WEBVTT - Boaz Weinstein on Investors' Unknown Risk 0:00:00.080 --> 0:00:06.040 M. This is Mesters in Business with Very Results on 0:00:06.200 --> 0:00:11.719 Bloomberg Radio. This week on the podcast, I have an 0:00:11.720 --> 0:00:17.040 extra special guest and a funny story about how this 0:00:17.600 --> 0:00:23.400 podcast came about. I interviewed Boas Weinstein back in May 0:00:23.440 --> 0:00:27.639 of two. It was one of the most popular podcast 0:00:27.760 --> 0:00:31.160 we did this year. And when the folks over at 0:00:31.240 --> 0:00:34.520 the Bloomberg invest conference came to me and said, Hey, 0:00:34.560 --> 0:00:37.000 we're looking for somebody who's a little out of the 0:00:37.000 --> 0:00:41.320 box snanker and kind of interesting. Um, who might you 0:00:41.440 --> 0:00:45.400 suggest as a interviewee? That was easy. I said, we 0:00:45.520 --> 0:00:49.279 just did this interview with Boaz six months ago. Everybody 0:00:49.280 --> 0:00:52.320 seemed to really like it. He's very much an outside 0:00:52.360 --> 0:00:57.480 the box sninker. Covers everything from credit derivatives, two spacks, 0:00:58.000 --> 0:01:02.560 two stocks, and bonds, but from an unusual perspective, not 0:01:02.920 --> 0:01:08.280 your typical investor. For for example, he's been an investor 0:01:08.319 --> 0:01:12.200 in spacks because he looks at it as a guaranteed 0:01:13.080 --> 0:01:15.360 uh fixed income return in a in a time of 0:01:15.440 --> 0:01:19.920 zero with potential upside. Uh. So he's done that really 0:01:19.959 --> 0:01:23.600 really successful. He's one of the five largest spack investors 0:01:23.600 --> 0:01:26.840 in the world. He's the person in case you don't 0:01:26.840 --> 0:01:30.039 know who boas Weinstein is of Saba Capital. He's the 0:01:30.080 --> 0:01:33.800 person who made the bet against the London whale and 0:01:33.840 --> 0:01:38.560 then went to uh JP Morgan Chase and presented at 0:01:38.560 --> 0:01:41.720 one of their conferences and said, by the way, you guys, 0:01:41.800 --> 0:01:45.080 you have this person in London that's sucking up all 0:01:45.120 --> 0:01:50.920 of the energy options. It's a wildly lopsided bet and 0:01:51.080 --> 0:01:54.120 it's gonna blow up. Oh nps, I've bet against him 0:01:54.600 --> 0:01:57.280 and lo and behold when the London whale blows up. 0:01:57.320 --> 0:02:00.880 Six months later, Saba Capital nets three or four hundred 0:02:00.880 --> 0:02:03.840 million dollars on the trade. Just an amazing story and 0:02:03.920 --> 0:02:09.160 incredible ability to look at risk and figure out when 0:02:09.240 --> 0:02:13.760 it's a fair bet or when it's an asymmetrical bet, 0:02:13.760 --> 0:02:16.160 where hey, if we lose, we lose a little bit, 0:02:16.200 --> 0:02:19.200 but if we win, it's a giant home run. Uh So, 0:02:19.400 --> 0:02:23.480 he's really an intriguing person. We did the interview at 0:02:23.520 --> 0:02:26.600 the Bloomberg invest conference. So when you hear the audio 0:02:26.600 --> 0:02:29.440 of this, it's a live event. You'll hear the you'll 0:02:29.480 --> 0:02:33.760 hear the audience, You'll hear um people rustling papers. It's 0:02:33.840 --> 0:02:39.040 not the usual. Hey, we're in a studio that's pristine 0:02:39.080 --> 0:02:41.840 and you don't hear anything other than the two of 0:02:41.919 --> 0:02:45.320 us speaking and breathing. Uh. So this was a live event, 0:02:45.400 --> 0:02:48.520 but it was so well received and it was so interesting, 0:02:48.720 --> 0:02:52.919 and he just is such a fascinating investor. We thought 0:02:52.919 --> 0:02:56.080 it would be perfect, uh for the holiday weekend. So, 0:02:56.200 --> 0:03:00.280 with no further ado, here is my live interview with 0:03:00.320 --> 0:03:06.440 Sabbath Capitals Boas Weinstein at the Bloomberg invest Live Conference. 0:03:06.840 --> 0:03:08.839 So this is the first time I'm wearing a suit 0:03:08.919 --> 0:03:11.680 and tie, and I don't know how long. Um, and 0:03:11.720 --> 0:03:16.280 I'm dead. He didn't tell me about the tie, sorry, guys. So, um, 0:03:16.320 --> 0:03:20.000 so we previously had a conversation. Um was it earlier 0:03:20.000 --> 0:03:22.840 this year? Last year? I can't even tell anymore. And 0:03:22.919 --> 0:03:25.320 there were a lot of really interesting things that that 0:03:25.440 --> 0:03:28.520 came up. I think this audience would love to hear 0:03:28.560 --> 0:03:31.440 an update on what's happened since then. But but I 0:03:31.480 --> 0:03:35.200 have to start by asking. You were a highly ranked 0:03:35.280 --> 0:03:38.200 chess player as a young kid. You have your reputation 0:03:38.280 --> 0:03:42.480 as a killer poker player and a dangerous blackjack player. 0:03:43.160 --> 0:03:49.720 These involve making probabilistic assessments about an inherently unknowable future. Um, 0:03:50.040 --> 0:03:53.400 seems like you've been setting yourself up for tail risk 0:03:53.440 --> 0:03:57.320 and derivatives and trading since you were a kid. You're 0:03:57.320 --> 0:03:59.360 giving me a lot of credit for having planned everything 0:03:59.400 --> 0:04:02.160 since I was I I think the only tail risk 0:04:02.200 --> 0:04:03.720 I was thinking about when I was five was was 0:04:03.720 --> 0:04:05.240 pinned the tail on the donkey to be to be 0:04:05.360 --> 0:04:07.960 quite honest, So you know, really I am. I enjoy 0:04:08.040 --> 0:04:10.880 games of strategy, and it turns out that Wall Street 0:04:10.920 --> 0:04:14.240 is the ultimate puzzle and challenge and and so. Yeah. 0:04:14.280 --> 0:04:16.120 So I've been working on Wall Street since I was fifteen, 0:04:16.160 --> 0:04:18.200 and I think, um, at a young age, I've already 0:04:18.200 --> 0:04:22.479 seen a lot. So let's let's talk about what's going 0:04:22.520 --> 0:04:26.520 on right now. We've discussed and you've brought up how 0:04:26.640 --> 0:04:30.200 different this bear market has been from from recent bear markets. 0:04:31.000 --> 0:04:33.480 What are the similarities, what are the differences? What makes 0:04:35.000 --> 0:04:38.160 so unique? Yeah, So when you think about not only 0:04:38.320 --> 0:04:41.520 what's happened, but even the investor behavior that it that 0:04:41.640 --> 0:04:44.320 it um in genders um A lot of the tail 0:04:44.360 --> 0:04:46.840 events that I've lived through. I was trading while nine 0:04:46.920 --> 0:04:49.000 eleven happened. I was at the New York Fed the 0:04:49.000 --> 0:04:51.719 weekend that Lehman was failing. A lot of those events, 0:04:52.160 --> 0:04:53.280 not all of them, but a lot of them were 0:04:53.279 --> 0:04:54.919 bolts from the blue COVID. You kind of had a 0:04:54.960 --> 0:04:56.800 month from when people knew is a thing before the 0:04:56.800 --> 0:04:58.839 market started falling, But they were bolts from the blue, 0:04:59.080 --> 0:05:00.760 and if you had not done anything about it, you 0:05:00.800 --> 0:05:03.800 had plenty of air cover to say, who who knew? 0:05:03.800 --> 0:05:05.640 Who knew this would happen? What could I have done 0:05:05.680 --> 0:05:09.000 in advance? Whereas this one has been so telegraphed when 0:05:09.000 --> 0:05:12.200 it at least the initial part of it about inflation 0:05:12.200 --> 0:05:15.240 being transitory and then transitory, and then transitory and then 0:05:15.240 --> 0:05:18.040 not transitory, So there was a lot of time to 0:05:18.080 --> 0:05:22.680 get worried and very little places to hide to say, um, 0:05:22.720 --> 0:05:24.719 you know, it was not reasonable to have thought, what 0:05:24.839 --> 0:05:27.200 if this forty year bowl market in bonds not only 0:05:27.240 --> 0:05:29.160 comes to an end but does a sharp reversal. Those 0:05:29.160 --> 0:05:32.239 were things that we and other managers we're talking about, 0:05:32.240 --> 0:05:36.320 where the the sixty forty plans that we're using treasuries 0:05:36.360 --> 0:05:39.040 as there, you know, as their antidote to a sell off. 0:05:39.080 --> 0:05:41.480 It turns out the treasuries were the poison, and so 0:05:41.760 --> 0:05:43.800 you know, this is this has been different in that respect. 0:05:44.120 --> 0:05:46.400 It's also been different because you have so many different 0:05:46.480 --> 0:05:49.719 problems swirling around some of them in conflict with each other, 0:05:49.800 --> 0:05:52.240 so solve one at the expense of the other. And 0:05:52.279 --> 0:05:54.800 then the number of new things showing up, whether it's 0:05:55.400 --> 0:05:59.159 you know, um maybe untoward rumors about credit sweets or 0:05:59.160 --> 0:06:01.960 what's happening in the u K. Guilt market, um is, 0:06:02.080 --> 0:06:03.800 it just makes the number of balls in the air 0:06:03.960 --> 0:06:07.040 enormous in terms of things non unknowns that could really 0:06:07.120 --> 0:06:10.040 cause more than a sell off, but more like a crash. 0:06:10.360 --> 0:06:14.240 So so let's talk about that. You've discussed multiple problems 0:06:14.240 --> 0:06:17.640 and multiple areas taking place at the same time. How 0:06:17.640 --> 0:06:21.480 do you distinguish between what's a genuine risk, what's unknown risk, 0:06:21.920 --> 0:06:26.960 and what's truly an unknown unknown? So usually you have 0:06:27.040 --> 0:06:29.240 your your known unknown like something is bad, we just 0:06:29.240 --> 0:06:31.279 don't know how bad, and you can respond to it. So, 0:06:31.600 --> 0:06:33.800 you know, nine eleven happens, it's not a good time 0:06:33.800 --> 0:06:36.000 to buy airline stocks. You know, COVID happens, not a 0:06:36.000 --> 0:06:39.120 good time to buy airline stocks. Oh eight happens. Probably 0:06:39.160 --> 0:06:41.560 you should de risk from financials, even like the moment 0:06:41.600 --> 0:06:44.600 after it happened. And here you just don't know exactly 0:06:44.680 --> 0:06:47.680 what to do. So normally, for example, European investment grade 0:06:47.920 --> 0:06:51.440 trades five basis points lower than US investment grade. Now 0:06:51.480 --> 0:06:54.520 it trades thirty basis points higher, twenty five basis points higher. 0:06:54.880 --> 0:06:56.840 Is that enough Europe is going to have a much 0:06:56.839 --> 0:07:00.520 more severe recession according to those that that that motificate 0:07:00.760 --> 0:07:04.760 and uh, And so whether or not you underweight or 0:07:04.800 --> 0:07:07.600 overweight Europe is all about what do you think happens 0:07:07.640 --> 0:07:09.840 with with Ukraine? Does it? Is there a chance it 0:07:09.880 --> 0:07:12.720 gets asymmetric? What can be done to mitigate? And then 0:07:12.760 --> 0:07:14.640 at the same time you have these other theaters, whether 0:07:14.640 --> 0:07:18.400 it's zero COVID policy in China maybe extending well past 0:07:18.480 --> 0:07:22.280 the party congress um, continuing to cause disruption in the economy. 0:07:22.400 --> 0:07:24.960 So so really what's happened is people just feel risk 0:07:25.000 --> 0:07:27.560 all over. They felt it now for ten months, and 0:07:27.600 --> 0:07:29.720 they're de risking the things that are in their book. 0:07:30.120 --> 0:07:32.080 And that has led to some things that are I 0:07:32.120 --> 0:07:35.880 don't view as particularly risky blowing out as much as 0:07:35.880 --> 0:07:38.040 things that I do view as risky. And that's that's 0:07:38.040 --> 0:07:41.720 created some interesting distortions, interesting opportunities. So let's talk about 0:07:41.760 --> 0:07:45.800 those opportunities. What has been overly d risks, What are 0:07:46.000 --> 0:07:50.120 are looking attractive after investors throw the baby out with 0:07:50.160 --> 0:07:53.360 the bath water, right, So not knowing where to focus 0:07:53.360 --> 0:07:56.080 your arrows and instead of focusing on de risking and 0:07:56.120 --> 0:07:58.600 the comments that Jamie Diamond made about bracing for a 0:07:58.680 --> 0:08:01.560 hurricane and another sea Yo said bracing for a tornado, 0:08:01.600 --> 0:08:05.040 and someone else mentioned some other weather weather disaster. You know, like, 0:08:05.760 --> 0:08:07.440 what do they actually mean when they do that? How 0:08:07.440 --> 0:08:10.480 do they actually brace other than like, you know, other 0:08:10.520 --> 0:08:13.320 than a physical brace. What are they doing? They're a bank, 0:08:13.440 --> 0:08:15.760 they have loans. They go to their loan portfolio hedging 0:08:15.800 --> 0:08:18.320 group and they say, please increase the amount of hedging. 0:08:18.600 --> 0:08:20.000 So what does the bank do. It looks at the 0:08:20.040 --> 0:08:22.480 loans that it's made, often to the best companies in 0:08:22.920 --> 0:08:26.000 America or in the world, and d risks where the 0:08:26.080 --> 0:08:28.800 risk is. And so we did a number of trades 0:08:28.840 --> 0:08:31.240 with banks where they're coming to us to say, in 0:08:31.240 --> 0:08:33.160 the middle of all this, we want to buy protection 0:08:33.480 --> 0:08:37.400 on Coca Cola, on Johnson Johnson, on Home deepo, Walmart, 0:08:37.520 --> 0:08:39.920 you know, a T and T, Verizon, these big companies 0:08:39.960 --> 0:08:41.960 that have a lot of dat outstanding in terms of 0:08:42.000 --> 0:08:45.400 revolvers and and not relative to their their balance sheet, 0:08:45.440 --> 0:08:48.280 but but relative to just the quantity of debt. And 0:08:48.360 --> 0:08:50.559 so there are a bunch of names. In fact, I 0:08:50.600 --> 0:08:52.840 think everyone I mentioned where if you look at where 0:08:52.840 --> 0:08:56.200 it is today, it's above the worst day of COVID. 0:08:56.760 --> 0:09:00.000 So those names that are not even candidates for discuss 0:09:00.040 --> 0:09:02.520 us and about could the run into trouble as credits 0:09:02.559 --> 0:09:05.360 are above their worst day of COVID, whereas the index 0:09:05.400 --> 0:09:08.160 that they sit in UM is only trading at two 0:09:08.200 --> 0:09:10.720 thirds of the worst day of COVID. Why would those 0:09:10.840 --> 0:09:12.760 names be worse? Why would they be at the wide 0:09:12.840 --> 0:09:15.440 the widest levels and the average be only a two thirds. 0:09:15.480 --> 0:09:18.160 It's because of this technical in the market. And I 0:09:18.200 --> 0:09:20.880 think technicals are the biggest force in the credit market now, 0:09:21.000 --> 0:09:23.480 much more than fundamentals, much more than any time in 0:09:23.520 --> 0:09:26.000 my career, where if somebody has something to do, which 0:09:26.040 --> 0:09:28.679 is to buy billions of dollars of Verizon one year 0:09:28.760 --> 0:09:31.280 or two year CDs, that's going to move the price 0:09:31.320 --> 0:09:34.240 to levels that just doesn't make sense from a fundamental 0:09:34.320 --> 0:09:36.680 point of view. And so what we've been doing is 0:09:36.720 --> 0:09:40.760 going along those names, selling that insurance to fund protection 0:09:41.080 --> 0:09:44.320 on companies with a history of blowing out if actually 0:09:44.360 --> 0:09:46.840 there is a real recession or some other kind of 0:09:46.840 --> 0:09:49.280 crisis and UM and so that that would be found 0:09:49.360 --> 0:09:54.480 usually in consumer finance companies, UM, economically sensitive company cyclicals, 0:09:54.880 --> 0:09:59.200 steel shipping, paper and UM. And so we've found it 0:09:59.280 --> 0:10:02.640 very interesting in the middle of this this problem to 0:10:02.960 --> 0:10:07.000 be able to find attractive long short trades because of 0:10:07.040 --> 0:10:10.080 the technical distortion. So so are you looking at the 0:10:10.120 --> 0:10:13.760 fundamentals of these equities? Are you looking at the technicals 0:10:13.840 --> 0:10:15.840 of how they're trading, or you looking at the credit 0:10:15.880 --> 0:10:19.960 spreads and saying, hey, people away too frightened beyond what 0:10:20.000 --> 0:10:22.839 they should be. Yeah. So we, probably more than most 0:10:22.960 --> 0:10:25.480 on the credit side, do look at equities for clues. 0:10:25.520 --> 0:10:28.960 And sometimes there is one market above faster or slower 0:10:29.000 --> 0:10:32.720 than the other. But we're we're sourcing the tail protection 0:10:32.720 --> 0:10:34.640 that we provide our investors, which is one of the 0:10:34.679 --> 0:10:38.280 main things we do UM through the credit market. And 0:10:38.360 --> 0:10:40.520 we'll get to that, I'm sure. And we're paying for 0:10:40.559 --> 0:10:42.800 it because there are many investors that want it paid for. 0:10:42.840 --> 0:10:45.360 They don't want to just bleed the negative carry through 0:10:45.440 --> 0:10:48.000 Some of these I view as ultra low risk trades 0:10:48.080 --> 0:10:51.679 in verising or Coca cola. Do we want to get 0:10:51.720 --> 0:10:55.000 more specific? Is it strictly an equity bed or is 0:10:55.040 --> 0:11:00.240 it equity combined with some derivative how you put intogether 0:11:00.280 --> 0:11:03.200 these paired traits. So you could look at the history 0:11:03.480 --> 0:11:05.679 and first you could use common sense and say, is 0:11:05.720 --> 0:11:07.600 this the kind of company that could run into trouble? 0:11:07.960 --> 0:11:11.360 Is it not? And and the price is not efficient 0:11:11.559 --> 0:11:15.000 um compared to the past, where fundamentals were the biggest driver. 0:11:15.320 --> 0:11:18.119 We're looking at the credit a little bit about the fundamentals, 0:11:18.120 --> 0:11:20.800 but the fundamentals are sort of not in question. On 0:11:20.840 --> 0:11:24.120 the long side, it's really have these served us well 0:11:24.200 --> 0:11:27.040 and investor as well as tail hedges in the past. 0:11:27.120 --> 0:11:29.800 We look at oh eight and two thousand twenty, two 0:11:29.800 --> 0:11:32.360 thousand and twelve and say, is this the kind of 0:11:32.360 --> 0:11:35.400 company that regularly blows out from a hundred basis points 0:11:35.640 --> 0:11:39.040 to foreigner basis points? Um. Take General Motors for example, 0:11:39.280 --> 0:11:42.559 they defaulted you know, eight problems with the U A 0:11:42.760 --> 0:11:46.520 W behind them. They've still been enormously vulable as a credit, 0:11:46.559 --> 0:11:49.400 as a as a as a company super exposed to 0:11:49.520 --> 0:11:53.000 the U. S economy and the global economy and the pressures. 0:11:53.280 --> 0:11:56.360 The credit in two thousand twenty went from a hundred 0:11:56.480 --> 0:11:59.719 to seven hundred back to a hundred, and it's had 0:11:59.760 --> 0:12:02.080 that of roller coaster, and so we look at and 0:12:02.080 --> 0:12:04.320 said that's a really volatile credit and when it's low, 0:12:04.960 --> 0:12:08.240 that's really asymmetric. You could buy protection and if things change, 0:12:08.240 --> 0:12:09.720 it might move out a lot. Right now it's at 0:12:09.760 --> 0:12:12.080 two fifty. It has moved out a lot more than 0:12:12.120 --> 0:12:14.480 the index. And so we're looking at at like at 0:12:14.559 --> 0:12:17.120 histories to give us a clue. We're looking at forward 0:12:17.160 --> 0:12:22.200 looking UM models, equity voll Um fundamentals. But what we're 0:12:22.240 --> 0:12:24.680 at the end also doing. I should make sure I 0:12:24.679 --> 0:12:28.240 say this is we're providing liquidity to the banks that needed. 0:12:28.280 --> 0:12:30.040 And if they come and say they want to buy 0:12:30.040 --> 0:12:34.800 protection on PEPSI or LVMH or Nestley, that's amazing. You've 0:12:34.880 --> 0:12:37.920 now given me UM the the ammunition I needed to 0:12:38.000 --> 0:12:41.000 go and fund protection on companies that really may run 0:12:41.000 --> 0:12:44.319 into trouble. So so let's talk a little bit about history. 0:12:44.320 --> 0:12:48.520 You mentioned away, Uh, we can also mention two thousand 0:12:48.960 --> 0:12:55.040 in the same sentence, UH, that we're fairly rapid and 0:12:55.360 --> 0:13:01.880 disorderly dislocations maybe might be the exception, and this you've 0:13:01.920 --> 0:13:07.120 described as sort of a slow motion implosion, and yet 0:13:07.160 --> 0:13:11.439 it's still been very orderly. What makes this year so 0:13:11.520 --> 0:13:17.720 unusual compared to UM previous collapses that really seemed to 0:13:17.720 --> 0:13:21.760 to make a bottom and snap back pretty abruptly. Yeah. 0:13:22.000 --> 0:13:25.760 So so first, um, there's the market is still trying 0:13:25.760 --> 0:13:28.280 to figure out what it should most worry about. Uh 0:13:28.360 --> 0:13:30.480 and and so you know, it's like just when you 0:13:30.520 --> 0:13:33.920 think something, maybe we're at peak inflation, past us, maybe um, 0:13:34.000 --> 0:13:36.080 the supply chain problems are coming down, but then you 0:13:36.080 --> 0:13:39.880 have new things. And so there's just been this this um, 0:13:40.240 --> 0:13:43.680 this sell off that continues to find new rationale. And 0:13:43.679 --> 0:13:46.880 then you have the FED um leaning on the market. Actually, 0:13:46.920 --> 0:13:49.880 and when when Powell sounded too devish, you know, first 0:13:49.880 --> 0:13:52.079 all of his peers came out to say, no, no, 0:13:52.720 --> 0:13:55.160 you know, the market we're gonna keep going. And they've 0:13:55.200 --> 0:13:58.000 continued to say that, Kashkari most recently. So, so you 0:13:58.040 --> 0:14:00.960 have the FED kind of um intent on showing that 0:14:01.000 --> 0:14:04.280 they mean what they say and uh and so and 0:14:04.320 --> 0:14:06.960 it probably liking that the market is going down on 0:14:07.000 --> 0:14:09.800 an orderly way, even if it's created some disorder in 0:14:09.840 --> 0:14:12.800 other markets. Look what's happening in the UK. And so 0:14:13.240 --> 0:14:15.200 I'm used to and we're we're all used to sell 0:14:15.240 --> 0:14:18.280 offs that are fairly quick that we know, even though 0:14:18.280 --> 0:14:20.400 eight was five or six months from Lehman to the 0:14:20.440 --> 0:14:22.840 lows of March oh nine, where at the end of 0:14:22.840 --> 0:14:25.160 it you can kind of wonder, is there an all 0:14:25.160 --> 0:14:28.560 clear sign? We have the Fed behind us quantitative easing. 0:14:28.880 --> 0:14:31.080 Now we don't really know who the savior is because 0:14:31.080 --> 0:14:32.800 at the end of all of this, we're it's still 0:14:32.800 --> 0:14:35.440 going to have quantitative tightening and shrinking the balance sheet, 0:14:35.600 --> 0:14:38.680 and so whereas a lot of sell offs, we're just 0:14:38.720 --> 0:14:41.080 a prelude to a to a bowl market one or 0:14:41.120 --> 0:14:43.440 six months later. You know, this has the feeling to 0:14:43.520 --> 0:14:46.520 me like we're going to be worried about some number 0:14:46.520 --> 0:14:50.680 of these things or new things for potentially quarters and 0:14:50.720 --> 0:14:54.640 maybe even years to come. So no capitulation yet no 0:14:54.880 --> 0:14:58.840 flush which gives us that all clear signal. How much 0:14:58.880 --> 0:15:02.680 of that is based on truly not knowing what the 0:15:02.720 --> 0:15:05.400 Fed is gonna do or is it We don't know 0:15:05.520 --> 0:15:09.080 which potential problem is real and which is fake news. 0:15:10.720 --> 0:15:13.560 I these things are so hard to predict. I even 0:15:13.600 --> 0:15:16.200 want to be cautious about, you know, um opining too 0:15:16.280 --> 0:15:18.480 much because it's just such a confusing market and there 0:15:18.480 --> 0:15:21.800 hasn't been a single thing to say, Okay, this is 0:15:21.800 --> 0:15:24.360 why the market is not enough. It should be forty. 0:15:24.440 --> 0:15:28.280 Let's take inflation. If if you look at UM forward inflation, 0:15:28.400 --> 0:15:30.240 it's expected to come down a lot. So you could 0:15:30.240 --> 0:15:32.760 look at tomorrow's CPI print if it comes in a 0:15:32.800 --> 0:15:35.520 tent or below or high, and get excited about it. 0:15:35.560 --> 0:15:38.040 But the market is still telling you inflation is not 0:15:38.120 --> 0:15:40.560 going to be the problem that it is one year 0:15:40.600 --> 0:15:43.000 from now. Now. If a few months from now that 0:15:43.280 --> 0:15:46.760 conviction is shaken, then we're gonna have a real strong 0:15:46.840 --> 0:15:51.160 sell off. If somehow Russia haven't forbid becomes more asymmetric, 0:15:51.400 --> 0:15:53.440 we're gonna have a real problem. And so we just 0:15:53.480 --> 0:15:55.920 don't know. We're in a fog, and we should not 0:15:56.040 --> 0:16:01.440 rely on the lessons that people learn, maybe incorrectly for 0:16:01.480 --> 0:16:04.640 this environment that we're good between oh eight and twenty 0:16:04.760 --> 0:16:07.520 and two thousand twenty two, which was UM the Fed 0:16:07.640 --> 0:16:10.720 is your put, don't fight the Fed, and UM dips 0:16:10.720 --> 0:16:13.880 should all be bought, and UH being short is is 0:16:13.880 --> 0:16:16.880 fighting the Fed. You know this, this really UH does 0:16:16.920 --> 0:16:20.600 not feel like that environment in particular because of where 0:16:20.920 --> 0:16:25.120 the central banks are versus then so, but the one 0:16:25.200 --> 0:16:29.000 lesson that should carry through sounds like continue not to 0:16:29.040 --> 0:16:32.320 fighting the Fed when the Fed reverses their position I'm 0:16:32.320 --> 0:16:34.480 glad you said that, Barry, because because about nine years 0:16:34.520 --> 0:16:36.960 ago I had a prospective investor in my office where 0:16:37.040 --> 0:16:40.760 Long Invall funds. One of our main products is long volatility. 0:16:40.840 --> 0:16:42.720 And I don't know if he didn't quite know that, 0:16:42.720 --> 0:16:44.880 because he kind of wagged his finger at me and said, 0:16:44.920 --> 0:16:46.880 didn't you know It's like, Sonny, didn't someone ever tell 0:16:46.920 --> 0:16:49.320 you don't fight the Fed just to be long volatility? 0:16:49.560 --> 0:16:52.280 When Mario drag said, trust me, I'll do whatever it takes. 0:16:52.280 --> 0:16:55.560 That's a and uh and that. But that that psychology 0:16:55.600 --> 0:16:58.080 of don't fight the Fed, don't be short is, in 0:16:58.120 --> 0:17:00.600 my opinion, a lazy person's way of saying, let's always 0:17:00.640 --> 0:17:03.520 belong Because if you if that person were around today, 0:17:03.520 --> 0:17:05.800 I don't exactly remember who even was to to make 0:17:05.840 --> 0:17:07.600 that call back, I'd say, if you really believe and 0:17:07.640 --> 0:17:10.080 don't fight the Fed, how much of your risk did 0:17:10.160 --> 0:17:12.359 did you take down when the Fed said that they 0:17:12.359 --> 0:17:14.879 really meant business and we're going to be selling ussets 0:17:14.920 --> 0:17:17.680 for years to come, and plus all of these problems 0:17:17.720 --> 0:17:19.960 that when you add up the number of problems in 0:17:19.960 --> 0:17:23.560 different theaters, I I can't think of a corollary that 0:17:23.720 --> 0:17:25.560 you know, it's it's to me, it does feel worse 0:17:26.119 --> 0:17:28.560 in many respects than than any other experience in the 0:17:28.560 --> 0:17:31.920 market I've haund So you hinted at UK guilt and 0:17:32.080 --> 0:17:36.119 what's going on over in London. Um, the strength of 0:17:36.200 --> 0:17:39.200 the dollar is another factor. How do you think about 0:17:39.240 --> 0:17:43.760 those when you're considering tail risk and volatility. So we're 0:17:43.760 --> 0:17:47.160 not experts in UH in foreign exchange, but I look 0:17:47.160 --> 0:17:49.520 at the guilt market, for example, and you see, like 0:17:49.640 --> 0:17:53.320 the UK half a percent bond of two thousand sixty one. 0:17:53.680 --> 0:17:55.720 Somebody you know in two one bought a four to 0:17:55.800 --> 0:17:58.439 year bond that was gonna pay not someone, a lot 0:17:58.440 --> 0:18:00.520 of people, It's gonna pay half a percent a year 0:18:00.760 --> 0:18:02.360 for forty years. And at the end of all that, 0:18:02.760 --> 0:18:05.520 the most you could possibly make was half a percent 0:18:05.560 --> 0:18:09.399 times forty minus some inflation and UH and that's so 0:18:09.480 --> 0:18:12.480 that would be twenty points without discounting. Without inflation, the 0:18:12.520 --> 0:18:14.879 things down seventy three points. So when you when you 0:18:14.920 --> 0:18:17.639 think about boundary conditions, you know, and I what I 0:18:17.720 --> 0:18:19.320 like to do and in the dirt of markets is 0:18:19.320 --> 0:18:21.800 look at boundary conditions to say how much can I make, 0:18:22.080 --> 0:18:24.640 how much can I lose? And where is there semisymmetry. 0:18:24.920 --> 0:18:27.920 And by the way, we were not sure at any 0:18:27.960 --> 0:18:29.920 any UK bonds to be clear, but there are a 0:18:29.960 --> 0:18:32.760 lot of trades that looked like this kind of I 0:18:32.760 --> 0:18:35.000 can only lose a little bit, but just in case 0:18:35.080 --> 0:18:37.840 it's not transitory, or just in case there's an unknown 0:18:37.880 --> 0:18:40.439 known that is really problematic, you might be able to 0:18:40.480 --> 0:18:43.199 make eight to ten or twenty times what you might 0:18:43.240 --> 0:18:46.280 have lost and to see this move and it may 0:18:46.280 --> 0:18:49.359 continue of higher rates, whether it's the U S or Europe, 0:18:49.800 --> 0:18:53.760 where the investor loses three or four times what they 0:18:53.800 --> 0:18:57.000 could possibly make at the end of the day with bonds. 0:18:57.040 --> 0:18:59.760 I think it it reminds me of how investors don't 0:18:59.800 --> 0:19:02.439 really think about um fixed income and equities in the 0:19:02.440 --> 0:19:04.520 way that that I do, which is, you know, equities 0:19:04.600 --> 0:19:07.840 gives you this unbounded upside. It could be Tesla, it 0:19:07.880 --> 0:19:10.760 could it could be uh, it could be uh Faraday 0:19:10.800 --> 0:19:13.240 Future or Fisker. But you know your your minus a 0:19:13.280 --> 0:19:16.400 hundred and your plus twenty and and that's and that's 0:19:16.400 --> 0:19:18.800 the range. But in fixed income often there's so little 0:19:19.200 --> 0:19:22.320 to earn that when I see my peers talk about 0:19:22.560 --> 0:19:24.679 high yield at five percent is amazing because it used 0:19:24.720 --> 0:19:27.800 to be a three percent. I feel like, wait a second, 0:19:28.080 --> 0:19:30.119 how many defaults do we expect this year? There's a 0:19:30.119 --> 0:19:32.040 lot of companies in that index that are going to 0:19:32.160 --> 0:19:34.880 run into trouble. So what are we really how excited 0:19:34.880 --> 0:19:37.159 can we really get just because high yield is you know, 0:19:37.240 --> 0:19:39.560 has widened by two percentage points and so so I 0:19:39.560 --> 0:19:43.240 think fixed income can end up effectively being an option, 0:19:43.280 --> 0:19:44.879 but people don't look at it as an option, and 0:19:45.040 --> 0:19:48.000 I view it often as asymmetric, as an asymmetric short. 0:19:48.200 --> 0:19:51.200 And that's one of the guiding principles of our tailheade strategy. 0:19:51.520 --> 0:19:55.359 So so let's talk about another UM credit related issue. 0:19:55.400 --> 0:20:00.119 A couple of weekends ago, people were talking about the 0:20:00.160 --> 0:20:05.679 winding credit defaults on Credit Swiss um and surprisingly you 0:20:05.800 --> 0:20:09.040 came out and said, everybody, catch your breath. Credit Swiss 0:20:09.080 --> 0:20:14.080 isn't isn't Lehman brothers. Just look it at various ratios. 0:20:14.280 --> 0:20:18.199 What made that so attractive to shorts and and what 0:20:18.359 --> 0:20:21.640 led you to the conclusion that Credit Swiss was more 0:20:21.720 --> 0:20:24.919 or less Okay? Yeah, I didn't start out thinking I 0:20:24.960 --> 0:20:27.480 want to say something public. I basically have zero Twitter 0:20:27.480 --> 0:20:30.200 followers before this, and then all of a sudden, Um, 0:20:30.520 --> 0:20:34.320 you know, it became a thing. I noticed that people 0:20:34.320 --> 0:20:38.120 with hundreds of thousands of followers were saying credit swite 0:20:38.160 --> 0:20:42.479 spreads are out their decade high. It's an imminent bankruptcy. UH, 0:20:42.840 --> 0:20:46.000 imminent default according to secret sources. And when you see 0:20:46.040 --> 0:20:47.960 like people with a hundred followers thing that find but 0:20:48.240 --> 0:20:50.560 we have kind of at the same time almost this 0:20:50.680 --> 0:20:52.560 you could almost read that it was the same person 0:20:52.600 --> 0:20:55.480 sending it from accounts or team with with hundreds of 0:20:55.520 --> 0:20:58.119 thousands of followers, that this sounds like scare mongering. It 0:20:58.119 --> 0:21:00.679 sounds like someone trying to make something of about it. 0:21:00.760 --> 0:21:03.000 And well, what do I know. I know that this 0:21:03.119 --> 0:21:06.800