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Boaz Weinstein on Investors' Unknown Risk · Masters in Business

0:00
Speaker 1: M. This is Mesters in Business with Very Results on
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Speaker 1: Bloomberg Radio. This week on the podcast, I have an
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Speaker 1: extra special guest and a funny story about how this
0:17
Speaker 1: podcast came about. I interviewed Boas Weinstein back in May
0:23
Speaker 1: of two. It was one of the most popular podcast
0:27
Speaker 1: we did this year. And when the folks over at
0:31
Speaker 1: the Bloomberg invest conference came to me and said, Hey,
0:34
Speaker 1: we're looking for somebody who's a little out of the
0:37
Speaker 1: box snanker and kind of interesting. Um, who might you
0:41
Speaker 1: suggest as a interviewee? That was easy. I said, we
0:45
Speaker 1: just did this interview with Boaz six months ago. Everybody
0:49
Speaker 1: seemed to really like it. He's very much an outside
0:52
Speaker 1: the box sninker. Covers everything from credit derivatives, two spacks,
0:58
Speaker 1: two stocks, and bonds, but from an unusual perspective, not
1:02
Speaker 1: your typical investor. For for example, he's been an investor
1:08
Speaker 1: in spacks because he looks at it as a guaranteed
1:13
Speaker 1: uh fixed income return in a in a time of
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Speaker 1: zero with potential upside. Uh. So he's done that really
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Speaker 1: really successful. He's one of the five largest spack investors
1:23
Speaker 1: in the world. He's the person in case you don't
1:26
Speaker 1: know who boas Weinstein is of Saba Capital. He's the
1:30
Speaker 1: person who made the bet against the London whale and
1:33
Speaker 1: then went to uh JP Morgan Chase and presented at
1:38
Speaker 1: one of their conferences and said, by the way, you guys,
1:41
Speaker 1: you have this person in London that's sucking up all
1:45
Speaker 1: of the energy options. It's a wildly lopsided bet and
1:51
Speaker 1: it's gonna blow up. Oh nps, I've bet against him
1:54
Speaker 1: and lo and behold when the London whale blows up.
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Speaker 1: Six months later, Saba Capital nets three or four hundred
2:00
Speaker 1: million dollars on the trade. Just an amazing story and
2:03
Speaker 1: incredible ability to look at risk and figure out when
2:09
Speaker 1: it's a fair bet or when it's an asymmetrical bet,
2:13
Speaker 1: where hey, if we lose, we lose a little bit,
2:16
Speaker 1: but if we win, it's a giant home run. Uh So,
2:19
Speaker 1: he's really an intriguing person. We did the interview at
2:23
Speaker 1: the Bloomberg invest conference. So when you hear the audio
2:26
Speaker 1: of this, it's a live event. You'll hear the you'll
2:29
Speaker 1: hear the audience, You'll hear um people rustling papers. It's
2:33
Speaker 1: not the usual. Hey, we're in a studio that's pristine
2:39
Speaker 1: and you don't hear anything other than the two of
2:41
Speaker 1: us speaking and breathing. Uh. So this was a live event,
2:45
Speaker 1: but it was so well received and it was so interesting,
2:48
Speaker 1: and he just is such a fascinating investor. We thought
2:52
Speaker 1: it would be perfect, uh for the holiday weekend. So,
2:56
Speaker 1: with no further ado, here is my live interview with
3:00
Speaker 1: Sabbath Capitals Boas Weinstein at the Bloomberg invest Live Conference.
3:06
Speaker 1: So this is the first time I'm wearing a suit
3:08
Speaker 1: and tie, and I don't know how long. Um, and
3:11
Speaker 1: I'm dead. He didn't tell me about the tie, sorry, guys. So, um,
3:16
Speaker 1: so we previously had a conversation. Um was it earlier
3:20
Speaker 1: this year? Last year? I can't even tell anymore. And
3:22
Speaker 1: there were a lot of really interesting things that that
3:25
Speaker 1: came up. I think this audience would love to hear
3:28
Speaker 1: an update on what's happened since then. But but I
3:31
Speaker 1: have to start by asking. You were a highly ranked
3:35
Speaker 1: chess player as a young kid. You have your reputation
3:38
Speaker 1: as a killer poker player and a dangerous blackjack player.
3:43
Speaker 1: These involve making probabilistic assessments about an inherently unknowable future. Um,
3:50
Speaker 1: seems like you've been setting yourself up for tail risk
3:53
Speaker 1: and derivatives and trading since you were a kid. You're
3:57
Speaker 1: giving me a lot of credit for having planned everything
3:59
Speaker 1: since I was I I think the only tail risk
4:02
Speaker 1: I was thinking about when I was five was was
4:03
Speaker 1: pinned the tail on the donkey to be to be
4:05
Speaker 1: quite honest, So you know, really I am. I enjoy
4:08
Speaker 1: games of strategy, and it turns out that Wall Street
4:10
Speaker 1: is the ultimate puzzle and challenge and and so. Yeah.
4:14
Speaker 1: So I've been working on Wall Street since I was fifteen,
4:16
Speaker 1: and I think, um, at a young age, I've already
4:18
Speaker 1: seen a lot. So let's let's talk about what's going
4:22
Speaker 1: on right now. We've discussed and you've brought up how
4:26
Speaker 1: different this bear market has been from from recent bear markets.
4:31
Speaker 1: What are the similarities, what are the differences? What makes
4:35
Speaker 1: so unique? Yeah, So when you think about not only
4:38
Speaker 1: what's happened, but even the investor behavior that it that
4:41
Speaker 1: it um in genders um A lot of the tail
4:44
Speaker 1: events that I've lived through. I was trading while nine
4:46
Speaker 1: eleven happened. I was at the New York Fed the
4:49
Speaker 1: weekend that Lehman was failing. A lot of those events,
4:52
Speaker 1: not all of them, but a lot of them were
4:53
Speaker 1: bolts from the blue COVID. You kind of had a
4:54
Speaker 1: month from when people knew is a thing before the
4:56
Speaker 1: market started falling, But they were bolts from the blue,
4:59
Speaker 1: and if you had not done anything about it, you
5:00
Speaker 1: had plenty of air cover to say, who who knew?
5:03
Speaker 1: Who knew this would happen? What could I have done
5:05
Speaker 1: in advance? Whereas this one has been so telegraphed when
5:09
Speaker 1: it at least the initial part of it about inflation
5:12
Speaker 1: being transitory and then transitory, and then transitory and then
5:15
Speaker 1: not transitory, So there was a lot of time to
5:18
Speaker 1: get worried and very little places to hide to say, um,
5:22
Speaker 1: you know, it was not reasonable to have thought, what
5:24
Speaker 1: if this forty year bowl market in bonds not only
5:27
Speaker 1: comes to an end but does a sharp reversal. Those
5:29
Speaker 1: were things that we and other managers we're talking about,
5:32
Speaker 1: where the the sixty forty plans that we're using treasuries
5:36
Speaker 1: as there, you know, as their antidote to a sell off.
5:39
Speaker 1: It turns out the treasuries were the poison, and so
5:41
Speaker 1: you know, this is this has been different in that respect.
5:44
Speaker 1: It's also been different because you have so many different
5:46
Speaker 1: problems swirling around some of them in conflict with each other,
5:49
Speaker 1: so solve one at the expense of the other. And
5:52
Speaker 1: then the number of new things showing up, whether it's
5:55
Speaker 1: you know, um maybe untoward rumors about credit sweets or
5:59
Speaker 1: what's happening in the u K. Guilt market, um is,
6:02
Speaker 1: it just makes the number of balls in the air
6:03
Speaker 1: enormous in terms of things non unknowns that could really
6:07
Speaker 1: cause more than a sell off, but more like a crash.
6:10
Speaker 1: So so let's talk about that. You've discussed multiple problems
6:14
Speaker 1: and multiple areas taking place at the same time. How
6:17
Speaker 1: do you distinguish between what's a genuine risk, what's unknown risk,
6:21
Speaker 1: and what's truly an unknown unknown? So usually you have
6:27
Speaker 1: your your known unknown like something is bad, we just
6:29
Speaker 1: don't know how bad, and you can respond to it. So,
6:31
Speaker 1: you know, nine eleven happens, it's not a good time
6:33
Speaker 1: to buy airline stocks. You know, COVID happens, not a
6:36
Speaker 1: good time to buy airline stocks. Oh eight happens. Probably
6:39
Speaker 1: you should de risk from financials, even like the moment
6:41
Speaker 1: after it happened. And here you just don't know exactly
6:44
Speaker 1: what to do. So normally, for example, European investment grade
6:47
Speaker 1: trades five basis points lower than US investment grade. Now
6:51
Speaker 1: it trades thirty basis points higher, twenty five basis points higher.
6:54
Speaker 1: Is that enough Europe is going to have a much
6:56
Speaker 1: more severe recession according to those that that that motificate
7:00
Speaker 1: and uh, And so whether or not you underweight or
7:04
Speaker 1: overweight Europe is all about what do you think happens
7:07
Speaker 1: with with Ukraine? Does it? Is there a chance it
7:09
Speaker 1: gets asymmetric? What can be done to mitigate? And then
7:12
Speaker 1: at the same time you have these other theaters, whether
7:14
Speaker 1: it's zero COVID policy in China maybe extending well past
7:18
Speaker 1: the party congress um, continuing to cause disruption in the economy.
7:22
Speaker 1: So so really what's happened is people just feel risk
7:25
Speaker 1: all over. They felt it now for ten months, and
7:27
Speaker 1: they're de risking the things that are in their book.
7:30
Speaker 1: And that has led to some things that are I
7:32
Speaker 1: don't view as particularly risky blowing out as much as
7:35
Speaker 1: things that I do view as risky. And that's that's
7:38
Speaker 1: created some interesting distortions, interesting opportunities. So let's talk about
7:41
Speaker 1: those opportunities. What has been overly d risks, What are
7:46
Speaker 1: are looking attractive after investors throw the baby out with
7:50
Speaker 1: the bath water, right, So not knowing where to focus
7:53
Speaker 1: your arrows and instead of focusing on de risking and
7:56
Speaker 1: the comments that Jamie Diamond made about bracing for a
7:58
Speaker 1: hurricane and another sea Yo said bracing for a tornado,
8:01
Speaker 1: and someone else mentioned some other weather weather disaster. You know, like,
8:05
Speaker 1: what do they actually mean when they do that? How
8:07
Speaker 1: do they actually brace other than like, you know, other
8:10
Speaker 1: than a physical brace. What are they doing? They're a bank,
8:13
Speaker 1: they have loans. They go to their loan portfolio hedging
8:15
Speaker 1: group and they say, please increase the amount of hedging.
8:18
Speaker 1: So what does the bank do. It looks at the
8:20
Speaker 1: loans that it's made, often to the best companies in
8:22
Speaker 1: America or in the world, and d risks where the
8:26
Speaker 1: risk is. And so we did a number of trades
8:28
Speaker 1: with banks where they're coming to us to say, in
8:31
Speaker 1: the middle of all this, we want to buy protection
8:33
Speaker 1: on Coca Cola, on Johnson Johnson, on Home deepo, Walmart,
8:37
Speaker 1: you know, a T and T, Verizon, these big companies
8:39
Speaker 1: that have a lot of dat outstanding in terms of
8:42
Speaker 1: revolvers and and not relative to their their balance sheet,
8:45
Speaker 1: but but relative to just the quantity of debt. And
8:48
Speaker 1: so there are a bunch of names. In fact, I
8:50
Speaker 1: think everyone I mentioned where if you look at where
8:52
Speaker 1: it is today, it's above the worst day of COVID.
8:56
Speaker 1: So those names that are not even candidates for discuss
9:00
Speaker 1: us and about could the run into trouble as credits
9:02
Speaker 1: are above their worst day of COVID, whereas the index
9:05
Speaker 1: that they sit in UM is only trading at two
9:08
Speaker 1: thirds of the worst day of COVID. Why would those
9:10
Speaker 1: names be worse? Why would they be at the wide
9:12
Speaker 1: the widest levels and the average be only a two thirds.
9:15
Speaker 1: It's because of this technical in the market. And I
9:18
Speaker 1: think technicals are the biggest force in the credit market now,
9:21
Speaker 1: much more than fundamentals, much more than any time in
9:23
Speaker 1: my career, where if somebody has something to do, which
9:26
Speaker 1: is to buy billions of dollars of Verizon one year
9:28
Speaker 1: or two year CDs, that's going to move the price
9:31
Speaker 1: to levels that just doesn't make sense from a fundamental
9:34
Speaker 1: point of view. And so what we've been doing is
9:36
Speaker 1: going along those names, selling that insurance to fund protection
9:41
Speaker 1: on companies with a history of blowing out if actually
9:44
Speaker 1: there is a real recession or some other kind of
9:46
Speaker 1: crisis and UM and so that that would be found
9:49
Speaker 1: usually in consumer finance companies, UM, economically sensitive company cyclicals,
9:54
Speaker 1: steel shipping, paper and UM. And so we've found it
9:59
Speaker 1: very interesting in the middle of this this problem to
10:02
Speaker 1: be able to find attractive long short trades because of
10:07
Speaker 1: the technical distortion. So so are you looking at the
10:10
Speaker 1: fundamentals of these equities? Are you looking at the technicals
10:13
Speaker 1: of how they're trading, or you looking at the credit
10:15
Speaker 1: spreads and saying, hey, people away too frightened beyond what
10:20
Speaker 1: they should be. Yeah. So we, probably more than most
10:22
Speaker 1: on the credit side, do look at equities for clues.
10:25
Speaker 1: And sometimes there is one market above faster or slower
10:29
Speaker 1: than the other. But we're we're sourcing the tail protection
10:32
Speaker 1: that we provide our investors, which is one of the
10:34
Speaker 1: main things we do UM through the credit market. And
10:38
Speaker 1: we'll get to that, I'm sure. And we're paying for
10:40
Speaker 1: it because there are many investors that want it paid for.
10:42
Speaker 1: They don't want to just bleed the negative carry through
10:45
Speaker 1: Some of these I view as ultra low risk trades
10:48
Speaker 1: in verising or Coca cola. Do we want to get
10:51
Speaker 1: more specific? Is it strictly an equity bed or is
10:55
Speaker 1: it equity combined with some derivative how you put intogether
11:00
Speaker 1: these paired traits. So you could look at the history
11:03
Speaker 1: and first you could use common sense and say, is
11:05
Speaker 1: this the kind of company that could run into trouble?
11:07
Speaker 1: Is it not? And and the price is not efficient
11:11
Speaker 1: um compared to the past, where fundamentals were the biggest driver.
11:15
Speaker 1: We're looking at the credit a little bit about the fundamentals,
11:18
Speaker 1: but the fundamentals are sort of not in question. On
11:20
Speaker 1: the long side, it's really have these served us well
11:24
Speaker 1: and investor as well as tail hedges in the past.
11:27
Speaker 1: We look at oh eight and two thousand twenty, two
11:29
Speaker 1: thousand and twelve and say, is this the kind of
11:32
Speaker 1: company that regularly blows out from a hundred basis points
11:35
Speaker 1: to foreigner basis points? Um. Take General Motors for example,
11:39
Speaker 1: they defaulted you know, eight problems with the U A
11:42
Speaker 1: W behind them. They've still been enormously vulable as a credit,
11:46
Speaker 1: as a as a as a company super exposed to
11:49
Speaker 1: the U. S economy and the global economy and the pressures.
11:53
Speaker 1: The credit in two thousand twenty went from a hundred
11:56
Speaker 1: to seven hundred back to a hundred, and it's had
11:59
Speaker 1: that of roller coaster, and so we look at and
12:02
Speaker 1: said that's a really volatile credit and when it's low,
12:04
Speaker 1: that's really asymmetric. You could buy protection and if things change,
12:08
Speaker 1: it might move out a lot. Right now it's at
12:09
Speaker 1: two fifty. It has moved out a lot more than
12:12
Speaker 1: the index. And so we're looking at at like at
12:14
Speaker 1: histories to give us a clue. We're looking at forward
12:17
Speaker 1: looking UM models, equity voll Um fundamentals. But what we're
12:22
Speaker 1: at the end also doing. I should make sure I
12:24
Speaker 1: say this is we're providing liquidity to the banks that needed.
12:28
Speaker 1: And if they come and say they want to buy
12:30
Speaker 1: protection on PEPSI or LVMH or Nestley, that's amazing. You've
12:34
Speaker 1: now given me UM the the ammunition I needed to
12:38
Speaker 1: go and fund protection on companies that really may run
12:41
Speaker 1: into trouble. So so let's talk a little bit about history.
12:44
Speaker 1: You mentioned away, Uh, we can also mention two thousand
12:48
Speaker 1: in the same sentence, UH, that we're fairly rapid and
12:55
Speaker 1: disorderly dislocations maybe might be the exception, and this you've
13:01
Speaker 1: described as sort of a slow motion implosion, and yet
13:07
Speaker 1: it's still been very orderly. What makes this year so
13:11
Speaker 1: unusual compared to UM previous collapses that really seemed to
13:17
Speaker 1: to make a bottom and snap back pretty abruptly. Yeah.
13:22
Speaker 1: So so first, um, there's the market is still trying
13:25
Speaker 1: to figure out what it should most worry about. Uh
13:28
Speaker 1: and and so you know, it's like just when you
13:30
Speaker 1: think something, maybe we're at peak inflation, past us, maybe um,
13:34
Speaker 1: the supply chain problems are coming down, but then you
13:36
Speaker 1: have new things. And so there's just been this this um,
13:40
Speaker 1: this sell off that continues to find new rationale. And
13:43
Speaker 1: then you have the FED um leaning on the market. Actually,
13:46
Speaker 1: and when when Powell sounded too devish, you know, first
13:49
Speaker 1: all of his peers came out to say, no, no,
13:52
Speaker 1: you know, the market we're gonna keep going. And they've
13:55
Speaker 1: continued to say that, Kashkari most recently. So, so you
13:58
Speaker 1: have the FED kind of um intent on showing that
14:01
Speaker 1: they mean what they say and uh and so and
14:04
Speaker 1: it probably liking that the market is going down on
14:07
Speaker 1: an orderly way, even if it's created some disorder in
14:09
Speaker 1: other markets. Look what's happening in the UK. And so
14:13
Speaker 1: I'm used to and we're we're all used to sell
14:15
Speaker 1: offs that are fairly quick that we know, even though
14:18
Speaker 1: eight was five or six months from Lehman to the
14:20
Speaker 1: lows of March oh nine, where at the end of
14:22
Speaker 1: it you can kind of wonder, is there an all
14:25
Speaker 1: clear sign? We have the Fed behind us quantitative easing.
14:28
Speaker 1: Now we don't really know who the savior is because
14:31
Speaker 1: at the end of all of this, we're it's still
14:32
Speaker 1: going to have quantitative tightening and shrinking the balance sheet,
14:35
Speaker 1: and so whereas a lot of sell offs, we're just
14:38
Speaker 1: a prelude to a to a bowl market one or
14:41
Speaker 1: six months later. You know, this has the feeling to
14:43
Speaker 1: me like we're going to be worried about some number
14:46
Speaker 1: of these things or new things for potentially quarters and
14:50
Speaker 1: maybe even years to come. So no capitulation yet no
14:54
Speaker 1: flush which gives us that all clear signal. How much
14:58
Speaker 1: of that is based on truly not knowing what the
15:02
Speaker 1: Fed is gonna do or is it We don't know
15:05
Speaker 1: which potential problem is real and which is fake news.
15:10
Speaker 1: I these things are so hard to predict. I even
15:13
Speaker 1: want to be cautious about, you know, um opining too
15:16
Speaker 1: much because it's just such a confusing market and there
15:18
Speaker 1: hasn't been a single thing to say, Okay, this is
15:21
Speaker 1: why the market is not enough. It should be forty.
15:24
Speaker 1: Let's take inflation. If if you look at UM forward inflation,
15:28
Speaker 1: it's expected to come down a lot. So you could
15:30
Speaker 1: look at tomorrow's CPI print if it comes in a
15:32
Speaker 1: tent or below or high, and get excited about it.
15:35
Speaker 1: But the market is still telling you inflation is not
15:38
Speaker 1: going to be the problem that it is one year
15:40
Speaker 1: from now. Now. If a few months from now that
15:43
Speaker 1: conviction is shaken, then we're gonna have a real strong
15:46
Speaker 1: sell off. If somehow Russia haven't forbid becomes more asymmetric,
15:51
Speaker 1: we're gonna have a real problem. And so we just
15:53
Speaker 1: don't know. We're in a fog, and we should not
15:56
Speaker 1: rely on the lessons that people learn, maybe incorrectly for
16:01
Speaker 1: this environment that we're good between oh eight and twenty
16:04
Speaker 1: and two thousand twenty two, which was UM the Fed
16:07
Speaker 1: is your put, don't fight the Fed, and UM dips
16:10
Speaker 1: should all be bought, and UH being short is is
16:13
Speaker 1: fighting the Fed. You know this, this really UH does
16:16
Speaker 1: not feel like that environment in particular because of where
16:20
Speaker 1: the central banks are versus then so, but the one
16:25
Speaker 1: lesson that should carry through sounds like continue not to
16:29
Speaker 1: fighting the Fed when the Fed reverses their position I'm
16:32
Speaker 1: glad you said that, Barry, because because about nine years
16:34
Speaker 1: ago I had a prospective investor in my office where
16:37
Speaker 1: Long Invall funds. One of our main products is long volatility.
16:40
Speaker 1: And I don't know if he didn't quite know that,
16:42
Speaker 1: because he kind of wagged his finger at me and said,
16:44
Speaker 1: didn't you know It's like, Sonny, didn't someone ever tell
16:46
Speaker 1: you don't fight the Fed just to be long volatility?
16:49
Speaker 1: When Mario drag said, trust me, I'll do whatever it takes.
16:52
Speaker 1: That's a and uh and that. But that that psychology
16:55
Speaker 1: of don't fight the Fed, don't be short is, in
16:58
Speaker 1: my opinion, a lazy person's way of saying, let's always
17:00
Speaker 1: belong Because if you if that person were around today,
17:03
Speaker 1: I don't exactly remember who even was to to make
17:05
Speaker 1: that call back, I'd say, if you really believe and
17:07
Speaker 1: don't fight the Fed, how much of your risk did
17:10
Speaker 1: did you take down when the Fed said that they
17:12
Speaker 1: really meant business and we're going to be selling ussets
17:14
Speaker 1: for years to come, and plus all of these problems
17:17
Speaker 1: that when you add up the number of problems in
17:19
Speaker 1: different theaters, I I can't think of a corollary that
17:23
Speaker 1: you know, it's it's to me, it does feel worse
17:26
Speaker 1: in many respects than than any other experience in the
17:28
Speaker 1: market I've haund So you hinted at UK guilt and
17:32
Speaker 1: what's going on over in London. Um, the strength of
17:36
Speaker 1: the dollar is another factor. How do you think about
17:39
Speaker 1: those when you're considering tail risk and volatility. So we're
17:43
Speaker 1: not experts in UH in foreign exchange, but I look
17:47
Speaker 1: at the guilt market, for example, and you see, like
17:49
Speaker 1: the UK half a percent bond of two thousand sixty one.
17:53
Speaker 1: Somebody you know in two one bought a four to
17:55
Speaker 1: year bond that was gonna pay not someone, a lot
17:58
Speaker 1: of people, It's gonna pay half a percent a year
18:00
Speaker 1: for forty years. And at the end of all that,
18:02
Speaker 1: the most you could possibly make was half a percent
18:05
Speaker 1: times forty minus some inflation and UH and that's so
18:09
Speaker 1: that would be twenty points without discounting. Without inflation, the
18:12
Speaker 1: things down seventy three points. So when you when you
18:14
Speaker 1: think about boundary conditions, you know, and I what I
18:17
Speaker 1: like to do and in the dirt of markets is
18:19
Speaker 1: look at boundary conditions to say how much can I make,
18:22
Speaker 1: how much can I lose? And where is there semisymmetry.
18:24
Speaker 1: And by the way, we were not sure at any
18:27
Speaker 1: any UK bonds to be clear, but there are a
18:29
Speaker 1: lot of trades that looked like this kind of I
18:32
Speaker 1: can only lose a little bit, but just in case
18:35
Speaker 1: it's not transitory, or just in case there's an unknown
18:37
Speaker 1: known that is really problematic, you might be able to
18:40
Speaker 1: make eight to ten or twenty times what you might
18:43
Speaker 1: have lost and to see this move and it may
18:46
Speaker 1: continue of higher rates, whether it's the U S or Europe,
18:49
Speaker 1: where the investor loses three or four times what they
18:53
Speaker 1: could possibly make at the end of the day with bonds.
18:57
Speaker 1: I think it it reminds me of how investors don't
18:59
Speaker 1: really think about um fixed income and equities in the
19:02
Speaker 1: way that that I do, which is, you know, equities
19:04
Speaker 1: gives you this unbounded upside. It could be Tesla, it
19:07
Speaker 1: could it could be uh, it could be uh Faraday
19:10
Speaker 1: Future or Fisker. But you know your your minus a
19:13
Speaker 1: hundred and your plus twenty and and that's and that's
19:16
Speaker 1: the range. But in fixed income often there's so little
19:19
Speaker 1: to earn that when I see my peers talk about
19:22
Speaker 1: high yield at five percent is amazing because it used
19:24
Speaker 1: to be a three percent. I feel like, wait a second,
19:28
Speaker 1: how many defaults do we expect this year? There's a
19:30
Speaker 1: lot of companies in that index that are going to
19:32
Speaker 1: run into trouble. So what are we really how excited
19:34
Speaker 1: can we really get just because high yield is you know,
19:37
Speaker 1: has widened by two percentage points and so so I
19:39
Speaker 1: think fixed income can end up effectively being an option,
19:43
Speaker 1: but people don't look at it as an option, and
19:45
Speaker 1: I view it often as asymmetric, as an asymmetric short.
19:48
Speaker 1: And that's one of the guiding principles of our tailheade strategy.
19:51
Speaker 1: So so let's talk about another UM credit related issue.
19:55
Speaker 1: A couple of weekends ago, people were talking about the
20:00
Speaker 1: winding credit defaults on Credit Swiss um and surprisingly you
20:05
Speaker 1: came out and said, everybody, catch your breath. Credit Swiss
20:09
Speaker 1: isn't isn't Lehman brothers. Just look it at various ratios.
20:14
Speaker 1: What made that so attractive to shorts and and what
20:18
Speaker 1: led you to the conclusion that Credit Swiss was more
20:21
Speaker 1: or less Okay? Yeah, I didn't start out thinking I
20:24
Speaker 1: want to say something public. I basically have zero Twitter
20:27
Speaker 1: followers before this, and then all of a sudden, Um,
20:30
Speaker 1: you know, it became a thing. I noticed that people
20:34
Speaker 1: with hundreds of thousands of followers were saying credit swite
20:38
Speaker 1: spreads are out their decade high. It's an imminent bankruptcy. UH,
20:42
Speaker 1: imminent default according to secret sources. And when you see
20:46
Speaker 1: like people with a hundred followers thing that find but
20:48
Speaker 1: we have kind of at the same time almost this
20:50
Speaker 1: you could almost read that it was the same person
20:52
Speaker 1: sending it from accounts or team with with hundreds of
20:55
Speaker 1: thousands of followers, that this sounds like scare mongering. It
20:58
Speaker 1: sounds like someone trying to make something of about it.
21:00
Speaker 1: And well, what do I know. I know that this
21:03
Speaker 1: quote it's at decade a decade high, you know, can
21:06
Speaker 1: be used as fake news to say therefore it's going
21:08
Speaker 1: to default. But if you look at the spread at
21:10
Speaker 1: the time, the five year credit spread of cs was
21:13
Speaker 1: two and a half percent. Now, if it defaulted back
21:15
Speaker 1: to our boundary conditions, it could go to zero, it
21:17
Speaker 1: could go to fifty. It would be like two and
21:19
Speaker 1: a half to lose or make to make or lose
21:22
Speaker 1: fifty to a hundred. It's still priced like to one right,
21:26
Speaker 1: um and UH low probability, very low probability. But it's
21:29
Speaker 1: discussed as something that's about to happen, and so I
21:32
Speaker 1: kind of took offense to it. I I'm supposed to
21:34
Speaker 1: know a thing or two about CDs, so I wrote
21:35
Speaker 1: a little bit about it, and then I posted, um,
21:38
Speaker 1: Coca Cola, by the way, also at decade high is
21:40
Speaker 1: better stock up on Coca Cola? And we had, you know,
21:43
Speaker 1: articles come out saying that I was saying Coca Cola
21:45
Speaker 1: they go to business, which you know, reminded me about
21:48
Speaker 1: sarcasm and how it doesn't necessarily translate to to at
21:52
Speaker 1: least some of the users. But this point of you know,
21:55
Speaker 1: some things at a decade widest level there for a crisis. Um,
21:59
Speaker 1: I I just I felt took offense to it, and
22:01
Speaker 1: I UM, I don't have any special connection to Credit Suite,
22:04
Speaker 1: but I felt like weighing in and and so far
22:09
Speaker 1: Credit Swiss still hanging around right has has yet to default.
22:12
Speaker 1: I did get some very nice messages from the fine
22:14
Speaker 1: folk a Credit Suite. So yeah, so since we're talking
22:18
Speaker 1: about tail risks, let's talk a little bit about that
22:20
Speaker 1: and hedges. Um, why have equity puts or vixed calls
22:25
Speaker 1: so disappointed this year? As insurance that's that's a brutal
22:31
Speaker 1: question actually, because there are people, you know. It's like
22:33
Speaker 1: if you say, look, I didn't study hard for the test.
22:35
Speaker 1: I didn't do on the test. Okay, Mom, dad, whatever,
22:37
Speaker 1: study harder. But when you when you study hard and
22:39
Speaker 1: you say I'm gonna be prudent, I'm gonna buy tell protection.
22:42
Speaker 1: I was there, I was there in January to buy it,
22:44
Speaker 1: and then it doesn't work. It's like, you know, it's
22:47
Speaker 1: a it's tailhedges have to be reliable because they serve
22:50
Speaker 1: a greater purpose. It's not just how did this manager
22:53
Speaker 1: do unto themselves, it's I was counting on this tailhedge
22:55
Speaker 1: to do to do me some great service in my portfolio.
22:59
Speaker 1: And I think the real interesting thing is that the
23:01
Speaker 1: the VIX is cited all the time as the barometer
23:04
Speaker 1: of fear. Well, so I remember and probably many of
23:06
Speaker 1: you remember that in the period let's say we even
23:12
Speaker 1: talked about there was a single digit day for the VIX,
23:14
Speaker 1: it went below ten. It was often between ten and
23:17
Speaker 1: twelve in good times. But something happened after two thousand twenty,
23:22
Speaker 1: which is, you know, we had COVID and that enormous volatility.
23:25
Speaker 1: It actually destroyed the people picking up Nichols in front
23:29
Speaker 1: of the steam roller a k. The short volatility crowd.
23:31
Speaker 1: They were no longer there after March UM and then
23:35
Speaker 1: came a new breed of investor that love to buy options, UM,
23:40
Speaker 1: whether it was options on meme stocks, and you saw
23:42
Speaker 1: the volatilities go nuts there. Soft Bank set up a
23:44
Speaker 1: unit to buy options on short you know, on tech stocks,
23:48
Speaker 1: and culturally I think in this country, UM. On the
23:51
Speaker 1: investing side, things became fast. Think about you know when
23:54
Speaker 1: someone when your friend, because it wasn't me, would you
23:57
Speaker 1: would tell you that, um, some n f T went
23:59
Speaker 1: up by x and you'd say ten X, I would
24:01
Speaker 1: like one X in five years. I'd be really excited
24:03
Speaker 1: about that. And everything became fast, and options are way
24:06
Speaker 1: to get there fast. So the long winded way to say,
24:09
Speaker 1: when we came into two thousand twenty two, the VIX,
24:12
Speaker 1: by prior measures was already at a forelarmed fire, we
24:16
Speaker 1: were at like twenty two to twenty eight on the
24:18
Speaker 1: VIX and that kind of number would have been a
24:20
Speaker 1: bear market the prior decade. But um, but we were
24:24
Speaker 1: at the peak for the SMP. So that so tail
24:26
Speaker 1: protection through equity options was incredibly expensive and it has
24:31
Speaker 1: served investors very poorly. Whereas credit spreads came into the
24:35
Speaker 1: year near the lows that they were pre COVID, they've
24:38
Speaker 1: widened and they've done their job, even if there's still
24:40
Speaker 1: a lot of widening potentially to come. So let's dive
24:43
Speaker 1: a little deeper into that. So the end of people
24:47
Speaker 1: market and the VIX very very high. So how are
24:52
Speaker 1: investors supposed to put two and two together? What? What
24:55
Speaker 1: did that signify? It meant that if you said I'm
24:58
Speaker 1: going to spend a certain amount of premium, like you
25:00
Speaker 1: think about with your car insurance or home insurance, Say
25:02
Speaker 1: I have this much premium, I'm gonna buy it, put
25:04
Speaker 1: struck five percent out of the money or ten percent
25:07
Speaker 1: of the money if I'm right, If this insurance was
25:09
Speaker 1: good to buy, what kind of payoff profile would I get?
25:12
Speaker 1: And you were getting nothing like you would get, not
25:14
Speaker 1: just pre COVID. But you know, over the past let's
25:17
Speaker 1: say twenty years, you were getting pretty miserable payouts for
25:20
Speaker 1: for a blowe market. When times are rough and vall
25:23
Speaker 1: is high, you understand why you have to pay a lot.
25:24
Speaker 1: But but coming into this year, um volved was stubbornly high,
25:29
Speaker 1: and so equity options were extremely expensive. We did a
25:33
Speaker 1: webinar for our clients where we showed that basically across assets,
25:39
Speaker 1: Bank Bank America put out some neat research that had
25:41
Speaker 1: the SNP and the NASTAC has literally, out of fifty assets,
25:44
Speaker 1: the two worst you could get interesting payouts from. And
25:47
Speaker 1: so those things are not necessarily undecipherable. But credit. In
25:51
Speaker 1: every sell off, credit has blown out. Whether it's the
25:55
Speaker 1: credit crisis, of course, but even the flash crash. I
25:58
Speaker 1: I remember being surprised that the flash I was trading
26:01
Speaker 1: during the flash crash made two ten. Maybe I'll get
26:04
Speaker 1: the date wrong by a little bit and uh. And
26:08
Speaker 1: credit spreads because of a glitch on the New York
26:11
Speaker 1: Stock Exchange moved that day almost as much as they
26:14
Speaker 1: did the day of nine eleven. So credit is an option.
26:17
Speaker 1: This low spread thing can move a lot. You can
26:19
Speaker 1: get an option like pay out being short or be
26:22
Speaker 1: exposed to the loss being long. Um and it is
26:25
Speaker 1: in my view of much more reliable tailhage that's been
26:27
Speaker 1: backed up in in academic research and UM and it
26:30
Speaker 1: also stands to reason that UM, you know, the credit
26:34
Speaker 1: is an option, whether you look at it a Merton
26:35
Speaker 1: model or you just think about I'm taking this little
26:38
Speaker 1: spread in return for exposing myself to a wider credit
26:42
Speaker 1: spread environment or defaults. And this is um. Uh, this
26:46
Speaker 1: is why I feel very fortunate that my sandbox where
26:48
Speaker 1: I grew up in the credit sort of market, you know,
26:51
Speaker 1: is UM is a really viable forum for tail edging.
26:54
Speaker 1: So so I have a last question before we go
26:57
Speaker 1: to audience questions in the last few minutes. Um, given
27:02
Speaker 1: where we are, how wide have um credit spreads gone?
27:08
Speaker 1: And if the put side wasn't attractive on equities at
27:13
Speaker 1: the top of the market, how does the call side
27:16
Speaker 1: look on equities today? Um? So the so credit spreads
27:22
Speaker 1: today are like in in absolute terms there slightly elevated.
27:29
Speaker 1: Like let's say it this way. Remember December two thousand eighteen. Uh,
27:33
Speaker 1: Trump and she were having a skirmish. The Fed was
27:36
Speaker 1: you know, being uh it was was was being tough
27:39
Speaker 1: on the market while while growth was was faltering. That
27:42
Speaker 1: seems like a walk in the park compared to now.
27:44
Speaker 1: And credit spreads then were roughly the same as they
27:47
Speaker 1: are today. So so maybe they shouldn't have been that
27:49
Speaker 1: wide then, or maybe they're too low now. But but
27:51
Speaker 1: spreads now are elevated, but in my view, nowhere near
27:55
Speaker 1: Um what what the risks the hidden risks and observed
28:00
Speaker 1: drisks are are in the marketplace now? Um In terms
28:03
Speaker 1: of call options, you know, Um, there's moments where credit
28:08
Speaker 1: falls enough that it isn't asymmetric, that it's symmetric, or
28:11
Speaker 1: it looks like if you locked it away in a box,
28:13
Speaker 1: you're gonna get a high return compared to defaults. We're
28:16
Speaker 1: not near that yet, and I still believe equities are
28:20
Speaker 1: much more attractive long even though there's going to be
28:23
Speaker 1: this sort of technical of people looking with loving eyes
28:26
Speaker 1: at a you know, five percent yield or six percent yield,
28:29
Speaker 1: and you can find in some investment grade corporates seven
28:32
Speaker 1: or eight percent yields if you go out far enough
28:34
Speaker 1: on the curve and um, and so there will be
28:36
Speaker 1: probably some people saying, I want the certainty of that yield,
28:40
Speaker 1: but um, you know, but that also comes with plenty
28:43
Speaker 1: of interest rate risk, to say the very least. All Right,
28:45
Speaker 1: a couple of questions from the audience, starting with where
28:49
Speaker 1: do you see the largest realignments of capital coming in
28:52
Speaker 1: the next five to ten years. I don't know if
28:55
Speaker 1: that's really your sort of question. But I don't even
28:57
Speaker 1: know what's gonna happen in the next five months, so
28:59
Speaker 1: so five years with with with respect, I am I really,
29:03
Speaker 1: I really don't know. But what I do believe is
29:05
Speaker 1: that the QT world, when all this is behind us,
29:09
Speaker 1: there's still a giant balance sheet, there's a head wind
29:11
Speaker 1: to the market is going to be really brutal for
29:14
Speaker 1: investors that have survived, meaning for trillion in fed assets
29:18
Speaker 1: that have to come off the balance sheets just in
29:20
Speaker 1: the US. And maybe they'll go slow or less slow,
29:23
Speaker 1: but um, but I think, um uh, this is going
29:27
Speaker 1: to be a period of much higher volatility than than
29:30
Speaker 1: the last decade was. So future volatility is going to increase,
29:34
Speaker 1: whereas it was modest but not low over the past decade. Yeah,
29:38
Speaker 1: there were there were punctuated moments, but there was a
29:41
Speaker 1: long period of very low volatility. And and it seems like, um,
29:46
Speaker 1: that may be behind us, because even if some of
29:48
Speaker 1: the problems go away, you still have the undoing of QUI,
29:50
Speaker 1: which is more than just no qui, it's the opposite
29:54
Speaker 1: of QUI. Is is I think a really underrated continuous headwind.
29:59
Speaker 1: And final question, and I'm gonna modify this. Given where
30:04
Speaker 1: tenure treasury reels are today, what does that mean for
30:08
Speaker 1: future GDP growth? What does that mean for the possibility
30:12
Speaker 1: of a recession either mild or more significant? So, uh,
30:18
Speaker 1: you know, until March there really weren't any any banks,
30:21
Speaker 1: um calling for a recession as as the most likely
30:24
Speaker 1: case it was. Around then maybe one or two banks,
30:26
Speaker 1: obviously Larry Summers and others did speak out. Um, I
30:29
Speaker 1: think that, um, these kinds of forecasts are are really folly.
30:33
Speaker 1: Literally we're standing in a thick fog trying to like
30:37
Speaker 1: play tennis and we can't even see the ball. So
30:38
Speaker 1: so like when I hear people and by the way,
30:41
Speaker 1: that's a great question you asked, but like when people
30:43
Speaker 1: answer it, I kind of shut her. So I'm going
30:45
Speaker 1: to try to not shut her at myself and say say,
30:48
Speaker 1: who knows. But what I know is that we should
30:50
Speaker 1: be aware that that this is not the market we
30:53
Speaker 1: were in and and this idea of thinking that still
30:56
Speaker 1: I can feel this thinking of you know, as soon
30:58
Speaker 1: as cp I misses and as we come in at
31:00
Speaker 1: seven something, okay, it's gonna be off to the races
31:02
Speaker 1: with the market. I feel like this is this is
31:04
Speaker 1: a personally, I think it's a Seldar rally market because
31:08
Speaker 1: people are not yet accustomed to all of the issues
31:11
Speaker 1: hanging over us. And anyway, that's my two cents. Thank
31:15
Speaker 1: you Boas for being so generous with your time. We
31:18
Speaker 1: have been speaking with BoA's Weinstein, founder of Saba Capital.
31:22
Speaker 1: If you enjoy this conversation, we'll be sure and check
31:25
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Speaker 1: rit Halts. Check out my daily reads at Hults dot com.
31:46
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31:48
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