The Macro Trading Floor transcript – 27 March 2025

Alf (00:00.706)

Welcome back to The Macro Trading Floor. Brent is back from vacation. You can see how relaxed he is. Look at him. Hey Brent, how are doing man?

Brent (00:09.208)

Hey, I’m good. I did a little tour of the Northeastern United States and Canada as my kid’s looking at universities. So, you know, it’s quite a process here in the United States. Not like when I was a kid, you just look at three colleges, you apply, you pick one, you don’t even visit them. Here there’s 5,000 colleges and you’re supposed to visit every single one before you go apply.

Alf (00:32.62)

Well, at least some family time, you’ve got to cherish that before the kids go to uni and then it’s a whole different thing.

Brent (00:39.958)

Yeah, actually it’s a bit of a rite of passage for kids in the US to do these university tours with their parents, so not all bad.

Alf (00:47.586)

All right, all right. So here we are, we’re back. Is it April 2nd? No, not yet. Ah, sorry. It’s the 26th of March. So we are here basically waiting for this event, which in my opinion is going to turn out to be a non-event. I think you also shared that opinion simply.

I mean, can somebody please tell me how am I supposed to react? Normally when there are these binary events, you have some sort of a thing on your trading screen that says… If this scenario, then I think that this asset will move by 2%. If not, it goes down here. You do some sort of probability weighted scenario outcome.

If you want to do the same with April 2nd, you need some sort of like two meter by five meter piece of paper on the wall. Because what about non article – like tariff related on barriers, outside goods, and VAT exemptions and whatever, like there are 3000 nuances. How am I supposed to react to April 2nd, frankly?

Brent (01:43.51)

Yeah. So it’s an interesting thing because normally with announcements like this, there’s kind of three steps. There’s the pre-announcement positioning, forecasting, front running, whatever you want to call it. Then there’s the announcement effect. And then there’s the real economy effect. So with something like quantitative easing, because we’ve seen multiple announcements, we kind of know how it works, right?

Like people prepare for it in advance. They usually buy risky assets. And then when the announcement happens, there’s a big boom of, you know, it’s a signal that rates are going to be low for a long time. And there’s usually a big boom in asset prices and a whole bunch of stuff happens. And then the actual economic impact of the Fed buying the bonds when they’re buying them, like the flow impact or the stock impact, which is the size of the Fed’s balance sheet, is almost irrelevant because by the time you get to the point where the Fed’s buying the bonds, the market has fully priced it in. There’s a schedule that comes out on the Fed’s website and you know what’s going to happen.

So in this case, first of all, no one really knows what’s going to be coming out. So no one’s really positioning for it because it’s too complicated. So like you got what countries are targeted? What are the rates? What industries are targeted? Will that be included? Other non tariff barriers, like you said, and then are the tariff rates fixed or could they rise?

And then the other question that hangs over all of this is, are these credible threats or will all these tariffs be negotiated away and rejigged and like, you know, they put the 25% on Canada, but then they said, well, actually we’re not going to apply it to USMCA goods, which is like 70% of goods or 50% or however you measure it.

So, and then you got like, will people retaliate. And the other question too is, is this part of a big comprehensive strategy? Like they say they want to raise revenue and all that. Or another thing that could happen is they make the announcement, whatever it is, and then Trump just declares victory and moves on to something else.

So it’s so complicated that I feel like no one’s really positioning for it. But then, so you got no, no pre-announcement effect other than some front running in copper and stuff like that, which we can talk about after. And then you’re not really going to get any announcement effect either, I don’t think, other than like, if there’s something really, really crazy in there, like that wasn’t expected, sure. But the initial announcement’s going to be so detailed and confusing, no one’s going to even know how to react.

So then you’re left with like, what’s the real impact on the real economy? But the problem is because of the lags with the economic data, say the real impact starts to be felt in April or May, then that’s gonna be, April and May data will come out in like June, July. So we’re not gonna know what the real impact is for a long time. And it just makes it super, super, super confusing.

Alf (04:49.038)

Yes, 100%. I can see people glued on the screen on April 2nd getting all this bunch of headlines. Okay, and so what now? I don’t know, frankly. Actually, to make it even more confusing, do you remember the last time that Trump made the “25% tariff on Canada must be applied now” type of statement? And then he basically took that back the same day. When he announced the 25% tariff effective on Canada, USDCAD went down.

Brent (05:19.797)

Right. So that’s the other thing is now we’re actually in a place where people don’t even know if tariffs are good or bad for the dollar. So like, how do you trade that? And then are they good or bad for stocks? Well, I guess it depends what was priced in and what it’s relative to. And right now there’s so many distortions. Like you see the soft data is very, very weak again. So confidence is low, but then the hard data has been pretty strong… but then a big part of that strong hard data is that people are freaking out ahead of tariffs.

So for example, a friend of mine in Canada owns a company that they sell packaging machines, like automated machines that wrap and package goods. And they’re in Canada and almost all, 80% of their businesses in the U S. So I said to him, things must be tough. And he was like, no, business is booming because everyone’s trying to buy as much stuff as they can before the tariff announcement.

So you have this big surge and you see it all over the place, like in the US trade deficit and gold imports, copper imports. You see it everywhere, that all this front running is happening. And then the problem is that, okay, so say the tariffs come out and there’s a relief, he just has no tariffs or whatever. Well, the issue is that, so this guy in Canada, still all those clients already ordered all the stuff they need for the next 12 months because they’re trying to get ahead of the tariffs. So he’s still going to see a sudden stop in business after the tariffs come out, whatever they are, because everyone has already front loaded everything.

So the problem with front loading is that it creates this bullwhip effect. And it’s really, really hard to measure what that bullwhip effect is going to be. But when you look at the confidence data, it makes you think like, shit, okay, you got a bullwhip effect and lower confidence. That’s going to be bad. But then on top of all that, the confidence data has been horrible, as a predictor of the hard data.

So people are now poo pooing the soft data, but I have a feeling that this is actually probably not a good time to be ignoring the soft data because it’s going to be a double whammy when, the tariff stuff happens. But then again, like I said, you’re not gonna really know until May, June, or July.

Alf (07:42.05)

Well, that’s basically five minutes of us trying to tell you not to expect too much on April 2nd from markets because it’s going to be impossible to predict. But why don’t we take a step back, Brent, and try to figure out, if we can, at least our own subjective thesis of what the Trump administration is after, actually. You know, these guys have been in for over two months now. It’s not a small amount of time, so we have some data points to try and figure out what is that they want to achieve for real.

So I have my own thesis by now, which of course can be completely wrong because you’re trying to predict the Trump administration. I wish you good luck. But I can still go ahead with it. What do I say? Should I try? Okay. So for me, I’m all hyped up for this. It’s a bit non-consensus, so let’s try.

So for me, the key trade you can think of out of the Trump administration is to sell USDCAD. And you’re like what? It’s like okay so how does that work and why would that be a trade? If you try to figure out what they really want, in my opinion, is to rebalance the mechanism by which the US has been the recipient of capital flows for the last 20 years. So everybody in the world has bought treasuries, has bought NASDAQ, S&P, et cetera, et cetera.

But the US, the other side of it is that it’s been on the giving flow when it comes to basically lending its consumer economy to the rest of the world. So everybody has exported their stuff into the US. And in exchange, the US has gotten a huge amount of capital inflows into the United States which has also kept the dollar stronger and it has made the let’s say, role of the US and exporter much much harder. Okay and now I think the Trump administration wants to try and reverse that on the margin.

Now there are two ways to do it. One is extremely painful. You basically shoot the economy in the foot, shoot the market in the foot and you say, sorry guys, but there’s gonna be a very hard detox period where we’re gonna stop fiscal spending, we’re gonna slow the economy down, and we’re gonna behave like assholes to the rest of the world so that basically you guys have to get out of these dollar assets you have, okay? Just out. You’re gonna start selling the US equities, you’re not gonna like the dollar anymore, but it’s gonna be very, very harmful to do it this way, okay?

There’s a second way to do this, which is, Brent, if you want to stop the dollar from appreciating by having this capital inflow thing and being on the wrong side of the trade flows basically… If you want the dollar to depreciate, one easy way to do it is to get the other countries to do what the US has done for the last 25 years, which is basically get other countries to spend, get other countries to appreciate their currency, get other countries to do fiscal. So this way, other countries appreciate versus the dollar, other currencies appreciate versus the dollar, and you don’t have to shoot your economy in the foot necessarily to achieve what you want.

So all this is basically to say Trump has already managed the Germans, I repeat, the Germans, to spend almost a trillion dollars in fiscal by effectively behaving like an asshole on the global scene of geopolitics and basically telling them, hello, you need your own defense, pretty much. And I think this sort of behavior is going to continue because Trump has effectively achieved the lower dollar versus the euro pretty dramatically by, so far, not applying any tariffs to Europe, not shooting the economy in the foot directly. And I think this is going to continue to happen.

Therefore, coming back to Dollar Canada, well… The Canadians spend only 1.4% of GDP on NATO. So I would expect Trump to want the Canadians to step up defense spending, step up fiscal and change the situation where other countries are fiscally responsible, Germany, Canada, Australia, New Zealand, all these countries are fiscally responsible and instead they use the US consumer market as the target of their exports.

Just do the opposite, just spend money, just have Canada be fiscal, you know… have actually them do fiscal deficits, which for all these currencies is actually positive for the currency, if you ask me. So sell dollars, buy Canadian dollars, buy Euros, buy Japanese yen, so on and so forth.

Brent (12:05.997)

So, I mean, I think what you’re saying makes sense. And it is sort of a rational view of “We’re spending more than everyone else on defense, this is BS, so some people have to pay their share.” Whether they’re actually reading that through to say, “OK, if we force Germany to do fiscal, then the euro will go up and that will help our exporters,” I don’t know. It seems like a pretty complicated policy to try to weaken the dollar. But like you said, it’s working.

And I guess the question is under both of those scenarios, the sort of hard one or the easy one, how do US assets perform? Because if everyone in the world is massively overweight US assets, like they were in 1999 and 2000, and then you send out a memo saying, hey, everybody, stop buying our assets because that’s part of the equation of how the money goes around the world is, if the deficits are on one side of the equation, then there’s going to be surplus on the investment side. So if you’re trying to cut the deficit side of the trade and then you are telling people essentially to sell MAG-7. So if all these entities own US assets, presumably they’re going to have to sell.

And then there’s also the risk of, this has been something that’s been floating around for awhile. And there’s been some thought pieces and stuff written about it. That sovereign wealth funds and government entities are tax exempt when they buy US assets. So another way that they could accelerate that is by taxing them.

For example, the CIC, Chinese Investment Corporation, is absolutely massive and they own a shit ton of US equities. So you can create situations where those entities will be selling US assets and selling US dollars. And you’re going to get a weaker dollar, but you’re also going to get NASDAQ 4,000 points lower. So I’m not sure if that’s totally a viable strategy because it’s funny every time the stock market kind of looks weak, they roll out LUTNIC to do some kind of reversal of whatever the tariff announcement was that hurt equities in the first place. So I guess I’m less like you’re describing sort of a bit of a 3D chess or 4D chess scenario.

Alf (14:25.89)

Now I was about to say, of course, this is just a theory that I’m developing and it could be completely wrong. When it comes to dollar flows actually from foreign jurisdictions into the US, I think the flows in treasuries are easier to target and reverse without too much pain, right, than the flows in equities. Floating treasuries, I mean, basically, as you say, you can apply something that is, I would call tariffs on money rather than tariffs on good.

So you basically say everybody who is an official foreign investor, say a sovereign wealth fund, say a foreign central bank, who’s buying treasuries as a reserve asset… Well, now you’ve got to pay some tax on that, basically. So you’re offering them a lower net yield, which is going to lower the dollar anyway, right? And what happens is that if they ever decide to sell or to reallocate part of their FX reserves away from the dollar into euros, yen, gold, I don’t know what, then the risk is, of course, that your treasury market can get dedestabilized.

But how do you repair that is you go to all your US banks and you say, here is a reform of the SLR. Now you can buy as many treasuries as you want. There is no penalty. Please unleash your buying capacity and buy the treasuries that the sovereign wealth fund is selling. So that’s a much easier market to stabilise if you really want to do it that way. On the equity side it’s much harder, definitely.

Brent (15:42.21)

Well, and I think that’s a great point because essentially the view in Trump One was that the S&P 500 was the metric of success. And now Bessent has kind of said that lower 10-year yields is the metric of success. And all these policies, you know, as convoluted and weird as most of this has been, a lot of them do point to selling stocks and not necessarily buying bonds right away, but there’s a put in the bond market and not in the stock market if these are the policies that they’re enacting.

And I guess the question sometimes though is, is there actually a strategy or they just wake up every day and do some stuff? Because I mean, obviously there’s no strategy with the tariffs. They’re like completely flying by the seat of the pants. And now it does look like, you know, there was a public comment period ahead of April 2nd.

It kind of seems like April 2nd was the real policy date. Like that was announced right on January 20th. And all this other stuff has kind of been noise and like negotiating tactics and just Trump having fun with Trudeau and all that stuff. I’m always a seller of like the 4D chess thing, just because I don’t think that it’s that easy to control so many moving parts in such a complex system.

And actually I heard on a podcast this weekend that the 4D chess argument now is that Trump is intentionally getting Mark Carney into power through this and that because of this and that. And like six months ago, was Trump’s intentionally getting Poilievre into power because you know, JD Vance is friends with this guy. So I feel like a lot of the unintended consequences can then be like assigned some kind of strategic value. But in the end, the put is in the bond market, not in the stock market. And then you got to kind of figure out what to do with that.

But then it’s interesting because if you look at bonds, they actually don’t trade that great. Like if a government says we’re targeting something, you know, a lot of times that can unleash a crazy aggressive trend in the thing. Like when the Fed bought liquid or bought high yield or the ECB was targeting a lower euro or whatever. Usually when the government’s targeting something you see often a raging bull market in that thing but actually bonds don’t trade that great.

Alf (18:18.178)

Not really. And actually, it’s not like you can manipulate bond yields to be lower. It’s really very complicated. At the end of the day, if you think about what a 10-year bond yield is, it’s the market interpretation of what the Fed fund rate will be over the next 10 years, plus-minus risk premium, term premium. Or if you want to think it in macro, it’s like long-term growth expectation and long-term inflation expectations.

So how are you going to lower that? Well, you’re going to have to apply policies that either lower inflation expectations aggressively so that the Fed funds be cut, or basically send the economy into a recession or some sort of a very low real growth environment. Of course the administration would prefer the disinflation side but again Brent, tariffs have nothing to do with disinflation. I mean they’re like the opposite if you do heavy tariffs on all your trading partners, then core PCE is gonna go up, core goods inflation is gonna go up.

So once again, so far it seems to be all very confusing. I just try to make sense into what, at least if you want to rebalance from a capital inflow place, which is the US, into a place where you can be more competitive on the global export stage, attract manufacturing jobs, then all you need is a weaker dollar, basically. I think it’s the trade where… I don’t think if the dollar all of a sudden goes up aggressively, this administration will be very happy. It’s contrary to many of the things that they say they want to achieve. You’re not going to rebalance the trade system if the dollar is permanently higher.

But again, maybe they don’t want to rebalance the global trade system. So far it’s very unclear what they want. I just try to come up with what I think could be a reasonable thesis. And one thing to be said, is one data point we have observed, they’ve gotten the Germans to spend almost one trillion euros. And that’s quite something. That’s quite something.

Brent (20:09.195)

Right. When I was off, when I left, that trade was really ripping. And since then, it’s kind of stabilized. And it’s interesting, I’ll put it in the YouTube, but essentially the ratio of DAX to Nasdaq and German versus US interest rate differentials and Eurodollar, the currency pair, have all been moving in tandem. So it’s essentially like a money flow story, like you’re saying, like, can they get money to flow out of the US in a controlled manner and into other economies and without blowing everything up? And I guess that’s the question.

One thing you mentioned, which I think might be useful to talk about maybe just for my own benefit is the Fed and ECB, because I feel like with all the tariff stuff and people much more focused on European banks and Dax and, you know, Ryan Mattel stock or whatever, people haven’t been talking that much about the ECB and the Fed. But it’s kind of interesting because I still think the Fed is in this tricky place where inflation is kind of sticky and you’re worried about unemployment because of DOGE and confidence drops, but you haven’t really seen it yet.

But if you look at the statements from the Fed, their concerns about inflation are actually going up in the statements. But then their concerns about rising unemployment are going up in the statement, which is kind of a stagflationary environment. And before all the crazy stuff started happening in Germany, that was actually a theme that was starting to take off a little bit was stagflation in the US. And I feel like it’s still a valid theme.

So then you also have the ECB now today saying that maybe more cuts are not necessary, even though actually there’s still cuts for April, a 72% chance for April. So what are you thinking about the Fed and the ECB? Or is the market right to ignore them? Because really, again, it just comes down to the economic data, which is too foggy to see.

Alf (22:14.03)

Yeah, I mean for the ECB it’s quite interesting because the German stimulus is obviously gonna come into play for European growth only in 2026. I mean, just as something that Dario Perkins, my friend said, I mean these guys have to pump a huge amount of money into the defense sector, which in Europe is like 0.5% of GDP. It’s like a tiny, tiny sector and they wanna channel billions and billions over that sector. It’s not gonna happen overnight, right? You need to build a supply side of that sector, it’s gonna take a while.

There was an article where Ryan Mattel was gonna use some abandoned warehouses where they used to make cars in Germany before, that’s the situation where we are. I mean, it’s gonna take a while until it pops up in hard data in Europe. So it’s understandable the ECB actually says, you know Let’s just move forward with our policy and whether it’s gonna be one cut or two cuts in April or June. I think it’s gonna be back to back cuts.

Holtzman today said, the Austrian guy, that if he were to vote, because he’s a non-voter in April, he was gonna vote against the cut. But Holtzman, and the world is just going upside down. Holtzman is the Austrian guy, okay? So Austrian guy in the ECB governing council is the guy who was gonna hike even if the aliens invaded Europe, okay? He was still gonna hike, doesn’t matter.

Now, this guy also said that he’s in favor of doing QE for defense spending. So we have an Austrian guy that is talking about doing QE for defense spending. So you know, I think there’s a bit of noise going on at the ECB level. Overall, I think they can ignore the fiscal for now because it’s going to only play out in 2026.

Brent (23:49.87)

So you made an interesting point about the supply side because I’m more on the dollar bearish side. Like I think that this money flow story is real and sure we’re correcting now, but a lot of it’s just like month end and people are worried about the tariff announcement and all that. So I’m more bullish Euro. But if you look at things like Ryan Mattel or like the fiscal spending and all that people haven’t been talking that much about the supply side. And the one thing with fiscal is you can announce whatever you want, but then the issue is always like, what are the shovel ready projects that you can actually spend money on?

And I was wondering that with Ryan Mattel stock too, is that like, at some point you have to say, okay, they sure there there’s an infinite, even if you have an infinite amount of money to spend on that, so the demand is infinite, there’s still a supply constraint where you can only make so many tanks in so many years.

And so I’m wondering if there’s going to be some issue with that too. Okay, we’ve proposed, you know one and a half percent of GDP for 10 years or whatever it is, but they end up spending way less because there’s just nothing to spend it on. Like, what are we actually going to buy here?

Alf (25:00.77)

Yeah, I mean, there is even a situation where people are talking about Europe actually spending defence money on US military equipment, which would be very funny because you spent on defence in the first place to get off the US defence umbrella and now you’re going to buy US military equipment. OK, that doesn’t sound very consistent, but it speaks to your point, right? So I think the ECB probably just ignores the whole fiscal thing, goes away with another two cuts and then it probably sits there at 2%. Nothing particularly interesting.

For the euro, think it’s more of question of capital flows, Brent. And in this case, capital flows outside the US into not necessarily European assets, but into the euro. And I’m talking about FX Reserve managers. I’m talking about people who have still 60% of their reserve buffer in dollar in a world that seems to be slightly changing. So it doesn’t really hurt to start buying some euro reserves assets, especially because apparently Germany is going to issue whatever bonds you want, which is a bigger change compared to five years ago.

Five, ten years ago, you had most reserve managers, if they wanted to buy some schatz, bobl, bunds, I mean like German bonds, they basically didn’t find any new supply of these things anywhere. Even if Germany issued a bid, then the ECB would come and buy them all basically. And they were left with nothing. And now there’s going to be as much supply of German bonds as you want. So I think slowly, you are going to attract capital into the Eurozone.

Brent (26:27.851)

Right. And I think part of that supply story obviously has been higher yields in Germany. And if you look at the start of this year, bunds yielded 2.3% worse than the U.S. And now it’s 1.4. So like that’s a massive move in three months. So you have a shitload of supply if you want to buy as a reserve manager. And then you have a hundred basis points better yield. So I agree that you know, the capital flow story into Europe seems like it should be persistent.

Speaking of capital flow, I don’t know if you want to talk about Turkey, but it’s an interesting kind of case of like a three-vol currency with a 20 risk reversal where people have been trying to do the carry trade and it’s been very successful, but then it massively blew up on some political stuff.

It’s just an interesting case study. It’s basically the most extreme version of the pennies in front of the steamroller that you could ever get from a carry trade because essentially the vol is either zero or it’s like infinite and the liquidity is infinite or zero. And we went from one extreme to the other like in two days this week. So that’s been an interesting theme in our business.

Alf (27:52.6)

Yes, so I think we should talk 10 minutes about carry in general. So carry is a proven risk premium. It sits in many alternative risk premium baskets. And effectively, I would define carry as my mentor used to say, a hot shower of money, regular hot shower every morning, without you having to do nothing to earn it. Now, of course, it’s not that simple, but I think the principle is correct, right? You put up a carry trade and then you hope that nothing happens and then you just get paid effectively. And this is important. People should understand.

You don’t need a specific direction. Actually, a true carry trade is when nothing happens and you make money, not when maybe in a pair you end up with your highly yielding currency lag appreciating. That’s just a benefit of a carry trade, but it’s not necessarily the carry you want to extract.

One important thing to know about carry is that it is the definition of negative skew in a distribution of return, which means that the mean, the median return every day, every week will be positive. If not strange thing happened, you actually get paid. But the left tail can be pretty fat, in point, I would say Turkey, where I this thing went down what, 10% in a day or something along the line of that? Anyway, it blew up the carry of like a year or something in one trading session. Not fun, not fun, you know.

So question for Brent, think, and then I’m gonna tell you my opinion is, FX carry trades are pretty popular and easy to understand, I think, as a design. But my question is how do you manage the risk in a thing like this? When do you take profits? When do you stop out of a carry trade in FX?

Brent (29:34.274)

Yeah, so that’s the issue. I guess essentially it’s very similar to selling options and there’s lots of different ways to collect carry. And I feel like the ultimate first thing for every trade or every platform or every hedge fund should be eliminating risk of ruin. So there’s just so many ways that you can be long carry. And the Sharpe will be amazing for two years, but then you’re out of business in year three.

And so I always start from the point of view, not of maximizing the return, not maximizing the carry, but in minimizing or completely eliminating risk of ruin. Because selling options, the reason that there’s a premium that is extracted is that you’re short an option and you’re short convexity. And when the convexity hits, then what do you, what does that mean?

And so there’s lots of ways in FX to be long carry via options. And so you have a fixed downside and I just think that’s always the best way. It’s not as sexy as doing the forwards. So when you do forwards, you’re basically just waiting for the thing to slowly converge to spot. And so you can be making tons of money. And like you said, every single day you walk in, you’re up 50 grand or whatever on your position, but then on day 500, you’re down $2.6 million on the position.

So I don’t really love the doing stuff like that through outrights. I just think that it’s better to pay away a little bit of money and do it through options or do it through fixed downside structures. So, say you think MicroStrategy stock is going nowhere, selling call spreads and selling put spreads is a lot better than selling calls and selling puts, but you’re gonna make less money doing it.

So that’s always the way that I think about it is always having a fixed downside thing, not like, oh I’ll stop out. Because you can’t stop out. That’s the thing is that even in something liquid like MEX, MEX is pretty liquid, but you can still get an 8% move in MEXJPY in four hours, which is more than the carry for the whole year. And no risk manager is gonna appreciate that.

And generally, just think it’s like a shitty way to structure your book. So lots of people do it and lots of people make money doing it. But in the end, to me, it’s just not worth it. Even if you do it for five years and blow up in year six, you’ll probably get paid. But I just think it’s a bad business.

Alf (32:13.922)

Yeah, tend to agree on that. There is in literature something that is basically doing the effects in linear for carry, so like a forward, and then they are, for example, buying at the money puts on the high yielding currency, right, as a way to effectively try to offset that. If you look into the math, though, unfortunately for you, most of the carry will be gone. If you want to hedge a proper amount of risk, then it’s gone.

I mean, it’s an alternative risk premium, as we said. So you are getting paid to take that risk, but effectively the risk is, especially in FX, I would say you’re talking about the risk that some policymaker in emerging market decides that he wants to do things differently, like Erdogan effectively arresting his biggest political opponent. So the Sharpe ratio, by the way, of alternative risk premium, carry in this case, is about 0.5, 0.6 over the medium term. It’s not that bad actually. And it can also be relatively uncorrelated to risk if you build a very well diversified basket of carry.

And now we talked about FX, but carry can be done in rates, right? You can do it in bonds. You can basically carry a roll down the curve. You can do a bunch of stuff, but please be careful about jump risk. And there is no good way to manage it actually. So you can try to do what Brent said, which is effectively implement the same strategies via options. But guess what? Your Sharpe ratio can be good, but the dollars you earn are gonna be much less than just doing the standard linear thing.

And of course, you do carry not to eat Sharpe ratios, but to eat dollars. So that’s a bit of the trade off you have to choose. If you wanna sleep at night, you can do it with options, but you’re gonna earn less basically, having your downside limited. In any case, the important thing, the big picture here is that you do get paid to do this stuff. It’s an alternative risk premium proven in literature that pays a 0.5, 0.6 Sharpe ratio over time. So don’t fully discard it.

Brent (34:09.771)

No, I definitely wouldn’t discount it either because it’s also a great overlay to directional trading because generally long carry is synthetic short vol and directional trading does better when vol is high. So if you have a book that’s always long carry, but then you take a lot of directional bets, you’ll probably notice that there’s a negative correlation between your P&L in the two books as a rule. Because when the shit’s hitting the fan, it’s easier to make money trading, or when things are moving. It doesn’t have to be shit hitting the fan.

But when things are moving and volatility is realizing, it’s easier to make money directionally. And in those instances, generally, your carry book will perform worse. And then when nothing is going on and everyone’s sitting around complaining about the lack of vol, then your carry book will be printing money.

Alf (35:00.898)

Hey, Brent, did you realize that the next podcast is actually scheduled for once after the release of an event? I mean, I can’t believe it. We’re going to actually be recording on like April 2nd or 3rd. Liberation Day. Wow. Wow. For once, we’re going to know what happened so we don’t look like idiots when we release it. That’s great.

Guys, thanks for listening. We’re back and we won’t be jumping two weeks for a bit, we hope. So we’ll talk to you again next week. Thanks for listening.

Brent (35:44.814)

All right, thanks everybody. Thanks, Alf. See ya.