1 00:00:10,760 --> 00:00:14,120 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:14,200 --> 00:00:15,600 Speaker 1: I'm Tracy Alloway. 3 00:00:15,280 --> 00:00:16,400 Speaker 2: And I'm Joe Wisenthal. 4 00:00:16,760 --> 00:00:19,040 Speaker 1: Joe, you know what one of the weirdest things about 5 00:00:19,040 --> 00:00:22,560 Speaker 1: twenty twenty three was. I mean, I guess there's that's 6 00:00:22,600 --> 00:00:23,840 Speaker 1: an unfair question, isn't it. 7 00:00:23,920 --> 00:00:25,599 Speaker 2: Why don't you just tell me what's on your mind? 8 00:00:25,720 --> 00:00:28,360 Speaker 2: And you know I could make many guesses, but why 9 00:00:28,360 --> 00:00:29,040 Speaker 2: don't you just tell me? 10 00:00:29,240 --> 00:00:32,880 Speaker 1: So after all the drama in the bond market, all 11 00:00:32,920 --> 00:00:36,440 Speaker 1: the ups and downs, all the volatility, we basically ended 12 00:00:36,479 --> 00:00:39,080 Speaker 1: the year kind of where we started, right around three 13 00:00:39,159 --> 00:00:41,680 Speaker 1: point eight percent all the ten year yield. And I 14 00:00:41,720 --> 00:00:43,960 Speaker 1: know it's picked up a little bit since then, but 15 00:00:44,360 --> 00:00:48,000 Speaker 1: we basically had this really round trip, but a lot 16 00:00:48,040 --> 00:00:48,960 Speaker 1: happened in between. 17 00:00:49,080 --> 00:00:51,600 Speaker 2: That was a great choice, Tracy, for one of the 18 00:00:51,600 --> 00:00:53,960 Speaker 2: weird things that happened. Yes, that was a huge story 19 00:00:54,000 --> 00:00:56,560 Speaker 2: throughout the year, bond sell off, higher rates, et cetera. 20 00:00:56,880 --> 00:00:59,600 Speaker 2: And then to get to the end of December and say, oh, yeah, 21 00:00:59,640 --> 00:01:02,760 Speaker 2: the ten years basically where it started the year, extremely 22 00:01:03,080 --> 00:01:05,640 Speaker 2: strange and unexpected. And when I saw that stat, I 23 00:01:05,680 --> 00:01:08,000 Speaker 2: was like, I did not anticipate that at all. 24 00:01:08,360 --> 00:01:10,319 Speaker 1: Yeah, and to me, maybe this is going to be 25 00:01:10,400 --> 00:01:12,920 Speaker 1: a bit of a tortured analogy, but twenty twenty three 26 00:01:13,080 --> 00:01:16,240 Speaker 1: is sort of emblematic of the bond market overall. People 27 00:01:16,280 --> 00:01:19,560 Speaker 1: tend to look at it and think it's super boring. Normally, 28 00:01:19,800 --> 00:01:22,640 Speaker 1: you know, before the wild years of twenty twenty one, 29 00:01:22,720 --> 00:01:25,959 Speaker 1: twenty twenty two, twenty twenty three, it didn't move around 30 00:01:26,400 --> 00:01:29,960 Speaker 1: that much. You know, bonds were supposed to be boring 31 00:01:30,160 --> 00:01:32,559 Speaker 1: in that sense. And I think people have this view 32 00:01:32,600 --> 00:01:35,000 Speaker 1: of like, Okay, you buy a ten year or maybe 33 00:01:35,000 --> 00:01:37,640 Speaker 1: you buy a tip or something like that, you invest 34 00:01:38,080 --> 00:01:40,640 Speaker 1: in t bills to get a little bit of pickup, 35 00:01:41,160 --> 00:01:44,319 Speaker 1: or maybe you sell some bonds, and that's basically the 36 00:01:44,400 --> 00:01:48,640 Speaker 1: extent of investing in the bond market. But there's this 37 00:01:48,800 --> 00:01:52,720 Speaker 1: whole world when it comes to trading fixed income and 38 00:01:52,840 --> 00:01:58,000 Speaker 1: interest rates that gets really interesting, really complicated in some ways, 39 00:01:58,440 --> 00:02:00,760 Speaker 1: and I feel like we don't talk about enough. Like 40 00:02:00,840 --> 00:02:03,240 Speaker 1: every once in a while it hits the headlines, Like 41 00:02:03,680 --> 00:02:06,920 Speaker 1: you know, when Bill Gross was talking about selling volatility 42 00:02:07,000 --> 00:02:10,200 Speaker 1: before he left PIMCO, everyone was like, oh, wait a second, 43 00:02:10,200 --> 00:02:13,040 Speaker 1: there's a big bond investor selling volatility. I wonder how 44 00:02:13,040 --> 00:02:16,080 Speaker 1: they're actually doing that. Yeah, but more often than not 45 00:02:16,600 --> 00:02:19,160 Speaker 1: we talk about yields, we kind of connect them to 46 00:02:19,200 --> 00:02:22,600 Speaker 1: what's going on in the macro economy and inflation and 47 00:02:22,680 --> 00:02:24,880 Speaker 1: maybe the US debt and that's it. 48 00:02:25,400 --> 00:02:28,600 Speaker 2: No, you're you're totally right. I mean, there's really two things. 49 00:02:28,639 --> 00:02:31,839 Speaker 2: I mean, a part of the story for bonds over 50 00:02:31,840 --> 00:02:34,920 Speaker 2: the last two years was the end of this incredible 51 00:02:34,919 --> 00:02:38,440 Speaker 2: like forty year bond bullmarket or treasury bull market. And 52 00:02:38,440 --> 00:02:41,120 Speaker 2: there were a few interruptions, of course in ninety four, etc. 53 00:02:41,400 --> 00:02:43,920 Speaker 2: And we know about that, but by and large, bonds 54 00:02:44,000 --> 00:02:46,840 Speaker 2: went up, yields went down, and bonds were like a 55 00:02:46,880 --> 00:02:49,959 Speaker 2: nice heg hedge against your you know, your equity portfolio 56 00:02:50,040 --> 00:02:52,680 Speaker 2: and sixty forty type portfolios were great. But then the 57 00:02:52,720 --> 00:02:54,440 Speaker 2: other thing is you say, like if you talk to 58 00:02:54,480 --> 00:02:58,200 Speaker 2: an equity manager, oh, I like tech docs this year, 59 00:02:58,200 --> 00:03:01,560 Speaker 2: I like energy, you know though, just some rotation. We 60 00:03:01,600 --> 00:03:03,799 Speaker 2: like big cabs, like small cabs. We like international. But 61 00:03:03,840 --> 00:03:06,200 Speaker 2: it's like different flavors of being long. Whereas you know, 62 00:03:06,240 --> 00:03:08,120 Speaker 2: when you look at how a lot of fixed income 63 00:03:08,160 --> 00:03:12,720 Speaker 2: portfolio managers invest, as you say, it is often various 64 00:03:12,760 --> 00:03:17,840 Speaker 2: flavors of derivatives around fixed income or you know, spreads 65 00:03:17,880 --> 00:03:20,680 Speaker 2: and things like that. Rather than just sort of long here, 66 00:03:20,720 --> 00:03:21,840 Speaker 2: long there exactly. 67 00:03:22,040 --> 00:03:24,960 Speaker 1: So I am very pleased to say that today we do, 68 00:03:25,080 --> 00:03:27,800 Speaker 1: in fact have the perfect guests to talk about the 69 00:03:27,840 --> 00:03:32,560 Speaker 1: intricacies of fixed income. We have someone who actually used 70 00:03:32,560 --> 00:03:36,080 Speaker 1: to work at PIMCO. He's now managing partner at Simplify 71 00:03:36,200 --> 00:03:41,200 Speaker 1: Asset Management, perhaps better known as the convexity maven. So 72 00:03:41,200 --> 00:03:44,560 Speaker 1: we're going to be speaking to Harley Bassman. Harley, thank 73 00:03:44,600 --> 00:03:45,920 Speaker 1: you so much for coming on the show. 74 00:03:46,440 --> 00:03:47,280 Speaker 3: Thank you, good morning. 75 00:03:48,000 --> 00:03:50,440 Speaker 1: Very excited to have you here. I should have added 76 00:03:50,480 --> 00:03:54,400 Speaker 1: to your intro that you are also a master of colors. 77 00:03:54,120 --> 00:03:56,440 Speaker 2: Right, which we were going to get into the best 78 00:03:56,480 --> 00:03:58,040 Speaker 2: color line charts in the business. 79 00:03:58,160 --> 00:03:58,480 Speaker 3: Thank you. 80 00:03:58,960 --> 00:04:01,160 Speaker 1: So I have a question to begin with, and this 81 00:04:01,240 --> 00:04:05,200 Speaker 1: is completely out of self interest as a journalist who's 82 00:04:05,240 --> 00:04:09,080 Speaker 1: had to write about convexity at many times during their 83 00:04:09,120 --> 00:04:12,320 Speaker 1: career and has always struggled to define it in a 84 00:04:12,360 --> 00:04:15,720 Speaker 1: way that satisfies my editors who want to encapsulate a 85 00:04:15,760 --> 00:04:19,120 Speaker 1: financial relationship in as few words as possible. How would 86 00:04:19,160 --> 00:04:19,760 Speaker 1: you describe it? 87 00:04:20,360 --> 00:04:23,640 Speaker 3: You know, convexity. It's it's an ex word. So everyone 88 00:04:23,680 --> 00:04:25,960 Speaker 3: gets a little rattle about that, but it's actually rather 89 00:04:26,000 --> 00:04:29,760 Speaker 3: simple it's just unbalanced leverage, which was also a hard concept. 90 00:04:29,920 --> 00:04:33,440 Speaker 3: Let's simplify it a little bit. If you have a bet, 91 00:04:33,440 --> 00:04:36,360 Speaker 3: you're making a wager where you make a dollar or 92 00:04:36,440 --> 00:04:39,600 Speaker 3: lose a dollar for equal up and down opposite payoffs, 93 00:04:39,880 --> 00:04:43,960 Speaker 3: that's zero convexity. If you make two dollars and lose one, 94 00:04:44,839 --> 00:04:47,800 Speaker 3: that's positive convexity. If you could lose three and make 95 00:04:47,839 --> 00:04:51,960 Speaker 3: two negative convexity. The reason why we hired all these 96 00:04:52,040 --> 00:04:55,600 Speaker 3: you know PhD you know quants in the nineties was 97 00:04:55,640 --> 00:04:59,280 Speaker 3: to basically figure out what that's worth. Clearly, you'd rather 98 00:04:59,400 --> 00:05:02,480 Speaker 3: own some makes two and loses one that is one 99 00:05:02,520 --> 00:05:05,600 Speaker 3: to one, and if it's lose three make two, you 100 00:05:05,680 --> 00:05:08,960 Speaker 3: better get paid for that. So all the mumbo jumbo 101 00:05:09,120 --> 00:05:12,800 Speaker 3: we go do around pricing out these various paths and 102 00:05:12,839 --> 00:05:15,559 Speaker 3: payoffs is just to make it up a fair bet 103 00:05:15,839 --> 00:05:18,320 Speaker 3: when you have these different payoff profiles, and that's it. 104 00:05:18,360 --> 00:05:22,160 Speaker 3: Covexy just means that the payoff is not linear, it's 105 00:05:22,200 --> 00:05:22,839 Speaker 3: not one to one. 106 00:05:23,800 --> 00:05:25,520 Speaker 1: Every once in a while you get to do something 107 00:05:25,520 --> 00:05:29,039 Speaker 1: really great on this podcast, Joe and asking the convexity 108 00:05:29,080 --> 00:05:31,960 Speaker 1: maven to define convexity is one of those things. 109 00:05:31,720 --> 00:05:34,560 Speaker 2: This was a historic moment. We're gonna clip that. But 110 00:05:34,640 --> 00:05:37,680 Speaker 2: let's go further down that. So often you hear about, 111 00:05:37,760 --> 00:05:40,880 Speaker 2: like the most common time you hear about the phenomenon 112 00:05:40,960 --> 00:05:43,719 Speaker 2: of convexity in the fixed income world is often related 113 00:05:43,760 --> 00:05:48,200 Speaker 2: to mortgage related securities. Can you then, uh, can you 114 00:05:48,279 --> 00:05:50,280 Speaker 2: take it a step further and sort of give us 115 00:05:50,480 --> 00:05:52,520 Speaker 2: what does it mean? So you describe, you know, the 116 00:05:52,600 --> 00:05:56,479 Speaker 2: search for positive, naturally occurring positive leverage in the world. 117 00:05:56,920 --> 00:05:58,960 Speaker 2: Give us sort of a concrete example. Why does this 118 00:05:58,960 --> 00:06:01,600 Speaker 2: pop up when we talk about mortgages frequently? 119 00:06:01,800 --> 00:06:04,840 Speaker 3: Well, you're probably backing into the idea of our mortgage 120 00:06:04,880 --> 00:06:06,919 Speaker 3: is a good value right now or not. Let's just 121 00:06:07,000 --> 00:06:09,560 Speaker 3: go one step back. Yeah, when you're in the bond market, 122 00:06:09,720 --> 00:06:13,039 Speaker 3: cod equities, the bond market, you have three buttons you 123 00:06:13,040 --> 00:06:18,200 Speaker 3: could push. That's it, okay, Duration, credit, convexity. Those are 124 00:06:18,240 --> 00:06:21,440 Speaker 3: your three risks. You start with cash, overnight cash, and 125 00:06:21,560 --> 00:06:24,080 Speaker 3: anything you do past there is taking one of those three. 126 00:06:24,600 --> 00:06:27,600 Speaker 3: Duration is when you get your money back. Credit is 127 00:06:27,680 --> 00:06:30,440 Speaker 3: if you get it back. Convexi is how you get 128 00:06:30,440 --> 00:06:34,080 Speaker 3: it back. And what a bond manager is trying to 129 00:06:34,120 --> 00:06:37,840 Speaker 3: do is move around those three buttons to find the 130 00:06:37,839 --> 00:06:42,480 Speaker 3: best risk return, the best value. Presently, selling convexity in 131 00:06:42,560 --> 00:06:45,160 Speaker 3: the bond market is the best thing to do out 132 00:06:45,160 --> 00:06:47,680 Speaker 3: there right now. What's duration? It is when you get 133 00:06:47,720 --> 00:06:50,440 Speaker 3: your money back, So a to your security'll move one 134 00:06:50,520 --> 00:06:53,200 Speaker 3: point eight points for a one point move, So if 135 00:06:53,279 --> 00:06:56,440 Speaker 3: rates go from four to five, to your bottle move 136 00:06:56,480 --> 00:06:59,160 Speaker 3: by one point eight points, a tenure by about eight points, 137 00:06:59,240 --> 00:07:03,320 Speaker 3: a thirty year by be seventeen points. You're usually paid 138 00:07:03,480 --> 00:07:07,960 Speaker 3: more to take longer maturity risk because there's more uncertainty. 139 00:07:08,520 --> 00:07:12,240 Speaker 3: An infinite curve is kind of upside downland because you're 140 00:07:12,280 --> 00:07:15,520 Speaker 3: getting paid less to take more risk. We could talk 141 00:07:15,600 --> 00:07:17,760 Speaker 3: why that is in a little bit, but right now, 142 00:07:17,840 --> 00:07:20,320 Speaker 3: duration is a very weird place to take risk right now, 143 00:07:20,320 --> 00:07:22,800 Speaker 3: because you're paid less to go out the curve, and 144 00:07:22,880 --> 00:07:26,560 Speaker 3: by a tenure versus a two year versus overnight cash credit. 145 00:07:27,120 --> 00:07:31,280 Speaker 3: Right now, investment grade credit is trading about fifty seven 146 00:07:31,360 --> 00:07:34,440 Speaker 3: basis points. It's a little over half point over the 147 00:07:34,600 --> 00:07:36,960 Speaker 3: over the yield curve, and you get that from looking 148 00:07:37,040 --> 00:07:40,040 Speaker 3: at these interest rate derivatives. On your Bloomberg is gonna 149 00:07:40,040 --> 00:07:44,920 Speaker 3: be CDX five year. That's actually tighter, a smaller number 150 00:07:45,160 --> 00:07:48,040 Speaker 3: than its historic average of about sixty five sixty six 151 00:07:48,360 --> 00:07:51,040 Speaker 3: you're paid fifty seven. Now junk bonds you're paid about 152 00:07:51,080 --> 00:07:54,600 Speaker 3: three sixty three point fifty three seventy, which is also 153 00:07:54,840 --> 00:07:57,559 Speaker 3: much tighter than it's usual for forty four to fifty 154 00:07:57,600 --> 00:08:01,080 Speaker 3: four to sixty. So going into credit now, yeah, you 155 00:08:01,120 --> 00:08:03,280 Speaker 3: know that's not a great bet. I mean, I would 156 00:08:03,280 --> 00:08:05,920 Speaker 3: say it's a disaster, but I mean, considering we're concerned 157 00:08:05,960 --> 00:08:09,640 Speaker 3: about the possibility of overtightening, a possibility of procession, which 158 00:08:09,640 --> 00:08:13,200 Speaker 3: an inverted curve kind of signals I don't wantally want 159 00:08:13,240 --> 00:08:16,560 Speaker 3: to go and take credit risk. Convexity right now. The 160 00:08:16,640 --> 00:08:20,600 Speaker 3: move index, which is a measure of the price of 161 00:08:20,600 --> 00:08:22,040 Speaker 3: convexity the same way. 162 00:08:21,880 --> 00:08:23,680 Speaker 1: It's which you invented, right I did. 163 00:08:24,080 --> 00:08:27,360 Speaker 3: It's the mix of bonds, plain and simple, the VIX 164 00:08:27,360 --> 00:08:30,640 Speaker 3: of bonds. Its average is maybe ninety or one hundred. 165 00:08:30,640 --> 00:08:33,840 Speaker 3: It's treating one twenty now, which averages out to about 166 00:08:33,840 --> 00:08:36,480 Speaker 3: maybe seven eight basis points a day of market movement. 167 00:08:37,160 --> 00:08:41,120 Speaker 3: That's higher, much higher than it's historical average. That's the 168 00:08:41,200 --> 00:08:43,000 Speaker 3: kind of trade you want to go and do. And 169 00:08:43,160 --> 00:08:47,839 Speaker 3: mortgage security is simply a glorified by right, That's it. 170 00:08:48,000 --> 00:08:50,560 Speaker 1: Wait, can I ask at a moment like this, when, 171 00:08:50,640 --> 00:08:52,320 Speaker 1: as you point out, there does seem to be a 172 00:08:52,360 --> 00:08:54,600 Speaker 1: lot of uncertainty. You know, some people are still saying 173 00:08:54,640 --> 00:08:57,800 Speaker 1: that there's a lot left to do when it comes 174 00:08:57,800 --> 00:09:00,840 Speaker 1: to stamping out inflation, but the market is already pricing 175 00:09:00,880 --> 00:09:03,520 Speaker 1: in rate cuts and some people are still worried about 176 00:09:03,559 --> 00:09:07,680 Speaker 1: a recession. Is the important thing to choose which of 177 00:09:07,800 --> 00:09:11,400 Speaker 1: those risks you want to take on duration, credit or convexity, 178 00:09:11,520 --> 00:09:15,439 Speaker 1: or is the important thing to do to identify the 179 00:09:15,480 --> 00:09:18,400 Speaker 1: exact right expression of the trade. 180 00:09:18,480 --> 00:09:20,840 Speaker 3: Well, clearly, if you know where rates are going to go, 181 00:09:20,920 --> 00:09:23,040 Speaker 3: you just go and buy futures contracts to call the day. 182 00:09:23,320 --> 00:09:25,400 Speaker 3: I assume that we don't know where the market will 183 00:09:25,440 --> 00:09:29,160 Speaker 3: be usually, and therefore, when you're building a portfolio, what 184 00:09:29,280 --> 00:09:31,079 Speaker 3: you want to do is you're always going to have 185 00:09:31,440 --> 00:09:34,920 Speaker 3: some exposure to all three of those. What you're trying 186 00:09:34,960 --> 00:09:39,160 Speaker 3: to do is over or underweight these various sectors, depending 187 00:09:39,200 --> 00:09:41,760 Speaker 3: upon your market view. So right now, what I'd be 188 00:09:41,840 --> 00:09:46,880 Speaker 3: doing is overweighting the convexity, underweighting the credit, and then 189 00:09:46,920 --> 00:09:50,280 Speaker 3: duration I'd be pulling into the five year or earlier 190 00:09:50,679 --> 00:09:52,560 Speaker 3: on the curve. For a variety of. 191 00:09:52,559 --> 00:10:10,840 Speaker 2: Reasons, explain this further when you say, okay, you want 192 00:10:10,840 --> 00:10:14,719 Speaker 2: to be going long convexity, or that's where the opportunity 193 00:10:14,760 --> 00:10:17,480 Speaker 2: is because if you say the move index, your creation 194 00:10:17,760 --> 00:10:20,840 Speaker 2: is higher than normal. Unlike say, you know you're not 195 00:10:20,840 --> 00:10:23,880 Speaker 2: getting paid for credit. How do you express that trade 196 00:10:23,960 --> 00:10:27,040 Speaker 2: of going long convexity and what does that look like? 197 00:10:27,120 --> 00:10:28,320 Speaker 3: Well, actually we're going short. 198 00:10:29,000 --> 00:10:30,320 Speaker 2: Sorry. 199 00:10:31,360 --> 00:10:34,320 Speaker 3: In general, I tend to be a long covexity person 200 00:10:34,600 --> 00:10:37,000 Speaker 3: and I like the idea of making two losing one. 201 00:10:37,520 --> 00:10:42,480 Speaker 3: So I've done most of my career owning covexity, owning optionality. However, 202 00:10:43,080 --> 00:10:46,960 Speaker 3: as they say, no bad bonds, just bad prices, there 203 00:10:47,120 --> 00:10:48,960 Speaker 3: is a level where I will sell it, and we're 204 00:10:49,000 --> 00:10:51,120 Speaker 3: at that level right now. Before the FED came in 205 00:10:51,440 --> 00:10:54,240 Speaker 3: scrambled things up in the last decade, the old rule 206 00:10:54,440 --> 00:10:57,240 Speaker 3: was on the move you buy eighty, you sell one twenty. 207 00:10:57,520 --> 00:11:00,280 Speaker 3: The problem with that is nobody would do it. Why 208 00:11:00,320 --> 00:11:02,480 Speaker 3: is that when the move got down to you know, 209 00:11:02,800 --> 00:11:06,079 Speaker 3: seventy eighty, that means the market's not moving that much. 210 00:11:06,520 --> 00:11:09,200 Speaker 3: And therefore, who wants to go and buy optionality? Who 211 00:11:09,240 --> 00:11:12,640 Speaker 3: wants to pay time decay when the maruk's not moving? 212 00:11:12,679 --> 00:11:14,559 Speaker 3: No one does so no one buys it when it's low, 213 00:11:14,600 --> 00:11:17,560 Speaker 3: and when once twenty or higher no one sells there 214 00:11:17,559 --> 00:11:20,280 Speaker 3: you have some crazy event going on. People are hiding 215 00:11:20,320 --> 00:11:22,800 Speaker 3: under their desks crying for mommy. So no one sells 216 00:11:22,800 --> 00:11:25,000 Speaker 3: it at one twenty. But the reality is you're supposed 217 00:11:25,000 --> 00:11:27,600 Speaker 3: to go and you know, not go naked short optionality. 218 00:11:27,640 --> 00:11:29,840 Speaker 3: But you can go and just bias what you do 219 00:11:30,120 --> 00:11:32,679 Speaker 3: to make yourself either short COVEXTI or maybe it's a 220 00:11:32,679 --> 00:11:35,439 Speaker 3: little less long convexity in your portfolio, just. 221 00:11:35,360 --> 00:11:37,040 Speaker 2: So that we can like when you say, like, okay, 222 00:11:37,120 --> 00:11:41,079 Speaker 2: short convexity, what is the type of instrument that allows 223 00:11:41,240 --> 00:11:43,120 Speaker 2: any trade or investor to express that? 224 00:11:43,240 --> 00:11:46,760 Speaker 3: Well, the most simple strategy would be for an investor 225 00:11:46,760 --> 00:11:49,360 Speaker 3: on the stock portfolio to go and sell covered calls. 226 00:11:49,640 --> 00:11:52,080 Speaker 3: I mean that's that's I mean you're selling options, selling 227 00:11:52,080 --> 00:11:55,360 Speaker 3: AVEXDI when you when you go, when you sell covered calls, 228 00:11:55,640 --> 00:11:58,600 Speaker 3: what are you really doing? You're kind of converting potential 229 00:11:59,000 --> 00:12:04,640 Speaker 3: capital gains to current income. You're limiting your upside, you're downside. 230 00:12:04,640 --> 00:12:06,680 Speaker 3: Of course you're still large, but stock can go down 231 00:12:06,720 --> 00:12:09,280 Speaker 3: a lot, but you're basically kind of doing a conversion 232 00:12:09,320 --> 00:12:12,880 Speaker 3: there of taking risk off the table. For current income, 233 00:12:13,200 --> 00:12:14,520 Speaker 3: and there's a price where you want to go and 234 00:12:14,600 --> 00:12:16,640 Speaker 3: do that, and there's prices where you don't. When the 235 00:12:16,720 --> 00:12:19,240 Speaker 3: VICS is at forty or fifty, I mean, you probably 236 00:12:19,240 --> 00:12:21,000 Speaker 3: want to sell covered calls. Of course you won't do 237 00:12:21,040 --> 00:12:23,040 Speaker 3: it because you'll be a panic, but that's kind of 238 00:12:23,040 --> 00:12:26,400 Speaker 3: the idea. And theoretically, portfolio managers supposed to have no 239 00:12:26,440 --> 00:12:28,480 Speaker 3: blood in their veins and they can go and do 240 00:12:28,640 --> 00:12:31,320 Speaker 3: these various trades when the time is right. 241 00:12:31,880 --> 00:12:34,520 Speaker 1: This is why I'm not a portfolio manager, Jery, I 242 00:12:34,640 --> 00:12:37,319 Speaker 1: in fact have blood. But actually this brings me to 243 00:12:37,400 --> 00:12:39,880 Speaker 1: a question I always wanted to ask, because a lot 244 00:12:39,920 --> 00:12:43,240 Speaker 1: of your trade ideas, I think they're publicly available. So 245 00:12:43,360 --> 00:12:46,840 Speaker 1: like every year you publish stocking stuffers, which is kind 246 00:12:46,840 --> 00:12:50,320 Speaker 1: of a series of trade ideas, and I'm never quite 247 00:12:50,760 --> 00:12:55,200 Speaker 1: certain who those trade ideas are aimed at. And the 248 00:12:55,240 --> 00:12:58,320 Speaker 1: reason I say that is because you will say stuff 249 00:12:58,520 --> 00:13:00,720 Speaker 1: in them, like you know, and if you don't have 250 00:13:00,760 --> 00:13:03,240 Speaker 1: an is to credit agreement, here's a way to get 251 00:13:03,240 --> 00:13:07,200 Speaker 1: around that. But then the trade itself is still quite complicated, 252 00:13:07,240 --> 00:13:11,920 Speaker 1: so I assume it's not aimed at your average retail investor. 253 00:13:11,960 --> 00:13:14,720 Speaker 1: Who is the target audience? For some of these things, well. 254 00:13:14,600 --> 00:13:16,760 Speaker 3: I'll say that as my career's gone by, I used 255 00:13:16,760 --> 00:13:19,720 Speaker 3: to target high institutions and hedge funds. I've now moved 256 00:13:19,760 --> 00:13:24,680 Speaker 3: more towards I would call it reasonably intellectually sophisticated high 257 00:13:24,679 --> 00:13:28,360 Speaker 3: networth retail as if you're towards an average person, probably not. 258 00:13:28,920 --> 00:13:32,600 Speaker 3: But you can still take these ideas and take the 259 00:13:32,640 --> 00:13:34,959 Speaker 3: flavor of them. You don't have to do the exact idea. 260 00:13:35,280 --> 00:13:38,559 Speaker 3: You could just do the flavor. So if it's a 261 00:13:38,640 --> 00:13:41,520 Speaker 3: duration concept, you can take your portfolio from a ten 262 00:13:41,600 --> 00:13:43,800 Speaker 3: year area to a five year area. If it's a 263 00:13:43,800 --> 00:13:48,319 Speaker 3: credit area, you can move into single A from double A, 264 00:13:48,520 --> 00:13:50,640 Speaker 3: things like that. But yes, you're right, a lot of 265 00:13:50,720 --> 00:13:55,079 Speaker 3: ideas are a little a little tricky and entertaining hopefully 266 00:13:55,080 --> 00:13:57,160 Speaker 3: also but yeah, yeah, it could be a challenge. 267 00:13:57,320 --> 00:14:00,240 Speaker 1: They are always entertaining, that is definitely true. But you know, 268 00:14:00,280 --> 00:14:04,440 Speaker 1: if you say something like short convexity for a simplified trade, 269 00:14:04,480 --> 00:14:07,720 Speaker 1: I would think do something with the MBS index. But 270 00:14:07,760 --> 00:14:09,800 Speaker 1: that's not what you're advocating at all. 271 00:14:10,600 --> 00:14:13,080 Speaker 3: Not right now. Well, my new job I'm with I 272 00:14:13,080 --> 00:14:15,400 Speaker 3: hate to give a plug over here, but I'm at 273 00:14:15,400 --> 00:14:18,280 Speaker 3: simplify asset management. And what we are doing is we're 274 00:14:18,320 --> 00:14:21,720 Speaker 3: taking a lot of the ideas that I've had and 275 00:14:21,840 --> 00:14:25,800 Speaker 3: putting them into ETFs. There was a SEC rule change 276 00:14:25,840 --> 00:14:29,480 Speaker 3: a few years ago that allowed people to put drives 277 00:14:29,960 --> 00:14:34,160 Speaker 3: of futures options, all these various things into ETFs, and 278 00:14:34,240 --> 00:14:38,720 Speaker 3: what we've been doing is putting these derivatives into ETFs 279 00:14:38,880 --> 00:14:41,240 Speaker 3: which you could basically point and click on Robinhood. So, 280 00:14:41,280 --> 00:14:43,880 Speaker 3: for instance, two and a half years ago, I created 281 00:14:43,880 --> 00:14:46,760 Speaker 3: an ETF where I put a seven year put option 282 00:14:47,040 --> 00:14:49,880 Speaker 3: on the thirty year treasury more or less into an ETF. 283 00:14:50,280 --> 00:14:53,160 Speaker 3: And this was actually I think Bloomberg rank is one 284 00:14:53,160 --> 00:14:55,640 Speaker 3: of the highest return trades for a while. 285 00:14:55,760 --> 00:14:59,000 Speaker 2: I mean from is this the pfix ETF. 286 00:14:58,680 --> 00:15:00,680 Speaker 3: Yep, it was up to two hundred percent for a while, 287 00:15:00,920 --> 00:15:04,120 Speaker 3: and it's basically a straight up, you know, way to 288 00:15:04,120 --> 00:15:07,480 Speaker 3: make money if rates go up. That was it, and 289 00:15:07,560 --> 00:15:12,800 Speaker 3: it was a way for civilians to get to institutional products. 290 00:15:13,200 --> 00:15:15,240 Speaker 3: And I have a new product out there where it 291 00:15:15,360 --> 00:15:19,600 Speaker 3: allows civilians to go and buy mortgage bonds. Mortgage bonds 292 00:15:19,600 --> 00:15:23,640 Speaker 3: are it's the second biggest asset class of bonds after treasuries, 293 00:15:24,000 --> 00:15:27,560 Speaker 3: and it's almost impossible to buy them for ordinary people 294 00:15:27,920 --> 00:15:30,880 Speaker 3: for a variety of reasons. And what we've done is 295 00:15:31,320 --> 00:15:35,600 Speaker 3: we have institutional quality trading abilities that we could put 296 00:15:35,680 --> 00:15:41,880 Speaker 3: into ETFs. We're allowing enabling civilian investors to buy mortgage 297 00:15:41,880 --> 00:15:44,600 Speaker 3: bonds that are trading, you know, near near par and 298 00:15:44,720 --> 00:15:48,600 Speaker 3: right now, these par mortgage bonds, bonds trading near ninety 299 00:15:48,600 --> 00:15:51,000 Speaker 3: eight nine nine one hundred are what I view to 300 00:15:51,000 --> 00:15:54,760 Speaker 3: be the best fixed income investment on the planet right now, 301 00:15:54,760 --> 00:15:56,960 Speaker 3: they're trading about one and a half points O. 302 00:15:57,080 --> 00:15:59,880 Speaker 2: Wait, sorry, what instruments are the best fixed income in 303 00:16:00,320 --> 00:16:00,960 Speaker 2: in the planet? 304 00:16:01,280 --> 00:16:04,320 Speaker 3: Near par So near us right now? Five five and 305 00:16:04,320 --> 00:16:06,000 Speaker 3: a half percent of mortgage bonds. 306 00:16:06,040 --> 00:16:08,600 Speaker 2: Okay, and how come sorry you were about to explain it. 307 00:16:09,280 --> 00:16:10,880 Speaker 2: Why are they the best investment right now? 308 00:16:10,960 --> 00:16:14,800 Speaker 3: Well, mortgage bonds, for all intents and purposes, are US 309 00:16:14,880 --> 00:16:19,160 Speaker 3: government guaranteed. Fany and Freddy are not guaranteed per se, 310 00:16:19,280 --> 00:16:22,240 Speaker 3: Jinny May are. I can assure you Fannie May will 311 00:16:22,240 --> 00:16:24,520 Speaker 3: never go bankrupt. If it was to go bankrupt, my 312 00:16:24,560 --> 00:16:26,840 Speaker 3: advice then is to go buy cans of tuna, a gun, 313 00:16:26,920 --> 00:16:29,200 Speaker 3: and small denomination gold coins because it will be the 314 00:16:29,240 --> 00:16:32,200 Speaker 3: end of civilization. Okay, So Fano Ma is not going bust. 315 00:16:32,400 --> 00:16:35,200 Speaker 3: You could buy these mortgage bonds yielding about five and 316 00:16:35,240 --> 00:16:37,600 Speaker 3: a half percent right now, which I can help you 317 00:16:37,640 --> 00:16:39,360 Speaker 3: go and do, which is about one and a half 318 00:16:39,440 --> 00:16:45,800 Speaker 3: percent over treasuries. Corporate bonds that can default are only 319 00:16:45,800 --> 00:16:48,320 Speaker 3: fifty seven basis points over treasuries. And this is kind 320 00:16:48,320 --> 00:16:50,520 Speaker 3: of crazy town where you could buy full faith and 321 00:16:50,560 --> 00:16:54,000 Speaker 3: credit of the US government almost one percent higher than 322 00:16:54,040 --> 00:16:56,680 Speaker 3: a corporate bond that can default, and if you are 323 00:16:56,680 --> 00:16:59,160 Speaker 3: a believer in a hard landing, will default. Okay. 324 00:16:59,160 --> 00:17:03,000 Speaker 1: But the risk with the ns, like the normal mbs 325 00:17:03,000 --> 00:17:05,359 Speaker 1: that you would see in the index, not the stuff 326 00:17:05,400 --> 00:17:07,640 Speaker 1: that's trading really close to par that you're picking out, 327 00:17:07,800 --> 00:17:11,159 Speaker 1: is pre payment risk, right, That's what you're trying to avoid. 328 00:17:11,800 --> 00:17:14,880 Speaker 3: So I think the better question is, excuse me, why 329 00:17:15,280 --> 00:17:19,040 Speaker 3: are these mortgage bonds trading one percent higher than corporate 330 00:17:19,040 --> 00:17:21,600 Speaker 3: bonds when clearly they are smart people in the world. 331 00:17:21,840 --> 00:17:25,320 Speaker 3: The reason why is a mortgage bond looks and barks 332 00:17:25,440 --> 00:17:28,439 Speaker 3: a covered call like you're selling this big call option 333 00:17:29,040 --> 00:17:31,640 Speaker 3: on a ten year treasury and with the move at 334 00:17:31,680 --> 00:17:35,880 Speaker 3: one twenty, that's the way you basically do a covered call. 335 00:17:36,040 --> 00:17:38,160 Speaker 3: This is the way you go and take convexy risk. 336 00:17:38,640 --> 00:17:42,200 Speaker 3: As opposed to credit risk, these par mortgage bonds can 337 00:17:42,280 --> 00:17:46,080 Speaker 3: be prepaid. Therefore, a bond trading at ninety nine, maybe 338 00:17:46,080 --> 00:17:47,720 Speaker 3: you can go to one oh two, one oh three, 339 00:17:47,720 --> 00:17:50,080 Speaker 3: one oh four before it gets called. That's what you're 340 00:17:50,080 --> 00:17:52,080 Speaker 3: giving up when you buy a mortgage bond, is you're 341 00:17:52,119 --> 00:17:54,680 Speaker 3: giving away the big upside. So if rates go from 342 00:17:54,840 --> 00:17:57,680 Speaker 3: four to two, a par mortgage bond not gonna be 343 00:17:57,760 --> 00:18:00,280 Speaker 3: so good. I mean you'll make money, you'll just a 344 00:18:00,320 --> 00:18:03,920 Speaker 3: lot less. And if rates go up, these bonds will 345 00:18:03,960 --> 00:18:06,040 Speaker 3: go down like a seven year treasury. 346 00:18:06,720 --> 00:18:09,920 Speaker 1: Uh, you mentioned credit risk just then, at this point 347 00:18:09,920 --> 00:18:13,840 Speaker 1: in the economic cycle, how worried are you about credit risk? 348 00:18:13,920 --> 00:18:17,000 Speaker 1: Given that, you know, going into twenty twenty three, there 349 00:18:17,000 --> 00:18:19,240 Speaker 1: were a lot of recession fears. There were a lot 350 00:18:19,280 --> 00:18:23,720 Speaker 1: of credit experts that explicitly said they thought that defaults 351 00:18:23,760 --> 00:18:26,560 Speaker 1: were going to pick up substantially, things were going to 352 00:18:26,560 --> 00:18:28,840 Speaker 1: start to fall apart in the credit market. And instead, 353 00:18:29,240 --> 00:18:32,520 Speaker 1: you know, November December we saw a pretty big rally 354 00:18:32,600 --> 00:18:36,120 Speaker 1: in the space, leading to very low spreads, which you've 355 00:18:36,119 --> 00:18:39,840 Speaker 1: already pointed out are kind of in crazy town territory 356 00:18:39,880 --> 00:18:43,040 Speaker 1: at least compared to some other possible investments. So how 357 00:18:43,080 --> 00:18:46,080 Speaker 1: worried are you about things like defaults in twenty twenty four. 358 00:18:46,760 --> 00:18:50,040 Speaker 3: Defaults in twenty twenty four not going to happen next year. 359 00:18:50,080 --> 00:18:52,240 Speaker 3: They might when we have to refinance all the debt 360 00:18:52,280 --> 00:18:54,760 Speaker 3: that was taken out. This is called the maturity wall, 361 00:18:55,119 --> 00:18:56,199 Speaker 3: and there's plenty of grass and. 362 00:18:56,240 --> 00:18:59,560 Speaker 1: Charge on this podcast. You have to say looming maturity wall. 363 00:18:59,680 --> 00:19:02,640 Speaker 3: That's okay, looming. Yes, well it's looming, but it's coming. 364 00:19:03,720 --> 00:19:08,760 Speaker 3: So I'm more interested in inflation than in default than 365 00:19:08,800 --> 00:19:12,520 Speaker 3: in hard landing ideas. And the reason why is I 366 00:19:12,560 --> 00:19:18,000 Speaker 3: think that the demographic of these boomers retiring retiring with 367 00:19:18,119 --> 00:19:20,920 Speaker 3: a lot more money than their parents had, which means 368 00:19:20,920 --> 00:19:23,520 Speaker 3: they're gonna keep on spending. The old rule was when 369 00:19:23,520 --> 00:19:25,960 Speaker 3: you got older and you retired, you're spending was reduced 370 00:19:25,960 --> 00:19:29,920 Speaker 3: because you had lower income. The boomers, well, we took 371 00:19:29,920 --> 00:19:31,879 Speaker 3: all the money. Okay, I'm sorry. 372 00:19:32,560 --> 00:19:34,919 Speaker 1: At least you're honest about it. I appreciate that we. 373 00:19:35,080 --> 00:19:36,800 Speaker 3: Took all the money with the stocks, with the bonds, 374 00:19:36,800 --> 00:19:38,760 Speaker 3: with the housing, with everything else. And so we're gonna 375 00:19:38,840 --> 00:19:40,840 Speaker 3: keep on spending, but we're not going to work anymore. 376 00:19:40,880 --> 00:19:44,880 Speaker 3: So we're pulling out the supply of labor. Right, the millennials, 377 00:19:45,240 --> 00:19:48,080 Speaker 3: they're working, and they're getting married, they're having kids, so 378 00:19:48,280 --> 00:19:50,400 Speaker 3: they have just demand they need. They're going to buy 379 00:19:50,480 --> 00:19:53,040 Speaker 3: stuff as they form households, and that's what I think 380 00:19:53,160 --> 00:19:55,880 Speaker 3: is going to keep inflation pressures up the same way 381 00:19:55,880 --> 00:19:59,680 Speaker 3: we had inflation in the seventies as the boomers right matured, 382 00:20:00,040 --> 00:20:02,840 Speaker 3: formed households baugh cars. So I'm a believer that inflation 383 00:20:03,200 --> 00:20:06,560 Speaker 3: the two percent target is not coming anytime soon. There's 384 00:20:06,600 --> 00:20:08,439 Speaker 3: a good story why it, Mike, I'm not a believer 385 00:20:08,480 --> 00:20:10,879 Speaker 3: in that. And I also think that the Fed is 386 00:20:10,920 --> 00:20:13,600 Speaker 3: not gonna take rates down nearly as much as the 387 00:20:13,640 --> 00:20:17,800 Speaker 3: market is implying by the futures market. And I think 388 00:20:17,880 --> 00:20:20,840 Speaker 3: that J. Powell good guy, bad guy. I don't know. 389 00:20:20,840 --> 00:20:22,480 Speaker 3: What I know is this. He has a lot of money, 390 00:20:22,680 --> 00:20:25,399 Speaker 3: his nice family, nice kids, probably a nice house. Also, 391 00:20:26,320 --> 00:20:28,359 Speaker 3: what does he care about? What do we think of? 392 00:20:28,440 --> 00:20:28,920 Speaker 1: That is? 393 00:20:29,000 --> 00:20:32,160 Speaker 3: What is humanity all about? We still read the Greek tragedies, 394 00:20:32,200 --> 00:20:34,640 Speaker 3: we still read Shakespeare. What did these guys all talk 395 00:20:34,640 --> 00:20:37,120 Speaker 3: about that it's still so interesting three thousand years later. 396 00:20:37,920 --> 00:20:42,359 Speaker 3: Hubris ego, that's what drives humanity. It's always the fault 397 00:20:42,359 --> 00:20:45,120 Speaker 3: of humanity. And I think what Jay Peale's thinking about 398 00:20:45,160 --> 00:20:48,639 Speaker 3: now is really not inflation per se. But what's my 399 00:20:48,720 --> 00:20:49,680 Speaker 3: tombstone going to say? 400 00:20:49,760 --> 00:20:52,679 Speaker 1: Yeah, legacy is a nicer way of saying, Ego. 401 00:20:53,320 --> 00:20:56,440 Speaker 3: Is it gonna be Arthur Burns, who basically we all 402 00:20:56,520 --> 00:20:58,520 Speaker 3: as the post your child for inflation getting out of hand? 403 00:20:58,840 --> 00:21:00,680 Speaker 3: Or is it going to be Paul Vulgar the Saints 404 00:21:00,680 --> 00:21:02,639 Speaker 3: who saved it from inflation. Some people will say that 405 00:21:02,800 --> 00:21:06,160 Speaker 3: it wasn't him, it was demographics, but whatever, whatever, he 406 00:21:06,240 --> 00:21:09,080 Speaker 3: wants to be Vulgar, not Burns, and therefore he's going 407 00:21:09,119 --> 00:21:11,680 Speaker 3: to go. And I think hold rates up longer than 408 00:21:11,680 --> 00:21:14,639 Speaker 3: people might think to go and ensure inflation is truly 409 00:21:14,920 --> 00:21:16,160 Speaker 3: wouldn't stake in the heart dead. 410 00:21:16,640 --> 00:21:19,399 Speaker 2: So I mean, I definitely want to get more into 411 00:21:19,480 --> 00:21:22,879 Speaker 2: the sort of I don't know, maybe a psychological approach 412 00:21:23,000 --> 00:21:25,440 Speaker 2: to forecasting defense. Maybe we spend the rest of the 413 00:21:25,480 --> 00:21:28,399 Speaker 2: show on that. But I do want to go back 414 00:21:28,480 --> 00:21:31,480 Speaker 2: and talk the sort of boring stuff about the mechanics 415 00:21:31,480 --> 00:21:35,240 Speaker 2: of mortgages real quickly on spreads. So the spread between 416 00:21:35,240 --> 00:21:37,560 Speaker 2: the thirty year I just did like a subtraction function, 417 00:21:37,600 --> 00:21:39,760 Speaker 2: the most crude thing, but you know, thirty year mortgage 418 00:21:39,920 --> 00:21:43,320 Speaker 2: minus thirty year treasury. You know a few years ago 419 00:21:43,400 --> 00:21:45,440 Speaker 2: that spread was I don't know, like around one percent. 420 00:21:45,600 --> 00:21:47,320 Speaker 2: It got as high, you know, got around three and 421 00:21:47,359 --> 00:21:49,560 Speaker 2: a quarter. It's come down a bit two point eight. 422 00:21:49,760 --> 00:21:52,920 Speaker 2: So just why are spreads as high as they are? 423 00:21:53,040 --> 00:21:55,960 Speaker 2: How would you describe that gap between mortgage spreads and 424 00:21:56,000 --> 00:21:58,800 Speaker 2: treasuries right now? Why is it still such historic hize? 425 00:21:58,880 --> 00:22:02,439 Speaker 3: Okay, you're supposed to you the par mortgage rate on 426 00:22:02,520 --> 00:22:07,760 Speaker 3: Bloomberg mtge fncl use that, okay, versus the tenure swap 427 00:22:07,840 --> 00:22:09,680 Speaker 3: rate or the tenure treasury rate. 428 00:22:09,840 --> 00:22:11,360 Speaker 2: The very much different. Right. 429 00:22:11,800 --> 00:22:14,960 Speaker 3: You'll see about a seventy five seventy basis points spread 430 00:22:15,000 --> 00:22:18,000 Speaker 3: historically back you know, thirty forty years. Okay, it's now 431 00:22:18,080 --> 00:22:21,000 Speaker 3: one fifty. Why is it? There? Two reasons. The easy 432 00:22:21,040 --> 00:22:24,080 Speaker 3: one is vall is high, the moves at one twenty. 433 00:22:24,320 --> 00:22:27,399 Speaker 3: That's the easy one. The harder one is that the 434 00:22:27,440 --> 00:22:30,040 Speaker 3: curves inverted. That's going to require a lot of explanation 435 00:22:30,359 --> 00:22:32,320 Speaker 3: that you can go look at my commentary on my 436 00:22:32,359 --> 00:22:34,800 Speaker 3: website to go read about. But those two things, the 437 00:22:35,040 --> 00:22:39,520 Speaker 3: inverted deal curve and high volatility, and you're gonna see 438 00:22:39,800 --> 00:22:42,560 Speaker 3: when this curve steepens out, which means a two year 439 00:22:42,640 --> 00:22:45,359 Speaker 3: rate comes down below the ten year rate, you're gonna 440 00:22:45,359 --> 00:22:48,679 Speaker 3: see mortgage bonds in general go up. You'll see mortgage 441 00:22:48,720 --> 00:22:51,680 Speaker 3: yields come down, You'll see the retail mortgage rate come down. 442 00:22:52,119 --> 00:22:54,119 Speaker 3: So that's coming, not yet, that's coming. 443 00:22:54,359 --> 00:22:54,600 Speaker 2: Wait. 444 00:22:54,640 --> 00:22:57,760 Speaker 1: But one of the questions about the recent dynamic and 445 00:22:57,840 --> 00:23:02,240 Speaker 1: mortgage rates is it has fallen quite quickly, even though 446 00:23:02,320 --> 00:23:07,000 Speaker 1: the spread between mortgages and treasuries is quite wide. I 447 00:23:07,040 --> 00:23:10,200 Speaker 1: think that's the question, like, why is it? It moved 448 00:23:10,320 --> 00:23:13,480 Speaker 1: up really quickly in twenty twenty two to twenty twenty three, 449 00:23:13,600 --> 00:23:16,639 Speaker 1: shot above seven percent and then eventually eight percent, But 450 00:23:16,720 --> 00:23:19,359 Speaker 1: now it seems to be falling really quickly, even though 451 00:23:19,440 --> 00:23:21,639 Speaker 1: a lot of people thought there were structural changes in 452 00:23:21,680 --> 00:23:24,320 Speaker 1: the market that meant rates were not going to be 453 00:23:24,359 --> 00:23:25,879 Speaker 1: able to come down that fast. 454 00:23:26,560 --> 00:23:28,879 Speaker 3: Look, as I said, the mortgage bond market is the 455 00:23:28,920 --> 00:23:33,000 Speaker 3: second biggest market after treasuries. That spread of one point 456 00:23:33,000 --> 00:23:36,520 Speaker 3: fifty drives the retail rate, and the retail rate is 457 00:23:36,520 --> 00:23:38,680 Speaker 3: going to be let's say another three quarters to one 458 00:23:38,720 --> 00:23:41,879 Speaker 3: percent over that rate. It's a business, and it's a 459 00:23:41,920 --> 00:23:45,080 Speaker 3: competitive business, and it kind of grinds along. And so 460 00:23:45,240 --> 00:23:49,919 Speaker 3: as you see the mortgage bonds tightened have a smaller 461 00:23:49,960 --> 00:23:53,520 Speaker 3: spread to treasuries, you will see the retail mortgage rate 462 00:23:53,520 --> 00:23:56,600 Speaker 3: come down. You're also going to see the spread between 463 00:23:56,960 --> 00:23:59,680 Speaker 3: the retail rate the rate the homeowners take versus the 464 00:23:59,680 --> 00:24:02,200 Speaker 3: mortgage bond rate that's going to come pressed in also 465 00:24:02,240 --> 00:24:03,840 Speaker 3: for a variety of market reasons. 466 00:24:04,119 --> 00:24:06,560 Speaker 1: This might be a slightly unfair question, but do you 467 00:24:06,640 --> 00:24:09,960 Speaker 1: have an estimate for how far the mortgage rate could 468 00:24:10,000 --> 00:24:10,480 Speaker 1: come down? 469 00:24:11,400 --> 00:24:13,879 Speaker 3: Oh? Yeah, I mean eventually the Fed will cut rates 470 00:24:14,280 --> 00:24:16,680 Speaker 3: and you can see easily another hundred based points in 471 00:24:16,800 --> 00:24:30,080 Speaker 3: mortgage rates, haven't. 472 00:24:32,960 --> 00:24:35,159 Speaker 1: I wanted to ask you about something else that you 473 00:24:35,240 --> 00:24:38,160 Speaker 1: sort of threw in there, the inverted yield curve, And 474 00:24:38,200 --> 00:24:42,399 Speaker 1: this has been a massive topic of conversation for the 475 00:24:42,440 --> 00:24:45,240 Speaker 1: past couple of years. I mean, even before the pandemic, 476 00:24:45,440 --> 00:24:47,679 Speaker 1: the yield curve was inverted, and so the joke was 477 00:24:47,760 --> 00:24:51,640 Speaker 1: that the treasury market predicted COVID nineteen and things like that. 478 00:24:52,000 --> 00:24:55,240 Speaker 1: But when you look at the yield curve now it's 479 00:24:55,280 --> 00:24:58,560 Speaker 1: been inverted for a while, there's this big discussion over 480 00:24:58,640 --> 00:25:02,080 Speaker 1: whether or not it is still valid as a recessionary indicator. 481 00:25:02,680 --> 00:25:06,520 Speaker 1: What economic information, if any, are you getting out of 482 00:25:06,520 --> 00:25:08,840 Speaker 1: the inverted yield curve. What is it telling you? 483 00:25:09,600 --> 00:25:14,000 Speaker 3: If you go look at various derivatives, It's indicates right 484 00:25:14,040 --> 00:25:16,480 Speaker 3: now that are to cut rates, you know, four or 485 00:25:16,520 --> 00:25:18,959 Speaker 3: five six times so called one hundred and twenty bent 486 00:25:18,960 --> 00:25:21,920 Speaker 3: basis points of cutting in the next year, which seems 487 00:25:22,000 --> 00:25:24,720 Speaker 3: kind of crazy unless we crash market. We have a 488 00:25:24,720 --> 00:25:28,000 Speaker 3: market crash. I think what's happening is this. I don't 489 00:25:28,000 --> 00:25:30,520 Speaker 3: think it's the market predicting that rates are going to 490 00:25:30,560 --> 00:25:33,640 Speaker 3: come down by one hundred and a quarter base points. 491 00:25:33,640 --> 00:25:35,320 Speaker 3: I don't think that's it. I think what's happening here 492 00:25:35,480 --> 00:25:38,240 Speaker 3: is like an eighty five percent chance their rates don't 493 00:25:38,280 --> 00:25:40,800 Speaker 3: move and a fifteen percent chance their rates go to 494 00:25:40,840 --> 00:25:44,080 Speaker 3: one percent that we have some kind of disaster. It's 495 00:25:44,160 --> 00:25:47,040 Speaker 3: it's a bimodal and if you add those two things together, 496 00:25:47,400 --> 00:25:49,399 Speaker 3: that's how you get the down one twenty five. No 497 00:25:49,440 --> 00:25:52,000 Speaker 3: one's saying one twenty five. I think it's zero and 498 00:25:52,119 --> 00:25:54,840 Speaker 3: four hundred and people are using the two year rate 499 00:25:55,240 --> 00:25:58,520 Speaker 3: or the five year rate as an insurance policy against 500 00:25:58,560 --> 00:26:00,800 Speaker 3: a bad thing happening. If you think in those terms, 501 00:26:00,880 --> 00:26:04,119 Speaker 3: it kind of makes sense because we only quote one number, 502 00:26:04,160 --> 00:26:06,000 Speaker 3: but how do we get that number right? 503 00:26:06,080 --> 00:26:09,000 Speaker 2: So the idea is if your long risk assets, which 504 00:26:09,080 --> 00:26:12,399 Speaker 2: most people are most of the time, one way to 505 00:26:12,560 --> 00:26:15,920 Speaker 2: hedge that would be to sort of, you know, make 506 00:26:15,960 --> 00:26:18,440 Speaker 2: big bets on rates coming down sharply. It doesn't mean 507 00:26:18,440 --> 00:26:21,040 Speaker 2: that that's your main view. It just means that if 508 00:26:21,040 --> 00:26:23,439 Speaker 2: your your bullish view is going to go wrong, a 509 00:26:23,440 --> 00:26:26,000 Speaker 2: way to hedge that is to you know, place big 510 00:26:26,040 --> 00:26:26,520 Speaker 2: bets on rate. 511 00:26:26,600 --> 00:26:29,040 Speaker 3: Yeah. Well that's why the curves inverted. But I mean, 512 00:26:29,080 --> 00:26:31,160 Speaker 3: I think buying tenure rates is kind of silly right now. 513 00:26:31,200 --> 00:26:34,480 Speaker 3: I mean, if you're gonna go and buy this theoretical 514 00:26:34,480 --> 00:26:37,520 Speaker 3: insurance policy of the FED doing a massive cut because 515 00:26:37,520 --> 00:26:40,000 Speaker 3: of a hard landing, you want by the two year rate. 516 00:26:40,840 --> 00:26:43,040 Speaker 3: And that's why we created another product that's basically at 517 00:26:43,080 --> 00:26:46,520 Speaker 3: five times levered two year. That way you get the 518 00:26:46,600 --> 00:26:47,160 Speaker 3: duration of the. 519 00:26:47,080 --> 00:26:48,800 Speaker 2: Ten's just a ticker on that. I want to look 520 00:26:48,840 --> 00:26:48,960 Speaker 2: at that. 521 00:26:49,119 --> 00:26:51,840 Speaker 3: Well, t u A to you. So it's a very 522 00:26:52,640 --> 00:26:54,840 Speaker 3: in theory. Civilians could do it. They can just buy 523 00:26:54,880 --> 00:26:57,919 Speaker 3: their own futures contracts, but civilians usually don't have futures 524 00:26:57,960 --> 00:27:00,920 Speaker 3: contracts accounts, so we are off for them for very 525 00:27:00,920 --> 00:27:01,560 Speaker 3: small fee. 526 00:27:01,720 --> 00:27:04,760 Speaker 1: Got it, Oh, t u A, I think I remember 527 00:27:04,760 --> 00:27:07,879 Speaker 1: this one. I used it to compare the performance of 528 00:27:08,000 --> 00:27:09,879 Speaker 1: the treasury market to a bitcoin. 529 00:27:11,280 --> 00:27:13,040 Speaker 2: Now I want to go look that up. Let's go 530 00:27:13,160 --> 00:27:16,280 Speaker 2: back to your outlook for the year. So I really 531 00:27:16,640 --> 00:27:19,360 Speaker 2: do love this sort of thinking. It's like, okay, on 532 00:27:19,480 --> 00:27:22,920 Speaker 2: his epitaph, on his obituary, Powell may have this sort 533 00:27:22,960 --> 00:27:25,880 Speaker 2: of like human impulse to not be Arthur Burns two 534 00:27:25,880 --> 00:27:27,879 Speaker 2: point zero. But you know, there also is the chance 535 00:27:28,280 --> 00:27:32,080 Speaker 2: for not to just avoid being Arthur Burns, but to 536 00:27:32,200 --> 00:27:36,200 Speaker 2: deliver the soft landing that every economist has said impossible. 537 00:27:36,240 --> 00:27:38,679 Speaker 2: So not just avoiding being one of history's sort of 538 00:27:38,960 --> 00:27:42,320 Speaker 2: scape goods, but actually being a legend and being the 539 00:27:42,440 --> 00:27:45,560 Speaker 2: central banker who fought the crisis in twenty twenty and 540 00:27:45,600 --> 00:27:48,240 Speaker 2: then delivered the soft landing when everyone said it was 541 00:27:48,240 --> 00:27:50,840 Speaker 2: impossible and that we'd have to have employment go to 542 00:27:50,880 --> 00:27:53,399 Speaker 2: six percent in order to get inflation down. Like, do 543 00:27:53,440 --> 00:27:55,320 Speaker 2: you put any weight on this possibility that the sort 544 00:27:55,320 --> 00:27:57,760 Speaker 2: of FMC goes for the let's be legends outcome? 545 00:27:58,040 --> 00:28:00,359 Speaker 3: Oh? Sure, I think they're they're there. They're going to 546 00:28:00,400 --> 00:28:02,520 Speaker 3: try and do it, and they it may well work. 547 00:28:02,560 --> 00:28:04,359 Speaker 3: I'm gonna say it's not gonna be six cuts. It'll 548 00:28:04,359 --> 00:28:06,640 Speaker 3: be two or three and it's not gonna happen in March. 549 00:28:06,720 --> 00:28:08,639 Speaker 3: It'll happen in July. That's all I'm saying. 550 00:28:09,040 --> 00:28:11,880 Speaker 2: So not radically different. Your sort of view of where 551 00:28:12,040 --> 00:28:14,320 Speaker 2: what the Fed does in twenty twenty four is not 552 00:28:14,440 --> 00:28:16,840 Speaker 2: radically different than what a lot of pundits are thinking. 553 00:28:17,040 --> 00:28:22,160 Speaker 3: Cruggling back to the duration credit convects. The idea duration 554 00:28:22,680 --> 00:28:26,199 Speaker 3: is I buy it here, it ends up there. Credit 555 00:28:26,560 --> 00:28:29,040 Speaker 3: I buy it here, it ends up there. It doesn't 556 00:28:29,080 --> 00:28:33,159 Speaker 3: matter how it gets to the found destination. Convexity is 557 00:28:33,440 --> 00:28:37,560 Speaker 3: path dependent. It matters how you get there. And so 558 00:28:37,600 --> 00:28:39,600 Speaker 3: what we're arguing about now is not where we're going 559 00:28:39,640 --> 00:28:41,120 Speaker 3: to be, but how we get there. And I'm saying 560 00:28:41,120 --> 00:28:43,920 Speaker 3: that we're gonna get there much slower than the market thinks. 561 00:28:44,200 --> 00:28:46,560 Speaker 3: And I want to go and invest accordingly. And if 562 00:28:46,600 --> 00:28:48,959 Speaker 3: I do that, this is where mortgage bonds come in. 563 00:28:49,480 --> 00:28:51,160 Speaker 3: I'll say you. If you want to want the big 564 00:28:51,200 --> 00:28:53,760 Speaker 3: prediction here, it is the Fed once a two percent 565 00:28:53,760 --> 00:28:57,640 Speaker 3: inflation rate, they'll get it eventually. I presume they're gonna 566 00:28:57,640 --> 00:29:00,360 Speaker 3: put the funds rate at two and a half over 567 00:29:00,480 --> 00:29:05,440 Speaker 3: for a fifty basis point real return. Historically, like if 568 00:29:05,440 --> 00:29:08,320 Speaker 3: you're a you know, bond geezer like, I am funds 569 00:29:08,400 --> 00:29:11,040 Speaker 3: rate to two years fifty basis points so now worth 570 00:29:11,080 --> 00:29:16,000 Speaker 3: three twos tens one hundred basis points so now worth four. 571 00:29:16,560 --> 00:29:18,600 Speaker 3: So we're kind of looking at the tenure right now. 572 00:29:18,720 --> 00:29:21,400 Speaker 3: Is what three eighty three ninety four four whatever it is? 573 00:29:21,440 --> 00:29:24,720 Speaker 3: I mean, it's done, it's stick a forgative man. The 574 00:29:24,800 --> 00:29:26,600 Speaker 3: tens aren't moving, and I think the three of yr 575 00:29:26,680 --> 00:29:29,400 Speaker 3: rate probably goes up from here as the curve re 576 00:29:29,520 --> 00:29:32,000 Speaker 3: steepens again all the actions the front end that's for 577 00:29:32,040 --> 00:29:34,200 Speaker 3: all the action is going to be and when it happens. 578 00:29:34,520 --> 00:29:38,280 Speaker 3: And so the trade that the geeky quants, the complex people, 579 00:29:38,280 --> 00:29:40,959 Speaker 3: as you might say, are yelling about right now is 580 00:29:41,240 --> 00:29:44,000 Speaker 3: how do I go and bet on a yield curved steepening. 581 00:29:44,960 --> 00:29:48,080 Speaker 3: That's very tricky to do. Fortunately, I do have products 582 00:29:48,080 --> 00:29:48,480 Speaker 3: that we'll do that. 583 00:29:48,520 --> 00:29:52,640 Speaker 1: Also, Wait, don't you just do a steepener tart? Like 584 00:29:52,840 --> 00:29:54,480 Speaker 1: how what are you recommending here? 585 00:29:54,600 --> 00:29:56,840 Speaker 3: Oh? Sure, a steepid exactly what you do. But who 586 00:29:56,840 --> 00:29:58,720 Speaker 3: can do that? I go shure, you people on this 587 00:29:58,800 --> 00:29:59,800 Speaker 3: podcast can't do that. 588 00:30:00,080 --> 00:30:02,920 Speaker 1: Yeah, well we can't do anything because we work at Bloomberg. 589 00:30:03,000 --> 00:30:06,920 Speaker 3: To be clear, if you bought my pifix ETF that 590 00:30:06,960 --> 00:30:09,560 Speaker 3: trade actually will make a lot of money if the 591 00:30:09,600 --> 00:30:12,600 Speaker 3: yield kurt steepens as I've described it, which is the 592 00:30:12,600 --> 00:30:15,040 Speaker 3: ten you're not moving, the two you're coming down, the 593 00:30:15,080 --> 00:30:17,880 Speaker 3: thirty year going up. That'll be a very profitable trade 594 00:30:17,920 --> 00:30:20,960 Speaker 3: if that happens, And the cost of holding that trade 595 00:30:21,520 --> 00:30:25,160 Speaker 3: is rather slim for a variety of reasons that don't matter. 596 00:30:25,760 --> 00:30:28,560 Speaker 1: You know. One of the other things that happened in 597 00:30:28,600 --> 00:30:30,640 Speaker 1: twenty twenty three and twenty twenty two, and one of 598 00:30:30,720 --> 00:30:32,840 Speaker 1: the reasons it was so painful for a lot of 599 00:30:32,840 --> 00:30:38,440 Speaker 1: investors was bonds and stocks became positively correlated. Right, Everything 600 00:30:38,600 --> 00:30:41,320 Speaker 1: sold off all at once, and this was bad news 601 00:30:41,360 --> 00:30:44,560 Speaker 1: for anyone who had constructed a sixty to forty portfolio, 602 00:30:44,840 --> 00:30:47,920 Speaker 1: or who had bought bonds as a hedge for riskier assets. 603 00:30:48,800 --> 00:30:52,320 Speaker 1: How are you viewing that relationship going into twenty twenty four. 604 00:30:52,640 --> 00:30:54,720 Speaker 1: I think there's still an assumption that things are sort 605 00:30:54,760 --> 00:30:58,160 Speaker 1: of moving together. But could we get a situation where 606 00:30:58,280 --> 00:31:01,240 Speaker 1: maybe they become invert correlated again. 607 00:31:01,440 --> 00:31:04,360 Speaker 3: If you were reading my covecs they maven commentaries long 608 00:31:04,440 --> 00:31:07,320 Speaker 3: enough to notice the colors I have there, you would 609 00:31:07,400 --> 00:31:10,560 Speaker 3: notice that quite a number of years ago, I was 610 00:31:10,600 --> 00:31:14,320 Speaker 3: talking about this exact notion of the correlation of stocks 611 00:31:14,320 --> 00:31:18,080 Speaker 3: to bonds, and what you saw was prior to ninety eight, 612 00:31:18,160 --> 00:31:20,560 Speaker 3: ninety nine to two thousand, you saw stocks and bonds 613 00:31:20,600 --> 00:31:22,840 Speaker 3: go up and down together. And for the last twenty 614 00:31:22,960 --> 00:31:26,200 Speaker 3: years they went inverse. They were hedging each other. Yeah, 615 00:31:26,200 --> 00:31:29,560 Speaker 3: and now they're back to being positive correlated again. The 616 00:31:29,640 --> 00:31:32,240 Speaker 3: driver of that has been the level of interest rates. 617 00:31:32,280 --> 00:31:33,720 Speaker 3: And if you go to my website, I have a 618 00:31:33,800 --> 00:31:36,680 Speaker 3: number of charts that show exactly this, that when inflations 619 00:31:36,680 --> 00:31:39,240 Speaker 3: blow two and a half and tenure rates are below 620 00:31:39,680 --> 00:31:41,960 Speaker 3: three and a half, you tend to see them work 621 00:31:42,000 --> 00:31:45,280 Speaker 3: in oppsit directions. When they're above that, they work in 622 00:31:45,320 --> 00:31:47,640 Speaker 3: the same direction. So I think you're gonna see stocks 623 00:31:47,640 --> 00:31:51,000 Speaker 3: and bonds correlated until we get rates and inflation back 624 00:31:51,040 --> 00:31:51,520 Speaker 3: down again. 625 00:31:52,280 --> 00:31:54,560 Speaker 2: I love that. I mean, there's like an intuition if 626 00:31:54,560 --> 00:31:57,160 Speaker 2: inflation is low, fed is more on fed put mode, 627 00:31:57,160 --> 00:31:59,840 Speaker 2: et cetera. You sort of get those like buoyancy under equities. 628 00:32:00,080 --> 00:32:02,480 Speaker 2: I want to go back to the idea of the 629 00:32:02,840 --> 00:32:04,680 Speaker 2: steepener and right now, if you just were to put 630 00:32:04,720 --> 00:32:07,320 Speaker 2: on it, make a chart, a dual life access chart, 631 00:32:07,480 --> 00:32:09,440 Speaker 2: or I guess even one you know, two year ten 632 00:32:09,480 --> 00:32:12,160 Speaker 2: year yields, they kind of look the same. But as 633 00:32:12,160 --> 00:32:14,400 Speaker 2: you point out, and as people have been discussed, you 634 00:32:14,440 --> 00:32:17,520 Speaker 2: could get to this point eventually or the FED cuts 635 00:32:17,880 --> 00:32:21,640 Speaker 2: and that is viewed as reflationary or you know, creates 636 00:32:21,680 --> 00:32:24,640 Speaker 2: this positive impulse and you could have the decline at 637 00:32:24,680 --> 00:32:27,160 Speaker 2: the short end and then the long end is the 638 00:32:27,360 --> 00:32:30,200 Speaker 2: rates go up? When does that happen? At what point? Like, 639 00:32:30,240 --> 00:32:31,960 Speaker 2: we haven't seen it yet, right, So we've had these 640 00:32:32,000 --> 00:32:35,240 Speaker 2: expectations of cuts, this pricing end of short end cuts, 641 00:32:35,480 --> 00:32:37,440 Speaker 2: and we've seen the long end go right down along 642 00:32:37,440 --> 00:32:39,960 Speaker 2: with it as the two year fell. At what point 643 00:32:40,000 --> 00:32:42,800 Speaker 2: does that change such that the expectation of cuts in 644 00:32:42,840 --> 00:32:45,440 Speaker 2: the short term leads to higher rates of the long term. 645 00:32:45,440 --> 00:32:47,520 Speaker 3: Well, there is the expression of don't fight the Fed, 646 00:32:47,560 --> 00:32:49,320 Speaker 3: and the reason is they're bigger than you are, man, 647 00:32:49,640 --> 00:32:52,880 Speaker 3: They're the casino. The FED will cut rates. Yeah, I'm 648 00:32:52,920 --> 00:32:55,560 Speaker 3: not sure when I think July, but they will cut rates, 649 00:32:55,800 --> 00:32:58,400 Speaker 3: and as they eventually start to cut rates, the curve 650 00:32:58,440 --> 00:33:00,719 Speaker 3: will steepen out. The question is how much of this 651 00:33:00,720 --> 00:33:03,560 Speaker 3: steepening will be the two year coming down versus a 652 00:33:03,680 --> 00:33:06,840 Speaker 3: rotation of twos down in tens and thirties up. I 653 00:33:06,920 --> 00:33:09,200 Speaker 3: tend to think it'll be a rotation for the reasons 654 00:33:09,200 --> 00:33:11,120 Speaker 3: you've described when's going to happen. 655 00:33:11,480 --> 00:33:13,960 Speaker 2: It's fun they cut, So right now we have markets 656 00:33:13,960 --> 00:33:16,320 Speaker 2: sort of coming down with the pricing and of cuts, 657 00:33:16,320 --> 00:33:19,880 Speaker 2: but you're saying when they're actually realized cuts is when 658 00:33:19,880 --> 00:33:21,720 Speaker 2: we would start to see that relationship change. 659 00:33:21,800 --> 00:33:24,960 Speaker 3: Tracy was talking about this notion of the curve predicting 660 00:33:25,280 --> 00:33:28,320 Speaker 3: the economy, and it's predicted the last I guess eight recessions. 661 00:33:28,320 --> 00:33:33,120 Speaker 3: It's been spought on for forty years. We us here 662 00:33:33,280 --> 00:33:36,520 Speaker 3: always talk twos tens because it's kind of fun. The 663 00:33:36,560 --> 00:33:40,360 Speaker 3: actual research was the three month rate versus the ten 664 00:33:40,400 --> 00:33:43,760 Speaker 3: year rate in treasuries, not in swaps, and the three 665 00:33:43,760 --> 00:33:46,760 Speaker 3: month rate is the FED rate. The market can't go 666 00:33:46,800 --> 00:33:48,520 Speaker 3: and pull the three month down with the FED rate 667 00:33:48,720 --> 00:33:51,000 Speaker 3: up where it is, so you need the actual Fed 668 00:33:51,040 --> 00:33:53,160 Speaker 3: to cut the interest rates to go and pull the 669 00:33:53,240 --> 00:33:55,920 Speaker 3: three month versus ten years down, and that's what will happen. 670 00:33:56,080 --> 00:33:58,520 Speaker 3: And all that's happening right now is people are in 671 00:33:58,600 --> 00:34:01,560 Speaker 3: theory placing these bets on when this will occur. I 672 00:34:01,560 --> 00:34:03,840 Speaker 3: think they're over their skis on this, but you know, 673 00:34:04,120 --> 00:34:04,680 Speaker 3: we'll see. 674 00:34:04,800 --> 00:34:07,040 Speaker 1: I just have a couple more questions, but one of 675 00:34:07,080 --> 00:34:10,759 Speaker 1: them is slightly outside the world of fixed income. But 676 00:34:10,840 --> 00:34:15,839 Speaker 1: I think given your experience in derivatives and you know 677 00:34:15,960 --> 00:34:20,360 Speaker 1: things where the tail is sometimes wagging the dog, maybe 678 00:34:20,360 --> 00:34:23,120 Speaker 1: you have an opinion on this. But zero day options, 679 00:34:24,040 --> 00:34:25,560 Speaker 1: is that something you've been following at all in the 680 00:34:25,600 --> 00:34:26,320 Speaker 1: stock market. 681 00:34:26,880 --> 00:34:29,920 Speaker 3: I find them very interesting and they're important to the 682 00:34:29,960 --> 00:34:34,320 Speaker 3: extent of when these options are trading, there's a buyer, 683 00:34:34,400 --> 00:34:37,120 Speaker 3: there's a seller. It's a closed system. The world has 684 00:34:37,160 --> 00:34:40,880 Speaker 3: not gone more or less optional or convex. It's a 685 00:34:40,920 --> 00:34:46,160 Speaker 3: closed system. However, the two parties may act differently. So 686 00:34:46,320 --> 00:34:49,520 Speaker 3: once upon time when you would see huge options selling 687 00:34:49,600 --> 00:34:52,680 Speaker 3: in the bond market or option trading, that might reduce 688 00:34:52,760 --> 00:34:56,439 Speaker 3: volatility because the seller very often would be my ex 689 00:34:56,440 --> 00:35:00,840 Speaker 3: employer and they would not be adjusting their portfolio, whereas 690 00:35:00,840 --> 00:35:02,760 Speaker 3: the buyers, people like me when I was a trader 691 00:35:02,760 --> 00:35:06,719 Speaker 3: on Wall Street, I would be delta hedging, adjusting my portfolio. 692 00:35:06,800 --> 00:35:11,360 Speaker 3: And if I'm trading against the option but the seller isn't, 693 00:35:11,680 --> 00:35:15,239 Speaker 3: that'll drive the market towards the strike at xpery. The 694 00:35:15,320 --> 00:35:19,320 Speaker 3: question is now, is those zero day options are the buyers. 695 00:35:19,320 --> 00:35:23,000 Speaker 3: Are the sellers trading them? Are they adjusting them? And 696 00:35:23,280 --> 00:35:26,240 Speaker 3: is that I'm gonna guess their retails by selling the options. 697 00:35:26,239 --> 00:35:28,880 Speaker 3: But in games Stop they're buying it. And so what 698 00:35:28,920 --> 00:35:31,440 Speaker 3: you saw there was Game Stop they buy the option, 699 00:35:32,080 --> 00:35:35,160 Speaker 3: sit elt Sasquahana would sell the option they were hedging. 700 00:35:35,719 --> 00:35:37,840 Speaker 3: Retail wasn't. And that's what drove the market to be 701 00:35:37,920 --> 00:35:41,400 Speaker 3: more volatile. Right now, you probably retail selling the options. 702 00:35:41,760 --> 00:35:44,520 Speaker 3: It s tis Quanta retail buying it, and therefore that's 703 00:35:44,719 --> 00:35:47,720 Speaker 3: reducing volatility. So you got to figure out who's the buyer, 704 00:35:47,880 --> 00:35:51,359 Speaker 3: who's the seller, who's trading it, and who's not. Can 705 00:35:51,440 --> 00:35:54,240 Speaker 3: we know that I see these guys on Wall Street 706 00:35:54,239 --> 00:35:56,160 Speaker 3: all the time saying, you know, this is the net 707 00:35:56,239 --> 00:35:58,880 Speaker 3: Gama of the world. Like do I believe them? Not? Really? 708 00:35:58,920 --> 00:35:59,960 Speaker 3: It just sells newspapers. 709 00:36:01,239 --> 00:36:03,120 Speaker 2: Can I just go a quick question? And I'm asking 710 00:36:03,120 --> 00:36:05,560 Speaker 2: you this because you mentioned a handful of tickers that 711 00:36:05,600 --> 00:36:09,399 Speaker 2: your firms Simplify Asset Management has created, like prefix. Are 712 00:36:09,480 --> 00:36:13,880 Speaker 2: these instruments that at different times you would recommend go 713 00:36:14,000 --> 00:36:16,799 Speaker 2: long or short? I mean, so you have this desk 714 00:36:16,880 --> 00:36:21,120 Speaker 2: where you can convert institutional quality trading of futures and swaps, 715 00:36:21,120 --> 00:36:23,879 Speaker 2: et cetera into a retail package that one could buy 716 00:36:23,920 --> 00:36:27,480 Speaker 2: even on a platform like Robinhood. You know, and when 717 00:36:27,480 --> 00:36:29,400 Speaker 2: I think of asset management in general, you know, I 718 00:36:29,400 --> 00:36:32,280 Speaker 2: think of like basically managers who want to create products 719 00:36:32,320 --> 00:36:33,960 Speaker 2: that will go up. But is the idea here that 720 00:36:34,000 --> 00:36:36,560 Speaker 2: you want to create products that allow people to have 721 00:36:37,160 --> 00:36:38,520 Speaker 2: exposure in both directions. 722 00:36:39,040 --> 00:36:42,360 Speaker 3: Some of our products are more strategic, some are more permanent. 723 00:36:43,000 --> 00:36:45,759 Speaker 3: One could argue that that Pifix was strategic. You know, 724 00:36:45,880 --> 00:36:47,799 Speaker 3: it came on two years ago, riach, we're you know, 725 00:36:47,880 --> 00:36:50,520 Speaker 3: one two percent, and they went a lot highers that worked. 726 00:36:50,960 --> 00:36:54,880 Speaker 3: I might add, though, although they desire to buy this product, 727 00:36:55,080 --> 00:36:57,759 Speaker 3: is less now because clearly we're kind of this, you know, 728 00:36:57,840 --> 00:37:02,120 Speaker 3: great paradigm of flat to low. I'd argue that it 729 00:37:02,239 --> 00:37:04,759 Speaker 3: still makes sense to own it, maybe less of it. 730 00:37:05,160 --> 00:37:07,960 Speaker 3: Because you don't buy insurance because you think you're going 731 00:37:08,040 --> 00:37:10,200 Speaker 3: to crash. It's because you might be wrong and you 732 00:37:10,239 --> 00:37:13,000 Speaker 3: might do it. You don't buy pifix because you're embarrassed 733 00:37:13,040 --> 00:37:15,000 Speaker 3: on rates. You buy it because your bullshy might be wrong. 734 00:37:15,400 --> 00:37:17,879 Speaker 3: And so as an insurance policy, a very low cost 735 00:37:17,960 --> 00:37:21,560 Speaker 3: insurance policy that makes sense. MTBA, which is our mortgage product. 736 00:37:22,040 --> 00:37:24,920 Speaker 3: That's more of a lifetime product. I mean that yields 737 00:37:24,920 --> 00:37:27,480 Speaker 3: one hundred and fifty over the curvature. You will always 738 00:37:27,520 --> 00:37:30,480 Speaker 3: have exposure in the mortgage market. If you are in 739 00:37:30,560 --> 00:37:33,520 Speaker 3: fixed income, you'll have some amount of money there. You 740 00:37:33,520 --> 00:37:35,520 Speaker 3: should have a lot of it now in the mortgage market, 741 00:37:35,760 --> 00:37:39,240 Speaker 3: and after the curve steepens involves come down, you should 742 00:37:39,239 --> 00:37:40,680 Speaker 3: have less of it. Yeah. 743 00:37:40,840 --> 00:37:45,040 Speaker 1: The p fix chart looks fantastic if you got in 744 00:37:45,280 --> 00:37:47,400 Speaker 1: in twenty twenty one and got out sort of like 745 00:37:47,600 --> 00:37:52,759 Speaker 1: last year. Yeah, but uh, feller's extremely painful if you 746 00:37:52,920 --> 00:37:55,080 Speaker 1: got in just before the end of the year. 747 00:37:55,200 --> 00:37:57,240 Speaker 3: We've had a huge thirty four dollars distribution. 748 00:37:57,719 --> 00:37:59,560 Speaker 1: Oh is that what it is? This is my fault. 749 00:37:59,560 --> 00:38:01,560 Speaker 1: I should adjusted for distributions. 750 00:38:01,600 --> 00:38:04,400 Speaker 2: So you still didn't want to get it in October 751 00:38:04,480 --> 00:38:07,160 Speaker 2: thirty first, No, the line is distorted at the end 752 00:38:07,200 --> 00:38:07,880 Speaker 2: by that distribution. 753 00:38:08,000 --> 00:38:10,840 Speaker 3: Yeah, since the distribution is the product has been re 754 00:38:11,120 --> 00:38:14,239 Speaker 3: restructured to the very similar to what it was its 755 00:38:14,280 --> 00:38:16,760 Speaker 3: original entry points two and a half years ago. 756 00:38:16,640 --> 00:38:18,160 Speaker 2: So it's you kind of have to reload. 757 00:38:18,480 --> 00:38:20,879 Speaker 3: You're supposed to reload now. It's actually a little better 758 00:38:20,920 --> 00:38:23,359 Speaker 3: product now than before. Although clearly, you know from one 759 00:38:23,400 --> 00:38:27,160 Speaker 3: fourteen down to forty looks challenging, but remember thirty five 760 00:38:27,200 --> 00:38:28,200 Speaker 3: bucks of that is distribution. 761 00:38:28,920 --> 00:38:31,680 Speaker 1: I just have one more question. It is the most 762 00:38:31,800 --> 00:38:32,560 Speaker 1: important question. 763 00:38:32,680 --> 00:38:34,919 Speaker 2: Are you going to steal my question of this conversation question? 764 00:38:35,040 --> 00:38:37,319 Speaker 1: Oh yeah, Joe, still one of my questions. I don't 765 00:38:37,320 --> 00:38:39,920 Speaker 1: think I am okay good, But you can claim that 766 00:38:40,040 --> 00:38:43,080 Speaker 1: I have and then show me the evidence. But this 767 00:38:43,200 --> 00:38:46,279 Speaker 1: is very important. What's your favorite color? Was that your 768 00:38:46,360 --> 00:38:46,960 Speaker 1: question was? 769 00:38:47,120 --> 00:38:50,759 Speaker 2: It was close? So I'm just gonn we just can Yeah, 770 00:38:50,760 --> 00:38:53,000 Speaker 2: you could tweak it, just like answer the question. So 771 00:38:53,120 --> 00:38:56,160 Speaker 2: for those who have never read Harley's notes, you know 772 00:38:56,239 --> 00:38:58,360 Speaker 2: here in Bloomberg we have the gold line sometimes in 773 00:38:58,400 --> 00:38:59,640 Speaker 2: a white line. I sort of leave it at that. 774 00:38:59,719 --> 00:39:01,520 Speaker 2: Harley these notes, I'd see. I'm looking at the most 775 00:39:01,600 --> 00:39:07,240 Speaker 2: recent grabag. There's the Kiddorooki line which I had, Zimbibu line, 776 00:39:08,000 --> 00:39:14,200 Speaker 2: the kahaweel line, and these are apparently all colors. So 777 00:39:14,239 --> 00:39:16,040 Speaker 2: I was like chatting with Tracy's like do you like 778 00:39:16,120 --> 00:39:19,040 Speaker 2: go down through like the pantone catalog each time to 779 00:39:19,120 --> 00:39:21,040 Speaker 2: come up with new catalog? Like what are these colors? 780 00:39:21,080 --> 00:39:22,400 Speaker 2: And I guess, like what is your favorite but how 781 00:39:22,440 --> 00:39:23,960 Speaker 2: did you or what is all this sol about? 782 00:39:24,480 --> 00:39:27,680 Speaker 3: I started writing a commentary nearly twenty years ago. You 783 00:39:27,760 --> 00:39:31,960 Speaker 3: can go to convexdemaven dot com. That's my entire inventory 784 00:39:32,160 --> 00:39:36,600 Speaker 3: of commentaries. I published every six to eight weeks. It's free, 785 00:39:36,719 --> 00:39:40,600 Speaker 3: semi email the list. I'll talk about macro concepts. I 786 00:39:40,680 --> 00:39:44,279 Speaker 3: started doing colors because I hated the all the charts 787 00:39:44,280 --> 00:39:47,320 Speaker 3: of Marylynch. We're all various shades of bling it out. 788 00:39:47,200 --> 00:39:49,800 Speaker 2: Of that sort of like the strict cell side like 789 00:39:50,080 --> 00:39:51,000 Speaker 2: styled guides for. 790 00:39:51,680 --> 00:39:54,760 Speaker 3: We had just created this new charting system that allowed 791 00:39:54,760 --> 00:39:57,640 Speaker 3: you to actually pick all the colors available. So I 792 00:39:57,719 --> 00:40:00,319 Speaker 3: started doing that just to get attention. And then after 793 00:40:00,360 --> 00:40:02,640 Speaker 3: a while I started naming the colors. That was fun, 794 00:40:02,719 --> 00:40:04,800 Speaker 3: that was crazy to do. And then after about you know, 795 00:40:04,840 --> 00:40:08,480 Speaker 3: fifteen years for colors, so I started going to actually 796 00:40:08,600 --> 00:40:11,080 Speaker 3: now foreign languages is the trick. 797 00:40:11,200 --> 00:40:11,759 Speaker 2: Oh, got it? 798 00:40:12,160 --> 00:40:15,839 Speaker 3: But my favorite color that was when I used hemoglobin 799 00:40:16,000 --> 00:40:17,840 Speaker 3: for red like that. 800 00:40:18,000 --> 00:40:21,880 Speaker 1: Have you considered starting your own line of paints inspired 801 00:40:21,960 --> 00:40:24,200 Speaker 1: by your chart colors, because I have to say, aspergen 802 00:40:24,400 --> 00:40:26,840 Speaker 1: is a very few color that I would consider for 803 00:40:27,200 --> 00:40:29,239 Speaker 1: a kitchen something like that. 804 00:40:29,360 --> 00:40:29,760 Speaker 3: Someday. 805 00:40:30,000 --> 00:40:35,040 Speaker 1: All right, a new area of diversification. Harley Basman, that 806 00:40:35,160 --> 00:40:37,640 Speaker 1: was an absolute pleasure. I'm so glad we finally had 807 00:40:37,680 --> 00:40:39,320 Speaker 1: you on the podcast. We wanted to have you on 808 00:40:39,560 --> 00:40:41,560 Speaker 1: for a very long time and this was the perfect 809 00:40:41,600 --> 00:40:56,799 Speaker 1: time to do it. So thank you so much. Thank you, Joe. 810 00:40:56,920 --> 00:40:59,120 Speaker 1: That was really fun. I'm glad we finally had Harley on. 811 00:40:59,560 --> 00:41:02,360 Speaker 1: I'm glad we got him to explain convexity to us, 812 00:41:02,800 --> 00:41:05,719 Speaker 1: given that a lot of his trade ideas for twenty 813 00:41:05,800 --> 00:41:07,840 Speaker 1: twenty four seem to be all about convexity. 814 00:41:08,239 --> 00:41:08,439 Speaker 3: Yeah. 815 00:41:08,600 --> 00:41:10,319 Speaker 2: No, that was a lot of fun. And I really 816 00:41:10,360 --> 00:41:14,680 Speaker 2: appreciate the balance of sort of big picture macro thinking 817 00:41:14,800 --> 00:41:18,080 Speaker 2: about like, you know, the sort of the reputational impulses 818 00:41:18,160 --> 00:41:21,480 Speaker 2: for the FED, the sources of inflation going forward, so 819 00:41:21,560 --> 00:41:24,160 Speaker 2: these big picture macro things, and then how one goes 820 00:41:24,200 --> 00:41:27,719 Speaker 2: about connecting that or, as they say in the expressing 821 00:41:27,800 --> 00:41:30,440 Speaker 2: that in the form of like very specific trades. Was 822 00:41:30,560 --> 00:41:31,960 Speaker 2: really interesting to hear us thinking on that. 823 00:41:32,200 --> 00:41:35,160 Speaker 1: Yeah, and this is really what I think differentiates Harley's 824 00:41:35,239 --> 00:41:39,920 Speaker 1: work from some others on Wall Street. It's the attention 825 00:41:40,200 --> 00:41:44,080 Speaker 1: paid to the construction of the trade and the technicals 826 00:41:44,160 --> 00:41:48,480 Speaker 1: and how exactly you're expressing a particular view because very often, 827 00:41:48,680 --> 00:41:51,279 Speaker 1: and you know on this podcast included, you will have 828 00:41:51,400 --> 00:41:54,440 Speaker 1: people coming on who say like sell credit, yeah, or 829 00:41:54,719 --> 00:41:57,480 Speaker 1: buy credit or whatever, but they don't actually go into 830 00:41:57,760 --> 00:42:01,799 Speaker 1: how one can or should do that, and it makes 831 00:42:01,840 --> 00:42:05,680 Speaker 1: such a huge difference to returns and investors ultimately, and 832 00:42:06,280 --> 00:42:08,879 Speaker 1: to get back to the sort of zero day option question, 833 00:42:09,040 --> 00:42:11,439 Speaker 1: it can have an impact on the overall market as well, 834 00:42:11,600 --> 00:42:14,520 Speaker 1: like the way these popular trades are actually constructed. 835 00:42:14,880 --> 00:42:17,680 Speaker 2: Yeah, and as you've been talking about for a long time, 836 00:42:17,800 --> 00:42:22,520 Speaker 2: like really large scale portfolio managers, like it's not like 837 00:42:22,640 --> 00:42:26,480 Speaker 2: stocks now just in like, you know, even something simple 838 00:42:26,520 --> 00:42:28,840 Speaker 2: about like expressing a view on rates. If you're bullish, 839 00:42:28,840 --> 00:42:30,680 Speaker 2: you buy stocks, right, I mean some people may, right, 840 00:42:30,880 --> 00:42:32,520 Speaker 2: but you know, even if you have some sort of 841 00:42:32,640 --> 00:42:35,719 Speaker 2: view on rates, like you know, these big names that 842 00:42:36,080 --> 00:42:38,759 Speaker 2: you know, like Pimco's of the world, like this is 843 00:42:38,840 --> 00:42:41,120 Speaker 2: what they are doing. They're coming up with different ways 844 00:42:41,239 --> 00:42:43,880 Speaker 2: of expressing this that is not maybe as sort of 845 00:42:43,920 --> 00:42:46,439 Speaker 2: straightforward as their peers on the equity side. 846 00:42:46,520 --> 00:42:50,440 Speaker 1: Absolutely, there is a whole hidden and wonderful world of 847 00:42:50,600 --> 00:42:54,560 Speaker 1: total return swaps, index options or swaptions, lots of stuff 848 00:42:54,600 --> 00:42:58,040 Speaker 1: that just doesn't get as much airtime totally. All right, 849 00:42:58,120 --> 00:42:58,799 Speaker 1: shall we leave it there? 850 00:42:58,920 --> 00:42:59,360 Speaker 2: Let's leave it. 851 00:42:59,400 --> 00:43:03,160 Speaker 1: There has been another episode of the Oddlots podcast. I'm 852 00:43:03,239 --> 00:43:05,880 Speaker 1: Tracy Alloway. You can follow me at Tracy Alloway. 853 00:43:06,200 --> 00:43:08,960 Speaker 2: I'm Jill Wisenthal. You can follow me at the Stalwart. 854 00:43:09,239 --> 00:43:12,680 Speaker 2: Follow our guest Harley Bassman, He's at the Convexity Maven. 855 00:43:12,719 --> 00:43:15,640 Speaker 2: Also go to his website, check out his writings, send 856 00:43:15,719 --> 00:43:17,680 Speaker 2: him an email, get on his list. See all the 857 00:43:17,719 --> 00:43:21,000 Speaker 2: different colors he uses for charts. Follow our producers Carmen 858 00:43:21,120 --> 00:43:25,200 Speaker 2: Rodriguez at Carmen Arman, Dashel Bennett at Dashbot and Kelbrooks 859 00:43:25,280 --> 00:43:28,280 Speaker 2: at Kelbrooks. And thank you to our producer Moses Ondam. 860 00:43:28,600 --> 00:43:31,280 Speaker 2: From our Oddlows content. Go to Bloomberg dot com slash 861 00:43:31,320 --> 00:43:34,000 Speaker 2: odd Lots, where we have a blog, transcripts of all 862 00:43:34,040 --> 00:43:36,720 Speaker 2: our episodes, and a newsletter, and you can talk about 863 00:43:36,760 --> 00:43:39,200 Speaker 2: this episode, along with any other twenty four seven in 864 00:43:39,320 --> 00:43:43,280 Speaker 2: the chatroom Discord Discord dot gg slash Oddlaws. 865 00:43:43,640 --> 00:43:46,200 Speaker 1: And if you enjoy odd Lots, if you want us 866 00:43:46,280 --> 00:43:49,839 Speaker 1: to advocate for hemoglobin to be Pantones color of the Year, 867 00:43:50,200 --> 00:43:53,240 Speaker 1: then please leave us a positive review on your favorite 868 00:43:53,280 --> 00:44:00,719 Speaker 1: podcast platform. Thanks for listening. In