The Macro Trading Floor transcript – 19 July 2024

Alf: Buongiorno and benvenuti. I’m going to do more and more Italian from now onwards. This is the macro trading floor. Alf speaking as always, my good friend, Brent Donnelly with me. Brent, how’s life?

Brent: It’s good. Actually, speaking of Italian I’m reading Dante’s Inferno right now, which I never have before, and it’s difficult.

So I’m listening to a podcast. Italian Renaissance podcast, and they go through all the details. It’s quite quite an amazing piece of work. I can’t believe I’ve never read it. So that’s my Italian stimulus stimulation right now.

Alf: Yes. Well, well, we when it comes to writing stuff or painting stuff, we’re pretty good at it.

For the rest efficiency wise, I would not want to comment, next question, please. Okay. So let’s talk about markets. All right. So the topic of the week is. Big rotation. I mean if you go on Twitter, you see that everybody and their mother are saying that this is a new breakout and you should buy small cap and garbage stocks and old economy stuff and value and dump all your semiconductors, your techs.

What are you doing? Don’t you see it? It’s happening, Brent. So question is, is it happening actually? Or what’s your view there?

Brent: So I think it’s a really interesting thing. It actually reminds me a little bit of the 2007 quant quake, where in that case, a bunch of funds went under and stuff. So it’s not quite the same thing, but where there’s just so much sector activity.

That the indexes almost don’t mean anything anymore because you think of indexes being this diversified group of stocks, but really what they are is just like a massive tech overweight. And so the rotation trade is interesting to me because I feel like, I think I wrote about this in Friday speed run last week, that it’s okay to sometimes just step aside from these things.

Like when you see things trading at 40 times sales and. Of course, the sales could catch up, but a lot of times the stock price catches up. So the equal weight, I saw through some of this rotation that S& P equal weight was making new all time highs. And I think there’s something to be said for staying away from massive overweights like this in the indexes, or at least being aware that if you own the index, all you’re doing is owning QQQ essentially.

And this sort of debacle or incident or whatever is just a good example of that. How the indexes are essentially a tech proxy, even the non tech indexes like S& P 500.

Alf: I agree on that front. And when it comes to rotations, I think there are. We shouldn’t confuse a good old momentum, a flush, which is completely fine and understandable with a macro rotation.

So when you look for macro rotations, what you try to do, I think, is look for more hints. Okay, not a day or two of the Russell overperforming the NASDAQ, but you look for more hints, right? So what are these hints? Well, you would want to see For example, break evens selling off. So inflation break evens, you will want to see markets becoming more sanguine about inflation, picking up nominal growth, picking up because at the end of the day, for value stocks or small cap to do well Brent, you need good growth.

You need the market to price in higher forward growth, higher forward inflation. So you need to watch a bunch of stuff like how are industrial commodities trading? Is copper breaking out? Is oil trading extremely well? What about the bond market? Is it acting accordingly? And does the action persist or is it a day or two or bar shock, basically, on momentum trades that get unwound?

And I think so far it looks like a day or two of VAR shock, which is fine. I mean, it’s okay. And if you were on the right side of it and you shorted NVIDIA into this, then well done. But between this and a macro rotation, namely something that can last for a quarter or two quarters or three quarters, I don’t think we have the evidence for that yet.

Brent: Right. And that’s a great point. Actually, all those things you were listing, I was thinking in my head, no, no, no, no. And it’s a great point. Because as consumers of financial media, people will now see like rotation trade triggered by, and then insert reason here. And really, like you said, a lot of times things in the market are not being driven by exogenous, like outside forces.

It’s just some kind of internal thing of, you know, the whole tech trade is a momentum trade essentially. So. When momentum turns, obviously that, that cuts both ways. And I’m more with you that I don’t really know what’s changed in the macro economics. It’s more just like a momentum unwind. And actually that kind of goes to a question of like, where are we in the economy and, and what’s going on in the economy.

And if anything, I would say like nothing has changed that certainly you have to look pretty hard to find. Anything significant that has changed?

Alf: Yeah. Some early signs of re equilibrium, I would say in the job market. We have discussed about when the market was extremely aggressive on. GDP growth estimates at two and a half percent by the end of the year and all this, you know, very aggressive growth estimate.

I think that’s now being repriced pretty robustly on the way down, which makes more sense. Initial jobless claim, I would say we need to discuss for a second, right? Because You know, you see these numbers again, it’s a weekly print. There is a ton of vault potential into this thing that has not been recently.

So it’s been always around the same level every week, which was also funny to see at some point. But now it seems like, you know, it’s a little bit moving. So and the some rule, which is something else we should discuss, right? So what in Powell also comes up together with Williams and Barkin, I would say the three most relevant amongst the most relevant fed members, and they say, you know, job market seems Much better in balance.

It’s not tight anymore. Should we derive something out of this?

Brent: So, yeah, I find this really interesting because a good general rule in the past has been, or in my lifetime anyways, has been once the U. S. economy reaches full employment, then starts to weaken away from full employment, it usually means a recession is coming soon.

And that’s the basis of metrics like the SOM rule or the SOM indicator. Or even the observation that steepening out of an inverted yield curve is, is a super bad signal for the U S economy. So generally that’s a momentum thing. Like I said, the SOM rule says that once unemployment starts going up, it keeps going up and usually it goes up a lot, but I’m wondering if this cycle is different because, you know, Most of the models and observations and everything that we’ve been using over my lifetime have been demand driven models.

And so this obviously has not been a good model of the economy in the last three or four years. So as the supply shock dissipates, And we disinflate, we get the immaculate disinflation. Maybe I guess my question is, are we just going back to the old equilibrium or the steady state that we were in in 2018, 2019 before COVID where the unemployment rate is around 4 percent claims and continuing claims were right around where they are right now.

And so you’re actually just transitioning from like a crazy supply shock, like white hot economy back to a more like, The old new normal or whatever they used to call it at PIMCO because to me, I actually think the second scenario is more likely that we’re just going back to the way it was and not necessarily going to something scary, like supply of labor is coming back.

Supply of goods is coming back. And so you get disinflation and you get a little bit higher unemployment. Of course. That could be wrong, but I think the default that people use is that the cycle looks like the other cycles and I think that’s backwards. I think the default should be that this cycle is not like the others.

Alf: And of course that’s a generally scary assumption to make and nobody wants to make that assumption because it’s proven to be very, very harmful. But look, I mean, unemployment rate is not only a function of demand for labor. It’s also a function of supply of labor. So it’s, it’s basically an indicator that looks at both.

We have discussed about the net immigration to the U S and what it has done to the supply of labor, which has been huge. And also one of the reasons why an employment rate has been ticking up and wage growth has been ticking down as you add a lot of, of cheap workers basically to the economy immigrants.

And you know, so I think you can’t look at one indicator, which can be the yield curve or the sum rule or whatever and say, this is it. You also have to discuss, for example, why is the steepening happening, right? I mean, if the steepening is the typical bull steepening post inversion, so namely you have had according to bond markets, a tight policy for a while.

And that’s why the curve has been inverted. And then all of a sudden you have to rush through cuts at the front end. So then you obtain a boost deepening because you know, yields go down, but they go down faster at the front end. Yes. Guess what? It probably means the policy has been tighter for too long.

And then the Fed is forced to cut very fast. And that’s generally been associated with a recession. But what if instead, You just get a steepening which is due to the fact that nominal growth is holding on fine and maybe you have some term premium back into the curve and all these other reasons why the curve could steepen.

So again, you can’t just look at one thing and say, some rule is here, therefore it’s going to be a recession, or the curve has steepened after an inversion, therefore it’s going to be a recession. I think you’re right on the fact it’s a very nuanced cycle with a lot of stuff going on the whole time. And so we need to think a little bit deeper rather than just looking at one indicator and getting conclusions out of it.

Brent: And a follow on to what you said is that maybe the steepener is just happening because of the assassination attempt on Trump and the rising odds of Trump. I mean, maybe that’s a segue to another topic, but to me, it seems like Trump is kind of at max odds to me. Like, The story around Biden has been simmering for ages, but now it kind of seems like there’s been so much smoke that maybe Biden’s still going to drop out.

And then you get a really big, different, different landscape where there’s a lot of uncertainty. Like there’s an Axios article today saying Schumer and a lot of people are trying to get them to drop out. They moved the roll call for the nomination from July to August. To give another chance. It almost seems to me like the smoke signals are now Biden’s looking for ways.

And I’m not a political expert, but this is just my observation that Biden’s looking for a way to save face now and get some doctor to say, okay, after he has COVID right now, so after this COVID his lung capacity is compromised and therefore it’s too risky for him to keep traveling or something like that.

And then if that were the case. So it’s funny because like, nothing could be worse, I guess, for the Democrats polling wise than Biden right now. So like anything is better and whether I guess it’s Harris or whatever, that just means that I would assume if Biden drops out, you would see flatteners and you would see the market sell crypto pretty aggressively just because that’s the inverse of what happened when.

When Trump’s odds shot up, but I don’t know. Anyways, what do you, what do you think about all that?

Alf: Yeah. On politics, I think we discussed the Trump trades at the last episodes. And I think it was a pretty decent prediction. Of course, we couldn’t predict that somebody was going to try and kill Trump. But let’s say we have seen how the market behaves.

If Trump odds of winning, or actually the odds of a sweep even, of a Republican sweep, go up. We have seen what the market tends to do, right? And that was the Monday open. So, we said the yield curve is going to steepen, and it did, it did steepen. On the dollar, I personally can’t find a clear cut trade.

Maybe dollar China on the upside with some, you know, PBOC hurdles to beat. But it’s gold and Bitcoin, right? That’s the other way to express all of this, and And they all went up. Gold goes up, Bitcoin goes up, and the curve steepens. So at least we can derive a little bit what the Trump trade would look like, Brent.

But now you come to the trading side of it. How much of it is already priced in? What are the odds of a Republican sweep priced in? How can you get them higher from here, basically, right? And those are all valid, valid questions. I think I broadly agree that if Biden drops, then yes, then I think you have to a little bit let’s say Trump win remains the favorite, the most obvious outcome as we remains possible, although not easy to achieve, but then you have an uncertainty part in the distribution.

You have all of a sudden to price, right? And that’s like, what if a Democrat, a candidate can, can do much better than Biden. up until the election point. So you have to reprice again, the probability distribution for more uncertainty. But what about Trump policies? Because this week we’ve heard a little bit more from him, right?

And we are pricing this steepener and gold and Bitcoin. on the basis of some assumptions we are making about the body of the distribution of Trump’s policies. What is he going to do? Most likely, you know, what are the things that he’s really going to implement? And then there is another question, which is what are the tales of Trump policies?

What are the stupid, stupid things like the extreme things that There’s a chance he will do. Okay. So I will split this in two things. I guess the things he will do most likely and what’s the impact and the things he might do are likely. But if he does that, then probability times magnitude still ends up being larger as an impact on markets because the magnitude is so much large of the stale policies, namely removing Powell forcefully as the fed president, for example.

So how do you think about body versus tails? In this Trump policy agenda.

Brent: So just one point that you made that I think is important is the red sweep is so different from just Trump winning. So I guess that’s the probability probably to keep an eye on, because that’s the more extreme result in terms of policies.

I mean, the tariffs are the easiest ones to do because he can just do them on day one. A lot of the stuff that he talks about, he also talked about from 2016 to 2020, but it never happened. Like, so the weak dollar policy, for example, it’s, it’s something that they hope for that, like Lighthizer and those guys, Would like, but they don’t really have any way of, of executing that.

So if you’re doing an MMT style fiscal policy, that’s generally going to be good for the economy and good, good for higher yields and higher dollar. And there’s the tale of, of Powell, but I mean, I don’t know. I’m not a big believer in that in the, in the business week article, he said he’s not going to get rid of Powell, but I mean, obviously he can do whatever he wants later on, or he can try to do whatever he wants, but I think really the tariffs and the tax cuts are the, are the policies that you can almost bet on for sure.

And I would say there’s kind of this complacency or like boredom of, it’s kind of like, There’s no shock factor anymore in the, in the idea of Trump coming in. So it’s like when Eminem started rapping in 1999 and saying all these crazy things, there’s like this massive shock factor, but now he’s doing it 20 years later, it just doesn’t resonate in the same shocking way.

And I feel like that’s the case with Trump as well, is that it’s just not as scary or exciting or crazy sounding that Trump’s going to be president and do all these things like tariffs. But they still matter. So like, I feel like the market is, is complacent because of just like, I don’t know, receiving so many shocks over so many years on the political side that anything shocking now doesn’t seem that shocking, but in the end, it’s still going to matter if he puts it.

60 percent tariff on China or a 10 percent global tariff on all imported goods. Those things are going to matter. They’re going to matter for the dollar and they’re going to matter for a lot of sectors. So to me, I think it’s actually, there will be opportunities to do things via options because We’re in this strange sort of stasis right now where the fed is fully priced for September.

And then, you know, we have the election in November and there’s kind of like, it’s a strange combo of almost 100 percent visibility into like September, October, and then zero visibility after that, because you don’t even know. I mean, I’m assuming Powell is still going to be there for a long time, but you don’t know who’s going to be running the fed in theory.

You don’t know tariffs. You don’t know fiscal policy. There’s just so many unknowns coming, but there’s so few right now that volatility is super, super low because everything’s not realizing because nothing’s moving and VIX, well, it’s at 15 now, but it’s been at 12. But I think it’s interesting because of the complacency.

I think there’ll be opportunities just to own options, own optionality into 2025. And the thing is, if you wait till October and November to buy those options, I don’t think you’ll be able to buy them at these levels. So I think it’s a really interesting setup where you have certainty followed by dramatic uncertainty and a market that’s pretty complacent about it.

Alf: Yeah. So I think we discussed, it’s not going to be a surprise if Trump wins, it might still be quite a surprise if he gets a sweep, that’s different. But then in general, the way I feel about the distribution of pricing here across assets, curves, the dollar, Bitcoin and gold, I think that a good 50 to 60 percent of the movement behind a Trump victory is in the price.

The remaining 30 to 40 percent is not especially linked to the sweep. I think the odds of a sweep might actually, you know, get you another interesting move there. But for me, the most interesting part of it all is Okay. There is this 30, 40 percent of the move left if he really ends up winning and sweeping.

But what about the tails? So let me, let me, let me now clarify one thing. I don’t think Powell is going to be removed straight away from Trump. Okay. I don’t think so. Again, when we talk about options and scenarios, what I think, or you think, Brent, it doesn’t necessarily matter, or as my mentor used to say, in macro, you don’t need to be right to make money, you just need to identify potential scenarios that the market is completely mispricing.

That’s all you need to do. And then at some point down the road, have the market perhaps reflect and reassess and say, oh, I underpriced that deal, or I overpriced that deal. That’s all. And you need to be there faster than the others. You don’t need to be right the whole time. If you’re on Twitter, yes, yes, you need to be right all the time.

But if you trade as macro, no, no, you shouldn’t. You, it’s fine not to be right. So in this case, it made me think, right? So what do you think is the market pricing of Trump removing Powell. How the hell do I price a thing like that? Well, what happens if Trump removes Powell? I am gonna bet that gold goes up a lot.

Okay. If he does something like that, we’re talking proper Lula emerging market, Brazil like behavior where you handpick your next fed president and you remove your current one. I mean, we’re talking serious stuff here. Okay. I am going to say gold goes up not knowing anything else. Okay. And then I said, How do I think about options here?

So I took I assumed that gold will have a two standard deviation move over the next six months. So we’re going to January next year and we are hearing rumors, Brian, that Trump might remove Powell. So then I said, what is a two standard deviation move? in gold in six months from now. And the answer is 20%.

Historically, A2 standard deviation in six months has been 20%. So we’re at 2, 500. That means we go to 3, 000, 3, 000 for gold. That’s huge. Okay. Then you go and check how much the market is pricing in for that probability. And that’s something that you can do by deriving market implied probability from options.

So if you can isolate a certain payoff in an option structure, and you can see how much do you pay for that particular option structure, versus the payoff you can get, if you win, if you’re, if you get it right, then effectively you can derive the probability. So say I’m paying a dollar for a certain structure that can pay as much as 10, if I’m right.

So what’s my probability? Well, roughly 10%. That’s what the market is pricing, right? They want me to pay a dollar to get a payout of 10 if I’m right. So if you do this for gold at 3, 000 by January, the market today is asking you to pay about 5 percent upfront. So 5 percent for a two standard deviation move in six months.

That’s pretty much standard pricing. I would say maybe a bit lower than standard for, it’s a tail. So normally you get priced a little bit for that. So outcome of my dissertation on options. So far, and Trump is at the tail risk. The market is also very calm about it. It’s calm about the odds that Trump might do something pretty stupid, pretty fast.

Brent: And the thing is, you, even if you look at the probability of Trump winning, even if you, even if that was a hundred percent, there’s still tremendous uncertainty, like you said, because you don’t know what he’s actually going to do. So it’s not just a matter of pricing in whether Trump’s going to win or not, which is one thing.

And then whether there’s a red wave, which is another thing, but then you go down the list of like the five policies that matter for markets. And there’s a really wide cone of an uncertainty around all of those things as well. So yeah, I think I was looking at some options in, in a G 10 effects. And very similar.

So like a 5 percent move in six months in euro dollar is very common. Like euro dollar can move seven as much as like 12 percent sometimes in six months. So 5 percent isn’t crazy. And if you pick a direction, if you pick the direction, right, like, let’s say you think the dollar’s going down then, and you think so euro dollar to one 15 or something, let’s say.

Then the, the digital option, which is basically just a bet, like, will it be above or below for that thing costs about 16%. So the, the market’s pricing 16 percent chance that your dollar moves up 5 percent in the next six months, which like, if you have that view, That’s an incredibly cheap option. Like I’m not espousing that view on this show right now, but I’m saying if you have a view on things, whether like you said, gold or whether it’s the dollar and almost all asset classes, obviously vol moves in tandem across asset classes.

There are definitely cheap things. If you think any kind of taily, Event is going to happen. And the thing is like 5 percent move in euro dollars, not even a tail, but it’s kind of priced like a tail. So that’s definitely, and, and sorry, one, one, one last thing, generally with these huge events, like I’ve gone through the data for like Brexit, Scottish referendum election, 2016, all those, like the big events that people really care about vol almost always ends up being too cheap initially because As you get closer to the event, people just won’t be short that ball.

Market makers just won’t be short. So they get a lot of shoulder taps as well, like from risk managers as the event gets closer. So like the risk manager at, you know, whatever, name a bank or hedge fund right now, isn’t really all that worried about the traders exposure over, you know, November. Of 2024, but when it’s August and September, then October, that risk manager is going to be looking more and more, and then people are just forced to, to cover shorts and balls.

So generally ahead of big events, it tends to be underpriced simply because the psychology of complacency disappears as you get closer to the event, people start crapping their pants.

Alf: Yeah. So I just checked if you go 20 years back in history and you check the six month rolling returns of Euro dollar. A 5% move is a 0.7 standard deviations, not even one standard deviation.

Right? So what tail, like, we’re talking like a standard move, which is a normal move. Okay. And how much do you pay for that 16%? On if you pick the direction, right? Yeah. Yeah. But it’s, it’s, it’s basically you’re not charged at all for convex, right? You, you get the options. No, no. And you get the, if you’re right, you get the pretty convex payoff and exam that you really weren’t charge for it.

And this is a bit how I think you can find and think about chip optionality Brent.

Brent: Well, that’s the thing too, is that the, the way that at least in FX options, I don’t know outside of FX, but I’m assuming it’s the same in other options, but in FX options, as vol comes down, the skew comes down as well, generally because people just aren’t worried about a particular direction.

So not only is the vol base lower, but you’re not paying as much skew for the tails. So Ian, it ends up being obviously. You know, you need to time it somewhat correctly, but in this case, the timing is obvious, like you want to own somewhere between October and, and like March volatility. And you want to figure out a way to buy it now without bleeding to death in the meantime.

And there’s definitely many, many ways to do that with calendar spreads or just with different strategies.

Alf: Yes, indeed.. So when it comes to options, I think we agree in the use of them ahead of a potentially convex events. even if your base case is not that Trump is going to do something so ballistic, even if there is any way a potential for a move like that to happen.

And the closer you get to the event, the mechanically, the higher people will have to pay attention. The more people have to pay attention to these events. So if you can get, you know, Basically cheap convexity through options. I think you should take a look at it in general. And how do you identify cheap convexity?

I would say, well, you need to be pretty systematic about it. So again, I’m a friendly guy. You go on Bloomberg now it’s Friday or Monday, you type my name and then you send me a message and I will share with you a bit of the framework. But in general, how you should do it, I think in principle is you should try to monitor what the tails are.

So try to monitor how much are these probabilities priced in and how much instead are these events supposedly occurring. Like Brian said, I mean, a Euro dollar move of 5 percent over six months, nothing special, right? It’s like a one standard deviation event. Good. How much am I supposed to pay for a one standard deviation event?

And then if you can keep checking these, you have a higher chance, I would say, of spotting these mispriced tails. So, I mean, I can share a bit of what I do. If you’re interested, I’m open to chat. Just ping me up on Bloomberg and I will, but Brent, I think we agree broadly on how to look at options.

Brent: Yep.

Yeah. A hundred percent. Now before, I guess we have about 10 minutes left before we go to the next topic. Here comes a quick advertisement. So I recently launched Spectra school and our flagship course, which is called think like a market professional. And I wanted to, as a thank you for the podcast listeners.

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Brent: Yeah, that’s right. So the course is has a substantial written component.

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So it’s very, very well done. The platform is also impressive. Just go under the description there and use the coupon and save 500 bucks. And we’re done with the ad. Now let’s talk about serious stuff on top of the ad, which is also very serious. So do we have another topic to talk about?

Brent: So I wanted to talk about Nvidia because in AlphaTrader, I have the seven stages of the narrative cycle, and I have a feeling we’re getting to stage six in Nvidia, which, so the stages are under the radar, which is when nobody knows about the thing, except for experts, momentum builds, primary trend, first cracks, which is when like, probably Nvidia was around 500 pre split when, you know, a lot of people thought it was a bubble.

And then the final hype wave and momentum and then the peak and the turn and, and then the end. And so the reason I think we might be in cell rallies or peak mode here is that first of all, the price action, but, but before the price action actually started Goldman Sachs put out a great piece. With a guy from MIT, Darren Acemoglu, and the piece essentially, it’s a 31 pager, we can put it, I’ll put it in the show notes because it’s public. The piece essentially questions, how will all this spending 1 trillion of spending on AI be monetized?

And I think it just raises a lot of great questions. And like my question, just going away from the Goldman piece is, is this thing more of a commodity than people think? So like I use Claude perplexity barred and GPT four. And honestly, like, yeah, some of them are better for certain things, but they’re kind of all the same thing.

And then the, there’s this sort of underlying assumption and I’ll put another link to Ed Zitron who writes about this. But there’s this underlying assumption in this more starry eyed circles that LLMs will lead to AGI and like, will they, I don’t know, I mean, I’m not a computer science expert, but the, the piece kind of goes to this and Ed Zitron’s piece goes to the fact that, you know, it may be LLMs actually have a peak and there’s only so much data you can train them on and they’re running out of data.

And so like, does Moore’s law apply to LLMs? Maybe not. Do LLMs lead to AGI? Maybe not. So, I feel like generally investment banks publish bullish things because that’s the business model and you want to get the underwriting and, you know, there’s a, there’s, this isn’t anything you know, controversial that I’m saying.

There’s a lot of research. There’s a lot more there’s a lot more buy recommendations and sell recommendations on Wall Street and there’s, that’s for a reason. My point saying that is that when Goldman puts out a 31 pager, that’s bearish, I think it’s, it’s important. And the bar is so high for them to publish something bearish that I think the people are taking note of it.

And so is it possible then that, I don’t know if everyone remembers that commodity super cycle, but that was a big deal in like 2011, 12, 13, 14 in Canada, Australia. And essentially it was just this massive build out of commodity capacity. And then once that capacity was built it just kind of became the peak and, and the story was over.

And I wonder if AI could follow the same trajectory where you get the AI super cycle and maybe we’re around the peak of it as Goldman Sachs is suggesting that it’s going to be impossible to make money off of this stuff. And so anyways, that those are my thoughts. Generally my view on NVIDIA and like, I don’t really care if I’m wrong all the way up because I, my view is just not to short it, but just to, to say things that are trading 40 times sales are negative EV and sure.

Sometimes they make money, but in general, they’re, they don’t. So I’m, I, my preference is to be an equal weight indexes and out of the, the actual indexes simply to avoid the overweights in NVIDIA and, and tech. So that’s kind of my view anyways, but this piece, and then the stuff that Ed Zitron has been writing, and then the price action make me think that, you know, despite the fact that the rotation trade could just be a one off. I do think that it’s possible, like, or I would bet that the AI story has peaked for now and there’s going to be more pain and not more upside.

Alf: Two things to add from my side here. One, are you ready for the amount of shit that’s going to be thrown at your email?

How do you dare? AI is eating the world. Jump on the bandwagon, Brent. No, I don’t know. I’m just going to tell you, you’re going to receive shit. I mean, and then the second comment that I have is I went and calculated the equity risk premium in the U S it’s 0. 4%, not four, it’s 0. 4 percent by looking at earnings yield of the S&P minus 10 year treasuries.

Then I looked back in the past, right. And I said, so what happens, what happens if you buy equities at a 0. 4 percent earning equity risk premium, what happens after that? What are the subsequent returns? Yeah. And then you realize that in the first 12 months, it basically doesn’t matter because if it’s a momentum trade, nobody gives a crap about whether NVIDIA is trading at 40 sales at 35 sales or 45 sales.

They’re just buying it because they have to mostly, or because it’s a trending trade or it’s a momentum trade. I know of many asset managers, some of them are my clients that said, I mean I’m down 3 percent against my benchmark this year. So, so what’s going on? Well, I don’t have Nvidia in my longs. And I’m like, and that’s it?

Yeah. And that, that explains 80 percent of my underperformance. So, I mean, I got my risk manager tapping my shoulder. I need to buy this thing at 40 sales. I need to, I need to, I need to get, I mean, I have a tracking error limit. I need to buy this thing. So certain things are really mechanic and it doesn’t matter what equity risk premium you’re buying.

I mean, if it’s a momentum mechanical driven thing, it doesn’t matter. But then if you look three year over the returns, eh, that’s a bit of a different story because if you bought stuff at zero or negative equity risk premium in the past four years, And then you held for three years, right? Your, your stocks that you have bought at ridiculous levels, then your expected value as Brent said is negative.

So you are more likely to actually lose money in an asset class, which historically, if you hold for three years, it has a right drift, you’re supposed to make money by owning equities. So it matters not maybe for the horizon of a macro trader, probably doesn’t. But take a look at valuations. Be safe.

Brent: And those two time horizons kind of explain why it’s impossible to be short these things because they just go up longer than, than anyone else could ever predict. I think we’re running out of time, but I wanted to do the stupidest thing this week. Sure. I just found this so funny. So first of all, I have no political bias.

I’m not allowed to vote in the United States. I’m Canadian. So this isn’t a politics thing. It’s just like. a wow thing. So this week, actually yesterday, the White House released a press release about Biden having COVID. And it says the president presented this afternoon with upper respiratory symptoms, including runny nose and nonproductive cough with general malaise.

And when you read that And then you contrast it with like Donald Trump dripping blood after getting strafed by an AR 15, take an indirect hit to the ear from a bullet at a thousand miles an hour. It’s just so crazy to just see those two things in contrast. And neither it’s not good or bad. It’s just an amazing contrast.

One guy’s out with a runny nose and the other guy’s screaming, fight, fight, fight. After getting shot in the ear,

Alf: I’m afraid that I’m going to stay out of politics in any case. Probably you also weren’t out of politics, but

Brent: Yeah, I think I wish I never said all these things, but anyways,

Alf: It’s okay. Very edgy, very edgy topic. But we are an edgy podcast. Anyway, we talk about options and trades. Who does that? Who’s this crazy guy? You generally blabber nonsense for 35 minutes on a macro podcaster. So we try to also do that. Of course, we blabber nonsense, but. Hopefully we also entertain and give you some frameworks guys, which is all that matter.

So now if you go in the freaking how do you call this? The, the note, the show notes below, you’ll find two things. A, how to save 500 bucks on Brent. You should, it’s a great course. And B how to contact me on Bloomberg. Do both, whatever you want, actually on Brent, you have to act fast because otherwise you lose the deal.

And that was it from our side, I think, Brent. That’s it. Yeah. Thanks very much. Thanks Alf. Thanks everybody for listening.

Alf: Talk soon.