The Derivative - Unpacking the Sell-Off! Awesome Insights from discretionary macro trader Asim Ghaffar

Episode Date: August 8, 2024

Today's episode features an in-depth discussion with discretionary global macro trader Asim Ghaffar, founder and CIO of AG Capital. Ghaffar shares his insights on the recent market volatility, including his views on the potential triggers behind the sell-off and the chances we have for a recession. Was it just a blip on the radar, algos deleveraging? He explains his discretionary macro trading approach, highlighting the importance of risk management, position sizing, and the psychological challenges of the business. Ghaffar also discusses the differences between his strategy and systematic trend following, as well as the unique opportunities smaller managers can pursue compared to large global macro funds. In this chat we also explore Ghaffar's personal journey into the industry, the challenges of starting a hedge fund, and his long-term outlook on markets, including his perspective on the role of gold in a portfolio. Chapters: 00:00-02:01=Intro 02:02-11:14= What triggered the Sell-off? The Yen Carry trade? Or just algos gone wild… 11:15-22:35= The secret sauce to a long-term approach, algo moves and the mental games of trading 22:36-31:55= Discretionary vs Global Macro & the unsolvable puzzle or crack under the pressure 31:56-43:00= Psychology & Philosophy? The real head games of trading & sparks to start a hedge fund 43:01-49:50= The potential of a recession, who wants it? Fed rate cuts, the wealth effect, & investment vs trend 49:51-01:06:19= What’s beyond the horizon, staying out of the noise and focus on the fed 01:06:20-01:14:22= Commodity prices for discretionary trading & what’s with gold? Getting perspective… From the episode: Derivative episode: Wisdom from the wizard maker  with Jack Schwager   Follow along with Asim on LinkedIn and AG Capital's LinkedIn. For more information on AG Capital visit agcapital.fund Don't forget to subscribe to ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, 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. Hello there. I hope you survived the market sell-off here early August 2024 as best you could. Hard to tell for me if this is real or just an overreaction, unleveraging of some trades that had an oversized effect. Anyway, you know it would be awesome if we had a global macro guy on the pod to talk through what went down and what it could mean.

Voila! We have Asim Ghaffar, founder and CIO of AG Capital, joining us today. Yes, his name is literally pronounced awesome, spelled A-S-I-M. And yes, I spent an inordinate amount of time getting into that coincidence. But we also get into some real stuff, talking about if this was just a yen carry trade. Unwind just what it takes to be a discretionary macro trader. Was he slinging yen trades at 3 a.m. Sunday night? And how discretionary macro differs from trend and quant approaches. Oh, yeah.

And if he ever gets tired of the macro tourists talking about the Fed and gold, send it. This episode is brought to you by RCM's cool and informative infographics. That's right. Who knew we have infographics? We just did a new one last week on what diversification really looks like. But we've got one on futures ecosystem, the Summer Olympics Guide to Investing, timely. And my favorite, of course, the Star Wars Fans Guide to Investing. Check them all out at rcmalts.com slash infographics with an S.

rcmalts.com slash infographics. All right. We are here with Awesome, which is pronounced awesome. We were joking. Did you get teased by a kid or praised as a kid for the awesome name more just the annoying fact of having to explain what your name is since kindergarten first grade my whole life uh and what's the background of the name awesome uh pakistani name parents came in the 60s early 70s uh so typical immigrant story. Spelled A-S-I-M, by the way. Pronounced awesome.

So lucky to have a discretionary macro guy here when we just went through a little macro noise. We're recording this August 6th. Had some global market activity August 1st, August 2nd, then the weekend, and it really blew out yesterday, August 5th, before recouping a little bit today. So tell us what you saw, what your thoughts were. I think this is for real. I think this is early innings, just a blip on the radar. What are your thoughts? I think blip on the radar from a very short-term perspective, it's all positioning that's getting

unwound. So this is a bunch of levered players, whether hedge funds or other players, algos going off. If you look at what happened, it really looks like just a positioning unwind across all these markets. And part of the reason I say that is normally it wouldn't filter out into what I would call secondary and tertiary type relationships. So an example is, we all know what's happened with equities. But if you look at currency markets, normally the euro and the pound are highly correlated against the dollar. So they're both developed market currencies.

The British pound and the euro are going to go in the same direction against the US dollar almost always. But what happened in the past couple of days is the euro ripped going to go in the same direction against the US dollar almost always. But what happened in the past couple of days is the euro ripped higher, appreciated against the dollar, while the pound went down. And the reason is speculators were flat or even net short the euro, and they were very long the pound. And so they just were covering those positions to raise cash to meet margin requirements. And if that's happening across the board, it means that across all these different market and macro relationships, everyone's just raising cash.

So whether it's pension funds that are borrowing in yen or pod shops that are very levered, long mag seven, everyone's just unwinding trades. Algos are firing off from the quant folks out there, exacerbating things, and there's your quick panic. And I think it's over now. So the markets probably will stabilize, and I guess equities would rebound for the next at least week or two. We'll see. And all on the news and the press,

they're blaming it on the yen carry trade. You think it is mainly the yen carry trade, or that's just a easy bogeyman for the press the latter yeah the yen has a carry trade out there the end carry trade's been around for 30 years i think it was probably bigger at points in the past maybe it's a little larger now in notional terms today i actually don't know but i don't think there's any way that the yen carry trade was the fuse that lit this off this happened, you called it a 30-year meme before we even talk. Yeah, this is happening across the board. Sure, the yen, people were short.

They're covering. The Bank of Japan had a hawkish hike. That's caused the Nikkei to really fall. But a lot of this, I think, is beyond just the yen carry trade. That's just one element. It's a symptom of this, not so much the spark or the cause. This is just deleveraging, debrocing, and algo's gone wild over the past few days. That's what it is. And you can look at the VIX. The VIX is telling you that this is absurd,

is what I would say. The VIX is at levels that it went to during real problematic prices in the past. For example, 1998, LTCM was a big deal, almost took down the financial system, you know, 9-11 a few years later. So the VIX is at similar levels, which tells you that again, this is just algos and positions that are being squared, causing a chain reaction that's way in proportion to an 8% decline in the S&P 500. So to me, that begs the question, and I know you don't know the books of every trader out there in the universe, but from your seat, right, begs the question, what was that trigger? Why did it start de-levering in the first place? Well, you could argue that in the latter half of July, there was a little bit of a tremor where folks were unwinding some of these long MAGG7 short Russell 2000 positions. So you saw the Russell 2000 spike higher as some of the MAG7 stocks sold off.

So there was already a bit of trigger finger sort of de-risking going on heading into this. And then it seems like the payroll report was the key trigger. So payrolls came out at 114,000. I think the expectation was for 175,000. So a big miss. But that in and of itself should not have set this off. The bigger picture is that markets tend to go quiet and lull you to sleep for many, many months and quarters in a row. And then all of a sudden, some data point comes out

and everybody quickly panics. So discontinuous tech moves, that's exactly what markets do after a long sleepy period. And that payroll report was a trigger. And then secondarily, maybe the Bank of Japan's hawkish hike, and a little bit of the end carry trade unwind. But I think it was more, people were ready to already had their sort of finger on the trigger coming into payrolls. And that really, that did it. I love that view of, hey, they're going to find some reason, right? There maybe probably wasn't a reason. It was just, we're going to find some reason right there maybe probably wasn't a reason it was just we're going to find some reason our fingers already on the trigger the market was getting long in the tooth all of that let's de-risk let's take our profits off the table

um it would have been something else if this print for payrolls had come in a little higher then this event would not have happened and maybe it would have happened three weeks from now on some other data point love it um and as a discretionary what's that look like for you are you up all night tracking these markets are you placing trades in the middle of the night like how does it look for you personally when you're looking at some sharp moves like this we're very long term our we have a basically a two-thirds, one-third split. We're a concentrated manager with usually five, six line items in the portfolio. Two-thirds are very long-term, meaning multi-year in nature. So we're not looking at day-to-day moves.

And even our short-term trades tend to be many months in a row. So the short-term idea for us might be a five-month hold. So we're not at all influenced by something that's going to happen over two days. That being said, the first rule of being a discretionary manager is risk management. And so when stuff goes haywire, yeah, you do wake up more than once in the middle of the night, just to take a look and make sure everything is not going out of whack. Because if we have to, we need to just cut positions. We always have to do that sometimes for risk purposes. But in this case, watched it, monitored it, and we did nothing to change positioning. Yeah, my vision of you is waking up at three in the morning, seeing the yen way overbought and slinging some short yen trades, betting on a mean reversion.

That's the cheap and dirty version of the discretionary trader, I guess. Yeah, that's the stereotype of the swing trader. So if you're putting on trades with a three-hour hold or a three-day hold, that's the legendary style of trading that was popularized, I think, in the 80s. It doesn't work anymore. I don't know anyone that does it. I'm sure somebody out there is trying it or doing it. Full disclosure, I did try it way before I built Deji Capital as a business when I was younger, just tinkering around with my own account, probably 20 years ago, maybe longer. And I failed at it miserably. You don't look that old. We can talk about that later. I'm old. We can talk about my failures later, but I tried swing trading and day trading and a bunch of other styles of short-term trading in the early 2000s

and just failed at it miserably. And you have the scars to prove it? Oh, yeah. trading in the early 2000s and just failed that at Miserable Ace. You had the scars to prove it? Oh, yeah. And that experience led you to, hey, I need to be longer term. I need to have these longer term convictions. Partly. Partly just that first, I think, three, four, five years of a trader's learning curve.

You need to experiment. I think that's important. And over time, you figure out what works for you psychologically. Your trading style or your investing style has to be married to your psychology. So for me, I would hate a systematic approach. That's not my style. I like to figure things out and understand what's happening. And I think the short-term trading, the market's changed so much from humans to now very algorithmic with moves that are so different on a three-hour chart than they were in the mid-90s. The short-term stuff requires you to adapt in a way that I think is just too difficult. Potentially doable, but the failure rate is too high. And I think it's very difficult to try to build a 30, 40-year track record with three-hour and three-day type swing trades.

I couldn't do it. It wasn't something I was capable of. So I gravitated towards more of a longer term fundamentals plus technicals plus sentiment. It's still considered a classic macro approach. It was prevalent in the 80s and 90s. But at the time, there were more of these sort of short term swing traders, and they've basically gone extinct. On the algo side, right? You've mentioned algos a few times. Do you think this move these past few days was exacerbated by the algos? Is it right? Are they both there?

Maybe the only ones who can trade in those hour to short term timeframes. And then when they decide to get out, it causes that cascade effect. Well, undoubtedly. And that's why our style is to stay outside of that algo fall. So whatever move they're going to drive over X hours or X days or even a few weeks, you want to be outside of that volatility.

You want to think bigger picture, longer term. The algos that did whatever they did in the last two days, they've been around for a while now. And this quant approach with algos has did whatever they did in the last two days they've been around for a while now and this quant approach with algos has been around for 20 years and so it shouldn't be a huge surprise that you get these sharp cascading style moves it's just it's happened over and over and over again so i think that definitely exacerbated the moves does your model consider that there's these moves are going to happen from time to time and have some exposure to sort of tail events like that? Oh, for sure.

I mean, a huge part of our style and any kind of longer term style, you're taking advantage of the tails. Classic long term trend following, which is systematic, as well as our style. We have very different entries and exits and different portfolio construction. But at the core of it, you're looking to take advantage of some of these very large moves where a ball expands and a market makes a move that nobody expects. If you can have a sense for what some of these outlying parts of the tail look like and just have enough sort of irons in the fire and viewpoints that are different than the majority, you'll capture some of those moves.

And you need to have some of those. If you're going to hold a move for three months or a year, a huge chunk of the gain is going to come from when the market finally slowly comes to your point of view. And it's going to happen in a discontinuous fashion half the time. And that's interesting, right? The kind of difference between a guy at a pod shop needing to make money day in, day out, week in, week out,

or maybe get fired versus you just said, I'm waiting for it to come back into my viewpoint. I can't remember exactly what you said, but right. Like I want the trade to come into where I expected versus that pod shop guy, or even an algo probably is like, if it doesn't work in the five minutes or five hours or five days, I'm out. And then I'll try again, try again. You're saying skip all that and just wait for it with conviction to get where you want it to be. Jason Lowery Yeah. The short-term performance pressure is what kills you, I think. If you need to make money day in, day out, this is a brutal business, unless you're market making potentially. But the key, I think,

to discretionary macro is if you have the 40 most liquid markets across currencies, commodities, rates, and equities on your screen, you don't have to have a view on all of them. You just have to have a high conviction view on three or four longs and maybe two or three shorts. And you can basically ignore a particular market if you need to for years in a row. So there are markets where we won't trade them for five, six years in a row, and then we'll go crazy and trade them a ton in the next six months. And I think that's the right

way to do things where you don't have to have a trade on all the time, especially if you have highly competitive markets like rates and currencies. If you're always trading currencies and rates, you're probably making a mistake. You should only put trades on if you have conviction, the technicals are there, sentiments on your side. You have to wait, wait, wait, wait, and then finally find a pitch you like. Can you give a few general examples of what those trades would look like? I'll give you one that we have on right now. We write a very transparent letter, so we don't have things I think are proprietary. We can get into a longer conversation, but I don't think idea generation or ideas are a secret sauce as much as people make them out to be.

It's position sizing, risk management, where you get in, where you get out, all that stuff. That's the secret sauce to managing money. But the feeder cattle market, this is one that a lot of folks probably don't talk about. So let's talk about something that gets away from just the S&P and the VIX and whatnot. The cattle market in general, both live cattle and feeder cattle, have been in bull markets for the last few years. And the reason is there are fewer and fewer animals, whether it's disease, drought, whatever you want to call it.

Herd sizes in the U.S. have gotten small. And I think they might be at their smallest level in 80 or 90 years. And so you have a supply problem that drove this big bull market in both live cattle and feeder cattle. If you go back through time and look at charts and look at previous bull markets in the cattle complex, at the end of the day, beef is a luxury good. It's something that Americans really take for granted that you always have access to every protein source. But when beef gets expensive, people trade down to cheaper cuts. They trade down to pork, chicken, other protein sources.

And so demand destruction kicks in. And everybody in the market likes to focus on the supply side of the equation with commodities because you can model things out. You have data. You don't have data on the demand side. And it's very qualitative. You have to sort of assess where is the consumer, what's the breaking point. But that supply-demand balance gets to a point where the consumer pulls back. And that's what catches the market.

So basically, as an example, you'd be saying, hey, people are going to be in the supermarket. They're going to be sitting there looking down saying, I've got to choose between the beef and the chicken. The chicken's cheaper. My rent's higher. Everything's bad. I'm taking the chicken. Yeah, that happens as an inflection point where it just builds and builds and builds. And finally, the market slowly gets the data and realizes that at the margin, it doesn't have to be a huge change, but just enough to bring that market back into balance and put an end to the bull market that we've been in for a few years. I think that's exactly what happens. And that type of thing also happens leading into a recession. And that'll just exacerbate the decline in the cattle complex. And is that an example of most of your trades kind of that seems like a mean reverting example or not necessarily?

That is two. Oh, sorry. One third of our trades are like that. They're shorter term. We call short term anything under a year, which might be long term to some people. But a short term trade for us is something between a couple of months up to a year. And those tend to be more mean reversion type ideas. So you need to be able to get in when you're on the other side of the crowd and pick a spot, have a feel that the fundamentals are going to go in your favor, that the core theme that everybody else is looking at is played out. And those will

be good mean reversion trades or short term trades that are less than a year in duration. And then the other two thirds is very long, you said? Very long. I think these days, you'll probably talk to a lot of systematic or discretionary macro folks who will say, well, we trade in a three to nine month horizon. Our long term ideas tend to be more multi year. You know, it might be two years, it might be five, six years, but it's more of a cyclical or even a secular theme that we look at and say, okay, we might not get this trade right the first time we try to execute it, but we'll work away at it and try to get a point where we get in. And we want to hold that position for a few years, and we'll manage the exposure up and down. With futures, you have to roll the contracts, and you want to look at where you are and dial things up and dial things down at different times. But it's a multi-year approach for some of those longer term themes. How do you square that with, it seems like nobody wants to look out more than two, three years, right? If that takes, say you had that only that one market and it took flat, flat, flat for three

years and then the pop in performance, how do you keep investors around for that long to see through that three, five year? And I think that's why nobody does it anymore because it's so hard to convince the investors, hey, this is a long-term trade. Partly, but if you only have that one market, I think you're in trouble. The whole key to having a portfolio

is if you have six trades in there, you're going to have some ideas that you're just off in your timing. And when we're off, if it's a long-term idea where we think it's going to be a, let's say it's a five-year move, you can be two years early. And two years early is wrong in our business. But you try it, you take a small loss. You might try it again six months later, take a small loss, try it again a year later and get it to work. But the key is you have those five other trades and hopefully a couple of the short-term trades are working out and maybe one of the other long-term ideas is working it's almost never

the case that all five or six ideas in the portfolio are working a great month is if you had half your trades go in your favor and work for you so we don't need everything to work you just need to have enough stuff working to to have a good month quarter a year and then talk through what's it look like for you personally and like the psychology of okay that trade i think it's a five-year idea i've tried once i failed i tried a second time i failed third time failed like both from a kind of your personal model how many times will you try before you say this isn't working or basically what would get you off of the longer term theme you know this is getting

into why this business is all mental it's a psychological struggle it's not what people think it is on the outside looking in but building a 30-year track record if that's what you want to do that's our goal we're 10 years into it it's basically 100 of mental game if you try a trade and you're wrong you want to be able to go back in a few times. And so it's maybe it's like a baseball analogy where you get three strikes. So we'll try a trade a few times over the course of a handful of quarters. And if it's not working, and we realize the fundamentals are no longer lining up, we'll just walk away and stop trying it. Other ideas are important enough where you can tell eventually this is

going to work and we just were wrong on our first two or three attempts. So maybe you take a fourth attempt and that's the one that works. But if you only try something once and it doesn't work and you don't have the guts to get back in there, you're going to fail at this business because the markets are very much a chaotic animal. They're not something you can model out mathematically with regards to getting perfect timing. You just have to be willing to be wrong all the time until you're right. And so it's position, sizing, risk management, drawdown management, modeling out your ad points, your entries, your exits, all that stuff ahead of time. That's 80, 90% of your success. And your idea generation,

your brand new idea generation from scratch, that's 10% of the business. Right. Which seems from the outside looking in, it seems those percentages would be flipped, right? That it's 90% idea generation and 10% being able to cope with it. If you're writing a newsletter or you're a consultant or you're in the business of charging clients a fixed fee per month or per year, you need to come up with new ideas all the time and you need to make everything about new ideas. You're not being graded on an actual live track record of the money. And so you don't then spend a lot of time on things like risk management and position sizing. Your entire report is going to be new ideas and catchy and whatnot. If you're managing money, you need to flip it around. And I

think this is probably one of the least understood ideas in the money management world is how different it is on the inside running a hedge fund or a CTA relative to what people think it is by going on Twitter or just watching tv shows about wall street and talk through that a little bit of the compare contrast discretionary versus global macro some of the pros and cons um first maybe from a personal level, from a psychology level. And then secondarily, we can get into like from the, as an investor looks at it and how they can ascertain what's going on. Well, the pros for me are easy. I love what I do. I think that's important, especially in a business like this. If you don't love it, if you don't want to read research and

figure things out, put the puzzle together all day long, you're going to struggle. And so as a business, I wouldn't want to do anything else. So the pros for me, this is just personally speaking, I went and studied liberal arts type subjects in undergrad and high school. And so for me, a little bit of math and economics married to a lot of history, psychology, philosophy, that's the dream job. And that's exactly what a discretionary macro manager does. They put together a lot of right brain subjects for the sprinkling of just enough left brain to glue it together.

And that's the day job. So I love it. Science plus art, so to speak. Yes, but I think, and then this is another probably point where people would disagree or this is controversial. It's probably 80, 90% art and 10, 20% science. Math and econ is the 10, 20% and the history, psychology and philosophy is 80, 90% of the game of managing money.

Yeah, you're talking to a philosophy major. So there we go. Good. Yeah. yeah you're talking to a philosophy major so there we go good yeah but i you real quick bringing in cons like i think a lot of people would say is it a puzzle is it something that can be solved or is it an unsolvable puzzle it's the latter which is why it's a it's a great puzzle to work on yeah it's all right that's like chicken and egg like if it's unsolvable how can you make money trying to solve it well you can still make money on a long-term basis with an edge that you carefully sort of

execute on. But let's put it this way. The markets are an unbounded set. There's no underlying distribution or math distribution you can use. We use shorthand heuristics like the normal distribution, the Gaussian bell curve. And of course, we know that the tails are fatter. And so people just say, oh, they're fat tails. But that's actually not true. It's not a bell curve and of course we know that the tails are fatter and so people just say oh they're fat tails but that's actually not true it's not a bell curve it's not it's not even a log normal distribution it's an unknown shape-shifting distribution where you're doing your best to get a feel for what those tails look like but you don't really know and this is just clear from looking at things like we talk about five six seven sigma events happening you know those things happen once in a million years yeah and so you know with the short hundred year track of the s&p 500 that what we're talking about is we don't know how to actually talk about

the underlying distribution it's better it's good to have a math background to understand what the concepts are but it's better to get rid of that and just think purely in terms of the math being a risk management foundation, knowing when to cut your size, manage drawdowns, et cetera. But it's an unbounded space. And so that's why the puzzle is fun is because it's not solvable. Yeah. I think the, right. If you outside looking in, oh, discretionary macro guy, he's trying to, he's going to, he or she's going to come up with, hey, I know exactly what's going to happen with the British pound, the banks, right? The George Soros example, he had it nailed. The bank's going to do this.

We're going to make a ton of money. And it's a super high conviction trade. Once they solve the puzzle, they go all in on that trade. Yeah. But like every great macro manager, he was probably only right on half or even fewer than half of his ideas or trades.

And that's the same thing for us. That's probably a misnomer. He probably wasn't risking 80% of his capital in that trade or something. I don't know what the numbers are. On that trade, from what I understand, he was probably risking 8% or 9%, far more than most people can afford to risk today. Yeah. Right. Which, back to your 80s style that's when was that before the 80s early 80s uh that's probably 90 91 okay so even 90s stuff but talk what you mean a little bit while we delved into it here 80s style global macro i'll give you well i'll give you the quick cons yeah yeah sorry yeah so the cons in this business are psychological, you could argue that sort of

psychological torture over time to deal with constant drawdowns. And it's the whole game theory notion where a loss, a dollar loss hurts you more than a dollar gained. And over time, that adds up because most of the time, you're in a drawdown. And in the minority of times, you're in a new equity high, just like the S&P 500. Most of the time, the S&P is in a drawdown. And in a very small minority of cases, it's making a new equity high. But it's an index that's gone up over 100 plus years. And because it's an index, it doesn't have feelings. As a trader and a money manager, I have feelings. And the pain of the losses, it takes a toll on you over time. And so you have to navigate that. I'll give you a little vignette. If you're a dentist or a landscaper, two totally different professions, but if you put the time in, study hard, build your business, you have a 30 year, maybe 40 year career ahead of you.

If you really run your operations well and scale your business. There are not many dentists that you hear of that just after eight years of doing it, they just closed down because they mentally cracked. I mean, somebody might have a breakdown, but in general, it doesn't happen. You know, you build a landscaping business, you hire people, you have trucks, and you can build a very nice business over 30 years. And you don't just quit in year 14 because something happens where psychologically it's too stressful. This business is different because-

And I'm like, it rained again. Yeah, exactly. Can't take it. Another cavity. I can't take it. Yeah. This business is different than almost every other industry out there where, you know, I worked as a consultant before setting up AG Capital as an investment consultant.

So I got to sit on the allocator side for six, seven years. And now you would see this happen over and over and over again. I can't tell you how many times, eight, nine times I would see the hedge fund that raised three, 400 million. They built a five to 10 year track record. And then all of a sudden out of the blue comes a letter. We've decided to close down. We gave it our all. We just have lost confidence in our vision in the trades we're putting on, the investment themes. Things aren't clicking. We gave it our all. We just have lost confidence in our vision, in the trades we're putting on, the investment themes. Things aren't clicking. We're not in sync with the markets. And quite frankly, we've decided to just liquidate and return capital. And what happened there is that manager just lost their confidence. They no longer know how they're going to make money.

And they sort of cracked like an egg. And that's the risk. And that's what happens to many people in this business. You know, projecting out a 30-year career or a 30, 40-year track record is difficult because those painful periods are there. And whatever your deepest or longest drawdown was in the past, it's going to get worse in the future. Your longest drawdown is ahead of you. Your deepest drawdown is ahead of you. And if you're not mentally prepared for it, you're going to probably fold psychologically. So that's the

con. It's a business where you're mentally always a little bit, not down, there's some great days and you have to maintain your equilibrium, but it takes a toll on you is what I'm trying to get at psychologically. You're not selling it so well for all those young hedge fund managers out there, discretionary managers. It goes back to if you really love it and you don't care about those sort of downsides to the business, there's nothing like it.

It's an amazing business. I love it. But I think too many people go into it just for the money. And that's the problem. And in that whole discussion, it seems like you're saying you have to have the discipline, right? To be able to not let those psychological pressures overtake the trading and influence the trading? It's more than discipline. Discipline to

me is a word that talks about, okay, I'm not going to risk too much on this trade. I'm going to follow all my processes, et cetera. You can still lose your confidence and decide to fold if you don't have a different sort of equilibrium. And it's more, it's just that mental clarity that comes from, I have this game plan. I have a blueprint for what I want to do here. I'm looking way out into the future and I have different scenarios, but I have a strong sort of bedrock confidence in some of my longer term themes and ideas and that's for example that's what gives me the confidence to come back when I'm in a bad state if I've had a bad year or even if we've had two bad years in a row which can happen and did happen to us recently it's that longer term

almost sense of serenity that I have the analysis done well, and I really know why I'm doing this for a living. The discipline is important, but that's almost a different subject altogether. The cynical part of me says they shut down not because they got tired of it, but because they couldn't charge fees anymore and center fees. So they shut down and restarted under a new umbrella. Some people can do that. It's much harder to do in real life than you think. Only a handful of very famous people are able to pull off restarting a fund after a drawdown where they can't charge fees. Most people, most average sort of hedge fund managers that have a few hundred million and they have a tough drawdown, maybe it's partly influenced by the fact that they can't get back to the high watermark to charge the incentive fee. But I think a lot of it is just psychologically they're beaten up and they just

they can't take it. They give up. So you mentioned the consulting piece and starting this business yourself, like talk a little bit about what that was like, why you decided this route instead of going to work at a pot shop or a prop trading firm? Well, I have a non-traditional background. I never worked on Wall Street. And so my entire career, just to give a shorthand version of it, I graduated college in the late 90s, 98. And I went down the consulting path. At the time, the economy was booming. And if you went to a school where you had on-campus recruiting, you could go down and you were going into, say, business, quote unquote. Go down either the Wall Street path, which was an investment bank or sales and trading at an investment bank.

Or there was the consulting path of probably management consulting of some sort. So I went down the consulting path and I spent the next 13 years in a variety of different consulting firms, one of which was a large prestigious investment consulting firm where, like I said, I sat on the allocator side of the table and I had clients that were pension funds, large insurance companies, endowments, foundations, ultra high net with families. So my career was Mr. PowerPoint slides and presents, which doesn't really lend itself to managing money. So there's a side story where I think it was 2000 or 2001. So again, almost 25 years ago, a close friend of mine handed me a book. And this won't be a huge surprise to listeners who are familiar with a lot of the legendary traders from the 80s. But the book was called Market Wizards, written by Jack Schwager, where he interviews a lot of famous traders. And it was just interviews directly with equity and a lot of macro and futures traders. And I read it, and it just lit my brain on fire.

I said, this is what I want to do. Now, this, what they're talking about here is, again, a mix of a lot of right brain topics like history, psychology, philosophy, married to a little bit of math and econ, all these subjects I loved in high school and college. And I said, I want to do this. And at the time, I was in grad school, and we had the dot com bust. So I tried sending resumes out to a variety of hedge funds or even banks. And I got zero interest, no interviews, no nothing. Consulting firms were interested because I had done consulting prior to grad school. And so I took a job in

consulting and stayed in that field, but I started to trade. Investment consulting. Investment. Well, at the time I was doing management consulting, but the key thing is outside of my day job, my nights and weekends were consumed. So this is 2001 to let's call it 2006, 2007. I was spending 40, 50 hours a week trading on the side. And I tried everything you can try. I tried swing trading, day trading, some systematic stuff. I failed at everything. And I finally gravitated towards this more longer term approach of marrying fundamentals

plus technicals plus some sentiment analysis. And it took a while. But in my late 30s, I felt I had the confidence and I was getting very consistent from a trading perspective over a few years. And I decided, listen, I love this. I want to do this for a living. There's no way somebody is going to take a 38-year-old consultant now that I've tried going over to the buy side repeatedly and never got any interest. The only way for this to work is if I quit my day job and start from scratch and try to build my own business. So that's how I got to where I am and how AG Capital took off back in 2013, 2014. I think there's an old saying, never quit your day job. We'll put it in the show notes. We had Jack Schwager on the pod a few years ago um

chatting with him which was cool uh and then i have a similar story except i was reading star wars expanded universe books and i wanted to become a x-wing pilot so it didn't work out as well for me tough it's a different universe it's tough to get over there right a different universe. It's tough to get over there, right? A different universe. So when you started, was there any thought of like, I want to be a systematic, I want to be trend, or you said always, right, we'll come back to that 80s thing. I want to bring back 80s style global macro. In the beginning, I didn't have strongly formulated ideas. Like I said, let's go back to say 2001, 2002, when I'm experimenting. I tried swing trading over, say, a two, three day time period, or even on a shorter hourly time period. I failed. I had put in $20,000 into, I forget which broker it was. I think it was either

a Refco or a Lynn Waldock account, brokers that no longer exist, that have been gobbled up by other FCMs. But I turned that $20,000 into $3,000. So I lost all my money trying to, oh, you know, it's one of the best things I think that can happen to you is to lose all your money when it's smaller stakes and you're learning. But I tried day trading, swing trading was totally inconsistent, couldn't make money, realized it wasn't for me. I then did try a little bit of systematic trading i tried basically coding i know a little bit of coding to be dangerous but not a lot but i tried coding my own sort of medium-term trend system and realized just a handful of months into trying it that i hate this i hate this following this computerized rules-based i don't

enjoy this i love reading about the markets and trying to put together the puzzle. So that wasn't for me. So then, you know, this was a process of years. And this is you're experimenting with your own money or with client money? No, with my own money. This is the 10 years, the 10 years in the wilderness prior to setting up the business. Those first five years were the experimenting phase. The following five years, let's call it, trying to make sure I have some dates here so people can get some context. Let's call it from, say, 2007 to 2013. By then, I had sort of cemented this longer-term approach of marrying multi-month, multi-quarter, whole times, using fundamentals to get the direction down, having a high conviction view with fundamentals. And then looking at sentiment, you know, where are other traders?

Is everybody on one side of the boat? Sentiment is used as a contrarian indicator take the other side ideally and then basic technical analysis so those three things combined fundamentals plus technicals plus sentiment longer term hold times that started to work and i became consistent and and realized that i have something here i know what'm doing. I've been doing this now for over a decade on the side with my own money. And that's what then ultimately led me to the decision to quit my day job and build a business. And how was that early years?

I know from experience trying to start a CTA without a Goldman background and without what I call a golden Rolodex can be difficult. So how were those early years? Was it the constant like, oh, I love what you're doing, but I only allocate in $5 million chunks and I can't be more than 50% of your equity, blah, blah, blah. A lot of that, which is why it did take a long time. I think we started off with 500K on day one in three separate accounts. And in the early years, what I did is there was a conference called CTA Expo that no longer exists.

I think it went under during COVID in 2020. Yeah, we almost took it over. Maybe we will. We'll talk offline if we restart it up. Yeah, the beauty of that conference was it was designed for truly emerging managers. I had come from this investment consulting world where an emerging manager was somebody with $500 million and had, again, to your point, either come out of a blue chip hedge fund or spun out of a Goldman trading desk, whereas I'm sitting here with $500,000 on

day one. But CTA Expo was fantastic because it was, if you had 500K or a million dollars and a six-month track record, great. Come meet people. There were a lot of introducing brokers, but it took time. I went to probably 12 or 13 of those conferences over four years to get the AUM from 500K up to somewhere between five to 10 million. So it took four years to get into that five to 10 million dollar range. That conference no longer exists. So if you're a young man or woman listening to this and you want to do something similar, I think there are different mechanisms you'll have to try today. Twitter is around where Twitter wasn't as big back then. So if you want to build

up a following on social media and try to meet people that way, that might be the way to go today. But the way I did it was to go to that CTA Expo conference circuit and just meet a lot of brokers and clients directly, make the case. And to your point in the beginning, if a one-year track record, people kind of potentially laugh at you behind your back. Okay, you come back with a two-year track record and a little more money, and they still think you're going to fail. And they're probably right, by the way, because the failure rate is extremely high. It's probably 90, 95% for folks in that AUM band.

But once you come back from that third year, now you have a four-year track and you've got 4 million, 5 million, and you've managed through, say, three or four drawdowns, you get taken more seriously. And all of a sudden, people introduce you to clients. Clients want to open up some separate accounts and things start to roll. But it's a process where you have to have that marathon approach. It's not a sprint. It's a very long, slow grind.

And I was well aware of that. I think you have to be. There are a lot of characters. And that was one of the fun things about those days is you just had a lot of interesting high net worth investors that were willing to take the risk and wanted to get away from just stock market type exposure. But those were kind of fun times. Yeah. And I've been on a panel before with one of the consulting firms, Mercer, Cambridge or someone. And it was like, oh, yeah, we've done our research that emerging managers can outperform and all this stuff. And I just stopped her. I can't remember. And I'm like, hey, hold on. How

many times have you actually recommended a manager under a billion dollars? And she was kind of backtracking like, well, I'm like, yeah, you say emerging managers good, but there's no way any of those consultants will ever put their neck on the line and actually recommend an emerging manager. As a firm, they can't do it. I work, so you can look me up on LinkedIn. I'm easy to find. I did work at Cambridge Associates for six years. All the consulting firms, I think there's an element where they do look at emerging managers and they will make some allocations, but there's tremendous career risks. So many emerging managers don't make it that you need to wait. And from their perspective, you definitely, you can do a little bit of it, but you have to wait and wait for someone to actually get past a certain threshold.

And so it's just- But that was my annoyance of like, well, don't sit here in front of this panel and tell these CTAs that you do allocate when you in practice really don't. Yeah. They also have, like I said, there's a different mentality around emerging. These days, the industry has changed so much in 40 years that an emerging manager in the 80s might have had, again, 5 million. Today, an emerging manager in the large institutional world is anybody with 500 million to a billion.

If you start with a launch that has 600 million, that's an emerging manager. A midsize hedge fund might have 5 billion and large hedge funds, as you know, have 20, 30 billion. So the numbers are crazy compared to what the industry looked like when it was nascent in the 70s and 80s. And speak to that for a minute. Like, how do you, obviously, besides the size, like, what can you do that some of the big $20 billion global macro funds can't do? Well, the most important difference, I think they're offering a different value prop. I think a lot of the $20, $30 billion managers, particularly last decade when rates were zero, they were trying to give you a 5%, 6%, 7% annual return with

6%, 7% volatility. And the pitch to a pension might be, you're getting nothing on your bond portfolio. Let us be a fixed income replacement, or maybe that's the pitch to an endowment. We'll step in and give you that 6%, 7% return. You can slot us in as an absolute return fund in your fixed income bucket or in your absolute return bucket because bonds are not giving you what they gave you in the 90s. Our approach is we're a boutique, so we're trying to go back and give you actual, I think, equity plus type alpha. So it's a very different pitch. But the one thing we can do and the way we, I think, have an advantage is if you're managing 20 billion as a macro fund, you have no choice but to have 90% of your exposure in equities, currencies, and interest rates. The most liquid commodity market is crude oil.

And once you get past crude oil, believe it or not, liquidity just evaporates. It's gone. So a market that's super liquid to me, a market like corn, it just doesn't move the needle. You can't take $10 billion and put on a corn position if you're managing a very large macro fund. It's just not going to happen. Your exposure has to be mainly in FX and rates. What I can do is if I don't see any good trades in the bond market or in the currency market, I have no problem having zero exposure to those two asset classes for two years in a row and have my entire portfolio be long the British pound, short cocoa, long sugar, and one other trade. And so we can do things that large managers just won't and can't do.

And I think you can have this nimble approach up until $1 or $2 or $3 billion in AUM. And then the game changes a little bit. Yeah, just from position limits alone. They can't meaningfully access markets like corn. Hopefully you weren't short cocoa. No, we were long cocoa and I wish I had held it for longer than I did. That was a crazy trade.

So speaking of those global macro guys and that kind of risk return profile, now compare yourself with and how investors look at it versus trend, classic systematic trend versus, say, tail risk, where I'm going to get this crisis period performance at a pure volatility or tail risk. What are your views on those three kind of buckets? Because if I'm an allocator, I'm like, okay, where do I put you? Tail risk is almost its own. I would almost put that into a separate category because my understanding with tail risk, however you structure it, you're constantly losing a little bit of the

ante at the poker table and then you'll have a massive payoff in year four. And so your entire profile is structured so that you would never want your entire portfolio to be in a tail risk fund or a substantial part. It's designed to give you that extreme payoff once a decade or twice a decade. It's not a core holding, whereas I think trend following can be a core holding within your hedge fund bucket, along with a discretionary manager like us. So I think the key comparison might be between us and, say, trend following. At the end of the day, you need to have a trend to make money, right? Even a value investor in equities, if you buy a stock at 10 and it goes to five and you buy more because your price target is 30 and it got cheaper, you still need it to go from five to 30 to make money. You need some kind of a trend. Everybody in markets needs a trend. The key question is where do you

get in and where do you get in and where do you get out? And how many markets are you invested in at any one time? And then there are ancillary questions around risk management, position sizing, et cetera. The big difference between us and a trend follower, trend follower, especially a classic trend follower, will have anywhere from 20 to 40, maybe more positions on at any one time. They're in everything because they're constantly getting a signal. They have two moving averages that cross or they have an end day, a 20-day breakout, the signal triggers and they get in the trade. And so they have some limits, but they're in, I think a majority of the markets that they have on their screen, they have some kind of

position in. So they're always in every market, let's call it, as a simple heuristic. And that means that they're almost guaranteed to be in every major trend. Now, the downside is they're constantly getting whipsawed and they're constantly getting chopped to death. We're only going to have five, six, maybe seven line items in our portfolio. And at times, we'll only have three line items. So we're going to miss a lot of the big trends out there, but the ones we capture, we're going to do very well in. And so we'll overlap with the trend follower in those moves that we're both in, but we're going to miss a lot of the other ones. But the key is on the risk side, we're also not going to get chopped to death and constantly have a lot of whipsawing going on. And so we'll have a lot of these short-term trades that we put on where we take profits, where a trend follower will give it all back. And so that's a big distinction. And the other distinction is

because it's a qualitative approach, it's our analysis, whether it's a five-month short-term trade or a three-year longer-term idea, our analysis is driving the conviction, the confidence to be in this position. Not a crossover. Yeah, not a moving average. so sometimes we'll be in a trade way ahead of a trend follower and some and and they'll enter much later i tend to be we tend to be earlier than a trend follower to the trends where we overlap with them and we also tend to get out a little sooner they'll wait for the moving averages to cross over so they'll give back a good chunk of the profits we tend to get out a little sooner um and so that's those are some of the differences.

Well, it'd be great for you, right? If the trend follower gets in the same direction, that's going to probably push it in your direction. Well, that's right. You need company. You'll be like, come on board, boys. Once you put a trade on, you want everyone else to follow you after, right? Right. Which do you get in, right?

We don't really call activist investors discretionary macro, but they sort of are on the stock side, like picking this stock picking that stock and then their game plans talking up their book right do you do any of that like in your newsletter whatever you're telling what positions you're in but it's a terrible idea in our markets i think the equity world is the wild west it's very different there's a lack of liquidity and you can push things around in our world you'll get carried out on a stretcher you can't push markets like the corn market look if you're a large fund maybe you can for a few days or for a week but in general you can't do it and it's a terrible idea and we're not big enough to do it anyway um i don't think it's a good strategy even if you are big enough to do it um but it's it's the wrong approach in in macro so we've had this big move the circle all the way back what's your well i'll ask it in two

different ways like what kind of themes i don't want to have your specific themes and trades, but what sort of generally, what sort of themes are you looking at? Like now that this market action happened through the rest of the year and even into your two, three, five, 10 year horizon. I'll start with the, let's start with just a 12 month horizon. We have some short term themes and views on in the commodity complex, mainly in the agricultural area. So the cool thing about commodities is there's always either a long or a short setting up. So you either have a supply-demand mismatch and the market looks like it's going to collapse, or you have a situation where a nascent bull market could happen.

You can always find some sort of unique short-term trade in commodities. And so in our case, the ag markets, the agricultural markets have some interesting setups where we have some views and some ideas. We have one position on and we have a couple others we're looking at. I put that in the short-term bucket because of our, let's call it six line items, we always have two, maybe three that are in that short-term bucket. On a longer-term horizon, you could almost call it a medium-term trade, but we have then let's call it 12 month views on some of the financial markets. I think that we are likely to get this long delayed recession that everyone's given up on.

The peak recession talk was back in the fall of 2022. And today, no one's really talking about it and i think the fuse was just it's like in the cartoons that we all watched as a kid where you have wiley coyote and you have uh you have the bomb and it goes off and it doesn't blow up and so they all the cartoon characters come back to it and then it blows up and annihilates them i think that's sort of what happened in the last two three years where the fiscal stimulus was so large and so many corporates and households had locked in low rates on a long-term basis that it just took time for enough new borrowers to need to borrow at these higher rates and for that fiscal stimulus to work its way through the system and for the

bottom third of society to sort of no longer have a lot of these savings left over. I think now we're finally getting to that point where those two-year, three-year lags are kicking in. So my view is we'll have, I think, a very mild run-of-the-mill recession. What I mean by that is, if you think about the last handful of recessions, I mean, they happen so infrequently that we have to go back for decades. But I was in, I think, eighth or ninth grade when the 1990, maybe it was 91, that recession happened. That was a pretty severe recession. That was a recession where people had a tough time getting jobs if they got laid off.

But it was a very mild stock market outcome where the S&P went down 25%. You can barely see it on a chart. And then you had the dot-com bust, which was actually a very mild recession. GDP barely went negative. And it wasn't really a terrible recession, but of course, because markets were so overvalued, they came down 50 to 80%. So I think we'll have a mild recession, similar to maybe the 01 style of recession. And I think we'll also have a mild bear market in equities. A good template might be, and this goes way back in time before I was born,

but 1969, 1970 bear market put an end to the secular bull market of the 50s and 60s. And I think it was a 30, maybe 32% decline. If you look at a chart of the S&P, and again, step back and zoom out over the decades, you can barely see it. And everybody remembers or talks about the 73, 74 bear market because it was a mega 50% bear market. But that 69, 70 cyclical bear was the one that kicked off the secular bear market of the 70s. And at the time, I think it was a meaningful bear market. So I could see a very mild recession from a GDP perspective, and I could see a mild 30% bear market. Now, the funny thing is, maybe it's not funny, when it happens, if I'm right, the S&P trades into the high 3000s, and it's going to cause a lot of panic and consternation. But what you want to see

if a bear market plays out is you don't want to see these crazy crashes like in COVID, or in the fall of 08. It's a methodical nine-month, 12-month, 14-month process where it has a number of moves. And each of those down legs gets people to panic. And then you have a rally that gets the bulls excited. It rolls over again for a few months, rolls over again. So it's a very drawn out, slow process where if it does occur, it'll, and let's say, I have no idea, but let's say it just started in the last couple of weeks, it'll take into Q1 or Q2 of next year to play out. So that's on the actual side. Historically, you see a lot of the largest

upmoves in stocks are during recession, during down markets, right? Because it's fits and starts, fits and starts. But my pushback would be if I'm on the other side of that, or it was like, what are you talking about? The Fed's about to start cutting rates and the Fed will come to the rescue and all that 60s, 70s is BS because now the Fed's so much more concerned about keeping the market up for all the boomers. And I could go into all those arguments of like, this time's different. That's why we haven't had second or third legs down because Mr. Fed comes and rescues you, the Fed puts secure. What do you say to all that? Well, the last two recessions, both the 07 to 09 episode and the

dot-com bust, the Fed cut rates, and then the lion's share of the equity decline happened after that. And so when you have a recession, the Fed's way behind the curve. And rate cuts, just like the rate hikes, didn't do anything to sort of slow down the economy. The rate cuts are going to, you first need a lot of rate cuts. You're not going to just need one or two. You're going to need 300 basis points of rate cuts if you have a recession. And it's not going to stimulate until after a year, at least, if not longer. And so the first cut does nothing. The second cut does nothing. The equity market keeps sliding all

the way down. And that's what happened during the dot-com bust and during 08. In the 70s, you can go back and say, well, Fed hikes and cuts were a little more coincident with growth. But the one interesting thing is the Fed still cut rates like crazy during recessions in the 70s, even though inflation was a yo-yo during recessions, the Fed cut quite a bit. And I'm not sure, yeah, maybe it helped a bit. It was a different economy. It was an economy with 30% debt to GDP, a lot of aggregate demand from the boomers coming into the labor market. And so those rate moves, I think they had a bit more of an immediate impact.

Today, we have a debt-heavy economy with 130% debt to GDP. And I don't think the rate cuts, I think the rate cuts that come this time around are going to be a little more similar to the way they operated in the 08 and in the 01 recessions, where the rate cuts don't do anything and the equity markets just keep on sliding throughout the entire time the Fed cuts. You think they go back to zero or never again? Never say never. Never say never, but let's say never again. And the reason is, I think there are secular moves in markets that are defined by the underlying political climate married to the economic climate. And those 30,

40 year periods, when you hit inflection points, you don't really realize it until you're deep into the next 40 year period, call it. But I think we hit one a few years ago. And I think we're now in a multi-decade inflationary world. And part of it is you have now fiscal spending by the government that has come in. And you have, I think, wage government that has come in and you have, I think wage increases that have just started to come through and they'll, I think, continue to come through in the decades ahead. So I think you'll be in a higher nominal growth world.

A lot of other folks have talked about this, but what that means is there's really no reason to go back to a 0% deflationary protection type world. That was the world of the post-reagan post-thatcher reform so you know late 80s all the way up until 2016 or even longer we were in that deflationary world and you had to go to zero you had minimal fiscal spending you had an excess labor and today you know the labor pool has shrunk even with all this sort of illegal immigration. I think you have fewer workers than relative to what you need in the economy compared to the last 40 years.

And you just have a world now of higher nominal growth. And so it doesn't feel right that the Fed will have to go to zero. They might cut rates down to 2%, 2.5%. But if anything, over the next couple of decades, I could see it stair-step higher where the the the trough in these rate cutting cycles ends up as higher higher yeah instead of lower and then you mentioned i can't remember if it was at the beginning of this conversation or another conversation we were having of the wealth effect is much larger these days right if people are using their portfolios to fund their lifestyle and whatnot, talk for a minute about that. And what does that box the Fed into more of a corner of needing to support the market versus just trying to support the economy?

I think it has. I think it's a very strange thing. I don't know what to make of it at some level. But just the observation that I have, and I think others have had is, if you go back and buy that boat and go on vacation and just have it spur animal spirits and consumer spending. Part of it's not even a feeling. They might actually borrow against their portfolio, right? Oh, totally. Whereas in the last 15 years, this bull market has changed things and people now, the stock market is more important than their income for the top, let's call it the top half of society. That's a strange thing because it means that the tail is wagging the dog. So what it means is that, you know, a 30, 40 percent decline in the stock market in the 70s or the 80s, it didn't have as much impact on GDP or on consumption.

Whereas it might today, it might scare people, it might cause people to really pull back. And the Fed is highly attuned to this. I mean, look, Bernanke's entire thesis was to generate the wealth effect, right? That was his way of getting us out of the deflationary bust of 08 and preventing a 1930s style outcome. And so part of QE was to just force people out in the risk curve and pump up the stock market and get people to spend and to feel wealthier. Now the Fed is trapped a little bit. So if you have a... Look what just happened. We had an 8% decline and you had talking heads on CNBC screaming for a 50 basis point emergency rate cut. It's insane. So what happens if you get a 20% decline in the S&P or even a 30% decline? I think the Fed cuts rates more than

people think and they completely give up on their inflation fighting. And they try to do whatever they can to protect employment. They're not going to actively, I think, protect the S&P. But since it's driving the economy more than it used to, it's on their radar. They look at it every day. I think when they meet, when they pull up their Bloombergs, they have it up. And I don't think Fed chairs had the S&P 500 up. And we're looking at it every day in the 60s and 70s. Maybe they were. I could be wrong.

But that's almost to the point of how can the recession happen when they're so in tune and trying to prop the market up? I guess just if they're out of bullets, if they're out of, they can't do it. Yeah, I don't think they have that kind of control. I think the last 16 years have lulled people into this mindset that, oh, the Fed comes in and eases or cuts a little bit and the market just goes back up. But I think they're conflating the fact that it was a secular bull market from 2009 up until today. 16 years is, you know, we had an 18-year secular bull in the 80s and 90s. We had an almost 20-year secular bull in the 50s and 60s. That's normal. Secular bull

markets shrug off bearish news. They keep going up. And the Fed was easy, and the bull market kept going. But I think it's dangerous to say, well, the Fed controls the S&P when the Fed cuts the S&P dances and goes back up. A lot of people have that mentality, and I think that's dangerous. And the next 10, 15 years might not look like the last 15. And we'll find out. If we do have a recession, the Fed cuts and the S&P keeps sliding. It'll be the first time since 08, and it'll corroborate this idea that they're not all omnipotent. And it's crazy being a trader, much less a discretionary trader, right? Three weeks ago, the market was rallying because people

thought the Fed was going to cut. We're finally getting to rate cuts, market rallies. Now we're saying, oh crap, the Fed might have to cut because of a recession, market sells off big. So I don't know if there's a question there, besides to say the market's crazy. How can it change the perception that quickly? And what do you personally do to be like, okay, that's all just noise or whatever? It's partly noise because that's sort of our philosophy. That's our mantra for how we stay alive over the decades is

if you get caught up in that level of day-to-day movement, you have to be aware of it and manage the risk for your positions. But if that's causing you to change your entire idea set on what to do, you're going to be a fish out of water, you're going to be a dog chasing its tail, whatever you want to call it, and you're going to struggle over the years. And so stay out of that noise, keep our focus on sort of these big picture multi-year moves that we think are coming in certain assets. And we have our short-term trades that are uncorrelated often in commodities.

But the important thing to do is to have an eye on those inflection points, mainly from a risk perspective, and also to look at is it corroborating or invalidating your current set of theses. But if you just don't want to get into that mindset of having to constantly change your view in the market based on what the market is doing on a day-to-day basis, that's dangerous. I feel like Josh Brown on CNBC would say like, no, that's why you just buy the market and ignore the noise. So there's that kind of trap as well. Like, yeah, we know it's noise. That's why we just want to hold long. It's fine. And in a secular bull market, it works. The problem is, again, long-term data sets tell us that the S&P does not actually compound at 8%, 9% a year. That's the geometric math, but that's just happenstance. That's what

happened to happen over the last 100 years. If you were to maybe run a Monte Carlo simulation in different worlds, it doesn't do that. Other developed markets have not done that. The Chinese economy has grown by leaps and bounds and the stock market's gone sideways for 20 years. Japanese stock market went into a bubble and went sideways for 30 years. You have to be careful with those extrapolations. And lost 12.5% yesterday.

Yeah, that too. But looking backwards at the top of the secular bull market it's going to give you some some different views on whether to just blindly index there's nothing wrong with indexing as long as you as long as you can look forward and say yeah you know you can have these dead 10 15 20 year patches and that's normal but most people can't can't stomach that and they just forget they've already forgotten what happened between 2000 and 2012 or 68 to 82. It's just, it wasn't that long ago to me, but it might be long ago to a lot of people. It's just, it's in the distant haze of time.

Yeah. Hell, I have people who forgot what happened in 2020, March. Good point. Look at the VIX. Oh my God, I've never seen this before. Like literally, seems like yesterday to me, but we just saw it. We just saw it four years ago. Do you ever get sick of talking about the Fed? It seems like it comes with the territory for your position, but I would get sick of it. how much they do move the markets and how their impact is felt by other participants. And because if you're trading currencies and rates, you need to have a handle on what the Fed is doing. But we have a lot of ideas in the commodity space, long-term ideas,

short-term ideas. So we spend at least half of our time in the commodity world. And the other half of our time is in financial futures. And so we keep an eye on it. So I don't say I get sick of it, but I see where you're coming from. It does get a little old to constantly parse every single one of these red line statements and whatnot. I guess you're coming at it from a different point. You're just listening to what the Fed's saying. I'm thinking of it more of like listening to what everyone else is saying about what the Fed is saying. That's the exhausting part to me. Yeah, that gets old. Because they switch on a dime. Last bit, I don't think we spent enough time on the commodity piece. So

let's talk a little bit more about that. That's designed just it's another couple tools in the toolbox? Or is it designed to track commodity prices, track inflation? No, it's a long, short, discretionary alpha generator for us like everything else. And so we have probably 45, 50 liquid futures markets we trade. Of those, I'd say 40% of them are commodity markets, so more than half. And it's everything from the energy markets, natural gas, crude oil, to agriculture, sugar, coffee, cotton, corn, soybeans, and then the metals, both processed and industrial metals like copper. And these are important markets because both our short-term ideas, which are the less than 12 months in duration, more technical, contrarian,

and our longer-term multi-year themes, A lot of them are in these commodity markets, whether it's copper or gold, or whether it's a position in cattle or corn. A lot of our alpha, I'd say probably half of our long-term track records alpha has come from long, short, directional commodity trades. So it's just like any other market to us, whether it's the Japanese yen or coffee, it's a directional investment or trade but they're important markets for us um and so you said the magic word the right macro tourists the only thing they love talking about more than the fed is gold so right i'm more in the warren buffett camp of if aliens saw us digging this stuff stuff up out of the ground paying money

to put it back under the ground in a safe they'd think we're crazy like talk a little bit about how you view gold personally and as part of the portfolio bill softly i'm actually going to agree with you and warren buffett i think i think to your point it's it's a rock yeah yeah over 5 000 years every civilization across the globe has decided it's a great form of jewelry and money. And we've all coalesced around that idea. I have a hard time believing that 5,000 years from now or even 1,000 years from now, we'll be doing it. and will not need to use a shiny rock that we have to destroy the earth and pollute the environment to dig up as a form of base money and as a form of savings.

I think that the concept behind it, to your point and to Warren Buffett's point, is a little bit ludicrous. That said, I'm living in the world today and in the world of today and the last 5,000 years and at least the next, the rest of my lifetime for sure and beyond. Luke Gromen, At the end of the day, it's the anchor, it's the level one

base layer of money that all societies have agreed on. We live in a fiat system where the money supply is elastic and base money is generated and created by commercial banks, accommodated by the central banks. And at the end of the day, there are times when gold does very well in either deflationary or inflationary time periods. And then there are other times where financial assets, equities, and bonds do well. And what's uncanny is that looking across the last, say, 80 years, you have these rotating 15 to 20-year time periods that line up with secular bull and bear markets in equities. And of all the commodity markets, you can argue that commodities do well

at times for 10 years, that equities do well. But the one commodity that tends to shine, no pun intended, during these commodity bull markets is gold. And that's because when you have a secular bear market for equities, it's either driven by an inflationary backdrop or a deflationary backdrop, and gold does well in both cases. And so the gold price tends to catch up in those scenarios over a 10, 15 year period. And that's the use for gold. So my perspective on gold is a little bit different than either the gold bugs or the broader financial and financial advisor community. The gold bugs always own gold and they have half their money in it i think i think that's crazy the financial advisor community what they do is they

have these model portfolios that look back over 100 years and say yeah you want to have a 60 40 portfolio and we're going to sprinkle in one percent into gld or into gold as an insurance policy so i don't think gold is an insurance policy. I think that's a misnomer. I think it's a bit nonsensical. What I do think is you want to have a huge chunk of your asset allocation in gold during these key, call it 10, 15 year periods, and then you want to sell it and have nothing in gold for the ensuing 15, 20 year period that lines up with the secondable market and equities. And that's one, let's call it a base layer of capital rotation over a very long multi-generation time period. And I happen to think that today we're in the early stages of

a secular move higher in gold. And I think it'll surprise to the upside. I don't want to be viewed as a tinfoil manager, but we do carry an allocation because I think it just has its right place in time for a variety of reasons today. But I'll caveat it by saying when the move is over, my personal view is you need to sell it at the end of this secular move, completely sell it, and then don't touch it for the ensuing 15, 20 years. And then I'll circle back and say my hope is that at some point in the future after I'm dead and I don't know if it's again 500 years from now or a thousand hopefully at some point in the long future ahead of us we can move away from having to destroy the earth

and store gold in vaults into bitcoin something else something else awesome awesome I've been waiting all day to say that. Anything else you want to share before we sign off? No. Enjoy the conversation, Jeff. Really appreciate you having me on the pod. I listen regularly to your podcast. It's one of the best

in my Spotify reputation. So thank you. Thank you. And best of luck. And I'm sort of weirdly rooting for this recession for the market to come down. I listened to Scott Galloway had a nice thing the other day. Like young people are stupid, kind of full stop. But because they're rooting for all time equity highs, he's like, no, you should be rooting for a recession. You should be rooting for all this stuff to come way back down. So then you can load up, right?

Right. In your prime earning years, you can be buying all these great companies at a big discount, right? Like the old people want the market at all time highs. The young people with jobs need it to be going into recession. It's a totally valid point. Yeah.

Interesting. All right. Awesome. We'll talk to you soon. Thanks again. All right. Thanks's a totally valid point. Yeah. Interesting. All right. Awesome. We'll talk to you soon. Thanks again. All right. Thanks, Jeff. Thank you. Okay. That's it for the pod. Thanks to awesome for being awesome. Sorry. Just can't help myself. Thanks to RCM. Thanks to Jeff Berger for producing and for making those cool infographics. We'll see you soon. Peace. You've been listening to The Derivative.

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