Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of The Odd Lots Podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal.
Speaker 2: Joe, I've been reflecting on this year. It's been a
Speaker 2: busy year.
Speaker 3: Yeah, go on.
Speaker 2: In fact, we're recording this. We're on yet another trip.
Speaker 2: We're in Huntington Beach for this year's future Proof conference,
Speaker 2: which is always a fun time an event I always enjoy,
Speaker 2: but we happen on the road a lot. Yeah, and
Speaker 2: I feel like the entire year is starting to feel
Speaker 2: very surreal for me. It feels just very different to
Speaker 2: prior years for many different reasons. But I was also
Speaker 2: thinking one of those reasons is because it seems harder
Speaker 2: and harder to do portfolio construction nowadays. And I know
Speaker 2: that sounds really weird, given that markets are still at
Speaker 2: record highs and everything seems to be going reasonably well,
Speaker 2: even though we had that terrible jobs number. But if
Speaker 2: I think back to the big leg down that we
Speaker 2: saw this year, it seemed really scary because basically everything
Speaker 2: sold off at once.
Speaker 4: Right.
Speaker 3: You know what I really like. I like how you
Speaker 3: started this with this philosophical thing like we're out on
Speaker 3: the road and.
Speaker 2: All this, and then I was like, how do I
Speaker 2: protect my.
Speaker 3: Portfolio and reflecting and then the surreality of the times
Speaker 3: and now we bring it around to portfolio construction. But no,
Speaker 3: that's true, and there's two a couple of things going on.
Speaker 3: So one is the sort of like cross asset class moves.
Speaker 3: The other thing is and is very related to that.
Speaker 3: I mean it's the flip side of this, which is
Speaker 3: correlation breakdown. And then there was still this other element
Speaker 3: that I think there is a play where at least,
Speaker 3: like I would say, there's two more things, which is
Speaker 3: that one within us assets, the winners are still the winners, right,
Speaker 3: especially a lot of these big tech names, so you
Speaker 3: haven't gotten the sort of secular and people.
Speaker 2: Have been talking about overvaluations for forever.
Speaker 3: And then the fact that you know you're not getting
Speaker 3: paid much to take on volatility risk or volatility measures
Speaker 3: are still very low. So there's a lot of difficult,
Speaker 3: unintuitive things going on.
Speaker 2: And I don't even know what a tail risk hedge
Speaker 2: actually looks like at this point, because I would have
Speaker 2: thought like, well, obviously maybe you diversify into long duration
Speaker 2: bonds or something like that. But then in April when
Speaker 2: we had the big sell off long duration and not
Speaker 2: do that well either. So it kind of has me
Speaker 2: scratching my head about if you were worried about stuff
Speaker 2: both literally and figuratively perhaps blowing up at this point
Speaker 2: in time, what would you be doing, Like, what does
Speaker 2: a tail risk hedge actually look like? Now?
Speaker 3: You like buke gold that's already at record high. Yeah, yeah,
Speaker 3: it's confusing.
Speaker 2: Yes, Okay. So on that note, I'm very happy to
Speaker 2: say we actually have the perfect guest to talk about
Speaker 2: tail risk insurance and just tail risks in general, someone
Speaker 2: who's been working on Wall Street for a really really
Speaker 2: long time and has a very storied career, lots of
Speaker 2: stories involving big names that you and I would definitely recognize.
Speaker 2: We're going to be speaking with. Veneer Bensali is, of
Speaker 2: course the founder of a long tail Alpha and again
Speaker 2: has worked at many many firms previously. We'll get into
Speaker 2: all of that. Veneer, thank you so much for coming on.
Speaker 4: All thoughts, thank you for having me.
Speaker 2: So I should just go ahead and ask you to
Speaker 2: give a sort of five minutes summary of your career
Speaker 2: because it is kind of amazing. But the important thing
Speaker 2: is you didn't start out as a trader, You started
Speaker 2: out as a mathematician.
Speaker 4: Yep. I started out as a theoretical physicist. I was
Speaker 4: finishing my PhD at Harvard, and this is nineteen ninety one.
Speaker 4: The recession had just hit. I didn't know what a
Speaker 4: recession was. I wanted to be a professor, but my
Speaker 4: job evaporated because I was going to go work at
Speaker 4: the super colliders. The Superconducting SuperCollider got canceled by Congress.
Speaker 4: Nineteen nineties. I had a post dot lineup in France
Speaker 4: and one I think it was in Texas and Austin,
Speaker 4: and I got a call out of Wall Street, out
Speaker 4: of Goldman. They were looking for quants like me to
Speaker 4: work on options trading or options model building rather, I
Speaker 4: should say. So I went and interviewed, mostly because of
Speaker 4: the free trip in New York. I went there, got
Speaker 4: interviewed by an elderly gentleman who was taking notes saying,
Speaker 4: doesn't know any finance. For disclosure, I knew no finance.
Speaker 4: I had no interest in it. It was Fisher Black
Speaker 4: who was in Really Oh wow, I decided Black Scholes fame.
Speaker 4: Little did I know when I turned that job down
Speaker 4: from Goldman. I took another job at City Bank, trading derivatives,
Speaker 4: because in my mind was a sabbatical. I was going
Speaker 4: to do this for about six months to a year
Speaker 4: and then go back to physics. Well, little did I
Speaker 4: know that my whole life would become basically, very deeply
Speaker 4: connected with ation trading. So that's what I've been doing.
Speaker 4: And we'll talk a lot more about dail risk getting
Speaker 4: in a second.
Speaker 2: Wait, I got to ask why did you decide to
Speaker 2: turn down Goldman? And given the Fisher Black himself was
Speaker 2: doing the interview, and you chose to go to City
Speaker 2: at that.
Speaker 4: Time, Well, one was a research job at Goldman, and
Speaker 4: the job at City was actually trading drivens. And since
Speaker 4: trading was so far away from what I knew, and
Speaker 4: this was really supposed to be a vacation for me
Speaker 4: for about a year, like found like a good thing
Speaker 4: to do, for a fun thing to do.
Speaker 3: Rather, did you ever feel like always so curious about
Speaker 3: stories from the early days of physicists going to Wall Street.
Speaker 3: Was there a period where you felt like it was
Speaker 3: a bit beneath I mean, you call it kind of
Speaker 3: a vacation job. Did it feel intellectually beneath you for
Speaker 3: a while, and then did it eventually become sort of
Speaker 3: genuinely intellectually satisfying in the way that maybe you had
Speaker 3: anticipated an academic career to become so interesting.
Speaker 4: Though the modeling certainly at those days seemed a little
Speaker 4: too naive. So for instance, I'll give you an example
Speaker 4: very first trade that we did, large trade. I was
Speaker 4: a city bank at the time, and it was an
Speaker 4: interest rate gap on yen. Interest rates linked to the
Speaker 4: dollar yen, so it was basically a two factor option
Speaker 4: called hybrid option. And it turned out that at a physicist,
Speaker 4: I was very easy. It was very easy for me,
Speaker 4: and I was very able to write a Monte Carlo
Speaker 4: to write this knockout gap, but for the finance people
Speaker 4: it was kind of tough. So the math was very easy.
Speaker 4: But I also learned that trading is not just math.
Speaker 4: Trading is a lot of behavioral stuff and so on,
Speaker 4: and that I just obviously had to learn. And I
Speaker 4: have some great stories of stuff that I did really
Speaker 4: badly back in nineteen ninety ninety four.
Speaker 3: Tell us the story I did badly well, So nineteen ninety.
Speaker 4: Four, if you remember, in a nineteen ninety three the
Speaker 4: fed ad eased and rates were quite low, and everybody
Speaker 4: was long the front end of the yeld curve and
Speaker 4: buying year dollar features contracts.
Speaker 3: Wait, didn't it talent around here go bankrupt?
Speaker 4: Yes, yes, yes, we'll get to that exactly. So February
Speaker 4: of nineteen ninety four, the Fed raised race by twenty
Speaker 4: five and then very surprisingly April eighteenth of that year,
Speaker 4: they did an inter meeting increase. And at that time
Speaker 4: bond market has always sold off quite a bit, and
Speaker 4: I just did what human beings you do, which is
Speaker 4: that on mean reversion. So I tried to buy the
Speaker 4: bond market, and tried to buy the bond market again
Speaker 4: and again and again until I realized that there's something
Speaker 4: called trend following and exit. And I think the bond
Speaker 4: market sold off a good fifteen twenty points and finally
Speaker 4: I recouped all that. It was a brutal few months
Speaker 4: of literally getting my face ripped off.
Speaker 2: So one other thing, I'm curious the sort of early
Speaker 2: days of quants, But what exactly was the pitch to scientists,
Speaker 2: whether they're you know, mathematicians or physics guys. When these
Speaker 2: big banks or big trading firms are trying to recruit
Speaker 2: back then, because you know, like quant was in the
Speaker 2: I know we had nineteen eighty seven by them, but
Speaker 2: it was still relatively in the early days. So I'm
Speaker 2: really curious, like what they told you about what you
Speaker 2: would be doing.
Speaker 4: So from the modeling side is pretty straightforward, right, the
Speaker 4: blactual equation and stochastic calculus. Stochastic finance is basically what's
Speaker 4: called the eight equation or the diffusion equation in physics,
Speaker 4: and that's something that every physicist learns when they're in
Speaker 4: early graduate school. It's like solving a partial differential equation.
Speaker 4: So the math is exactly identical the math of finance.
Speaker 4: And maybe that's the problem actually in retrospect now that
Speaker 4: having done this for thirty years and thirty plus years
Speaker 4: and survived, maybe that's the problem because the beauty can
Speaker 4: somehow hide the frictions underneath it. From the trading side,
Speaker 4: when I first started crating, I think it was very
Speaker 4: simply being mathematically sharp and quick and being able to
Speaker 4: answer quizzes just made interviewers feel like they were getting
Speaker 4: smart people on the desk that they could train right
Speaker 4: the blank canvas, so speak.
Speaker 3: So once people on these desks got armed with PhD
Speaker 3: physicists and understanding of like Brownian motion and stuff like that.
Speaker 3: Did that change how the actual markets traded from your perspective,
Speaker 3: like sort of pre and posts that, did assets conform
Speaker 3: more to as models anticipated because of the model effect
Speaker 3: on them? Like what was your observation of actual existing
Speaker 3: market behavior pre and post the physics revolution?
Speaker 4: Oh? Absolutely, And this is a very important question because
Speaker 4: if you fast forward to twenty eighteen, the Big XIV
Speaker 4: debacle and the bottomagedin and a lot of things that
Speaker 4: happen now and actually fundamentally, what we do now, what
Speaker 4: I do now is related to this fact that there's
Speaker 4: a very night feedback loop between models and markets and models.
Speaker 4: So give you a very simple example, Right, you have
Speaker 4: an option that you've sold to somebody, and you have
Speaker 4: to manage the risk. Of course, when you sell the option,
Speaker 4: you're getting a multimary premium. That's why you sell it.
Speaker 4: You're getting an insurance premium, so to speak. But then
Speaker 4: to manage the position, you have to delta hedge. But
Speaker 4: delta hedging means that you have to buy and sell
Speaker 4: the underlying asset and some higher order greeks as well,
Speaker 4: Gamma vega data that you've all read about. But delta
Speaker 4: hedging requires people to be able to buy and sell
Speaker 4: so that they are the seller. The market maker is
Speaker 4: locally flat of course, so the market maker, that's what
Speaker 4: you do, and that's how you earn your keep, earn
Speaker 4: your visa, so to speak. The problem is that there's
Speaker 4: an idealization in mathematics or mathematical finance that you can
Speaker 4: do this at an unlimited size, and size doesn't matter,
Speaker 4: but it matters. Liquidity is actually not there. The basic
Speaker 4: assumption of black shoals is that you can continuously trade
Speaker 4: with almost zero transactions costs. Well, that's just not true
Speaker 4: in real markets. As a matter of fact, in the
Speaker 4: last maybe two years even you've seen liquidity in the
Speaker 4: EMNI futures contracts, which are possibly the I would take
Speaker 4: the zero to order hedging instrument for the equity markets
Speaker 4: go down relative to the high levels, frequently go down
Speaker 4: to maybe one twentieth or one fiftieth office level. So
Speaker 4: people just can't get out. So what happens is that
Speaker 4: people sell options, then they start delta hedging. Delta hatging
Speaker 4: results in the options market reacting to the delta, then
Speaker 4: results in new hedges coming in. So this feedback loop
Speaker 4: gets tighter and tighter and tighter until something breaks. And
Speaker 4: when something breaks and the box shut down, which is
Speaker 4: today's environment, you actually have no liquidity and that's when
Speaker 4: you get these crashes like Liberation Day on April second.
Speaker 2: Vall Mageddon was definitely one of the more weirder events
Speaker 2: in markets because everyone could see what was going to
Speaker 2: happen when the VIX curve actually inverted, Like you could
Speaker 2: see that all these products were going to go absolutely
Speaker 2: belly up and no one, no one seemed to react
Speaker 2: to it until it was like much, much too late.
Speaker 2: That reminds me so one of the reasons that we
Speaker 2: are interviewing you here in Huntington Beach is because you
Speaker 2: used to work at Pimco with Bill Gross. In the
Speaker 2: last time we spoke to Bill Gross, I think was
Speaker 2: actually at Huntington Beach two years ago, and one of
Speaker 2: the things we spoke to him about was volatility selling,
Speaker 2: and Bill kind of became the poster child for a
Speaker 2: little bit of volatility selling, at least in the bond
Speaker 2: market in the sort of like Guesse. It would have
Speaker 2: been twenty fifteen around then, mid sort of twenty tens area.
Speaker 2: I'm really curious who's selling fall now and how has
Speaker 2: it changed over the course of your career.
Speaker 4: Yeah, so a great little site point there. So Bill
Speaker 4: and I've been great friends. As a matter of fact,
Speaker 4: I went to pimcoll because I heard Bill speak at
Speaker 4: a talk when he was advertising in book back in
Speaker 4: two thousand and Bill's an amazing genius, great investor, and
Speaker 4: one of the best compliments I got. Recently, I was
Speaker 4: communicating with him and he said, I have your paper
Speaker 4: at the top of my reading list and I said,
Speaker 4: wish paper, Bill, And he said, this paper that I
Speaker 4: wrote with Larry Harris on the volatility selling ecosystem that
Speaker 4: basically you grew up before twenty eighteen. So yes, So
Speaker 4: Bill actually in a sense invented the sole idea of
Speaker 4: selling volatility in fixed income, especially through buying mortgages or
Speaker 4: explicit selling of straddles and strangles and what we realized.
Speaker 4: And again I was head of analytics at pimcos, so
Speaker 4: over the last or over fifteen years or so I
Speaker 4: was there, I got to see and help him manage
Speaker 4: the quantitative risks of those portfolios. We ended up educating
Speaker 4: a lot of our clients at that time about volatility selling, harvesting,
Speaker 4: wall premiums and so on, which did end up adding
Speaker 4: quite a bit of as Bill calls its structural alpha
Speaker 4: to the Pimco portfolios and twenty thirty forty basis points
Speaker 4: every year. What happened is that everybody got educated and
Speaker 4: it became part of the academic lore and everybody realized it.
Speaker 4: There was a lot of crowding, and it's a little
Speaker 4: bit like selling insurance, right, so when you find that
Speaker 4: one insurance policy selling works, then you say, why don't
Speaker 4: become multi line insurance provider, so you start telling insurance
Speaker 4: policy and everything. And so what has happened now over
Speaker 4: my career it have gone from institutional selling, where first
Speaker 4: of it was hedge funds, then it was large sophisticated
Speaker 4: mutual funds like Pinco, who could actually still fit it
Speaker 4: inside of the mutual fund complex because selling naked options
Speaker 4: is not really allowed unless you cash back it. And
Speaker 4: then over time it has now gone to all the
Speaker 4: do it yourselfers, so all the wealth offices and family
Speaker 4: offices and large endowments, and this whole area which is
Speaker 4: now called alternative risk premiums, is based on this idea
Speaker 4: that you can go and sell volatility in various forums
Speaker 4: explicit forms or implicit forms to generate income. So everybody's
Speaker 4: doing it.
Speaker 2: Yeah, that's the answer. Everyone. Even more people are doing it.
Speaker 2: So when we see alternative risk premia, it's basically a
Speaker 2: vall selling overlay. Is that it?
Speaker 4: Yeah, I mean you can make it more or less sophisticated.
Speaker 4: I mean it's a little bit naive to say it's
Speaker 4: only wall selling, but wall selling is a very important
Speaker 4: component of it. And there were some great papers by
Speaker 4: people from AKR who took every asset class, so equities, bonds, credit,
Speaker 4: foreign exchange, and then also sliced stray down in various
Speaker 4: types of strategy, style and quality and momentum and so on.
Speaker 4: They made like a sixteen by sixteen matrix, and then
Speaker 4: they recreated this what I'd consider to be more sophisticated
Speaker 4: sounding ball selling, But it really is ball selling. And
Speaker 4: what people do, just to be very clear, is it's
Speaker 4: not just ball selling. They also layer on other things
Speaker 4: like trend following on top of it to create a
Speaker 4: counterbalance to the ball selling, because trend following is naturally
Speaker 4: a ball liking or ball long ball type of strategy.
Speaker 3: Going back to I hadn't realized that about the declining
Speaker 3: or the collapsing liquid within the many futures. But is
Speaker 3: there some sort of I don't know, law of thermodynamics
Speaker 3: or something. I don't know if that's the term or
Speaker 3: that's the analogy in market where such that when some
Speaker 3: instrument becomes the hedging instrument of choice, the more popular
Speaker 3: that gets, the less capacity there is for liquidity in
Speaker 3: that instrument. Is that sort of what's going on?
Speaker 4: Yeah, So in this case, the even futures contract are
Speaker 4: basically a speculation vehicle. They're a cash equitization vehicle, so
Speaker 4: they serve a lot of different purposes. But I think
Speaker 4: the biggest thing that's going on here is that, starting
Speaker 4: maybe about ten years ago and somewhat surreptitiously, the market
Speaker 4: morphed from human market makers. So when I started trading,
Speaker 4: it was human market makers. I still remember when I was,
Speaker 4: you know, in the nineteen nineties, Tommy Baldwin on the
Speaker 4: pit of the CBOT floor chicagoboard to trade floor. You know,
Speaker 4: you would do a trade and Tommy Baldwin, and he
Speaker 4: was legendary obviously, he would lift his hand up and
Speaker 4: the market would stop and turn and go the other
Speaker 4: way humans could do that.
Speaker 2: Yeah, but what.
Speaker 4: Happened surrepticiously or very strangely over the last fifteen or
Speaker 4: ten years maybe, is that the human beings have sort
Speaker 4: of left this market making area and ninety plus percent
Speaker 4: is being made by bots. And what bots know very
Speaker 4: well self survival is extremely important to them is as
Speaker 4: soon as they see a liquidity tidal wave coming so
Speaker 4: nami coming at them, they just get out of the way.
Speaker 4: Liquidity just becomes very episodic and muhammadalarians to call it
Speaker 4: latent ill liquidity, which is just the fixture of the
Speaker 4: markets today. It looks liquid and when you don't need it,
Speaker 4: it's there, but if you need it, it's not there.
Speaker 2: So how do you actually deal with that as a trader?
Speaker 4: Yeah, so as a trainer. So this comes back to
Speaker 4: the role of options fundamentally, right, So what do options
Speaker 4: in the world of quantitative finance. You can take an option,
Speaker 4: you can replicate it by doing delta hedging and so on,
Speaker 4: basically looking at the partial derivatives of an option pricing equation,
Speaker 4: or you can say I'll just buy the option. An
Speaker 4: option is a contractual agreement between you and the option provider.
Speaker 4: So if there's ill liquidity, and if you believe this
Speaker 4: is a fixture of the environment that we're going to
Speaker 4: live in, then there is no other way than to
Speaker 4: actually have a contractual agreement with somebody where you're delegating
Speaker 4: the illiquidity is to them, so you are buying it
Speaker 4: when the premium is cheaper. But trying to delta heget
Speaker 4: yourself is like literally trying to put an elephant to
Speaker 4: the eye of a needle. It's just people just cannot
Speaker 4: work out. I mean, I just can't. I just can't
Speaker 4: imagine the market collectively trying to get to that needle.
Speaker 4: These days, there is just nothing there.
Speaker 3: Let's talk about April for a second, and maybe that
Speaker 3: period like between April second and April ninth, because there
Speaker 3: was a market event, for sure, and it was also
Speaker 3: a real economic event with many things going on that
Speaker 3: weren't just lines on a chart, et cetera. And we
Speaker 3: know it sort of happened there with the tariffs and
Speaker 3: then the reversal of some of the tariffs and what
Speaker 3: so forth. Since then, we've seen some of these correlation
Speaker 3: breakdowns that some of our previous guests have talked about.
Speaker 3: From your perspect active, you know, whether it's April second
Speaker 3: and three, April ninth, or April second through Now, what
Speaker 3: happened then such that maybe some maybe is it a
Speaker 3: new regime? What changed in that month?
Speaker 4: Yeah, So I think one of the thing that is
Speaker 4: going on is we are slowly undergoing a regime shift.
Speaker 4: And I'd like to always paint this picture, and I'll
Speaker 4: come to your question right after I give you this
Speaker 4: big macro picture. From the sixties to the eighties. Sixties
Speaker 4: to the mid eighties, you had this period of rising inflation,
Speaker 4: rising volatility, non credible central banks, and stuff was kind
Speaker 4: of breaking and people were behind the curve. Then you
Speaker 4: had the vulker increase of interest rates starting in the
Speaker 4: nineteen eighties and until the maybe late twenties twenty twenty
Speaker 4: call it twenty twenty one, COVID was an accelerant. You
Speaker 4: got negative yels and falling volatility, credible central banks and
Speaker 4: so on. And I think we've actually turned the corner again.
Speaker 4: So starting in twenty twenty twenty one, I think we
Speaker 4: are probably going to look more like the sixties to
Speaker 4: eighty than nineteen eighty seven to twenty twenty. Now, having
Speaker 4: put that backdrop, you know, in front of US. I
Speaker 4: think the issue really comes back to, yes, there is
Speaker 4: a regime shift, both in terms of people's response function
Speaker 4: and how quickly things happen. So one data point that
Speaker 4: I can realize since I started trading is in the past,
Speaker 4: when crises would happen, even including the GFC, which I
Speaker 4: lived through and did fairly well, it used to take months,
Speaker 4: maybe weeks for things to correct, and you had time
Speaker 4: to plan and time to execute. Then Vollmageddon maybe took
Speaker 4: a few days twenty twenty COVID it maybe happened in
Speaker 4: a few days to few hours, and then starting this year,
Speaker 4: it feels like things are actually happening on an hourly
Speaker 4: to maybe minute basis. For instance, in April, when the
Speaker 4: big crash happened and the correction happened, all the action,
Speaker 4: including some of our trading, happened in the pre pre market,
Speaker 4: so the markets had not even opened up, and if
Speaker 4: you needed to do something, you had to do it
Speaker 4: during the night session because that's where all the action was.
Speaker 4: So I think that's one fixture of what's going on
Speaker 4: right now, is that stuff is happening much faster, and
Speaker 4: it does feel like the balance that's tilted in the
Speaker 4: favor of more automated trading rather than human driven trading.
Speaker 2: Let me ask a philosophical question about tail risk protection,
Speaker 2: which is, whenever there's a blow up, we suddenly get
Speaker 2: all these stories about tail risk funds that have done
Speaker 2: phenomenally well out of last month's chaos or whatever it
Speaker 2: might be, and then no one talks about them for
Speaker 2: like the next three years.
Speaker 3: You don't know how they're bleeding dry during those other months, right.
Speaker 2: That's right, until we got another blow up, and then
Speaker 2: the cycle repeats itself in your mind, What is the
Speaker 2: purpose of tail risk protection?
Speaker 4: Yeah, this is very simple, and I've been trying to
Speaker 4: do this. This is actually one of my missions since
Speaker 4: I started our firm, is not just managing the risk,
Speaker 4: but also trying to educate people and what the purposes.
Speaker 4: This purpose is very similar to insurance, and not everybody
Speaker 4: needs it. If you don't live in California earthquake prone
Speaker 4: zone or in Florida hurricane and prones on, you don't
Speaker 4: need the insurance. But if you're going to run a
Speaker 4: large equity heavy portfolio, and by the way equities have
Speaker 4: demonstrated over the last hundred years and maybe going forward,
Speaker 4: are the one way to create long term wealth because
Speaker 4: people go to work. The first thing I learned when
Speaker 4: I was a city bank from my boss told me
Speaker 4: was just look at log GDP versus log SMP. The
Speaker 4: charts are aligned. Basically, if people work, the market goes up.
Speaker 4: So what that means is that you need to be
Speaker 4: invested in the stock market. And the more you invest
Speaker 4: in the stock market, the more likely it is that
Speaker 4: you're going to make higher compounded returns over time. But
Speaker 4: also you will suffer big drawdowns. And one of the
Speaker 4: biggest problems with people's behavioral function is that when the
Speaker 4: markets collapse, they forget their plans and they liquidate. So
Speaker 4: what tail risk fundamentally does. It's not a fund that
Speaker 4: you should look at isolation and say is this fund
Speaker 4: a good performer or not? Just like you would not
Speaker 4: go back home and say, well, what was the total
Speaker 4: return on my home insurance policy? Right? It's just negative percent?
Speaker 4: Right every single year? So would you quit buying insurance?
Speaker 4: You won't, because home insurance or car insurance is not
Speaker 4: an investment. It is the cost of doing business. So
Speaker 4: that's the context in which one should think about dail
Speaker 4: risk catching is it allows you to first protect yourself
Speaker 4: from yourself in that events, and then secondly, when the
Speaker 4: markets are down, the value of those hedges going up
Speaker 4: allows you to buy assets on the cheap, which results
Speaker 4: in compounded growth.
Speaker 3: Why hasn't Wall Street created an instrument where you could
Speaker 3: sell away your liquidity to protecting from yourself automatically. I'm
Speaker 3: going to invest in this fund and I cannot sell
Speaker 3: until the year twenty sixty.
Speaker 2: Isn't that called lockups?
Speaker 3: But to those funds that actually exist, could I buy that?
Speaker 3: And then there's two things that intuitively seem that A.
Speaker 3: You protect yourself from yourself. B You diversify automatically by
Speaker 3: the fact that you're across time. And then see presumably
Speaker 3: that would be more stable for securities, lending and collect
Speaker 3: the little instrument? Has Wall Street created a fund that
Speaker 3: one can't get out of?
Speaker 4: I think, like Chrissie just mentioned, hedge funds like to
Speaker 4: have lock ups, and.
Speaker 3: I should just be able to buy an e TF
Speaker 3: that I can't sell.
Speaker 4: Yeah, I think that if you can get over the regulators.
Speaker 4: I think that we are living in a world where
Speaker 4: mark to market daily and av et cetera. For ETFs
Speaker 4: and port transparency is required but I do think. I mean,
Speaker 4: one one very sophisticated institutional investor who was a client
Speaker 4: of ours actually said I would bay you more if
Speaker 4: you sold me a product that actually had a longer lock.
Speaker 3: Because this is a question I have about portfolios and
Speaker 3: diversification in general, and it goes back to the point
Speaker 3: that you made about how stocks have done very well
Speaker 3: and the expectation is that as long as the economy growers,
Speaker 3: stocks will continue to do well for a while. Sixty
Speaker 3: forty was a craze, right, and this is a good
Speaker 3: portfolio over your treasury is and your stocks balance out.
Speaker 3: But why should like, what is the case for diversification,
Speaker 3: Let's say, sitting aside the behavioral fact that people sell
Speaker 3: it the lows, what is the case for diversification when
Speaker 3: there is this asset class that does so well over time?
Speaker 4: Yeah, so this is great. Though, if you could guarantee
Speaker 4: that this asset class would keep growing always, then you
Speaker 4: woul one hundred percent be on stuff. Now, what bonds
Speaker 4: traditionally used to do was they provided you with income
Speaker 4: that when the stock market wasn't doing well, at least
Speaker 4: you wouldn't go completely broke because you would have some yield.
Speaker 4: But I think it got taken to an extreme right,
Speaker 4: I mean to the greatest example, and I wrote a
Speaker 4: whole book on this topic is is the European Central
Speaker 4: Bank followed the Japanese Central Bank and then they start
Speaker 4: buying it negative yields. Yeah, and they convinced all the
Speaker 4: indexers to keep buying bonds with them, right, I mean
Speaker 4: think about this. You were buying bonds, meaning you were
Speaker 4: lending somebody money and you were paying them interest. And
Speaker 4: at that point, diversification is an insult. I mean, you
Speaker 4: don't want to buy a negatively yielding bond along with
Speaker 4: stocks because it does nothing for you. And we're living
Speaker 4: the consequences of it today because the bond market over
Speaker 4: the last five or seven or ten years even has
Speaker 4: had absolutely dismal zero turns.
Speaker 2: Joe, do you think people who want positive yielding bonds
Speaker 2: are entitled still?
Speaker 3: That was your tradition. Yeah, I still think that. I
Speaker 3: still don't. Anyone is entitled to yield. No, I don't.
Speaker 3: If you want to take the risk, go get it.
Speaker 3: But the sort of moral demands that the government must
Speaker 3: provide you yield for what for not spending and doing anything?
Speaker 3: Give me a break.
Speaker 2: Joe spent a good year making fun of yielding.
Speaker 3: That's great, go out collect your yield. I'm happy for you,
Speaker 3: But don't pretend that it's some sort of moral insult
Speaker 3: that the government isn't providing you risk for yield. That
Speaker 3: is my only that is my only stamp.
Speaker 2: That's I would argue, the US government's most important role. Anyway,
Speaker 2: Let's go back for a second. So it's not just
Speaker 2: the insurance idea you touched on this, but it's also
Speaker 2: the idea that, like, you can get a massive windfall
Speaker 2: when there's a market crash, and then you can use
Speaker 2: that money to actually go on a buying spree at
Speaker 2: a time when markets are cheap and everyone else is
Speaker 2: you know, short on cash and they can't do the same.
Speaker 2: How do you actually deploy that into practice, and how
Speaker 2: do you scale, for instance, and expected windfall against that
Speaker 2: type of assets that you could potentially buy.
Speaker 4: Yeah, I think this is where the principles thinking becomes
Speaker 4: really important. So you have to look at every portfolio
Speaker 4: is different, right. So one of the other mistakes I
Speaker 4: think people make is they think you can just pick
Speaker 4: up a finance one on one book and say every
Speaker 4: portfolio is identical. It's all risk neutral, and everybody is
Speaker 4: exactly the same. It's just not the case. Public fund
Speaker 4: that has a forty percent or fifty percent funded ratio
Speaker 4: is very different than a ninety percent or a bank
Speaker 4: that's one hundred and twenty percent fully funded, right, so
Speaker 4: everybody has different needs. The first thing that you do
Speaker 4: is you look at the underlying portfolio's posture. How much
Speaker 4: loss can you take, look at the systemic risk shocks
Speaker 4: that they can actually withstand. So you run a shock,
Speaker 4: you run a full distribution analysis and figure out what
Speaker 4: is the outcome under which they will be under so
Speaker 4: much distress or so much duress that they might end
Speaker 4: up having to liquidate assets. And there are actually quite
Speaker 4: a few like that right now, where if the stock
Speaker 4: market went down twenty percent and privates went down about
Speaker 4: twenty percent, in order to raise liquidity for distribution, they
Speaker 4: would have to actually sell seed corn, right. So it's
Speaker 4: really really bad. So that's an existential risk that you
Speaker 4: want to quantify. So the first thing that you do
Speaker 4: is you figure out what that risk is a full
Speaker 4: distribution of outcomes, and then you look at the instrument
Speaker 4: set that's out there in the marketplace. Starting from the
Speaker 4: most reliable and surprisingly enough, like Joe mentioned already, the
Speaker 4: cheapest one, which is equity option volatility. You can buy
Speaker 4: those put options, but people who are not willing to
Speaker 4: be a lot of continuous premium, you can do more
Speaker 4: sophisticated tricks where you can buy indirect heages, for instance,
Speaker 4: credit to false opts. Today, the CDX index, if you
Speaker 4: don't see the charts, it's actually tighter than it was
Speaker 4: pre the GFC. It's the tightest has ever been because
Speaker 4: people are buying it for cosmetic yield reasons, so there
Speaker 4: are a lot of derivative instrumental Cosmetic yield simply means
Speaker 4: that the total yield, if you look at the yield
Speaker 4: of a corporate bond today, it is basically treasury yield
Speaker 4: plus some spreads. So the treasure yields are at quite
Speaker 4: four and a half four percent, but the spreads are
Speaker 4: actually very tight, only fifty basis points to see the X,
Speaker 4: So you're getting a five percent six percent yield, which
Speaker 4: in the context of where we were three years ago,
Speaker 4: it looks.
Speaker 3: Like it's cosmetic.
Speaker 4: It looks good, it looks good, but actually you are
Speaker 4: taking that risk. Okay, keep going that it's a cosmetic yield.
Speaker 4: You're decorated yield, So to me, the yield is not
Speaker 4: justified by the risks that I underlied. So there's various
Speaker 4: instruments that you can use and create a portfolio of
Speaker 4: these types of hedges.
Speaker 3: Is tailor risk hedging like insurance from as from a
Speaker 3: structure of how people buy it? Is it like insurance
Speaker 3: where people sort of reload every year in a sort
Speaker 3: of okay start of the new year. What is the
Speaker 3: tail risk I want to put on et cetera, or
Speaker 3: something that renews and they have to keep paying a
Speaker 3: fee or is it just sort of something that can
Speaker 3: be set it and forget it a permanent allocation. That's
Speaker 3: sort of the tail risk heage. Like talk to us
Speaker 3: about the business of selling a tail risk cage.
Speaker 4: Yeah, definitely. So it goes up to the highest level
Speaker 4: where this becomes part of where you guys started portfolio construction.
Speaker 4: It's an acid allocation decision. It's not a trade. So
Speaker 4: the context has to be that if the agents are
Speaker 4: aligned up meaning boards and trustees and so on, they
Speaker 4: think of this decision as protecting the portfolio or making
Speaker 4: a more robust portfolio. As part of the DNA and
Speaker 4: the tail risk becomes part of the how you re
Speaker 4: balance your portfolio over the long term. Okay, so that's
Speaker 4: how you set up the strategic portfolio. But then to
Speaker 4: your point, every year, yes, you have to renew this policy.
Speaker 4: You re have to have to recommit premiums. Now you
Speaker 4: can prefund for the next five years if you wanted to.
Speaker 4: But because options decay, in order to have this reliable heade,
Speaker 4: you sort of have to buy new options.
Speaker 2: What would be the worst kind of tail risk hedging
Speaker 2: in your view? Is it, you know, too expensive or
Speaker 2: does it not actually work when there is a big
Speaker 2: market crash?
Speaker 3: Like?
Speaker 2: What is the ultimate sin of a tail risk strategy?
Speaker 4: Ultimate sin absolutely is the one where promises to work
Speaker 4: but doesn't work. Right, So a lot of people try
Speaker 4: to reduce your costs by creating synthetic strategies.
Speaker 2: Right.
Speaker 4: I already mentioned futures markets aren't very deep when you
Speaker 4: need them. But there's a lot of strategies which actually
Speaker 4: use a future's replication strategy like the nineteen eighty seven
Speaker 4: crash also purported to do. And those strategies typically don't work.
Speaker 4: And so there's many that promise and they look like
Speaker 4: they are cheaper and they don't cost any bleed, but
Speaker 4: they also do not deliver, which, again going back to
Speaker 4: April second, the only thing that worked during that April
Speaker 4: second to April eighth period was reliable hedging using index options.
Speaker 4: Not that duration didn't work. Tr and following didn't work
Speaker 4: a lot of other ult eupremium strategies didn't work. So
Speaker 4: that is the cardinal's sin. You just do not have
Speaker 4: the luxury to go to the constituency of clients whoever's
Speaker 4: bought it and said, you know, we're to be too
Speaker 4: smart and oops, it didn't work.
Speaker 3: Yeah, as you mentioned that, to even talk about buying
Speaker 3: a tail risk, heade, you have to sort of understand
Speaker 3: is what is the existential risk for the fund? And
Speaker 3: different funds have different flavors of existential risk depending on
Speaker 3: how funded they are, And so obviously an entity that's
Speaker 3: one hundred and twenty percent funded is going to have
Speaker 3: very different risk scenarios than one that's forty percent funded.
Speaker 3: But you said something interesting, which is that and I've
Speaker 3: been thinking about this a lot in a different context,
Speaker 3: which is how levered is the financial system or the
Speaker 3: real economy to an ongoing rise in the stock market.
Speaker 3: How important is that? And at what point does even
Speaker 3: a sideways stock market, let alone to decline, become risky
Speaker 3: for something that could break. And you know, we used
Speaker 3: to think credit is the thing that breaks, but I
Speaker 3: wonder if it's in the stock area thing. Now where
Speaker 3: you really get the problem with the equity values don't
Speaker 3: go up? Tell us more about what you said about
Speaker 3: what happens to various types of economically important players. If
Speaker 3: the stock market one day stops going up for sustained
Speaker 3: period of time.
Speaker 4: I think you have a big problem.
Speaker 2: Right.
Speaker 4: So not only is the stock the whole system for
Speaker 4: one ks and public pensions, they're all levered up to
Speaker 4: the stock market because that's the only way you can
Speaker 4: get to your seven and a half or eight percent
Speaker 4: actual yield. So if the stock market doesn't keep going
Speaker 4: up and keep delivering those kind of returns, it's very
Speaker 4: hard to get to that point. Maybe if inflation rises,
Speaker 4: at least again cosmetically, maybe the long bond gets up
Speaker 4: to seven percent or eight percent and everybody can just
Speaker 4: lock it in and immunize and you're there. But in
Speaker 4: real terms, you're not going to have the income that
Speaker 4: you need thirty years from now to retire.
Speaker 1: I'm fine.
Speaker 3: I have a Zurperer mortgage. Yeah, so I have a
Speaker 3: mortgage that's locked in from that one keep week period
Speaker 3: of time.
Speaker 4: Yeah, exactly. So the system is very levered. And then
Speaker 4: corporate credit clearly is very very concentrated. We all read
Speaker 4: about pains and so on, but corporate credit, based on
Speaker 4: the Mertin model again that connects equities to corporate credit spreads,
Speaker 4: is also levered to the stock market. So if the
Speaker 4: stock market suddenly had a big sell off, corporate credits
Speaker 4: wide Now, which is the real problem, right, because if
Speaker 4: corporate credit widens out and the cost of borrowing goes
Speaker 4: up for all the corporations, maybe not the Fang stocks,
Speaker 4: but the four hundred and ninety three other stocks, then
Speaker 4: how does the system produce? Because our whole system is
Speaker 4: based on borrowing and I don't think very many companies
Speaker 4: in the US can function if your cost of operating
Speaker 4: your business was ten percent a year.
Speaker 2: Okay, Well, on that note, we would be remiss to
Speaker 2: have a tail risk person here and not ask what's
Speaker 2: the big risk that you see on the horizon in
Speaker 2: let's just say the short to medium term.
Speaker 4: So I think for me, The biggest risk right now
Speaker 4: is what people have been talking about is, you know,
Speaker 4: the so called and I call it so called the
Speaker 4: FED independent paradigm shift, because I don't believe the FED
Speaker 4: was ever really fully independent. But now it's coming to
Speaker 4: the foe that the fiscal and monetary authority they're actually one.
Speaker 4: So what happens in the aftermath if the FED actually
Speaker 4: becomes part of the central government the fiscal authorities. I
Speaker 4: think at that point all bets are off because that's
Speaker 4: the one anchor that everybody, whether realistically or not, has
Speaker 4: held onto. But if interest rates can change just based
Speaker 4: on the need to finance something, that totally upside down
Speaker 4: the financial system. So to me, that's the single biggest
Speaker 4: risk right now.
Speaker 2: So would that materialize into an inflationary risk for instance,
Speaker 2: and then would you be focused on what you can
Speaker 2: do to offset that?
Speaker 4: Yeah, inflationary risk and I think one of the best
Speaker 4: option traits. Again this is not a direct option. So
Speaker 4: going back to what you were asking before, you don't
Speaker 4: always just have to pay premium. The yield curve steepener
Speaker 4: where you buy the short end of the yield curve
Speaker 4: and you sell the long end of the yield curve
Speaker 4: Today you can do it through using swaps and all
Speaker 4: that for essentially zero net carry. So here's an option
Speaker 4: very similar to shorting the negatively liding bond market in
Speaker 4: Europe a few years ago, where if you put a
Speaker 4: youth curve steepener on either in a hyper inflationary maybe
Speaker 4: not hyper but a lot high inflationary scenario, or in
Speaker 4: an aggressive FED cut, the yield curve steepens. So yes,
Speaker 4: so that environment is the environment in which the curve
Speaker 4: steeper could work. And yes, my zero to order prior
Speaker 4: forecast would be that if we lose explicit independence of
Speaker 4: the FED, the yield curve actually steepens a lot more.
Speaker 3: Something I'm interested in. So, you know, you're talking about
Speaker 3: the recent eras and the sixties and eighties and things
Speaker 3: may have gotten a little on glued, and then the
Speaker 3: Vulgar era and then the post COVID era, and now
Speaker 3: this question about whether what's left of FED independence is
Speaker 3: at risk. You know, you're a physicist, and are a
Speaker 3: lot of people in your space are mathematicians. Is there
Speaker 3: a limit to how much you can sort of math
Speaker 3: it out, so to speak, Because a lot of these
Speaker 3: questions are external to mathematics, and so how do you
Speaker 3: think about the limits of quantitative analysis when we're dealing
Speaker 3: with things like will the political system allow the Federal
Speaker 3: Reserve to remain independent?
Speaker 4: Yeah, I think a lot of it is actually non quantitative.
Speaker 4: And what I've learned, even though I come from a
Speaker 4: quantitative background, is not the math itself, but it's the
Speaker 4: sequence of logical arguments that you can make to get
Speaker 4: to a conclusion. Right. So, for instance, we knew even
Speaker 4: before fancy mathematics was discovered, you know, Lagrongins and so on,
Speaker 4: that gravity exists. Gravity's existence has been known before maybe
Speaker 4: math was invented, but gravity has been there. And so
Speaker 4: I think there's some central laws of finance which will
Speaker 4: still continue to exist regardless of the mathematical modeling of them.
Speaker 4: And you know, the Bill Grows When I used to
Speaker 4: work with him, he used to say, some things we
Speaker 4: can take for granted I'm paraphrasing it, but the steepness
Speaker 4: of the youth curb, the fact that the youth curve
Speaker 4: needs to be upward sloped for the financial system to function,
Speaker 4: because people lend money in order to get something in return.
Speaker 4: Those are not mathematical devices. Those are really just the
Speaker 4: way the capitalist system works. So I think you can
Speaker 4: take the quantitative modeling to its own limit. But there
Speaker 4: are certain things that have happened in our system where
Speaker 4: we are a point now where gravity so to speak
Speaker 4: of the financial markets are going to have to take over.
Speaker 2: But presumably also if you can't predict the politics, because
Speaker 2: it's very difficult, especially nowadays, if you can't predict the politics,
Speaker 2: then maybe right sizing your positions becomes more important, and
Speaker 2: so the maths actually becomes one way of dealing with
Speaker 2: the very uncertainty, non mathematical element of what's going on.
Speaker 4: Yeah, exactly. And I think to take that point one
Speaker 4: step further, so correlation has been the greatest gift since
Speaker 4: the nineteen mid eighties to twenty twenty. Right, so you
Speaker 4: got stocks and bonds to say sixty forty. Stocks went up,
Speaker 4: bonds went up, and they were diversifying, which is what
Speaker 4: a beautiful place to be in, right, sounds nice? Ye,
Speaker 4: So that was a freebe And again this goes back
Speaker 4: to financial gravity, so to speak, that state of affairs
Speaker 4: that free lunch should not exist. So I think we
Speaker 4: might be entering a phase where stocks and bonds maybe
Speaker 4: are actually not diversifying, and you have to look at
Speaker 4: other things gold, of course, as you mentioned, maybe bitcoin,
Speaker 4: who knows. But I think the fact that reliable insurance
Speaker 4: or portfolio protection is so available today using the options
Speaker 4: market would be the place where I would look.
Speaker 3: When you look at the long end of the yield
Speaker 3: curve today in the US, is there an element in
Speaker 3: which these concerns about the loss of FED independence are
Speaker 3: being priced in right now? If suddenly you could snap
Speaker 3: your finger and know for a fact that the federalill
Speaker 3: operate it as it has been for the last twenty
Speaker 3: years for the next twenty years, would there be a change?
Speaker 3: Is there some margin that's concerned there?
Speaker 4: You know what?
Speaker 3: I don't know if the FED is going to be
Speaker 3: a committed inflation fighter as well as it has been
Speaker 3: in the past. Therefore I'm demanding extra yield today.
Speaker 4: No, not yet, I don't think so. Maybe a slight
Speaker 4: amount of premium has gone up. But one of the
Speaker 4: most striking features of the system is that if you
Speaker 4: look at the treasury yields, look at the thirty year
Speaker 4: bond to day is four seventy, but you look at
Speaker 4: the thirty year interest rate swap, it's straighting at believe
Speaker 4: it or not, three eighty nine, right, so it's almost
Speaker 4: eighty five basis points under the US Treasury. Now you
Speaker 4: ask why would somebody take the swap market at a
Speaker 4: lower yield, And I've been eating swaps its inception back
Speaker 4: in the nineteen nineties. Swap spreads are negative eighty five
Speaker 4: and that goes back to the receiving of interest rate
Speaker 4: swaps to hedge liabilities by a lot of large institutions.
Speaker 4: So they have certainly not priced in inflationary effects into
Speaker 4: the swap market. But at some point this has to
Speaker 4: also equilibrate, So in my view, it has not been
Speaker 4: priced in. Maybe it's too early to price in, because
Speaker 4: maybe the FED does not lose its independence and you know,
Speaker 4: rises its phoenix from the ashes. But I'm a little
Speaker 4: bit pessimistic about it.
Speaker 2: Just going back to your storied career on Wall Street
Speaker 2: for a second, how good were you at playing Liar's Poker?
Speaker 4: I was actually pretty good, I think. I mean I
Speaker 4: learned it after I joined Salomon Brothers as a good
Speaker 4: group of people, and I think the first year maybe
Speaker 4: I lost a bit, but I think in the third
Speaker 4: year that I was there, I won it. And I
Speaker 4: was actually, I think the one who took the biggest part.
Speaker 4: And I also my boss gave.
Speaker 1: Me his.
Speaker 4: Eighteen foot fishing boat. He was buying a new one
Speaker 4: as part of the settlement in.
Speaker 2: Lieu of cash. He was like, here to take my.
Speaker 4: Cash plus the boat again.
Speaker 3: Wow, So yeah, it's a really big pot.
Speaker 4: That was a big pot. Yeah, at that point you
Speaker 4: used to spend after the trading day was over. Every
Speaker 4: day we would print out randomized liars poker sheets, usually
Speaker 4: about twenty four or thirty of them, and we'd play
Speaker 4: about thirty thirty rounds every day.
Speaker 2: Wait, liar's poker sheets. I thought you played with actual cash.
Speaker 4: Yeah, so actual cash. Yet you play with dollar bills. Yeah,
Speaker 4: but you know, if you're playing twenty four rounds, they're
Speaker 4: not enough.
Speaker 2: Dollar bills drawing around. I never thought of that.
Speaker 4: Yeah, so you randomize based on how the dollar bill
Speaker 4: numbers are generated.
Speaker 3: Is there going to be a future in finance for
Speaker 3: a young physics student or a math nerd in high
Speaker 3: school today? You know people worry about this with AI
Speaker 3: and so forth, But a young person who's quantitatively minded,
Speaker 3: do you feel confident that there will be a role
Speaker 3: for them? And finance in the future.
Speaker 4: Absolutely. I think finance has existed from the very very
Speaker 4: beginning because it's based on the two fundamental emotions, right,
Speaker 4: greer and fear. Right, So as long as there's greed
Speaker 4: and fear and they're smart people around. And again going
Speaker 4: back to math and physics, it's not so much that
Speaker 4: the DOUN kit itself is teaching you anything special. It's
Speaker 4: just that teaches you think in a discipline logical fashion.
Speaker 4: And I think with tools like what we're seeing with
Speaker 4: AI and so on, encoding becoming completely democratized, I think
Speaker 4: the ability to ask important questions rigorously becomes even more important.
Speaker 4: I think it's going to be even better than it's been.
Speaker 2: Vanir, that was absolutely fantastic. Thank you so much for
Speaker 2: spending time with us at Huntington Beach at the future
Speaker 2: Proof conference and that was great.
Speaker 3: Yeah, thank you so much. That was fantastic.
Speaker 4: Thanks for having me, Joe.
Speaker 2: That was really fun. We should have a near back
Speaker 2: and just do like stories from Wall Street in the
Speaker 2: nineteen nineties episode, we just do that.
Speaker 3: I love the stories. We could do a lot more
Speaker 3: on the story. And I'm also interested in basically, you know,
Speaker 3: the philosophy of portfolio construction. I mean, obviously there's the
Speaker 3: math of portfolio construction. But I do have a certain
Speaker 3: dissatisfaction with many conversations about portfolio construction, including this, what
Speaker 3: sense well diverse? If I have stocks have almost always
Speaker 3: gone up his every insurance I mean, I guess another
Speaker 3: question that I could have asked is, has every insurance
Speaker 3: contract on the stock market essentially so far been a
Speaker 3: waste in human history? Because the stock market is at
Speaker 3: all time high, I have questions about that.
Speaker 2: But the counterpoint to that is, and I've come to
Speaker 2: realize this as I get older in my life and
Speaker 2: in my portfolio, is there is something nice about like
Speaker 2: waking up during a cell off and going like, oh shoot,
Speaker 2: my four oh one K has been absolutely decimated today.
Speaker 2: But if I look at, you know, some other position,
Speaker 2: some other tail risk hedge that I have, like that's
Speaker 2: actually up a little bit, and it's offset some of
Speaker 2: the pain. And if I actually had to cash out
Speaker 2: of my portfolio on that day because of whatever I
Speaker 2: had to make a mortgage payment or whatever, then I
Speaker 2: would have some extra cash to spare, and you could
Speaker 2: get an extra return by having that extra cash available
Speaker 2: to you to then go into the market and buy
Speaker 2: stuff on the cheap.
Speaker 3: I think that we really should have an odd lot's
Speaker 3: ETF that just advertises its illiquidity, that you can't sell
Speaker 3: this if you need cash now, this is not the
Speaker 3: instrument for you. If you are putting your money in this,
Speaker 3: don't expect to see it again for thirty years. But
Speaker 3: the plus side is it will keep you from making
Speaker 3: baddi rational decisions on a day when everything is read.
Speaker 2: I mean there's a value in that. There's a value
Speaker 2: in that, and there's also a value in being able
Speaker 2: to sleep at night a little easier because you have
Speaker 2: different positions. But anyway, shall we leave it there.
Speaker 3: Let's leave it there, all right.
Speaker 2: This has been another episode of the Authoughts podcast. I'm
Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3: I'm Jill wisent Though. You can follow me at the Stalwart.
Speaker 3: Follow our guest Vanier bon Sally He's at long Tail Alpha.
Speaker 3: Follow our producers Kerman Rodriguez at Kerman armand Dashel Bennett
Speaker 3: at Dashbot and kel Brooks at Keil Brooks. For more
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