The Macro Trading Floor transcript – 07 June 2024

This is a transcript of The Macro Trading Floor podcast featuring Brent Donnelly and Alfonso Peccatiello.

To listen to the podcast and see the show notes, go to Podcasts.

Alf: Hi everyone. Welcome back to the macro trading floor. Alf here this week, finally back with my friend, Brent. How are you doing Brent?

Brent: Hey Alf, I’m good. I have to apologize to New York sports fans because I did the cheer hedge on New York sports when I mentioned it on the podcast. That was the ding dong high for New York sports.

So I apologize to Rangers and Knicks fans.

Alf: Wait a second. Can you please explain for people what is a cheer hedge? It’s an amazing concept you can apply to financial markets and trading as well. Go ahead.

Brent: So this is the craziest thing that I’ve ever seen. It’s basically 100 percent hit rate. So when I was a manager at banks, I noticed this met like 20 years ago and it still works when someone would cheer for a position, like say someone was long dollars and data comes out and someone’s like America F yeah, or whatever, as soon as that would happen, or someone would say like, yeah, Euro going down or whatever.

We would do the opposite position in the management book and it made money every single time. And so it’s still true. Like, I think there’s a saying in the crypto world, like screenshot it. And like, if you screenshot it, it’s about to reverse. I don’t know what the actual expression is, but when you see screenshots or people pumping their fists, and there’s actually a reason for it.

Like it’s a funny thing, but the reason is that you’re, the fact that you’re reaching that emotional high means that hundreds of other people are as well, and you’re overconfident and they’re overconfident and you’re about to get punched in the face.

Alf: So if on Twitter you see your timeline getting full with people saying that, you know, they were right here, right there, you’re confused.

probably apply the same taxi driver narrative of, you know, doing the opposite of what your taxi driver is advising you to do on finance and your positive expected value will probably be there.

Brent: Yeah. Because by definition, when you’re cheering for something, it’s, it’s outperforming.

Alf: Fair enough. So, where are we in the, in the cycle?

Now we are, we are in the, the U S economy is falling apart again, part of the cycle, right? Because we have had, I think a few weeks ago, we discussed about the option implied rates distribution signaling zero cuts for the Fed for the next 12 months as the most observed scenario. we had, recently a cover of Barron’s with the face of Mr.

Powell that says, you know, the Barron’s then says, you know, the Fed is not going to cut. We will discuss about the front cover value as a contrary indicator later on, Brent. But now we have moved all of a sudden on the other spectrum of it, right? Now it’s like, What? Have you seen the Atlanta Fed GDP? It has, you know, the projections gone down.

And if you remove inventories, it’s only 1. 3%. And have you seen the jolts? Have you seen this? Have you seen that? And all of a sudden is all about, soft nominal growth again. So what the hell do we make of this?

Brent: Well, you know, what blows my mind is that I think it’s not very controversial to say that demand now appears to be slower than it was in January.

And inflation is kind of like some people were saying higher, some were saying lower and it’s flatline. So it hasn’t been like an amazing outcome for the Fed, but we were pricing six or seven cuts in January and the economy’s weaker now, in my opinion, clearly weaker than it was. And now we got to basically zero cuts and that just absolutely blows my mind.

And like, as someone who I think is right sometimes and wrong, sometimes I, I never go out of my way to point out when people are wrong, but it’s amazing how wrong the consensus has been. I think that’s, what’s fascinating to me is the consensus has just been so wildly wrong so many times in this cycle.

It’s really interesting. And to me, I think it’s wrong again. And, and that. You need to have way more of the optionality in the back end in terms of how many cuts, like we had in January, where, you know, there’s, there’s a, there’s a world where unemployment’s going to four and a half, 5%, and you’re the one that showed me the Kansas City Labor Market Conditions Index, which I wrote about today.

And the beauty of that index is that you don’t have a cherry picking problem where you say like, Oh, I I’m, I’m calling recession since 2021. So let me find all the worst data points under the hood. the, the Casey thing is really good for that because it eliminates that problem. And if you overlay them, it does look like unemployment’s going quite a bit higher.

So to me, it’s fascinating that The, the disconnect now, and one thing we’ve said in the podcast is if you’re expecting a soft landing and soft landings price, it’s very hard to make money. But if you’re expecting something different in January, or you’re expecting something different now, then there’s definitely money to be made in saying, you know what, the, the tail is going to come back a little bit in September and December cuts, and maybe the Fed will cut a bunch.

Alf: So, as my mentor used to say, Brent, you don’t make money in macro by being right or wrong. Well, you do, but you most, you make most money in macro by foreseeing how the distribution will move towards a certain way or another over time and then getting ahead of the herd before the herd actually moves your way.

And maybe the terminal outcome is that you weren’t right. You aren’t going to see a recession. You aren’t going to see an employment rate to 5%, but. As long as more people will believe that unemployment rate can be 5 percent and you are there before they are, then that’s how you make most of the money in macro by anticipating how the probability distribution will move over time.

And, yeah, well, a few weeks ago, I think the risk reward of, given zero cuts being the model outcome in the distribution was quite high to fade and move the other way. Right. And now we have seen the move in the front end, actually, I should say we have seen the move in The whole curve, the yield curve has moved parallel down pretty much between two year and 10 year.

And you have had this 20, 25 basis point rally, which is a two standard deviation moving in a couple of weeks. It’s quite aggressive. And now you look at the, at the, at the outcomes now, and you should benchmark what’s, what’s expected. Thank you. in terms of nominal growth versus what’s price in the rates markets.

And again, you don’t have a dovish pricing at all right now, but it’s a bit more dovish than it was a couple of weeks ago. So when you need to pick what to do in rates, if you ask me here, and of course we are recording on a Thursday on the 6th of June, just before the non farm payroll. So I’m not going to tell you what to do on rates because what the hell, I’m facing the most volatile data point almost of the, of the next month.

So I’m not going to front load that. But in principle, The Fed has a very strange reaction function, Brent, I think, where they, if NFPs tomorrow come up at, I don’t know, 300k, okay, as long as the supply side of the labor market, so you’re getting enough labor supply in, so which growth is contained, and, Unemployment rate, doesn’t go down, but it stays more or less the same.

I think the Federal Reserve doesn’t really care whether NFPs 300, 000 tomorrow. If you print on the high side, as long as it looks like a disinflationary Goldilocks type of rebalancing of the labor market, they don’t care. And then if you have that outcome, I think the curve has to steepen because they will still proceed and slowly but surely cut, but the economy is showing resilience.

So then the curve steepens and it’s a completely different manner. But the reaction function is cute because what if NFPs are 50k tomorrow, a hundred K. I mean, these guys have basically told us they will run for the hills and start changing their reaction function as soon as they see some weakness emerging right in the labor market.

And that part of the distribution is still wide open, I think in rates.

Brent: Yeah, I agree with that. And I think that the drop in commodities also helps psychologically that if you see commodities ripping, it’s just a little bit more nerve wracking as a central bank. And people will say like, Oh, financial conditions are loose.

S and P’s at 50 million, 655, 000. But in the end, I don’t think the fed ends up caring all that much about equity prices. I mean, there’s a lot, a long history of them not caring unless equities go down. So if commodities are somewhat anchored. Inflation seems anchored, even if it’s above target, it seems pretty anchored.

And then you have essentially a labor market that looks like it’s cooling. And so I agree all the asymmetry would be labor market cools more than we thought. And inflation comes off more than we thought as like Target, Walmart, CVS, everybody’s announcing price cuts. Pricing power is, is. Diminishing commodities are relatively weak other than metals, like oil can’t get off the, off the mat.

So to me, the path of least resistance and the convexity is, is lower yields. And still not that much is really priced in.

Alf: So if we look a bit at what, forwards are pricing and let me specify for the people who are not in the bond jargon, which it’s good for you. Trust me. What the forwards mean is basically what, bond markets are pricing the Federal Reserve or the ECB or any other central bank to do over the next one or two years.

And ladies and gentlemen, to make money in bond markets, it’s not only enough to predict what the central bank is going to be doing, but you have to outpace the forwards. You have to predict better. What the central bank will be doing versus what’s priced in the forwards. That’s why you always hear us talking about what’s priced in, what are, what is priced in the forwards.

Because if you can’t beat that either on the hawkish or on the dovish side, and you say, Oh, I expect ECB to cut. ECB did cut today, but if it was already priced in the forwards, I’m sorry, you didn’t make any money from your trade. So, when we look at that over the next two years, right now, the Fed is priced to do about 140 basis points.

So that’s like the grand total of five cuts, five and a half cuts, something along the lines. And if you think of how that will unravel, what we’re looking at is, you know, a cut in September, maybe a cut in December and then a, but let’s say a quarterly pace of cuts pretty much. That’s it. Right. And it’s still a number of cuts that are priced in, but it is nothing that has any insurance really built in against a move towards unemployment rate to the 5 percent area, because then the Fed has to go faster than that.

That’s effectively the point. On the other hand, yeah, well, what if you get 300 K tomorrow? What if you get wage growth higher than you will have to reprice a bit towards the hawkish side of it, but still the distribution, I think, or the convexity of the distribution, I would say is more towards the dovish surprise.

At least that’s where I see it.

Brent: Well, no, I agree. I think that’s almost by definition, like they could cut. 150 basis points in 2024, but they could barely hike 25. Like, so the bar to hike is so incredibly high that as you get close to zero, zero cuts, it’s never free money, but as it gets closer to zero cuts, there’s the convexity increases a lot because all you need are two bad numbers and, you know, two bad payrolls and one bad CPI.

And everything’s going to be, you know, back to four cuts priced again. And, it’s interesting that the ECB and the bank of Canada cut this week and the narrative at the start of the year too, which was wrong on a lot of fronts, but the narrative was the fed will start cutting in March and then everyone will follow.

And in fact, it’s been the opposite. So bank of Canada and ECB, are going ahead. And that’s one misconception that people have. Is that, the bank of Canada is not independent. All they do is follow the fed. And obviously their policy is going to have a lot of similarity because it’s, it, the economies are so tightly linked, but it’s not true that they follow the fed.

Very often they go before or the fed goes and they don’t go. So just want to put that myth to rest.

Alf: Fair enough. So today we got the ECB cutting rates for the first time. it’s not the first central bank, right? You’ve got Switzerland, you’ve got Sweden, you’ve got Europe and you’ve got Canada. Well, for economies that aren’t particularly well equipped, I would say to handle higher interest rates like the U S is, they actually went earlier than the U S, which is interesting, right?

It, it shows a bit how the pass through of previous acts is different depending on the structure of your economy. And so they went, they went earlier than the Fed. interestingly enough for the ECB, there is now a theory because the Hawks at the ECB, they love this brand. And, you know, the ECB goes out, does something an hour later, Reuters, ECB insiders say something.

And it’s very often the opposite of what Lagarde has just said, pretty much. So this time the turn was Oh, ECB insiders tell you that they don’t even, they don’t think that July should be the next cut and they don’t even know whether September should be the next cut at all. So basically they’re saying, you know, we just did one cut and.

I don’t know. We did one last hike in 2023, which was called the insurance hike from the ECB. Everybody felt it was unnecessary. Everybody felt in September last year that Lagarde did it just because she had to and she promised to do another hike. And now some insiders are saying, well, let’s do an insurance, an insurance cut.

Okay. Let’s take that hike off and let’s go back to 375. But this is not the start of a cutting cycle. How much do you buy into this theory Brent, that this was just an insurance cut?

Brent: I mean, I think it makes sense because I, I actually think similar to the last hike, they kind of locked this in way too early. And then all of a sudden wage growth started picking up, CPI bounced.

And then they were like, Oh shit, but we already promised we’d cut on June 6th. I guess we have to cut or we’re going to look stupid. So to me, it just speaks to the pointlessness of forward guidance. I feel like the, the central banks have got into this mode of massively over communicating with 15 speeches in a week and telling everyone what they’re going to do in advance, just set the policy and announce the policy.

You don’t need to pre announce everything, you know, two months ahead. But anyways, that’s just me.

Alf: Very clear that Brent was trading in the nineties, ladies and gentlemen. just a reference to the age of my friend, Brent, sorry. but okay. so I agree with that in principle, I think they locked themselves in and that’s why they cut.

But if you look at the underlying trend of core inflation in the Eurozone, it has picked up and you can say, yeah, it’s because of holiday distortions and Easter and. Whatever it is, German, transportation tickets, whatever it is in, in the European service inflation, but it has picked up, it has picked up and they box themselves in and they went for it.

On the other hand, if you marry this hawkish thesis, you should just look at the forwards in Europe because wow, now I’m going to say this out loud for people for the first time in a while, you have European interest rates over the next two years, rise to almost out hawk. the Federal Reserve. So I’m going to repeat, the European Central Bank is priced over the next two years to almost outhawk the Federal Reserve.

And I find that very hard to believe. I think if you look at the history of this series of let’s say Euribor versus SOFR or European rates versus U. S. rates, when you get these entries where you’re given basically the opportunity to do a relative value trade where you buy European rates, you sell U. S.

rates at almost the same type of pricing in. over the next two years, you generally have a very positive expected value, namely the European central bank ends up being more dovish than the Fed at the end of the day.

Brent: Yeah. I mean, I think that, I like that. And it also fits with your framework of vulnerabilities where the U S just has fewer vulnerabilities than say Sweden or, or most places in Europe or Canada.

You know, we missed the big event this week, which was So I’m going to move on to that, the massive carry unwind. So that was a nice call. And I think this is a really interesting topic because the carry unwound really in response to an election result in Mexico. That in some different timeline of the multiverse could have been a non event, but in this timeline, it created a massive blow up because a positioning was significant and B people didn’t really take the event seriously.

And I think it’s especially interesting in the context of. How you were saying, I guess I was fishing last week, but the week before that, the sharp of carry had was basically off the charts and in a little red zone up in the top of the chart. And so it points to the idea that sometimes you can get large or massive moves in markets.

For almost exclusively idiosyncratic reasons. So yes, I’m not completely denying that the election in Mexico did have a slightly out of consensus income outcome, but I think the response was much, much more about complacency and position sizing. And so if you want to talk about that, I think it’s really interesting because I feel like most of the time positioning doesn’t matter that much, but at the mega extremes, which you identified with your sharp calculation, obviously it does matter.

Alf: Yeah, so the theory there was that if you observe the realized sharp ratio, so the risk adjusted return of a bunch of carry trades, basically, and you see this risk adjusted return being very high. In other words, people have had a lot of fun by being long carry or short ball over the last 12 months. You can almost always assume that when they had too much fun, then the part is too crowded.

Okay. And then it takes very, very little, as you said, Brian, it could be an election. It could be anything to be honest for this to unwind. Right. So Mexico was an example. Let me give a figure, which I think is pretty impressive. If you were long Mexico, Japan. Okay. So you were doing the carry trade long Mexican peso, short Japanese yen.

And you were looking forward to lock in your nice nine to 10 percent annualized carry a year for interest rate differential, right? The Banksy Co has an 11%,  whatever they have. Great. And Japan has like a zero point something. You, in eight trading days, eight trading days lost seven and a half percent spot in the pair, which is about 70 percent of your carry that you’re supposed to get in a year.

So in eight trading days, you were wiped out of 70 percent of the carry you projected to earn in a year. So it’s a massive unwind basically.

Brent: I mean, that’s one thing that I always found pretty puzzling in my early days of trading was like, if, if New Zealand dollar in, when I was trading at Lehman brothers was, you know, 8%.

And Japan was zero you’re making 8%, but the thing’s moving 1 percent per day. How do you reconcile that? And obviously like over time, I kind of learned and I understand how, how carry trades work now, but I think it raises the question of how do you risk manage carry trades? Because if you’re a short dollar max cash and it blows up like this, like you said, first of all, you lost a whole year.

Return in one day, but also if you stopped out, then you don’t benefit from what generally happens is. These convexity events almost always overshoot. And then there’s some mean reversion. And then either you go back to carry trades or it’s over because there’s some like credit event or whatever. So when you’re thinking about this stuff, how do you like, just say, let’s just say max yen or, or whatever, carry trade.

It could be credit, whatever. how do you risk manage it?

Alf: So what I do there is, first of all, I enter a carry trade only for the purpose of carry if the ex ante sharp ratio of the carry trade is above one. So what I mean is, you said it before, if my carry in an FX is 8 percent a year, but then the annualized ball is 20%, That’s not a great carry trade, is it?

Because you’re getting paid eight, but you’re chopping around the whole time, right? And that’s not why you want to put up carry. Carry is the expression of getting paid while nothing happens. not when the economy is strong or weak, nothing happens and you get paid. That’s the true definition of carry. So you want nothing to happen.

You want low ball, right? So you want a high sharp ratio. You want a high carry, but low ball. So you try to screen their brand for, you know, entering something that makes sense. Once you are in, what I would do is how many months of carry. Do I need to get paid with price action my way? So let’s say I go long, New Zealand dollar, short US, or in this case, Mexican peso, short Japanese yen.

Okay. I’m planning to make, let’s say 5 percent of carry in six months. For example, what if Mexico, Japan moves in terms of spot effects by 5 percent in a month? So I have already earned the carry basically by the means of price action. So the price action has rewarded me by six months of carry. So what would I do at that point is I would tighten my stop a lot.

So I would move my stop very, very close because I’ve already achieved what I wanted, right? I wanted to be paid six months of carry. And then I will look at price action if price action comes my way. and effectively rewards me with a certain number of months of carry in advance because of the price action, I will simply tighten my stop.

So if you get a drawdown like the one we have seen, you effectively can get out, but not get particularly hurt by the idea. So this is my way to risk manage it. But I will ask you about yours and I will say one last thing about carry trades is that you are watching a thing whose return distribution is very interesting.

It’s not normal. It has a right drift. That’s the positive carry that you’ll get paid over time. So you are starting not from zero expected returns. But from positive expected returns, that’s your carry. So the distribution is not centered at zero. It’s centered to the right. Okay. It has a positive drift, but it also has a very fat,  occasional left tail, which you are supposed to be able to prevent somehow.

So that’s, I think, the framework when you think about carry trades. Now I’m going to shut up and ask you, how do you do that? How do you manage?

Brent: Well, yeah, there’s so many interesting things with this because It also reveals something that, you learn over time as a risk manager is that sharp ratio has a lot of assumptions about normal normality in the distribution of the returns.

And so someone who runs long carry or short vol, which are tend to be similar, similar strategies. Can have an amazing sharp for two or three years and then blow up and then go somewhere else and have an amazing sharp for two or three years and then blow up. And so the, the distribution is so not normal that you have to take that into account, but then I think the other issues are, it’s very suboptimal generally to stop out of anything.

Like if you’re backtesting strategies, normally stopping out of any strategies, just negative EV. However, It’s like saying buying fire insurance is negative EV. You have to have it because what you’re trying to protect is risk of ruin. Not you’re not just maximizing returns. You’re trying to also, minimize risk of ruin to literally zero.

So that makes me uncomfortable in things like spot dollar max, because for example, the first blow up happened in Asia. When we went to 1823, and if you had a stop loss in Asia, you were probably paying like 4 percent slippage on what you thought your stop was. So I’ve really come to the idea that carry trades are just most easily expressed and also cause I like sleeping at night.

Most easily expressed through options, because when you do something like a Euromax option, I know this is more difficult in retail, but on the institutional side, these are easy things to do. You’re capturing the forward. You’re capturing, the carry in, in the option price itself. And so all you have to do is buy the option that you think makes sense and then just sit there and wait for it to either work or it doesn’t work, but you’re never going to ruin your, you know, if you’re risking 3 percent of your portfolio, you’re going to lose 3 percent if you’re wrong, but if you are short 50 million max, 3 percent if you’re wrong.

Risking 3 percent of your portfolio. And it blows up at 6 PM, which is Asia time when there’s no market, you may end up accidentally losing 7 percent of your capital. So I feel like because the options market and FX is so efficient and liquid, it’s just carry trades for me and FX are always better expressed through options.

And like I said, the other benefit is that the path doesn’t matter. So if you do spot, you need the path to be relatively orderly, or you’re going to get stopped out. But with options, like say dollar max, you, you owned a 1750 and it goes to 1820. And then it goes to 1710. You’re going to be alive in the options, but you’re going to be dead on the spot side.

So that’s, that’s kind of where I am at with this stuff.

Alf: Correct. And I like the way the use of option with one caveat. Options are often very expensive. So they allow you to sleep at night and there is a price for sleeping at night, ladies and gentlemen. So please take a look at the convexity, how much you pay for it, how much you pay for gamma, et cetera, et cetera, et cetera.

Options are expensive, but they are a great tool, I think, to make sure that you’re As you said, Brian, the path to get there matters less if you’re long optionality, right? What matters the most is, whether the payoff, or actually whether the, the, the, the prize at the end of the period, basically have the payoff structure resembles a bit what you thought or not.

And the path matters way less, let’s say.

Brent: Yeah. And then there’s this non linearity in the path that that’s the part that keeps people up at night. So if you’re doing Euro dollar and there’s no Eurozone, crisis. You know, you have a pretty solid expectation of the somewhat linear path of how Euro is going to move, but things, carry trades generally have this crazy tail that’s really hard to measure.

Alf: Yes, correct. Hey, let’s talk about an asset who doesn’t have any carry, shall we? because, you know, we, we, this, this carry, we discussed so far trades who have an explicit ride drift, an explicit measurable carry. So for example, FX carry trades, they do have an explicit carry. It’s the difference between the interest rates, but there are trades that have no carry whatsoever.

Before that there is, there are trades who have an implicit ride drift as I would call it. For example, if you’re long equities, your implicit right drift in the distribution is the fact that the world doesn’t fall apart. Therefore, earnings tend to grow. Therefore, stock prices over time tend to go up simply reflecting earnings growth.

Okay. So you have a right drift on a long period of time. That’s an implicit right drift, right? but then there are assets who don’t have any drift at all because they don’t pay any coupons and they don’t have any implicit right drift, for example, gold. So how do we think about something like that?

Brent: Yeah. So I find gold just endlessly fascinating for a few reasons. One is that, it’s kind of a personality type in a way, like, people that are very libertarian or buried, nihilistic or both, or just people that don’t believe in the current system for whatever reason, either tend to now to, to gravitate towards gold or now more recently to Bitcoin.

And that’s interesting to me. Because I just don’t think any asset price should be that relevant to, you know, your worldview. I don’t know. I, to me, I just, I’m a much more agnostic about, I just want to try to make money on things going up and down. And if I want to invest my personality in something, it’ll be like volunteering at a school or something, not in an asset price, but anyways.

so there’s a really interesting paper that I read this week and I’ll put it in the show notes, but it essentially talks about gold. And some of the interesting aspects of gold that there is a time component to gold because it’s a nominal asset that as The world, there’s more dollars in the world and prices just generally go up.

You can chart the price of anything and it’s going to go up over time. And they kind of back out what that linear expansion of the gold price looks like. And it doesn’t look all that different from the way that, holding T bills looks. So the interesting thing about gold is that, like you said, it’s either zero or, or negative carry.

If you own physical, a lot of physical gold, you have to pay to store it. So it’s negative. Or if you own something more efficient, it’s zero. whereas T bills generally over the course of the last 50 years have, have yielded whatever, two, five, seven, sometimes 12%. And the most important thing to acknowledge there is that those T bills, unless you believe the U S government’s going to go bankrupt, which is not a thing, and should not be something that you’re considering that those T bills are going to pay off and you’re going to get 5 percent and that 5 percent is going to compound on over many years.

And compounding is magical as anyone who’s ever done like the rice on the chessboard thing. I think most people are familiar with that fable, but, anything that’s exponentially growing and compounding over many years, that’s a massive, massive thing. So there are many periods where T bills outperform and then there’s periods where gold outperforms.

But this paper is kind of suggesting that whenever gold outperforms on a real basis and exceeds, you know, the, the return of T bills, I’m kind of paraphrasing here, it tends to mean revert because in the end, it’s a nominal asset that’s going up around the same speed as prices. And then just one little capper on this is that.

That sort of suggests that gold is an okay inflation hedge because it rises around the same prices as all other nominal goods. But the problem is that equities are just a way better, inflation hedge. They’re just higher beta. They go up way more when inflation goes up. And so like, I’m never really a huge lover of gold because I feel like a zero carry asset, that’s a worse inflation hedge than equities.

Is not really that great of a, of a asset, but it’s easy for people to argue with me right now because gold’s at the highs and it’s had a really good run, but this is a very unusual run that it’s had. And if you look historically, most periods, T bills outperform gold, but not always.

Alf: I think what you said is correct.

I think that people when measuring carry should always remember that your standard choice is not zero carry. Your standard choice is the risk free rate. So when you say, Oh, I’m going to go long bonds because the 10 year rates have a positive carry of 4 percent a year. No, Your alternative is a 5%, 5. 25 actually until the Fed cuts.

that’s your, your T bill rate. That is your starting point. That is what you should measure again. So therefore gold has almost always negative carry almost always. Okay. Even if you include a storage cost on physical, even more. Okay. So it’s an asset with negative carry, but, gold of course is also an asset that produces outsized positive returns in two occasions, right?

A when there is some sort of undisciplined fiscal policy or monetary policy of some sort, or B when there is, you know, we are debating the viability of the monetary system. Both of them are very rare, rare, occasions in which brand you will see. Gold returns temporarily skyrocket way higher than the risk free rate has compounded recently, right?

That’s what you alluded to. But ultimately, unless the house is really on fire, right? And then gold pays off to whatever 10 X, 20 X, unless that is the case, you will mean reversed, right? It’s basically your insurance premium had become more in the money. You’d rather take that money normally speaking, because unless you think the house is going to be on fire for real, then gold basically reverts back to its mean.

That’s your point.

Brent: Right. And I’m not always bearish gold. I’m just saying, I think it’s an important thing to factor in. And honestly, it’s the same reason that by definition, passive will always outperform active and aggregate is that. You’re paying fees for active and not for passive. So if, if you pick a good manager, obviously you’re going to outperform as active, but in aggregate, you’re, there’s no net alpha in the aggregate in the, all the markets combined.

So by definition, active is going to underperform on the average because you’re paying fees and those fees are negatively compounding. So that is not an argument to never be active. It’s just. the reason that it’s harder to make money inactive because there’s fees, just like it’s more difficult to make money in gold, but it’s tortoise and hare type of thing.

So the tortoise is T bills, the hare is gold and sometimes the hare wins and sometimes the tortoise wins.

Alf: Yes, that’s completely correct. And the role of gold in a portfolio is just because it provides you with this convex returns from time to time and also diversifying returns. It still has, or can have a place in a multi asset portfolio, but here we are discussing a bit The long term, or let’s say the path of returns, which can be.


Brent: And I don’t think at all, the message should be like gold is bad. I think the message should be that the longer you’re holding period, the more conscious you should be of the carry and how fast the thing has to go up in order to keep up with the carry.

Alf: Reach, Mr. Donnelly reach. Okay. Now let’s talk about more fun stuff.

Okay. Because it’s too much macro and risk management, man. I mean, I just saw a picture of, the CEO on video signing. the boob of a fan. I mean, between magazine covers, taxi drivers, talking about a certain stock, where do we put as a contrarian indicator, the CEO of a company signing the boob of a fan?

Brent: So when Jeff Bezos signed the boob in 2000, Oh, no, wait, that wasn’t a thing. I mean, the thing that it reminds me the most of is when Budweiser and Pepsi were exchanging on Twitter saying like, wag me w a GMI, we’re all going to make it. typing friends, spelling it F R E N S and that was like to the day, the peak of the NFT bubble.

I mean, this reminds me so much of that, but I mean, do we want to fight NVIDIA? I mean, it’s, I definitely think a year from now. we may very well be looking back at the signing of the boob as the peak of this whole cycle, but we’ll see.

Alf: The signing of the boob and Brent one day will write an article, backtesting all the boob signing of all the CEOs in 50 years from now.

And then we will have a look at it. Okay.

Brent: We have a sample size problem, but, we’ll definitely have a sample of one now.

Alf: Well, for sure. We have a sample of one. Okay. So look, we have, three to four minutes left, and I think we should talk about Spectra school.

Brent: Oh yeah, we forgot about that. So Spectre school has launched.

And the main idea of this is I went to business school, I studied economics and I felt like about four weeks after I got on a trading floor, I knew more about markets than I had learned in the previous two years. and the reason for that is that you learn a lot of theoretical frameworks in school and, and then in the real world, there’s a lot of frameworks that are not learned in school.

And so I developed spectra school to give people practical frameworks to understand, not just fundamentals, because I feel like in school, you learn a lot about fundamentals, but you don’t learn much about narrative behavior, behavioral elements and things like that. So combining stories and data to make money in the market is basically the idea.

And it, I think it’s appropriate for anyone that’s relatively new to the market. Like say someone that’s been in the market for less than five years. Or people who are entering the market, who are interested in finance, who have not studied all that much finance so far.

Alf: I have seen the platform. I’ve participated in the Spectra school.

There is even an interview with me, not sure whether it’s out of value at all, but there is. And, I love it. It’s awesome. There are quizzes. It’s a bunch of stuff. It’s beautiful. Go and sign up. We’ll put a link in the, in the show notes. Okay.

Brent: All right. And it’s, spectramarkets dot com slash school. If you want to go right now.

Alf: Fair enough. And, you’ll find that in the transcript as well. And as always, of course, you can find as well, the stuff that Brent writes. Where, Brent, by the way?

Brent: SpectraMarkets. com

Alf: Fair enough. And you can just, ping me on Bloomberg, guys. I mean, just type my name. Sounds very Italian. Alfonso Peccatiello.

And, you can just, chat with me and we can exchange views. I’m an open book.

Brent: And one last thing before we go, I just want to say thank you to everyone that completed the survey. One immediate thing that we’re going to do is we’re going to start posting the transcript because a lot of you wanted that and we’re incorporating some of the other suggestions as well.

So thanks very much for doing that.

Alf: Thank you very much guys. it’s been a pleasure again being with you and we’ll talk again, next Friday.

Brent: All right. Thanks Alf.

Thanks everybody.

Alf: Ciao. Ciao.

Brent: Ciao.

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