:50,800 --> 00:30:53,880
Speaker 1: be aware that that this is not the market we

591
00:30:53,880 --> 00:30:56,760
Speaker 1: were in and and this idea of thinking that still

592
00:30:56,920 --> 00:30:58,840
Speaker 1: I can feel this thinking of you know, as soon

593
00:30:58,880 --> 00:31:00,680
Speaker 1: as cp I misses and as we come in at

594
00:31:00,840 --> 00:31:02,640
Speaker 1: seven something, okay, it's gonna be off to the races

595
00:31:02,680 --> 00:31:04,800
Speaker 1: with the market. I feel like this is this is

596
00:31:04,840 --> 00:31:08,000
Speaker 1: a personally, I think it's a Seldar rally market because

597
00:31:08,040 --> 00:31:11,840
Speaker 1: people are not yet accustomed to all of the issues

598
00:31:11,880 --> 00:31:15,280
Speaker 1: hanging over us. And anyway, that's my two cents. Thank

599
00:31:15,320 --> 00:31:17,960
Speaker 1: you Boas for being so generous with your time. We

600
00:31:18,040 --> 00:31:21,520
Speaker 1: have been speaking with BoA's Weinstein, founder of Saba Capital.

601
00:31:22,120 --> 00:31:24,960
Speaker 1: If you enjoy this conversation, we'll be sure and check

602
00:31:25,000 --> 00:31:28,040
Speaker 1: out any of the four hundred previous ones we've done

603
00:31:28,040 --> 00:31:32,480
Speaker 1: over the past eight years. You can find those at iTunes, Spotify,

604
00:31:32,560 --> 00:31:35,960
Speaker 1: wherever you find your favorite podcasts. We love your comments,

605
00:31:35,960 --> 00:31:39,160
Speaker 1: feedback and suggestions right to us at and might be

606
00:31:39,280 --> 00:31:42,680
Speaker 1: podcast at Bloomberg dot net. Follow me on Twitter at

607
00:31:42,720 --> 00:31:46,440
Speaker 1: rit Halts. Check out my daily reads at Hults dot com.

608
00:31:46,480 --> 00:31:48,560
Speaker 1: I would be remiss if I did not thank the

609
00:31:48,560 --> 00:31:52,160
Speaker 1: correct team that helps put these conversations together each week.

610
00:31:52,320 --> 00:31:56,360
Speaker 1: Mohammed Ramaui is my audio engineer. Sean Russo is my

611
00:31:56,400 --> 00:32:01,120
Speaker 1: head of research. Paris Woald is our producer. Attika Valbronn

612
00:32:01,600 --> 00:32:05,880
Speaker 1: is our project manager. I'm Barry Reholts. You've been listening

613
00:32:05,880 --> 00:32:08,800
Speaker 1: to Masters in Business on Bloomberg Radio