The Macro Trading Floor transcript – 02 August 2024

Alf: Benvenuti everyone. You’re listening to the Macro Trading Floor. This is Alf speaking, and as always with me, my good friend, Brent Donnelly. How are you doing, Brent?

Brent: I’m good. I’m excited about the Canada women’s soccer, Canada men’s basketball, both going to win gold at 15 to one odds. So I’m excited about those.

Alf: 15 to one odds. You heard it. There you go. Okay. Happy Olympics, everyone, but happy mayhem macro week, everyone, because the bond market is exploding. The Japanese yen is exploding and a few more things too. Equity market ball is back, commodities all over the place. So where do we want to start, Brent? Shall we talk about, I don’t know, the Fed or U.S. macro first or move to Japan first?

Brent: Sure. Let’s start with the U. S. Interesting. Just now the employment index on ISM came in about six points lower than last month. It definitely feels like we’re getting the possibility of an acceleration in the weakening and some of this data. A lot of it’s still kind of up for grabs, whether it’s, you know, It’s real or not, but you are getting more and more stuff like ADP missed claims.

We’re going to get payrolls tomorrow. I guess that’ll come out around the same time as the podcast. But it does seem to me that. the data is potentially signaling something a tiny bit worse than we thought. And then maybe we’re coming out of the soft landing and into something a little bit less good.

Alf: Sorry. I was on mute, not particularly smart. So I think the macro data has been pretty clear now for a bit. It’s potentially a downward trend. It’s not anything worrying so far, but it sure complements the disinflationary theme and the Fed that says we’re ready to cut in September and we don’t discard 50 basis point cuts down the road, by the way, we’re not closing the door to that either.

And so now you have a situation where If I look at the probability distribution of outcomes that traders were pricing in March versus today, it’s completely nuts. So in March we had an episode where we said, well, maybe consensus pricing and probability pricing is extreme on the hawkish side. Back then we had model outcome of the fed cuts in 12 months at zero, zero cuts priced in, and then we had a very, very, very cheap deal on the rece or on the recession side, something like 7% probability.

Higher for longer, 36 percent back then. So almost the base case. Now you look at the thing today, eh, a bit different, eh? Min pricing, six cuts over the next 12 months. And the recession odds that I estimate from the option market at almost 20%, 2 0. And so, you know, bonds are rallying, the curve is steepening, it’s bull steepening, it looks like 2019 from a certain perspective.

And so I get the question more and more like, Have we already seen the big fat bond rally or more to come here? And then there is, I guess, Japan to consider as well into the equation because, you know, the two things are not always you know, uncorrelated. Japanese investors are big in bond markets and there’s a lot going on there as well.

But okay, first, what do you make of bonds?

Brent: Well, it’s interesting because I would say generally. Obviously most throughout this cycle, people have been overpricing the downside and, and the recession risk. And then we went to zero cuts and all the banks were like rapidly changing their forecasts to no, no cuts this year.

And now it’s, I would say it’s pretty much guaranteed that we’re going to get a cut in September. Not just because of the pricing, just because of the amount of time between now and the meeting and Powell essentially signaled it. But I think it’s interesting that bonds have rallied this much. And at least among my clients and people I talk to, people are way more skeptical than I would have expected.

Like people have been wanting this recession and like us slow down trade for so long and then got killed on it, obviously in 2023 and then completely stopped out of it. The market completely stopped out of it. And now The data kind of supports it more than it has in a long time. And yet people are hesitating because you’ve already got tens, 10 year yields below 4%. People are like, ah, the move already happened. I don’t know. I’m not so sure.

Like, I think there’s. There’s easily a way that you could get 35 or even like 38 basis points priced in for the September meeting, which is like one and a half cuts because the way that the meetings fall in, it’s going to be tricky for the Fed because of the election.

So, I think that dynamic makes it possible that if you get like something on the weak side on the payrolls this month, and that ratifies what’s been a lot of weak data, rising claims, rising unemployment, horrible employment in the ISM, then you, then you got to start thinking about 50 in September. And I think yields could still go lower, especially because I think a lot of people are fighting it or are just denying it at least. So I don’t think there’s been like a ton of participation on this bond market rally.

Alf: None of my research clients are jumping and telling me how happy they are that bonds are rallying, which is also a sign that they weren’t long. No, just kidding. But it’s generally speaking, when you feel protests from people, I think that’s a good sign that the trade is very much underowned.

You know, it’s like a bit of refusal from that perspective and mathematically as well. The way we could see bond yields lower I, I mean, when you look at the front end, that’s one way to do it, Brent, right? I mean, they cut 50, they cut every intrameeting they can and, you know, recessionary odds go up and then the front end can lead the rally further.

But I would say the bar is pretty high there given where we are now. We’re pricing 150 basis point of cuts in the next 12 months. It’s quite something. You can still surprise on the downside there, but bar is a bit high. What I find interesting instead is if you look at more the terminal rate, right? So let’s say the Fed cuts maybe faster, maybe slower, but what is the rate at which they end their cutting cycle?

So what is what the market estimates to be the terminal rate? And if you ask this question before the pandemic, the market would always tell you, yeah, the terminal rate is like two and a half percent or so along the line of that, right? Roughly. And if you ask the question today and you look at forward bond markets to realize where it is, the market still says 3. 3 percent today.

So, you know, like 80, 90 basis point above pre pandemic. some sort of equilibrium that the market is pricing in nominal fed funds, where they land after a hiking or a cutting cycle in this case. So 90 basis point, I mean, like it seems to be like a bit of a premium that people are attaching to fiscal and Trump and the world is a little bit different than it was before the pandemic.

And maybe it is, but if you ask me, how can you rally more in bonds, then my answer will be, well, you either get a recession and the front end goes ballistically lower in yields. Or the market thinks at some point that we’re going back to pre pandemic. It’s not that much different after all. This could also be a narrative that unfolds.

Or do you think it’s impossible?

Brent: No, I think that’s a good point because if you look outside of just the fed, there are a lot of things that could change or that are changing. Like if you look at before COVID, what China looked like and what China looks like now, you know, the rest of the world can weaken significantly.

And that obviously will help the backend in the U S help yields go lower. And then you referenced the Trump thing. So the polls are basically even Harris and Trump, but then the gambling odds still had a huge skew. Like it was like 58 39 and those are moving fast. It’s like, I think Harris is up to 45 percent now.

So it’s almost a coin toss. And I do think there is an MMT premium in bond yields. So MMT has been such the orthodoxy since 2017. And then obviously everyone quadrupled down after COVID. And I don’t know, I just don’t think Harris is going to be as much an MMT person as Trump would be. So, and I think the market believes that too.

So you then could end up with a fiscal drag story. Some of this stuff is like late 2025, but markets are forward looking and the tax cuts or tax cut and jobs act. Most of the provisions expire at the end of 25. I don’t see Harris wanting to renew a lot of that stuff. So if we’re talking about higher corporate tax rates or definitely not lower under Harris and potentially less fiscal especially on the revenue side, but on either side, then, and then you have China still looking horrendous.

And then, you know, Europe is always kind of at the edge of the cliff. There’s definitely a scenario where global growth just dumps. And then the U S fiscal drag story comes into play. And all of a sudden tens are trading at three 40 or something like that next year. So I think there’s a lot of scenarios outside of just quick Fed cuts that could see the back end come off for sure.

Alf: That’s a fair point. And would you please spell the acronym for people? What does MMT stand for? Magic Money Tree. That’s correct. But I was waiting for you to say Modern Monetary Theory. So I could say Magic Money Tree. But okay.

We missed the joke there. Okay. So, so rates and it’s a huge rally and we’re beating our chest because in March we looked at the property distribution and we said, what he hell guys, are you nuts? Okay. Nice. The bond is bond move is running. It could extend into a trend, but can we see our friends from Japan you know, getting into the picture?

I mean, I will talk about how they look at bond markets. It’s a very fascinating discussion. They own a trillion dollar of foreign bonds. Geez, that’s a lot. So good to know how they look at the bond market. You are more of a specialist in FX, but in general, the bank of Japan – you know, pull the trigger again here.

So just curious to know how did you look at it? And then I’ll tell you my opinion on what the hell is going on in Japan and the yen and bonds and all that. Go ahead first.

Brent: I mean, I think it’s a meaningful move, especially because the BOJ was also pretty hawkish and Their conditions on wages are met, and then they have this mix of like so many different data points to choose from that they can kind of do whatever they want and then justify it with whatever data they want. But it’s, it’s a continuation of the theme of everything that was popular, which was a lot of it was carry, but a lot of it was also momentum and debasement trades simply unwinding one by one.

And the market has been burned so many times on BOJ that the participation actually was pretty light. Like there’s a system in Bloomberg where you can look at option strikes in dollar Yen and normally into an event like this, you just see billions of dollars of strikes all the way down.

And that was not the case this time. And again, part of it is that people got hurt so many times. Part of it is that the carry is still a little bit expensive, but obviously it’s getting much less expensive as us yields go down and Japan’s yields go up. So I think this is a meaningful move from the BOJ and it’s interesting too, because It’s created a flip now where yen or Japan rates are actually higher than Switzerland on a lot of tenors, like five and 10 year.

And my experience has been a lot of times when there’s a flip in terms of a differential, like Canada goes above the U S or, or Australia goes above New Zealand or whatever. That does tend to trigger a change in behavior. So you’re seeing quite a lot of yen buying, but what I think we’ve seen so far is mostly position unwinds because cTAs have been long cross yen and dollar yen for so long that they’re still getting out of it, but we haven’t really seen an actual accumulation of yen longs at all.

And it’s very similar actually to the bond trade. So they’re correlated, you know, us yields go down. Then the yen tends to go up. And like I was saying about the bond trade, it’s, it’s a similar psychology in the yen where it’s like, well, I think we kind of had the move already, I don’t really want to jump on board here. I don’t want to sell the hole in dollar yen. And again, that creates a situation where a lot of times you can see the move continue because participation is very low.

Alf: I think you’re right. And the only thing that is interesting to add here is that if you look at the yield differential between the dollar and the yen, and if you overlay a dollar yen chart on the yield differential today in OIS space between the U S and Japan, basically you should be at like 140, 142.

Now it doesn’t mean you have to go there, but it means that fundamentally there is a path ahead for which Lower U. S. rates and, you know, differential shrinking should indeed sustain the yen.

Something I noticed on the BOJ. So, first of all, I’ve never ever heard these guys talk about upside risks to price forecasts. I mean, upside risks to inflation in Japan. I mean, they have these nice slides that some intern somewhere in a room at the Bank of Japan is making, right? They make this slide and they did some monetary policy slide. So you can download it and they have these arrows pointing up for fiscal year upside risk on inflation for 2025 and 2026.

Quite impressive. And then the other thing is the guy said you know real rates are going to remain deeply negative even if we hike, right? So that’s a signal of, you know, we’re hiking. We’re not going to stop here. We don’t want to stop here. And also the Ike 15 basis point one five. So the upside range is now 25 bips.

Hey, does that mean that The Bank of Japan is going to not do Mickey Mouse 10 basis points anymore, but actually in 25 basis point steps, like a grownup central bank trying to hike? It could be, yeah, it could be. So all these things are all hawkish. I agree. Like they add the hawkish flavor to the whole thing.

But look, 10 year JGBs are stuck at 1 percent because what’s happening is that even with all this hawkishness, Brent, like the bond curve in Japan is flattening. I mean, people don’t really believe it’s sustainable. Like, you know, the more they hike now, the more the Japanese economy will flatline and suffer.

So the back end of the curve flattens out. And so I’m wondering whether we are at the last steps of the Japanese bond deals are going higher mania. And if we are at the long end, that is 10 years, 30 years, then what are Japanese investors going to buy? When they figure out their domestic yields are 1 percent and that’s it.

And maybe in the long end too. And now they find the yield differential versus the U. S. actually shrinking. So the hedging costs are lower because the front end rates are moving in the opposite direction that helps. And then maybe the yield curve is steepening in the U. S. Maybe, you know, maybe not. So can they come in and buy treasuries and maybe, you know, strengthen the trend in, in, in dropping yields?

Maybe.

Brent: Yeah, it’s tricky because there’s a lot of Japanese money in foreign assets already. So the question is, at 1 percent do the big pension funds in Japan start to switch? And, and move money in back into JGBs. And I mean, that’s kind of the theory behind part of the sell off in dollar yen and cross yen is that every single night for like the past 15, not every single night, but almost every single night for the past 15 nights, dollar yen and cross yen have got smashed in Japan time.

And, you know, usually that’s an indication of the flow and the biggest flow there’s a pension fund. So to me, it’s interesting for sure. And the amount of denial makes it extra interesting. And then the question becomes, is there going to be persistent volatility in global capital markets? And will that continue to make carry trades and popular trades unwind?

And just sort of pivoting a bit here to the U. S. I feel like what we’re seeing in equities is unhealthy. Like there’s unhealthy amounts of volatility going on here. Like if you look at realized in the NASDAQ we’re back now to levels that we haven’t seen, like NASDAQ’s realizing 29 or something over the last 30 days.

Those are the last time we saw that was silver gate. And just in general, momentum trades with high vol once they break can be quite dangerous. And you can put a lot of things in that bucket. You can put all like the Mex carry trade, Brazil carry trade, which have mostly unwound, but then the yen carry trade, but then you can also put Nvidia and crypto in there too.

So I feel like the turn In assets accompanied by this much volatility, even though we saw that rip roaring NASDAQ rally the other day, rallies like that don’t happen in bull markets as much as they happen in bear markets.

Alf: Yes, I think you’re right. So vol is back, which is fun if you ask me, but also it doesn’t look like healthy vol. I mean, the Russell is down three and a half percent in a day as we speak. So it’s, it’s not something small here we’re talking about.

Hey let me go and talk about a topic we don’t talk about for a while now, which is China. So one thing I noticed about China is that they’re cutting rates month in and month out.

I mean, they have a bunch of rates. It’s all over the place over there. When it comes to monetary policy, they have like the loan prime rate, which is this sort of benchmark for lending and mortgages. And then they have the reverse repo rate, which is some sort of a collateral seven day type of repo rate they use for, let’s say money markets type of thing.

But. Maybe they’re cutting one, maybe they’re cutting the other, but it’s like a week after the other they’re cutting rates, cutting rates, cutting rates, cutting rates and macro data looks like to be sluggish to say the least and… slammed to the floor, to be more aggressive. So what the hell is going on in China?

Is there any smart way that we can play it without Mr. Xi Jinping locking our money in China and never paying us back?

Brent: So there’s been this ongoing narrative since China, remember the China reopening trade, the big stimulus, the big China reopening and what Western investors are waiting for is a massive fiscal stimulus and it’s just not coming.

And for that reason, I think monetary policy is actually disappointing for investors. So like when they cut rates. It’s not exciting. It’s not like the fed cutting 50. It’s more like, Oh shit, but we wanted fiscal and you’re giving us monetary. This isn’t good. So the third plenum passed. And that I guess would probably be one of the last places or the last bastions of hope for the consumer stimulus crowd.

And there’s just no stimulus coming there. Like they’re just using a different strategy. They’re trying to just allow something a little bit more organic to happen. Like I think Ireland did after 08 or whatever – it’s more saying, okay, we have too much leverage in real estate, this and that. Let’s just let it all kind of happen organically with a bit of creative destruction.

And that’s just not that great for consumption and assets. And like, if you look at what ags – agricultural commodities are in the absolute toilet, because the presumption is that consumer demand in China and overall demand from China is just not very strong. And like I said, I would say that Rate cuts are meaningless.

And if anything, they’re actually kind of bearish China because they are not a substitute for fiscal. And the funny thing is actually in the U S more and more, I think 21, 22 has reshaped the economic orthodoxy to believe that fiscal is so much more important than monetary and monetary is kind of like this Scottish witchcraft where you think you’re doing something, but the long and variable lags make it really hard to tell cause and effect.

Whereas fiscal, you just do it and everything rips. And so if that’s the case in the U S where people actually did believe in monetary policy up until recently, it’s certainly, there’s going to be zero belief in the ability of monetary policy to make any difference in China.

Alf: I think you’re perfectly right. And it reminds me of our friends in Japan and the real estate crisis they had in the nineties, right? And instead of trying to stabilize things through fiscal, they slashed rates from like 6% to 0%. And that did a lot, right? That did absolutely nothing to stop the crisis because, you know, if, if you have developers failing and people under the burden of, of too much leverage, if you cut rates, do you think they’re gonna borrow more?

I mean, that’s not how it works, right? They’re, they’re repairing the balance sheet and bleeding. I think China is doing the same, which Japan did in the 90s. Not very smart if you ask me, but hey. I mean, they control their economy and the most, the hardest part there is to say, okay, so what’s the trade?

Because if you’re going to tell me, yeah, you know, interest rate differentials ultimately between China and any other currency are going to make their currency weaken, right? So you want to play the currency side. As we know, it can be a bit frustrating, right? Ultimately it can work, but it can be frustrating on the way there.

I mean, dollar CNY has been stuck at 725 now for like forever. And you keep wasting your option premium, trying to chase something, maybe there that doesn’t happen, or maybe a little bit of positive carry, but it’s not, we are not really making a ton of money right out of the, of the thesis. Are you not?

And then just to finish my thought, then you want to do what a Chinese bonds, because you know, if they’re cutting rates, then maybe you want to go ahead of the forwards and buy bonds. I mean, how, like literally you, you have to buy some, some low liquidity type of thing where you buy Chinese bonds, which by the way are denominated in CNY.

So if the currency weakens, you also get that negative effect. I mean, if you’re a hedge fund, you can do some swaps, fine, whatever, but for a normal human being, then, then you, you really can’t get that exposure done. So what’s left, like I don’t find that, let’s say a retail friendly or a normal person friendly way of expressing this idea around, to be frank.

Brent: No, I mean, I agree with that. I don’t think there really is a trade and Chinese equities are pretty random and depend on a lot of different factors like government buying and more idiosyncratic factors, not just the economy. So I would agree. I don’t think there really is a trade.

I think the only thing to keep in mind is that it’s kind of like this big sucking abyss that’s pulling inflation and growth down. And we’ve been able to avoid getting sucked in because there’s been so much strength in the U S and enough manufacturing strength in the U S to kind of support everything, but it is still this massive drag that’s just sitting there. And so I think the relevance is more on the global economy and as a, an accelerant of weakness, if things start to weaken, then, then all of a sudden you have Europe kind of on the edge, china in the toilet, and then the U. S. can get sucked down pretty quick.

Alf: You’re very optimistic today, Brent.

Brent: Okay, so I’m optimistic on Canadian Olympic teams, but less so on the global economy.

Alf: There are people in the toilet, people on the brink, and people getting sucked down, quoting Brent Donnelly today. This should be the title of the podcast, I feel. Okay, now Let’s talk about trading and risk and, you know, how, what happens when we try to make a framework and, and apply to trading.

So I know before the show that today you want to briefly touch upon positioning and how do we embed that into our trading framework. So go ahead, positioning.

Brent: Sure. I mean, I think it’s interesting right now because so many positions are blowing up. And the higher volatility means a lot of times people have to degross large positions simply because of if they’re risk weighted and, and, and vol weighting and volatility is going up, then you’ve got to have smaller positions when there’s higher vol, I mean, just by definition, but that’s a position sizing thing in.

In terms of positioning, I think generally, It’s actually overrated. So like, I think sentiment and position positioning matters sometimes, but not most of the time. So like we publish this positioning report on FX and get a lot of queries on like, okay, well, how do I use this?

And I would say generally like 80 to 90 percent of the time sentiment just follows price. So if you trade against sentiment and positioning, you’re just fighting the trend, a majority of the time. But then at inflection points, positioning can be like the only thing that matters. So it’s, it’s a funny thing.

It just doesn’t matter a lot of the times. And then it’s the only thing that matters. And the analogy I would use is like, it’s like potential energy for a fire. So like you have dry Tinder sitting there and there’s a gas, there’s a can of gasoline sitting there. It doesn’t mean that there’s going to be an explosion or a fire.

But the bigger the can of gasoline is, and the bigger the pile of wood is, the bigger the fire is going to be if there is one, and then you got to understand like, okay, well, what’s going to be the spark for the fire and the spark can sometimes just simply be something. Internal in the market, like it can be totally random that the price just moves enough that that triggers the fire, or you can have an external catalyst.

So like, this is pretty esoteric, but Aussie Kiwi is a cross that people like to trade. And that’s been a super, super popular trade. And the other night Australia had a weak CPI. And Aussie Kiwi dropped like two and a half standard deviations in one night. And normally a weak CPI of, you know, it wasn’t that huge of a miss from Australia, might trigger like a 0. 8 standard deviation move, but there you had the big position that had been building up for a couple of months. And then a weak data point as a catalyst and then boom, the fire catches. So what I feel for, for positioning in general is that it has to be at a huge extreme. So like, I’m looking for like two, three, four standard deviation kind of situations.

And you can get that from the data, like CFTC from bank reports daily sentiment index. There’s a lot of different ways you can collect data. But then also I feel like just conversations and anecdotes are really important for me in terms of assessing positioning, because that visceral kind of tone of the conversation where like, you’d say I’m bullish bonds and 20 people call you a moron, that can be as good of a signal as you know, CFTC data, because the CFTC data specifically is quite slow moving.

So, in general, I feel like positioning is not that important most of the time, but then it builds and builds and builds. And then you have to be able to identify those inflection points either from experience or from data or ideally from a combination of both.

Alf: Yeah, I would say my contribution to the positioning thing has to do with options because nowadays options are very, very crucial as an underlying market – I would say they’re not necessarily the underlying market anymore. They are on par with the linear market because every linear flow that gets in from market makers can be recycled or hedged through options. And it is. So it’s important to look at option markets. So there are two hints I would give there from my perspective.

The first is, so if you are in, I don’t know running money and you have a Bloomberg and you have a sales guy that is covering you and pitching you ideas, as soon as you hear A sales guy or somebody from the sales side or a bank telling you the following, we propose you do this zero cost option structure.

These are magic words, zero cost option structure where you will sell this tail. But don’t worry, this will never realize. And you will fund basically by selling these options. You get premium, you get, you can fund through the selling the acquisition of this option, which we believe is gonna explode.

Yeah, that tells you something about positioning. So if somebody is asking, pitching you from the sell side to sell a downside tail to monetize that to fund an option trade somewhere else, that rings a bell for positioning. Anecdotally, anecdotally. And then the second one is more quantitative, I would say.

So if you have a grasp on options, tracking how the tails literally are priced can give you an idea of how much people have a strong consensus that the specific tail will not realize or will really realize. But this work specifically on will not realize. So if you can track the implied vol and the probabilities in these tails it’s quite interesting as a signal to tell you how crowded consensus is on a certain opinion of a certain tail.

Brent: Yeah. And another way that we use options here in FX, but it works in, in everything is looking at skew as well. So a lot of times you’ll see, I mean, in, in equity markets, I know everyone does this, but in, in FX as well, you’ll see the skew for puts or for calls in specific currencies is that all time highs are all time lows.

And again, like something being three standard deviations off or all time highs, or never seen this level before… those are the situations generally that I find are the most useful. So anything in the middle of, of the distribution generally, it just, it’s just identifying the fact that positioning follows price.

But when you get into the really extreme parts of distribution, that’s when you watch. And what you can do a lot of times is that you can say, okay, red flag here from positioning, but it doesn’t mean that you have to like go limit short the thing. You can say red flag from positioning. Now let’s watch for some kind of reversal pattern or whatever other inputs you use, technicals or price action or fundamentals.

You can wait for something else to line up. And then you have more of a, of a real trade thesis, as opposed to just saying like, Hey, everyone’s long. I’m going to go short. I just don’t find that works very well. But if you say, everyone’s long today, and then you’re on high alert, and then you watch that thing for the next three weeks, and then three weeks from now, there’s like a key reversal day after making an all time high and failing and closing back below that kind of stuff, I find that tends to have a lot better risk reward than, than just fading positioning. And the one of the worst diseases in trading, which I was like, I had that disease for a long time when I first started was just reflexively fading, positioning all the time.

And that’s just like the, that’s literally the opposite of trend following. And, you know, there’s entire careers that have been made on trend following. So trying to do the opposite of trend following just isn’t a basic, like, isn’t a baseline strategy. It has to be a little bit more complicated or sophisticated than that.

Alf: Ah, now that’s a nice bridge to talk about the next trading framework thing, which is how does one personality relate to high hit rate strategies versus low hit rate strategies when you trade? So a trend strategy is something that is low hit rate. You are not going to find a lot of breakout trends in a year.

You will find like, I don’t know, three, four, five, depending on how many markets you’re trading, but it’s a low hit rate strategy. And when you’re right, let’s say you’re right. 30, 40 percent of the times when you are right, you can be right freaking big if you’re doing trend following, right? So that’s the idea. Low probability of success, high expected outcome.

Otherwise you have another type of strategy, high hit rate, but limited upside type of thing. So you’re right very often, like 70, 80 percent of the times, but you know, you can’t make a killing. And when you’re wrong, by the way, you get smashed. So, and in this bucket, I would put like carry trades, vol selling, all this beautiful stuff. So you write a lot and when you’re wrong, you blow up.

Okay. Now, so how do I feel about personalities in this? So I’m going to make a small parallel now. So I’m, I’m launching the fund and I’m raising money. And so what happens is that of course, in most conversations you have, people are not going to say, Hey, Alf, Please take my money.

It’s actually the opposite. Right. They’re going to say, Oh, sorry. Come back in a year, blah, blah, blah. We want the fund to be a billion gazillion before we give you money, et cetera. Right. So it’s a lot of nos, right? They want you to be big before they allocate fine. And so you, the hit rate is very low, like very, very low.

And then you have to keep grinding and grinding and grinding. And so. From trading, it’s like the same thing. If you have a like a long option or a long tail strategy, you’re never going to be right. I think, Brent, but I don’t know, you have more experience than me, but I think that specific trade structure requires some sort of mental stamina.

It’s not even maybe for anyone, to be frank. It’s just ridiculous. You’re wrong all the time. So how do you handle that? Have you ever run a strategy that was low hit rate and high EV when you’re, when you’re right?

Brent: Well, I mean, so I’ve, I’ve thought a lot about this and, and written about it a lot. And generally my hit rate throughout my career has always been between 50 and 55 percent like on looking at daily data or trade by trade data.

And so what I learned from that was that first of all, collecting data is really important because if you know, your hit rate, you know, when I was in my twenties or thirties, it’s just so depressing when you lose money because you’re like, ah, man, I suck. This is brutal. But if you have collected like say five years of data and you know, your hit rate is 52%, it just makes it a lot less viscerally disappointing on days when you lose money.

Cause you’re like, you know what? I’m going to lose money 48 percent of the time times, 252 days, whatever that is. A hundred or whatever, 120 or whatever, I’m gonna lose money 120 days a year. Like I can’t be getting really angry and upset every single one of those days, or, you know, I’m going to not be in a good mental state when I’m 51 years old.

So and I got some of this from, there’s a great book by Ken Grant called Trading Risk. And he talks a lot about collecting data. And so that was a big breakthrough for me was collecting the data and seeing like, Oh shit, my hit rate is only 52%. Okay. Well, but if it pays, if your trades or your days pay 1. 8 to one, then, you know, you run a simulation and that could be, you can make 10 million doing that at a bank with those ratios.

So, I think what you’re asking is like, how do you survive the losing? I mean, I, everybody loses money all the time in trading. And I think part of it is first of all, just accepting that and not getting too upset about it.

And then also. If you collect data, then you can sometimes discern whether something is just variance because a lot of times you lose money three days in a row. It’s just variance, right? Or is something busted in your process where, you know, your win loss ratio, your, your wins are making a dollar and your losses are losing a dollar 80.

Then if you’re collecting all your data, then, you know, okay, something’s broken in my process here. Whereas if your hit rate’s 52 percent and you lose money three days in a row, you know, whip de doo, that’s just variance. So, I, I feel like having a good, deep understanding of variance, And collecting your data then allows you to not be as traumatized by every single loss and every single losing day.

But that said, you still get traumatized by them anyways. That’s just the way it is.

Alf: I mean Brent sharing some experience there and you have written a lot about it. So, but it is, it is very hard mentally to try and do low hit rate strategies, guys. It is what it is. So just, just buy carry and sell vol and be happy.

No, just kidding. Don’t do it. In the meantime, talking about crazy things before we close the show I just read here that there has been the equivalent of a 1. 75 billion sale of a guy just posted the block of 1. 75 billion 10 year bonds. So he said, you know, 10 year below 4%, you can take the bonds, thank you very much. Either he’s taking profit or he’s selling, I don’t know, but 1. 75 billion, it’s a huge ticket. So somebody who doesn’t believe that rates can go lower. There you go.

Okay. Said that, I think the last thing I have to add from my side is that as always you know, that Brent and I also do a bunch of stuff, Brent has Spectra products, you should go and check it. If you want to talk to Brent. I don’t know what, Brent, I will put some email under the description here, or you people can go on Bloomberg, whatever, we’ll put it in the, in the description below. If you want to talk to us, just do it, guys, we don’t bite. And then you will find the same email and the Bloomberg thingy to talk to me below as well.

We appreciate you. We love you. Thanks for bearing with us for 40 minutes and hearing my Italian accent and that was it from my side. Brent, any parting words?

Brent: No, I think we’re out of time. So that’s it. Thanks everybody for listening. Go Canada.

Alf: Ciao. Talk soon.