August 6, 2024 • 59 mins
Unlock the secrets of intelligent investing with Diego Parrilla, a former commodities and macro trading expert from JP Morgan, Goldman Sachs, and Merrill Lynch. Now at Quadriga in Spain, Diego introduces his innovative "anti-bubble" framework, illuminating how misperceptions in the market create undervalued opportunities. His strategy blends gold, fixed income, and options volatility to provide a well-rounded defense for your portfolio. Get ready to rethink your approach to market risk and learn how to capture premiums during extreme market events.
Discover the fascinating world of game-changing technologies and their market-shaking impacts. From the dot-com era to the rise of AI and ChatGPT, we discuss how technological excitement often leads to growth spurts and inevitable corrections. Learn why these bubbles might actually expedite the adoption of transformative innovations and how to shield your investments from their volatility. Diego provides insights into leveraging gold, volatility, and other precious metals to navigate through these turbulent times.
Dive deep into the economic challenges faced by high-debt nations like Japan and explore the complex interplay of geopolitical risks, economic imbalances, and energy trends. Understand the implications of Japan's soaring debt-to-GDP ratio, the potential for currency devaluation, and the global market repercussions. Drawing from historical analysis and expert insights from Ray Dalio, we unravel the interconnectedness of economic policies and global energy shifts. Equip yourself with strategic protective measures to safeguard your portfolio against these multifaceted risks.
The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:08):
My name is Michael Guy, a publisher of the Lead
Lagrime Report.
Joining me for the rough houris Diego Paria, who is not
exactly in the US.
We'll talk about where he's at,but, diego, introduce yourself
to the audience.
Who are you, what's yourbackground, what have you done
throughout your career and whereare you located?
Speaker 2 (00:25):
I'm currently connecting from Santander in the
north of Spain.
I'm originally from Spain.
I'm a mining and petroleumengineer by training, started my
career in investment banking,trading commodities and effectsX
with JP Morgan that was in themid-late 90s and I then worked
(00:50):
with JP Goldman and MerrillLynch, always within the macro
NFX.
I then moved on to the buy sidewhere I've been privileged to
work for some pretty largeplayers such as Blue Crest,
diamond, 36 South and Quadriga,where I'm now.
(01:10):
In addition to my experience onthe buy and sell side, I've
written a couple of books.
One of them I call the EnergyWorld is Flat, which I co-wrote
with my good friend DanielLacalle, and a second one called
the Anti-Bubbles.
Both of them were at least atthe time of writing were
(01:34):
contrarian frameworks and, yeah,I kept that discipline of
writing over the past few years.
It's a very humbling exerciseand extremely productive, at
least for me.
So yeah, on a day-to-day I'meffectively managing defensive
strategies in usage format underQuadriga.
(01:58):
We have a couple of strategies.
One is called Ignail andeffectively it builds on the
ideas of the anti-bubble.
It combines gold, fixed incomeand options volatility
strategies.
Using a soccer football analogy, we're the goalkeeper of the
(02:20):
team, so we're there to makelarge absolute returns during
moments of crisis and, yeah, wecan suffer during more benign
periods, but the idea is to be ateam player and basically
create that dynamic.
And that's the second strategythat we run, called Aqua, which
(02:42):
basically combines the longequity with the protection and
the rebalancing which, forprobably the large majority of
the people listening, is aneasier strategy to understand
and to hold because thegoalkeepers can be quite punchy.
And so that's a little bit of anutshell of who I am and what I
(03:05):
do.
Speaker 1 (03:06):
When I hear that phrase anti-bubble I think of
Nassim Tala's anti-fragile.
I also think of boredom.
The reason I say that is thatbubbles seem to be just the
natural order of markets,capitalist systems.
They can be really exciting andthen really depressing
afterwards, and if you don'thave bubbles, things are kind of
(03:27):
boring, right.
So let's talk about what thatmeans.
The anti-bubble framework whatexactly is that?
Speaker 2 (03:35):
Yeah, you're right.
I always like to start bylooking at the concept of
bubbles and to borrow GeorgeSoros' definition of bubbles.
Of bubbles, and to borrowGeorge Soros' definition of
bubbles, he would define them asassets that are artificially
expensive based on a belief thathappens to be a misconception,
(03:57):
a false belief.
So, effectively, bubbles areconstructs where we have found.
It's a matter of when, not if,that bubble will implode.
It's an artificial setup.
What I did by coining theconcept of anti-bubble is I sort
of generalized the frameworkand said well, misconceptions
(04:20):
can create artificially highvaluations, but they can also
create artificially lowvaluations.
And in that sense, the conceptof anti-bubble has these three
dimensions.
The first one is the idea ofassets that are grossly
artificially cheap.
It is a matter of when, not if,that they will basically go up.
(04:43):
It's in some ways a form ofextreme value.
There's a second dimension,which relates to the idea that
bubbles and anti-bubbles arelike distorted mirror images of
each other.
They're two reflections of thesame misconception.
So, as such, I called itanti-bubble, a bit like an
(05:05):
antivirus or an anti-missile.
It's a defense mechanismagainst the bubble.
And the third concept, which isvery important, is they happen
to be reflexive in the sensethat bubbles and anti-bubbles
can feed on each other.
In the sense that bubbles andanti-bubbles can feed on each
other and there's an element ofrisk premium.
(05:28):
If you think about it.
There are times when there's nogood and bad guy in this movie,
sometimes equities.
What would be a good example ofbubble-anti-bubble is the
relationship between equitiesand volatility.
Let's say the S&P and the VIX.
There are times when equitiesmight be artificially low and
(05:52):
there are times when equitiesare artificially high and vice
versa.
There are times when volatilitymight be artificially low
referring to your point, mike,on boredom and there are times
when you have the opposite.
You have volatility explodingto levels that are artificially
high.
So really the idea here is tocreate this team that
(06:16):
effectively embraces thatvolatility, embraces and takes
advantage of those artificialsetups in a way that you can
combine the bubble-anti-bubbleand embrace that opportunity.
If you take it to an extreme,you know, tail events such as,
you know, a pandemic or war, canresult in pretty extreme
(06:41):
dynamics that you're only goingto catch if you're in, and
that's why this becomes astructural source of risk
premium or protection that maycome with some sort of pain,
sometimes in the form of costand bleed through some time, but
it more than pays when this ishappening.
(07:02):
And I think there's a lot ofscience, a lot of work, you know
.
The other thing I didn'tmention is the intro.
I'm also a visiting lecturer atImperial College, so there's an
academic side to how we thinkabout portfolio construction,
beyond the monkey brain sort oflinear understanding of
(07:23):
something made money, somethinglost money.
It's about the non-linearity.
Maybe we can expand on thatlater, but the general idea of
this bubble and anti-bubble as aframework can be extremely
helpful, both to understandwhat's happening in the macro
side as well as help us makebetter decisions from an
investment perspective.
Speaker 1 (07:42):
Is it that easy to identify artificially low versus
artificially high the reason Isay that?
I know it sounds like it shouldbe, but I've seen studies that
show, for example, volatilityfor markets is highest at
extreme valuations.
It's also highest at extremelow valuations.
Meaning the commonality interms of overvaluation
undervaluation is volatility isextreme in both cases.
(08:04):
So how can you determine ifsomething is, in quotes,
artificially too elevated or toodiscounted?
Speaker 2 (08:13):
Yeah, I think the first thing we have to say is
that we don't have a crystalball, we don't try to pretend
that we're here to tell youexactly what's going to happen
and when it's going to happen,but certainly these
relationships hold and when it'sgoing to happen, but certainly
these relationships hold andeventually, two plus two equals
four.
So in that sense, and to yourpoint earlier, it's not obvious
(08:35):
to you know.
Going back to Soros and thebubbles, when you're inside of
the bubble, I think it's not soobvious to reflect and realize
whether this is a very obviousbubble.
And even if it is, thesebubbles, as we will know, can
last a lot longer, go a lothigher than anyone anticipated,
(08:59):
but they also tend to go a lotlower, a lot faster than anyone
expected.
So I think part of thisframework and there are
relationships that are more mean, reverting, such as volatility
there are others that might haveother drift elements to it,
such as inflation and otherassets, but I don't think the
(09:20):
word easy applies.
I think it's generally thediscipline of creating these
portfolios that effectively willembrace these dynamics.
But the artificial nature,going back to the bubble and the
bubble, and can we spot them,I'd say that show me the
(09:42):
misconception and I'll tell youwhat the bubble and anti-bubble
is in some ways.
So, on that idea, part of themacro framework is there are
multiple levels of artificialsetup in our system and think
about artificial interest rates,yield curve control, all sorts
of shield curve control, allsorts of money printing and debt
(10:05):
.
So it's relatively obvious tosee the manipulation and the
impact that that has on themarket and the fact that it's
distorting the world.
Is less obvious what the endgame might be or what those
things play out.
But my general framework andthe application is that if we
(10:27):
were to think about what are themisconceptions in the system
and what are the bubbles andwhat are the anti-bubbles I've
had this view ever since I wrotethe book and before.
I don't think the biggestmisconceptions are the belief
that you can actually solveproblems through printing money
(10:49):
and debt, ie the misconceptionthat monetary and fiscal
policies solve problems.
The reality is they're notsolving anything.
They're not solving problems.
They're doing four things in myview.
The first thing is they aredelaying the problem.
They're kicking the can downthe road through spending and
(11:10):
debt.
The second thing we're doing iswe're transferring the problem.
So monetary and fiscal policieswithout limits have an impact
of exchange rates and currencywars, trade wars.
This is not really solving theproblem, it's just passing the
hot potato around.
The third thing is we aretransforming the problem.
(11:32):
So something that might be,let's say, a bubble or a problem
with valuations could actuallybe transformed into inflation if
you do monetary and fiscalabuse.
And unfortunately along thatpath you end up creating big
problems.
You know inflation and you knowsocial unrest and geopolitical
(11:58):
issues and polarization and allthe close cousins of inflation
and monetary and fiscal abusethat we know through history.
And lastly, we are enlargingthose problems.
So unfortunately, this is not azero-sum game where we're just
passing the ball around.
It's actually enlarging theproblems and perhaps in some
(12:21):
cases reaching a point of noreturn where the monetary and
fiscal abuse has gone so farthat it will not be able to be
reverted.
And that's why I think you know, from a game theory perspective
, the end game of these macroframework is likely to result in
(12:41):
, you know, more, not less,monetary and fiscal abuse, which
will end up lacking badly.
I mean, for those of you who'vegot a copy of my book and have
dedicated it, I tend to dedicatethe anti-bubble saying I hope
you like it, I hope I'm wrong.
I feel like a doctor diagnosinga terrible disease to a friend
(13:04):
as a friend.
I want to be wrong.
As a friend, I want to be wrong.
As a doctor, I want to becorrect.
My view of the patient is thatthese measures that we take
through monitoring, fiscalpolicies without limits are
creating again, are delaying,transferring, transforming and,
unfortunately, enlarging theseproblems are delaying,
(13:25):
transferring, transforming and,unfortunately, enlarging these
problems.
Speaker 1 (13:30):
So I love that framework of show me the
misconception and I'll show youwhere the bubble is.
It seems to me that themisconception, more often than
not, is often around the timethrough which a narrative plays
out.
Right?
So, okay, we can all agreeabout AI, but the misconception
there might be about how quicklyit gets integrated into every
single aspect of our lives.
Same thing with robo-taxis andautomatic self-driving cars.
(13:55):
Sure, you can see the endpointInvestors bid it up thinking
that it's going to happentomorrow, when in reality it
would take decades, right?
So how much does sort of themisconception around time factor
into bubbles playing out?
Speaker 2 (14:11):
No time is huge and obviously, you know, it's
impossible to predict withcertainty and there are multiple
dimensions.
But I found, you know, back in2003, I think it was, I read a
book that really changed myperspective.
It was Thomas Friedman's theWorld is Flat.
Those listening that are oldenough to remember the dot-com
(14:37):
bubble, basically what wentthrough left many of us with a
bit of a sour taste.
Right, it was effectively asituation that, upon reflection
and that was really the amazingmessage from Friedman's book and
(14:58):
the framework which I willdiscuss shortly, has stayed with
me and actually was key indeveloping my first book called
the Energy World is Flat,applying some of these ideas.
And I think the framework isvery much alive today with,
arguably, the AI bubble.
And so, for the benefit of thelisteners, maybe I'll touch on
(15:20):
it.
And I think it all starts withthe idea of a game changer
technology.
So a game changer technology.
There's no question, lookingback at 2001 and also today,
that there are technologies thateffectively divide the world
into a before and after.
You know, before the internet,before AI on a mainstream basis.
(15:43):
So sometimes the bubble comesbecause what looks like a game
changer technology and might bewidely acknowledged as a game
changer technology was not.
It was either fraud or it wasjust impossible or whatever.
But generally speaking, evengame changer technologies, the
(16:04):
first point is they change theworld right.
The second phase is we all getsuper excited about it, right,
and we start investing anddeploying capital and that
results obviously inexpectations in growth, in
growth in income, in investments, and that incredible amount of
(16:29):
influx of money results inhumongous growth in capacity.
So think about today, forexample, how many chat GPTs are
going to be out there between.
Everyone will have a versionright.
You're going to have plenty ofengines and ways in which you
know these basically tools, getand grow.
(16:53):
And I would say that one of thekey misconceptions that we've
seen it in many times is theidea that people invest as if
they were the only one doing itright.
So you go and say back in, thedot-com was like okay, let's
literally wire the oceans withfiber optics and we're going to
earn, you know whatever one europer megabyte or whatever the
crazy number was at the time.
(17:14):
And you build theseexpectations and this investment
based on a very linear view ofthe world, extrapolating
dynamics, ignoring the fact thateveryone's doing the same, and
so what happens afterwards isthat you end up with
overcapacity.
So, believe it or not, therewas a point in the dot-com where
(17:35):
we laid so much fiber that itbecame almost virtually free.
You had a situation wherepeople had made these
investments based on hugeexpected returns and just that
didn't happen.
And this is basically when themagic happened, because you had
(17:57):
a game-changer technology inhuge capacity for free.
And that's when the worldbecame flat, because if you were
for lack of a better example anaccountant in India, mangalore
suddenly you could do your workfor someone in California right,
and the world became flat.
(18:17):
And so from there, I think whatI loved about that book is
plenty of big messages, but oneof them was in some ways,
bubbles accelerated the impactof technology.
So back to your question ontiming what should have taken a
very long time to implement at aregular pace, it was this
(18:38):
incredible flow of money in andcapacity that was built that
effectively accelerated thingsin a major way.
We are now, I think,experiencing something similar,
except that effectively alltechnologies tend to follow some
sort of what we call an S-curveright.
So initially they're relativelyflat, then you go kind of
(19:02):
exponential, but every singletechnology has limits.
When you are in the exponentialphase, you may not appreciate
it, but eventually these thingsflatten out.
At the same time, I think thepace at which things are
happening you referred earlierto people embracing an impact we
are building S-curves on top ofS-curves on top of S-curves,
(19:26):
right.
Anything from Uber throughanything else is built on
multiple things, from GPS tointernet to mobile payments.
So as we look at theopportunity set that we have
right now, I'm super excitedabout what it means for the
world, the game-changingtechnology but I don't
necessarily think that we willsee those valuations playing out
(19:51):
because of the dynamics I'mdescribing, and the expected
winners may not be the ones thatwe're pricing today, but they
will certainly be new.
But they will certainly be new.
I happen to be an acquaintanceto what I believe is the first
$1 billion one-man company and Ithink there'll be more of those
(20:12):
in the future as productivitygrows and we have a world where
you can have literally an armyof analysts doing tons of things
for us.
So it's a very exciting.
As an engineer, I'm a big fan oftechnology, I embrace it, and
things are happening very fastand it's difficult to know in
(20:34):
the timing where we are and Iwould ask you and the audience,
if we were in the dot-com,assuming that we're going
through something similar are wecloser to 1997 or 2001?
And you know, despite all thebig challenges that we're seeing
at the global macro level, thishas been the one that I have
(20:55):
thought for a while that we werecloser to 1997 than 2001.
And therefore, I think theseforces continue to play out and
timing is absolutely impossibleto, in my view, to predict, and
that's why I think it goes downto, you know, embracing this
volatility and creating teamsand portfolios that have
(21:16):
strikers, midfielders, defendersand goalkeepers.
You can't just build portfoliosbased on strikers, which
eventually fall in this veryimportant concept of false
diversification, right, which isconfusing a portfolio with a
lot of things, with adiversified portfolio, not to
pick on any sensitive topic.
(21:38):
But a portfolio of 20 cryptosis not really diversified as far
as I'm concerned, right,they're all likely to behave is
not really diversified as far asI'm concerned, right, they're
all likely to behave in a verysimilar manner.
So, anyway, I think some of thefascinating features that we're
experiencing now, some of thechallenges, but I think it's
really reinforcing the free workin terms of what's happening,
(22:01):
what might be ahead and how wecan take advantage of that.
Speaker 1 (22:05):
Got a question off of LinkedIn from Pablo Flames I'm
going to show on the screen here.
Question for Diago Do you stillbelieve that the best way to
profit and protect a portfolioagainst a bubble like we are
seeing today is via gold,volatility and correlation?
How about other precious metalswhose price derives more from
their scarcity?
Speaker 2 (22:26):
greetings, pablo.
Great to thank you for thequestion.
Very good question.
Uh, yeah, I do believe.
If you think about protecting aportfolio, the first thing we
need to understand is what arewe trying to protect it against,
right?
So we generally look at aportfolio and say, well, I'm
(22:48):
long equities.
Right, I'm long risk.
So that's what we tend to inthe industry.
That's our starting point.
But it's very important tounderstand that each of the
listeners today has a differentstarting point.
Some people might be lawyers,some people might be
construction companies.
(23:09):
There's tons of differentprofiles which give you
completely different roles.
So you yourself and your incomeand your assets and your wealth
past, previous and future, youknow, might be a striker, a
midfielder, a defender, right?
So I think the starting pointis that, but assuming that you
know, as it tends to be the case, the starting point is we have
(23:31):
a risk portfolio.
Then we want to basically tryto come up with you know as many
ways or the best possibleportfolio to protect against you
know, pretty much any risk thatcould take place and some of
the hedges and some of theprotection will give you, you
(23:54):
know, effectively insuranceagainst multiple things at the
same time.
But I'll give you an example,and this is a relatively
quantitative exercise.
You know, when we define thefeatures of a good striker, you
know you want him to score goals, you want him to do certain
things.
The goalkeeper is a verydifferent animal.
(24:14):
You know, if you're judgingyour goalkeeper by the goals he
scores, then it's obviously thewrong metric, right?
You want to look at differentthings.
So what do we look for in adefender and goalkeeper?
And the single most importantvariable is called reliability.
And for those that are moremath oriented, this is
effectively the conditionalprobability that something will
(24:38):
work, meaning, if the market'sdown, one, two, three sigma, ie
the market's standard deviations.
If the market's down heavily,how likely is it that this asset
will protect me?
So reliability, you think aboutsomething like gold.
Gold's not particularlyreliable in the sense that.
(25:01):
Or oil, or certain assets.
Sometimes oil works very wellin a crisis If the crisis is
driven by geopolitics and war.
Some other times, like COVID,oil went negative.
So in terms of the reliabilityof the protection, even
(25:23):
volatility may not be asreliable.
You could have a year like 2022where the big risk back to
Pablo's question was correlation.
It was the core drawdown riskbetween equity and fixed income.
It was inflation up rates upthat resulted in equity fixed
income lower.
At the same time, 60-40portfolios not being protected,
(25:48):
showing hidden leverage, andthere were things that worked
really well during that scenario, but volatility or gold or
fixed income were not there Inour case.
We had other things like longdollar and other things that
actually more than offset that,and so I think it's really about
(26:10):
creating these portfolios thatwill give us the most reliable
protection as possible.
The second key variable is whatwe would call reactivity, so
that again, for themath-orientated people is the
conditional beta is how do youreact?
And you want things that, asthe market goes down, they
(26:34):
become more and more reactive.
They ideally become exponentialon the upside, and things like
the VIX can be extremelyreliable and reactive under
certain scenarios.
They're also potentially quiteconvex, but they have other
challenges, such as, you know,the negative carry and other
(26:56):
considerations.
So, as a professionalgoalkeeper, you know we have an
array of a menu of things thatwe look at, which is very broad.
It goes from puts on equities,calls on VIX or volatility and
all sorts of variations.
(27:17):
We have duration, we havedollar, we have correlation.
We have plenty of things thateffectively are at our disposal
and we will try to createportfolios that give us the most
reliable reactive, convex,asymmetric protection per unit
of cost and carry.
It's not an easy task.
We have a self-imposed risklimit where we only buy options.
(27:43):
I, like most people in the call,like to sleep at night.
Most people in the cold like tosleep at night, and I think it's
(28:07):
effectively throughout myexperience.
You know I want to warn everyoneon this call about the risks
and perils of hedges that arehighly leveraged through, for
example, long shorts, right,we've seen big accidents and
things happening throughcorrelations breaking down, and
so I think, ultimately, you knowthe idea of creating these
portfolios that are giving youthe most reliable reactive
protection per unit of cost andcalories is what we try to
(28:29):
achieve.
You can do that and buy it on astandalone unit, but that's only
part of it.
You're delegating, I would say,what to buy, but I think in
experience, what's moreimportant in portfolio
construction is not only what tobuy, but also how much and when
, and I think those areincredibly important questions.
(28:51):
It's not just about you knowhow much gold, you know should I
buy gold or not, it's how muchand when.
And building those portfoliosand embracing that volatility, I
think is very much critical tothe success, the long-term
success.
And this all goes down as veryclosely linked to emotional and
behavioral biases, which is whenyou become a professional
(29:16):
investor or a professionalsports player.
It's a big part of the game, soyou need to find ways in which
you are unemotionally, in a verydisciplined basis, taking
advantage of these opportunities.
Speaker 1 (29:34):
And that's what we try to do.
The issue there, of course, isthat if you're going to have a
portfolio like that, yourupcapture is going to be less
because you're not fully exposedto the best performing asset
classes, and, as much as peoplemay understand a framework like
that, fomo always gets thebetter of them.
It sounds to me like it's a bitphilosophically like a
permanent portfolio or riskparity type of approach.
Speaker 2 (29:53):
Yeah, except that the key thing is the reliability.
So when you think about riskparity or other type of
strategies that rely heavily onhistorical correlations, you're
driving the car with the rearmirrors.
You're basically often assumingthat what happened in the past
(30:17):
is what's going to happen in thefuture, and if you are running
a 60-40 balance portfolio,thinking that fixed income is
going to protect me when thecrisis comes, you might be for a
surprise, and so the essencehere is being able to
(30:38):
effectively understand thesources of this reliability and
reactivity, and that includespositioning and many other
factors.
But setups like you know riskparity, vol target, even CTAs,
(30:58):
right Trend following strategieshave great merits, but they're
often portrayed as you knowuncorrelated defenders to the
portfolio, and I don't think youknow that's necessarily the
case, particularly when you havevery sharp drawdown risk, right
(31:21):
?
I mean, how can you be adefender if you're max long
equities at the top and,ironically, the way many of
these strategies are constructed, they fall in the bubble and
the bubble trap Because as theequity valuations increase and
implied and realized volatilitygoes down, what happens is the
model is telling them to leverup and that lever up pushes
(31:46):
valuations even higher.
It creates more complacency,which pushes volatility even
lower and, before you know it,you end up max long at the lows
in volatility and as the marketunwinds and equities collapse
and volatility increases, thateffectively creates a very
mechanical process where youhave forced liquidation.
(32:07):
As volatility goes up, you'reforced to reduce risk, and it's
happening when everybody else islong and you're potentially
selling into a vacuum.
So I would just be.
In essence, I agree with you.
The difficulty is effectivelyfinding, not with the rear
mirrors, but on aforward-looking basis, what are
(32:29):
the things that would protect mein the portfolio.
And over-reliance on historicalcorrelation is possibly one of
the most dangerous things youcan do, because it can lead to
especially combined withleverage, because it can result
in bankruptcy, it can result inpretty big accidents.
(32:50):
That's why, to your pointearlier on potential
underperformance on the way up,of course, in some ways in the
short term, that's what you see,as you have effectively some
money spent in insurance.
The fact is, when you thinklong term, what are the benefits
?
Those minus one, minus one,minus one plus 20, is it worth
(33:12):
it?
And ultimately, for me it's allabout buying the right thing in
the right size at the righttime.
And that right size and theright time is you know very much
.
You know as humans and manypeople that I've seen throughout
the years, we tend to doexactly the wrong thing at the
(33:34):
wrong time, right?
So people are buying insuranceright after COVID, I mean,
that's the point where, arguably, insurance is high.
The accidents already happen.
At that point in time, what ischeap is the equity, it's not
the insurance, right?
That's why I make the pointthat this has to be a process
(33:54):
where you're in, your goalkeepershould be in at all times.
Real Madrid, barcelona, itdoesn't matter who they play,
they always have a goalkeeperright At all times.
And I think this is critical tounderstand.
So those emotional behavioralbiases of owning insurance and
FOMO and throwing the towel, Ithink, get offset when you do
(34:17):
something like Aqua, which is wecombine them and it's much
easier to understand, mucheasier to buy, much easier to
hold when the market for youknow, I think right now market's
up, whatever you know 16, 17,and this thing might be up
whatever 14, right, but if themarket's flat or minus 10 or
minus 20, these things are flator up.
(34:39):
So the general idea is, ifyou're too greedy and you're
like only focused on maximizingthe upside and you don't want to
have any defenders orgoalkeepers, on maximizing the
upside and you don't want tohave any defenders or
goalkeepers, yeah, uh, timingwill be critical, uh, and some,
some people might be very goodat it, but I I generally believe
that the success is more aboutemotional indifference, it's
(35:02):
about discipline and, as I saidat the beginning, I think each
one of the listeners has, um,they themselves have a different
team and a different team and adifferent in their own strategy
.
So you listen and you're thecoach of your own team.
You decide, you know how youwant to play the game and some
parts you will do yourself, someparts you will delegate to
professional stock pickers ordefenders, like might be our
(35:26):
case.
Speaker 1 (35:29):
I think the broader point is and I've seen this from
a asset management perspectiveas well you don't want to chase
convexity, because that'susually when the drawdown is
about to happen.
It's your point about.
All these black swan type fundsend up getting all the AUM
after the event actually takesplace, and then those investors
blame the manager, saying youhaven't performed that well.
(35:50):
Why is that?
Well, right, because you'resupposed to be in it before the
events, not afterwards, andthat's always the dilemma about
FOMO when it comes to thosetypes of strategies.
There's a question here.
It's actually well-timed, so Iwanted to pivot this anyway.
From Nicola Lampas Ciao, DiegoCheers from Lugano.
How do you see the latest movein the yen and the impact that
the restriction in BOJ monetarypolicy can have on global
(36:13):
markets?
Sounds like somebody's trackingmy reverse carry trade thesis.
Do you see it in volatility inthe next few months?
Speaker 2 (36:21):
Look, I think Japan is at the epicenter of monetary
and fiscal abuse.
Right, and they have been.
In my opinion, they've beenleading, you know, with zero
negative nominal yields.
So if you read my book I'vebeen talking about, you know
Japan for a while and in someways you can.
(36:44):
It's what's been happening,it's it's, it's, it's been
letter by letter a little bitthe dynamics.
The point is, you know, if youfall in the misconception that
you can print at infinitum andyou can borrow at infinitum and
(37:05):
that's okay because the enemy isdeflation and other things, I
think you're really you knowthere's a lot of second and
third order effects.
So what's happened in Japan,and you know it's critical also
to introduce the concept ofyield curve control.
Going back to effectively whatwe talked about earlier of
(37:28):
manipulation of markets andartificial settings, when you
said, interest rateshistorically were really about
front-end rates, so centralbanks controlled monetary policy
in the front and there weresome expectations of what we'd
have.
But when you had the verylong-dated stuff, you know, like
10 years, 20, 30 years, thatmarket was driven more by things
(37:50):
like not only expectations forrates but more importantly,
inflation and also credit risk.
Even if it might look likelocal currency bond doesn't, or
a dollar Argentinian bonddoesn't, there is credit risk
and other forms of penalties.
So when you introduce yieldcurve control and you say the
(38:13):
10-year JGB yield is 0.10, 0.1,so almost zero, why?
Because I say so and I have thebullets to buy infinite amounts
and keep it there, I thinkwhat's happened in the last few
years is that bluff has beencalled and, effectively, as
(38:34):
inflation has become a problemand this is not the pandemic, it
was a problem before.
It had been accumulated througha lot of abuse the pandemic
just added a whole new level.
But as inflation becomes aproblem and you have 250% of
debt to GDP, amongst many otherproblems you're really not able
(38:57):
to hike interest rates as youwould like, because you're
literally going bankrupt.
I mean, bear in mind theEuropean crisis in 2012, where
countries like Spain or Italywere at the end.
But the other guys, you knowwe're talking about levels of
debt that were dramaticallylower than that and with rates
(39:19):
of 5%, 6%, 7%, it was literallyimpossible to pay that.
So a country like Japaneffectively has sacrificed in
many ways, monetary policybecause of the monetary fiscal
abuse, and so what's happened isyou know, I think they're
trapped in the sense that andthe bluff that they can actually
(39:40):
hike rates has been played outand we're in a situation where
dollar-yen went all the way over160 to the dollar.
In this dynamic whereeffectively becomes a bit of a
snowball, where you haveinterest rate differential to
(40:02):
other countries going up, youcan't really quite hike.
If you do, then the problembecomes in your fixed income
market, in your equity markets,you can't really hike.
If you don't, then you'reforced to defend those yields by
printing money.
You're effectively diluting thecurrency, which is creating
inflation which is feeding intoyour issue as the currency
(40:24):
devalues.
So this sort of dynamic got tothe point, I think, quite
critical.
Where you know, boj started tointervene, but I think the fate
of the BOJ falls arguably alittle bit more in the hands of
the Fed than the BOJ.
The Fed effectively and othersstart easing.
(40:46):
I think that gives a bit of arespite to Japan.
But overall we're in scenarioswhere there are limits really to
how much you can hike in Japan,or Europe for that matter, or
places that have too much debt,and we've seen that limit in
(41:09):
rate hikes and expectationsstart to with the benefit of
better numbers.
Things are starting to tame.
We've had some cuts already inEurope, and so overall, I think.
Japan is a fascinating place towatch, and it's not just an
idiosyncratic Japan only problem, because if, for whatever
(41:32):
reason, this trend and thispositioning right now there's a
lot of pain in the market right,so all the trend followers were
playing that the market startsto reverse the force to sell and
they're now short gamma andthey might be hurt in both ways.
But if dollar-yen was to goback to previous levels which I
(41:54):
don't rule out I think you mightbe in a situation where the
only way to you might haveforced repatriation of assets,
which could result in forcedliquidation of treasuries, which
creates higher global yields.
And before you know it, thatbackend requires yield curve
(42:16):
control again, which seems tohave been a little bit out of
people's worry list, but I thinkit's part of the end game.
So there's no way to controlthe backend, in my view, without
more printing, and so watch outfor Japan.
(42:37):
Right now, again, I thinkthere's a repositioning, forced
liquidation, cpm, wind, amongstother issues, but the structural
issues remain.
I love the country.
It's cheap, you know now.
I love the people.
There's a lot of opportunitiesthere.
They're not necessarily in acrisis themselves, but what it
(43:02):
is is something gives upeventually, and if you abuse
monetary and fiscal policies,what happens is, with pretty
much 100% certainty, is thecurrency, is the degree of
freedom of the system.
You know, argentina knows that,venezuela knows that, zimbabwe
knows that and Japan knows thatand China will know that.
So, if you are pretending thatyou can actually you know print
(43:26):
and borrow your way out ofproblem, you might fail.
They look good for a while, buteventually these imbalances
show up and they show up throughthe currency and that's why
things like gold are doing whatthey're doing, because
ultimately, fiat with exactlythe same issues, and why I think
(43:58):
gold I talked about gold'sperfect storm it's playing out.
Gold I defined had a fewhundred dollars of downside, a
few thousand dollars of upside.
That's starting to play out.
(44:24):
Yeah, I think again, japan, it'sdefinitely a gray swan over
there in terms of how themonitoring fiscal abuse play out
and that could potentially havesecond and third order effects
in other areas, alongside withmany others, alongside with many
others.
But it's a key part of myframework and a key part of the
opportunities to potentiallyprotect against these things,
because you have this beautifulblessing now that you can
(44:45):
actually have tail risk withpositive carry, which is not the
norm right.
So there are opportunities andpockets where you can accumulate
what I humbly believe isartificially cheap insurance
that could be very reliable,reactive and convex at cheap and
positive carry.
So for someone like us, again,you can't put all your money in
(45:08):
this sort of opportunities, butit's part of this.
Going back to the point ofartificial setups, these
artificial setups actually giveup and there are opportunities
and risks on both sides.
Sorry for the long answer, butit's a long.
Speaker 1 (45:27):
I'm in agreement with everything you just said.
You did say print and borrow,and that's always what ends up
happening, but you typicallyneed some kind of excuse or
scapegoat.
I had put out that postyesterday, stealing it,
admittedly, from Gerald Salente.
When all else fails, they takeyou to war, and war is often the
(45:49):
thing from a geopoliticalperspective.
That gives all the policymakersan excuse to continue to print
money.
I am curious your views onheightened geopolitical risk
here, given what's going onbetween Israel, iran, if the
market is maybe mispricing, therisk of something really getting
out of control.
I joked and it's a sad joke.
(46:11):
I said I don't know if this isWorld War III or World War IV.
I'm losing count.
Speaker 2 (46:17):
I think geopolitics is here to stay.
It's a byproduct.
You talked about scapegoatsearlier.
It's very hard for most peopleto pinpoint that monetary abuse
and fiscal abuse are behind.
(46:38):
You know a lot of the issuesand if you think about you know
there are so many things thatare lined up here in terms of
you know the geopolitical risks,but I do think they are, and
I'm very much with Ray Dalio onthis as a student of history.
(47:01):
I think there's plenty ofpockets and risks and, to your
point earlier, scapegoat, excuseor just simple need.
Ultimately these imbalances areaccumulating.
People are not happy and youcan see that.
You can see inflation isimpacting purchase power, it's
(47:27):
enhancing inequality, it'screating a larger polarization
of the world, clearly apolarization of politics, and
this is obviously fuelingpopulism, social unrest and
worse.
Add religion, add oil, add manyother things that are difficult
(47:53):
or impossible to resolve.
And, yeah, china, taiwan,russia, ukraine, israel, iran I
mean in some cases talking aboutnuclear powers as well it's a
really meaningful tail risk andI personally think it's here to
(48:14):
stay.
It can show up any minute andyeah, it's part of the game we
live in and hopefully thingswill not escalate.
But if inflation was to getworse and the economies are
doing badly and you need thesescapegoats.
(48:37):
It's quite easy to blame.
Pick your guy, putin or anybodyelse.
I think one of my favoritesayings of all time is the bad
guy is the good guy of his ownmovie, right?
So I think in that sense I'm'mnot defending anyone, but
clearly people tend to.
(48:57):
You know there's differentperspectives here and uh, these
are very complex andmulti-dimensional problems that
we will not fix um easily.
Um, but that polarization ofthe world.
You know things like prettymuch confiscation or freezing
Russian assets.
(49:17):
It's a game changer.
It's a game changer for theworld.
Who do you trust and where do Ikeep my money?
And if the SWIFT system is nolonger acceptable for certain
people, of course they're goingto build their own and that's
going to create, as part of thistrend that I think, the
globalization versus.
(49:38):
You know protectionism.
I think protectionism the rise.
You know tariffs, things likethat.
They're all closely related towhat we're discussing.
You know Currency wars.
We're all about beggar thyneighbor, devalue your way out
of trouble until someone comesin.
If you want to devalue by 20%,I'll tariff you by 20% and
(50:02):
that's kind of game over for theguy who's been doing that abuse
.
So I think these dynamics arepiling up and again, once again.
I hope I'm wrong, but I thinkit's something we'll have to
live for the foreseeable future.
Speaker 1 (50:21):
So you mentioned at the start a number of books that
you've written, and it's onyour ex-profile at Ria Diego.
That is a hell of a banner tojust have nothing but your own
books at the top.
I am curious if there's onebook that is perhaps most
relevant to today that you'vewritten, which is the one that
(50:44):
you'd say this is the one youshould read right here, right
now.
Speaker 2 (50:49):
Well, in all fairness , what you see there is there
are really two books the EmptyBubbles and the Energy World is
Flat.
The three on the right arebasically the Energy World is
Flat was published in English,in Spanish and Chinese, so very
proud of that.
To get a book published inChinese is not something I had
(51:12):
thought about, but I thinkthey're both relevant because
they're both meant to beframeworks, so they are more
trying to teach how to fish orhow to think than giving you the
thoughts necessarily.
So I think the energy book isback in the sense that the ideas
(51:36):
I presented there.
They were challengingeffectively a lot of
misconceptions in the system.
Right, and it's things like,you know, peak oil at the time,
or a number of things, and someof them are very relevant and, I
think, very important tounderstand.
(51:57):
I mean, I'll pick on a couple.
But if we were to do a poll nowwith everyone in the audience
and we said, okay, why has OPECbeen so successful?
I would think 99% of the peoplewould say, well, it's an
oligopoly of supply or a cartelright.
The reality is that that's anecessary but not sufficient
(52:24):
condition.
There's a lot of markets wherepeople have an oligopoly and
they haven't been nearly assuccessful.
The reality is that they had amonopoly of demand and so, in
particular, transportationdemand.
So our cars or buses, or trainsor ships, they were all running
with, effectively, productsderived from crude oil, whether
(52:47):
it's gasoline or kerosene orfuel oil, and so effectively.
To understand that is verypowerful, because when you get
the super cycle that we've seenin natural gas through LNG and
shale, and now the story is backafter the war in Russia,
(53:07):
ukraine, where we can't rely onRussian gas and there's no
shortage of gas, there's gaseverywhere you can, many, many
places.
So as we build these LNGliquefied natural gas plants,
which require very largeinvestments, and you create this
regasification terminals, youliterally wired I called it the
(53:29):
energy broadband.
You've wired the world withfloating pipelines and suddenly
natural gas becomes a globalcommodity.
Prices go down.
Think about in the US.
One of the fun things incommodities is that, because we
use different units, it's verydifficult to compare apples with
apples.
But in natural gas, dollars inMBTU translate to approximately
(53:54):
$1.
Know, $1 is 5.8 barrels of oilequivalent.
So natural gas at $2, $3 inMBTU is $10 to $15 barrel of oil
equivalent.
And of course you know thatmeans that someone like Warren
Buffett would buy the traincompany which was the second
(54:14):
largest of consumer of diesel inNorth America and transformed
some of those trains into whatwas reliable gas, et cetera.
So, as you have these dynamicsand you have what I call energy
flatteners, suddenly themonopoly of crude oil in
transportation is challenged.
We're starting to see more cars, electric cars or buses with
(54:37):
LNG or many other ways, ortrains, and so I think part of
the silver lining of what'shappening in this crisis, this
volatility spikes and thissearch for energy security, is
this again massive investmentand capacity.
So I think over the next fewyears, in the short term there's
(54:59):
not much we can do, but overthe medium term I think there'll
be some fascinating dynamicsplaying out in the energy
markets.
So I think that frameworkhopefully people will find it
helpful.
And for the rest of thisdiscussion, we've spent most
time talking about bubbles, andthe bubbles and macro, which I,
so both of them are are relevant.
The other thing you, you, you,you can see in the banner is
(55:21):
front page article of the FT,which my mom's very proud.
Now I it just I just wrote aninside column and, and when I
went to buy a copy just as amemory.
I saw it on the front page andI didn't quite anticipate that,
but anyway, there it is.
It's called Gold's PerfectStorm and it was written before
(55:42):
the anti-bubbles, but it wasbased on these ideas that we've
discussed, where gold, I thinkit's from a game theory
perspective and, giveneverything that's happening, it
showed a very asymmetric caseand things are being confirmed
and playing out.
Speaker 1 (55:59):
Everybody.
Please make sure you followDiego Priya on X on LinkedIn.
I appreciate those that watchthis live and were asking
questions, so shout out to allthe LinkedIn folks that put some
good topics here.
This will be an edited podcastunder LeadLag Live hopefully in
24-48 hours and hopefully I'llsee you all Lead Lag Live
hopefully in 24, 48 hours andhopefully I'll see you all on
the next episode.
(56:19):
Thank you, diego.
Speaker 2 (56:20):
Appreciate it.
It's been my pleasure.
Mike, All the best and thankyou everyone for listening.
Anything you need, do reach outand hope people found it
helpful.
Thank you again.
Speaker 1 (56:31):
Cheers everybody.
Speaker 2 (56:32):
Cheers.
Thank you.
My name is Michael Guy, a publisher of the Lead
Lagrime Report.
Joining me for the rough houris Diego Paria, who is not
exactly in the US.
We'll talk about where he's at,but, diego, introduce yourself
to the audience.
Who are you, what's yourbackground, what have you done
throughout your career and whereare you located?
Speaker 2 (00:25):
I'm currently connecting from Santander in the
north of Spain.
I'm originally from Spain.
I'm a mining and petroleumengineer by training, started my
career in investment banking,trading commodities and effectsX
with JP Morgan that was in themid-late 90s and I then worked
(00:50):
with JP Goldman and MerrillLynch, always within the macro
NFX.
I then moved on to the buy sidewhere I've been privileged to
work for some pretty largeplayers such as Blue Crest,
diamond, 36 South and Quadriga,where I'm now.
(01:10):
In addition to my experience onthe buy and sell side, I've
written a couple of books.
One of them I call the EnergyWorld is Flat, which I co-wrote
with my good friend DanielLacalle, and a second one called
the Anti-Bubbles.
Both of them were at least atthe time of writing were
(01:34):
contrarian frameworks and, yeah,I kept that discipline of
writing over the past few years.
It's a very humbling exerciseand extremely productive, at
least for me.
So yeah, on a day-to-day I'meffectively managing defensive
strategies in usage format underQuadriga.
(01:58):
We have a couple of strategies.
One is called Ignail andeffectively it builds on the
ideas of the anti-bubble.
It combines gold, fixed incomeand options volatility
strategies.
Using a soccer football analogy, we're the goalkeeper of the
(02:20):
team, so we're there to makelarge absolute returns during
moments of crisis and, yeah, wecan suffer during more benign
periods, but the idea is to be ateam player and basically
create that dynamic.
And that's the second strategythat we run, called Aqua, which
(02:42):
basically combines the longequity with the protection and
the rebalancing which, forprobably the large majority of
the people listening, is aneasier strategy to understand
and to hold because thegoalkeepers can be quite punchy.
And so that's a little bit of anutshell of who I am and what I
(03:05):
do.
Speaker 1 (03:06):
When I hear that phrase anti-bubble I think of
Nassim Tala's anti-fragile.
I also think of boredom.
The reason I say that is thatbubbles seem to be just the
natural order of markets,capitalist systems.
They can be really exciting andthen really depressing
afterwards, and if you don'thave bubbles, things are kind of
(03:27):
boring, right.
So let's talk about what thatmeans.
The anti-bubble framework whatexactly is that?
Speaker 2 (03:35):
Yeah, you're right.
I always like to start bylooking at the concept of
bubbles and to borrow GeorgeSoros' definition of bubbles.
Of bubbles, and to borrowGeorge Soros' definition of
bubbles, he would define them asassets that are artificially
expensive based on a belief thathappens to be a misconception,
(03:57):
a false belief.
So, effectively, bubbles areconstructs where we have found.
It's a matter of when, not if,that bubble will implode.
It's an artificial setup.
What I did by coining theconcept of anti-bubble is I sort
of generalized the frameworkand said well, misconceptions
(04:20):
can create artificially highvaluations, but they can also
create artificially lowvaluations.
And in that sense, the conceptof anti-bubble has these three
dimensions.
The first one is the idea ofassets that are grossly
artificially cheap.
It is a matter of when, not if,that they will basically go up.
(04:43):
It's in some ways a form ofextreme value.
There's a second dimension,which relates to the idea that
bubbles and anti-bubbles arelike distorted mirror images of
each other.
They're two reflections of thesame misconception.
So, as such, I called itanti-bubble, a bit like an
(05:05):
antivirus or an anti-missile.
It's a defense mechanismagainst the bubble.
And the third concept, which isvery important, is they happen
to be reflexive in the sensethat bubbles and anti-bubbles
can feed on each other.
In the sense that bubbles andanti-bubbles can feed on each
other and there's an element ofrisk premium.
(05:28):
If you think about it.
There are times when there's nogood and bad guy in this movie,
sometimes equities.
What would be a good example ofbubble-anti-bubble is the
relationship between equitiesand volatility.
Let's say the S&P and the VIX.
There are times when equitiesmight be artificially low and
(05:52):
there are times when equitiesare artificially high and vice
versa.
There are times when volatilitymight be artificially low
referring to your point, mike,on boredom and there are times
when you have the opposite.
You have volatility explodingto levels that are artificially
high.
So really the idea here is tocreate this team that
(06:16):
effectively embraces thatvolatility, embraces and takes
advantage of those artificialsetups in a way that you can
combine the bubble-anti-bubbleand embrace that opportunity.
If you take it to an extreme,you know, tail events such as,
you know, a pandemic or war, canresult in pretty extreme
(06:41):
dynamics that you're only goingto catch if you're in, and
that's why this becomes astructural source of risk
premium or protection that maycome with some sort of pain,
sometimes in the form of costand bleed through some time, but
it more than pays when this ishappening.
(07:02):
And I think there's a lot ofscience, a lot of work, you know
.
The other thing I didn'tmention is the intro.
I'm also a visiting lecturer atImperial College, so there's an
academic side to how we thinkabout portfolio construction,
beyond the monkey brain sort oflinear understanding of
(07:23):
something made money, somethinglost money.
It's about the non-linearity.
Maybe we can expand on thatlater, but the general idea of
this bubble and anti-bubble as aframework can be extremely
helpful, both to understandwhat's happening in the macro
side as well as help us makebetter decisions from an
investment perspective.
Speaker 1 (07:42):
Is it that easy to identify artificially low versus
artificially high the reason Isay that?
I know it sounds like it shouldbe, but I've seen studies that
show, for example, volatilityfor markets is highest at
extreme valuations.
It's also highest at extremelow valuations.
Meaning the commonality interms of overvaluation
undervaluation is volatility isextreme in both cases.
(08:04):
So how can you determine ifsomething is, in quotes,
artificially too elevated or toodiscounted?
Speaker 2 (08:13):
Yeah, I think the first thing we have to say is
that we don't have a crystalball, we don't try to pretend
that we're here to tell youexactly what's going to happen
and when it's going to happen,but certainly these
relationships hold and when it'sgoing to happen, but certainly
these relationships hold andeventually, two plus two equals
four.
So in that sense, and to yourpoint earlier, it's not obvious
(08:35):
to you know.
Going back to Soros and thebubbles, when you're inside of
the bubble, I think it's not soobvious to reflect and realize
whether this is a very obviousbubble.
And even if it is, thesebubbles, as we will know, can
last a lot longer, go a lothigher than anyone anticipated,
(08:59):
but they also tend to go a lotlower, a lot faster than anyone
expected.
So I think part of thisframework and there are
relationships that are more mean, reverting, such as volatility
there are others that might haveother drift elements to it,
such as inflation and otherassets, but I don't think the
(09:20):
word easy applies.
I think it's generally thediscipline of creating these
portfolios that effectively willembrace these dynamics.
But the artificial nature,going back to the bubble and the
bubble, and can we spot them,I'd say that show me the
(09:42):
misconception and I'll tell youwhat the bubble and anti-bubble
is in some ways.
So, on that idea, part of themacro framework is there are
multiple levels of artificialsetup in our system and think
about artificial interest rates,yield curve control, all sorts
of shield curve control, allsorts of money printing and debt
(10:05):
.
So it's relatively obvious tosee the manipulation and the
impact that that has on themarket and the fact that it's
distorting the world.
Is less obvious what the endgame might be or what those
things play out.
But my general framework andthe application is that if we
(10:27):
were to think about what are themisconceptions in the system
and what are the bubbles andwhat are the anti-bubbles I've
had this view ever since I wrotethe book and before.
I don't think the biggestmisconceptions are the belief
that you can actually solveproblems through printing money
(10:49):
and debt, ie the misconceptionthat monetary and fiscal
policies solve problems.
The reality is they're notsolving anything.
They're not solving problems.
They're doing four things in myview.
The first thing is they aredelaying the problem.
They're kicking the can downthe road through spending and
(11:10):
debt.
The second thing we're doing iswe're transferring the problem.
So monetary and fiscal policieswithout limits have an impact
of exchange rates and currencywars, trade wars.
This is not really solving theproblem, it's just passing the
hot potato around.
The third thing is we aretransforming the problem.
(11:32):
So something that might be,let's say, a bubble or a problem
with valuations could actuallybe transformed into inflation if
you do monetary and fiscalabuse.
And unfortunately along thatpath you end up creating big
problems.
You know inflation and you knowsocial unrest and geopolitical
(11:58):
issues and polarization and allthe close cousins of inflation
and monetary and fiscal abusethat we know through history.
And lastly, we are enlargingthose problems.
So unfortunately, this is not azero-sum game where we're just
passing the ball around.
It's actually enlarging theproblems and perhaps in some
(12:21):
cases reaching a point of noreturn where the monetary and
fiscal abuse has gone so farthat it will not be able to be
reverted.
And that's why I think you know, from a game theory perspective
, the end game of these macroframework is likely to result in
(12:41):
, you know, more, not less,monetary and fiscal abuse, which
will end up lacking badly.
I mean, for those of you who'vegot a copy of my book and have
dedicated it, I tend to dedicatethe anti-bubble saying I hope
you like it, I hope I'm wrong.
I feel like a doctor diagnosinga terrible disease to a friend
(13:04):
as a friend.
I want to be wrong.
As a friend, I want to be wrong.
As a doctor, I want to becorrect.
My view of the patient is thatthese measures that we take
through monitoring, fiscalpolicies without limits are
creating again, are delaying,transferring, transforming and,
unfortunately, enlarging theseproblems are delaying,
(13:25):
transferring, transforming and,unfortunately, enlarging these
problems.
Speaker 1 (13:30):
So I love that framework of show me the
misconception and I'll show youwhere the bubble is.
It seems to me that themisconception, more often than
not, is often around the timethrough which a narrative plays
out.
Right?
So, okay, we can all agreeabout AI, but the misconception
there might be about how quicklyit gets integrated into every
single aspect of our lives.
Same thing with robo-taxis andautomatic self-driving cars.
(13:55):
Sure, you can see the endpointInvestors bid it up thinking
that it's going to happentomorrow, when in reality it
would take decades, right?
So how much does sort of themisconception around time factor
into bubbles playing out?
Speaker 2 (14:11):
No time is huge and obviously, you know, it's
impossible to predict withcertainty and there are multiple
dimensions.
But I found, you know, back in2003, I think it was, I read a
book that really changed myperspective.
It was Thomas Friedman's theWorld is Flat.
Those listening that are oldenough to remember the dot-com
(14:37):
bubble, basically what wentthrough left many of us with a
bit of a sour taste.
Right, it was effectively asituation that, upon reflection
and that was really the amazingmessage from Friedman's book and
(14:58):
the framework which I willdiscuss shortly, has stayed with
me and actually was key indeveloping my first book called
the Energy World is Flat,applying some of these ideas.
And I think the framework isvery much alive today with,
arguably, the AI bubble.
And so, for the benefit of thelisteners, maybe I'll touch on
(15:20):
it.
And I think it all starts withthe idea of a game changer
technology.
So a game changer technology.
There's no question, lookingback at 2001 and also today,
that there are technologies thateffectively divide the world
into a before and after.
You know, before the internet,before AI on a mainstream basis.
(15:43):
So sometimes the bubble comesbecause what looks like a game
changer technology and might bewidely acknowledged as a game
changer technology was not.
It was either fraud or it wasjust impossible or whatever.
But generally speaking, evengame changer technologies, the
(16:04):
first point is they change theworld right.
The second phase is we all getsuper excited about it, right,
and we start investing anddeploying capital and that
results obviously inexpectations in growth, in
growth in income, in investments, and that incredible amount of
(16:29):
influx of money results inhumongous growth in capacity.
So think about today, forexample, how many chat GPTs are
going to be out there between.
Everyone will have a versionright.
You're going to have plenty ofengines and ways in which you
know these basically tools, getand grow.
(16:53):
And I would say that one of thekey misconceptions that we've
seen it in many times is theidea that people invest as if
they were the only one doing itright.
So you go and say back in, thedot-com was like okay, let's
literally wire the oceans withfiber optics and we're going to
earn, you know whatever one europer megabyte or whatever the
crazy number was at the time.
(17:14):
And you build theseexpectations and this investment
based on a very linear view ofthe world, extrapolating
dynamics, ignoring the fact thateveryone's doing the same, and
so what happens afterwards isthat you end up with
overcapacity.
So, believe it or not, therewas a point in the dot-com where
(17:35):
we laid so much fiber that itbecame almost virtually free.
You had a situation wherepeople had made these
investments based on hugeexpected returns and just that
didn't happen.
And this is basically when themagic happened, because you had
(17:57):
a game-changer technology inhuge capacity for free.
And that's when the worldbecame flat, because if you were
for lack of a better example anaccountant in India, mangalore
suddenly you could do your workfor someone in California right,
and the world became flat.
(18:17):
And so from there, I think whatI loved about that book is
plenty of big messages, but oneof them was in some ways,
bubbles accelerated the impactof technology.
So back to your question ontiming what should have taken a
very long time to implement at aregular pace, it was this
(18:38):
incredible flow of money in andcapacity that was built that
effectively accelerated thingsin a major way.
We are now, I think,experiencing something similar,
except that effectively alltechnologies tend to follow some
sort of what we call an S-curveright.
So initially they're relativelyflat, then you go kind of
(19:02):
exponential, but every singletechnology has limits.
When you are in the exponentialphase, you may not appreciate
it, but eventually these thingsflatten out.
At the same time, I think thepace at which things are
happening you referred earlierto people embracing an impact we
are building S-curves on top ofS-curves on top of S-curves,
(19:26):
right.
Anything from Uber throughanything else is built on
multiple things, from GPS tointernet to mobile payments.
So as we look at theopportunity set that we have
right now, I'm super excitedabout what it means for the
world, the game-changingtechnology but I don't
necessarily think that we willsee those valuations playing out
(19:51):
because of the dynamics I'mdescribing, and the expected
winners may not be the ones thatwe're pricing today, but they
will certainly be new.
But they will certainly be new.
I happen to be an acquaintanceto what I believe is the first
$1 billion one-man company and Ithink there'll be more of those
(20:12):
in the future as productivitygrows and we have a world where
you can have literally an armyof analysts doing tons of things
for us.
So it's a very exciting.
As an engineer, I'm a big fan oftechnology, I embrace it, and
things are happening very fastand it's difficult to know in
(20:34):
the timing where we are and Iwould ask you and the audience,
if we were in the dot-com,assuming that we're going
through something similar are wecloser to 1997 or 2001?
And you know, despite all thebig challenges that we're seeing
at the global macro level, thishas been the one that I have
(20:55):
thought for a while that we werecloser to 1997 than 2001.
And therefore, I think theseforces continue to play out and
timing is absolutely impossibleto, in my view, to predict, and
that's why I think it goes downto, you know, embracing this
volatility and creating teamsand portfolios that have
(21:16):
strikers, midfielders, defendersand goalkeepers.
You can't just build portfoliosbased on strikers, which
eventually fall in this veryimportant concept of false
diversification, right, which isconfusing a portfolio with a
lot of things, with adiversified portfolio, not to
pick on any sensitive topic.
(21:38):
But a portfolio of 20 cryptosis not really diversified as far
as I'm concerned, right,they're all likely to behave is
not really diversified as far asI'm concerned, right, they're
all likely to behave in a verysimilar manner.
So, anyway, I think some of thefascinating features that we're
experiencing now, some of thechallenges, but I think it's
really reinforcing the free workin terms of what's happening,
(22:01):
what might be ahead and how wecan take advantage of that.
Speaker 1 (22:05):
Got a question off of LinkedIn from Pablo Flames I'm
going to show on the screen here.
Question for Diago Do you stillbelieve that the best way to
profit and protect a portfolioagainst a bubble like we are
seeing today is via gold,volatility and correlation?
How about other precious metalswhose price derives more from
their scarcity?
Speaker 2 (22:26):
greetings, pablo.
Great to thank you for thequestion.
Very good question.
Uh, yeah, I do believe.
If you think about protecting aportfolio, the first thing we
need to understand is what arewe trying to protect it against,
right?
So we generally look at aportfolio and say, well, I'm
(22:48):
long equities.
Right, I'm long risk.
So that's what we tend to inthe industry.
That's our starting point.
But it's very important tounderstand that each of the
listeners today has a differentstarting point.
Some people might be lawyers,some people might be
construction companies.
(23:09):
There's tons of differentprofiles which give you
completely different roles.
So you yourself and your incomeand your assets and your wealth
past, previous and future, youknow, might be a striker, a
midfielder, a defender, right?
So I think the starting pointis that, but assuming that you
know, as it tends to be the case, the starting point is we have
(23:31):
a risk portfolio.
Then we want to basically tryto come up with you know as many
ways or the best possibleportfolio to protect against you
know, pretty much any risk thatcould take place and some of
the hedges and some of theprotection will give you, you
(23:54):
know, effectively insuranceagainst multiple things at the
same time.
But I'll give you an example,and this is a relatively
quantitative exercise.
You know, when we define thefeatures of a good striker, you
know you want him to score goals, you want him to do certain
things.
The goalkeeper is a verydifferent animal.
(24:14):
You know, if you're judgingyour goalkeeper by the goals he
scores, then it's obviously thewrong metric, right?
You want to look at differentthings.
So what do we look for in adefender and goalkeeper?
And the single most importantvariable is called reliability.
And for those that are moremath oriented, this is
effectively the conditionalprobability that something will
(24:38):
work, meaning, if the market'sdown, one, two, three sigma, ie
the market's standard deviations.
If the market's down heavily,how likely is it that this asset
will protect me?
So reliability, you think aboutsomething like gold.
Gold's not particularlyreliable in the sense that.
(25:01):
Or oil, or certain assets.
Sometimes oil works very wellin a crisis If the crisis is
driven by geopolitics and war.
Some other times, like COVID,oil went negative.
So in terms of the reliabilityof the protection, even
(25:23):
volatility may not be asreliable.
You could have a year like 2022where the big risk back to
Pablo's question was correlation.
It was the core drawdown riskbetween equity and fixed income.
It was inflation up rates upthat resulted in equity fixed
income lower.
At the same time, 60-40portfolios not being protected,
(25:48):
showing hidden leverage, andthere were things that worked
really well during that scenario, but volatility or gold or
fixed income were not there Inour case.
We had other things like longdollar and other things that
actually more than offset that,and so I think it's really about
(26:10):
creating these portfolios thatwill give us the most reliable
protection as possible.
The second key variable is whatwe would call reactivity, so
that again, for themath-orientated people is the
conditional beta is how do youreact?
And you want things that, asthe market goes down, they
(26:34):
become more and more reactive.
They ideally become exponentialon the upside, and things like
the VIX can be extremelyreliable and reactive under
certain scenarios.
They're also potentially quiteconvex, but they have other
challenges, such as, you know,the negative carry and other
(26:56):
considerations.
So, as a professionalgoalkeeper, you know we have an
array of a menu of things thatwe look at, which is very broad.
It goes from puts on equities,calls on VIX or volatility and
all sorts of variations.
(27:17):
We have duration, we havedollar, we have correlation.
We have plenty of things thateffectively are at our disposal
and we will try to createportfolios that give us the most
reliable reactive, convex,asymmetric protection per unit
of cost and carry.
It's not an easy task.
We have a self-imposed risklimit where we only buy options.
(27:43):
I, like most people in the call,like to sleep at night.
Most people in the cold like tosleep at night, and I think it's
(28:07):
effectively throughout myexperience.
You know I want to warn everyoneon this call about the risks
and perils of hedges that arehighly leveraged through, for
example, long shorts, right,we've seen big accidents and
things happening throughcorrelations breaking down, and
so I think, ultimately, you knowthe idea of creating these
portfolios that are giving youthe most reliable reactive
protection per unit of cost andcalories is what we try to
(28:29):
achieve.
You can do that and buy it on astandalone unit, but that's only
part of it.
You're delegating, I would say,what to buy, but I think in
experience, what's moreimportant in portfolio
construction is not only what tobuy, but also how much and when
, and I think those areincredibly important questions.
(28:51):
It's not just about you knowhow much gold, you know should I
buy gold or not, it's how muchand when.
And building those portfoliosand embracing that volatility, I
think is very much critical tothe success, the long-term
success.
And this all goes down as veryclosely linked to emotional and
behavioral biases, which is whenyou become a professional
(29:16):
investor or a professionalsports player.
It's a big part of the game, soyou need to find ways in which
you are unemotionally, in a verydisciplined basis, taking
advantage of these opportunities.
Speaker 1 (29:34):
And that's what we try to do.
The issue there, of course, isthat if you're going to have a
portfolio like that, yourupcapture is going to be less
because you're not fully exposedto the best performing asset
classes, and, as much as peoplemay understand a framework like
that, fomo always gets thebetter of them.
It sounds to me like it's a bitphilosophically like a
permanent portfolio or riskparity type of approach.
Speaker 2 (29:53):
Yeah, except that the key thing is the reliability.
So when you think about riskparity or other type of
strategies that rely heavily onhistorical correlations, you're
driving the car with the rearmirrors.
You're basically often assumingthat what happened in the past
(30:17):
is what's going to happen in thefuture, and if you are running
a 60-40 balance portfolio,thinking that fixed income is
going to protect me when thecrisis comes, you might be for a
surprise, and so the essencehere is being able to
(30:38):
effectively understand thesources of this reliability and
reactivity, and that includespositioning and many other
factors.
But setups like you know riskparity, vol target, even CTAs,
(30:58):
right Trend following strategieshave great merits, but they're
often portrayed as you knowuncorrelated defenders to the
portfolio, and I don't think youknow that's necessarily the
case, particularly when you havevery sharp drawdown risk, right
(31:21):
?
I mean, how can you be adefender if you're max long
equities at the top and,ironically, the way many of
these strategies are constructed, they fall in the bubble and
the bubble trap Because as theequity valuations increase and
implied and realized volatilitygoes down, what happens is the
model is telling them to leverup and that lever up pushes
(31:46):
valuations even higher.
It creates more complacency,which pushes volatility even
lower and, before you know it,you end up max long at the lows
in volatility and as the marketunwinds and equities collapse
and volatility increases, thateffectively creates a very
mechanical process where youhave forced liquidation.
(32:07):
As volatility goes up, you'reforced to reduce risk, and it's
happening when everybody else islong and you're potentially
selling into a vacuum.
So I would just be.
In essence, I agree with you.
The difficulty is effectivelyfinding, not with the rear
mirrors, but on aforward-looking basis, what are
(32:29):
the things that would protect mein the portfolio.
And over-reliance on historicalcorrelation is possibly one of
the most dangerous things youcan do, because it can lead to
especially combined withleverage, because it can result
in bankruptcy, it can result inpretty big accidents.
(32:50):
That's why, to your pointearlier on potential
underperformance on the way up,of course, in some ways in the
short term, that's what you see,as you have effectively some
money spent in insurance.
The fact is, when you thinklong term, what are the benefits
?
Those minus one, minus one,minus one plus 20, is it worth
(33:12):
it?
And ultimately, for me it's allabout buying the right thing in
the right size at the righttime.
And that right size and theright time is you know very much
.
You know as humans and manypeople that I've seen throughout
the years, we tend to doexactly the wrong thing at the
(33:34):
wrong time, right?
So people are buying insuranceright after COVID, I mean,
that's the point where, arguably, insurance is high.
The accidents already happen.
At that point in time, what ischeap is the equity, it's not
the insurance, right?
That's why I make the pointthat this has to be a process
(33:54):
where you're in, your goalkeepershould be in at all times.
Real Madrid, barcelona, itdoesn't matter who they play,
they always have a goalkeeperright At all times.
And I think this is critical tounderstand.
So those emotional behavioralbiases of owning insurance and
FOMO and throwing the towel, Ithink, get offset when you do
(34:17):
something like Aqua, which is wecombine them and it's much
easier to understand, mucheasier to buy, much easier to
hold when the market for youknow, I think right now market's
up, whatever you know 16, 17,and this thing might be up
whatever 14, right, but if themarket's flat or minus 10 or
minus 20, these things are flator up.
(34:39):
So the general idea is, ifyou're too greedy and you're
like only focused on maximizingthe upside and you don't want to
have any defenders orgoalkeepers, on maximizing the
upside and you don't want tohave any defenders or
goalkeepers, yeah, uh, timingwill be critical, uh, and some,
some people might be very goodat it, but I I generally believe
that the success is more aboutemotional indifference, it's
(35:02):
about discipline and, as I saidat the beginning, I think each
one of the listeners has, um,they themselves have a different
team and a different team and adifferent in their own strategy
.
So you listen and you're thecoach of your own team.
You decide, you know how youwant to play the game and some
parts you will do yourself, someparts you will delegate to
professional stock pickers ordefenders, like might be our
(35:26):
case.
Speaker 1 (35:29):
I think the broader point is and I've seen this from
a asset management perspectiveas well you don't want to chase
convexity, because that'susually when the drawdown is
about to happen.
It's your point about.
All these black swan type fundsend up getting all the AUM
after the event actually takesplace, and then those investors
blame the manager, saying youhaven't performed that well.
(35:50):
Why is that?
Well, right, because you'resupposed to be in it before the
events, not afterwards, andthat's always the dilemma about
FOMO when it comes to thosetypes of strategies.
There's a question here.
It's actually well-timed, so Iwanted to pivot this anyway.
From Nicola Lampas Ciao, DiegoCheers from Lugano.
How do you see the latest movein the yen and the impact that
the restriction in BOJ monetarypolicy can have on global
(36:13):
markets?
Sounds like somebody's trackingmy reverse carry trade thesis.
Do you see it in volatility inthe next few months?
Speaker 2 (36:21):
Look, I think Japan is at the epicenter of monetary
and fiscal abuse.
Right, and they have been.
In my opinion, they've beenleading, you know, with zero
negative nominal yields.
So if you read my book I'vebeen talking about, you know
Japan for a while and in someways you can.
(36:44):
It's what's been happening,it's it's, it's, it's been
letter by letter a little bitthe dynamics.
The point is, you know, if youfall in the misconception that
you can print at infinitum andyou can borrow at infinitum and
(37:05):
that's okay because the enemy isdeflation and other things, I
think you're really you knowthere's a lot of second and
third order effects.
So what's happened in Japan,and you know it's critical also
to introduce the concept ofyield curve control.
Going back to effectively whatwe talked about earlier of
(37:28):
manipulation of markets andartificial settings, when you
said, interest rateshistorically were really about
front-end rates, so centralbanks controlled monetary policy
in the front and there weresome expectations of what we'd
have.
But when you had the verylong-dated stuff, you know, like
10 years, 20, 30 years, thatmarket was driven more by things
(37:50):
like not only expectations forrates but more importantly,
inflation and also credit risk.
Even if it might look likelocal currency bond doesn't, or
a dollar Argentinian bonddoesn't, there is credit risk
and other forms of penalties.
So when you introduce yieldcurve control and you say the
(38:13):
10-year JGB yield is 0.10, 0.1,so almost zero, why?
Because I say so and I have thebullets to buy infinite amounts
and keep it there, I thinkwhat's happened in the last few
years is that bluff has beencalled and, effectively, as
(38:34):
inflation has become a problemand this is not the pandemic, it
was a problem before.
It had been accumulated througha lot of abuse the pandemic
just added a whole new level.
But as inflation becomes aproblem and you have 250% of
debt to GDP, amongst many otherproblems you're really not able
(38:57):
to hike interest rates as youwould like, because you're
literally going bankrupt.
I mean, bear in mind theEuropean crisis in 2012, where
countries like Spain or Italywere at the end.
But the other guys, you knowwe're talking about levels of
debt that were dramaticallylower than that and with rates
(39:19):
of 5%, 6%, 7%, it was literallyimpossible to pay that.
So a country like Japaneffectively has sacrificed in
many ways, monetary policybecause of the monetary fiscal
abuse, and so what's happened isyou know, I think they're
trapped in the sense that andthe bluff that they can actually
(39:40):
hike rates has been played outand we're in a situation where
dollar-yen went all the way over160 to the dollar.
In this dynamic whereeffectively becomes a bit of a
snowball, where you haveinterest rate differential to
(40:02):
other countries going up, youcan't really quite hike.
If you do, then the problembecomes in your fixed income
market, in your equity markets,you can't really hike.
If you don't, then you'reforced to defend those yields by
printing money.
You're effectively diluting thecurrency, which is creating
inflation which is feeding intoyour issue as the currency
(40:24):
devalues.
So this sort of dynamic got tothe point, I think, quite
critical.
Where you know, boj started tointervene, but I think the fate
of the BOJ falls arguably alittle bit more in the hands of
the Fed than the BOJ.
The Fed effectively and othersstart easing.
(40:46):
I think that gives a bit of arespite to Japan.
But overall we're in scenarioswhere there are limits really to
how much you can hike in Japan,or Europe for that matter, or
places that have too much debt,and we've seen that limit in
(41:09):
rate hikes and expectationsstart to with the benefit of
better numbers.
Things are starting to tame.
We've had some cuts already inEurope, and so overall, I think.
Japan is a fascinating place towatch, and it's not just an
idiosyncratic Japan only problem, because if, for whatever
(41:32):
reason, this trend and thispositioning right now there's a
lot of pain in the market right,so all the trend followers were
playing that the market startsto reverse the force to sell and
they're now short gamma andthey might be hurt in both ways.
But if dollar-yen was to goback to previous levels which I
(41:54):
don't rule out I think you mightbe in a situation where the
only way to you might haveforced repatriation of assets,
which could result in forcedliquidation of treasuries, which
creates higher global yields.
And before you know it, thatbackend requires yield curve
(42:16):
control again, which seems tohave been a little bit out of
people's worry list, but I thinkit's part of the end game.
So there's no way to controlthe backend, in my view, without
more printing, and so watch outfor Japan.
(42:37):
Right now, again, I thinkthere's a repositioning, forced
liquidation, cpm, wind, amongstother issues, but the structural
issues remain.
I love the country.
It's cheap, you know now.
I love the people.
There's a lot of opportunitiesthere.
They're not necessarily in acrisis themselves, but what it
(43:02):
is is something gives upeventually, and if you abuse
monetary and fiscal policies,what happens is, with pretty
much 100% certainty, is thecurrency, is the degree of
freedom of the system.
You know, argentina knows that,venezuela knows that, zimbabwe
knows that and Japan knows thatand China will know that.
So, if you are pretending thatyou can actually you know print
(43:26):
and borrow your way out ofproblem, you might fail.
They look good for a while, buteventually these imbalances
show up and they show up throughthe currency and that's why
things like gold are doing whatthey're doing, because
ultimately, fiat with exactlythe same issues, and why I think
(43:58):
gold I talked about gold'sperfect storm it's playing out.
Gold I defined had a fewhundred dollars of downside, a
few thousand dollars of upside.
That's starting to play out.
(44:24):
Yeah, I think again, japan, it'sdefinitely a gray swan over
there in terms of how themonitoring fiscal abuse play out
and that could potentially havesecond and third order effects
in other areas, alongside withmany others, alongside with many
others.
But it's a key part of myframework and a key part of the
opportunities to potentiallyprotect against these things,
because you have this beautifulblessing now that you can
(44:45):
actually have tail risk withpositive carry, which is not the
norm right.
So there are opportunities andpockets where you can accumulate
what I humbly believe isartificially cheap insurance
that could be very reliable,reactive and convex at cheap and
positive carry.
So for someone like us, again,you can't put all your money in
(45:08):
this sort of opportunities, butit's part of this.
Going back to the point ofartificial setups, these
artificial setups actually giveup and there are opportunities
and risks on both sides.
Sorry for the long answer, butit's a long.
Speaker 1 (45:27):
I'm in agreement with everything you just said.
You did say print and borrow,and that's always what ends up
happening, but you typicallyneed some kind of excuse or
scapegoat.
I had put out that postyesterday, stealing it,
admittedly, from Gerald Salente.
When all else fails, they takeyou to war, and war is often the
(45:49):
thing from a geopoliticalperspective.
That gives all the policymakersan excuse to continue to print
money.
I am curious your views onheightened geopolitical risk
here, given what's going onbetween Israel, iran, if the
market is maybe mispricing, therisk of something really getting
out of control.
I joked and it's a sad joke.
(46:11):
I said I don't know if this isWorld War III or World War IV.
I'm losing count.
Speaker 2 (46:17):
I think geopolitics is here to stay.
It's a byproduct.
You talked about scapegoatsearlier.
It's very hard for most peopleto pinpoint that monetary abuse
and fiscal abuse are behind.
(46:38):
You know a lot of the issuesand if you think about you know
there are so many things thatare lined up here in terms of
you know the geopolitical risks,but I do think they are, and
I'm very much with Ray Dalio onthis as a student of history.
(47:01):
I think there's plenty ofpockets and risks and, to your
point earlier, scapegoat, excuseor just simple need.
Ultimately these imbalances areaccumulating.
People are not happy and youcan see that.
You can see inflation isimpacting purchase power, it's
(47:27):
enhancing inequality, it'screating a larger polarization
of the world, clearly apolarization of politics, and
this is obviously fuelingpopulism, social unrest and
worse.
Add religion, add oil, add manyother things that are difficult
(47:53):
or impossible to resolve.
And, yeah, china, taiwan,russia, ukraine, israel, iran I
mean in some cases talking aboutnuclear powers as well it's a
really meaningful tail risk andI personally think it's here to
(48:14):
stay.
It can show up any minute andyeah, it's part of the game we
live in and hopefully thingswill not escalate.
But if inflation was to getworse and the economies are
doing badly and you need thesescapegoats.
(48:37):
It's quite easy to blame.
Pick your guy, putin or anybodyelse.
I think one of my favoritesayings of all time is the bad
guy is the good guy of his ownmovie, right?
So I think in that sense I'm'mnot defending anyone, but
clearly people tend to.
(48:57):
You know there's differentperspectives here and uh, these
are very complex andmulti-dimensional problems that
we will not fix um easily.
Um, but that polarization ofthe world.
You know things like prettymuch confiscation or freezing
Russian assets.
(49:17):
It's a game changer.
It's a game changer for theworld.
Who do you trust and where do Ikeep my money?
And if the SWIFT system is nolonger acceptable for certain
people, of course they're goingto build their own and that's
going to create, as part of thistrend that I think, the
globalization versus.
(49:38):
You know protectionism.
I think protectionism the rise.
You know tariffs, things likethat.
They're all closely related towhat we're discussing.
You know Currency wars.
We're all about beggar thyneighbor, devalue your way out
of trouble until someone comesin.
If you want to devalue by 20%,I'll tariff you by 20% and
(50:02):
that's kind of game over for theguy who's been doing that abuse
.
So I think these dynamics arepiling up and again, once again.
I hope I'm wrong, but I thinkit's something we'll have to
live for the foreseeable future.
Speaker 1 (50:21):
So you mentioned at the start a number of books that
you've written, and it's onyour ex-profile at Ria Diego.
That is a hell of a banner tojust have nothing but your own
books at the top.
I am curious if there's onebook that is perhaps most
relevant to today that you'vewritten, which is the one that
(50:44):
you'd say this is the one youshould read right here, right
now.
Speaker 2 (50:49):
Well, in all fairness , what you see there is there
are really two books the EmptyBubbles and the Energy World is
Flat.
The three on the right arebasically the Energy World is
Flat was published in English,in Spanish and Chinese, so very
proud of that.
To get a book published inChinese is not something I had
(51:12):
thought about, but I thinkthey're both relevant because
they're both meant to beframeworks, so they are more
trying to teach how to fish orhow to think than giving you the
thoughts necessarily.
So I think the energy book isback in the sense that the ideas
(51:36):
I presented there.
They were challengingeffectively a lot of
misconceptions in the system.
Right, and it's things like,you know, peak oil at the time,
or a number of things, and someof them are very relevant and, I
think, very important tounderstand.
(51:57):
I mean, I'll pick on a couple.
But if we were to do a poll nowwith everyone in the audience
and we said, okay, why has OPECbeen so successful?
I would think 99% of the peoplewould say, well, it's an
oligopoly of supply or a cartelright.
The reality is that that's anecessary but not sufficient
(52:24):
condition.
There's a lot of markets wherepeople have an oligopoly and
they haven't been nearly assuccessful.
The reality is that they had amonopoly of demand and so, in
particular, transportationdemand.
So our cars or buses, or trainsor ships, they were all running
with, effectively, productsderived from crude oil, whether
(52:47):
it's gasoline or kerosene orfuel oil, and so effectively.
To understand that is verypowerful, because when you get
the super cycle that we've seenin natural gas through LNG and
shale, and now the story is backafter the war in Russia,
(53:07):
ukraine, where we can't rely onRussian gas and there's no
shortage of gas, there's gaseverywhere you can, many, many
places.
So as we build these LNGliquefied natural gas plants,
which require very largeinvestments, and you create this
regasification terminals, youliterally wired I called it the
(53:29):
energy broadband.
You've wired the world withfloating pipelines and suddenly
natural gas becomes a globalcommodity.
Prices go down.
Think about in the US.
One of the fun things incommodities is that, because we
use different units, it's verydifficult to compare apples with
apples.
But in natural gas, dollars inMBTU translate to approximately
(53:54):
$1.
Know, $1 is 5.8 barrels of oilequivalent.
So natural gas at $2, $3 inMBTU is $10 to $15 barrel of oil
equivalent.
And of course you know thatmeans that someone like Warren
Buffett would buy the traincompany which was the second
(54:14):
largest of consumer of diesel inNorth America and transformed
some of those trains into whatwas reliable gas, et cetera.
So, as you have these dynamicsand you have what I call energy
flatteners, suddenly themonopoly of crude oil in
transportation is challenged.
We're starting to see more cars, electric cars or buses with
(54:37):
LNG or many other ways, ortrains, and so I think part of
the silver lining of what'shappening in this crisis, this
volatility spikes and thissearch for energy security, is
this again massive investmentand capacity.
So I think over the next fewyears, in the short term there's
(54:59):
not much we can do, but overthe medium term I think there'll
be some fascinating dynamicsplaying out in the energy
markets.
So I think that frameworkhopefully people will find it
helpful.
And for the rest of thisdiscussion, we've spent most
time talking about bubbles, andthe bubbles and macro, which I,
so both of them are are relevant.
The other thing you, you, you,you can see in the banner is
(55:21):
front page article of the FT,which my mom's very proud.
Now I it just I just wrote aninside column and, and when I
went to buy a copy just as amemory.
I saw it on the front page andI didn't quite anticipate that,
but anyway, there it is.
It's called Gold's PerfectStorm and it was written before
(55:42):
the anti-bubbles, but it wasbased on these ideas that we've
discussed, where gold, I thinkit's from a game theory
perspective and, giveneverything that's happening, it
showed a very asymmetric caseand things are being confirmed
and playing out.
Speaker 1 (55:59):
Everybody.
Please make sure you followDiego Priya on X on LinkedIn.
I appreciate those that watchthis live and were asking
questions, so shout out to allthe LinkedIn folks that put some
good topics here.
This will be an edited podcastunder LeadLag Live hopefully in
24-48 hours and hopefully I'llsee you all Lead Lag Live
hopefully in 24, 48 hours andhopefully I'll see you all on
the next episode.
(56:19):
Thank you, diego.
Speaker 2 (56:20):
Appreciate it.
It's been my pleasure.
Mike, All the best and thankyou everyone for listening.
Anything you need, do reach outand hope people found it
helpful.
Thank you again.
Speaker 1 (56:31):
Cheers everybody.
Speaker 2 (56:32):
Cheers.
Thank you.
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