The Derivative - BITFD & Wake the F Up with Ben Hunt of Epsilon Theory

Episode Date: August 12, 2021

Over 100,000 investors in 180 countries listen to Ben Hunt, founder of Second Foundation Partners and the Epsilon Theory blog, debunk the latest narrative machines in each of his opus-like post. So with Covid cases climbing and inflation expectations rising, it seemed like as good a time as ever to bring Ben back on the pod to talk through all that is going on, and all that they are trying to tell us is going on. Listen in to Ben get animated about our current auto-tuning society, the Grand Canyon-sized chasm between market world and the real world, llamas, the Delta variant and why Covid has become so politicized, building fences (literal fences), Bill Gross’ staple obsession, finding a pack to carry on meaningful conversation, getting your Robinhood calls on today!, why even a war with China won’t derail risk assets, inflation, inflation, inflation, narrative missionaries, wage growth, Robinhood, the housing market, wage growth, burning it the F down, Jamie Dimon is just a bank manager, the video game of life, taking the red pill, waiting for narratives to shift before piling into Trend Following, and how jazz hands work in Bitcoin world. Have fun! Chapters: 00:00-3:00=Intro 03:01-08:26=Finding your Pack 08:27-24:09=Politicized Covid in an “Auto-tuned” Society 24:10-42:29=There is NO Deflationary Shock that can Derail Risk Assets, but Inflation…. 42:30-56:26=In the poker game of [stock buybacks], Corp. MGMT. is the Rake 56:27-01:04:40=Trend Following, Bitcoin, and Jazz Hands Listen or Watch our previous episode with Ben Hunt, follow Ben on Twitter @EpsilonTheory, and visit the Epsilon Theory website. Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2,  or LinkedIn , and Facebook, and sign-up for our blog digest. And visit our sponsor, the CME Group at www.cmegroup.com to learn more about futures and options. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. What matters for the way that we as a society experience inflation so that it becomes something that plays a role in our social games of investing in politics, is for it to be reflected in wages and prices. It is. This is happening. I don't see what is happening in terms of employers and employee expectations about wages,

not just new employees, but also existing across the spectrum. If you don't see that the barge has turned, and these things are barges, right? These like barges sail in one direction for 20 years. Yeah. And then they slow down and then they there they start going the other direction the barge is going the other direction on the wage expectations the barge is going the other way on prices i've never i just can't forget that right that in the real economy

thought i was in his house is now the opposite of those sevens the opposite of q4 of 07. where expectations are not the price is going to go down and your car is going to go down. No, the expectation is the other way. And these barges do not move easily, but when they move, they keep moving. Hello and happy summer. We're here recording on August 4th, having just had Lollapalooza in Chicago and pretty much feeling things are back to normal. But we also have more and more Delta variant headlines and schools starting back up in a few weeks and likely mask mandate for the kids. And then I've gotten some sticker shock lately with a trip to Montana coming up and paying $2,500 or so for a rental car. So the inflation narrative is kicking strong. And I thought, who do I know that can talk about the Delta variant and the Delta and inflation expectations? And it had to be Ben Hunt of the wonderful blog,

narrative negotiator website, Epsilon Theory and co-founder at Second Foundation Partners. So welcome back, Ben. Great to be back, Jeff. That's wow. Twenty five hundred for a rental car, huh? Yeah, I actually ended up doing Turo, which is like an Airbnb for cars. It's kind of you rent other people's cars. Yeah. So that was about half the cost, but still expensive. So I don't know what's going on in rental car world. I think Fort Myers. It's just transitory, Jeff. Come on, man. Well, I'm sure if you're the rental car CEO, you're going to be like, oh, build more car. You're going to be like, cool. We can, we can charge more.

I can throw in some extra fees um it's all good so we did a pod about a year ago i think and went through your background and all that so i'm going to skip the uh good stuff there about the farm and we'll put a link in the show notes for those who want to hear how ben raises bees and used to be a trend follower uh and you were telling me offline you're just fixing a fence out there on the farm. I was, never ending work of fence fixing. It's, yeah, yeah. Where's Tom Sawyer or Buck Finn or whoever it is when you need him. Exactly.

Then I've seen some of your posts that you lost a beloved goat and some other animals. That's just normal farm life as well. It's the circle of life man it really is it's uh you know i'm such a dilettante farmer right i mean we've got our animals are essentially pets i mean not essentially we don't raise anything for meat that would that would that would that would seem to be terribly rude right so but we But we've got sheep for wool, although the wool is crappy.

I mean, they're basically movable works of art. That's the way I like to think of them. That need to be fed, though, as well. Well, they do. My four daughters, they've each taken turns. They do all the farm work, except for the bees and the tractor. That's my purview.

And I guess that's, you know, fixing. I guess that's the also. But I got to tell you, Jeff, and it is connected with that whole circle of life thing, the responsibility for kids to have to take care of living animals. And take care of them. Frankly, I mean, that's not taking away from house pets, which we've got a ton also, dogs and cats and all that. But there's keeping an animal outside, it depends on you to live.

There's no one else they can depend on. It's a tremendous responsibility, right? And it's just been, that's really why we did it, right? It was really because this is the environment we wanted to raise our family in. And it's been the best thing, Jeff. Really, it's been the best thing. Which goes all the way down to the fence mending, right?

So you got to feed them. You got to keep the wolves out, all that stuff. Although, can a fence stop a wolf? Well, no, no. Coyotes are our issue around here, but our dogs do an okay job of keeping out the coyotes. It's amazing stories with this stuff, though, the JEP, which you've learned. So most sheep herders, so we've got sheep and we've got goats and horses and chickens and bees like that but the um a lot of the the sheep herders and goat herders say up in new hampshire something you do it for

goat milk to make cheese they'll they'll have a llama or uh or an alpaca right some some sort of big goat like animal right Because they're amazingly protective. Some animals are just really protective. I find, you know, we've got a goat that's pretty protective. Anyway, the pack or the flock makes its way, that's for sure. So the llama will protect the goat, even though he's not related. Correct. All I know about llamas is that's how Chicago's Scotty Pippin

supposedly lost a lot of his earnings. He owned a llama farm and got bilked out of some money. Yeah, I think, you know, llama farms and ostrich farms, I think they've been the downfall of many a young man. Yeah, that was big stuff in the 90s. Let's get to the good stuff. So let's start with a little inconvenient truth that this pandemic is still ongoing, despite all our best efforts to pretend it's not.

You were super early on the initial pandemic. I think partly because your brain works in a geometric manner instead of a linear manner. So you knew that 17 cases in Connecticut was a big deal. You know, not that it was going to be 18 tomorrow, it was going to be 34 tomorrow. And partly because of your narrative machine. So what are you seeing with this Delta variant? What are you seeing with everything you're doing in that space? You know, Jeff, I think I'll say a couple of things. the disconnect between real world and market world is even more cavernous or canyon-like today than it was certainly a year ago today, but even more so from last March, let's say, when we were,

I at least was really alarmed and focused on that there would be real world consequence or market world consequences for the real world impact of the initial COVID spread. I think that's my first takeaway there, Jeff, is that this Delta variant is just brutal, right? I mean, you've got a R0, I don't know, maybe it's eight, maybe it's nine. I mean, that's just, those are insane numbers. That's, you know, you can catch this, you know, two seconds. It doesn't take five minutes of exposure, right, or 10 minutes of exposure. It's two seconds. It's just insane.

But, you know, you can see it. I mean, you know, maybe you see a little bit of, you know, concerns, quote unquote, in rates or in bond world. But, man, our markets, particularly our risk assets, they're just so insulated from anything that happens in the real world. That's my, you know's my first big observation. The second observation I'd make is that we're at the point societally where it is now impossible for me to write about freedom. It's impossible for me to talk about it. And I say that because I'm not a lockdown guy, right? And I also

I wear a KN95 mask when I go out. I think that vaccines are one of the greatest scientific developments this country's seen in 50 years, the freaking miracle. I can't say what I want to say about COVID because when I do, it is immediately either dismissed by those who think I'm a fear monger or whatever, or if I'm talking about how I think cloth masks are essentially theater and that the noble lies that have been told us by everyone,

but particularly by Fauci and the CDC and the like, how destructive I think that's been to our public health efforts. I get auto-tuned by the other side. I get dismissed by the other side. It's impossible to say anything. There is no middle round anymore, Jeff, in any sort of communications around COVID. It's just been totally auto-tuned and tribalized. Which is crazy, right? You'd think you'd get more tribalized on like the fed is doing this or that and get a bunch of people getting upset at that but no they want to come after you for uh your thoughts on covid and they're not thought you're not just saying crazy stuff in my opinion

right you're you're trying to quote facts you're trying to put numbers out there you're calling out people who do a poor job of putting numbers out there. So, yeah, it's weird pushback to me, for sure, from afar. Yeah, look, I mean, by training and experience, Jeff, I mean, this is what I do. This is what my PhD was in, was on statistical analysis of this stuff. As you say, thinking geometrically or at least exponentially and not just linearly and understanding what that means and understanding again how governments lie with their statistics almost always to to portray a kinder gentler you know experience whether it was the lies of china the lies of the World Health Organization, our own, you know, administration's efforts to minimize the impact of all this. And then, you know, look, a group we put together, we bought and distributed over 500,000 N95 masks directly to doctors and nurses and firemen and EMTs all over the country.

I mean, we did this for the better part of a year. Yeah. Unbelievable. 500,000. Yep. Yep. Yep. All in batches of 100 and 200. We sent out to, you know, thousands of individual, you know, nursing staffs, EMT departments, clinics everywhere, every state in the country. Yeah, and I've even seen pushback for you on that, which is like, hey,

why do you attack him for that? He's trying to help people. Their thing is like, oh, he's just trying to help people to look good. It wasn't really needed. What's their angle there? No idea. I really don't have it. This is, I is i guess what i mean that it's become so i thought the craziness would kind of die down after

600 000 americans and 4 million humans die from this yeah uh but it hasn't it hasn't at all like i tell you jeff i mean, this gets into our conversation about inflation also. The big picture around inflation, what really distresses me is that it also has been auto-teamed now. It's also been tribalized, where you've got AOC talking to Don Lemon about how it's just supply chain stress and don't worry. I mean, when did this become a DNC talking point? Answer, answer, when it became an RNC talking point to talk about Biden inflation. You know, and it just, it's just very distressing to me that, you know, I call or we like to call it what we write auto-tuning that whatever music is being played it gets auto-tuned to fit with the marching band of either

the maga or rnc crowd or the aoc dnc crowd and it's just so depressing because now i'm having a harder and harder time you know i said i can't really so depressing because now I'm having a harder and harder time. You know, I said I can't really talk about COVID anymore. I'm having a harder time talking about inflation anymore. Because when I talk about what I look at, which is the embeddedness of inflation expectations in autos, your rental car, autos, housing, and stonks, right? You know, half the audience tunes in the ad saying, oh, you're just, you know, you're just a Biden hater. And it's like, are you?

Anyway, I just- But you're rather, yeah, and it seems to me you're apolitical and you're just trying to point out numbers and facts. Right. And say, here's here's the narrative they're trying to sell you on both sides. Right. No, no one side is right or wrong. Well, that's right. I wouldn't call myself apolitical. I mean, there's you don't have a political motive. I'm saying that's correct. That is really correct. I think that what's going to save our country is bottom-up action, not top-down action through a political

party or a big corporation, because it's only from the bottom-up that you can find a group of people who treat each other as autonomous human beings, not as a means to some end. That to me is what it's all about. It's finding your pack, as I like to call it, the people who will treat you for who you are, a person in your own right. And with those people, you can have a conversation, right? I can, I can talk to somebody who's in my pack about, you know, vaccinations. And, you know, we did this the other day, we've got a, you know, so we've got a couple of thousand subscribers in that salon theory every Friday, about 50. So we get together on a zoom call and we had a great conversation about vaccination and about my view that it is your duty to others to be vaccinated it's not just for your own

protection but there is an active duty as a citizen in the same way you don't drive drunk, I think everyone should be vaccinated. But I'm able to have a very good conversation with someone who feels very differently about that because I know that they're not treating me instrumentally. They're not looking to score points because they're going to go tweet about it for their own gain, right? It's an honest conversation between people

who I trust have full hearts on this matter. And that's what's so lacking to J. Jeff. We get auto-tuned and we get used as instruments. Auto-tune, I like that. And yeah, I used to tell people with the flu vaccine way before covid like no it's not about you and people like oh i never get the flu i'm like yes but you can carry it and give it to my grandma or some little kid like the flu and some doctor told me i actually had no idea about that until a doctor right told me of like yes you're getting it you're

30 this was years ago, you're a 30-year-old healthy male, but you can get this because it's helping other people. I'm like, okay, that's fine. It doesn't bother me, stick it in my arm. But I can see the other side where people are like, no, I don't want you sticking something in my arm that isn't needed. I can see that too, Jeff. I absolutely can see that too. And I think you have to respect that. And that's why it's so hard to have an honest conversation with anyone. Do you think some of the vaccine stuff is because it's mRNA, like because it's actually editing or supposedly, you know, I'm trying to get a,

actually a private equity guy that invested into that on the pod next week, but right. It's editing the DNA sequence. It's giving the instructions to help create this, uh, immunity. Like, do you think that's part of the reason of like, yeah, that seems like GMO or right. That seems like stuff I don't want in my body versus if it were normal, quote unquote normal vaccine people would have more they'd be more willing to get it i think everyone's got their different two things one risk spectrum risk tolerance and also we all have our own i'll say sensitivities to narratives and ideas. Yeah. So the true answer to your question is yes, of course.

I mean, for some people, they hear that, and that's a meme or that's an idea that clicks with something in their brain. It's, oh, my God, I don't want that. And what I think was counterproductive is to tell somebody, you know, oh, you're wrong. Right. Right. Right. Because this is what I mean about treating people as, you know, autonomous human beings. I think it's so important to respect those decisions.

And I want to add to that calculus that I think everyone makes, what you just said, right, which is that, yes, there's the calculus of, okay, what risks you personally are willing to take in terms of the virus and the vaccine treatments and the like. There is also consideration of risks to others, because if you do catch this, you will almost certainly pass it along to others. And it's funny, we live in the society, Jeff, where we accept so little risk in almost everything we do. And I say that because, you know, as part of this exercise of trying to kind of get a sense of, well,

how much risk do you pose to others if you catch the Delta variant? So we're comparing it to, okay, what, what is the, what are the odds, right, of you killing someone else if you drive drunk? And so we went on the DUI stats and they've been collected. It's not just a little more dangerous to others to catch COVID than to drive drunk. It's about 5,000 more times dangerous. And I say these numbers, right, and I was looking at it and said,

well, there are two ways to interpret this. One is that, you know, there's a real substantial risk if you catch COVID you're going to pass it on to someone else who may not be in the same situation that you are in in terms of their health and ability to survive. I mean, you experienced it. Hell, you know this chap uh that's one way to look at the other way to look at is but i think i'm sorry like

everyone else i'm i think driving while intoxicated driving influences is an horror and it's just awful it's terrible it the odds of you actually killing somebody or hurting somebody else driving drunk are actually extraordinarily low. I was going to say, be careful what you say here. Their takeaway is going to be, oh, it's okay to drive drunk. That's what I mean about getting auto-tuned. This is the kind of society we live in. It's just very challenging today because we

I understand why we have such stringent rules against driving drunk. I'm thrilled we have those rules. I abide by those rules. I believe in those rules. And yet, I can show you the numbers, right? We're far more likely to kill someone else by catching COVID, by being unvaccinated, than by drive drunk. Now, just a little more likely, thousands of times more likely.

And that's why I find it so hard to have these conversations. Right. And then that was early on, right? Of like, are we going to make people go back to the office? Can we give all the companies legal protection in case someone gets COVID and dies

while in the office? Right. That was a narrative there for a minute of like, how are we going to legally protect those who infect others, right? I don't know if that was ever solved. I don't think so. No. Nope, never solved.

But hey, hey, did you get your Robin Hood call spread on today, Jeff? I mean, come on. Exactly. Do you think a lot of that is because, like if the Delta variant is bad, there'll be more stimulus that can go into stocks and stocks go up, right? That's kind of the calculus there. Like, right, if the Delta variant's not bad,

the economy's back, everything's good, buy stocks. If the Delta variant's not bad, the economy's back, everything's good, buy stocks. If the Delta variant's bad, we're going to stimulate the economy and everything's good and buy stocks. Right. So we're more entrenched than ever in a world where there is no deflationary shock that can derail the scarce assets Sorry, doesn't exist. I don't even think of a war with China at this point over Taiwan. I mean, I think we'd get hit for a couple of weeks and then there'd be another couple of trillion dollars pumped down. I really don't see any deflationary shock that can derail risk assets. Now, that leaves the question, can an inflationary shock derail risk assets? Yes, absolutely.

Right now, though, and this is what we're picking up in our narrative analysis, the Fed's mantra of this is transitory. If it's not transitory, we have it under control. If we don't have it under control, this is what we want it anyway. This is kind of the litany of our fathers and the Hail Marys that one must say 50 times before going into the Eccles building. But this mantra, these prayers are now common knowledge.

This is the dominant narrative on Wall Street. But within financial media. That, you know, don't worry your little head about it. And I think that until that changes, until you see it, the narrative shifting to, oh, my goodness, I think that's a little bit, you know, behind the curve here and blah, blah, blah, and they're going to have to type sooner, blah,

et cetera, and they're going to taper sooner. Until they get started, right, I don't see what derails risk assets. And, you know, that's, it goes against kind of what I feel in my gut, because I look at real world and I see what's happening around Delta you know my family lives in Alabama you know and it's like oh my god here we go again yeah bad down there uh but um but on that Fed and I was arguing with the economist the other day like does it does it matter I'm not solely on the MMT side, but they'll just keep doing stimulus. They'll keep printing and they'll keep saving everything. They'll go out and buy equities like Japan and Europe, right? Whatever they have to do to keep the game going, they're

going to do. So to borrow one of your phrases- There is no deflationary shock. There is no deflationary impetus that can derail risk assets. It has to be an inflationary. Now, what I will say, though, is I'm increasingly getting whiffs of, I don't want to call it stagflation, but disappointing growth alongside well-embedded inflation expectations and the things that matter in the real economy, autos, houses, and financial assets. So inflation expectations well-embedded in those big three. I'll say certainly a demand slowdown in the real economy all at the same time. You look at the GDP on Q2, 6 point whatever percent.

Huzzah, that sounds great. Well, you know what? It wasn't 8.5%. It wasn't different. It's like, hmm. You look at the housing market. I see a lot of housing markets today where the prices keep going up. But the transaction level is just way off.

A lot of these markets are just frozen right now because you don't have a lot of supply, but you also don't have a lot of demand. And I'm seeing that in more and more markets around there. And so that leads to bad or disappointing growth numbers at the same time your expectation for increasing wages and increasing prices makes it more difficult for the Fed to do I'll say traditional you know aggregate demand stimulus right I mean you know cut rates now all right oh really you're to cut rate? We're going to go to ZERP? Because demand's a little soft in places when we're growing at 6% GDP? It does create a potential problem for risk assets, equity markets in particular.

But, you know, you've still got to see that show up in the narrative. People have got the missionaries have got to start talking about that. They're not. And until they do, it's going to be party on. But that's what we're watching for. A few things. One, you mentioned, who are the missionaries, first of all? Like you're saying bedchairs and whatnot, or like Bill Gross's, Al Lorene's of the world, or who? Yeah, yeah, yeah. So the short answer is that any famous person, anyone with access to a printing press or a TV camera can be a missionary. And a missionary is someone who presents an opinion as fact.

The most powerful missionary in the world by an order of magnitude is Jay Powell. You know, other central bank chairs are kind of 2A and 2B. Biden is so-so. You know, it's interesting. Presidents aren't as big of a missionary as you expect. They're not as big as, like, say, Warren Buffett. So when Warren Buffett goes on CNBC and talks his book. I mean, that's what I mean by a missionary. Anyone on CNBC is a missionary.

So El Ariadne, absolutely. Of course, of course, Mavidage, right? Yeah, I dated myself with Bill Gross. I'm not sure the last time he's been on TV. Yeah, yeah, Bill Gross has got his own issues now, right? Yeah, that camera. Some noise war with his neighbors. Oh, my God. He's an ET subscriber though.

I got a nice email once from Bill Gross. You can look up. You can read the stories about Bill Gross. My favorite. Sorry, I'll get to the ET story. That's on Theory of the Story. My favorite story about Bill Gross was that Pemko was the fit he would throw if in stapling a report, you did not put the staple at a diagonal angle to make the page turning a little bit easier yeah i i you know you can't make this stuff up this is this is a true thing from someone who was there the fits you would throw about well

the staples back there anyway no matter what a nice email to him that's right right i got a nice email to him from one day because i quoted emily dickinson and apparently he's as i am an enormous emily dickinson fan who knew who knew um and then the second part of that you mentioned wage growth so yeah can any of those inflationary pressures happen without wage growth like it seems the answer would be, of course, yes, but also it seems maybe not, right? Because I don't know. Inflation that matters is always expressed in wages and prices, period, full stop. Right? If I have to have anyone say, you know, inflation is a monetary phenomenon, okay, just

fine. That's a tautology, frankly. That can't be disproven. Gosh, I just believe this so strongly. What matters for the way that we as a society experience inflation so that it becomes something that plays a role in our social games

of investing in politics is for it to be reflected in wages and prices. It is. This is happening, right? If you don't see what is happening in terms of employers and employee expectations about wages, not just new employees, but also existing across the spectrum, if you don't see that the barge has turned, and these things

are barges, right? These like barges sail in one direction for 20 years. Then they slow down and then they start going the other direction. The barge is going the other direction on wage expectations. The barge is going the other direction on wage expectations the barge is going the other way on price expectations i you know in the edge fund i ran right we did well in 05 and 06 and 07 yeah who cares everybody did well in the 5 and 6 and 7 we had a great year in 08 and that's what's made our bones and that's what made the fund and my partner and I

he was looking at it from the perspective of the real economy I was looking at it from the perspective of CDS and all of this and we both came to the same conclusion and I'll say from this perspective looking at the real economy I'll never forget this you saw in Q4 of 07 you saw autos

and you saw houses roll over, prices roll over. We didn't yet have the edifice that had been constructed to protect against deflationary shocks. So when you saw the prices of autos and housing roll over in Q4 of 07, and you combine that with what we were seeing in terms of the systemic risk in the financial sector, credit default swaps and this inverted pyramid of residential mortgage-backed securities. We put on our short going into 08 and the rest was history for our fund. I just can't forget that, right? That in the real economy,

thought I was in his housing is now the opposite of those sevens, the opposite of Q4 of 07, where expectations are not that the price is going to go down and your car is going to go down. No, the expectation is the other way. And these barges do not move easily, but when they move, they keep moving. And you combine that.

You know, I laughed about, you know, Robin Hood. Did you see freaking Robin Hood today? Yeah. I mean, it's up 50%, man, after 20% yesterday. Because options are trading on it now. That's what happened, right? I mean, oh, great. You know, it's today's best day of the year. Options get to trade on it. So's what happened right i mean oh what oh great you know it's today's best idea options get to trade on it so of course it's going to be up of

course that's worth whatever 30 billion dollars in market market cap are you and they like 300,000 or so of their customers they put into the ipo yeah yeah Which is the ultimate self-fulfilling, right? That's, that's going to be a new model out there. Like start a brokerage, have your customers be part of the IPO. Then they get extra money margin and then they can trade more and it'll just keep feeding on it.

So. Right. Because they're, they're, they're, they're the meansters anyway. I, it's like,

look, this is what I mean by inflation expectations down embedded into, I'm going to say risk assets again. I'm going to say stonks, right? That's where inflation expectations are embedded. And so you've got inflation expectations. We all think that the price of our car is going up, our house is going up, and our stonks are going up. And if that's what we all

think, then and we get our expectations that, well, we deserve

to be paid more. Yeah, or we need to be paid more. Oh,

my God, we deserve to be paid more. That combination, in addition to what's making me kind of nervous about kind of disappointing growth, because like I say, take a look at the transactions. Prices are going up, but it's not like we've got a lot of volume

following that. At least I'm talking about you know houses and cars right yeah you know i'm talking about stonks houses to me like i've got friends who write their houses they could sell it make a huge profit but then they got to go buy something else so it's like there's that problem too like now then what then what do i do unless you're gonna sell it and move to some totally different area at a cheaper price it It's not necessarily a financial windfall, right? Well, think about what you just said. They say we can sell it for a great price. Why do you think that?

It's a real-life example. We added this rental house after 20 years. And we finally said, okay, now's a good time to put it on market for exactly what we all think. Oh, my God, we're going to get a great price for this. Put it on the market. By the way, up here in Fairfield County, Connecticut, I'm basically putting out for just, honest to God, I'm putting out on the market for 20% more than I paid for 20 years ago. I mean, that's how crappy the real estate market's been in Connecticut for 20 years. 20 years.

But I'm excited, man. If I could get that, that's better than it was a couple of years ago. So I'm really excited to get that. There are no buyers. There are no buyers, Jeff. I mean, there's not a big supply of houses, but there are no buyers. So this is what I mean. We've all got these expectations that the price is going to be great.

But there is, and the lack of supply keeps those expectations high. What I'm telling you is there's a lack of buyers too. And so there are just not many transactions happening, even though we all believe that the prices are going higher still. And does it matter to you? Does it matter at all if what comes first, prices higher than wages higher or wages higher than prices higher? Well, and this is why I'm not apolitical. I hope wages go higher. I think that for everything I believe politically wages need to

the polarization and the disparities we have in wealth generation in large part thanks to our friends at the Fed and their inflation of financial assets I think that's ultimately a political disaster. So I'm very happy that wages go up. And I'm a small business owner.

I pay wages for people. And so it makes me happy that wages are going up. What I know, however, is that wages do not go up in a vacuum, and that companies are now, you see this every day, they're able to raise prices. Why are they able to raise prices? Because we all think the prices are going higher and this it is a classic wage price inflation spiral it's it yeah we started this conversation talking about covid right and looking at it last february and march and looking at the chinese numbers and saying okay they're lying that's not what an exponential function looks like they're clearly lying

this is very dangerous we need to start looking at masks et cetera like that okay, they're lying. That's not what an exponential function looks like. They're clearly lying. This is very dangerous. We need to start looking at masks, et cetera. To me, it's the same thing with wage and price inflation. Look, the spiral is happening. Don't tell me it's not happening. You see it every day. You see it in our own lives.

How many conversations have you had with neighbors about home prices? Yeah, lots. Lots. Yeah. And myself, small business, I've lost an employee to a big tech company who can pay 50 percent more plus stock. Exactly. Plus all this. So it's like, yeah, we feel it in real time for sure. You feel you you feel it all the time. Right. And yet, it's this... And then does it matter if it's transitory? Right? Sure, if it's transitory for three months, but I lost that employee, like, who cares? That was transitory. Yeah, I'm so sick of the whole transitory, you know, debate because it's... Who came up with that? It's meaningless. Did they sit in the Fed boardroom and come up with that word? Yeah. Yeah.

Look, this has been the big change of the last 12, 13 years in everything we do, whether every aspect of government, every aspect of corporate life, you name it, is that communication policy, shaping and crafting your narrative, everybody knows this is how the game is played. A lot of conscious attention is paid to it. And whether you're a sports team, whether you're a central bank,

whether you're a mom and pop corporation, everyone knows you need to shape your own narrative and that's how you survive in this world. So absolutely, it's conscious. Well, bring me to your burn it the fuck down, ma'am. B-I-T-F-D. So we didn't get to cover that last time. So a lot of that in the early days seemed to focus on stock buybacks. You know, the Deca millionaires or what do you call those guys? Yeah, Deca millionaires. But it made me really clear what stock buybacks are fun.

When I was running my headshot i love to see a company buy back stock right i loved it i loved it right all right so we're going we're going to create earnings above the line i get it i get it i'd much rather you buy back your stock than do some cockamamie acquisition yeah and and you know you're not going to do a dividend i know that so great buy back stock What makes me angry though, is that when stock buybacks are used to sterilize massive stock grants to management. Right. And so all the pushback you get is, hey, stock backs are, they don't matter. They're just the same capital. Returning cash to shareholders. I get it, man.

But when they're used to sterilize, when the company is buying back stock with one hand and they're giving it away with the other hand, right? That stock buyback, that money does not return to shareholders. It's just math, as the kids say. It is a pure wealth transfer from shareholders to shareholders. It's just math, as the kids say. It is a pure wealth transfer from shareholders to management. Pure wealth transfer to the tune of hundreds of billions of dollars. And that's, you know, that's why I'm saying deck of millionaires, right? So the, meaning that the chief accounting officer at any S&P 500 company is a decamillionaire. They're not risk takers.

They're not entrepreneurs. They're not founders. Look, a founder, a risk taker, an entrepreneur wants to make $100 million. Great. More power to you, buddy. Right? Great. More power to you, buddy. But we're in a world now where being a line manager of an S&P 500 company has never been, there's never been a more lucrative job choice in the world. The risk-reward has never been better. Zero risk, enormous reward.

Does that make you mad from a like shareholder perspective? Or from a like, I should have been one of those guys perspective? Not the latter. I mean, I'm just I'm just not built that way. I'd be a terrible chief accounting officer. I'd be the worst. It would be the worst. It wouldn't last. But no, what burns me up, Jeff, is the mendacity. What burns me up is the conscious subversion of their hiding of this practice under yay stock buybacks yay capitalism yay returning money to shareholders when yeah it's just bad it ain't returning money to shareholders if you're sterilizing the stock that you're handing out well it's both right so they are returning to stare but inside are returning to sterile.

But inside the returning to shareholders, there's this slice that's going direct to management through the options. Yeah, it is an enormous slice. So I like to call it the rake, right? So, you know, you go to Vegas and you play at the poker table there, the house takes the rake. And usually it's a couple of bucks out of a big pot. It's nothing, right?

1%, maybe, right? Is the rake 2%? The rake at, I'll use an example, JP Morgan, the rake is 18% to 20%. That's the rake is 18 to 20%. That's the rake. Meaning the stock buybacks, 18 to 20% goes to sterilize stock rates. That money does not go to shareholders. But did all the big firms that own these stocks know the rake? They know the percent? It's like showing up at the poker table in Vegas and you know the rate and you say, cool, I still want to play. So in that scenario, does it matter?

If they're getting rich, the shareholders are getting rich, everyone's getting rich. Why does it matter? Well, are the shareholders getting rich? So I'll leave that aside. Again, that's why I'm not apolitical, right? Yeah. Jamie Dimon, bless his heart. Jamie Dimon is not a founder.

Jamie Dimon is not an entrepreneur. Jamie Dimon is not a risk taker. Jamie Dimon is a, by all accounts, very good bank manager. And he is a billionaire for being a manager. It is the triumph of the manager. And I think that the dynamism in our economy, the productivity of our economy, the fire that creates real growth in our economy comes from risk-taking, entrepreneurship, everything that Jamie Dimon is not. And those qualities, entrepreneurship, risk-taking, et cetera, those are not rewarded in our system to an iota, to a fraction of what management in a too-big-to-fail company is awarded.

J.P. Morgan cannot fail. By law, by law, J.P. Morgan cannot fail. By law, by law, J.P. Morgan cannot fail. No matter what he does, right? No matter what he does. And I'm sure whatever it is he does, enough people have told me how great J.P. Diamond is. God forbid, I can't deny that. When you could argue that him getting them to the point where they're by law too big to fail is worth paying them at least a billion dollars.

Well, we know what happened for them to become too big to fail. Yeah, they fail. Right? He and others broke our economy, is how they became too big to fail. Right.

So, you know, there but by the grace of God. So anyway. And then more meta. Yeah, yeah. But beyond even the, beyond the You know what I started saying, you know, burn it the fuck down, Jeff. I started saying that when Epstein was

found dead. Because that that and look I have no idea whether it was suicide. What I'm saying is I don't care. A non-corrupt state has one job

when Jeffrey Epstein is in jail. You keep him alive for trial. That's right. You have one job. One job. And for that not to happen, that kind of threw me, I'm not going to lie,

that threw me for a loop. I have not felt so shook. The last time I felt that shook was in September and October of 08. When I had, oh man, I was short everything. I mean, our fund, we were killing it. Killing it. And I remember looking at the screen one day and said, oh, my God, you know, we made like 5% that day because the world was just collapsing around us.

And then I got a call from my buddy at, you know, it was still Lehman in time, but not much longer. And then all of a sudden it struck me. It's like, wait a second. If this all collapses. Can I make, can I cash that out? Who's going to pay me? How many of them catch this out? And then, you know, we got the temporary liquidity guarantee program by the U.S. Treasury, where they went and they backstopped the senior debt, senior unsecured debt of all bank holding companies

like J.P. Morgan, like Morgan Stanley and Goldman Sachs, who became bank holding companies. That's what I was going to say, even let them become one. Yes, exactly. Right. So, you know, the most amazing coincidence,

we're going to become a federal bank company and then the next week, here's the temporary liquidity guarantee program where, oh, the senior unsecured debt of J.P. Morgan is now backed by the full faith and credit of the United States government. And for that, J.P. Diamond becomes a billionaire. Give me a fucking break. Right. Right. So those two events. Right. The the temporary liquidity guarantee program where the full faith and credit of the United States government was put behind Goldman Sachs debt. Right. And Epstein dying. It's like. There are these kind of moments in your life, right, where the the pleasant skin is kind of ripped off to show the naked sinews of power

below it. And anyway, that tends to spur a little, you know, burn it the fuck down anger. Don't try, Jeff. I'm trying to get calm. No, I love it. To me, it's like the Matrix. It's like, do you really want to see what's on the other side

of the curtain? Or this new movie with uh ryan reynolds guy where he's inside a video game but he doesn't know it so it seems to be the main theme you're trying to get is like hey everyone we're inside this massive video game where we're getting played left and right by those the those in power that that power class you know you could change it to wake the fuck up instead of burn it the fuck down. Yeah. But at the same time, I come back to like, does it matter if you're participating in that game and doing very well? Why should you care? Well, two reasons besides a moral compass or whatnot, but maybe.

Well, and that's going to be the second reason, right? But the first reason we care is that I'm not a fight the Fed guy. On the contrary, my whole business is about, you know, what is the narrative? And even if you think the narrative is full of shit, I'm telling you, the narrative is going to win. So that's, you know, the race doesn't always go to the swift, but, you know, that's the way you want to place your bets. And it's the same way for me with the narrative. I mean, you know, my opinion in 275 will get you a subway token. You know, my whole business is trying to understand what's the narrative and, you know, pay attention to that. I'm not a fight the Fed guy.

But what I am is a don't give your heart to these guys maintain a critical distance from these guys understand that yes it may be the only game in town

because that's the other line with the poker game you know the dealer's cheating yeah I know but it's the other line with the poker game. You know the dealer's cheating? Yeah, I know, but it's the only game we have. But don't kid yourself because this is what we all start doing. We all start saying, oh, you know, it's not a game we're playing. It's not, you know, rigged in this way or that way. I'm just really smart.

I figured this out. I'm just really a genius. Unlike all these other rigs, I got it all figured out. What I'm saying is play the game, manage other people's money or your own money, whatever it is you do, most obviously other people's money, and do it with that moral compass and do it with that critical distance. I think that's great. It's important both to be a real human being, right?

Yeah. But it's also important actually for the instrumentalism of managing other people's lives. Because narratives change. The rules change. You saw this in LA. You've seen it in different ways of it, and you don't want to be the bag holder, because you will be the bag holder if you let these guys into your heart, if you start believing the lies they're telling you,

if you don't maintain that sort of critical distance. So my strong belief is both to maintain a compass as a moral human being and look for ways to change the system, which I do, as well as to navigate the system as best we can for ourselves and our family and our clients and the people we have a relationship with, a bond with, I think it's important to have that sort of critical distance. That's what I think we should pay attention to. That's why it matters. As I view it, if we're in the video game, the video game could break. It could glitch. You need to know you're in it in case it glitches and know how to react.

Know thyself. That's right. What else is going on outside inflation, outside Delta variant? What else is the narrative tools you have popping up? That's my quick thoughts were the, I'll let you answer. And if it's not one of those, I'll bring it in. Yeah, look, it's still very much, our focus is on this gigantic gulf between real world and market.

The bridge is going to be, does the narrative around central banks change? Not around Delta, right? Because, you know, they will stop at nothing, right? Again, they've got plenty of tools for a deflationary threat. The issue is what happens if we get disappointing growth and continued well-embedded inflation in wages, prices, autos, houses, and stocks? If we get kind of that whiff of stagflation, first time you start,

you see an article about that in the journal. Hey, you know, there's a lot of airspace, right? Between where the market is today and where it's at. That's what we're looking for. And not that this is necessarily what you do, but a little bit, but what asset classes are you looking at once you get that whiff? And basically what do you think will do well in an inflationary regime? Price and power, price and power, price and power.

You know, nobody talks about price and power anymore. But if, if we get these kind of inflationary regimes, then everybody's going to be talking about pricing power. And it's wonderful, right? Because I actually think maybe, maybe fundamental analysis would matter again. Now it's kind of a dream of mine. One day, you know, before I die or retire, I'd like to see fundamental analysis better again, like see differences between companies better. But until then, you know, I'm just going to go out and buy my Robinhood false grids. And what about like commodity owning outright commodities or trend following commodities, right? Because they should do well in a inflationary period. So one of the things that we're really excited about with our new narrative research is really as an indicator, not for price levels on risk assets, but

for the efficacy of trend following strategies. Because it's these narratives have a cycle to them. They have a life cycle to them. And that's then reflected in when trend following strategies do well and when they don't. Right now, our belief is that trend following strategies, we're underweight trend following as a strategy. I'm excited, though, by the opportunity to be overweight trend following strategies. I think that time is coming.

I also think that our narrative signals will tell us when that time comes. It ain't here yet, but that's what we're looking for also. And to summarize that, Everett, the narrative machine right now is saying, hey, any trends are going to get handicapped or cut in half or whipsawed by the narrative that's on right now. So be careful. Once that flips, then those trends might be able to extend. Correct. We're in an inflection point right now, right? So we're, you know, trend following works best in the straightaways, right? It doesn't mean that you want to avoid when the trend flips.

We are at a potential trend flippings period right now. So, you know, I don't want to be in trend following strategies right now. I'm looking forward to getting into them when we enter into a straightaway. Love it. And then my last thing, I think you called the inadvertently called the top in Bitcoin by giving yourself the laser eyes on Twitter, adding the pay for your newsletter in Bitcoin. Right. That had to be right around the same time? Yeah, and I did all that as cultural appropriation, right? Because I'm the opposite of a Bitcoin bro, right? I have zero interest in Bitcoin as a trading instrument

or what the price of Bitcoin is. That's what I write about and what I talk about that. So, yeah, that's going to be the next product we're rolling out because Bitcoin, or as I like to call it,

Bitcoin, with jazz hands. Trademark. Trademark. It's all narrative. There are no fundamentals. It's all narrative right there there are no fundamentals it's all there so we think we've got kind of the ultimate test for your your philosophy right your theory right on brother right on um so what so your thoughts are like i don't care about it one way or the

other i'm just interested in in how this has become a thing exactly it has become a thing so it's definitely become a thing and summarize. It has become a thing. It has definitely become a thing. And summarize here that piece. You basically think Wall Street's co-opting it, it's going to brand it, it's going to make it even more of a thing? Already happened. Yeah.

The ship has sailed. And Wall Street turns it into Bitcoin, you know, a securitized product. The U.S. Treasury, I like to call it the eye of Sauron, Bitcoin, you know, a securitized product. The U.S. Treasury, I like to call it the eye of Sauron, puts, you know, they just want to see all the money in the world.

So, you know, all the reasons that the OG Bitcoin people were into Bitcoin, that's all gone, man. You know, There's no more oh, I'm going to change the world.

You're just another table at the casino now. You want to go into the Bitcoin room? Go ahead. You can make a lot of money, but it's just another room it's just another set of tables. It's the crypto room at the casino. I love it. All right. Any other thoughts before

I let you go? No, man. Just stay healthy. Take care of yourself and your family. I will. You too. Good luck on the farm. I got to come when this is all over. I want to come visit the farm. How far from New York are you? We're an hour on the train. So, Huck's keeping a job. Perfect. Piece of cake. I should have. We were in upstate Cooperstown with my son for the Little League. Oh, right on.

Yeah. In July. So, I could have shot over. It's not far from Woodstock, I think. So, yeah. Looking forward to it. You stay safe. Best of luck. We'll put all the stuff.

I finally, I felt guilty asking you to come on here and talk to you without uh signing up so we actually signed up this morning as a member so part of the pack now right on like an honorary member of the pack before but i wanted to make you were indeed now you're an official member love it thank you jeff all right ben thank you thanks guys Bye-bye. The Derivative is brought to you by CME Group. CME Group is the world's leading and most diverse futures and options exchange. For more information and educational resources about futures and options, visit cmegroup.com. You've been listening to The Derivative.

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