The Macro Trading Floor transcript – 06 March 2025

Alf (00:00.6)

Buongiorno everyone. Welcome back to The Macro Trading Floor. There is a lot going on right now. Actually, it’s a fun year, I would say, in macro. The least fun part is that a random tweet can change the P&L of your day from red to green very quickly. But for the rest, at least it’s not boring. Brent, how are doing?

Brent (00:17.878)

Hey, yeah, I’m good. Actually, it’s really interesting because as someone at the intersection of micro and macro, like you said, there’s kind of something for everyone because if you’re a headline trader, you can buy, you know, auto stocks on the fact that they’re not going to do tariffs on the USMCA portion of the whatever. And if you’re a big picture person, you know, you could be buying euros on the change in European hegemony away from the US and all that. So there’s so much going on, I guess let’s do it.

Alf (00:48.514)

Yeah, well, I think we’ll have to start from Europe for once. We’re not going to start talking about the US straight away Brent. What do you say?

Brent (00:55.766)

But I thought the US was exceptional.

Alf (00:58.366)

Yes, or not, maybe not anymore. No, okay. So on Europe, first of all, credit where credit is due, there was somebody who sent out the daily am/FX saying sell the dollars, I think two days ago or three days ago or something like that, very recently, right Brent?

Brent (01:17.482)

Yeah, it was actually yesterday right before the move.

Alf (01:26.154)

Well, perfect. And that has proven to be very good. Frankly, even for somebody like me who’s been saying Germany’s going to do fiscal, please listen to the Germans. The Germans, when they say something, they normally want to do it. I wouldn’t have expected bunds to move 25 basis points in a day. I mean, that is quite something, frankly. I’ve never seen it.

Brent (01:43.03)

So I think the reason or part of the reason, maybe you can go through some of the numbers because that’s more your area, but I think the real reason that things are moving so much is that people have this perception of Europe as this bureaucratic, sclerotic, slow moving, stagnating milquetoast kind of place. And so when they do something decisive, it catches people off guard. You saw the same thing with Draghi in 2012. I think the underlying assumption is always bureaucracy and rules and slow moving and you gotta get 21 people in a room.

So when you see something happen fast, the market’s just not really ready for it. I mean, when they were talking about doing increasing defense spending, people were saying, well, three months for coalition and then three months of meetings, you know, I’ll see you in 2026. And they’re coming out with this stuff like days after the election. So I think it is actually a pretty watershed moment.

Alf (02:42.382)

Yeah, I would say so. So there are, let’s summarize a bit what Germany has announced, okay? So for people to understand what are we talking about here. So first we should start from Europe, I would say, because Ursula von der Leyen, which is the president of the European Commission, the day before Germany came out with their fiscal announcement, announced that Europe is gonna grant 150 billion in loans for defense spending to various countries. That’s not a lot.

But she also then said that 650 billion additional is going to be exempted from any excessive deficit procedure. Which for non-European bureaucracy speakers means that governments of Italy, France, Spain, it doesn’t matter who, can actually borrow for defense a large amount of money and the European Commission is going to say, oh, your deficit is too high. That’s what it means. It’s basically like a free out of jail card to spend on defense for every European state that is the case.

Now, the day after, Merz announced what I think is a historical turnaround in German fiscal. This is against every fiber of being of every German fiscal hawk that ever existed. That’s what we’re talking about here. So Merz announced that together with the SPD, they will do the following.

They will, on defense, anything that is above 1% of GDP, anything above, so there is no cap guys, there is just a floor, anything above 1% of GDP for spending is exempted from the debt break. Which means Germany could as well just go and spend a trillion for defense for all we know, okay? And the debt break isn’t gonna be a problem there.

Then they also said, well, but it’s not only defense spending by the way, it’s also infrastructure, which is also big, I would say, because if you have ever taken a train in Germany, you will know what I’m talking about. It sucks. Or a highway. Or because people found out I speak German, an Autobahn. Now, if you think about the infrastructure part, it’s a 500 billion deal. Putting this in context, it’s 12% of German GDP to be spent over the next 10 years.

So it’s 1.2% additional fiscal deficit on top of the defense per year for the next 10 years. And also German states got another 0.3 % of deficit to spend. So basically Germany said, we’re gonna do 1.5% primary fiscal deficits on top, plus all the defense, which is limitless in purpose. They could do as much as they wanted. We’re talking about, I think if you try to put some numbers on it, Germany could be printing deficits in the 2.5 to 3%, 4% area going forward. I repeat, Germany will print deficits in the 3 to 4% area going forward. This is completely unprecedented.

Brent (05:33.706)

Now, just a question because I don’t, like obviously I follow this stuff fairly closely, but I don’t remember them ever saying anything about infrastructure until yesterday. Is that right? Or had they been talking about it?

Alf (05:45.049)

No, if you wandered on some German newspapers, you found already that there was a 500 billion infra package already floated around, together with the 400 billion spending on defense. So now they’ve done two things. They’ve confirmed the 500 and they’ve taken off the cap of 400 on defense. Defense could be even larger if Germany wanted. And also they’ve given some deficit leeway to German states on top of that.

And the most beautiful thing of all, think, is that they’re going to pass this before March 25th, which defies any expectation of, oh this is a bureaucratic machine and it’s never going to be approved. No, no, no, no. They’re going to use the old parliament, which sits until March 25th, to actually pass this. So it’s going to happen and it’s going to happen pretty quick. And now the resistance I get, Brent, from people is, yes, but what about the supply side of the economy? Can the infrastructure part of Germany and can the military part of Germany absorb the spending quickly?

The answer is no, it can’t super quickly. But from a macro standpoint, guys, it doesn’t matter. If GDP in Germany grows this year or it grows at the end of the year or it grows in 2026, it doesn’t really matter because it’s the change of direction here that really, really, really matters, in my opinion.

Brent (07:02.698)

Now, I always like to be ready for whatever headlines are gonna go the other way. So, is there any headline risk from a smaller fringe party saying, like, we’re gonna be a blocker?

Alf (07:11.852)

Yes, correct. It’s the Greens. So in the old parliament in Germany, the majority is the, again, now with the German sounding acronyms, CDU, so it’s like CDU, the bigger party, the conservatives, the SPD, the left, and the Greens. So they do need the Green Party to pass all this. Of course, today you already get some political position from the Greens saying… Yeah, guys, but where is the green part of the package, right? I mean, you sit in a room, the two large parties, and you say, here is infra, here is defense spending. Yes, but we want to negotiate something on the green side of things.

Brent (07:48.31)

So they’ll slap some green pork on there and then put it through.

Alf (07:51.502)

Probably, but you might have some headlines where, you know, to play political pressure, the Greens might say, we’re not going to vote for this. And then the market could draw down pretty aggressively. I ultimately think that the Greens have an interest to make this happen anyway, as long as they get some green part of the deal in the fiscal package too.

Brent (08:10.538)

Okay. And then just, just to put it in perspective, because we were talking about this yesterday and saying how big it was, but you know, sometimes you just get excited about stuff and it’s not actually that big. But I’ll put it up in the YouTube… The move in the German yields today is like the biggest one since, since East Germany, basically since the Berlin wall. So it’s the biggest move in yields since 1990.

And, the interest rate differential interestingly was already moving super hard in favor of the euro because US slowdown risk is increasing. The data has been a little bit soft in the US and US yields have been going down, maybe some more suasion from Bessent. And so the rate differential was already blowing out even with euro at 1.05. And then now, I mean, it’s like on the moon.

So it’s made a really interesting setup for the euro because the market’s been buying dollars for a long time and then waiting for the tariffs which have this theoretical dollar positive impact. Then you get 25% tariffs on Canada, which is like worst case scenario that no one believed was actually gonna happen. And it comes in and Dollar Canada basically did nothing. So that was like a massive tell of where we are in terms of positioning and valuation for the dollar that like a five-sigma event on the level of global financial crisis type of hit to employment in Canada, and the currency didn’t move.

So it’s a pretty interesting setup for big picture people who have been salivating to short dollars, but it’s been too scary to be short dollars because you knew you’re going to get your face ripped off on the tariff headlines. So then you actually get the real tariffs and dollar goes down and then everyone’s like, okay, well, I guess it’s safe to be long euros now because you know, if dollar Canada didn’t go up then is Euro really gonna go down in April on reciprocal tariffs? I mean, maybe it will, but I strongly doubt it. The market gets bored of themes after a while. And the market is very bored of the tariff theme.

So there’ll be impacts now, I think tariffs becomes more of like an industry play where you say, okay, Stellantis is exempted from auto tariffs because of USMCA compliance… So, you know, I’ll buy Stellantis and I’ll sell and whatever other thing. But in terms of like national economies, people are just bored of trading it, at least in FX and people are moving on.

Alf (10:43.65)

Yeah. And the other interesting part is that the market has started to punish the U.S. for tariffs. So for the first time in a while, now people are not saying, “tariffs in, U.S. economy, strong dollar up.” They’re not doing that anymore. They’re saying, tariffs… OK, well, things don’t look that rosy anymore. Companies are slowing down their hiring. They’re slowing down their capex.

You talk about cutting fiscal spending in the first half of the year and you want to do tariffs. Well, you know what? I am actually gonna sell some dollars and I’m gonna price down rates and I’m gonna sell equities. I’m basically gonna widen risk premia, Brent. You’re basically saying to own dollar assets in an environment where policymakers are unfriendly to the economy, well, I wanna get rewarded. I’m not gonna buy the S&P at 22 forward, price-earnings, because there is no basis. The S&P used to trade at such high valuation premia versus other markets because the policy mix was the opposite.

You always had low and controlled inflation, bit of fiscal deficits, very, very pro-growth geopolitical environment. You always had all that, right? And that favored tech dominance and earnings that were looking good. And now you have all the opposite, right? You have a bunch of uncertainty for which you have to get rewarded. You have tariffs. You have companies that have a hard time planning and hiring and spending. So why would somebody volunteer to pay 22X for the S&P at this level. I think it’s reasonable actually.

Brent (12:14.058)

Right, and there’s so many things that have all come together in a short span because Mag-7 earnings growth has peaked, then you had the DeepSeek and stuff, and then the US slowdown. And essentially this idea that like US is the only place to invest has just kind of been blown out of the water. And one thing that I don’t like usually getting into like the real ivory tower stuff, like the structural stuff too much because it’s just usually not useful.

I think there is something to just be discussed about the US dollar as the reserve currency and US dollar hegemony is somewhat based on… like when people say, the dollar’s not backed by anything, it’s backed by a lot of things. Like it’s backed by tax revenue and a lot of natural resources and a big ass military. And so that military dominance and America world police thing, is definitely one contributor to the dollar’s reserve status, right? I mean, that’s what gave the UK reserve status as well.

And so if you say at the margin that the responsibility for global defense is now shifting a little bit away from the US and a little bit towards Europe, and then you say, okay, Europe’s being quite decisive here. They’re moving fast and breaking things. Then as a reserve manager, maybe you say, well, you know what, maybe dollar hegemony is a little bit less strong than I thought it was.

Now it’s not binary, so it doesn’t just mean like, okay, dollar’s not a reserve currency anymore. But if you’re at, say you’re at 62% dollars, do you say, you know what, euro’s a little more credible here, I get a higher yield, let me do a switch and I’m gonna drop 3% of US dollars and I’m gonna add 2% euro and 1% yen or something like that. Especially given the valuations.

So I think the defense cutbacks in the US combined with the massive increase in Europe actually at the margin does increase the value of euro as a reserve asset. And like I said, it’s very ivory tower kind of bullshit argument, but I don’t think it’s nonsensical. I think it’s actually correct.

Alf (14:32.502)

No, but even from a plumbing perspective, one of the reasons why, if you look at FX reserves around the world, the share is so large in dollars is yes, because the treasury market is larger. Yes, because it’s deeper. But why is it deeper and larger than the euro bond market? It’s because freaking Germany never ever issued any paper, guys. I mean, it’s pretty simple.

Now you have these guys having to issue hundreds and hundreds of billions of bonds to fund this massive defense spending. So guess what’s going to happen? You’re going to broaden the pool of investable assets for FX reserves managers. You’re going to say, here is a big free float of bunds for you to invest in. The market is bigger. The market is more liquid. This is going to, of course, increase the attractiveness of the euro as well as an FX reserve.

Because, well, the US on the geopolitical theater is playing some games, just to say the least. And then because you are super over allocated to dollar as a FX reserves, dollar represent over 60% of FX reserves, buffers of countries. So you’re starting to see some diversification into gold over the last two years. But the euro actually now scores pretty well, if you ask me. And frankly, the other thing, just gonna try to say this. The other thing is, if you look at 10 year bunds, which are now 2.75, and if you look at the policies of Trump, I’m not gonna say that treasuries will yield less than bunds, but at some point, if we continue like this, the yield differential might also be not so impressively attractive anymore towards the dollar.

And also, the euros can be funded at a much lower level. So basically, the level of steepness in the curve, I should say, between the euro curve and the dollar curve becomes much more in favor of the euro, where the front euro, if you want to borrow them, the ECB is going to say, you know, yield is 1.75, yield is 2% if you want to borrow them. But if then you want to invest down the curve, you’re going to be able to get 3% yield.

And so, I think the steepness of the curve helps and I think the fact that there is more bunds to be bought simply by FX reserves managers will help flows coming into the eurozone as well and into the euro.

Brent (16:36.972)

Right. And then you can look back to 1999, 2000. So at that time there was a tech bubble. There was no alternative other than the U.S. All the innovation was in the U.S. All the money flowed in. U.S. yields were high. Dollar went absolutely apeshit. Like, you know, Aussie was trading below 0.5. Euro was trading at like 82 cents at one point. And then there was a bit of a delay because the Euro had just been born at that time and there were some whatever kind of issues.

But then once the tech bubble burst, then you got into a massive sell dollars era where reserve managers were switching out of dollars and into euros from like 2002 to 2008, basically with a couple of exceptions in there. And so it’s a little bit analogous to where you have very highly valued tech stocks and very overvalued dollar, and then all of a sudden the narrative flips and you know, this kind of thing can go on for a long time.

Alf (17:35.916)

Yeah, absolutely. And now there is one question that I’m still left there wondering, to be honest, Brent, which is… we’re talking about traders here, we’re talking about how the reaction should be to this type of news, but what about the world of money? I mean, what about Japanese real money? What about US endowments? What about these type of investors? How are they looking at this situation? What are they waiting for?

Because it’s very hard to find data, but I would find it extremely hard to believe that all of a sudden Japanese mega banks or Japanese investors have gotten in European assets now. They’re super long to Euro and they’ve bought all the European banks they can find. I don’t think that’s the case. Question is what does it take?

Brent (18:21.15)

No, you’re right. mean, I remember seeing something recently. I’ll see if I can find it for the YouTube. But essentially, Japan got out of Europe in the eurozone crisis and they never came back. So, you know, if those guys start coming back, that’s huge. One thing on US stocks is I think the bear case is pretty well known now, like valuation, there’s an alternative place to put your money in Europe, and all that stuff.

But I think there’s a bit of a bull case now that we’re down here. Which is like one the seasonality starts to get better now So stocks followed the seasonal pattern exactly this year like they peaked on Valentine’s Day or 15th or whatever and then sold off, and that’s the seasonal pattern as the New Year money flows run out. You get like a little bit of an air pocket there.

But if the rest of the world is looking a little bit better and you have also lower US yields and then maybe like the chance of the Fed cutting with not recessionary stuff in the US. And then you have, a weaker dollar is actually a tailwind for a lot of companies like Microsoft. I’m wondering if actually that stocks still end up doing okay in the US, like they underperform, but I don’t know. I don’t think I want to be short S&Ps at 5770, but we’ll see.

Alf (19:38.51)

Haha, I get you there. Look, I think the question really boils down to what is the Trump pain point. I think this is key. If somebody gets the answer to this question right, it can be right in directional macro. And in the first Trump term, Brent, it was relatively straightforward. The pain point was the S&P 500. And now it’s like, eh, I don’t know.

I mean, there is a speculative thesis that says, dude, like, they have made a billion for themselves between the Trump coin, the Melania coin and that pump over the weekend with the reserve currency thing. I mean, do they really need the S&P to make money when they can make a billion in a few days off crypto, basically? That’s a bit of a cynical take, but actually might have some points, to be honest.

But now when it comes to, let’s say Trump policies, they are not making a secret anymore, Brent, of the fact that they’re happy to put some pain through the economy to try and achieve what they want to achieve. Question is, what is some pain? I mean, what are we talking about? Are we talking about a drawdown of 5 % year to date to the NASDAQ like yesterday? And then you get a tweet that says, no, no, no, we were joking on tariffs, by the way, what were 25%? Who said that, I didn’t say that, we’re gonna take them off.

Or are we talking about something different, which is, well, it’s like a negotiation tactic where I’m gonna keep applying pressure, trying to get bigger and bigger concessions from foreign countries. Because, however you see it, Trump got Germany to spend a gazillion, billion, million in defense, right? And in the end, he did that. So he now can spend way less on NATO than he was spending before.

So if that is the tactic, then the question is, what is the pain point? Is it the economy? Probably. I don’t think Trump wants to be labeled as the president who sent the US in a recession. I don’t think that he wants that. But if the pain point is US GDP can be 0.5 to 1% for two quarters, so soft but not recessionary, well, then I have bad news for people buying stocks because there is a long way to go between where the economy is today and an economy that is semi- but not recessionary. So then in that case, the pain point is much bigger.

Brent (21:53.44)

Well, and there’s something to be said if you if you’re worried about the election cycle and midterms in 2026. There’s something to be said for just front loading all the bad stuff right away and then do all the good stuff later. And I mean, that’s what generally that’s why there’s a presidential cycle in the stock market is because that’s what they do. Obviously, that’s what the incentives reward.

So they’ve made it pretty clear that they want a lower 10 year yield. So I think the general consensus is that the put is in the bond market and it’s not in the stock market. And then, of course, there’s a pain point where, I mean, the thing is, if stocks go down 20%, the Fed will cut. So in a way, there’s always going to be the Fed put. But then in terms of like the government policy put, I think it’s more in the bond market than in the stock market.

Alf (22:46.754)

Yes. This is really tricky because at the end you need to be able to be, to really understand Trump’s incentive schemes. If you ask me personally – I can be completely wrong – I think that Trump pain point is a bit wider than people think. He’s gonna try and manage it, Brent. I mean, he doesn’t want the S&P to draw down 10 and 20%. He doesn’t want that. He’s gonna try to manage it, but at some point it doesn’t really matter what he tries to manage because the market’s gonna try and hunt: What is your pain point? Where is it?

Because markets have this, I learned in my few years in markets that investors have this uncanny ability to test policy makers’ resolution. Like if you say, I can get the US economy a bit weaker, no problem. Then there are high odds that the market will say, oh really? Okay, well let’s test you out. Of course you need data to confirm that. If data doesn’t confirm it, then there is no narrative.

But imagine you get a weak NFP, for example, on Friday, Brent. Would you be surprised if the market says, well, let’s actually price 40% chance that the Fed has to cut in March. Let’s go. And then let’s tell Trump that the S&P is down another 3% on a Friday. Would you be extremely surprised? I wouldn’t actually.

Brent (24:08.844)

Right. And there’s a good example of that in the first Trump term. He was always saying he wanted a weaker dollar, but he didn’t have any policies or actions that were leading to a weaker dollar. So in the end, you can say you want whatever you want, but eventually you’re going to have to then react with policy. So in the stock market, it’s harder, whereas in the bond market, like if things start coming on hinge, there’s so many things they can do right away in terms of regulatory stuff and all that.

They can only have so many goals and so many targets. And if the target and the goal now is to get lower yields and reorder the global trading system, then, you know, the release valve could be stocks and it could be stocks for a little while. But I don’t know. Like I said, I feel like we’ve gone from 6100 to 5763 now. And so I don’t know. I just feel like pressing shorts here just feels like a bad idea to me. Especially as mid-March tends to be actually when the seasonal gets really bullish for stocks. So I don’t love being short down here, that’s for sure.

Alf (25:15.446)

No, no, no, but it’s good to talk about the incentive schemes and this is going to be a very fun market guys. Be nimble and actually do use options in your favor because I think we should have a chat about the market side of the podcast and the trading side and the risk framework side, which people always tend to enjoy. So why don’t we talk about the use of options in this last 10 minutes?

So let me tell you one example at my fund, which I am now, you know, having to decide basically how to handle this. So we bought some euro upside under the idea that, well, as I said a few times in this podcast, that Germany was going to spend and that the euro could go much higher. We think 1.10 is totally possible. OK, so we buy some upside options. Nice. Germany announced that. And today you’re like 1.08 almost in like in a blip.

OK, so what do you do when you have a position that is largely in the money, but your data is still long, so you still have to wait for two or three months until the expiry is there? How do you actively manage a position where the delta has gone from like 10 delta to 40 delta in like two days, basically? Like, what do you do in that case? Well, I’ll first ask you because you do use options quite well, and maybe I can learn something.

Brent (26:35.204)

Sure. So this is something that I ran into when I first went to work at a hedge fund and be a PM. I traded way more options than I ever had before. And what I found was I was putting on options with a view, a directional view, but I didn’t really have a plan of what I was going to do if it worked. So what I would tend to do was then massively over trade it because my Delta would be getting so big, so fast that I would trade my way out of my good ideas. Because I’m a short term person, so I buy a one month option and then the thing goes up 2% and then I delta hedge and then the thing goes up another 7% and I made 2% minus the premium.

So the first thing I think you have to do, this solved a lot of problems for me when I worked at the fund, was as soon as you put on an option, have a plan ex ante what you’re gonna do with it. Because otherwise you get sucked into price action. You see that huge Delta, see the huge P&L and you just, all these behavioral things start kicking in.

So to me, there’s two types of options. One is the CAD yen one, which I’ve been talking about in am/FX, which is more of a gamma trade where you think the thing’s going to go to your strike, but then you think it’s going to fly around and you want to trade the gamma. And then the other one is a directional trade where you’re trading for leverage because you think the thing’s going to move a lot. And you can employ less capital to make more money on a huge move.

So when you’re long euro calls, like say one month calls, and then it goes up 2%. ideally you don’t want to start Delta hedging because you’re, you know, the thing that you thought was going to happen starts happening, but then the problem becomes managing the P&L. So for me, either ex ante, I decide, okay, I’m going for home run on this and I’m just going to leave it and I’m going to, you know, I’m spending 500 grand to try to make $4 million… And that means I could be up 3.1 and then draw all the way back down and I’ll make sure my risk manager or my boss or whatever knows about it. And then I’ll just do it and I write it down and that’s it.

Or otherwise, if I want to try to maintain more of like a steady delta, then I’ll just roll it. So if it gets anywhere up close to my strike, like say I bought a 1.09 and now we’re at 1.07 already in one day, I’ll sell the 1.09 and buy a 1.11 or something like that. And then maintain basically constant delta. And that way you’re still maintaining sort of like the same directional view with similar leverage, but you’re booking money all the way up. But you don’t get into the trap where you sell the full notional and then you end up over hedged and losing money on a good idea.

But I think the real key is before you do the trade or the second after you do the trade, you have to know what your plan is because otherwise, you get the cartoon dollar signs in your eyeballs when this stuff happens. And really, sometimes those are the times when you can be a pig, right? You spent five hundred grand, and if you just sit back and come like come back to work in six weeks, you’re going to be up five bucks.

But if you sit there over trading, you’re going to be up, you know, one point four. So that’s how I look at it.

Alf (29:52.696)

Yeah. I think that’s a very smart way of doing it. In general, you always have to have a plan before buying an option. When you run risk at a hedge fund level or at any level, the problem you have is that once the delta of something becomes very large all of a sudden… which means it’s not a problem, I mean, you were right, so that’s good – so you were right and very fast. The size of that position becomes extremely large as a contributor to your P&L.

But even if you sized it already having that in mind, it still will become too much of a swing on a daily basis. So you need to do something, let’s say. You don’t necessarily need to roll it, but if you don’t roll it, then you have to basically manage it really tight. You cannot afford something that went to be, I don’t know, 3%, 4% of your P&L… You cannot draw down to zero. Basically, you need to always continuously manage your drawdown risk from where you are, not from your entry, because you’re mark to market every single day and that’s the job effectively.

And the other thing I would like to discuss about options is time. Unless you use options to trade vol and then congrats, you’re a pro, you’re doing vol RV, you’re trading down the surfaces and all this beautiful stuff. But if you use options in a more, let’s say, macro sense, if you wish, try to risk a little bit to make a lot so you buy them, you don’t sell them… Time is a bitch. Can we say bitch on the podcast? Yes, of course. Time is a bitch.

Brent (31:27.596)

I feel like that with life as well.

Alf (31:30.062)

But how do you think about something like this? So for example, if you now say, I think Germany is going to pass fiscal, OK, and it’s going to pass it until 25th of March. There are really two ways to do this. One, you buy an option that is like expiry 30th of March, basically. So you just make it expire a few days after, few days before the deadline, pretty much. So you really increase your leverage.

Or you say, look, I’m a medium-term investor. I don’t do these gambling type of things, effectively binary event risk. I’m actually gonna go longer and then I’m gonna wait for the wall of money to come in in April and May and push the trade over time. Do you think that using time as leverage, basically, Brent, like looking for convex payoffs in very short-dated options, is a good practice or a bad practice in general?

Brent (32:25.964)

So I mean, that’s the thing that I most like to do. But the problem with that strategy is that events are almost always overpriced. So you have to have some kind of edge on determining what events are priced correctly or underpriced. So what you’re dreaming of is like a thing that’s not that well known. Like if you thought this was this announcement was going to happen this week, you know, and you bought one week options, obviously, you mean they paid 25 to one.

So having some kind of edge on timing, but like saying, I think payrolls is going to be weak, so I’m going to buy dollar inputs for payrolls… That’s just like a losing game every time. Because those things, it’s like buying calls for earnings, you know, in equities. They’re priced where they’re priced for a reason. So you have to have some kind of reasoning that’s differential from what the market’s reasoning, I think when you when you buy stuff.

So what you want is like some speech that people aren’t really focused on or some catalyst or like this economic number that you think is going to move the market, but no one else thinks that. Those are the really good times to buy like two day options and three day options.

Alf (33:36.546)

Yeah, I think that’s really the key. I mean, event risk is generally very expensive, but it’s not expensive if nobody knows there’s going to be an event. Haha. Or if people are just massively underpricing that event. Like yesterday, there was this release. No, no, it’s even worse than that. I mean, if you were following the German news, this 500 billion infrastructure plus 400 billion defense, was already floated around.

Of course, was like economists are proposing this. So you cannot say it was the finance minister that was proposing this. No, no, no. But still, if you gave even a small probability of these numbers being close to reality, then you know, this was, and there was a clear deadline, which was the 25th of March. So one could have played for like a one month option, maybe not a two or three days, because frankly, nobody knew that Merz yesterday would have announced something, but a one month option.

Brent (34:27.572)

Right. I mean, and that’s essentially what you did, right? And the way I’m wording it, it makes it sound like you have to know about these secret events. But like for another example would be something that’s known, but may not be priced in, you’d have to check, is on the 20th of March, Nvidia is having a quantum conference. So like those stocks will probably be really volatile around that time. And they tend to rally into that. And this is not investment advice.

But that’s the kind of thing where it might not be on everyone’s calendar and those options, for example, might be cheap. Or your March 25th deadline, I don’t think it was on everyone’s calendar, so those options were cheap.

Alf (35:06.538)

No, no, indeed, that’s actually the key, that’s correct. Well, it’s a pleasure as always to have a chat with you, Brent. We’re gonna put, you know, whatever, the email, website, name, and surname of the two of us in case you wanna reach out to us for any type of question or inquiries. We’re always happy to help, answer and, you know, make some jokes with you. Thanks for listening.

Brent (35:29.322)

Alright, thanks, Alf. Thanks, everybody. Happy March. And I’m away the next two weeks, so there you go.

Alf (35:36.002)

So now you know why we won’t publish and it’s Brent’s fault. No seriously, we’ll back in two weeks guys. be in touch. Ciao.

Brent (35:39.028)

It’s my fault. Yep. I’m a bad person. Ciao.