The Derivative - Hedge Funds vs ETFs, Passive vs Active, 70s Inflation vs Now, & Commodities vs CTAs with Simplify's Mike Green

Episode Date: April 7, 2022

What exactly does a chief strategist do? Besides picking fights with Bitcoin HODLers on Twitter… And how exactly does one of the most prominent voices on the dangers of too much passive money trying to fit into a single asset classes on/off ramps, end up at….wait for it….an ETF shop? We aim to find out in this episode with Simplify's Chief Strategist and Portfolio Manager - the one and only Mike Green - he of Clue character handles, Princess Bride Avatars, and insightful RealVision interviews and macro focused writing pieces. In this fun chat, Mike shares his particular brand of monotone macro mastery with us, but we also dive into his famous anti-XIV trade, role at Simplify, why the ETF structure keeps getting more and more appealing, big boy markets, exchanges and the LME, the inflationary pressures of the '70s vs. today, why 'team transitory' gets a bad rap and quick thoughts on Crypto and NTFs. You're not going to want to miss this jammed-packed episode! Chapters: 00:00-01:25 = Intro 01:26-09:06 = Joining the Navy, College enrollment & Keto Success 09:07-32:46 = Mike and his views on Passive at an ETF shop?  ARKK and identifying a “Flows Beta” 32:47-43:18 = $CTA, the new Managed Futures ETF & Discretionary vs Systematic 43:19-53:35 = CTAs too big, Big Boy Markets, Big Exchanges & the LME 53:36-01:09:24 = Inflationary Pressures: 1970's vs Today, Fragile Systems & Team Transitory 01:09:25-01:14:57 = Quick thoughts on Crypto & NFTs 01:14:58-01:17:33 = Two Truths & a Lie From the episode: Learn more about Mike's background in our previous recorded episode here. Follow along with Mike on Twitter @profplum99 and check out Simplify Asset Management here. 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. 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

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. Happy spring, everyone. It's April in Chicago, and we're finally warming up, and the pod's warming up too, with performance coach Denise Schell on next week, followed by the guys behind the new VIX ETFs, followed by Quant Arter Set. So subscribe today on your favorite pod program.

Be the first to get these episodes as they drop. We've got a great one for you today with the one and only Mike Green, Chief Strategist and Portfolio Manager at Simplify. To share his particular brand of monotone macro mastery with us. This was a fun chat talking through kids leaving for college, why he went into the passive viper's den, so to speak, joining an ETF shop and coming up with a few new things from Morning Startup in its fund research, flow beta and leverage beta.

Send it. This episode is brought to you by RCM's Managed Futures Group and their newest white paper, going through all the ins and outs of trend following. We talk with Mike in this episode about Simplify's new trend following ETF, and RCM's professional team of advisors can help you really dig into what products like that are doing under the hood. Check out everything RCM does at www.rcmalts.com. Now, back to the show. okay we've got them the one and only professor plum slash bazini mike green of simplify i always want to say spotify yeah you too it's not spotify it's simplify right it is not spotify it is

simplify um so we're gonna skip over the background a little bit we did our first pod with you back in Spotify, it's Simplify, right? It is not Spotify. It is Simplify. So we're going to skip over the background a little bit. We did our first pod with you back in 2020. Go check it out. We'll put it in the show notes, especially the part where Mike structured a very nice trade buying puts on the inverse fixed ETN before it went bust down to zero. So let's start with your tweet last night. Your son's going to Navy. Yeah, he finally made the made the call he uh had a number of choices and candidly um took the path less traveled

um you know turning down some really amazing schools that are more traditional academic choices, but he really loves the discipline. He really loves the coach at Navy. He's a big swimmer. I think you know that. And, you know, this is really an opportunity for him to try to do something that, you know, when I asked him, you know, what what are you afraid of in the traditional Ivy League sort of choices or the UC choices? You know, his reaction was nothing. Right. What is there to be scared of? Same thing I've been doing, you know, my entire life, basically. And when I asked him about Navy, it was, you know, well, I'm worried, you know, could I hack it? Right. Is it more than more than I'm prepared to handle? And from my standpoint, that's exactly the reason why you end up doing something, right? You challenge yourself,

particularly early on in your life to try things that you're not entirely sure you can pull off. And, uh, if, if you succeed at it, then you don't have that to worry about anymore. And if you fail, well, you learn something new about yourself. Uh, and what, how does that work? So you go there and then you have to serve at least two years or what's the. It is four years. So I'm sorry, five years actually. So he will have four years of U.S. Naval Academy undergraduate and then five years in the service. He also considered doing things like ROTC, which are similar in terms of their dynamics. But he really, you know, just wanted to be involved with the Navy and the discipline and brotherhood associated with the service academies. Good for him. I always feel a little unspectacular.

My grandfather was in the Navy, World War II. My dad was in the Navy in Vietnam. And here I am doing hedge fund stuff. Doesn't equate. So hats off to him. You're near enough to the pits. It's like wading into battle. Yeah, that's awesome. And how did you find the whole college application? I've been hearing horror stories of people with straight A's and they can't get into schools because basically COVID condensed three years of applicants into one year. Yeah. So that, that, that affected him more than most. So he's our third, um, our last actually. And so this is very bittersweet, um, in that, you know, he is not only going off to college,

but leaving early because he has to go for club summer. So he's, uh, he's going to be taking off basically June 30th. Um, and that's the last time he'll live at home for a very long period of time. Because then during the summers, they have the equivalent of internships where they go and experience different opportunities in different areas of the service. So now you're going to get me emotional because I'm in the process of losing my last son. He's a very serious athlete. He just missed the Olympic trials cuts for swimming this past summer, which is great for a high school kid. Yeah. And, you know, he was a recruited athlete, but the dynamics of being a recruited athlete were heavily screwed up by

COVID. His sister, who was playing volleyball at the University of Pennsylvania, just missed or managed to get recruited just before the cutoffs began. He was in the middle of his recruiting season as COVID kicked in. And one of the weirder dynamics that happened is that all NCAA athletes had their eligibility extended by an additional year. And so the implications of that were that the recruiting classes were cut in many situations, less so for sports like football, but certainly for sports like swimming. Instead of eight kids to recruit, typically there'd be five kids because you had kids sticking around for a longer period of time. So that, that really played havoc with his expectations

around the process, but it all ended up working out great in the end. And he's with the coach he wanted to be with. And, uh, I look forward to getting to travel cross country to go see him swim now. Um, yeah, you're going to be on those red eyes nonstop. Yeah, exactly. If anyone, if anyone else out there is a swim parent, you know exactly what I'm talking about. Gavin is a sprinter. And so I will travel, you know, for a three day swim meet to watch him swim a grand total of about two and a half minutes across his various events. So it's, you know, on, on a it's like watching your kid ride the bench continually, even if they're pretty good at it. So, um, and so does he still have a shot at Olympic trials next time around four years? He'll make the Olympic trials

next cycle. Um, almost certainly, um, usually they drop a couple of seconds during college. Um, and with that, like he'll, he'll definitely, it's my expectation that he'll qualify. Well, we'll, we'll see, never say, you know, you can't take things like that for granted. Right. Where did all these athletic genes come from? Is that from you? Did you play a sport? I did play sports, but I never played them particularly well. My wife was the same. And I will tell you that our kids are a testament to the fact that two

parents with very limited athletic talent can produce kids that, that seem to pull it off if they have the discipline to do it themselves. I love it. Um, and last personal bit before we get into the good stuff, the, uh, how's the keto going? I know I was big on that four years ago and kind of fallen off the wagon. So I see your tweets and you're giving me hope to get back in there. It's gone really, really well. So, um, I'm down about 75 pounds, um, 75, 75 pounds and am roughly the weight I am when I got married. Um, and if I, uh, if I'm honest with myself, I've got another 20 pounds to lose and those 20 are probably going to be the hardest because I feel pretty good and I can feel a little bit of the keto exhaustion kicking in, but I'm doing

better than I have been done in a long time. And, you know, I'm giving myself the grace to say, okay, let's have a little bit of celebration and then let's, let's get back to it. The biggest challenge at this juncture is just finding the time to work out as I had been doing, because now at Simplify, we're launching multiple, we've launched multiple new products that I'm very directly involved in.

And as you've obviously observed and others are catching on, the markets have become quite a bit more tricky than they were in kind of the one-way trade following March, 2020, right? So figuring out the right way to structure products, helping people understand how products should respond, thinking up better ways to hedge in the environment where hedging costs are much more expensive is mentally quite a bit more taxing. So, you know, now I've got multiple loads competing

on my brain right now. I hear you. So simplify, what exactly does a chief strategist do? What's your normal day look like? To me, it's you wake up, fight with some Bitcoin holders on Twitter for a little while, and then come up with some cool product. That's basically it. That's exactly it. Yeah, you nailed it. So I have two titles, Chief Strategist and Portfolio Manager.

As Chief Strategist, I'm responsible for thinking about things like how market structure will contribute to our product's behavior, understanding the general macro environment, not quite putting us into the quadrant type framework, but thinking much more about how should we be hedging in this particular environment and contributing far too much experience to that process. On the portfolio manager side, it's much more traditional, right? It traditional. Should we actually execute a hedging trade? What is the budget that we're going to use over this quarter? What are the discretionary trades that we can deploy? Because we do do discretionary trading, particularly in small size at the front end to try to defray some of the costs of carrying the hedges. So being actively involved in that process is pretty typical. You do see me being very active on Twitter. That is part of my job is promoting the Simplify brand, sharing the insights that we have across markets, contributing a little bit of my personality to it to the extent that somebody

with a monotone voice and a face made for radio can contribute to those sorts of things. But 75 pounds down your face alone, probably dropped 10 pounds, right? So you're all good for video. My head is significantly less swollen now, shall we say, but yeah. No, it's so, so the day-to-day existence like is, you know, I'm usually up around four 30 in the morning, uh, cause I'm on the, on the West coast and, you know, we'll, uh, start the day off with some reading. And part of that reading is of course, going through Twitter, which has become one of the better news services for capturing information, um, quickly and efficiently, much greater degrees of flexibility

with the analysts and thought leaders on Twitter than you have in the sell side investment banks. And so it's actually quite a bit less filtered and in many ways more efficient to gather information off of Twitter if you know what you're looking for. Yeah, that's kind of counter to some people's like there's too much noise. But yeah, if you have the right filters and the people you want to know. There's an incredible amount of noise, but there's also an incredible amount of quality as well. Right. I mean, there's just some really, really smart, thoughtful people out there. Yeah. And sometimes you find with like 300 followers and you're like, this guy really knows his stuff. Yeah. You do find that. And one of the nice things about being relatively well followed on Twitter is the opportunity to amplify some of those individuals, right? They're,

you know, they're, they're both very talented and very smart and often incredibly appreciative of somebody paying attention to them. Right. Which can be quite helpful in terms of understanding stuff. So I've developed networks on Twitter that include US government officials, that include regulatory advisors. There's a number of very talented analysts that work for the Fed or the Bureau of Labor Statistics that are on Twitter. And they really provide excellent, excellent analysis. And something you said in the back there of discretion inside the ETF. So I feel like the original ETF creators would be rolling over in their grave right now, right? It's just a passive stock index following model. So how to simplify and overall is kind of a more active

trade, active ETFs, right? But then how do you be able to trade inside the ETF structure? So we fall into a class that's referred to as active ETFs. And anytime you're using derivatives, and this was actually, you mentioned earlier the trade around XIV, for example, part of the reason why that trade was made possible is because XIV and Velocity shares did not have any discretion. I knew exactly what they were going to do. And so it was relatively easy to disaggregate the impact that they were having on the market and what was the likely impact if they were to encounter a particular type of event. Within an ETF, for example, our flagship product SPD, we have to be very cognizant that those same dynamics are in place. So if the price of long

dated deep out of the money insurance rises significantly, which it has in the aftermath of the pandemic and has not retreated, right? So even as the VIX moves back down into the teens, we're not seeing a retreat from longer dated volatility yet that is consistent with that sort of move, right? So you're seeing a one-year variance or a two-year variance contract printing in the mid to high 20s, that changes the character of how you should be seeking insurance. Right. And I feel like the regulators were a little too naive at first, right? Of like, oh, if it's rules-based, it's systematic, it's better for the investor, it protects them.

When in fact, as you're pointing out, well, sometimes that can hurt them because someone can gain the other side of those rules. Yeah, it does. And, um, the regulatory environment is still not changed enough from that standpoint. Right. Um, you know, I just finished having a, a, um, a meeting, um, speaking with a large wire house. And one of the things that was made very clear is that if you have a purely systematic strategy, it is actually much easier to get onto platforms. It is much easier for people to allocate capital to you than even if you have a small slug of discretionary for the very simple reason that it's not predictable, right? They can't know

exactly what you're going to do. That's from the market maker side or just from the wire house trying to sell it? Both. Yeah. I've gone down that path before myself of like, if the market maker can't make a market, fine, you have an ETF, but the spread is $3 wide and nobody's going to trade it or want to buy it if the spread's too wide. Right. And so you run into those issues. One of the advantages of being somewhat of a first mover into these types of products is that we've managed to get to scale so that market makers allow us to do things that others might not have been allowed to do or might not have been viewed as favorably. Among those would be products like introducing the first ETF,

CTA, commodity trade, trend advisor. We'll get to that one in a minute. We're going to deep dive that. Those sorts of products are things that we're bringing to market that I don't think are easily accomplished. I know it looks like everything is easy on the ETF side, but that's because there's a ton of work that's going on behind the scenes. And we can talk about some of those dynamics. But one of the most important and powerful dynamics is the ETF structure has an extraordinary amount of tax efficiency associated with it. And that's particularly important when you start talking about derivative strategies. And so there are things that I can do that are tax efficient within ETFs that really were not appropriate within the traditional hedge fund space, except for tax deferred or tax advantaged institutions.

Right. So, so a lot of that's just buy and hold stuff you're saying. Well, buy and hold is always tax efficient. Right. But what is not tax efficient, for example, is any strategy that involves options, right? Because the best case scenario is you're using index options. In that scenario, you can elect for partial split treatment between long-term and short-term capital gains. But for the most part, derivatives are always treated as short-term capital gains. And so anytime you're running a strategy, mild strategies at Logica or the strategies for Ben Eifert, for example, at QVR, et cetera. These are strategies when you involve options that tend to be uniquely well-suited for institutions as compared to individuals either on the retail side

or on the high net worth side. And so, you know, one of the key attractions was recognizing that the ETF structure could be used to improve the tax efficiency of option strategies quite significantly. Do you see there was a little bit of talk of that ETF tax efficiency could be regulated away? Any fears of that? Always. I also think of like if you move to that, hey, we're going to mark to market income tax on all your holdings. Does maybe the ETF get carved out of that and become an even bigger play? The quick answer is we can't possibly know.

This is one of the fun things when policy begins to move front and center is that it is inherently unknowable and stochastic in its framework, right? We just can't actually know in advance. Are they going to suspend the tax advantages of ETFs or are they going to expand the tax advantages of ETFs? One of the nice things in our industry is, while I complain about it in a lot of other ways, the power of BlackRock, the power of Vanguard

from a marketing standpoint in terms of lobbying is pretty unmatched and they're pretty locked in at this stage. Yeah. What are they? Trillions? We just had Robin Wigglesworth wrote the book Trillions talking about the whole ETF space. So what is BlackRock? Five trillion? I can't remember the number. BlackRock is now 9 trillion and Vanguard is about 7 trillion. A lot of work. And so how did you weigh coming from the hedge fund world to the ETF world? It seems like you a little bit like made a deal with the devil to go into the passive space, but you're saying they're active, but there's still a bit of passive inside of

there, right? Yeah. So this is one of the things that hopefully was very clear from my narrative, you know, starting several years ago, the dynamics of the growth of passive creates conditions under which it is almost impossible to beat them, right? For the very simple reason you've heard me use the analogy, it's like that horse racing game or the inflate the balloon water game at the carnival, right? My son's really good at that. What's that? Your son's really good at it. Okay. Well, you can make your son even better if both of you shoot at the same target, right? You're increasing the water pressure. You're increasing the potential for the balloon to fill faster or

the horse to run faster. That's effectively what's happening in the passive space is all the money is flowing into passive strategies that's causing the underlying securities that mimic the passive component or make up the passive component to outperform. And there's not a lot of ways that you can improve that without taking significant tracking error risk. One of the ways you can improve it is taking advantage of the fact that option theory does not even provide for the possibility that the market is being influenced in that manner. So the whole thought process behind put-call parity and risk-neutral arbitrage is functionally

dependent on the efficient market hypothesis, the idea that there is no forward drift that is not compensated, i.e. knowledge-based, for example, that's one of the most foundational components in option theory. And it creates the opportunity to earn excess returns in options if something's going on that's creating conditions of drift. It's almost like the YOLO meme stock traders figured that out by accident, right? Of like, hey, if we go into these call options and everyone's flowing into them, we're going to get this huge outsized payout. That's what I mean. That's one of the great ironies, right? Is that as I think I said it this way on the Grant Williams podcast a long time ago, there's genius in the naivete, right? Sometimes it's as simple as saying, hey, we can do this, not should we do this? Is this the right thing to do?

Is this a long-term trade, et cetera? Just do it, right, to quote Nike. And the vast majority of people are going to lose under those conditions. But every once in a while, you'll get a GameStop, you'll get an AMC. And that's particularly true if there's an environment in which the marginal purchaser of those underlying securities is either somebody who's forced to hedge or an index player. And GameStop, for example, and I believe AMC as well at one point became the largest stocks within their respective indices. They created a tremendous amount of buying pressure as money flowed into Vanguard, for example. You know, they were following on and buying AMC and GameStop for the very simple reason that the assumptions under passive investing presume that there must be really good stuff going on to justify that type of price increase. And then is ARK a good example

of your theory on the downside, right? Of like, hey, when this money comes out, it's going to be- In both directions. So if you disaggregate ARK's performance into, you know, the traditional way to do it would be that you run the performance of ARK against the S&P or the NASDAQ, right? And if you do that, you discover that ARK has a relatively unstable beta, that their beta to the NASDAQ, which is probably the best benchmark for them, has been growing. But it doesn't do a very good job of explaining behavior. If you introduce a second variable, which just flows into ARK, what you discover is that second variable has its own beta that ultimately began to subsume first on the top side and then on the downside, much of the beta exposure associated with the NASDAQ itself. And so the

beta for ARK to the NASDAQ, if I incorporate flows, has remained relatively constant. And you can think of Cathy Wood as the, well, there had to be somebody who was willing to go with a 1.5 beta to the NASDAQ. Once flows started to come in, it caused her portfolio to begin to outperform even the NASDAQ as the flows in created positive behavior. And then once that flipped, you began to see them all underperform. I think it's a fascinating insight in terms of this dynamic of a flows dominant marketplace. We need, that should be a new Morningstar stat or something, the flows beta. Is there a fancy Greek for that or anything? There is no fancy Greek, although it actually probably should be designated in some form

or another. The challenge is that it's been really hard to disaggregate this type of stuff. Two academics at Chicago, Gabay and Koijin, who you've heard me talk about before, have done some very fancy math that allows you to do that. One of the beautiful things about Cathie Wood's ARC is that we have daily flows associated with ARC because it is an ETF. And so it's relatively easy to disaggregate that type of performance. I don't need to do the very fancy higher level mathematics that Gabay and Koijin are doing. But there's definitely something there. And the data is becoming more and more clear that this idea that markets are nearly perfectly elastic and that all the

information or all the source of price change in a market is a function of information flows. It's just becoming painfully clear that that's not what's actually happening. Right. I bet that's an interesting point on all that available data. We're going to see academic papers probably for the next decade, right dissecting arc and what happened exactly we we've already started to see an extraordinary explosion this is you know in the same way that uh that fama and french kicked off kind of a you know a cambrian uh or pre-cambrian explosion in terms of the diversity of factor research, et cetera. I would argue that the first paper by Lasse Peterson, Sharpening the Arithmetic of Active Management, which I consider to be foundational in my thinking around indices, and really was the first to highlight, look, they can't actually be described as passive because they occasionally have to transact. That paper in 2016, in my view, started the process of kicking off a new revolution in thinking. And we're witnessing an extraordinary explosion in very good academic research that is challenging the very core precepts of the efficient market hypothesis.

And unfortunately, the great irony is that that is happening at exactly the same time that we're seeing more and more and more of the market managed under the assumption that the efficient market hypothesis is true. And where do you sort of tangential to that? Where do you land on the whole option market maker, gamma hedging, right? Really driving the market at times. We've had some on this podcast are basically saying that's the whole game. Some are saying that's way overblown. It's like just a drop in the bucket. It doesn't really matter if you're trying to grab a few ticks here and there, maybe it matters, but on on the grand scheme it's not pushing things around i i think it depends on what you're trying to accomplish um you know the first of all i would never say any one factor is all that that there

is right um it's always an additional dynamic right um? So gamma is really important in terms of the indices. It is less important in terms of individual stocks. We are seeing an extraordinary amount of influence from stock option positioning on some of these meme stocks, for example. Ben Eifert did a wonderful analysis on how that could translate to an extraordinary amount of notional purchasing of the underlying. That is absolutely important and really critical. I tend to think of gamma hedging or gamma signals from a regime standpoint. Am I looking at a rising vol or a falling vol environment?

If the market is shifted into positive gamma, then all else being equal, there's a vol dampening influence on the market. And if we're in a gamma negative environment, then all else equal, we're in a vol expansionary environment. Many of the traditional metrics still remain true and important, right? It is really hard. We just went through this and those who follow me on Twitter or elsewhere know that I was out there cautioning people and saying, don't get too bared up. I understand what you're all seeing from a fundamental standpoint. Yes, nuclear apocalypse seems like that would be really bad for stocks, but everybody had positioned themselves on the discretionary side, super bearish already. Right. And so understanding that sort of stuff is absolutely going to influence it. Maintaining a

VIX or an implied volatility in equity options in the absence of true fundamental uncertainty around the economic environment is just really tough, right? I mean, a 35 VIX translates to every single day in the market, you have to move more than 2% on average, right? That's really hard to pull off. It's just really hard to pull off. It just seems like that's the next step from the, right? We went from like, it has a beta just based on information to, hey, flows are important. And now the third leg is like, hey, guess what leverage in this implied leverage of all this options activity is almost just as important. Yeah, I think that's right. And I think we should have known that early on when we saw the betas themselves did a terrible job of predicting returns, right? Yeah. it's almost

like all this stuff is just in plain sight. Now we're just starting to talk about it more, but those who knew, knew. Yeah, I mean, shame on me probably for taking as long as I did to figure it out, although I think I've done a pretty good job of extending the research in areas that other people may not have. But there's nothing particularly insightful that says a market should be influenced by the behavior of its, of the buyers and sellers in the market. Right. It's only in some weird academic world that we could say, well, none of them actually influences it. It's just the market is anticipating all the available information through the

application of infinitesimally small pressures that are occurring. People forget that the initial conditions that are assumed in something like a Grossman-Stiglitz paradox or an efficient market hypothesis is that each player, each agent in the market is presumed to have the same endowment. In other words, the same capital base, right? Like we just know that world doesn't exist. And the same desires and incentives, right? There might be non-economic reasons for it. They're always non-economic, right? There are all, you know, there's all sorts of stuff that's going on. And when you have dynamics like the baby boomer retirement, or you have new product introductions,

entirely new product introductions like passive, for example, when you have a regulatory change that favors the growth of a particular style of investing, you have to believe that that's going to influence the market significantly. But for some weird reason, that was not the focus. Right. Poker 101, right? You've got to play the guys at the table, not necessarily play the guys at the table. And that is ultimately, so you had asked me earlier, like, you know, going into the, you know, the enemy's camp on, on the passive side, the objective for me was never to say you shouldn't do passive. It's that passive is changing the structure of the market. My objective for my clients is to both make them money and give them effectively the seatbelt and airbag

that allows them to survive the inevitable accident if my theories are correct. Yeah. And for Simplify, hell of a lot of sense, right? Hey, let's get this guy who's talking about this stuff to make sure we're not falling into the same trap or we're doing all we can to protect ourselves, right? And that's really the opportunity set and to do that in a tax efficient manner, at least, you know, for now is, you know, what I would describe as a gift. Changing topics. So you mentioned the new CTA product. Great job getting that ticker. Thank you. So you're wading into my world of managed futures. Just talk to us how you've felt, how you've interacted with managed futures over the years.

From my understanding, you've always been a little bit more discretionary macro type versus purely systematic. So what's your experience been with managed features over there and how are you looking at them now? Yeah. So, so first you're a hundred percent correct that I have always been on the discretionary side. And part of that is simply a function of, I don't believe that you can fully program a system, you know, to do everything that a human being should be aware of or is capable of doing if they take a step back and try to approach the market from the standpoint of what are people being forced to do as compared to what do we think they kind of want to do, right? The dynamics of CTA, we've wanted to have the capacity to build out many of the product strategies that you've heard others talk about.

So, for example, Chris Cole's permanent portfolio or you've had it, you know, you're close to the guys at Mutiny and you're aware of the importance of things like trend following strategies in forms of diversification. We've wanted to have the capacity to offer people access to these tools in a way that wasn't historically available. I have no unique talent on the systematic side, but what I do have is a Rolodex of friends that are willing to work with us at very reasonable prices that are extraordinarily good at this stuff. So whether it's Mike Taylor working with us on the healthcare fund, Mike Brand, Millennium's largest healthcare pod and is a legend in the healthcare investing space.

He's running our Pink product. In this case, we went out and we found a firm that was owned by a friend of mine, Charlie Magera, who used to run Goldman Sachs' commodity desk and is now actively involved in the crypto space, among other things. But his partnership with a firm called Altus, who had been a long-term provider in the CTA space, created the opportunity for us to co-brand and launch this product together. And so this is a product that was built by the guys at Altus. It is designed to work well with other products within the Simplify universe. And so many CTAs, for example, have survived by including a heavy portion of equity exposure in their underlying strategies.

We've chosen to eschew that, right? So we're not using equity exposure because we're trying to actually create a product that does a very good job of diversifying a core model portfolio that we might offer on a simplified type platform. I also shifted to long bias. The longtime listeners know all about this. We're like, hey, in order to survive those lean times, they went long equities, long biased. Yeah. No. And this was, I mean, part of that is just being smart, right? Let's just lay it out

there, right? Want to go out of business or change your model? Yeah. Yeah. I mean, you know, when the world is different now that the issue that I have with that is, was it done because that's what happened empirically or was it done because there's a thoughtful theoretical application, right? I always struggle with the, well, this worked over the last 10 years, therefore it's most likely to work going forward. I want to have a very fundamental reason why that's the case, right? And so that can range from thinking about things like the value factor radically differently. You know, you read the paper that I wrote about a year and a half ago,

you know, called Talking Your Book About Value that highlighted and hypothesized the role of portfolio formation in delivering the value premium, right? I would argue that CTAs are similar, right? Trend following, Corey Hofstein does a really good job of articulating this as do others, resembles a call option or a put option in terms of the delta hedging characteristics, right? So instead of going explicitly long volatility, they're behaving as if they're long volatility through what is the equivalent of a Delta hedging routine, right? Yeah, that's a straddle profile, right?

Right, exactly, a straddle profile. Option smile. So that characteristic actually has unique value in a portfolio that already has long value characteristics to it, right? Because it doesn't, in technical terms, they have the Delta exposure that you want to have from a long vol fund, but they don't have the explicit Vega exposure. And so when you enter into an environment like you have today, where Vega is relatively elevated, this becomes a much more attractive way to approach a long volatility position.

Trey Lockerbie, And my favorite part might be strong, but one of my favorite part of it allows you to, without much cost of carry access things like silver and lumber and these markets that if you tried to access those directly and wait for some outlier move, you'd run out of money way before the outlier move happened. Yeah. I mean, the real benefit to the CTA space is the ability to trade futures markets across lots of different areas. You know, there are always issues around the relative liquidity. There's always issues. I would argue this is particularly true in 2005, in the immediate aftermath of 2005, when Gary Gorton's Facts and Fantasies of Commodity Futures came out and opened up that whole institutional space. You may remember that was the time period in which USO was introduced and GLD was introduced.

And basically people on the institutional space began to actively go back into commodities, which had basically been a backwater and the institutions really hadn't invested in it for a very long period of time. That period from 2005 to give or take 2012 was all about something very similar to what I would argue has happened in Bitcoin in the past couple of years, which is just increased access through institutional investing. And they were just carving off, which I think was the wrong approach, proved to be the wrong approach, but just, hey, we're going to put 5% in long and buy and hold commodities, cost to carry be damned. There's just a lot of ill-conceived methods to do that. Well, there were a lot of products that did a poor job and the extreme version of this again was USO, which we discovered

was uniquely exposed to the potential failure for liquidity to emerge or the ability to take delivery of physical in May of 2020. I guess it was actually April 2020, the May 2020 contract. You're starting to see those products do a better job, right? But they inevitably have to go through that fire. And the irony, of course, is that what you're describing, the Gary Gorton paper, the majority of the returns actually came through carry. But as is always the case, when you're assuming something along the lines of the returns actually came through carry. But as is always the case, when you're assuming something along the lines of the efficient market hypothesis, it's presumed that the asset class has a stable but cyclical return. And again, this just goes back to my arguments around passive that

why would you possibly assume that equities have an 8% return simply because that's what they delivered over the last 100 years. There's so many conditional components around the very short datasets that we have, even when we use the longest datasets like a Shiller-type database. Having information on the behavior of stocks from the 1870s is just not particularly useful unless you think that the world is largely an invariant place. And I don't believe that at all. The great example is the first, I believe, managed futures ETF was WisdomTree's product, and they based it on Trader Vic's index, which didn't go short oil. So we had a blog post. We'll put in the show notes that showed the index, of course, was straight up and to the right. They launched the ETF. 2014 happens,

right? Oil crashed. All the CTAs made a ton of money because they were short oil. And this thing didn't do well because it had picked the wrong index essentially, right? Gotten too few. Well, the flip side of that is what happened to risk parity in the fourth quarter of 2018. So I understand the 2014, 2015 into early 2016 dynamics around oil, which most people had associated with a Chinese slowdown. I agree with you, by the way, that the behavior of institutional investors exiting that asset class was a primary component. But the most extreme version of that, I would argue, is the fourth quarter of 2018, when you had two separate factors in play.

You had a tremendous amount of hedging activity that had occurred on the oil and gas producer's side, right, where they had effectively sold topside participation to buy downside participation that allowed them to access the debt markets, right, that stood against the flip side of the equation, which is I believe it was AQR had chosen because of the positive carry to introduce the term that you had, the fact that oil was the only commodity that offered positive carry, they chose to concentrate their risk parity commodity allocation into the oil markets. And if I remember correctly, the largest commercial owner of oil in the fourth quarter of 2018 was AQR, right? Unwinding that position proved to be painful,

I think is the technical term for it. And that just goes to show back to that kind of discretionary versus systematic, like even systematic models, risk parities, right? Have some discretionary when you put the portfolio together, when you made decisions on sizing and whatnot. So how do you think about, I don't know if you've done any research on this, but right back when CTA was underperforming, which was basically, you know, 08 did great crisis period performer. Then vol just got sucked out, not just in equities, but across the whole commodity space and trend followers. Basically I joke that my son's been in drawdown his whole life. He was And vol just got sucked out, not just in equities, but across the whole commodity space. And trend followers, basically, I joke that my son's been in drawdown his whole life. He was born in 2009.

So from basically 2009 until that oil sell-off in 2014, it was pretty brutal there. And then a lot of things came out of like, it's central bank intervention. The space is too big. So coming back to your passivities, it's like, do you have worries that the space could get too big again? Right. And then I kind of summarize your passive thesis. There's too many, too much money going through too small of a pipe and kind of in CTA space that gets magnified even more. I don't know if there's a question there. I think there's a whole bunch of things that are working together that create the conditions that you're observing, right?

The single most important thing that I would highlight is that we now have massive players where we used to have widely diversified small individual players. And so if you think back again to the fundamental thesis, where everybody starts with the same endowment, everybody has the same share, that actually was not a terrible model of the markets 50 years ago, where even the largest holders, the JP Morgans, Morgan Stanley's, et cetera, of the world did not behave all in the same way because you had individual brokers that were helping to manage accounts. And the share was very, very small, right? Nobody ever imagined a financial services industry

consolidating to the extent that it has, both in terms of the asset allocators, the BlackRock vanguards, to a certain extent, Fidelity, State Streets, et cetera, the world have now become large enough that we know that they are going to be the largest holders of basically everything. The second dynamic that I would argue that we never really considered was more on the market maker side, where you used to have the components of the specialist system where each individual specialist behaved largely together. There were rare, or individually, I'm sorry, there were rare instances like 1987, where they all had their lines of capital pulled at the same time that created and facilitated the conditions that emerged there. But today, you've got basically two or three options, market makers

that matter, right? You've got two or three market makers that really matter, that represent the vast majority of trading activity, James Street, Citadel, Susquehanna, a few others, right? Those players are in this business to make money. And they have a very nasty habit of behaving with their own self-interest. And I'm using sarcasm as I say that. When they have limited capital, which seems hard to believe Citadel has limited capital. But everybody has limited capital. That's almost the definition, right?

And so when you think about behaviors in markets, if markets become more risky, Citadel wants to risk less capital, right? Same thing we want to do, right? Same thing other people want to do in the market. So it's completely rational that they do it, but when they are the sole providers or they happen to be a dominant provider, that's going to influence the market and the liquidity and make all the behaviors more extreme, right? The other thing that I would highlight on the CTA space, and this tends to be underappreciated, is prior to the global financial crisis and the Volcker rule, it was much easier for the macro CTA traders like Paul Tudor Jones, et cetera, to negotiate terms of service that effectively gave him option-like exposure, right? So he would be

able to negotiate with his prime. If I place an order, you guarantee you will execute it within a tick. And if you don't do it within that tick, then you take the loss, not me, right? Well, that's functionally just turning a buy order into a call option and a short order into a put option that guarantees that the most you can lose is X. Right. When those went away, the space began to struggle more. And I think that that has a lot more to do with it actually ultimately than the Fed does. Interesting, which I just thought of, like there's position limits in commodity markets, right? So you can't have a BlackRock and those players can't emerge having all their... There's not going to be a $50 billion CTA ETF because they won't be

allowed to put on the positions they need. Yes, there are limitations around that, although... Yeah, you can do swaps and some... Well, yeah, as we just saw with the LME, there is discretion about enforcing those margin limits, right? Member margin limits. And that's one of the big complaints, but a for-profit exchange had different economic incentives than to let the market function properly. the right part of it, which is just that, look, if the LME can't be trusted to behave in a manner that is consistent with its stated bylaws and objectives of behaving in a certain way, then the answer is you stop trading with the LME or you reduce your trading with the LME. The LME is owned by the Hong Kong exchange, right? So part of the natural suspicion is did China play a role in influencing these outcomes? Did JP Morgan play a role in influencing these outcomes? We'll never know, right? And there's a part of me that-

I know what Cliff Asness thinks the answer is, but yeah. Yeah, well, we know what Cliff Asness thinks, but part of it also is just like, look, this is definitely not the first time that effectively force majeure clauses have been used by exchanges. It tends to be very preferable that the exchange has a set rule book that says, if these limits are breached, this is how we behave, right? That's why you document it and you build it out in advance. But these are big boy markets, right? And the ability to bend those rules has always been there. It's been exploited. Guys like Mark Cohodes, for example, will highlight how badly they got screwed by Goldman Sachs

and the global financial crisis. It's just a continuation of the same behavior. It's a legitimate complaint, right? It shouldn't be there, but it has been an enduring feature. Right. And I think we can complain, but do we want the exchanges to be government owned and run? I don't know if that's a better answer, right? Like if they're utilities, they're utilities and they're not going to. Right. But, but, but do we actually want the government to own the utility or do we want the government to regulate the utility? Yeah. Right. And, or do we want neither? And, you know, I think unfortunately what we're seeing with the LME is, is that there, there tends to be a pretty good reason to have a degree of degree of regulatory authority and rulemaking decision

set at the CFTC type level as compared to determined on a discretionary basis by the exchange. Right. And I think to me, the big piece there is, hey, suspend trading all you want. But you cancelling trades. Don't unwind trades, right? That's a whole nother ball of wax, right? So it should be like, hey, if you have to cancel trades, you need to meet these 10 requirements by the regulators or whatnot. And I would suggest that ultimately we end up heading in that direction. But the far more important message to me is how fragile everything is, right? We're experiencing these types of behaviors and breaks with the S&P 3% to 5% off of all-time highs, right? I mean, what does this look like down 30, right? What does this look like when credit markets are

actually stressed, right? One of the unheralded aspects of the LME dynamic was the blowing out of credit spreads of Goldman Sachacks and others, right? That should have been a lot more concerning to people, I think, than it kind of got the airtime for, right? And that is the kind of thing that could snowball. So maybe we should applaud the LME, right? Of like, hey, you kept this from causing the next financial crash, right? Of like, okay, JP Morgan just got hit for 8 billion, which causes Goldman to get hit for X and down the chain. Well, this is one of the real challenges is with the exception of crude oil, right? There are very few commodities that are quote unquote large enough on a price basis to cause that sort of crisis, right? I mean, the largest commodity markets by dollar value in terms of permanent storage are things like gold,

which is somewhere in the neighborhood of $10 trillion, right? Financial markets are somewhere in the neighborhood of $400 trillion in aggregate. $10 trillion, I'm not going to say, you know, is subprime contained sort of framework, but it is hard with commodities to create a financial crisis. What you can create is a legitimate shortage crisis, and that can be far uglier for many of the players why you've seen the LME and the nickel markets develop in this way is because, in all seriousness, who really cares other than stainless steel producers? And a bunch of weird futures traders, CTAs like me.

We're shocked and outraged that there's nefarious activity and behavior going on in the mafia-run casinos. I don't know why anyone's all that surprised. So a lot of this interest, I saw you did a Twitter poll. Basically, what would you invest in? And Bitcoin, of course, was number one and gold, I think, or commodities number two. I thought your more interesting thing is like, hey, this is really about inflation,

not about these two pieces. So let's talk a little bit about inflation. I read your post on Medium as well and talking about how this was, the 70s was unique. A lot of people are saying this is just like 1973 when the curve inverted, yada, yada, yada. Like take us through a little bit how the 70s were unique in that regard. Well, so the unique feature of the 1970s was just extraordinary population growth, right? And that was true in the developed markets where in the US,

the labor force is growing somewhere around three and a half percent every year. The population was growing slightly faster than that because of the, you know, the extension of life expectancy to get older and older. And around the developed world, even in regions of the world that now have negative population growth pressures, places like Germany, et cetera, you had significantly positive pressures coming out of the aftermath of World War II. In the developing world, you saw extraordinary population growth that was similar in a lot of ways to what had transpired at the end of the 19th century in much of the developed world, where you suddenly began to introduce modern concepts of sanitation, antibiotics, improved food techniques, et cetera, right? And so this led to a dramatic expansion of population. Things like commodities are very much what I would describe as pantry items, right? You need a certain amount of toilet paper per capita, right? You need a certain amount of steel per capita. You need a certain

amount of coal or oil or natural gas per capita tied to your level of economic development. And so the 1970s were this incredible time period where every single year you knew that the demand, the aggregate demand function was going to shift outwards significantly, right? And that was creating conditions under which you needed to find replacements that allowed you to significantly scale and grow your oil, for example, right? Or your wheat or your beef. This time around, we don't have that at all, right? U.S. labor force growth is effectively zero. Developed market labor force growth is pretty close to zero, if not negative. Developing markets around the world are effectively shut off from many of their largest sources of capital in terms of tourism, et cetera.

And we're facing conditions under which there's been a very rough and inefficient restart to a global system that we shut down in a somewhat unprecedented fashion, similar to what you would have with a war. But on the flip side of that, we don't have that continual growth in aggregate demand. So if I'm looking at demand for oil three or four or five years out, I don't see it as being 20% higher. I don't see that. I think we have a problem of supply right now. I think we have a problem of supply chains. I think it's, you know, I would just highlight that another Evergrande ship just ran aground in the Baltimore Harbor, right? It's almost like, you know, you've got a distressed institution that is underpaying its workers and isn't properly, you know, managing its role in the global logistics system. Or you kind of have to believe that the Chinese are doing everything they can to screw up supply chains and continue to put pressure on the West, right? But

this is a snafu-driven dynamic as compared to an outward shift in the aggregate demand function. And the most extreme version of that can be seen in things like unemployment, which is doing the exact opposite of what it did in the 1970s, right? So the 1970s, you had huge labor growth. The 1970s was actually the decade that had the highest rate of job formation of any decade in US history. And unemployment rates rose dramatically

over the course of that decade for the very simple reason that we had so many people coming into the labor market, we couldn't possibly figure out what to do with them. A lot coming in, some getting pushed out. Right, exactly. But this time around, we had the exact opposite scenario. We can't find the workers.

We have nearly unlimited job openings and an unemployment rate that looks much more like the 1950s than the 1970s. And then just two interesting pieces of that paper. The one was 70s was the introduction of the credit card, which I hadn't seen tied to that inflationary pressures before, but makes sense. And then secondly, that I can't remember the number, 25% or something of manufacturing was oil-based essentially. So creating way more oil demand than we have now as well. Well, so you had two separate components associated with that. One is what credit cards did was they introduced unsecured lending, right? So young people were suddenly able to tap

into credit in a manner that they might not have historically been able to. That led to an inelastic outward shift in the aggregate demand curve that was even greater than you would have had otherwise. You also had women entering the labor force and being able to run independent households in a manner that they had not historically. The introduction of the war on poverty, which was really basically, let's give money to old people, facilitated the maintenance of independent households, whereas historically you would have seen parents move in with their children and collapse that household. Starting with the expansion of the war on poverty, you saw that change and elder headed households became a very important component.

The extreme dynamic of this can be seen in the demographics of the United States for the median. You've seen all the data that says, what happened to median workers or median household income? Why did it move off in a totally different direction in the 1970s? That's because in the 1970s, we changed the definition of household quite significantly. So the marginal incremental household was suddenly instead of a married couple with 2.2 children, it became a single mother or it became an elderly headed household, right? And their incomes are going to be structurally much lower. So there was a large portion of that slowdown that was actually just driven by the changing

description of what the median household actually was. We just don't have any of that going on this time around. I just don't see it. I do see the snafu. I do see that we made our systems far too optimized and far too fragile. We decided that we could rely on stuff being shipped 3,500 miles across an ocean, you know, to be there tomorrow, um, in order to, to optimize supply chains and surprise, you know, to, to use go more pile, you know, surprise, surprise, surprise. Um, when you shut that system down and try and restart it, it experiences pain, right. It has frictions. So,'re on the transitory, team transitory? So I am on team transitory, but I want to emphasize why I think team transitory has gotten a bad rap, right? So the first is one, the quantity of time, right? So the idea that

we were going to immediately reverse this is somewhat silly, right? The second is, is when you talk about team transitory, it's important to understand we're talking about an inflation rate rather than a price level. So I don't know anyone who is forecasting that, oh, hey, oil prices are going to go back to minus $37 a barrel. That's what we mean by transitory, right? What they mean, or at least what I would argue, I mean, when I say transitory is the rate of inflation, the rate of price increases is going to slow down significantly in part because those high prices destroy demand. And in part, because those high prices facilitate the growth of supply.

It's almost by definition of rate can't just keep printing the same. Correct. And so this is part of the frustrating dynamics. People are like, well, that's not what we see in the grocery store. And yes, absolutely. You see higher prices in the grocery store. By the way, you should have seen higher prices in March 2020 or April 2020, when we were all experiencing shortages of bottled water and toilet paper, it's just they weren't allowed to price gouge in that way. So there was no ability to respond. We're now two years into it and people are able to say, you know what? It costs me more. I'm not able to source stuff. I'm going to effectively price gouge. And that's really what we're seeing is an

increase in prices rather than a dramatic shift in the inflationary conditions. And we're seeing exactly what you would expect under that dynamic. Real incomes are beginning to decline. Real purchasing power is beginning to decline. You're seeing increased credit card usage, particularly amongst those in the lowest quintile. They're beginning to already experiencing increased credit card delinquencies. The whole system is grinding to a halt. And of course, the Fed, this goes back to a paper that I wrote almost the time of our first interview, which is policy in a world of pandemics, the Fed reacts to the markets. The markets in turn are trying to predict what the Fed is going to do.

And so you have all sorts of confusing stuff that's going on right now. I would argue that the markets for interest rates are seeing a combination of derivative positions being unwound and an incredible amount of volatility that is causing the front end to push much higher than even the Fed has articulated. If I look at December 2022 Eurodollar futures, they're pricing in nine hikes, whereas the Fed's dots are proposing something like six. We're increasingly hearing discussion around 50 basis point hikes. To me, this is just narrative that's being used to describe what's happening in the market. And of course, the Fed is then being forced to respond to that and saying, oh my gosh, we're really behind the curve in terms of hiking, even as the yield curve inverts telling us that

the Fed's going to be cutting going forward, right? It's like the market is pricing in a Fed mistake. Which I think is from years and years, right? Of like the Fed's out of bullets, the Fed, they don't know what they're doing. Like the Fed put is gone. Like, where do you stand on all that? They still have plenty of ammo, right? Well, plenty of ammo, I think it's a dangerous phrase, but yes, they still have a lot of ammo, right? Well, plenty of ammo, I think it's a dangerous phrase, but yes, they still have a lot of ammo left. My expectation is that one of the forms of ammo that they will use is pausing sooner than people think in terms of the hiking activity or quantitative. It's so weird, they haven't really even started yet. We're already talking about pausing, right? Correct. The market is very clearly telling us that something is going to break. that lower bound, I would argue is? Gold tips, that kind of thing. Like, okay,

whether or not it's happening right now, but how do I, how do I as an investor protect against my real wages, my real income, my declining, which is another problem that on that very lowest quintile, they can't even, right. They don't even really have the tools or the means to do it. Right. So that's a separate conversation. Right. Exactly. But, but that, so, so, so one that's an important general observation, which is there is no one way to protect your purchasing power. Right. The classic advice is to go out and buy things like real assets, right. CTA can help in that, right?

It does give a bias to physical assets. Gold has traditionally functioned as a hedge in that type of environment. A lot of people have been worried that interest rates are going to rise significantly as the Fed loses control of the situation. I don't see a lot of evidence to suggest that. And, you know, this has been part of the reason why I've been focused on the transitory dynamic, right? Like your individual purchasing behavior, your individual purchasing basket is not something I can replicate. I can't know if you really like lime flavored jello, or you really like chocolate pudding, right? So your individual purchasing basket is your individual purchasing basket. Bloomberg took an incredible amount of flack for a reporter putting

out an article saying, here's how you can deal with it by lentils instead of beef. Terrible perspective, but true, unfortunately, which is that we're all going to be forced to do certain things that we may not necessarily want to do, whether that's learning how to use a pressure cooker to deal with cheaper cuts of beef, or whether that's substituting lentils for beef, or whether that is using big box stores, freezing products, et cetera, in a freezer. all those things are various coping mechanisms. From an investment standpoint,

I care about two things in particular. One is, is there actually conditions being created under which assets are going to flow into an asset class because of these fears? So CTA would be a direct example of that. We have a product, Pfix, that is designed to deal with much higher interest rates, which is another significant issue that people would face. And by the way, just to be very clear, I don't know the answer on that. So the advantage to

something like Pfix is that we're using an option-based structure as compared to a Delta one forecast, right? So define loss, define characteristics to it, treat it as a hedge, not as the core of a portfolio. But those are the things that I ultimately care about. The other thing that I've highlighted for people is just this broader issue of like, what we've traditionally thought of as the role of inflation is that, well, higher inflation causes asset prices to collapse, right? Because we have exactly an N of one in our observations with the 1970s. And therefore, by definition, we know what's going to happen to equities, right? Because we've seen this once before. Well, obviously, that's not working, right? Nothing like the 1970s seems to be playing out in the market behavior. And so understanding why that is,

I think it was actually really important. And it's almost like stocks are our number one export, right? That's our number one commodity in the US. So it's like, if there's inflation of asset prices, why shouldn't that inflate as well? Like, and we're talking nominal terms, In real terms, it could decline. So we could spend the whole pot on it. Let's just get 45 seconds to two minutes on your thoughts on crypto after all this time kind of wading into those waters. Since you've been in there, there's been NFTs, Web 3.0, DeFi, all the above. What are your quick thoughts on where we are and where we're going? So my quick thoughts are that, one, I am a very particular critic of Bitcoin as distinct from crypto. And the language that is used around Bitcoin, in my opinion, is unfortunate and increasingly

untrue. I would describe this idea of a digital gold, money good collateral sort of framework that Bitcoin has tried to carve out for itself as a misrepresentation of the realities of that system. It cannot be a money good commodity. It cannot be a store of value if it requires the network to continue to operate. So gold does not require Swiss banks for it to be gold. It will always be gold.

Whether it maintains value is ultimately up to an individual, but not on somebody else maintaining a network. In the case of Bitcoin, it is a permanently negative cash flow network that exists in terms of paying the miners to run the accounting systems that allow the network to have any value whatsoever. There is no equivalent to just pulling out the scales and weighing and measuring something. There's a secondary issue associated with Bitcoin, which is the dynamics of perfect scarcity is not actually a feature, it's a bug, because it does not allow for innovation. So under the gold standard, which again, did not derive its value because gold had an inherent value. It derived its value because of the exchangeability, the willingness of the government to gold production through human ingenuity, right? Inventing the cyanide process, for example, dramatically expanded the production of gold. Discovering new gold deposits or an asteroid that has gold on it has the potential to use

human ingenuity to create expansionary capabilities in the monetary system. It just doesn't exist within Bitcoin. And as a result, it is inherently flawed because it presumes that human ingenuity is a negative, not a positive. As it relates to crypto, to me, there is absolutely no question that we are headed down the path of digitally native securities. And a lot of what's going on in the DeFi space and the crypto space is basically play acting to get us to that point,

right? Not dissimilar to the construction of the internet backbone under the flawed assumptions of global crossing or level three, right? I think a lot of mistakes are being made. A lot of money is being wasted, but the capability to develop a parallel financial system that has at its core, a potentially more robust framework that doesn't rely on centralized clearing, counterparties, et cetera, is emerging. And so I think that's really, really positive. But we're a long way away from it being the solution. And I'm starting to do more work around it being the solution, but we're a long way away from it being defined.

Agreed. Quick thoughts on NFTs? Again, NFTs are a symptom of a market that needs to be developed, the market for scarce digital assets that doesn't really have product to sell. So what it really wants to sell is stock certificates or stock tokenization, things that are truly non-fungible that actually have the capability of being uniquely valuable and not subject to the whims of, do I happen to like my apes with, you know, you know, bloodshot eyes, or do I want them clear and focused on, on the opportunity ahead? You know, so, so to me, it's like, is it unfortunate that the language is being built

up around it and the speculation is being done by many who can't afford to do it. And there's a high degree of misrepresentation of, you know, well, Justin Bieber, you know, went and spent a million dollars on this NFT. Therefore it's a good deal without fully disclosing that he actually was gifted that million dollar. Like, I don't know the answer. I genuinely don't know the answer. Or that that's like $20 to the rest of us. Yeah. Or that's $20 to the rest of us. Right. Like, I don't know, but I would just describe it broadly as it's the same type of artwork that used to happen on stock certificates when people would individually receive their

stock certificates. Right. It's, you know, if I can turn it into collector's art, people are less willing to sell it. Therefore it gains some form of effectively seniorage in its, in its behavior. Right. So I just think that's, what's going on. Can I know that? No, because that requires knowledge of the future. And I don't have that. Two truths and a lie. Give me three things about you personally or professionally and I'll suss out which one is not so true. I got my start in my first job as a commodities trader. Let's see. My lowest grade at Wharton was in option theory. And let's see.

I currently own Bitcoin. Those are tough. I'm going lowest grade option theory. I think it's true. That's a tough subject. Yeah. True? True. And I'll go that you were a commodities, you started out as a commodities trader. True? True on multiple fronts. So my very first job was actually selling eggs and then I was a crude oil trader for Spearleys and Kellogg. I didn't know you were crude. Selling eggs, like physically selling eggs? Physically selling. I grew up on a farm. Nice. So obviously, owning Bitcoin, not so much. I do not own Bitcoin. Correct.

All right, Mike, it's been fun. Go catch your plane. And we'll talk to you soon. All right. Have a good one. Take care. Bye bye. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCM Alts and visit our website to read our blog or subscribe to our newsletter at RCMAlts.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments. We'd love to hear from you. 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.