1 00:00:10,640 --> 00:00:14,040 Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast. 2 00:00:14,120 --> 00:00:18,840 Speaker 1: I'm Tracy Alloway and I'm Joe wisn't so, Joe. It's 3 00:00:19,120 --> 00:00:21,560 Speaker 1: that time of year again. You know, we're getting close 4 00:00:21,600 --> 00:00:25,640 Speaker 1: to the end of and that means everyone is starting 5 00:00:25,680 --> 00:00:30,400 Speaker 1: to talk about what nineteen might have in store for markets. Truly, 6 00:00:30,560 --> 00:00:34,080 Speaker 1: the most wonderful time of year, I think is the 7 00:00:34,200 --> 00:00:37,720 Speaker 1: season right about now. It always warms my heart and 8 00:00:37,760 --> 00:00:41,160 Speaker 1: that's when you start getting analyst notes from sell side 9 00:00:41,479 --> 00:00:47,120 Speaker 1: shops talking about what the forecasts are for all asset classes, uh, 10 00:00:47,159 --> 00:00:50,160 Speaker 1: stocks and bonds and currencies. I truly think it's really 11 00:00:50,200 --> 00:00:54,639 Speaker 1: like the most heartwarming time of year for right, Okay, Um, 12 00:00:54,680 --> 00:00:59,720 Speaker 1: don't you absolutely the most wonderful time of the year. Indeed. Uh, 13 00:01:00,040 --> 00:01:02,880 Speaker 1: But there's there's a little bit of a difference this year, 14 00:01:03,000 --> 00:01:07,000 Speaker 1: I feel, and probably it's because December is coming off 15 00:01:07,040 --> 00:01:11,319 Speaker 1: the back of November and October, which, as we've discussed 16 00:01:11,360 --> 00:01:15,160 Speaker 1: on the All Thoughts Podcast before, have been pretty painful 17 00:01:15,319 --> 00:01:18,560 Speaker 1: months for a lot of investors. Yeah, that's true, and 18 00:01:18,600 --> 00:01:24,800 Speaker 1: of course people always update their forecasts basically to some extent, 19 00:01:25,040 --> 00:01:28,560 Speaker 1: extrapolating on what happened in the recent past. So I 20 00:01:28,600 --> 00:01:31,080 Speaker 1: think the fact that we got this sort of October 21 00:01:31,200 --> 00:01:35,680 Speaker 1: November intense about of volatility has caused people to say, oh, suddenly, 22 00:01:35,720 --> 00:01:38,440 Speaker 1: we see all these new risks on the horizon, Whereas 23 00:01:38,440 --> 00:01:40,760 Speaker 1: if you had asked them at the end of September, 24 00:01:40,920 --> 00:01:43,000 Speaker 1: they would have been much more sanguine about what the 25 00:01:43,040 --> 00:01:46,720 Speaker 1: future had in store. Yeah, everyone's sort of rushing to 26 00:01:46,920 --> 00:01:51,240 Speaker 1: retool their risk forecast for next year. But there's one 27 00:01:51,400 --> 00:01:56,280 Speaker 1: person who has been consistent in forecasting a very similar 28 00:01:56,520 --> 00:01:59,840 Speaker 1: set of risks for many years now, and that person 29 00:02:00,080 --> 00:02:02,240 Speaker 1: is going to be our guest on the show today. 30 00:02:02,600 --> 00:02:04,680 Speaker 1: That's great. I'm looking forward to this because a it'll 31 00:02:04,720 --> 00:02:08,680 Speaker 1: be nice to get an alternative viewpoint from the always 32 00:02:08,720 --> 00:02:12,720 Speaker 1: sort of, you know, somewhat rosy outlook of the mainstream 33 00:02:12,800 --> 00:02:16,040 Speaker 1: investing class. But it's also interesting to talk to people 34 00:02:16,080 --> 00:02:19,520 Speaker 1: who are contrarians, because while it's true that you know, 35 00:02:19,840 --> 00:02:22,560 Speaker 1: it can pay to have a different view, in the 36 00:02:22,639 --> 00:02:25,240 Speaker 1: meantime when markets aren't blowing up, it can be a 37 00:02:25,320 --> 00:02:31,400 Speaker 1: costly view. So how you reconcile that is always very interesting. Yeah, absolutely, 38 00:02:31,440 --> 00:02:33,320 Speaker 1: And I have to say I've been a fan of 39 00:02:33,320 --> 00:02:36,200 Speaker 1: this particular person's work for a very, very long time. 40 00:02:36,360 --> 00:02:38,880 Speaker 1: So I'm quite happy that we're going to have him 41 00:02:38,880 --> 00:02:40,320 Speaker 1: on the show and that we'll get to put these 42 00:02:40,400 --> 00:02:43,760 Speaker 1: questions to him. So, without further ado, our guest for 43 00:02:43,840 --> 00:02:49,320 Speaker 1: this episode is Chris Cole over Artemis Capital Management. Chris 44 00:02:49,560 --> 00:02:53,760 Speaker 1: is the founder and c IO of Artemis Capital and 45 00:02:53,880 --> 00:02:58,760 Speaker 1: he's been writing about the markets and specifically volatility for many, 46 00:02:58,800 --> 00:03:01,760 Speaker 1: many years now. Chris, welcome to the show. Thank you 47 00:03:01,800 --> 00:03:04,400 Speaker 1: for a pleasure to be here. So Chris, maybe just 48 00:03:04,440 --> 00:03:06,239 Speaker 1: to get started, you can give us a little bit 49 00:03:06,360 --> 00:03:10,520 Speaker 1: about your background and how you got to Artemis and 50 00:03:10,680 --> 00:03:14,200 Speaker 1: what exactly it does, because it's a little bit unusual, 51 00:03:14,280 --> 00:03:17,959 Speaker 1: I feel sure. Well, I think the mission of Artemis 52 00:03:18,720 --> 00:03:23,880 Speaker 1: is to really create opportunity out of chaos. Normally, when 53 00:03:23,880 --> 00:03:27,919 Speaker 1: there's volatility in the marketplace, that's a bad thing, big 54 00:03:27,960 --> 00:03:31,359 Speaker 1: equity draw downs, it impacts people's portfolio in a negative way. 55 00:03:31,960 --> 00:03:35,760 Speaker 1: Our job is to turn that volatility into something that's positive. 56 00:03:36,640 --> 00:03:39,440 Speaker 1: And the history of the firm actually comes out of 57 00:03:39,640 --> 00:03:42,560 Speaker 1: an old school hedge fund story. I used to I 58 00:03:42,600 --> 00:03:45,400 Speaker 1: was trading my own proprietary capital throughout the period of 59 00:03:45,400 --> 00:03:49,320 Speaker 1: two thousand seven to two thousand ten, and really turned 60 00:03:49,360 --> 00:03:52,880 Speaker 1: two thousand eight into something that was quite profitable and 61 00:03:53,240 --> 00:03:57,280 Speaker 1: try to develop strategies that paid off in the event 62 00:03:57,320 --> 00:04:00,280 Speaker 1: that there was a tremendous amount of volatility, but it 63 00:04:00,360 --> 00:04:04,000 Speaker 1: didn't bleed uncontrollably or lose a tremendous amount of capital. 64 00:04:04,240 --> 00:04:07,680 Speaker 1: Uh if the market continue to do well. And that 65 00:04:07,800 --> 00:04:09,640 Speaker 1: that was how Artemis was founded. It was founded out 66 00:04:09,680 --> 00:04:11,520 Speaker 1: of a bedroom um and you know today we have 67 00:04:11,560 --> 00:04:15,280 Speaker 1: institutional clients all over the world. So is the goal 68 00:04:15,560 --> 00:04:20,000 Speaker 1: of Artemis to be or even the goal of their 69 00:04:20,080 --> 00:04:24,159 Speaker 1: sort of framework, to be profitable over the long term, 70 00:04:24,360 --> 00:04:28,200 Speaker 1: or is it as some other funds are positioned, to 71 00:04:28,440 --> 00:04:32,799 Speaker 1: essentially allow people to take more risks during the good 72 00:04:32,800 --> 00:04:37,200 Speaker 1: times while ensuring that when the bad times hit unexpectedly 73 00:04:37,640 --> 00:04:42,120 Speaker 1: that they don't suffer a massive negative shock. Basically, the 74 00:04:42,160 --> 00:04:44,719 Speaker 1: answer is both actually depends how you want to use 75 00:04:45,080 --> 00:04:47,040 Speaker 1: the uh. You know where a hammer, you can use 76 00:04:47,040 --> 00:04:49,839 Speaker 1: this whatever we like to. I think we have clients 77 00:04:49,839 --> 00:04:52,120 Speaker 1: to look at it in both ways. But the goal 78 00:04:52,160 --> 00:04:54,040 Speaker 1: at the end of the day is is that throughout 79 00:04:54,040 --> 00:04:57,680 Speaker 1: the business cycle we want to deliver returns that show 80 00:04:57,760 --> 00:05:00,919 Speaker 1: excess alpha that are on par with what you'd expect 81 00:05:01,000 --> 00:05:03,880 Speaker 1: from an alpha generating hedge fund. But The difference is 82 00:05:03,880 --> 00:05:06,640 Speaker 1: that we want to create most of our returns when 83 00:05:07,120 --> 00:05:09,560 Speaker 1: the overall market is suffering the most and when there's 84 00:05:09,560 --> 00:05:13,600 Speaker 1: the most volatility. So instead of where most the classic 85 00:05:13,600 --> 00:05:18,120 Speaker 1: hedge fund structure of the classic portfolio has these long 86 00:05:18,200 --> 00:05:20,520 Speaker 1: periods when there's a bolt market and people are doing really, 87 00:05:20,520 --> 00:05:23,159 Speaker 1: really well. But that's when we're just trying to stay 88 00:05:23,160 --> 00:05:26,360 Speaker 1: static and not not really make or lose a lot 89 00:05:26,400 --> 00:05:28,640 Speaker 1: of money. Um. But when we end up having that 90 00:05:28,800 --> 00:05:33,640 Speaker 1: twenty brought down draw down a market crash, that's when 91 00:05:33,640 --> 00:05:36,560 Speaker 1: we want to really shine and do do particularly well. 92 00:05:37,120 --> 00:05:39,720 Speaker 1: And uh So, to that effect, you can you can 93 00:05:39,720 --> 00:05:42,560 Speaker 1: think of us as a hedge, but we we like 94 00:05:42,640 --> 00:05:45,080 Speaker 1: to look at ourselves as a hedge that pays you 95 00:05:45,120 --> 00:05:47,960 Speaker 1: to own it through the business stuffle. Right, So you 96 00:05:48,000 --> 00:05:51,560 Speaker 1: mentioned creating value out of chaos, and I'm trying to 97 00:05:51,560 --> 00:05:55,479 Speaker 1: think how to phrase this question. But why did chaos 98 00:05:55,600 --> 00:06:00,919 Speaker 1: or volatility become your thing or your area of expertise 99 00:06:01,000 --> 00:06:06,400 Speaker 1: or focus a long time ago? Uh Now, I train 100 00:06:06,520 --> 00:06:08,839 Speaker 1: myself with the c s A, I PAS the CFA program. 101 00:06:08,880 --> 00:06:12,440 Speaker 1: I worked at Merrill Lynch in my early days, and I, 102 00:06:12,600 --> 00:06:16,000 Speaker 1: like most people, began starting out and value investing and 103 00:06:16,040 --> 00:06:18,640 Speaker 1: I looked at all these different strategies like like value 104 00:06:18,680 --> 00:06:23,839 Speaker 1: and momentum and all these different financial products, and I 105 00:06:23,880 --> 00:06:25,200 Speaker 1: really kind of looked at them the way that an 106 00:06:25,200 --> 00:06:28,839 Speaker 1: alien would looking look at different looking at different return streams, 107 00:06:29,640 --> 00:06:32,520 Speaker 1: whether you're talking about credit or value investing. These are 108 00:06:32,600 --> 00:06:35,680 Speaker 1: mean reversion strategies. And then there are strategies like global 109 00:06:35,720 --> 00:06:37,640 Speaker 1: macro and c t A s that make money off 110 00:06:37,680 --> 00:06:42,280 Speaker 1: of prend or divergencies, divergences and change. So I came 111 00:06:42,320 --> 00:06:44,479 Speaker 1: to this conclusion that really there were only two at 112 00:06:44,520 --> 00:06:49,640 Speaker 1: A classes in actuality, long and short volatility. There's people 113 00:06:49,680 --> 00:06:52,680 Speaker 1: that say is volatility asset classes, saying volatility is the 114 00:06:52,720 --> 00:06:58,280 Speaker 1: only ethic class because in a crisis, people have all 115 00:06:58,320 --> 00:07:01,760 Speaker 1: of these these different strategies in their portfolio. But in 116 00:07:01,760 --> 00:07:04,960 Speaker 1: a crisis, these strategies end up looking a lot like 117 00:07:05,000 --> 00:07:08,720 Speaker 1: a short volatility strategy, a strategy that is that ends 118 00:07:08,760 --> 00:07:12,160 Speaker 1: up doing particularly bad during draw downs, and all of 119 00:07:12,200 --> 00:07:15,120 Speaker 1: these different diversification ends up being correlated with one another, 120 00:07:15,560 --> 00:07:17,480 Speaker 1: and then you end up having a strategy that is 121 00:07:17,480 --> 00:07:24,680 Speaker 1: particularly fragile to change. So institutional investors, individual investors in essence, 122 00:07:25,440 --> 00:07:27,960 Speaker 1: kid themselves into believing that they have all these different 123 00:07:27,960 --> 00:07:32,120 Speaker 1: asset classes when n actuality, they're just crowding into strategies 124 00:07:32,160 --> 00:07:34,320 Speaker 1: that are that are fragile to change in the market, 125 00:07:34,880 --> 00:07:38,440 Speaker 1: and that the true diversification is actually finding strategies that 126 00:07:38,480 --> 00:07:41,480 Speaker 1: are long volatility or strategies that that make money from change, 127 00:07:42,080 --> 00:07:44,600 Speaker 1: and that when you look at the world in this lens, 128 00:07:45,000 --> 00:07:47,480 Speaker 1: there there are really there's really only one asset class, 129 00:07:47,520 --> 00:07:51,160 Speaker 1: and volatility is the only real asset class in a 130 00:07:51,200 --> 00:07:56,320 Speaker 1: sense of replicating returns chris In theory, this idea of 131 00:07:56,360 --> 00:08:00,440 Speaker 1: having assets or having diversification that could pay off in 132 00:08:00,520 --> 00:08:05,440 Speaker 1: both long, heightened and reduced volatility is the premise behind 133 00:08:05,680 --> 00:08:09,360 Speaker 1: a lot of sort of do it yourself at home portfolios, 134 00:08:09,440 --> 00:08:11,680 Speaker 1: like buying a lot of stocks and buying a lot 135 00:08:11,720 --> 00:08:15,000 Speaker 1: of bonds, buying treasuries that you know, maybe pay off 136 00:08:15,040 --> 00:08:17,440 Speaker 1: a little bit a little bit extra money during the 137 00:08:17,480 --> 00:08:20,240 Speaker 1: good times button bad times bit up and are a 138 00:08:20,320 --> 00:08:24,560 Speaker 1: safe haven asset class when we get a surgeon volatility. 139 00:08:24,680 --> 00:08:27,800 Speaker 1: This arguably has worked well for the last few decades. 140 00:08:28,240 --> 00:08:30,880 Speaker 1: Do you think there's a reason that that won't work 141 00:08:30,920 --> 00:08:33,840 Speaker 1: in the future, and that the assets that seem to 142 00:08:33,880 --> 00:08:37,240 Speaker 1: have thrived in the past during heightened volatility won't do 143 00:08:37,320 --> 00:08:40,199 Speaker 1: so in the future. You know, it's a wonderful topic 144 00:08:40,240 --> 00:08:44,200 Speaker 1: to bring up because for the greater part of thirty years, 145 00:08:44,440 --> 00:08:47,200 Speaker 1: people have looked at the stock bond anti correlation and 146 00:08:47,200 --> 00:08:49,000 Speaker 1: have said, you know, why do I need to be 147 00:08:49,080 --> 00:08:51,880 Speaker 1: invested in something like long volatility or something that that 148 00:08:52,000 --> 00:08:54,800 Speaker 1: is exposed to change when I can just be invested 149 00:08:54,840 --> 00:08:57,800 Speaker 1: in fixed income because I know that bonds will go 150 00:08:57,880 --> 00:09:01,240 Speaker 1: up when stocks go down, and that has been true 151 00:09:01,280 --> 00:09:05,960 Speaker 1: for my entire life. But if we take a longer 152 00:09:06,000 --> 00:09:10,240 Speaker 1: history and look out one one hundred twenty years, and 153 00:09:10,240 --> 00:09:13,120 Speaker 1: I presented this evidence as far back, it's become a 154 00:09:13,160 --> 00:09:15,400 Speaker 1: popular thing to talk about now. But if you look 155 00:09:15,400 --> 00:09:18,160 Speaker 1: at some of Artemiss research dating back to two thousand fifteen. 156 00:09:18,200 --> 00:09:21,600 Speaker 1: Two fourteen, we talked about this at length, stocks and 157 00:09:21,679 --> 00:09:26,760 Speaker 1: bonds have actually spent more time correlated with them one another, 158 00:09:26,920 --> 00:09:30,880 Speaker 1: and they've spent anti correlated. There's been multiple periods in 159 00:09:31,120 --> 00:09:36,400 Speaker 1: history where stocks and bonds have dropped together for two 160 00:09:36,440 --> 00:09:39,920 Speaker 1: to three years at a time. This includes the early 161 00:09:40,000 --> 00:09:43,440 Speaker 1: nine hundreds, periods like in the fifties, and periods like 162 00:09:43,480 --> 00:09:46,760 Speaker 1: in the late seventies. So if I go to an 163 00:09:46,800 --> 00:09:51,360 Speaker 1: average financial advisor, out on the street and I say, what, 164 00:09:51,600 --> 00:09:53,720 Speaker 1: you know, I have a hundred thousand dollars. What should 165 00:09:53,720 --> 00:09:55,839 Speaker 1: I do with my money? That person is likely to say, well, 166 00:09:55,920 --> 00:09:58,760 Speaker 1: you put it in sixty stock bond split and then 167 00:09:58,760 --> 00:10:01,520 Speaker 1: the bonds will protect you when you're stocks too badly. 168 00:10:02,040 --> 00:10:03,680 Speaker 1: And if I have a little bit more money, I 169 00:10:03,679 --> 00:10:06,280 Speaker 1: can go to a very expensive financial advisor and they'll say, 170 00:10:06,280 --> 00:10:09,840 Speaker 1: you know what, we want you to lever the bonds 171 00:10:09,880 --> 00:10:13,320 Speaker 1: against the stocks because that's better on a market with 172 00:10:13,480 --> 00:10:17,360 Speaker 1: risk reward framework efficient frontier. That's something called risk perry. 173 00:10:17,440 --> 00:10:19,760 Speaker 1: But if you look at these portfolios, they performed very 174 00:10:19,880 --> 00:10:23,439 Speaker 1: very well over the last thirty years. But if we 175 00:10:23,480 --> 00:10:27,120 Speaker 1: look out over a hundred years, there are multiple free 176 00:10:27,160 --> 00:10:30,760 Speaker 1: year periods where these portfolios would have had massive drawdowns, 177 00:10:31,360 --> 00:10:35,280 Speaker 1: massive drawdowns in some instances for risk parity, even even 178 00:10:35,960 --> 00:10:39,960 Speaker 1: career ending drawdowns. So this assumption that stocks and bonds 179 00:10:39,960 --> 00:10:43,880 Speaker 1: will always be anti correlated is a very very dangerous assumption. 180 00:10:44,679 --> 00:10:47,680 Speaker 1: And I think all one has to do to prove 181 00:10:47,720 --> 00:10:52,040 Speaker 1: this is look look across history. Now, if yields were 182 00:10:52,080 --> 00:10:55,000 Speaker 1: all the way up at you know, ten, as they 183 00:10:55,000 --> 00:10:57,720 Speaker 1: were in the late seventies, you could sit back and say, well, 184 00:10:57,720 --> 00:11:01,040 Speaker 1: there's room for bonds to perform uh in the event 185 00:11:01,120 --> 00:11:03,960 Speaker 1: stocks drop. But if we think about what it would 186 00:11:03,960 --> 00:11:07,600 Speaker 1: take for treasury bonds to perform as well as they 187 00:11:07,600 --> 00:11:10,360 Speaker 1: did during the last recession, we'd have to have treasury 188 00:11:10,440 --> 00:11:14,559 Speaker 1: yields go all the way down to negative two. I'm 189 00:11:14,600 --> 00:11:17,600 Speaker 1: not saying that that's not possible, but I'm just saying 190 00:11:17,600 --> 00:11:22,760 Speaker 1: that's highly improbable. And if you're this is the baseline 191 00:11:22,760 --> 00:11:27,439 Speaker 1: assumption from which trillions of dollars of asset allocation decisions 192 00:11:27,440 --> 00:11:30,880 Speaker 1: are made upon this, this assumption on the stock bond 193 00:11:30,880 --> 00:11:35,440 Speaker 1: at a correlation. So this this makes alternative forms of 194 00:11:35,480 --> 00:11:40,160 Speaker 1: defense like volatility, like smart global mackerel very very important 195 00:11:40,200 --> 00:11:42,880 Speaker 1: at this particular juncture in the cycle. I think it's 196 00:11:42,960 --> 00:11:45,560 Speaker 1: very important that people understand that the stock bond, the 197 00:11:45,600 --> 00:11:48,600 Speaker 1: assumption that bonds can be a form of defense for you, 198 00:11:48,960 --> 00:11:52,520 Speaker 1: is particularly dangerous at this stage of the market cycle, 199 00:11:53,000 --> 00:11:56,640 Speaker 1: when most yields are at their zero bound. Right. So 200 00:11:56,679 --> 00:12:00,640 Speaker 1: the argument here is that when most people talk about 201 00:12:00,679 --> 00:12:05,439 Speaker 1: being short volatility, there's an assumption that they're explicitly short 202 00:12:05,520 --> 00:12:11,040 Speaker 1: volatility by for instance, you know, buying VIX related exchange 203 00:12:11,080 --> 00:12:14,439 Speaker 1: traded products or something like that. But you're saying that 204 00:12:14,480 --> 00:12:17,840 Speaker 1: there are big parts of the market that are implicitly 205 00:12:18,120 --> 00:12:23,400 Speaker 1: short vall through an assumption of existing relationships like the 206 00:12:23,440 --> 00:12:28,680 Speaker 1: correlation between bonds and stocks. Are there other things that 207 00:12:28,800 --> 00:12:33,240 Speaker 1: you think are implicitly short vall in the market. Absolutely. 208 00:12:33,640 --> 00:12:35,560 Speaker 1: One of my papers I talked a little bit about 209 00:12:35,600 --> 00:12:38,920 Speaker 1: the short ball trade as being like an oboros or 210 00:12:38,960 --> 00:12:42,120 Speaker 1: the classic image of a snake devouring its own tail 211 00:12:43,120 --> 00:12:44,800 Speaker 1: um And this is this is how I like to 212 00:12:44,920 --> 00:12:51,280 Speaker 1: visualize modern markets today, this financial outcomy driving markets higher 213 00:12:51,280 --> 00:12:55,760 Speaker 1: and volatility lower. The global short vall trade now represents 214 00:12:55,760 --> 00:13:00,480 Speaker 1: an estimated to trillion dollars in financial engineering strategies. And 215 00:13:00,679 --> 00:13:05,080 Speaker 1: these strategies that I deem as short volatility simultaneous exert 216 00:13:05,160 --> 00:13:10,320 Speaker 1: influence and are influenced by volatility. This includes what I 217 00:13:10,320 --> 00:13:14,280 Speaker 1: would deem about sixty billion dollars of explicit short fall 218 00:13:14,320 --> 00:13:18,880 Speaker 1: exposure and another one point four trillion dollars worth of 219 00:13:18,920 --> 00:13:21,920 Speaker 1: implicit So what do I mean by the difference between 220 00:13:21,960 --> 00:13:26,240 Speaker 1: explicit and implicit short fall? Well s, Explicit short fall 221 00:13:26,760 --> 00:13:29,800 Speaker 1: tends to be the weak hands at the table. These 222 00:13:29,920 --> 00:13:33,280 Speaker 1: are These are traitors or their institutions that are actually 223 00:13:33,280 --> 00:13:36,480 Speaker 1: shorting volatively This is where you're actually going out and 224 00:13:36,559 --> 00:13:39,560 Speaker 1: shorting a vixed future, where you're actually going out and 225 00:13:39,600 --> 00:13:42,640 Speaker 1: you're rolling. Are you doing a by right overwrite program. 226 00:13:42,679 --> 00:13:45,880 Speaker 1: You're actually shorting your shorting calls or your shorting puts 227 00:13:46,360 --> 00:13:49,640 Speaker 1: to earn extra income UM. It involves actually selling a 228 00:13:49,679 --> 00:13:52,920 Speaker 1: derivative UM. I think most people are aware of this, 229 00:13:53,000 --> 00:13:55,560 Speaker 1: but this is actually the smallest component of the short 230 00:13:55,600 --> 00:13:59,920 Speaker 1: alter rate. The much much bigger component of the short 231 00:14:00,000 --> 00:14:04,960 Speaker 1: all trade, the trillion dollar plus component of it, is 232 00:14:05,000 --> 00:14:09,520 Speaker 1: what I call implicit short fall. When you are when 233 00:14:09,559 --> 00:14:13,800 Speaker 1: you are sorting an option, you are taking on the 234 00:14:13,840 --> 00:14:18,840 Speaker 1: assumption of stability, and that assumption of stability expresses itself 235 00:14:18,880 --> 00:14:23,480 Speaker 1: through various risk profiles that can be expressed in uh 236 00:14:23,520 --> 00:14:28,920 Speaker 1: these esoteric Greek terms that we use. But long story short, 237 00:14:29,520 --> 00:14:33,520 Speaker 1: you're taking the assumption of that volatility and markets will 238 00:14:33,560 --> 00:14:36,520 Speaker 1: be stable. You're taking the assumption that there's not going 239 00:14:36,600 --> 00:14:38,800 Speaker 1: to be any jump risk. This is something we've option 240 00:14:38,840 --> 00:14:42,080 Speaker 1: traders are called gamma. You're taking the assumption that there's 241 00:14:42,080 --> 00:14:44,840 Speaker 1: not going to be rising interest rates UM, and you're 242 00:14:45,480 --> 00:14:49,800 Speaker 1: taking assumption that there will be stable cross asset correlations. 243 00:14:49,840 --> 00:14:55,040 Speaker 1: These implicit short fall strategies replicate the payoff of a 244 00:14:55,120 --> 00:15:00,720 Speaker 1: portfolio of short options by creating these similar exposures. So 245 00:15:00,760 --> 00:15:04,680 Speaker 1: these would include strategies like ball targeting funds, which are 246 00:15:04,840 --> 00:15:07,680 Speaker 1: a short gamma in the market, their short volatility and 247 00:15:07,680 --> 00:15:11,000 Speaker 1: their short gamma. These would include strategies like risk parity 248 00:15:11,040 --> 00:15:14,760 Speaker 1: which are implicitly short gamma and short correlation. So even 249 00:15:14,760 --> 00:15:19,720 Speaker 1: though these strategies may not be directly selling volatility, they 250 00:15:19,760 --> 00:15:25,240 Speaker 1: are implicitly replicating the exposure of a portfolio of short options. 251 00:15:26,120 --> 00:15:28,800 Speaker 1: And you know what, one of the greatest examples of 252 00:15:28,920 --> 00:15:33,080 Speaker 1: an implicit short ball trade in history was actually was 253 00:15:33,200 --> 00:15:40,680 Speaker 1: the portfolio insurance debacle of portfolio insurance was implicitly um 254 00:15:40,880 --> 00:15:44,400 Speaker 1: short some of these exposures of a short option portfolio, 255 00:15:44,480 --> 00:15:47,720 Speaker 1: even though it was never actually shorting a put or 256 00:15:47,720 --> 00:15:51,760 Speaker 1: a call option. Um So, I think many of these strategies, 257 00:15:51,880 --> 00:15:55,120 Speaker 1: ranging from the the financial engineering of share by backs, 258 00:15:55,600 --> 00:15:59,320 Speaker 1: to certain risk premious strategies, to certain ball targeting strategies, 259 00:15:59,560 --> 00:16:04,440 Speaker 1: to certain risk parity strategies, which are comprising a very 260 00:16:04,560 --> 00:16:09,960 Speaker 1: large portion of the institutional flows in equity markets today, 261 00:16:10,440 --> 00:16:14,720 Speaker 1: are replicating the payoffs of a short straddle. And this 262 00:16:14,840 --> 00:16:18,520 Speaker 1: presents a layer of embedded and very hidden risk that 263 00:16:18,560 --> 00:16:36,320 Speaker 1: people aren't fully taking into consideration. Chris, I don't want 264 00:16:36,360 --> 00:16:40,960 Speaker 1: to get too philosophical here, but whenever I think about this, 265 00:16:41,120 --> 00:16:45,080 Speaker 1: I start my mind starts to drift beyond mere financial markets, 266 00:16:45,160 --> 00:16:48,480 Speaker 1: and I always think about like, isn't life and living 267 00:16:48,720 --> 00:16:54,320 Speaker 1: in a society implicitly short volatility? I take a job, 268 00:16:55,120 --> 00:16:57,880 Speaker 1: there's no guarantee that that job will last. But as 269 00:16:57,920 --> 00:17:00,800 Speaker 1: long as sort of things more or less function as 270 00:17:00,800 --> 00:17:03,240 Speaker 1: they are, I keep my job, I buy a house. 271 00:17:03,640 --> 00:17:06,000 Speaker 1: There's no guarantee that there's not going to be some 272 00:17:06,119 --> 00:17:09,320 Speaker 1: freak fire or war in the area. But if there is, 273 00:17:09,440 --> 00:17:14,400 Speaker 1: then of course that's completely potentially destroyed. Like isn't aren't 274 00:17:14,440 --> 00:17:17,240 Speaker 1: we all always going to be as long as we're 275 00:17:17,240 --> 00:17:24,479 Speaker 1: functioning members of society sort of all implicitly short volatility? Well, 276 00:17:24,480 --> 00:17:26,040 Speaker 1: you know, Joe, it's it's funny you mentioned this, and 277 00:17:26,080 --> 00:17:29,480 Speaker 1: I could ask this question a lot because I actually 278 00:17:29,520 --> 00:17:32,000 Speaker 1: wear a watch that counts time backwards to my to 279 00:17:32,080 --> 00:17:36,600 Speaker 1: my death, So so that gets some perspective on the 280 00:17:36,720 --> 00:17:40,280 Speaker 1: issue the world. I guess that's right. I look at 281 00:17:40,320 --> 00:17:43,640 Speaker 1: myself as a call option, you know, and I by 282 00:17:43,760 --> 00:17:47,320 Speaker 1: there's an element of of time exposure. That's ticking off. 283 00:17:47,560 --> 00:17:50,120 Speaker 1: We are a short time and that's that's a form 284 00:17:50,160 --> 00:17:54,120 Speaker 1: of short fall. There are ways in our lives that 285 00:17:54,200 --> 00:17:59,160 Speaker 1: we make ourselves and I fragile and in less exposed 286 00:17:59,240 --> 00:18:03,240 Speaker 1: to the whims change. You know, certainly, if by by 287 00:18:03,280 --> 00:18:07,479 Speaker 1: a process of self education and by learning, learning, um 288 00:18:07,560 --> 00:18:12,320 Speaker 1: and reading and continually educating yourself, you are making a 289 00:18:12,359 --> 00:18:15,600 Speaker 1: long volatility trade. By meditating and taking care of your health, 290 00:18:15,640 --> 00:18:18,720 Speaker 1: you're making a long volatility trade. By having lots of 291 00:18:18,920 --> 00:18:22,040 Speaker 1: meaningful connections in your life and knowing a lot of 292 00:18:22,080 --> 00:18:26,840 Speaker 1: individuals um that that can provide good contexts and good 293 00:18:26,840 --> 00:18:31,880 Speaker 1: healthy relationships. These are these are ways to be long volatility. 294 00:18:31,920 --> 00:18:34,320 Speaker 1: But almost certainly most of what we do in life 295 00:18:34,359 --> 00:18:37,960 Speaker 1: has an element of of of short vall exposure, and 296 00:18:38,200 --> 00:18:41,159 Speaker 1: the biggest one of course being time that is the 297 00:18:41,560 --> 00:18:45,600 Speaker 1: only true currency and the most fragile one. So is 298 00:18:45,640 --> 00:18:49,720 Speaker 1: the implication here that overall people should think about the 299 00:18:49,840 --> 00:18:53,520 Speaker 1: role of financial markets and investing sort of differently than 300 00:18:53,560 --> 00:18:57,080 Speaker 1: they do, because I think like basically people see, they 301 00:18:57,119 --> 00:18:59,560 Speaker 1: go about their lives and they make money from their jobs, 302 00:19:00,040 --> 00:19:03,479 Speaker 1: and then to some extent, the role of investing in 303 00:19:03,520 --> 00:19:06,400 Speaker 1: the market is to augment that and to turn their 304 00:19:06,440 --> 00:19:08,879 Speaker 1: savings into even more and to make even more money 305 00:19:08,880 --> 00:19:12,399 Speaker 1: than they would just get from labor income. It sounds 306 00:19:12,440 --> 00:19:16,320 Speaker 1: like the implication is that, for you, since most of 307 00:19:16,320 --> 00:19:19,919 Speaker 1: our lives are going about being short vall that to 308 00:19:20,000 --> 00:19:23,239 Speaker 1: some extent, we should really rethink what the purpose of 309 00:19:23,280 --> 00:19:26,160 Speaker 1: investing money is and that it should be more like 310 00:19:26,680 --> 00:19:31,000 Speaker 1: a general lifeheage. I absolutely think that one of the 311 00:19:31,000 --> 00:19:34,480 Speaker 1: ways to look at savings is to to make yourself 312 00:19:34,840 --> 00:19:39,920 Speaker 1: and I fragile to turbulence, to give yourself options. So 313 00:19:40,160 --> 00:19:43,720 Speaker 1: you know, it's amazing that the US is probably one 314 00:19:43,720 --> 00:19:48,040 Speaker 1: of the only cultures in the world where we assume growth. 315 00:19:48,800 --> 00:19:50,720 Speaker 1: I think my friend Jared Dillian has made this point 316 00:19:50,760 --> 00:19:54,000 Speaker 1: really well, that it's it's always assumed that the stock 317 00:19:54,040 --> 00:19:57,600 Speaker 1: market should always be going up, it's always assumed that 318 00:19:57,720 --> 00:19:59,720 Speaker 1: earnings per share should always be going up. Now, that's 319 00:19:59,720 --> 00:20:04,120 Speaker 1: been a fantastic assumption to bet on over the last 320 00:20:04,119 --> 00:20:07,080 Speaker 1: fifty years, um and maybe a wonderful assumption to been 321 00:20:07,119 --> 00:20:09,840 Speaker 1: on the next fifty years. But it's actually important to 322 00:20:09,880 --> 00:20:13,320 Speaker 1: understand it's it's it's quite unusual in the history of 323 00:20:13,400 --> 00:20:17,160 Speaker 1: most most nations. Most people don't have that philosophy. So 324 00:20:17,240 --> 00:20:20,159 Speaker 1: the concept of being able to provide a sense of 325 00:20:20,160 --> 00:20:24,800 Speaker 1: savings is not necessarily to to lever up your lifestyle, 326 00:20:24,880 --> 00:20:28,200 Speaker 1: but it should be too to give you an ability 327 00:20:28,320 --> 00:20:31,119 Speaker 1: to to be your highest self. The money and saving 328 00:20:31,119 --> 00:20:35,560 Speaker 1: should be a form of of antifragility. Um Cash itself 329 00:20:35,600 --> 00:20:39,119 Speaker 1: provides optionality, So I want to be an in the 330 00:20:39,160 --> 00:20:42,200 Speaker 1: money call option. That's how I'm going to start thinking 331 00:20:42,240 --> 00:20:46,000 Speaker 1: of myself. So I want to get back to that 332 00:20:46,200 --> 00:20:50,359 Speaker 1: short volatility idea, because of course, in February we had 333 00:20:50,720 --> 00:20:54,439 Speaker 1: this volumit getting occurrence where we saw a lot of 334 00:20:54,520 --> 00:20:59,880 Speaker 1: explicitly short voll strategies like VIX related exchange traded notes 335 00:21:00,040 --> 00:21:03,960 Speaker 1: and products blow up, and there was a theory that 336 00:21:04,040 --> 00:21:06,639 Speaker 1: when they blew up, they basically had to hedge, and 337 00:21:06,720 --> 00:21:11,040 Speaker 1: so they started pushing up the VIX index itself, and 338 00:21:11,119 --> 00:21:14,639 Speaker 1: that kind of caused investors to get even more nervous, 339 00:21:14,680 --> 00:21:17,159 Speaker 1: and then the VIX would go up even more and 340 00:21:17,320 --> 00:21:20,480 Speaker 1: the exchange traded notes would have to hedge even more. 341 00:21:20,560 --> 00:21:23,280 Speaker 1: So you have this feedback loop that ended up making 342 00:21:23,280 --> 00:21:26,320 Speaker 1: the whole thing really really painful for a lot of people. 343 00:21:27,200 --> 00:21:30,639 Speaker 1: I think you mentioned one point for trillion dollars for 344 00:21:30,800 --> 00:21:37,280 Speaker 1: your implicit shortfall strategies. So I'm wondering, could we get 345 00:21:37,320 --> 00:21:41,960 Speaker 1: a sort of self reflexive feedback loop in implicit shortfall 346 00:21:42,000 --> 00:21:45,600 Speaker 1: strategies And if we did, how bad would that be 347 00:21:45,880 --> 00:21:49,720 Speaker 1: for the overall market? Well, if we look at the 348 00:21:49,760 --> 00:21:54,080 Speaker 1: cause of this main problem. So today trillions of dollars 349 00:21:54,080 --> 00:21:57,159 Speaker 1: in central bank stimulus share by back systematic strategies are 350 00:21:57,200 --> 00:22:01,320 Speaker 1: based on market volatility as a key decision metork for leverage. 351 00:22:02,320 --> 00:22:06,160 Speaker 1: So what we think we know about volatility is pretty 352 00:22:06,240 --> 00:22:09,720 Speaker 1: much all wrong. Uh you know the MARKO it's modern 353 00:22:09,760 --> 00:22:13,760 Speaker 1: portfolio theory conceives volatility as some external measurement of the 354 00:22:13,800 --> 00:22:18,360 Speaker 1: intrinsic risk and asset. And this is a highly flawed concept, 355 00:22:18,400 --> 00:22:21,959 Speaker 1: even though it's wildly taught in MBA and financial engineering programs, 356 00:22:22,680 --> 00:22:27,400 Speaker 1: because it views volatility as an exogenous measurement of risk. 357 00:22:27,960 --> 00:22:29,760 Speaker 1: So this is extended sort of like the way a 358 00:22:29,800 --> 00:22:33,880 Speaker 1: sports commentator sees strikeouts and shots on goal. It's sort 359 00:22:33,880 --> 00:22:37,000 Speaker 1: of a statistic measuring past outcomes of a game to 360 00:22:37,040 --> 00:22:41,800 Speaker 1: keep score, but that somehow exists externally from the game. 361 00:22:42,840 --> 00:22:45,240 Speaker 1: But the problem is that volatility isn't just keeping score. 362 00:22:46,320 --> 00:22:48,920 Speaker 1: It's a player on the field now massively affecting the 363 00:22:48,960 --> 00:22:50,960 Speaker 1: outcome of the game itself in real time at a 364 00:22:51,080 --> 00:22:55,000 Speaker 1: level that's never been seen before. The last time we 365 00:22:55,000 --> 00:23:00,760 Speaker 1: we saw something like this was leading into and back 366 00:23:00,800 --> 00:23:05,680 Speaker 1: then the short volatility dynamic of portfolio insurance. What's really 367 00:23:05,680 --> 00:23:10,360 Speaker 1: only about two percent of the market today. Today, these 368 00:23:10,359 --> 00:23:15,640 Speaker 1: short volatility strategies comprise upboards of ten of the overall market. Now, 369 00:23:15,680 --> 00:23:20,720 Speaker 1: that doesn't mean that we're likely to have another type 370 00:23:20,720 --> 00:23:25,119 Speaker 1: of crash in a day, but it does make the 371 00:23:25,160 --> 00:23:29,720 Speaker 1: probability of some event like that much much greater. These 372 00:23:29,760 --> 00:23:33,639 Speaker 1: short volatility strategies are like a barrel of nitro glycerin 373 00:23:34,840 --> 00:23:38,280 Speaker 1: sitting in your offices. Now I can walk over to 374 00:23:38,320 --> 00:23:42,560 Speaker 1: your offices in Bloomberg and I can sit back and say, hey, guys, 375 00:23:42,800 --> 00:23:45,720 Speaker 1: you know Joe Tracy, what's what's in that barrel? And 376 00:23:45,840 --> 00:23:49,919 Speaker 1: be like, Oh, it's, uh, just some nitroglycerin. Be like, 377 00:23:50,040 --> 00:23:53,119 Speaker 1: isn't that highly explosive? Could it blow up several city blocks? 378 00:23:54,080 --> 00:23:55,479 Speaker 1: Oh no, it's it's not a big deal. It's been 379 00:23:55,480 --> 00:23:57,479 Speaker 1: there for for years. It's been in factually, we've been 380 00:23:57,480 --> 00:23:59,919 Speaker 1: adding to the stockpile of it for years. The banks 381 00:24:00,040 --> 00:24:04,560 Speaker 1: pay off a healthy yield to store it here, and 382 00:24:04,600 --> 00:24:07,119 Speaker 1: I'm like, my god, this is scary, this could this 383 00:24:07,160 --> 00:24:10,480 Speaker 1: could blow up. And then you just say, well, haven't 384 00:24:10,480 --> 00:24:12,679 Speaker 1: blown up for years on end, and you know what, 385 00:24:12,800 --> 00:24:16,200 Speaker 1: it may never blow up. Risk does not necessariate outcome. 386 00:24:17,160 --> 00:24:20,439 Speaker 1: But if you have a fire that starts somewhere else, 387 00:24:21,280 --> 00:24:24,000 Speaker 1: and that fire gets larger and larger and larger, it 388 00:24:24,040 --> 00:24:27,040 Speaker 1: may touch that barrel of nitricglysra in and what starts 389 00:24:27,080 --> 00:24:30,440 Speaker 1: out as a as a regular fire could explode outwards 390 00:24:30,880 --> 00:24:33,960 Speaker 1: into something that blows up several city blocks. That's what 391 00:24:34,000 --> 00:24:38,800 Speaker 1: happened in where we had a routine market correction. Market 392 00:24:38,880 --> 00:24:42,760 Speaker 1: was down, and then that caused the barrel of nitric 393 00:24:42,800 --> 00:24:46,159 Speaker 1: glycerim known as portfolio in, starts to blow up and 394 00:24:46,240 --> 00:24:50,760 Speaker 1: drop the market. One day, we could see something very similar. 395 00:24:51,640 --> 00:24:56,800 Speaker 1: It's a fundamental credit crunch. Liquidity and leverage crunch intercedes 396 00:24:57,080 --> 00:24:59,959 Speaker 1: with these short volatility strategies the way that they're currently 397 00:25:00,000 --> 00:25:03,080 Speaker 1: composed in the market. Chris, I just want to point 398 00:25:03,119 --> 00:25:07,320 Speaker 1: out that your theoretical story about us having nitroglycer and 399 00:25:07,359 --> 00:25:10,520 Speaker 1: barrels in the office is not as ridiculous as it sounds. 400 00:25:10,520 --> 00:25:13,040 Speaker 1: Because I used to sit next to Tracy and she 401 00:25:13,200 --> 00:25:15,800 Speaker 1: literally had a mini barrel of oil sitting on her 402 00:25:15,840 --> 00:25:18,919 Speaker 1: desk for a long time. So are sort of like 403 00:25:19,160 --> 00:25:24,280 Speaker 1: internal risk management practices with dangerous substances in the office. 404 00:25:24,320 --> 00:25:27,240 Speaker 1: Is not quite as outlandish as maybe you thought. I 405 00:25:27,240 --> 00:25:30,040 Speaker 1: want to ask one last question I think is right key, 406 00:25:30,040 --> 00:25:32,480 Speaker 1: and it touches on something you said in the very beginning. 407 00:25:33,000 --> 00:25:34,840 Speaker 1: You know, it's very easy to come up with sort 408 00:25:34,840 --> 00:25:40,879 Speaker 1: of naive long volatility strategy strategies. You could uh, you know, 409 00:25:41,000 --> 00:25:44,480 Speaker 1: buy puts that pay off in the event of a 410 00:25:44,560 --> 00:25:47,920 Speaker 1: massive draw down, or you could just go along the vix. 411 00:25:48,160 --> 00:25:51,680 Speaker 1: But we know that these are really costly strategies and 412 00:25:52,000 --> 00:25:55,840 Speaker 1: keeping it very simple like that doesn't really pay off. 413 00:25:55,920 --> 00:25:57,879 Speaker 1: You could really lose a lot of money fast. So 414 00:25:57,960 --> 00:26:00,560 Speaker 1: you talked about how the goal at to this is 415 00:26:00,600 --> 00:26:03,399 Speaker 1: not just to provide a classical hedge, but do you 416 00:26:03,520 --> 00:26:06,960 Speaker 1: actually make money over the whole cycle. So can you 417 00:26:07,000 --> 00:26:10,480 Speaker 1: talk a little bit about how you go about sort 418 00:26:10,480 --> 00:26:16,240 Speaker 1: of identifying long volatility strategies that don't kill you during 419 00:26:16,280 --> 00:26:20,480 Speaker 1: the weight during the low volatility periods. Sure, it's it's hard. 420 00:26:21,560 --> 00:26:25,320 Speaker 1: It's really hard to do, and I think that's why 421 00:26:25,480 --> 00:26:28,520 Speaker 1: why Actually, you know what we spend we have. We've 422 00:26:28,520 --> 00:26:31,440 Speaker 1: spent all day and all night thinking about this. So 423 00:26:31,520 --> 00:26:35,160 Speaker 1: I think it takes it takes a specialist to be 424 00:26:35,240 --> 00:26:39,200 Speaker 1: a little crazy, a little cookie, to focused on this 425 00:26:39,280 --> 00:26:41,400 Speaker 1: day in and day day out, because you know, it's 426 00:26:41,440 --> 00:26:43,359 Speaker 1: it's one of those strategies where you don't see the 427 00:26:43,359 --> 00:26:47,000 Speaker 1: payoffs every day. But there's a couple of different routes 428 00:26:47,119 --> 00:26:52,199 Speaker 1: that you can use to execute this, and and some 429 00:26:52,280 --> 00:26:54,359 Speaker 1: of the tricks that we use UM we look for 430 00:26:54,400 --> 00:26:59,919 Speaker 1: opportunities when we're paid to own connexity, So we're analyzed 431 00:27:00,160 --> 00:27:06,080 Speaker 1: markets every single day using computer algorithms. And when you know, 432 00:27:06,119 --> 00:27:07,560 Speaker 1: if I sit back and said, you know, Joe, would 433 00:27:07,560 --> 00:27:10,480 Speaker 1: you would you like to buy some car insurance? You'd 434 00:27:10,480 --> 00:27:12,240 Speaker 1: be like, and I don't really need car insurance. And 435 00:27:12,240 --> 00:27:14,920 Speaker 1: I'll be like, well, what if I pay you ten 436 00:27:14,960 --> 00:27:17,919 Speaker 1: dollars to own car insurance but you only get it 437 00:27:17,960 --> 00:27:21,080 Speaker 1: for free days? Would you then want to own car 438 00:27:21,080 --> 00:27:24,360 Speaker 1: insurance if I pay you to own it? Be're like, yeah, yeah, sure. 439 00:27:24,720 --> 00:27:28,440 Speaker 1: Well sometimes in markets you're able to to buy portfolio 440 00:27:28,520 --> 00:27:32,480 Speaker 1: insurance very inexpensively or get paid to carry it, but 441 00:27:32,600 --> 00:27:35,840 Speaker 1: you have to be very quick and nimble and UM 442 00:27:35,880 --> 00:27:39,040 Speaker 1: agile to find those opportunities. The other opportunities is you 443 00:27:39,080 --> 00:27:40,920 Speaker 1: know we we if I look at it and you're 444 00:27:41,000 --> 00:27:43,200 Speaker 1: trying to figure out when a forest fire might break out, 445 00:27:44,240 --> 00:27:46,520 Speaker 1: you know, you you don't look at the spark that 446 00:27:46,720 --> 00:27:49,200 Speaker 1: lights the forest fire. You look at a myriad of 447 00:27:49,280 --> 00:27:54,280 Speaker 1: underlying conditions. So we're looking at when numerous or use 448 00:27:54,320 --> 00:27:56,400 Speaker 1: a tremendous amount of data and we crunch a lot 449 00:27:56,400 --> 00:27:59,560 Speaker 1: of that data to understand when is it opportune to 450 00:27:59,640 --> 00:28:02,439 Speaker 1: buy that portfolio insurance and when can we get in 451 00:28:02,800 --> 00:28:06,280 Speaker 1: um into positions where the probabilities are higher, even if 452 00:28:06,280 --> 00:28:09,439 Speaker 1: when we're carrying a negative lead, but it's worth it 453 00:28:09,520 --> 00:28:12,560 Speaker 1: too based on the probability set, and it requires crunching 454 00:28:12,560 --> 00:28:14,720 Speaker 1: a tremendous amount of data. So these are some of 455 00:28:14,760 --> 00:28:18,840 Speaker 1: the techniques that will use in order to find ways 456 00:28:18,880 --> 00:28:22,440 Speaker 1: to carry that exposure efficiently. And it's not an easy 457 00:28:22,480 --> 00:28:24,399 Speaker 1: thing to do. It takes a lot of time and 458 00:28:24,480 --> 00:28:26,919 Speaker 1: expertise and focus and a lot of data and a 459 00:28:26,920 --> 00:28:30,040 Speaker 1: lot of quantitative efforts to be able to manage that process. 460 00:28:30,640 --> 00:28:33,280 Speaker 1: All right, Chris, I'm afraid we're going to have to 461 00:28:33,359 --> 00:28:35,479 Speaker 1: leave it there, but thank you so much for coming on. 462 00:28:35,520 --> 00:28:37,760 Speaker 1: That was really great, Yeah, thank you. It's been been 463 00:28:37,760 --> 00:28:54,640 Speaker 1: a pleasure. I really appreciate it. So, Joe, I love 464 00:28:54,680 --> 00:28:57,880 Speaker 1: that conversation, and I'm going to start thinking of myself 465 00:28:57,920 --> 00:29:01,720 Speaker 1: as a call up and hopefully in the money call 466 00:29:01,960 --> 00:29:04,840 Speaker 1: call option. I really like it too. I think that 467 00:29:04,920 --> 00:29:07,680 Speaker 1: the you know, we've seen a lot of in the 468 00:29:07,720 --> 00:29:10,120 Speaker 1: post crisis period, the emergence of a lot of popular 469 00:29:10,200 --> 00:29:12,680 Speaker 1: like perma bearer types. You say, oh, everything is going 470 00:29:12,720 --> 00:29:15,800 Speaker 1: to blow up eventually because the fed and run for 471 00:29:15,840 --> 00:29:18,560 Speaker 1: the hills. And I feel like Chris had a slightly 472 00:29:18,680 --> 00:29:23,520 Speaker 1: more interesting perspective, and in particular his idea of well, 473 00:29:23,640 --> 00:29:27,640 Speaker 1: we're sort of uh, you know, implicitly short volatility all 474 00:29:27,680 --> 00:29:31,000 Speaker 1: over the place, and so the idea of seeing investing 475 00:29:31,160 --> 00:29:33,360 Speaker 1: as a reason to at least sort of get flat 476 00:29:33,440 --> 00:29:36,240 Speaker 1: volatility or more long volatility, the way he framed it, 477 00:29:36,280 --> 00:29:38,560 Speaker 1: I think made a lot of sense. Yeah, And I 478 00:29:38,600 --> 00:29:42,800 Speaker 1: think his point is that those volatility strategies, the low 479 00:29:42,880 --> 00:29:46,840 Speaker 1: vall strategies, tend to feed on themselves, and they tend 480 00:29:46,840 --> 00:29:50,280 Speaker 1: to sort of naturally cause the market to double down 481 00:29:50,360 --> 00:29:56,480 Speaker 1: on those positions. And so basically, maybe before the era 482 00:29:56,640 --> 00:29:59,360 Speaker 1: of low interest rates and central banks and lots and 483 00:29:59,400 --> 00:30:01,880 Speaker 1: lots of path some funds. You used to have markets 484 00:30:01,880 --> 00:30:04,880 Speaker 1: and investors that were sort of self limiting. Once things 485 00:30:04,920 --> 00:30:08,400 Speaker 1: got out of whack, eventually there'd be a correction and 486 00:30:08,520 --> 00:30:11,240 Speaker 1: things would get evened out for a little bit. And 487 00:30:11,320 --> 00:30:13,840 Speaker 1: I feel like what Chris is implying is that that 488 00:30:13,920 --> 00:30:17,800 Speaker 1: doesn't happen that much anymore. Stuff just stays sort of 489 00:30:17,880 --> 00:30:21,440 Speaker 1: imbalanced for much longer than it used to, and that 490 00:30:21,480 --> 00:30:24,920 Speaker 1: means that when it does finally correct, the correction is 491 00:30:24,960 --> 00:30:28,560 Speaker 1: more painful than it used to be. Yeah, it does 492 00:30:28,640 --> 00:30:31,920 Speaker 1: feel like maybe as investors overall are sort of sleep 493 00:30:31,960 --> 00:30:34,239 Speaker 1: walking into some big risks that they're not thinking of 494 00:30:34,280 --> 00:30:36,120 Speaker 1: because they think they have them all taken care of. 495 00:30:36,200 --> 00:30:39,200 Speaker 1: So they buy an index fund. So they're thinking, Okay, 496 00:30:39,200 --> 00:30:43,040 Speaker 1: I'm going to diversify away idiosyncratic risk of investing in 497 00:30:43,120 --> 00:30:46,000 Speaker 1: jewel stocks, and I'm going to buy a bunch of bonds, 498 00:30:46,080 --> 00:30:49,600 Speaker 1: so I'm going to diversify away macro risk because I 499 00:30:49,640 --> 00:30:51,680 Speaker 1: have some bonds. And then it's like, all right, I 500 00:30:51,760 --> 00:30:54,600 Speaker 1: bought this, said it, forget it by a little bit 501 00:30:54,640 --> 00:30:57,920 Speaker 1: every month, and then look at my portfolio when I retire, Like, 502 00:30:58,240 --> 00:31:01,520 Speaker 1: maybe it's not quite so simple, and maybe it's impossible 503 00:31:01,640 --> 00:31:04,760 Speaker 1: to just sort of people just sort of naively think 504 00:31:04,840 --> 00:31:07,040 Speaker 1: that they've taken care of what they need to do 505 00:31:07,160 --> 00:31:12,880 Speaker 1: to be good risk managers. Right, Okay, Well should be interesting, that, 506 00:31:13,000 --> 00:31:15,920 Speaker 1: shouldn't it. Yeah, No, absolutely, And you know, the one 507 00:31:15,960 --> 00:31:18,160 Speaker 1: thing I'll say though in the meantime is that we 508 00:31:18,240 --> 00:31:21,840 Speaker 1: have had these blow ups, but they so far it's 509 00:31:21,880 --> 00:31:24,760 Speaker 1: worth noting that the market gets by them. Like we 510 00:31:24,840 --> 00:31:28,280 Speaker 1: had the exchange traded products blow up earlier this year, 511 00:31:28,280 --> 00:31:30,440 Speaker 1: and we talked about it, but we didn't, you know, 512 00:31:30,480 --> 00:31:32,600 Speaker 1: and then it's sort of flushed out of the system 513 00:31:32,640 --> 00:31:35,120 Speaker 1: and it was okay. So I think the jury is 514 00:31:35,160 --> 00:31:38,240 Speaker 1: still out on whether the system is still you know, 515 00:31:38,320 --> 00:31:41,440 Speaker 1: sort of so filled with nitroglycerin that the big one 516 00:31:41,480 --> 00:31:44,480 Speaker 1: will come and there'll be this massive unwind. But maybe 517 00:31:44,480 --> 00:31:46,160 Speaker 1: we'll find out more in the next year or two. 518 00:31:48,160 --> 00:31:51,320 Speaker 1: Hopefully nothing and we'll have Chris. He could come back 519 00:31:51,320 --> 00:31:54,000 Speaker 1: and do a victory left the night choke lyscer in 520 00:31:54,440 --> 00:31:58,280 Speaker 1: metaphor is a little bit unnerving, there are right, ye, 521 00:31:59,400 --> 00:32:02,680 Speaker 1: a bit to us to home. This has been another 522 00:32:02,800 --> 00:32:06,320 Speaker 1: episode of the All Thoughts podcast. I'm Tracy Alloway. You 523 00:32:06,320 --> 00:32:09,480 Speaker 1: can follow me on Twitter at Tracy Alloway and I'm 524 00:32:09,560 --> 00:32:13,080 Speaker 1: Joe wisn'tal. You could follow me on Twitter at the Stalwart, 525 00:32:13,400 --> 00:32:16,680 Speaker 1: and you should follow our producer on Twitter. He's to 526 00:32:16,920 --> 00:32:20,240 Speaker 1: for foreheads and he's at foreheads T, as well as 527 00:32:20,280 --> 00:32:24,800 Speaker 1: the Bloomberg head of podcast, Francesco Levie at Francesco Today. 528 00:32:24,800 --> 00:32:25,600 Speaker 1: Thank you for listening.