The Derivative - Making Market Music with Roy Niederhoffer with Roy Niederhoffer

Episode Date: March 25, 2021

How many families have two brothers who’ve been in the hedge fund game for 30+ years, much less on polar opposites of the long vol/short vol spectrum. We’re talking with the volatility loving, positive skew seeking brother in our episode today, Roy Niederhoffer. Roy is the founder and President of the eponymous R. G. Niederhoffer Capital Management, which has been coding, trading, analyzing, and investing in futures markets since before most of us had a future. We’re talking with Roy about 100-screen backdrops, delivering what’s best for the whole portfolio, not just the fund manager, crisis performance, predicting risk, short-term is the best “-term”, the start of RGN, jazz music, human bias (all the way to 100s of millions of years ago), superstars vs teamwork, the potentially huge difference between getting interest rate trend right and actually making money doing that, playing the lottery in reverse,  bitcoin/crypto performance in crisis, and building business around identifying similarities across asset classes. Chapters: 00:00-02:27= Intro 02:28-17:39=A Musical Dilettante’s path to Hedge Funds 17:40-29:19= Having a Short Vol Brother 29:20-49:20= The Flagship Strategy / My Job’s to Help the Whole Portfolio 49:21-58:11= Yield Curves, Bond Carry and Trend Following 58:12-01:11:28= Talking Sharpe Ratio’s, a Possible Rate Driven Crisis & Markets Moving Forward 01:11:29-01:17:21= Favorites Follow along with Roy and RGN on their website. And last but not least, don't forget to subscribe to The Derivative, and follow us on Twitter, 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

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 we're trying to do is find repeating patterns that have occurred thousands of times in the past where human behavioral biases that are evolved into the human brain over hundreds of thousands to millions of years of primate evolution are triggered in ways that have left their signature across decades of market data, intraday market data, across all the markets that we look at, of all asset classes.

So patterns where people have been anchored to an extreme price, or they're loss averse, or they're consensus biased, that there's a tremendous stampede going on, or they remember a particular event that's occurred, it's so scary because everyone's memory of that is fresh. So our models will tend to have a risk-off look to them, especially in the equity Hello, everyone. Informally dubbed the crisis star, today's guest is not new to the notion of performing while the markets are down. And in fact, he's made a career of it. Roy Niederhofer is the president of R.G.

Niederhofer Capital Management, or RGN, or RGN-CM, or however many letters you want to put in there. A well-known firm that capitalizes on predictable, quote-unquote, predictable volatility triggers and emotional responses, such as greed and fear from both human traders and quantitative strategy. So today we're getting into how all that works, how we started the firm years and years and years ago, some touch on some trend following, some crisis performance,

some mean reversion, and more. So thanks for joining us, Roy. My pleasure. Thanks, Jeff. So first I got to ask what in the world is going on behind you? It looks like we're about to blow up Alderaan with the Death Star there and all the controls. Well, just a way for me to keep an eye on what's going on. And I can actually do it while I'm talking to you. If I see anything crazy going on, I'll actually see it behind my own head. And so you're actually, some of these guys will just put all that for show. You're actually ingesting all that?

Yeah, yeah. That's your normal screen you look at on a day-to-day basis? I have that. I actually have two that you can't see on either side of me too. Perfect. And those are, how many markets are on there? Oh, we must have, I don't know, 75 on there, I guess. But you're purely systematic. So if something caught your eye,

just do it for a personal account or for fun or what? Well, I don't trade a PA, but I think a role of a PM and a hedge fund CIO is really to monitor what's going on and understand how systems work in that context. So while we're not making decisions on a moment-to-moment basis, I have to understand how the models are reacting to what is going on. And of course, every once in a while, something really extraordinary does happen. When I put up this screen in my home, this is coming to you from Vermont right now. It was right at the peak of the crisis in early March and things were just going on. I looked behind me and I just couldn't believe what I was seeing. So occasionally there are things that really will, even after almost 35 years of

doing this, still shock me. I bet. And so up in Vermont, whereabouts? It's Stratton Mountain, Vermont. Oh, nice. All right. I've been there. And that's home or no? But the office is in New York City. Right. Our home office is New York City and I've lived there for decades. But in early March, actually in January, it became pretty clear to us that we were going to have to disperse and leave New York City. So we started practicing running from home and running the business from home. In Jan of 2020? Jan of 2020, yes. So you were a few months ahead of the current.

I was a little bit ahead. Yeah, I was the guy wearing a crazy looking mask and completely swabbing down the airplane in about January 20th because I recognized what was going on for better or for worse. And so we had already started practicing sending everybody home on Fridays. And then in about mid-February, we sent everybody home. So we were actually a few weeks into it when things really went south. But I think March 12th was the date. And we came up here and I set up an office that I thought was going to be maybe a few months, I guess, was our prediction.

But it turned out to be a great place for me to be productive. And our firm is now as decentralized as we were centralized a year ago. We have people in New Jersey, we have people in Florida, California, Illinois, and everything is just humming along. You didn't take the Citadel approach and rent out a hotel for a year in Palm Beach? Well, I have a few in Miami and northern Florida, but not for me yet. I like the cold more than the heat. Vermont. And it amazed me back then and certainly after, like people in our space just got it a lot quicker, right? They were like, they know non-linearity and geometric returns or geometric growth. So it seemed like they were ahead of the curve,

maybe not as early as you were, but for sure they got that it could, you know, other people are saying, oh, there's only six cases. What's the big deal? Well, six becomes 12, becomes 20. You're telling us that in non-equity markets, there was a little more sign of a crisis.

Certainly the bond market was really afraid of this very, very early on. And it wasn't clear that the stock market got it, but the bond traders did. So when you start to see that kind of bull market in bonds, it's telling you something is really a threat to the economy. And I think also all of us in our field in quant trading, we're used to looking at left tail risks. And it was so clear that there was a massive left tail and there was really no reason not to protect it because it was very cheap. So we were able to do that. Our models were able to succeed at that. And so it's been a great period. And as much as I was excited, not obviously the reality of what's happening in the world,

but in terms of trading for what was happening a year ago in the first quarter, this first quarter, I think is even more exciting because the reasons to be excited. And for me, that means volatility. And I am a guy that has the iHeart volatility thing on the back of my phone. The reasons to think that volatility is not just here to stay, but perhaps going to increase even from here are so legion and so structural that I'm very optimistic for what's going to happen next. I'm going to dive more into that, but I'm going to ask you now about the guitar behind you. So you're a bit of a musician.

I'm a bit of a musician. If you can't quite see it, I'll pan down a little bit. There's a keyboard over there. There's a bass over there and some music. And I've been, I guess you can call me a bit of a musical dilettante. I play somewhere around 15 instruments and I, I spent the first few months working on jazz piano with another family, actually, who was quarantining with us in this rather large house that we have here. And then I moved on to taking bass and drum lessons. So I've really expanded a little bit,

even in quarantine. But you played before quarantine, right sure yeah i'm a pianist and violinist from my age four or five i was going to call you a concert pianist but you said it's a little too well if their concert is a lot of a few people having beers in a bar that counts so i've infamously tried to play the piano in a uh lounge once and I'm not a piano player but the guy's like sure come on up here I think luckily there was no fruit nothing got thrown at me but there were some like get that guy off there um and so give us let's go back to the beginning like how did you you were uh you went to Harvard got out of school was hedge fund always the path or what was the path to the hedge fund? Actually, speaking of music, my career path was something in between medicine,

neuroscience, and music. I was accepted and came very, very close to heading off to Cambridge to to study how the human brain processes music and be a cognitive psychologist slash neuroscientist. And I also, at the same time, when I was 21, got an offer from my brother, Victor, who was running a massive $15 million hedge fund at that point, which was fairly large for the time. What year is this like this is 87. and i'd already spent my high school years going there on weekends and interning during the summer and during college so i was already you know pretty well ensconced in trading but i wasn't super interested in it until I realized the alternative was going to be that I was going to get even further in debt. And this was a way to at least support myself. And so I came to my brother's shop and he was already 10 years into his hedge fund career.

As you may know, he launched the careers of a large number of billion dollar managers and many other many other successful business people. He's been a great mentor and was to me. So I had the responsibility of really automating and a good part of the operation, writing code to test strategies, to run a back office, to display trades in real time and produce P&L in real time, which was fairly unusual for the time. But without any coding experience? You were kind of a... Yeah, yeah, I was a good coder. I actually had a business when I was in high school, starting from age 13, that after a couple of years back then had about 30 employees, and we wrote several hundred, what would be called now casual games for some of the early microcomputers. And so I was able to put myself through college

that way. So I was a good coder for the time, I would say. And I'd spent some time studying artificial intelligence and systems programming and data structures and algorithms in universities. So I had some academic training there, too. So I felt like I had some background there. And I then spent five years working for my brother trading strategies that I developed. And, of course, coding a large fraction of the operation ended up being the code that I developed. And of course, coding the whole, a large fraction of the operation ended up being the code that I wrote. So I had a good training in a lot of different areas of the business. And about five years later, I left and started RG Niederhofer. And I guess that was October of 1992. And we're still at it coming up on year 29, I guess. That's crazy. Did you ever think it would be this long or what were

your thoughts of like, I'll give this a try for five years or? You know, it's funny. I had a five year business plan and to my amazement, when I actually looked back, we pretty much hit it. You know, the thing that I wrote before we had a dollar under management and actually before I even, I think, left, I had a business plan and we, plan was to get up to $100 million in two or three years, which we did. And it really has been a very fortunate run. And I think we've done some good things for our clients over the years and done our job, which has always been to provide a combination of absolute return and consistent downside protection by being long realized volatility, because that's always been the condition that drives our models from back then.

I'm going to sound very much like if you'd was what, 64 megabytes, I want to say, or no, that was too much. It was much less than that. had two employees. And you would have heard a description of what we do that's very much like we'll talk about today. And we haven't strayed far from that. I think we've executed relatively well over the years on that strategy. Obviously, with the caveat that when you're long volatility, short volatility regimes, very quiet regimes are going to be harder. And obviously, the majority of hedge funds are doing something that's the opposite. Most hedge funds, of course, are short volatility, do well when things are quietly rallying, of course, in equities, in kind of a risk-on environment. We love risk-off. You reminded me of a few things.

I started business back in 2002, attained capital, and my dad had started some companies. I took my business plan to him. He read it over. He handed it back. He goes, nobody loses money on a spreadsheet, son. I was like, okay, so this isn't realistic?

He's like, it may be, but it's probably not going to look exactly like that. So kudos to you that it looked mostly like that. I think that was really just luck rather than foresight. But one thing I always say, a lot of people are in the habit of looking retrospectively at business leaders and say, I want to take advice from this person. They've done a great job and look at all their success. But really a lot of it is timing. And I think having a great skill stack of things that one can do relatively well is very helpful. And I have a lot to say on that subject. But the reality also is you have to be lucky and you have to have the right timing. And as it turned out, the year that

we started, we kind of got going and it was right before the mortgage-back crisis. We were asking and that whole thing. and the first real sustained rise in interest rates after the liquidity injection following the SNL crisis. So we had said that we would probably do well during a rising rate period when there's more volatility and then suddenly six months or eight months after we started, we started to see a rapid rise in interest rates and volatility. We did very well. So people recognize, at least, that we had done what we said.

But had that happened, had we started two years later, we would have missed that and started right around 1995, let's say, when everything was buy an index fund and very low vol and off to the races for equities. And any sort of non-equity strategy would have been underperforming, as we did also. So that was the SNL crisis, like Orange County, that whole thing. Where was that, 93, 94? Well, the SNL crisis was probably 90, 91 or something like that. And then it was reflated with a lot of liquidity by the central bank.

And the first tightening though, when it looked like the economy was starting to expand was in something like February 7th of 94. And there was an unemployment number and the Fed just came in and tightened and took everybody's surprise. And then for the first time, rates started to rise rapidly.

And that was not in the data at that point because they had just not done that for a long time. And I think that was a bit of a harbinger of 1998 and what happened to LTCM as well. Yeah, that was always on our infographic and some crisis period graphs, right? Of like October 87 dot com bubble, but that surprise Fed rate hike is always in those graphics. Right. And so you mentioned your brother, who's rather well known for being short volatility. So what does that look like at the thanksgiving dinner table you guys what's the dynamic you have these huge philosophical debates of well my brother will say things like the stock market always goes up and so in in one sense we

had a very very diversified family portfolio where he was the most short vol and I was the most long vol, probably a four sigma long vol and four sigma short vol. And, you know, we both mellowed over the years. I have tried to make money both ways over the years. And I think so is he. But I think it was certainly good to learn there. And a lot of what he was doing in the 70s and 80s was much more bidirectional and not as much in equities. The equity markets were kind of the black sheep of the world. I remember in 1983, when I had some money for my computer software

business, I look back at track records and the stock market was completely unchanged in real terms for a dozen years. And I just thought, why would anybody invest in the stock market? I want to be in the bond market. You can get 11% in high yield at that point. So the stock market really didn't develop in the futures market as early as first commodities. And then the U.S. bond futures was the one to trade back then more than the notes. And so we did a lot more interest rate, currency and commodity trading back then. And then over the years, the equity market became more interesting, probably after the mid 90s when there was this big retail boom. And so, but were you sitting there with Victor like when you decided to go out on your own of like, well I don't, this shortfall stuff makes me nervous or you're just like, I got to plant my own flag. I don't, I wouldn't say that back in those days, he was doing a lot of shortfall trading.

We, he wasn't trading a lot of options back in the late eighties and early nineties. Um, we, uh, one formative experience just weeks into my actual trading career. I'd spent a couple months coding and then I started trading some models. It must've been something like September of 87, but just in bonds. A few people were trading more other things, but I was just trading bonds. And I remember being long bonds on the Friday on October 16th. Bonds went down a point on that Friday and we had a lot of mean reversion models and we came in and bought some more

on the morning of October 19th. And my brother was also long stocks. And I remember watching him who was, he was the only successful guy that I actually knew. I mean, I wouldn't call him massively successful at that point, but he certainly was the first multimillionaire I'd ever met. And he went from the most successful guy, went to essentially insolvent by being long equities from 9.30 a.m. to 3 p.m. and then from 3 p.m. to 5 p.m. got massively successful again

because he was also long a tremendous amount of bonds for the same reason that I was. I was just fortunate enough that I didn't get my equity systems going at that point. Wait, and this is October of 87? October 19th, 87. Yeah. So at that point, any sort of belief that I had that fundamentals had anything to do with what markets are going to do was destroyed forever. So it's one of those formative experiences. Right. Where would you have been if you believed in fundamentals? Yeah. Well, I think what was really interesting about that day, and it was just etched into my mind, like, you know, being at downtown New York on 9-11, this was like the 9-11 of market of the S&P. But what happened then was something got created financially that shouldn't exist, which is the treasury market became a positive return put on the equity market. And suddenly,

and that shouldn't exist, right? You should have to pay for insurance. But instead, you got paid this tremendous height of the yield curve at, say, a 30-year duration, 3%, 4%, let's say, over the next 30 years, on average, to own your insurance. So that became kind of a fundamental law that you should have stocks and bonds. And some people figured out that, well, if we leverage this stuff, which we call risk parity, you can make even more money and have even less risk because you have even more insurance. And my whole career until recently has been spent in a falling rate environment. And it's only now that we're starting to see the potential for bonds and stocks to move in the same direction. And that throws off this whole 60-40 idea that you should have stocks and bonds. risk parity, when you have leveraged multiple times two things that are positively correlated, that's a tremendously risky trade, especially if that trade needs to be reduced when volatility increases, which is what happens. That's probably not so popular of an opinion around the hedge fund

world in Connecticut and elsewhere in New York. Well, I mean, look, I can't argue with what's happened over the last 30 years. My view in general of how to construct portfolios is not to try to predict what's going to happen in the direction of all these different asset classes, but try to predict what the risks could be in various scenarios. And to me, the greatest risk is not equity bear markets, but rising interest rates. Because that's the one thing that really none of us, I mean, unless you're in your 70s, you've never really seen a rising rate period as a portfolio manager. And so no one really knows what that feels like. And in addition, when correlation of stocks and bonds gets high, as it does in those rising rate periods, all the fundamental assumptions of how to construct portfolios need to be

thrown out. And one of the charts I like to show, and maybe I'll show it a bit later, is that the performance of all different types of hedge fund strategies is very challenging. In fact, pretty much every style is down. If you take the 25 worst drawdowns for fixed income, the rising rate periods, you just see straight lines going down. And that's, of course, also true for equities. But I don't think anyone is surprised by the idea that hedge funds represent, for the most part, as they are used by most people, a long bet on equities, which is why what you do and what we do can be so interesting on top of that.

So when stocks go down, if you take the 25 worst drawdowns for stocks, it really is a straight line downward. And it's a pretty grim set of descending lines, if you can imagine that. And then if you were to do the same thing with fixed income, it's actually even worse. But I don't think too many people recognize that. And I think a lot of people would say, yeah, I get it. Most hedge funds are kind of like equity replacement, right? You're going to get a great hedge fund gives you equity returns with a little bit less risk. You can argue that. But I think there are also a bit of bond replacement as well, right? There's some bond beta built into those as well.

Yes, yes. And of course, when stocks and bonds then go in the same direction, now you've got both at the same time. Infamous double whammy. Yes, exactly. And of course, what's always true about those periods? They're always volatile. Markets move. So what I've spent my career talking about is you don't need to make a prediction as to

what is going to happen in these things. You've got plenty of risk, long equities, long fixed income, and short volatility. In every asset class, save a very small handful, trend following, maybe short-term trading, maybe, and long volatility in options, maybe, depending on the manager. But you can find it. And those are the only things that are going to move in the opposite direction. And you should have a slug of that. That's worth having just in case. I'm going to get, we'll get more into that in a second, but you mentioned 9-11 and being like being in New York at 9-11. I'm assuming you were in New York on 9-11. Yes. So 9-11 was your 9-11 story. Sure. So I, of course, as, as everyone does, I remember exactly where I was when, in my case, my, my, my CIO, Paul Shen, who started my business

with me in 93, he walked in my office. He said, well, you're not going to believe this. A plane just hit the World Trade Center. I said, what? And immediately we thought of that baseball player who had flown his plane into an apartment building. And everyone thought, oh, it must be some dumb pilot who got caught in the clouds, but it was a beautiful sunny day. And the idea that- Ultra light or something other people- Right, exactly. The idea that somebody or something other people right exactly the idea that somebody could intentionally fly a jetliner because i mean we even knew that there was a crash

in iowa city where people they the pilot had piloted the plane just by throttling the engines back and forth so it literally is impossible to hit a building and it just seemed no one had any clue but paul was really concerned. So we all walked in the trading room and we were long equities. And I remember, again, one of these formative moments. Stocks had been down, I think, all five days and then the prior week. So we were contrarian. So we were long.

And then Monday, September 10th was a big up day for stocks. And September 11th was also up in the morning. So we walked in there. We had about a percent and a half or 2% profit. We were feeling pretty good. And we were just slowly reducing our position as we normally would. But Paul said, you know, I don't like this. This is maybe 858 or something like that.

And he said, let's get out of our position but the market wasn't open yet the s&p futures opened at 9 30 so he had the idea to sell dax we also had some european stocks so he he there was a we had an intern um i'm an intern he was a young guy and he was like selling one lot and two lots and paul's like get out of the way and he started really hitting it and of course at the same time there was no answer from car futures which was our currency desk and these these guys we talked to 10 times a day already i talked to them i still can hear their voices in my head now that was me on the bond pit of like car it was the symbol yeah

i mean we had a lineup of single line phones you know the old school and we normally you know just call them up and there's jeff from car and we talked to him and it was dead but again we didn't think anything terrible had happened we just thought oh the phone line must have gone down but of course then by the time the second plane hit, when the second plane hit, we knew exactly what had happened. And of course, that was the last we heard of anybody. And it was just an extraordinary tragedy, very personal for us because we knew so many people there and I knew a few other people. So- Where were your guys' offices? So we were on 57th Street between 6th and 7th.

So we didn't have a view of it. But obviously, we'd all been down there. I mean, I'd been down there a couple weeks before. We all spent lots of time visiting exchanges and car. Yeah. All right. Changing subjects a bit. Give us the elevator pitch on the, you've touched on it a little bit already,

but give us the elevator pitch on what the flagship strategy is doing, and then we can dive in a little more. Sure. So what all of our funds do is make short-term trades lasting anywhere from a few hours to I guess even as few as a few minutes to say five to 10 days. And in all the liquid markets of the world, mostly

futures, some cash FX and most of the time equity a little bit of equities, cash equities. And what we're trying to do is find repeating patterns that have occurred thousands of times in the past where human behavioral biases that are evolved into the human brain over hundreds of thousands to millions of years of primate evolution are triggered in ways that have left their signature across decades of market data, intraday market data, across all the markets that we look at, of all asset classes. So patterns where people have been anchored to an extreme price or their loss averse or their consensus bias that there's a tremendous stampede going on or they remember a particular event that's occurred. Today is a very good example, by the way. The memory of yesterday's record setting rally off the lows and equities.

Stocks rallied 4.5% off the lows after being down 2.5% or so. They ended up plus 2% or something like that, which is a massive reversal. It's the biggest in 10 years off the low. And everybody who was short Friday remembers that as though it was, you couldn't have been more crushed in the last 10 years than you were yesterday. If you were short halfway through the trading day yesterday, Friday, the stock market.

So what do we do? We do the opposite. We want to be short today because it's so scary because everyone's memory of that is fresh. So our models will tend to have a risk-off look to them, especially in the equity futures market. So that, again, is recency bias, loss aversion, anchoring, emotional bias, all these different things that you can read about. book, Thinking Fast and Slow. It's just laid out for us in non-investment terms for the most part, but it's that book. I've given out hundreds of copies of it. I think it's the greatest book on trading ever written. So I think the- Send me a copy. Sorry? I said, I haven't read it yet. Send me a copy.

I strongly recommend it. I will certainly send you a copy. A few things there. One, it just, well, one, I'd say you have told me before, and we've talked that this isn't like crude oil. Here's all the patterns in crude oil, and we're trading those patterns. You're looking at the patterns across the universe of markets and then applying them to different markets. So talk a little bit more about that. That was interesting. Sure. Well, our view is that what we identify, and when I say we now, of course, there's a lot of machine learning and there's, it's, it's a much more complex and, and statistically

broader process that we undertake to find our, our, our features and how they fit together. But the general idea is that the things we identify, the patterns that have recurred thousands of times before, occur in all markets because they're features of how people behave, not features of the way dollar Swiss or soybeans soybeans or google behaves and that there are certain common features to all of them and not everyone thinks of the world that way some people most people or many people uh think of each market separately and have a way of trading bonds and way of trading stocks and a way of trading grains we trade them all the same. And that is a simplifying, but also robustness

creating an assumption that we make. And it allows us to get a much larger number of observations than we would if we had only one market. So that allows more statistical power. But it's weird, right? Like on a micro market structure basis like crude oil is gonna be way different than bonds or something in some ways it will be different in some ways it will be the same I think another way to think about it is that you can look to a market that has had a move occur for types of moves that have not occurred in markets in which they have not that's a rather complicated way to say it but i get it i've like the idea is that what what has occurred in crude oil could happen in

dollar in 10 year or what has occurred in swiss happen in soybeans. And probably especially at like inflection points or not necessarily? It could be at inflection points or it could be the opposite. It could be, you know, at times when markets are the most quiet and they ambush you. And, you know, some of the moves that occur. Look at what happened in March and February of 2020. We had almost record low volatility right on the highs in equities, even right before the global financial crisis. We were right on all-time highs of equities in October, long after the thing had begun, stocks were still on the high. So a lot of times when you least expect it and things seem the most positive. Oh, February of 18, another example.

So it doesn't have to be an obvious turn in the markets that then really goes. It can be literally the last possible thing you would ever expect is for this to happen and then it happens. And then the second thing, when you were mentioning that I jumped to like AI and you say you use some machine learning, but I naively think that as we get more and more AI and hedge funds and investing and everything, it's going to lessen that emotional response and behavioral response. Right. And like eventually if the computers are all taking over, it's like the IBM thing that beat the go champion. Right. Like it just did move. No one had ever seen before. So if you have enough of that in the Go champion, right? Like it just did moves no one had ever seen before. So if you have enough of that in the markets, does that lessen the behavioral reactions? I think the answer is yes and possibly no. For example, many quant systems still have embedded within them the behavioral biases of their creators. And it can be something as simple as

when a quant strategy is doing poorly, people stop allocating money to it. And that's what happened to say long-term trend following or even short-term trading from say, I don't know, 16 to 19, let's say, was a kind of out in the cold moment for trend following and short-term trading. And in fact, all long while trading. And even though the strategies were quantitative, a lot of people stopped using them because they were looking at recent performance and they were loss averse. And they said, wait a minute, we're aware of these losses. We overvalue losses by two and a half times, just like Danny Kahneman says in his book. And that just happened last year, the last couple of years.

And we remember that. And our clients are on our case. And so we have to deallocate from this strategy. And it can be as quantitative as can be. And yet it's still emotionally driven in its allocation and its use. And there are even other parts of strategies that can be quant strategies that have behavioral biases embedded. So loss aversion is one of those. Right, never lose more than 3% in a day or something as simple as that.

Exactly. And the fact that clients like to hear that kind of thing. So it makes it into a lot of strategies, even though it doesn't necessarily mean that it's an optimal sharp ratio producing strategy. But it might mean that it makes it into your quant strategy because you can't raise money. And the ones that don't have it in their strategy

are the ones that you never hear about because they closed their shop or they never raised money to get a critical mass. And the ones that do, it all sounds so great, but in reality, it's completely suboptimal and merely a result of client pressure rather than optimal investing behavior. And the other piece of it is that what a lot of managers will do is optimize a parameter, which is not necessarily optimal for their clients. It's optimal for their own financial reward, which is if you maximize your Sharpe ratio, your own Sharpe ratio, what are you going to do in that case? You're probably going to end up with a lot of short vol, a lot of long risk, a lot of long equity, which almost every client in the world already has before they invest with

your, quote, alternative fund. And so in periods of time when you have long Fed-driven, let's say, periods of liquidity and risk on becomes a factor to have, you literally have de-diversification through performance chasing and the opposite, the managers that are truly diversified don't survive. And so again, you have this pressure toward, which is caused by behavioral biases on quant strategies, both positive and negative, that can massively change the risk factors in a portfolio. Yeah. I think if you're morally obtuse or don't care about your legacy or the clients at all, you just say, yeah, launch an option selling program, raise as much money as

you can and ride it until it blows up. And as a manager, you're going to make a lot of money. The clients didn't do so well, but yeah, that kind of on itself. I've only, I've only actually been a little afraid of multi-strat shops that have risk budgets that they offer to people that walk in with strategies. And I feel that this also can create this kind of systemic short volatility for what you, for the reason that you just said, if someone says, okay, come and work for me and you know, you're when we want to have 200 traders,

here's your $5 million risk allocation. And you walk in there with a trend following strategy. You're not going to make it very long. Exactly. You're much more likely to hit that minus 5 million before you hit the plus 50 million, the right tail strategy, the positive skew strategy it's called, as you know. Whereas the short vol manager who makes money nine years out of 10, but has the five sigma left tail

that's gonna be down 385%, well, that's not his risk. That's the business's risk that he's part of. So it can create, if they're not really, really careful, a large number of ways to sell volatility. And by the way, machine learning does the same thing. It tends to find a lot of ways to buy the stocks on dips and be short volatility. And because it's so black boxy, you don't really often understand the many ways in which it does that. So you have to be very, very careful with computers when you're in machine learning strategies. Yeah. And one thing you brought up, like if the

clients leave, the strategy is likely going to go under, right? It's not a public utility. They're not like, I run this long ball strategy no matter what. Like, no, they need the clients, they need to pay the bills and keep the computers running. Exactly. I think the idea of a public utility is a good one. A lot of people are very comfortable with protective strategies in other parts of their lives, such as fire insurance, let's say. So if you ask somebody, what's the sharp ratio of your fire insurance? Yeah. Negative. Scratching, like, oh, it looks like it's minus infinity. Yeah. Same cost every month.

No volatility. At least it doesn't have volatility. But boy, does that thing lose money. On a standalone basis, that's like literally the worst investment you will ever make in your life. Most likely for 96% of people or something like that. It will never pay out. But everybody has it. For CIOs in the alternative, or let's say the traditional world in alternatives,

the idea of having insurance policies that pay out one year in 10 or one year in five, or in our case, much more frequently than that, it always comes down to like, well, I prefer the returns of short vol to long vol. Actually, Danny Kahneman and I did a presentation on this very topic about four or five years ago called allocating fast and slow. And we talked about some of these behavioral factors that make diversifying strategies more difficult to hold in a portfolio for allocators. And I've really seen it over 30 years of being in business, just how difficult it can be. And I get it. I'm not saying that they shouldn't experience these emotional impacts of

having a strategy that doesn't make money as often as strategies that are short value, but you still need them in a portfolio. And if a hedge fund is doing their job, they should be maximizing the benefit that they provide to their client's portfolio rather than to their own. But very few do. Yeah, that's an important. I'm going to get back to that in a second. You made me think of I always put this to people who play the lottery. I'm like, would you play the lottery in reverse? Because it's got the same mathematical

expected return. Like if you went to the gas station and they gave you two, three dollars every time you went in there, but there's a one in a trillion chance that they could come and take all your money, all of your children's money, all of your grandchildren's money down into infinity. Like, would you play that game? And everyone's like, no way. Are you crazy? Right. Even people that are statisticians. Yeah. We all know if you're a good statistician, like, yes, I would absolutely play that game. Well, of course, if it's someone else's loss, however, like in a multi-strat shop, then it's an entirely different story because that is exactly the situation that I described. And then with your, the biases leaking into the AI, you made

me think of like a robot that has complete automation and can do whatever it wants. But right, it's like in the lab. It can't like go out of the lab and walk down the street. So it's like, yeah, watch it, it can, it'll go over there and whatever it wants to do, it does. So it's kind of a similar way of I think about it of like, yes, they might be black box and totally AI driven, but they're still inside the larger room, if you will. Right. And that room is the historical data usually of a particular market. And in addition, it because a lot of the strategies tend to converge on the same optimal solutions, you actually end up with a large fraction or a majority of the AI strategies,

which all seem like they should be completely uncorrelated to each other, managing to put on exactly the same trade at exactly the worst possible time, because they've all done something that's a little bit reflective of what's happened in the past and you can get enormous potential discontinuities. And I think we've started to see some of that in the equity markets right now. Right. It's like if they're making ice cream, they're all going to come up with flavors of vanilla, you're saying, right? They're not going to come up with like bubblegum pistachio or something. Yeah. Although if there's, you know, I don't want to, even calling it vanilla doesn't quite do it justice because these really are great ways to trade the historical data.

Because I don't want to, by saying it's vanilla, it's not plain vanilla. It's very interesting and sweet tasting and complex and has a lot of elements and notes to it. And boy, is it good at the data that it's seen? But you have to really wonder what will happen in something that has not been seen before. And I think the way to solve that is to have a much larger data set and really take a step back and say, holy cow, there are going to be times when maybe this is just going to fail completely. And at least be aware of that and have things in your portfolio that might not be as optimal, but will do better at those times. And that's how, in fact,

we approach that very challenging problem. And not that we've solved the problem, but at least we try. And then let's go back to, this is super interesting to me, that you view your job as to help the overall portfolio is sharp. And we, like most people would say, throw sharp out the window to begin with, but whatever, whether it's sharp or risk adjusted return in some way. But you're saying, no, your job is to help the overall portfolio,

not just maximize your own sharp. When it would seem like, no, if I just put a bunch of investments that have the maximum sharp together, that's going to be my best case scenario. Yeah. Well, I think anyone that's ever watched a rather mediocre basketball team on an all-star team basis managed to win a championship. You know, you don't necessarily need a superstar to win a championship if all the team plays beautiful ball together. And I think that is, there's a fantastic study from years ago that

Galen Burkhardt of New Edge did called superstars versus teamwork. And he compared some of the allocation strategies that people use, like, you know, pick the top five sharp ratio managers, pick the five highest returns, random, pick the five lowest correlation managers. And it turned out that just to summarize, it was like that beauty is skin deep, but ugly goes clear to the bone. Performance is skin deep, but correlation goes clear to the bone. In other words, managers tend to have correlations that are stable over time, but their performance tends to revert to the mean. And with optimism bias,

another really important behavioral bias that people have, you look at the sharp ratio of a portfolio created with 20 managers, each of which has a two sharp who are somewhat uncorrelated. And you're looking at a four or five sharp or something like that. And you say, wow, even if it doesn't work so well, if it makes half as much, I'm gonna have a two sharp. That's fantastic.

But the problem is the prior is not the manager's survivor biased two sharp or four sharp track two sharp track record. But it's like the average sharp of all managers who've ever traded before. That's what you should be using, which is like point three. Yeah. And then suddenly you start to say, well, wait a minute, maybe it's good to have a bunch of uncorrelated managers or even better negatively correlated managers that you can leverage a little bit with 0.3 sharps because they're probably going to stay at around 0.3 as all managers do. But the correlation is going to be very, very predictable. And you're doing much better with negative 0.3 correlation intermanager correlation than with 0.7 intermanager correlation, which is what you have in the hedge fund world.

And I like to when we build portfolios that are the same, I take that a step further and say, like, the statistical correlation might not even be enough. We might have too short of a sample or something. Like, let me make sure that they're doing something fundamentally different different return drivers so i can have a little bit more confidence in the correlation holding up right if it's a discretionary hog trader and you guys or something i'm pretty confident that that low correlation is going to stay there I had you guys confused for a little bit. Like in my history, I've always thought of you guys as more of a trend follower, but you're saying not correct at all. I've become a bit of a pariah for not being quite as bullish on trend as the only thing

one can do to make money in the managed futures world. And we've always described ourselves as majority contrarian. And that doesn't necessarily mean that we're always going to be against the trend because we could just as well be selling a rally in a downtrend as we are buying a dip in a downtrend. But my general point is there's a few different ways to trade. You can do very, very short term. You can do mean reversion trading. You can do long term trend following and all of them are good, but they will make money at different times. One of the things I think is really worth talking about right now is the difference between the carry of fixed income and being right on the direction of interest rates

and following the trend of interest rates. And this is something that when I wrote a paper on this maybe four or five years ago, it really got an enormous amount of pushback. And I said something very simple. I said, well, let's look at what's happened in the fixed income futures markets from 1990, let's say for the next 25 years, but now it's 30 years. Well, that fixed income market has been in a positively sloping yield curve environment since around 1990 during this tremendous decline in interest rates. So you would say as a first pass approximation

that managed futures trend following is gonna do great in that environment. Huge one way trend interest rates go straight down. Wow, look how much money there is to be made. And sure enough, everybody made money trading fixed income being long duration but when you decompose that and you say okay well how much of that money was made because rates went down and how much was made because the yield curve was positively sloping that you got paid to own

duration it turns out that 70 percent was the carry, was the slope of the yield curve. And only 30% was being right that interest rates went down. So here's the problem. Most people think of long-term trend following as a bi-directional strategy. You can short as well as you can go long something and you'll make just as much. But in the interest rates, it doesn't work that way. So imagine that I said to you for the next 30 years, interest rates are going to go up to the really, really high levels that they were in 1990.

So let's say that's a short rate of 6% or 7% or something like that. Basically, the whole 30 year, 8% to zero, we go back from zero to- Right. Just run the world in reverse basically the whole 30-year 8% to 0 we go back from 0 to right just run the world in Reverse for the next 30 years Now you would think that this bond market would go down that the price of bond futures of 10, you know futures would be lower 30 years from now than it is today Right now if you just say oh we're trying to find a great there and they'll do the mirror Exactly Not only doesn't it go down as much it actually goes up You just say oh what trend falling did great there and they'll do the mirror Not only doesn't it go down as much it actually goes up Which is a remarkable paradox the price

Sorry, the bond price you're saying will go up or the futures market price Us tenure no futures will be higher than they are today on a buy and hold not the actual nominal price but because you have to roll it each month you will actually lose money uh being short if rates go back up to where they were over the next 30 years and the reason is that the yield curve spends 97 of the time with a positive slope. And why are yield curves positively sloping? Because to lend somebody money for a long time, you need a little bit of extra yield to induce them to do that. Right. So the only way that wouldn't be the case is if longer term rates were below short term rates for 30 years. Exactly. And that happens a few percent of the time. So over the last 75 years,

it's been a handful of percent of times, 97% or something like that at a time, the yield curve has a positive slope. So what that means is to be short fixed income futures, you're actually paying the carry instead of receiving the carry. And the price actually ends up higher. So you still have an uptrend in futures, even though you're trying to make money on the short side, because you know interest rates are going up. So it's hard to trend follow. And that could be the case for many commodities, right?

Yes, it could be. Where they have a higher cost of carrying. It could also be true for equities. Being short equities is not the same too i like that um anyway that so my point is and and what i didn't i i said it in the paper but i didn't say it strongly enough so i'm going to say it right now okay if rates go up profits are not going to be made as much from being short fixed income futures. However, there's going to be great opportunities in FX and in commodities. Now, in the past, most long-term trend following was made money in, sorry, in past rising rate periods, like the 70s,

a lot of money was made in commodities. The problem is that commodities are much smaller now as a fraction of the total world, and managers are much bigger. So you're talking about, say, $500 billion of people doing managed futures strategies. You can't do very much in live hogs, in corn. You can trade- Well, even regulatory-wise.

Sorry? Regulatory-wise, you're limited, right? Right, exactly. Your position limits. But even if you could, the markets just aren't liquid enough. Yeah. So the only place you have to look, well, I guess you can look at equities. And which way are those going to go in rising rate period?

I don't know. I would have said up, but it could be down, right? That's what's been happening lately. And then FX. so you would expect significant fx trends and that's the place to look for profits and so there will be great opportunities but just not in fixed income but anyone who says yes we're going to make just as much money on the short side in a rising rate environment as we do in the long side in a falling rate environment doesn't understand the bond market and i I'm not really, I'm no bond expert, believe me, but this much I do know that

positive carry is a pretty massive thing to either profit from or overcome. And not even enough to just say, well, it'll be, we'll still make money, but probably just not enough. Like there's a possibility. There's no downtrend. Yeah. There isn't a downtrend at all, which is real. I couldn't believe it when I, when I came up with that result, I thought I made a mistake.

Right. Go back and double check that. And, but when I was mentioning trend followers, so you, so a lot of it is contrarian, which I take as mean reversion. Yes.

Call it, which we will. But to me, that's always like more of a short volatility strategy. Right. But you're a long volatility shop. Yes. Call it what we will. But to me, that's always like more of a short volatility strategy. Right. But you're a long volatility shot. Yeah. You can think of it that way. How do you square it? But in some ways, though, if you think about what markets do when they're volatile, they actually bounce around a lot. So there is I think of March of 2020, our contrarian strategies did great because it was, it wasn't being actually short volatility, like selling options. It was that the market just kept, the fixed income market just kept gyrating back and

forth. And there were tremendous opportunities to buy and sell and also for short duration momentum trading. And here, I mean, less than a day, you know, a few hours to a day or two at a time. So there's a lot to do beyond long-term trend following in volatile periods, but it's a little bit of a, like, it's not the same as just selling options, what we're talking about here. Yeah. Yeah. Yeah. But, but would you, I guess you're, you're kind of selling that volatility because it is mean reverting, but you're not technically selling. So it's, yeah, it's nuanced, but you're saying no, no matter what, what you guys do and what you've seen in

your statistics, when you do those mean reverting trades, statistically, they have positive skew in their kind of long volatility. That's right. right that's right but that's the rub of like how do you how do you do something convergent and get divergent returns yeah well i mean we have a few tricks up our sleeves after 30 years i mean not that we have a perfect track record but we we've learned a bit about how to do it one last thing when you were mentioning, like you're looking out for the overall sharp versus your own sharp. Well, let me just, while we're mentioning sharp, what are your, right?

Like, do you think it's a flawed metric? Do you think you're fine with it? Well, I think sharp ratio is both the manager and the environment. And you have to really dissect the environment and say, well, let's take the last dozen years or so since the lows of March of, let's call it a March of 09. So literally a dozen years almost to the day, the S&P was one fourth of what it is right now. So if you had somebody that started around then, boy, is their Sharpe ratio going to be phenomenal. And all you had to do was sell vol and be long equities.

And the more you were long equities and short vol, the better you did. That's not manager alpha. I mean, you could say it is and that somebody was smart enough to start a fund right then and say, we are going to be massive. That took a little courage right on the lows.

I would admit that. Mostly timing. Sorry? Mostly timing alpha. Yes, right. going to be you know massive that took a little courage right on the lows i would admit that mostly timing yeah sorry mostly timing yes right there's that timing again um or it could be someone with negative correlation to equities that's actually has the same sharp ratio that to me is a much harder thing to do and perhaps a more sustainable edge than someone who's got a 0.9 correlation to stocks during a period when the stock market had a too sharp. So it really has to be teased out. And then the final piece of it is, okay, that's great on a standalone basis, but is that the guy that's going to throw, if you're the first baseman, is that the guy that I want on second base? He's got to be able to make that throw. In other words, he's got in the portfolio, that manager has to do their job

because you already may have the very same risks that they're offering. And the same downside that the manager has is already in your book. So to me, I think it's so important to say, what risks do I have? What could go wrong in my portfolio? Not that you think that they're going to necessarily go wrong, but what could go wrong? Right now, I think it's overprinting by central banks, interest rate pressure, potentially simultaneous declines in stocks and bonds. And that is what I would call an extinction event for families, for multi-generational asset pools. It's not equity market declines that take people out of the game.

It's actually the basement of the currency that does it. So to me, that's the most dangerous thing of all, to have the dollar go down 99.9% in real terms. And that was going to be my next, like, is the next crisis a rate-driven crisis? to have the dollar go down 99.9% in real terms. And that was going to be my next, like, is the next crisis a rate-driven crisis? I think it might be. I think it's the biggest risk right now.

But I don't want to say it's going to happen because that's not my job. I'm not a global macro guy. I'm not going to pound the table and say, yes, the Fed is definitely going to mess things up. Modern monetary theory is garbage and it will definitely fail. No, I don't know that. No one knows that. You sort of believe it? Well, you can probably guess how I feel about it. But as a Bitcoin bull, that's probably all you need to know how I feel.

But talk a little bit about that we've touched on before that would be a unique situation that unless like you said unless you're in your 70s of bonds down stocks down um if that's to me the more interesting part of a rate crisis leading stocks lower of if that provides no flight to safety quality right and what you said what that does for 60 40 portfolios for risk parity like that's really what that does for 60-40 portfolios, for risk parity, that's really the risk in all these people's portfolios of what happens if that bond piece

looks nothing like it has in the past. Yeah, I think that's really the place to look for the holes in one's portfolio. Would a portfolio survive that kind of environment? And one reason to look at cryptocurrency, specifically Bitcoin, is to say, well, this is a fixed supply asset that actually has a yield of 4% or 5%

and perhaps even more these days. So it's a yield play. But the really important piece of it is that it is a very liquid asset that you can put your money in, receive a yield and even invest in. Let's call them equities. Of course, they're ICOs and things like that denominated in Bitcoin. But there's a whole financial ecosystem that isn't subject to the universal bias of everyone in human history who's ever had the opportunity to print fiat money, they've overprinted it. Every single time for 2,000, 2,100 years.

Yeah. Or started dividing it before they could print it. They were melting it down. In fact, every time you hear the word dinero, just remember the Roman Emperor Denarius, who was right around the time of Jesus. And they used to pay soldiers with an ounce. A denarius was an actual coin, which is about an ounce of silver. And you got about one of those per month. And about 300 years later, they had debased that to be 0.15% silver. And that's about the time that it takes. If you think about the U.S. dollar, here's a good little anecdote. I love to tell this story. In 1900, if you lived in Manhattan, you could go to one of hundreds or even thousands of oyster bars.

Oysters were ubiquitous all around Manhattan. And you could get all the oysters you could eat and all the beer you can drink for seven cents. Nice. I need the time machine. I want to go back. Right. And think about how much that would cost now. So in real oyster terms, the US dollar, let's say it's 200 bucks. Now, you're talking about your 99 point something percent debasement

over time. And that's about what the CPI tells you. It's also gone down about 99 point something percent since then. So it's not just oyster, terms, it's real purchasing terms. And that's before we had the Fed going from $1 trillion to $20 trillion in their balance sheet in a handful of years. I don't think they can ever stop at this point. We see what happened in 2018 and the taper tantrum back then in, what was that, 2014? When they try to do that, it just tanks the equity market. So they're back into a corner. And we also know that Powell isn't going to stop it. Once it starts to happen, he's been very clear, they're not going to come in and tighten,

probably because they can. It would be too expensive to fund the government if they were to hit that situation. So we could have rapidly rising inflation and it's going to be, it could happen so fast. There's nothing you can do about it. You have to have those protection in place. You have to have your fire insurance before the fire starts because that fire could start really rapidly. And historically in every case that there has been hyperinflation, it happens pretty rapidly. And most people aren't able to move assets around fast enough to take advantage of the opportunities. Or they get locked in, right?

Legally or whatever they say, you can't move assets. Right. So do you trade Bitcoin futures or now the Ether futures? We don't for clients yet. We would like to. We probably will at some point. The liquidity isn't quite there in the futures market, but it's a massive market.

I mean, you're talking a trillion dollar market cap asset in just Bitcoin right now. And that's bigger than most commodities right now, except energies. Right, and to me, it's just, regardless of what you think its merits are, if it's volatile and it jumps around and it should be perfect for a shop like you guys, right? Yes. And our models do seem to work in it.

How early did the game, were you in Bitcoin? Sorry? How early did the Bitcoin game, were you? Did you load up like- Well, I will tell you, and you'll probably run into people who will confirm this, in 2012, in January, I was at the Context, actually it was called Alphametrics back then, summit in Miami. And if you took a meeting with me, you would have left the meeting with a one Bitcoin coin with a private key for a one Bitcoin address on the back of it. And you would have heard me give my spiel about inflation and the risks of Fed balance sheet. It's exactly the same thing I said now, but I was way too early. Has anyone called you up?

I was a Bitcoin. And actually just this week, I helped somebody who I met with in that conference, recover his one Bitcoin into his wallet and use it. And so I was giving them out like candy. You're like, thanks for that meeting, right? Because what was it then? 10 bucks or something? Was it more?

Yeah, it was like maybe six or seven or something. Yeah. So a few people you met with, you handed over 50 grand to back then. Yeah, I probably gave out what is now worth, I don't know, five. I was probably going to give out 100. Yeah, it's like $5 million worth of Bitcoin in current prices. I should have taken that meeting. We were probably there.

I was probably there. Got anything else you want to cover? Despite a little bit of volatility, most of the Q3 and Q4 was spent in almost record low territory. Dollar Yen did hit a record. Treasury note futures did hit a record treasury note futures did hit a record low the major markets taken together all hit a combined record low of realized volatility so again i just want to be clear we're talking about realize what markets actually do not implied volatility

we're not really options traders we're just trading directionally in futures and that's a on a close to close basis to right that's right yes so the day-to-day volatility and I'm sure everyone remembers you can even see it right behind me the the flat periods where the bond market just flat line for weeks and weeks and traded the same price 20 days in a row. You rarely see that, but that appears to have ended. And February, March, these are really volatile months. And we're talking about volatility that's like old school vol from the 90s. And it may be that you need to look back a little further than the 08, the 09 to now Fed driven liquidity low vol world that we've all spent the last dozen years in for indications of what can happen next and it's it's these seem like out of database moves but

you know i i remember seven points in the bond market was like my six week of trading that doesn't seem like a big move to me but when the bond market is trading the same price for 20 days, that can seem like out of nowhere and it can blow up a model. So I think it's interesting to look at history, to look at what hasn't happened, to look at what happened in other markets and say, well, that can happen here too. We could have a downtrend in fixed income

that looks like the downtrend in crude oil. And what would that be like? That's what hyperinflation looks like. So anyway, so my point is, be diversified. Just I try to not make a prediction as to what's going to happen and just say, what could happen? What's the worst thing that can happen? And the final bias that I like to talk about is called the ostrich effect, where people will literally bury their heads in the sand or figuratively bury their heads in the sand and say, you know, this can't, it's so bad, I can't even imagine this happening. So I'm not even going to think about it. I'll pretend it won't happen. And those kinds of risks are the things that can be heroic saves for families and for pension funds and for institutions. If you're thinking about these in advance and not saying, well, it hasn't happened in my career, so it will never happen in my career. And what does that hyperinflation look like to you? Because that's

going to be rates shooting higher, but the Fed's going to try and, you because that's going to be rates shooting higher but the fed's going to try and right they're going to be cutting them to negative 10 or something well i i think maybe it's it's it feels like they need to have they need to just ease and ease and ease until finally all that liquidity sloshes back the other way and there's just every asset gets chased every everything you can buy is just bought up and bought up and bought up. And it will probably start in real estate and equities the way it sort of feels like right now. But when it starts to spread and somehow all this liquidity, which they can't turn off the spigot, keeps chasing the goods and services, well, that means your real purchasing power is going to just go way, way down. And eventually, the only

way to do that is to print, the only way to solve it is to print more money. And then you get the vicious cycle that we've seen in places that you, I mean, no German, no Austrian thought they'd ever see this. These are the greatest economies in the world, in Europe. And people completely wiped out. Not like, oh, I lost 60% of my equities and I feel terrible because I'm back to where I was four years ago. Right. Or the Austrian stock market just ceased to exist, right?

Yeah. I mean, I have $100 trillion Zimbabwe note. Yeah. That you use it for wallpaper, right? I'm going to move on to some of your favorites, some quickfire questions. So favorite New York City borough? I got to go with Manhattan.

That's where you've spent most of your time. Yeah. That's where I live. That's where all the cult, I'm a musician and I love classical music and jazz and opera. So that's where that is. I'm going to bring those three up. So favorite jazz player. Bill Evans. Say again? Bill Evans, a pianist bill evans all right i don't know um favorite opera the ring go to dameron all right i don't know what the uh what's

the wagner or the german opera yeah that's that's wagner it's i went to it with my wife i told her afterwards it felt like i'd been drugged stuffed in a trunk of a car and driven to Mexico. It can, it definitely can. I will admit to those to being a little bit less than paying attention for some of the many rings that I've seen. But I will tell you the last five or 10 minutes of Gertrude Dameron, where everything kind of comes together and all this incredible structure that Wagner has created recapitulates subtextually as the action is going on he's all the music is sort of referencing ideas and themes and events that have occurred all before it this incredibly complicated almost a fractal structure that he creates it's phenomenal and it's so beautiful and it totally

moves me to tears every time really did you see the uh did you see the disney movie the new cartoon what was called soul i did yeah yeah yeah he was a jazz pianist and he was i i didn't love the music in that movie i i did that particular style of jazz i didn't really care for but i like at any time the jazz pianist is the hero of a movie that's always good yeah it's good um and what about chicago you got a favorite chicago jazz spot uh i don't actually spend much time in chicago these days you know back in the future's heyday i was there all the time but but i've been there maybe once in the last 20 years well Well, you got to come visit. Favorite investing book besides Danny Kahneman?

We mentioned him already. Yeah. I'm going to go with my brother's book, The Education of a Speculator. All right. I think there's a lot of really good wisdom in that book, especially for the time, but even and i mean the obvious of course there's always the reminiscences of a stock operator and secrets of a professional turf better these are like the insider books but everybody knows them but i think my brother did a very good job of incorporating a lot of the paramutuality to recognize that you know it's not just the fundamentals it's not just

the trend it's but it's everyone and what they've already done and positioned themselves. And that a lot of times, exactly at the times, like what we said before, when you think one thing is going to happen, that makes the opposite the most likely to happen. And he covers that very well. And you wrote a book, right? No, no. Oh, I thought you wrote a, are you going to write a book? You want to write a book? You would think from the amount of amount of talking that I've done that I would have a

book in me, but not yet. Um, all right, we'll write one. We'll read it. Uh, best New York city slice of pizza. Oh boy. I'm a keto guy. I don't eat pizza, but if i had a pick i what is it was it raised on prince street and uh like prince and mulberry i think i think the raise i forget that one i think it's called raised but that that's the best one i remember from my pizza eating days how long you've been keto about four or five years all right how you drop how many pounds 40 good for you. I was about the same five years ago. Excellent. And favorite Star Wars character, which we ask all our guests. Oh, boy. Favorite Star Wars character.

I've got one behind me here in the basement. I think I have to go with Darth Vader. Okay. Yeah, just because he really has the greatest arc. For sure. I'm, I'm, I'm, this,

you know, this goes back to my love for opera. If there's one character that has a beautiful transformative arc and learn something in the process and really shows humanity and love, you have to say Darth Vader. I love it. All right. Redeems himself in the end.

Exactly. All right, Roy, this has been fun. Thanks so much for joining us. We'll put links to all your papers and website and whatnot in the show notes. All right. May the force be with you. May the force be with you. Thanks. Enjoy the skiing. You going to ski there or no? Yeah, there's been some good skiing. And I find that's a very meditative place for me on the chairlift. It's a one place. It's too cold to take out my phone to check the prices. There's no one to talk to.

And I really can think it's great. I was just saying that on a ski trip. Like when I'm going down the mountain, there's no time to think about anything else. You're just, I got to think about that next turn or I'm going to hit that tree. That's right. Take care. Thanks so much. Thank you.

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