Transcripts
Erik: Joining me now is Wayne Himelsein founder of Logica Funds. Wayne has prepared a slide deck to accompany today's interview. Registered users will find the download link in your research roundup email. If you don't have a research roundup email, just go to our homepage macrovoices.com. Look for the red button that says looking for the downloads.
Wayne, there's a backstory to how we got you on the show this week. Our listeners retreated way back in the beginning of 2018. In January, we had Chris Cole, from Artemis Capital on the show and I want to refer actually to your slide deck on page seven because when we had Chris on in January, we were at the top of that big black performance line of this short volatility trade, which had gotten so much attention and frankly, suckered a lot of people into taking risks they didn't understand.
Chris told us what was about to happen, or what was at risk of happening and of course as your chart shows here, that's exactly what happened only a couple of weeks later. Since then, we've had a huge amount of interest in this subject. But we really have a lot of listeners who want to know how do you put on the long vol trade and what's the real secret sauce to getting a positive carry when you do that. So when you're kind of the guy for the long vol fund. Talk to us a little bit about how you see this long vol versus short vol space, and how your views maybe differ from Chris Cole's, which a lot of our listeners are familiar with.
Wayne: Sure. Yeah. So long vol versus short vol space. I mean, that's just a giant question. And it's a giant question because short vol is really just everywhere. I mean, it's pervasive across all of Wall Street. And so when you say the space is I look at it as like 99% shortfall, and then perhaps 1% of space as long vol, which is, you know, certainly the contrarian view. And to really highlight the extremes of short vol, there's a great graphic that we have on page five of the presentation, which shows how this is the negative skew across different hedge fund strategies. And so you see that we call it the blood shark, it's the blood shark because everything's red, right? And then just doesn't matter what type of strategy you are. And, you know, the top one is merger arb has a one of the highest negative skews in the industry, or across hedge fund styles at least over that period. It's not totally persistent over time, but certainly over this period, it was merger arb and you go down the list, there's completely different things event driven and multi-strategy, relative value, they all have their pitch books with completely different stories to tell about what they do and how they do it, and how they identify cheap versus expensive and all these different facets of each strategy.
And yet, at the end of the day, they all share the same exposure, which is this negative skew, ie their down vol is greater than their up vol. They consistently make little bits of money. And every once in a while have these extreme events where things go really out of whack and get this big downside move, or big drawdown that creates this negative skew. So it's like always waiting for this event when you're invested in one of these strategies, which is really all strategies is the way to think about it. And the one last point looking at this page in this chart of how widespread it is in our industry is, to me it's almost ironic is the let's see, eighth one down is hedge fund index of multi strat. So multi strat chose to have a -1.2 negative skew. But the point here is the irony is that it's multi strat like these are people who get into the business to say, we're going to diversify strategies, right, their sole job is to build a diversified book and yet, with all that they're doing at the end of the day, no matter how diverse their pie chart is, they're still ending up with the same grand exposure to short volatility and it's just fascinating, right? How much of it there is out there.
So when you say that the short vol space, it's really to me the answer is pretty much everyone right? So then on the other side of the coin, you get the small group of people who say okay, you know, we're gonna battle the world, right? We're gonna say, it's really hard to do. All these odds are against you when your long vol. But the problem being that you don't want to sit with that negative skew. You want the opposite outcome in your book, we want the fact that we want our up vol to be greater than our down vol. It's okay to make little bits along the way and then every once in a while, have a home run. To me that's a much happier, safer, and pleasant way to live is I'm not sleeping at night, because the big event might happen tomorrow, I'm going to sleep comfortably because tomorrow I might have the big pop, right? And so it's just almost like philosophically, it's the other side that is a pleasant way to exist. So that's point number one, which is really the two different spaces.
Erik: Joining me now is Lakshman Achuthan, founder of the Economic Cycle Research Institute. Lak has prepared a slide deck to accompany today's interview. Registered users will find the download link in your research roundup email. If you don't have a research roundup email, it means you're not yet registered at macrovoices.com. Just go to our homepage, click the red button that says looking for the downloads. Lak, it's great to have you back on the program. Last time we talked you were I think earlier than most people calling out the inflation turning up the way that clearly it has. Are we still looking at and I think it was not just inflation. But you were looking at business cycles turning up and a number of things. Let's do a quick review of what we discussed last time we had you on the program and what's changed since then.
Lakshman: Sure, sure. Good to be back with you, Erik, thank you. I think we spoke last fall of 2020. And we were kind of updating several cycle upturn calls. And we look at many different cycles at ECRI. And so we had the business cycle upturn in the United States. We had the global industrial cycle upturn that we had also made from the spring of 2020, which was I think it's been a very key call. And then the related inflation cycle. It's a separate cycle upturn call that we made late last summer. And on each one of those cycles. There's been really interesting developments, Mostly I have to say to the downside, decelerations that we've been working through, you know, with people we speak with or our clients in recent months. And so, you know, last time we were on, we weren't equivocating. You know, there was lots of drama in the headlines. It seems like that's the norm these days, but during the whole all the upturn last year, we did not equivocate on those uptrend calls at all. Stocks went certainly along for the ride, commodity prices went along for the ride, inflation stuff went along for the ride. Even though you know, there was lots of stuff going on pretty serious stuff with a pandemic, and also alongside the political strife.
And all those calls, they held straight through the winter. But they started to show up like different cycles started to peek out. And you mentioned, thank you for mentioning the slide deck at the beginning of the call. We have this many cycles framework, what we call the equity framework. It's not a model, right? So nothing I'm talking about today is about models. It's about an array of leading indexes, coincident and leading indexes have different distinct but related cycles that we're tracking. And there's dozens of them. There may be dozens of them for one economy, and we're doing them for 22 economies. And so it's from that vantage point that I'm giving comments today.
And our basic process that's important to understand, and it kind of sets up this discussion is that once we've made a cycle turn call like last year was all the upturn calls. You know, almost immediately, our job is to be on the lookout for the next downturn. What's the risk of that cycle turn, you know, that cycle turning again. And, as I've intimated now, global industrial growth, we've made a downturn call in global industrial growth. And I think we should get into the nitty gritty on that. Separately so full period on that, and then a full stop and then a separate cycle is growth in the US economy. And so here, it's quite separate from the global industrial downturn call. We have a US growth rate cycle downturn call. And there are some you know that the on the inflation cycle call where you know, we did have that strong upturn call. Our forward looking future inflation gauge, the highest reading in that looks to be back in April. And it's kind of gone sideways a little bit. So we don't have the emphatic run up that we had earlier. And we can get into what's going on there too.
Erik: Joining me now is Santiago Capital founder Brent Johnson. Brent prepared an excellent slide deck for today's interview and I strongly encourage you to download it as we will be referring to the charts and graphs that contains during today's interview. Registered users will find the download link in your research roundup email. If you don't have a research roundup email, it means you're not registered yet at macrovoices.com. Just go to our homepage, macrovoices.com, click the red button that says looking for the downloads. Brent, it has been way too long since we've had you on the show. It's great to have you back. Let's jump into your slide deck and talk about a favorite topic of mine when I talk to you, the US dollar. Everybody's asking me I can't decide.
Brent: Well, I had a feeling you might ask me about the dollar, Erik. So that was the first slide that I threw in here. But in any case, it's really great to be back. I always appreciate the opportunity to talk with you and your listeners. It's one of my favorite podcasts out there so happy to jump in. And, you know, the point I wanted to make with this first slide here is I was here talking with you about a year ago, Erik, and the dollar was around 93. You know, and since that time, I've had innumerable people tell me, remind me, try to convince me that the dollar is going to zero. And there's just nothing that can stop it.
However, you know, in the last year, despite printing over $1.4 trillion, despite having a democratic president get elected, despite having a totally democratic congress get elected, despite numerous stimulus plans, a contested elections, and social unrest. The dollar is at 92. So I guess I would say are you sure? Are you sure the dollar is go to zero? I'll tell you I'm not sure about anything, Erik. But, I think it's a very uncertain time. And I think a lot of people who are certain in their narratives may be proven wrong. And so we'll just have to see how it goes.
Erik: Joining me now is Bill Blain, strategist and head of alternative assets for Shard Capital, and probably better known as the author of Blain's Morning Porridge. One of the most intriguing investment blogs on the internet. Bill, it's great to have you on as a first time guests. I've been asking everybody about inflation. Janet says it is transitory. I think my favorite quote that I've heard so far is World War II was transitory. What do you make of this transitory argument? Is inflation here to stay? Is this a secular phenomenon? And what does it mean?
Bill: Yeah, I rather the opinion that inflation is not only here to stay, but the most significant thing that's going on is we have long term inflation is now being imported into the real world from distorted financial assets. Everybody tells me that there's no inflation out there. And what we're seeing is just a transitory spike caused by supply chains breaking down, and things like the chip shortage and people who are anticipating a faster recovery. But what we're really seeing is all the inflation that's been generated over the last 12 years of monetary experimentation, quantitative easing, and buying back bonds and keeping interest rates artificially low, that's generated tremendous inflation in financial assets. And that financial asset inflation is no creeping into the real world.
So you're going to see a whole series effects inflationary moves that occur as a result of that. Plus, I think we're also going into a very different world that is not going to be one where you can easily, simply brush off inflation effects as transitory. I mean, let's just think for one second about some real world events that have just occurred. Like all these climate disasters we've seen in the last month, they cause real costs. These costs have to be paid from somewhere. And that is going to be inflationary in its own right. So I think we really have moved into a new world where inflation is going to start really impacting bottom lines again.
Erik: Joining me now is Darius Dale founder and CEO of 42 Macro. Darius prepared an extremely complete chart deck for today's interview. I strongly recommend that you download it. Registered users will find the download link in your research roundup email. If you don't have a research roundup email, it means you're not yet registered at macrovoices.com. Just go to the homepage, macrovoices.com, click the red button that says looking for the downloads. We're going to be referring to the slides in that deck. We're not going to have time for all of them. But I encourage you to go through all of them at your leisure because it's a really great deck.
Darius, I want to start with a story which you know, when we booked you for this. We said listen buddy, we're really looking for a deflationist because we've had so many secular inflationists including myself, we want to offset that with an opposing view. And you said, sorry, I'm a Model-Driven guy. And my model says inflation, then something changed, because I got an email from you just a couple of hours before we did this interview on Tuesday morning. And you said you might get your deflationists after all. What did you mean?
Darius: Hey, thanks Erik. It's great to be back. So in terms of what changed, we run this dynamic factor model that we use to now cast what we call the dominant market regime or what we believe or how we believe investors should be orienting their risk management exposure. As we show on slide 6 through 13, that system, and it's born out of 42 market indicators that were scoring through the lens of our volatility, just a momentum signaling process. That system finally tipped in favor of deflation, as of this morning Tuesday, July 20.
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