To close out the 2024 season of the Derivative podcast, host Jeff Malec sits down with two friends of the pod, and friends of his – Jason Buck (@jasoncbuck) and Zed Francis (@convexitas) – for a wide-ranging discussion on the state of the markets, the unpredictability of macro events, and the importance of understanding underlying structures and dynamics. The conversation begins with an exploration of the unexpected market reactions following the first Trump election (in ‘16), highlighting the challenges of the past, and ends with making sort of, semi- predictions for the year ahead in 2025. The guests delve into the concept of “volatility echoes” and how past events can influence future market reactions. The discussion then shifts to the impact of interest rates, with the guests analyzing the significant moves in the long end of the Treasury curve during the recent election week. They debate the potential implications for asset classes and the role of political influence on market dynamics. Beyond the macro landscape, the podcast also touches on the evolution of option strategies, the rise and fall of “pod shops,” and the importance of liquidity and market maker strategies in stabilizing markets. The guests share their insights on navigating the complexities of the financial world. While the core of the conversation focuses on the markets, the episode also features a fun and engaging segment where the hosts and guests engage in a “Mount Rushmore” challenge, sharing their top picks for burgers, dive bars, and fine dining experiences around the world. You found it – the pod that gives you financial insights and culinary recommendations – so bring your appetite for mind and body…this ones’ juicy! SEND IT!
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Check out the complete Transcript from this week’s podcast below:
The Polymath Pod: Jason Buck and Zed Francis talk rates, vol, and cheeseburgers?!
Jeff Malec 00:06
Welcome to The Derivative by RCM alternatives, where we dive into what makes alternative investments. Go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Hello there. Happy holidays. Well, we’re not there quite yet, releasing this a little bit ahead of Thanksgiving, but this will be the last part of the year, as we’ll be taking off Thanksgiving through New Year’s Eve, as we’ve done in years prior. So the greeting makes sense, at least to me. So I want to send you off in style. We got two of my favorite guests to come on and talk through the election and what it might mean for markets. What caught their eye in 24 what 25 might look like. We’re talking with none other than Jason buck of mutiny funds and Zed Francis of convexidas, both of whom are no strangers to the pod. They get into all the nitty gritty on trend, vol rates and more, before we take a little detour at the end and discuss who is on each person’s mount. Rushmore for best burgers, dive bars and fine dining. Send it. This episode is brought to you by RCM, from clearing to execution portfolio construction to outsource fund ops China to Nebraska. RCM has you covered for all things futures and derivatives. Learn more@rcmaltz.com and now back to the show.
Jeff Malec 01:32
All right, everyone, we’re here with the two guys I’ve never met before. Jason Buke, how do I spell your last name? How do i pronounce that? Oh, Buck. Buck and Zed Francis, welcome guys. Silent, Franks. Franks, so wanted to get my two pals on here talk about what’s gone on so far this year. Maybe what people are sleeping on that should have been a story and wasn’t. And even the big stories, what do we make of it? And then what’s in store for 25 um, I’ll start with Jason. Like, how you love making predictions and macro calls on based on elections and whatnot. What’s your what’s your thoughts on 25 real quick? Or what’s your thoughts on the overall prediction market?
Jason Buck 02:26
I’ll say I’ve already been bamboozled. I was told this was gonna be a podcast about food and not about global macro predictions. So the only thing I think is interesting is, you know, after the first Trump election, you know, 2017 was like the lowest of all environment ever. We had 15 straight months, up months, and for the S, p5, 100. Now, are you going to bet on that for 2025? I don’t know. You know like it’s so I think that’s, I don’t think it’s a predictor, but I think it is fascinating that that’s what happened. But the reason why, as you alluded to, I hate predictions, is actually there’s a story from going infinite. The you know, the book about Sam bankman Fried, where he brought up when he was at Jane Street, apparently he worked on a project. So I think this comes from SBF, so I take it with a grain of salt. But Allegedly, he worked on the project at Jane Street for the first Trump election, where they were trying to get election results faster than anybody else. And they had modeled that for months, and came up with a system, and they were, they were getting election results faster, but they expected in a Trump win to be bad for the stock market, so they were shorting the S, p5, 100. And so they originally were up because they were getting the early election results, they were up 300 million on the trade. Well, in the middle of the night, the markets decided it would be good for the economy and went the other way, and it reversed on them, they ended up with a negative $300 million loss. And if true, that’s the biggest loss in like Jane Street history, and it’s a $600 million swing. So like the other day, when I had my in laws, were asking me before, prior to the election, what are my predictions, what it will do for markets, etc? I always, you know, my favorite answer is, I don’t know, and nor does anybody else.
Jeff Malec 03:58
And said we were on the golf course with a friend who works at Apple or Amazon. I think Amazon. He’s like, Ooh, hey, two finance guys. What do you guys think is going to happen? What do you think is going to happen in markets, if with the election? And what was your echoed my thoughts? What were they?
Zed Francis 04:15
I’m pretty sure I’ve said the same thing every time, but just vol crush and everybody’s gonna move on with their lives shortly thereafter. Yeah, non
Jeff Malec 04:24
event, both of us kind of said, like non event, they’re both the same in terms of markets. Probably,
Zed Francis 04:30
I think what’s actually interesting is last week s p option volume was below its yearly weekly average. So you have, like, the the main event, and an FOMC meeting, an actual trading activity was a smidgen below the average for the year. So you’re like, you know, I think that really shows you that it was all the news was pent up, like, what is going. To happen, and then whatever was going to happen, almost like no matter which way anything, as long as it ended, we were all going to move on from it Ted
Jason Buck 05:09
and I talked about this before. There’s a there’s a trade where you can trade the IV ramp going into earnings. It’s interesting has as as volatility will tend to pick up going into an earnings announcement. But what’s interesting, when you do that over multiple quarters and everything, you start to notice this, like echo of volatility, where if earnings had a surprise the last quarter, you’ll see implied volatility ramp higher going into those earnings. So people are really on recency bias. And I always thought it was interesting. In the 2016 original Trump election, it was kind of unprecedented, and so volatility kind of popped during at that at the election night. And so what was interesting then going into 2020 because of that recency bias from 2016 even though it’s four years ago, it’s just that one iteration, they were really pricing in the volatility for the election. And it was really, there’s a huge kink in the in the vol surface around the election on November 5. And so that was interesting that this time it was down a little bit, but it’s just shows that, like, even these small iterations over, you know, with four years in between, we tend to, like, kind of price in the recency bias and then so, like Zed was saying, with this one being quiet and popping, it’d be interesting to see if the next one has kind of a low implied volatility going into it. Said you have any thoughts on that? Or the 28 one
Jeff Malec 06:19
you’re saying, yeah, yeah, we
Zed Francis 06:21
don’t want to talk about that. Jason, no, I think it was just too clear, like ball was too darn high, right? So if you, if you remove last week, the month ish, leading up to the election, realized volatile in the s, p was between nine and 10, essentially. And intraday, if you just took the high and low of the day was like a four. So it was like, we weren’t moving close to close. We’re moving even less once the Mark was open. So just absolute dead zone. And, you know, figuring the area, like, Okay, what should implied volatility in the s, p5, 100, B, you’re like, about 15% what realized is, and then the wings, obviously, that pulls back towards the middle, but like 15% so you’d be like, okay, the correct no event volatility for S, p5, 100, I don’t know, 11 and a half. You know, 15% higher than 10 would be your finger in the air. Like we went from day before election, implied volatility over the last year being like 93rd percentile. Skew was like 98th percentile, meaning puts were expensive relative to calls, in terms of steepness, vol of vol people, buying calls and vix was like 96 percentile. And then by last Friday and pie volatility was 50th percentile. Skew was like down to like 54th percentile. Volatile is 57th percentile. I we all went right back to like the middle of the last year, and surprise, surprise, one month, s, p, implied volatility was like 11.6 exactly, you know, 15 ish percent. What realized volatility was prior to the week’s event. So we just, you know, we were way overpriced for a long period of time. Event happens, and then everything went right back to, in theory, where it should have been trading the whole time. What
Jeff Malec 08:01
historically has that happened in all elections, or that you can remember that, or you have data for? Or is it because of January 6, last time with Trump, and because there was the specter of maybe the contest that, or we don’t know who wins, for a long time,
Zed Francis 08:15
the risk being priced into this event was higher relative to how little risk was like actually in the market, right? So the spread, if you will, from how elevated implied volatilities and how steep skew was relative to the very limited nature of risk that the market had in leading up to the event was very dramatic, like that spread. I mean, about, you know, four years prior, implied volatility, it was a smidgen higher than what it was coming into this one, but we were also moving like crazy. It was 2020, rather than, you know, watching paint try and having one of the best risk adjusted returns years that we’ve seen, you know, basically since 1995 so very, very different outcomes. I think most of the charts will be like, just picking a vol number and being like, oh, you know, it was high, but not like, outsized. Be like, well, relative to the actual risk in the marketplace, it was pretty darn dramatic. How expensive, if you will, volatility was going into the event. Do
Jason Buck 09:10
you think related to that? Like, I was thinking, I’m sure you guys heard the same things. Like, almost everybody talked to everybody here talking about it was like, oh, we’ll see how long it takes to know the election results. Right? Is this going to be contested for weeks or months, and to me, my contrarian to nature, just want to take the other side of that, right? Because everybody’s just, everybody operates off a recency bias, right?
Zed Francis 09:27
Yeah, no, I think because whatever every poll is like, Oh, he’s way up, oh, she’s way up, you know, whatever the ILO one the week before, right? And I think real answers, we know that data truly is just garbage,
Jeff Malec 09:41
who answers their phone anymore? There’s a number you don’t know. Are you answering your phone?
Zed Francis 09:48
And what is it? The fun French guy trade, the thing that he looked at was the ask your neighbor poll, yeah, which you know, essentially is, forget you you lie if you take. Talk about yourself, but you don’t lie about your opinion. If somebody says, Oh, what would your neighbor do? But you know, all this, I think, is just throwing numbers at the wall, and the answer is, the wings were just as likely as nobody knowing and things being close.
Jeff Malec 10:16
I love this concept of recency by spanning years. And you can probably argue of like, well, the last World War happened, right? We have recency bias going back 50 years, 100 years election
Jason Buck 10:29
cycles, right? It’s just like the, you know, our other favorite four years of the Olympics, right? But, like, yeah, so if you’re talking about a few elections, right, you’re going to be back several decades. So it is the recency bias of that. And then for 2025 though, what do you think? Like, correct me if I’m wrong. Like, this is the whole thing about markets, right? Why I don’t predict is because they can, they can do wonky things or do things that you don’t expect. So, you know, I don’t believe a politician when they’re going to get elected, but with Trump said he’s going to imply all these tariffs, right? But then obviously, you think about tariffs, you’re going to have competing tariffs, of everybody retaliating as well. All of that should intentionally, you know, essentially, if you read your, you know, macro textbook, should be inflationary. So is that something like we should be thinking about for the future? But if everybody the expectation of the inflationary nature that it’s like, you know, like, once again, back to, like, just big game theory. Yes, it’s the cadence and beauty contest. Like, the example that was, like the French, you know, prediction market guy that thought, oh, I asked my neighbors of what their neighbors think it’s like. Once again, it’s like, is it kind of priced in or expectations? So that
Zed Francis 11:27
was the, by far, my opinion, the most interesting thing last week was the long end of the Treasury curve, right? So the, as you’re saying, everybody leading up to the election, the known trade was, you know, Kamala wins, that’s going to be stagflationary, lots of spending, more regulations, whatever, more of the same. But on that side of the house, like, oh, Trump is definitely hyper inflationary, lots of spending, deregulation, tax cuts, like, we’re just going to, you know, spin out of control, hyperinflationary world, and the first move was the long end, selling off almost 20 basis points, essentially overnight on Tuesday. But we never really saw the lows in the long end that we experienced overnight during the trading session on Wednesday. And it actually kind of started rallying a little grind on Wednesday, and then throughout the rest of the week, rates kept on going to the point where 10 year treasuries last week were completely unchanged. No move at all. And it was because so quickly the narrative of him changed from hyperinflationary guy to like ultimate like D Reg, we’re going to find all this productivity gains, like we’re going to have growth without additional inflation. And you know, those 48 hours, that narrative
Jeff Malec 12:49
Elon is going to fix the deficit,
Zed Francis 12:53
I’d agree nobody actually knows the fact that, like, this was the beat the drum, definitely the move. It’s going to take place and completely reverted in 48 hours to a completely new narrative.
Jeff Malec 13:03
And that comes back to our golf course conversation with that guy. Well, both are going to spend, like drunken sailors, yeah, right, like so it doesn’t matter who’s going to win in terms of both are going to spend, and then it’s just what happens to counterbalance that. How do you square gold in that whole thing dead? Because, right, it was weird that gold was down at the same time that tenure was down that day.
Zed Francis 13:30
Well, I mean, my joking answer is, I don’t know anything about gold. And you know, my wedding band is tungsten, even though you’re supposed to say nobody exactly that my doctor buddies say this dumb because I’ve ever smashed my finger, they can’t cut the ring off. Like they’d have to cut the finger off. That’s why your wedding ring is gold, because you can
13:49
cut it off. But for the day,
Jeff Malec 13:53
some like old British sailing ship background, like, yeah, if you got caught on a thing, yeah.
Zed Francis 14:00
But I think ultimately, gold was a, I don’t know, tail risk hedge, and so similar to vol, event goes by vol gets smashed like, I don’t need my hedge anymore. The event’s over, and my hedge, in that case, was gold. So I just think that’s gut shot reaction that people had it as the, you know, negatively correlated to equities thing in the portfolio event rolls off, like equities are happy get out of the hedge thing. And just for some people, gold was that thing,
Jeff Malec 14:30
right? Like the real traders are buying 10 years for their inflation hedge, not gold, yeah. But you think
Jason Buck 14:36
part of it is like, as you know, we talked about this many times before, it’s like, gold is an interesting hedge, but not necessarily in the cute time frame you’re looking for, like, over, you know, decades or centuries. It’s an interesting inflationary hedge, but it could be something different. And then I believe, I think Matt Faber was talking about the other day, is like, is this the first year in history that you have both gold and S, P up, like, well into the double digits on the year? You
Zed Francis 14:58
know, better than me, my guess is two. 821, but I don’t know that’d be my random guess. Sounds like a blog post.
Jason Buck 15:04
But that related to that, though, is like, speaking of just like, these narratives and changes so quickly. You know, what is it months before the election? You know, Trump comes out as now Bitcoin positive. And, you know, talk about just a crazy bull run for Bitcoin this year, and then the last few months, and then even, you know, election week, post election. But also, I mean, do you guys think this is just like the exit liquidity for those through those, via those ETFs, or the bag holders are now going to be retailer? I
Zed Francis 15:28
just think all we know is that the greatest ROI is buying politicians, right? Yeah, you got Coinbase, like, what, 75 million pack and you know that stocks up probably 100% in the last month or so. Or, you know, Elon just doing million dollars a day lottery in your state. Jason, yeah, leads me 100 100 billion of personal wealth gain. Like, that’s good.
Jeff Malec 15:50
You stole my thunder. I had that as a question. Why aren’t we talking about those guys as activist investors? Right? That’s that blows away any hedge fund that’s an activist investor. Like, what did Elon put up 10 million and maybe 100 million of his time to make $5 billion right to your point, that’s a huge return on investment.
Jason Buck 16:10
It’s shocking how much that, if you actually look across the board, like, how little you would have to spend to, like, capture all the government employees on both sides. So it is fascinating that you don’t see it even more often, and like, I think, I think that people that are a bit of a stretch, when they said, If Kamala would have won, he would have been in jail and lost his company. So he had to make that bet. But, I mean, I think that’s a little bit too egregious.
Jeff Malec 16:30
I think he knew exactly, like, if she won, there’s nothing is going to happen to him. They’re like, rule of law, and he was fine. And whatever, he’s got a right to his opinion. And then, if he wants, he wants, he makes ten billion so it was, like, totally a one sided trade, but you don’t think they should be. He’s an activist investor. I want to like once, right? We like acman and all these guys, we trumpet their ability to get on the board and, like, change minds and eke out 13% or something on a stock because they changed the board or got this activist stance. And, like, here’s Elon. Like, obviously he was doing it for his stock price and for his private, his own wealth. That’s my belief. Maybe he was doing it for his beliefs, but kindergarten
Jason Buck 17:15
stuff, yeah. Like, activist investing is kindergarten stuff to buying politicians. That’s a story as old as time is political graft, right? Yeah,
Jeff Malec 17:21
I guess. But I’m saying they’re like, they should, we should exactly. They’re kindergartners. This is, like, AP, bio level stuff that they’re pulling up with the politicians, like they should be trumpeted as the better activist investors, especially. What
Jason Buck 17:33
would he found out, like, tangentially all, like government jobs in this country, and then tangentially related to government jobs, is like 30% of our workforce. So yeah, why wouldn’t you that be spending your money there
Jeff Malec 17:44
last bit on markets and the election here US has massively outperformed foreign. Jason was sharing with me a chart today or yesterday on since the global financial crisis, since oh 708, before that, it was not at all right, foreign usually outperformed us. And why would that continue with this new administration? Why might not it? Any thoughts on that?
Zed Francis 18:11
Yeah, I mean, this was the first move. Is definitely, you know, pure USA, USA, right? Yeah, equity markets, like, as I said, fixed income markets were small rally, right? You know, it’s not even like inflationary dollar, obviously, was spectacular strengthening last week, so this definitely the gunshot move, without a doubt is, you know, more of the same, but potentially even more dramatic,
Jeff Malec 18:32
right? But, like, look at but if you’re take it to its extreme end, right? We become China. Everything’s totally nationalistic. We’re gonna just gonna keep all the money here. We’re gonna do all this, like, at some end point that doesn’t work out so well, right, with in relation to the other countries. Or maybe we’re so unique that it does and we’re like, if we struggle, they’re gonna struggle more. I don’t know,
Jason Buck 18:54
but part of it is there. The chart I sent you was like, historically, for the long arc of history, like stock markets, it’s like they have 53% dominance by ex US global stock markets, where, since the GFC, that’s only 18% so that’s just having American dominance since the GFC. And then, more importantly, like, you know, I knew it was high, but like, I keep asking people, is like, since 2010 what’s your what’s your guess at multiple returns for the stock market. Like, what has been the multiple return Since 2010 if you invest in S, p5, 100 only, what
Jeff Malec 19:28
do you mean? Like, the
Jason Buck 19:28
average annual return? Yeah, well, average annual return equals your multiple over the 15 years. Like, how much you think you’re up. I
Zed Francis 19:34
mean, multiple is a double, a little
Jason Buck 19:35
bit more than that, actually, but the multiples, it’s 10x like your
Zed Francis 19:40
return on spot, right? Yeah, yeah, yeah. You’re, I
Jason Buck 19:44
think you’re talking about, yeah, the PE multiple is double, but then the return is 10x so we’re at like a 15% cager since, like 2010 like that is an unprecedented run in world history. I knew it was good. I didn’t realize it was that good. And I was just thinking about, you know, people that were in their peak earning years, and you. Know, 15 years ago, when they’re in their 50s and now retiring, is like a 10x return. I mean, granted, they probably weren’t in spy only. They’re probably in some sort of target date, or 6040, or 8020, but I find it fascinating. But also, the problem, Jeff, though, with this that I, you know, always take umbrage with, is that we’re talking about a narrative, right? And the the pernicious thing about narratives is they’re strongest at tops and bottoms. So right now, you could tell a great story of American exceptionalism, and it’s easy for us to do as Americans, but also, like, part of that story is that, you know, Europe and Asia can’t compete with us on AI and the technology front, and this country is going to continue to outpace everybody on both, you know, work ethic and ability to innovate and have the most innovative companies in the world. And all of those sound great when you’re telling your the story in hindsight bias, but like the last night that’s right at the turn right, yeah. And
Jeff Malec 20:45
it helps that they have that 10x history to prove it. Yeah, exactly, yeah. Because what? What’s the X us over that same time? 2x 3x maybe, yeah,
Jason Buck 20:54
if that, no,
Zed Francis 20:56
I do think it’s mind blowing that returns. The last essentially, 18 months have been so spectacular, and it doesn’t get much coverage, if you will, right? It’s like, realize volatility has been basement and returns have been spectacular. Like, the only in the last you know, our lifetimes that are like somewhat similar, is 2017, and like returns were less, but vol was truly zero. 2013 was pretty similar to right now and then. 1995 was basically the best of the best. It was high 30s returns and like something like an eight realized volatility. But this is pretty rare how spectacular risk adjusted returns have been in 2024 and that’s obviously after a pretty spectacular, you know, quarter leading into 2024 so then one heck of a run. And yet the market’s pricing in very, very little risk. You know, I had to, like, check it three different times that I was shocked that high yield spreads are now 273, which is the tightest they’ve been since the GFC. And really it was only like a quarter and a half in 2007 that they were tighter. So you’re like and like, you know, oh, 567, spreads were very, very tight due to aggressive securitization really grinding the gears tighter and tighter, and we’re like, almost there. So it’s like credit markets are saying no risk at the moment, relative to history, we have spectacular returns, as we said, and yet, everybody, everybody now seems to be max bullish, like, I can’t find any negative articles about anything.
Jason Buck 22:46
Yeah, that’s the sentiments, the highest it’s been in history, right for bullishness, which, as you know, is a contra indicator. But like, your two points that I think we’re up like, through today, up over 26% year to date. But if you go trailing 12 months, it’s 38% and then if you go, probably, like, you’re saying 15 to 18 months, it’s even higher than that. And, yeah, it’s just like insane to think about. But I always think the counter to that would be and like you’re saying credit spreads being so tight is stability breeds instability. Hyman Minsky, right? Like, this is what happens. As everybody says, oh, there’s no risk anywhere to be seen. And it’s, you know, bullish sentiment at its high is like, when does that crash come? But then I also have to counter that argument with going into 2007 2008 GFC, we had gone 1400 trading days without a negative 2% move. So, like, the market can just keep ripping like this much longer than we expect. It’s just we don’t know when that’s going to happen.
Zed Francis 23:35
And one thing on your sentiment side, the bullishness on equity use, as you say, is basically at all time highs from sentiment. But bullishness on bonds is also like, about as high. It’s just like, straight up by everything that’s
Jeff Malec 23:50
crazy given, right? Bonds doesn’t have that past three year profile at all. I mean, that’s that’s a contrary right? There people are bullish on them because they’ve gotten so beaten down question.
Zed Francis 24:02
I think it says, You say it’s the, you know, I guess, Buy America, right? It’s, yeah,
Jason Buck 24:07
but Jeff, you, I think you’re though you’re talking about, like, nominal returns and the drawdown, where maybe zad is talking about, like we were talking about mailbox money. People just want those that that income, right? It’s like a UBI for the rich, right? If you can afford to hold treasuries, you’re getting a nice, stable income.
Jeff Malec 24:26
Yeah, my there’s the the Democrats are idiots, post op, no, but, like, they should have been trumpeting like, Hey, we’re at all time highs. This is the best performance in the market this year. And that, like, no one was talking about that per se, right? Of like it was the or the Republicans were genius of Oh, things are terrible. Things are terrible. Ignore the stock market. Yeah, that’s only for the rich people.
Jason Buck 24:50
What does a four year book end have anything to do with global economies? Absolutely nothing. Yeah, we pretend like the President has some control over global economies and asset. Flows globally. It’s insane, yeah,
Jeff Malec 25:01
and inflation, right? Like inflation was all COVID. Why are we pretending it was one party the other? Let’s switch gears a minute. Talk what kind of strategies or markets or things surprise you in this year in 24 as I’ll mute myself,
Zed Francis 25:27
go for it, Jason, you have broad view.
Jason Buck 25:32
I don’t know about surprised, right? Like, that was, that’s the hard part. Like, what is surprising? You
Jeff Malec 25:36
found interesting? Yeah.
Jason Buck 25:39
I mean, it was interesting, like, from a start, with a commodity trend perspective, right q1 we had the big cocoa trade. And it was interesting that commodity trend following was doing well at the same time stock market was ripping, which doesn’t necessarily always happen, but as an uncorrelated asset class, it tends to, it does happen over time. But what I think is more interesting about the CoCo trade is that, like, if you have the classical philosophies of trend following, you should have as many markets as possible. But what is interesting, when people build trend following systems, a lot of times, they’ll be like, well, Coco hasn’t trended in two to three decades. So I’m not going to include Coco. It’s a non trending market. Well, then right when you needed it at most, all sudden, cocoa start trending for the first time in decades. So I think it’s that’s what I think is interesting is more surprising on on portfolio construction, when we going back this idea of recency bias, when you maybe exclude markets because they haven’t performed the way you want to, whether it’s convergent or divergent trades, well that can easily flip and kind of show up right in your face.
Jeff Malec 26:34
The Go ahead.
26:36
No Doug. Go for Jeff. I
Jeff Malec 26:37
was going to pivot. Go ahead. Come off that. All right?
Zed Francis 26:40
Well, my pivot was essentially, to me, the most interesting thing is the risk on, risk off, light switch is just flicking even like faster, you know, is it’s been a pretty consistent theme since the GFC, that as soon as there’s been, oh, geez, there’s more risk in the system, and it bleeds out, you know, reasonably quicker and quicker and quicker. But man, August was was pretty phenomenal how, you know, essentially the event week, actually, markets were flat. Vol was down, Volvo was down. And it’s like it just cannot retain any sort of risk off environment from, you know, seemingly like hours at this point in time. So I think, I think that was the most mind blowing part is that we were more aggressively leaning even down that tunnel. Do
Jeff Malec 27:34
you think part of that is technology and risk department? Right? Of like, things are more real time. We have more idea at a hedge fund, at a bank or wherever, of where everyone stands, what the actual risk is, and technology, we can either flatten it out right away or
Zed Francis 27:49
- I do think there’s one big structural reason why that can happen. And I think prior to essentially 2010 most of the risk was warehoused in a handful of institutions that all acted incredibly similar, right? So investment banks were the residual dumping grounds for risk. They would welcome that risk. That’s how they made money. And they all had very similar, you know, shock profiles and mechanics of how you de risk and things along those lines. So it’s like concentrated holders of risk that had a very similar reaction function. Was what we were in prior to 2010 post 2010 you know, they’ve been kind of removed as the main risk takers, and now the new risk takers are dispersed, and they do many, many different things. They don’t have this same reaction function of how they have to remove risk. They have different models. They have participate in different markets. And because it’s dispersed around these players with different reaction functions, the ability for when there’s that risk off event, to have somebody in that ecosystem book, the switch to actually start taking more risk is just very, very, very different. So I think that is the structural change that’s taken place from call it, you know, or the the mid 1980s through 2010 and then 2010 on is just where that I
Jeff Malec 29:19
would set. I would argue those new groups have more skin in the game, and they’re losing their own right, versus the guy at the investment bank desk, who might lose his bonus or whatnot, but no, and he’s maybe puking out and but, well, it’s not my money. As
Jason Buck 29:32
long as you have the liquidity right, not to step on zed’s toes, but like, as long as you have the liquidity there, the spreads have widened, so you have a much more target rich environment. You have you have a higher P and L in those as long as you don’t get blown out, and you have the parameters where you can step in with some liquidity, you’re even better off, and almost like to Zed point way, it was amazing to see that was the fastest ball crush in history, you know, from a ball spike. And what was interesting is like, even if you look at like volmageddon, which was a pretty idiosyncratic, siloed trade, right, it still took months for the ball to get crushed back. Down technically. I mean, most of it’s towards the end of the month, but it still took months for it to trail off where we were saying days or weeks now. And do you think part of that related to what I was just saying? Those that is like, you know, those players after the market opens, you know, and we start getting more liquidity, come back in. People are covered those positions, whoever got blown out, then they know they can step right in. And this is a, this is a real opportune time, as long as they had the liquidity to take advantage of those wider spreads.
Zed Francis 30:24
Yeah. I think ultimately, the mechanics of you know that, we’ll call it the new regime, is they have the ability to just say, hands off. And that’s was much more difficult for essentially, banks to do right? They have customers calling it like, hey, I need to do this. I need to do this. These guys are not, you know, beholden to any specific customers. They’re just like, hands off. Let dust settle upstairs. They’re saying, how much juice do we have to actually lean into this move? And they come with, okay, this is, this is what we’re willing to, you know, put but to work in terms of risk budget. And then when they get comfortable to do so, they are aggressive. It’s not a, you know, slow bleeding into market. It’s like, okay, this is our risk budget, what we think is appropriate here, like go and that, you know, mentality of both being able to step away and then put the foot on the gas versus everybody prior is, you know, Risk Manager tapping shoulder, like, you gotta get out. You gotta get out. Like, no, no. This is the opposite. They’re like, All right, we’ve been kind of just blocking and tackling, market making, doing our thing, and now these are the events we’re looking for. Like, how much do we want to put at risk right now to take advantage of, you know, this change in situation, so totally different mentality versus, you know, feeding into the problem, like they’re kind of like crushing the problem to be opportunistic at this point in time, and they and it has worked so well, right that that risk budget number is probably been going up and up and up and up and up, along with those same institutions have been getting bigger and bigger and bigger, so they have the ability to lean into it more so that that my main gut is basically the amount of money at risk that they’re willing to put in each event over the last 15 years has only accelerated, both because it’s worked well and because it works well. They’re bigger. Tangentially
Jason Buck 32:19
related to that? Do you think, because all of us are entrepreneurs and business owners on this call, I think it’s interesting that, like, without naming names, but there’s a there’s a prominent options market making firm down the street, for me, that was started by five partners, but it’s all their capital. So do you think part of that is, like, without having the institutional infrastructure, they can move that much quickly, because they just make one phone call and say, Hey, this is the risk I’m willing to put on. They say, here’s the parameters. They say, go for it. Like, instead of having to run up and down an org chart,
Zed Francis 32:45
no, completely. Like, that’s what I mean, it’s just it’s faster and faster. Because, again, confidence to take more risk increases after you win a bunch of times you yourself are wealthier. So like, the numbers are bigger, and your conviction and doing the right thing, obviously increases the speed at which you’re gonna say, go for it.
Jeff Malec 33:05
But so say, I’m one of the four people listening to this podcast the and I’m like, Oh, well, these guys say, These guys just come in and support the market, and it bounces back. Why? Why don’t I, Mr. Retail, just come in and buy those dips? What could go wrong?
Zed Francis 33:21
Well, you probably don’t have the fortitude to withstand being wrong. This is probably one of the
Jeff Malec 33:28
right but if I base it on, those guys are going to come in and support the market. If they’re going to sell the spikes, they’re always going to buy the dip and but that’s
Jason Buck 33:34
the nuance, I think, of what Zed saying is that light switch is so much faster. What we’re saying is like when they they pulled and pre market on on Monday, August 5. But then once the market opened and things started to settle down, and they saw the opportunity, opportunity in that set, then they turned back on so quickly and went, you know, and just started taking fistfuls of making markets. So that’s what I think, that’s more saying, is like they will only turn it back on when they see the opportunity set in their favor. So if it cascaded the other way, they would have all just stayed out. They wouldn’t have made markets, right? They would have stayed on the sidelines, which is why we saw this irrelevant vix index number is because the bid ask spreads were so wide, and it was skipping over strikes because they just stepped away, right? But like the Zed saying, they can step away quickly, they can step back in quickly, but they may just step away permanently if they don’t see an opportune set, is that a fair way of category? But
Jeff Malec 34:23
also to that point, then they everyone turns the off switch. There’s no more selling pressure.
Zed Francis 34:28
It’s just you might not be able to survive a week waiting for the event to end. And you know, these folks can survive more than a week,
Jeff Malec 34:40
right? But I like you guys are too in the weeds. I think the nuance, to me is nobody understands nuance, so they’re just gonna be like, No, it always bounces back. The ball always crushes back down, and now it’s doing it faster and faster and faster, just and even two point. I don’t have to be retail trader. I can be the guy with his own money. Of like you’re saying, of like, oh, last 10 times this was the best trade. We’ve ever had. Let’s do it the 11th time. Or you’re saying, and maybe they were risking 2% of their equity now they’re risking five now, next thing you know, they’re risking 10. Yeah, it’s
Jason Buck 35:09
Tina and btfd, yeah. From your point, people are going to keep buying the dip until it doesn’t work. Stability breeds instability. But yeah, we’re talking about the nuance of the market. Makers might pull away permanently, or they can come back in when they think it’s opportunity. They’re just much quicker. And so, yeah, it looks like as they have found opportunity sets to still make markets. It’s been a buy the dip mentality, where that can easily change
Jeff Malec 35:30
well, but maybe, yeah, I’m arguing that maybe it can’t. Maybe we’ve entered a new normal where, right, they can come in, they turn, they have the quickness to turn off the switch, they don’t cause that cascade. And then there is no cascade because they’re not, nobody’s causing it, right, absent some huge, whatever 911 type tragedy or something’s happening where every mom and pop person is selling also,
Zed Francis 35:54
yeah, but I think you’re, we’ll call it Feb to march 2020. Waterfall is a good example. Like, I think they were, you know, the market makers in general were big stabilizing factor the latter half of February. And you’d even argue kind of like that first week of March. But you know, then they’re like, Man, this, this is not a snap recovery here. Let’s adjust the playbook and the risks that we’re taking. And then you saw things go actually haywire the next couple weeks. And then, if you were just ran a retail guy like you’re probably gone by the time, you know, we get to May 1. And Jeff, in your scenario,
Jason Buck 36:35
it’s not the market makers, it’s that everybody is fully risk on and yields are getting compressed, so they’re taking more and more leverage to get the same amount of yield. Amount of yield. And then, then now they get the panic happens so quickly they have to really reach for those hedges, and that’s what explodes the value of those hedges, not necessarily the market maker stepping
Jeff Malec 36:58
away. Related, but different. Do you think I’m already seeing it? We’re already seeing probably all of us seeing it, right? One, you have all these mutual funds with alternative income, which is just selling options to more and more option selling strategies. Hedge fund strategies are coming across my desk. Like, look how good we’ve done the past three years. And right? We started in 2021 we have a sharp of 6.4 like how does that end?
Jason Buck 37:25
Same as it always does in tears.
Jeff Malec 37:28
But do, like, do people need to be more cautious or right? I’m kind of going back with this, this times different theme, maybe, right. So those what, that’s what those guys are pitching. Of like, this time different. We can use zero DTE. We can do quick hedging with this and that
Zed Francis 37:42
right? So I think one of the biggest misnomer for we’ll call it that broad category, is that they’re short vol products like the risk that they’re taking in general is the main one is not short volatility. And as these iterations of products have evolved, it’s become less and less in terms of their overall risks. Are taking in the short volatility category, and more and more in the long Delta and essentially selling skew, jump risk, anything in that category, but very few are selling volatility. And very little of the actual risk taking is in the volatility camp, right? Because, like, you’re trying to be
Jeff Malec 38:27
a little more specific on that for my buddy George at home, yeah,
Zed Francis 38:30
like the purest, you know, short volatility type of situation, you’ll be selling, like, five year variants. We’re truly harvesting implied volatility versus realized volatility. We’re selling volatility. You know what these things are doing, and general is selling. We’ll call it at the money puts and calls they used to be doing, you know, maybe a little bit of three months, probably mostly one month, and now it’s one week, and now it’s one day, you know, going along that trend, if you’re selling a one month footer, call the main risk in there is the 50 Delta, like it’s actually directional, is the number one risk that you’re taking in there. And then, like, one month, we’ll call it half and half. You know, short volatility and short jump risk, you know, something like that. But as you get closer and closer to it’ll go
Jeff Malec 39:25
right into the money, and then you’re just have a long future on basically,
Zed Francis 39:29
the point is, like the main risk in these things is delta, and as you get shorter and shorter, you’re shifting more of that short vol risk towards jump risk rather than short volatility, and delta is a almost increasing component, because, you know, one day option is binary. It’s either a zero delta or 100 Delta, like, that’s the main risk that you’re ultimately taking, right? So it’s delta, then jump, then they you know, implied volatility matters a little bit for what the price of that option, but that’s not the. Risk. That’s not the, you know, one day option implied vol goes from 10 to 100 you know, Oh, there’s one hour left on that option. Like, you’re not even going to see it in the price. Like, that’s not the risk that you’re taking.
Jeff Malec 40:10
Maybe we need to change our terminology to selling risk versus buying risk instead of selling volatility. Well, I
Jason Buck 40:16
think maybe, maybe, let me say it another week, because I think one of the nuances that was saying before. I mean, let’s exclude zero DTE for a second, but let me say this back and see if I have it right. Is like historically short ball trades, right? Let’s just say a simple like, they were selling deep out of the money wings or something, right? And they’re collecting that premium. That’s a pure short ball trade. But now you’re saying people have long beta that then they’re selling covered calls, or they’re collaring, etc, you know, or hedged equity that they’re they’re just foregoing their future income, so to speak, for for income now, right? And so you’re saying that, you know, that is a much more slow grind of losses, where it’s more the whipsaw losses, where they get the pin risk on the way down and on the way up, and then people will be like, well, this underperformed my s, p positions over a quarters or years, and that’s what they’re going to take it off, where, if you had a pure short ball position, you can blow you can blow up in a day. Well, I mean short
Zed Francis 41:05
if the risk you’re taking is short volatility, your P L should move based on implied volatility changing or your every single day realized volatility being more or less than the implied volatility that you sold. And essentially none of these products care about changes in implied volatility. That’s not what’s driving the P and L, nor necessarily the realized on a daily snippet versus implied volatility. It’s it’s Delta, or it’s jump risk. So delta, obviously, we’ll say like 50 Delta, like the fact the market goes up every day, that’s what’s causing you to make money, or your risk jump all your you know, August 5, your delta went from 50 to 100 like that, because you still jump, not necessarily volatility. You know, the last year realized volatility has been lower than implied volatility. Selling volatility would have been a profitable position, but essentially the the ultimate numbers, and they will call it a productized world, meaning where people care about notional are too small, they’re they’re not exciting. Profit number based role, right? So it drives everything towards taking more and more Delta risk and taking more and more jump risk, because those create bigger numbers in a productized, ie notionally driven world, if you were selling one year, you know, true volatility, so like a one year variance swap, the notional amount of risk that you would need to equate to just sign again, we’ll go to the extreme, like one day at the money options is, you know, 567, times, like, from a notional perspective, that would be like the risk equivalent. But that’s just not how products, you know, necessarily work. People get really fixated on one to one, and so thus we’ve ended up in a world that’s selling a lot of jump risk and taking a lot of Delta risk, but not really selling much volatility. Do you
Jeff Malec 43:10
think those take out the beta components of those products? Do you think their option strategies are terminal break even, like as if I was just selling the volatility naively back in the day, right? Is it collecting, collecting, collecting on that risk until it doesn’t, then you lose everything you collected. So
Zed Francis 43:27
where these things go haywire is, is actually more of a like December 2018, because, again, like the products are built in, like, a notional landscape, right? So it’s like, you know, Margaret goes down 20% tomorrow, and it’s only down 18% like, that’s, we won. That’s a win, right? You know, it’s like, it’s not great, but like, hey, like, that’s fine. It’s, it’s gapping moves with some chop, where you have the Hey, I lose 3% Monday and Tuesday, I only make 50 bips, and then I lose 3% you know, Wednesday, and then, hey, I make 50 bips Thursday, on the recovery kind of thing. And you keep doing that over and over again, and you’re like, Whoa, December, like the market by the end of it was, you know, only down, you know, 10% I’m down 20. What the heck happened there? Now that is the problem. Like it’s, it’s, it’s gapping moves with some chop, likely over a shorter time period. So really jumps out to you, where you but they know they perform the market a
Jeff Malec 44:36
one in 21, in 50, type month years, right? So there the productizers are willing to take that risk, like, we have this small risk of this kind of move happening, let’s, let’s take it. That’s how it initially
Jason Buck 44:49
starts off, right? But then everybody piles into the trade, and now you gotta bring your strike, strikes in tighter, right? So then you just change the probability distribution, right? And then, like, Jeff, you’re saying, like you’re. Saying, like, basically, options are zero sum over the long term. Yes, but there’s tertiary effects of rebalancing. What’s the rest of your book look like? And are you hedging your, you know, external business risks and other ways of looking at it, yeah. I
Zed Francis 45:11
mean, like, listen, like, the, I guess 18 is, like, the funnier fall stuff. But like, you know, the volume again, February 2018 that was essentially a will throw everybody in the basket of like people that essentially try to harvest you or sell skew, like that was them, like, that’s their you know, really, really bad outcome. But that’s tough to put in, like, a non LP type of product, right? So, like the product, people are very notionally driven. You can’t really sell harvest skew in a notionally driven world. It’s like, again, just like the potential return numbers are not interesting at the end of the day. And so where you get problems in the product ties world is just that, like, if, if we just went up and down 2% every single day for like, 30 days, and the market’s completely unchanged. The product world, people are not doing well, and that’s when everybody goes to, like, what the heck happened? Like, the market is on and I’ve lost a lot of money. Like, that’s confusing. Like, you told me my risk was notional one to one. Like, how did I lose more than just owning the underlying risk? Which a
Jeff Malec 46:17
way to think of that is, if I’m delta hedging that constantly, right? I’m losing on my delta hedge on both sides. Yeah,
Zed Francis 46:24
- And that’s why most of these things, back before, you know, recent world kind of did the one month don’t do anything like there. There is a reason why, you know, the largest hedge equity product out there does longer iterations and doesn’t touch it because, you know, they may or may not win or lose, you know, the coin toss at expiration, but they can’t get chopped up, which is ultimately what, you know, ends these products, what
Jeff Malec 46:53
looks worse on the marketing brochure, right? Yeah.
Jason Buck 46:56
And then to put to also de synchronize that, I think what you’re saying too, it’s interesting, is like you can’t build up a lot of that, like skew harvesting or whatever, to be too big to fail, right? It’s always gonna be a small product and a niche product, where these products, the, it’s really death by 1000 paper cuts, right? And by going quarterly or whatever, on the rules they’ve extended, you know? So it’s more of that slow bleed out before, as people slowly rotate out of those products because they’re not performing with line with their expectations,
Zed Francis 47:20
yeah? Like, I mean, like, obviously the main one, and December 18 was the iron condor folks, right? It’s like, Hey, this is meant to be, you know, two to 3% yield enhancement to your portfolio. And, you know, we’re selling, put spreads, call spreads, meaning, like, the max risk is, whatever the difference in between those strikes are, and you’re like, Yeah, that’s the max risk for like, that iteration. But you can do that time iteration of a week, a month, whatever the rebalancing schedule is, infinity amount of times as time goes on. And so that’s how you head up in those situations where, like, well, they rebalance, or things expired, then you did it again. Well, you lost that tranche again, and they lost that tranche again. And that’s where the chop really just eats the notional style products, because they just lose more than the S, p5, 100, which everybody thought was like the max possible worst case scenario. And
Jeff Malec 48:11
my brand just goes to like an article in four years of like, Well, Mrs. Smith didn’t know she was selling jump risk and this when she invested in XYZ alternative income fund, she thought they were, like, loaning money to teachers or something, I don’t know, right? It’s like, that’s the big disconnect for me, of, like, what they’re calling it and marketing it, versus what’s actually happening under the hood. Seems to be a pretty wide, wide division there.
Jason Buck 48:36
And either way, Jeff, you’re gonna look like an a hole, right? Like, when you’re saying before, like, warning about the returns of this, then everybody’s going scoreboard. We’re crushing it when you shut up. And then after the fact is, like, are you? Are you, you know, stepping on Miss Smith’s neck? After this, are you calling her an idiot? Like, how dare you? Like, you’re this is not a good scenario to even be talking about.
Jeff Malec 49:00
We talked what interests you, which we got into, what about what sucked, what kind of strategies, what things were like, really, poorly performed, poorly in 24 right? Like any in your world said, dispersion, skew, any of that stuff.
Zed Francis 49:18
No, I mean, what was not fun. Was essentially the last, you know, we call it eight weeks, because implied volatility, again, was extremely elevated. Realize his basement and, you know, there’s not much to do other than do your best hand fighting to
Jeff Malec 49:39
acknowledge, realize needs to do something to
Zed Francis 49:42
get Yeah, acknowledge that like yeah, options are just too darn expensive, and we all know why, and we all know that’s going to stay that way until it rolls off. But you know, hired to do a job, and so you have to still keep trying to do the job the best you can. So yeah, that last eight we. Weeks was not fun. Very happy to be passed. We
Jeff Malec 50:03
already talked foreign versus us, value versus growth, right? The Russell had a few crazy, big moves, but overall, right? Nobody cared.
Zed Francis 50:11
I mean, I you, you had that in your like, notes of things to talk about, and I might really pay attention overly. Like, the narrative is growth is better. I just went to, like, a couple random indices, but I think more than anything, it just screams like, this was just no video, awesome year. You can’t lose anywhere. I mean, like, whatever value index I picked, they were all up between like, 20 and 25% like, yeah, the growth stuff was like pushing 30. But you’re like, man, like the the bad thing was up 20 to 25% and I always wonder,
Jason Buck 50:47
like, it’s not even like growth versus value. Jeff, I think they the overarching thing is more rotation and pod shops. And that’s when you see those big spikes in a day, like on a rustle or something like that. It’s, to me, it’s more like rotation from, you know, these, these pod shops, or whoever’s trading faster, and that’s what people then assign it to growth versus value. But that, that may be a misallocation of of what actually happened. The other one that absolutely sucked this year. And Jeff, you have a long history of this is like commodity trend following, right for all of the returns. You just said it was awesome with Coco, yeah, yeah. It was great q1 but then you had the commensurate drawdown. So this is why, historically, it’s going back to even what Zed said about you can’t, you know things you know they can accumulate large size tend to accumulate large sizes as the good times roll. But that’s why the maybe you have never seen truly large size and commodity trend following, because most of them have Mar ratios of 0.2 to 0.3 so you have to take these commensurate drawdowns a lot of times after you have good years, and that keeps, you know, money from plowing into them a lot of times, because they take some pretty sharp drawdowns, and it can be quite painful to hold that asset class. And
Jeff Malec 51:52
you mentioned pod shops there. Let’s touch on that real quick. I know you’ve talked and interviewed a lot of them. Jason, right, if, if all the retail money is flowing into alternative income. It seems all the institutional and professional money is flowing into pod shops. And that model, what? What do you like? What do you dislike about that model? There’s a couple
Jason Buck 52:10
things. One we’re actually seeing starting to see outflows this year. So this is the first year of outflows Since 2020 in pod shops. I think it’s still de minimis so, but I wouldn’t put too much credence in that. What I think’s interesting and not interesting about pod shops is the actual pod shop model has a sustainability and survivability to it, but I’m not sure there’s that true alpha that they believe with the PMs below it. And what I mean by that is, you know, I’ve talked to some of the best people in the analytics that have really analyzed different PMS for pod shops, and even persistency of returns, or the persistency of this alpha, they’re they’re trying to use with their, you know, individualized benchmarks. They will limit it to, like, two to five years of just one regime, because as soon as they go into more regimes, it looks like that alpha. They have alpha decay. So I’m like, Yeah, of course they do. So why would you do that? But then, if you think about it from the 30,000 foot view of the actual pod shop, and you’re cutting 50% exposure at down three, and then 100% down six, and then you’re replacing them like Lego pieces. That’s how you maybe get the returns from these pod shops. Continuing to move forward is because it’s more about the emergent portfolio aspect, if you get with running hundreds of pods, versus do these individual PMS, do they actually produce alpha in some sort of sustainable manner, I’m absolutely dubious of that. And then the other thing that makes it exceedingly difficult is, after 2020 when you had all this money flowing into pot shops, and then, especially in 22 and 23 is, you know, when they’re spending $50 million bonuses to get these PMS that they think have alpha over the last two to three years, is that likely to be persistent? And how much does that detract and then eventually, when they’ve had these, like, kind of lower single digit returns, you see the institutional allocators getting upset, because then they start looking at those pass through fees, and now that becomes a problem. And instead, when they’re putting up double digit
Jeff Malec 53:54
returns, that thoughts you’ve been anyone approach you and put you in a positive that was gonna say,
Zed Francis 54:00
like, I mean, the, you know, we’ll call it rise of the pod shop was one of the reasons I left being at a hedge fund in 2013 you know, for the first call it six years of my career, when I was at a long, short, distress hedge fund, like we had serious edge that We can enact, and like, you know, did well, but, you know, post kind of 2010 2011 really came to the conclusion that if you weren’t massive, it was going to be really difficult, just really difficult, because it became you had a focus on, not only, like, you know, what are the potential risks that We can take. But how do we get out of these? Because our capital base is not going to be stable like you just had to admit that, unless you were massive, like, your capital base was going to fluctuate, which then drove you into less and less attractive positions knowingly so, because you just, you had to worry about, you know, operating the business side. Of investing way too much. And, you know, along with that, obviously you get less favorable terms in terms of ability to access very various, you know, leverage and things along those lines. And I just came to that conclusion after, you know, kind of 1112 I was like, I don’t think, unless you’re at a behemoth the hedge fund industry is going to likely be successful, no matter you know, how great you were as an investor. So it drove you to, you know, you had to go to one of the behemoths like and, you know, I think that is the attractiveness of the pod situation is it allows you to, in theory, have somewhat of a stable capital base and things along those lines. But now you’re like, I got my risk overlord as an individual pod within in the shop, so it’s a different type of instability of capital. But yeah, I just it’s not surprising to me, like, this is where things ended, if you will. Yeah,
Jeff Malec 55:59
my signal it might be the top for pod shops is there was we talked with a group the other day. It’s like a cottage industries formed of finding those traders and getting them out, right that the pod ships are hiring these groups to go in and kind of like pod recruiters, essentially, which I’m sure has always been there. But it seems it’s more focused on that trader aspect, then someone right? They’re not. These people aren’t on LinkedIn. They’re not saying they want out, but they’re being recruited to get pulled out. Last thoughts on what could be in for the year ahead, in terms of dead, in terms of all we’ll finally see some realize, who knows? Yeah, who knows?
Zed Francis 56:39
There I think the main fan focused for 2025 is the return for rates actually being in focus. I think, I think the long end of the Treasury curve is going to really tell you, like, what, what, what is going to be the the game plan for most asset classes in 2025, and it’s, of course, it’s like, you know, nobody cares about inflation anymore. So that’s gone, you know, we’ve, we’ve had our, like, backup and treasuries, but it’s like, oh, you know, we’re hanging out at four, three and 10s, like we were at five, like, a year ago. Like, this is all good and fine. So I think everybody’s really ignoring the concept that your discount rate matters for the fair value of any asset class. So to me, it’s 2025 is can rates kind of remain in this lazy mid fours range, or do we actually get some significant shift? And I think that’ll be the main driver of of risk in 2025 and
Jeff Malec 57:42
for me, Trump, as a real estate guy, he right. He hates high rates. He’s going to be like, lower, lower I need to get right. Everyone know, my real estate friends, needs to get these deals done at low rates.
Zed Francis 57:52
Yeah. Well, I think that’s, I think that’s funny, because everybody, obviously, you know, Powell, leaned into it last Wednesday for from the question of, you know, like, oh, like, can you be fired on him? Being like, no, but, I mean, like, these aren’t these guys gonna be like, friends this time around, like they didn’t like each other because he was raising rates and, you know, 18, right? Like he’s in rate cutting cycle mode, they’re gonna be friends. Yeah,
Jeff Malec 58:17
it was weird. They didn’t give him, like, a 50. I mean, I guess he gave him a 25 Yeah, but to me, there’s no way that he would trump, would want or allow higher rates. Then that’s a whole nother question, whether he has that authority to control that but yeah.
Zed Francis 58:33
And, I mean, again, like the longer end they have less control over is, you know, yeah, the real answer, and long end holders are kind of topped up. I mean, the pension community is already kind of de risked, so, like, there’s nothing additional to buy insurance. Yeah, they sell more product. They need to buy more duration. But that’s not, you know, an overwhelming move. It’s like a GDP growth type of situation. Sovereigns don’t really, are not exactly excited by us paper. And, you know, at the end of the day, like, what stabilized rates a lot was actually, you know, retail wealth, anything in that, like channel, like actual taxable investors were decent buyers of duration. And 23 and early 2024 and I think it’s as simple as, you know, as Jason said, Jason, we had a bunch of, you know, older folks with a lot of money that got brain warped by, you know, zero rates for a long period of time. And so they viewed four as, like, Wow, that’s amazing. Like, let’s go ahead and get in. But like, that’s, that’s kind of one time ish of an adjustment. And then two, I think the you know, messaging for those folks is actually shifting, not even necessarily like FOMO, but I think they forget that you pay taxes, income rate, I’m at 4% so the whole, like. Ah, geez, this these darn treasuries made me get a really big tax bill. It makes it seem a lot less attractive. So I, I kind of think the natural home for all this paper that we know is coming down the pipe. There’s, there’s not a lot of places to stash it, so,
Jeff Malec 1:00:18
yeah, isn’t there an ETF for that now, where you can buy, they give you basically the T bill rate without taxes.
Jason Buck 1:00:25
Yeah, let’s not that’s debatable on whether that’s going to carry into the future. So let’s point that out. But as they as Zed and I have the eternal debate is like, I don’t think people care about taxes more. They care about mailbox money. They just care about getting those checks. And then they’ll worry about the taxes later. And then Jeff, I’ll play your game. I’ll throw you out two random bones for you for the future. I heard Jared Dillon say this the other day, so maybe some other people have been saying is, like his conspiracy, or maybe 2% probability is that Biden steps down now, and Kamala goes ham or YOLO for the next few months, and that just throws a wrench and everything. So that I thought that was interesting, and then
Jeff Malec 1:01:01
we could get our first female president, yeah,
Jason Buck 1:01:03
yeah. There you go. And then I would go, the other one out of the blue is, I’m long try tunes right now, if I’ve seen anything, is like these boomers have a lot of discretionary income, and they love tri tunes.
Jeff Malec 1:01:15
But yeah, the because that yeah, Bentley, or whatever, the B name, that one big group sold to Barrington. Barrington, yeah, they sold to sea, do, like, three years ago. So you might be late on that trade, but for sure, yeah, they’re like, oh, I have a double decker. I can turn it 90 degrees with a skier on there. I’m, I’m big on that myself. We’re going to nominate some Mount rushmores for food. This is really your guys favorite topic. And as Jason alluded to, we told him to come on that we talked about food. So Zed is not Zed to my go to here in Chicago, but hey, I’ve got, not only does he have good restaurant recommendations, he can give them specific. I can be like, Hey, I got some college friends coming into town. This is the vibe, oh, I’ve got my old physics teacher coming into town. We need this vibe. I’ve never had dinner with my old physics teacher, but you get the point. So Zed is good at that, then Jason is well traveled, knows little dive bars, knows fine dining, knows everything. So let’s just do we’ll start it off with my and I got, I brought this from Bill Simmons, right? Instead of, like, what’s your favorite? He has you do a Mount Rushmore. So then you get four, right? Instead of just having to pick one, who’s better, Jordan or LeBron, Michael Jordan, obviously, but fine. They can both be on Mount Rushmore. They can both be up there. And then we can argue who’s up there. So let’s start with burgers. We can get. We’ll do back and forth. Everyone put one on the Mount Rushmore, or you can each have your own Mount Rushmore. I’m excited
Jason Buck 1:02:50
to see how much Zed and I cross over. I think there’s at least two places we’re gonna we’re gonna cross over, but Zed can start. So we’re just going one each to start.
Jeff Malec 1:02:57
Yeah, one, one each. You each get four. But one each. Ah, geez.
Zed Francis 1:03:01
All right, so to me, the best burger is, without a doubt, the Black Label burger. Emmett Tavern in New York.
Jason Buck 1:03:09
I knew you’re gonna I knew that was the first crossover we were gonna have right there. Yep.
Jeff Malec 1:03:16
All right, I’ve never had it. All right. I gotta go black. I
Zed Francis 1:03:18
gotta go Papa McDougal Street, yeah,
Jason Buck 1:03:20
MINETA tavern. I knew that was good. I knew that was that was one of my guesses that we’re gonna have crossover. So seeing how you went more, you went outside Chicago for that one. I’m gonna steal a Chicago one from you, and I’m gonna go warlord
Jeff Malec 1:03:35
concur. That thing is, I went back there the other night. Oh boy, that thing’s good. Zeds had that. And you put it a button, you put it a button, you put the black label, boom. And what a great restaurant name, warlord.
Jason Buck 1:03:47
It’s the best name. Yeah,
Jeff Malec 1:03:49
Zed, you’re next.
Jason Buck 1:03:51
So this, Jeff, are you not, you know, participating? Jeff, is this just,
Jeff Malec 1:03:55
I’m not participating? Yeah, it’ll take too long.
Zed Francis 1:03:57
So a weird one, because it’s the hog salt family, but it’s not a shavall. I actually think the burger at Armitage Ale House is spectacular. That place
Jeff Malec 1:04:08
is blown up. People are like, what’s going on? All right, Chicago, we got two Chicagos.
Jason Buck 1:04:14
Jason, hard to be, it’s hard to be hot hog salt in everything, especially even off Shabbat. But I’m gonna go, I’m gonna start with a hot take. I am not a big fan of the Smash burger craze. I grew up on, like, thick, juicy burgers, like rare in the middle, you know, like Eddie Murphy, McDonald Yeah, like the Wisconsin sharp cheddar, you know, some good Dijon on there. Like, get your ketchup out of here. Those are what tomatoes are for. Like, I just am not a smash burger fan, but that said, I have to give a little shout out to my boy, Chris costow at Charter Oak in St Helena, Napa Valley. He has one of the best smash burgers in the country, and I’m sure we’re gonna get this later. But there’s nothing like a three Michelin star chef going down market and trying to create the best burger on the planet. Jeff had that did. When you were there? Yes, I
Jeff Malec 1:05:01
don’t know if I had the burger, but was there. I mean, I’ll just throw in Osh fog, because you guys mentioned it, but you’re saying the Armada jailhouse is the same family. I didn’t know it.
Zed Francis 1:05:09
Yeah, they’re, they’re hog salt, but I’m telling you, their burger is a little different than a Shava. And I actually think it’s, it’s a better rendition of the Smash burger.
Jeff Malec 1:05:18
And I ruined Jason at OSHA ball when we were there, what did I say? I’m like, I don’t like cheese, and it’s too cheesy. And all you could think about was the cheese at Ocean.
Jason Buck 1:05:26
But I do try to stop it at small Shab every time I’m in Chicago. So I’m a big fan of ocean. Very good.
Jeff Malec 1:05:32
They redid that one near uz. It’s like, easier to get in there, yeah.
Zed Francis 1:05:36
And it’s got, uh, ice cream in there, because they took over Mr. Freeze. And so it’s like, it’s now, you’re like, you know, banana split, old school ice cream shop and small cheval. All
Jeff Malec 1:05:49
right, we’re moving on. Fine slash, great dining. Fine dining, great dining worldwide.
Jason Buck 1:05:53
Hold on, hold on. I got one more thing to say about burgers. This is, it’s all nuance, right? Like, it’s your burger to bun ratio. It’s a lot of little nuances. Because, like, even, like, canard in Portland does an amazing, like, steam burger, but they’re like, steam sliders, and they use Kings Hawaiian Bucha, like, you gotta, yeah, but you gotta get, like, the the like, the meat to bun ratio has to be just right. And that’s I’m saying, sometimes the Smash burgers don’t quite get it. So I’m just, I’m just airing my grievances with the especially without cheese.
Jeff Malec 1:06:22
One favorite fast food, burger steak and shake, five guys. I don’t like five guys. That’s all right, five
Jason Buck 1:06:30
guys, all right. I’m not in and out, even after living in California for 15 years, in and out is like, yeah, it’s better McDonald’s or Burger King. But in general, it’s got
Zed Francis 1:06:39
probably five prices. I think they’re fries stink. Yeah, it’s hard to me to, like, lean in on the burger, because the fries
Jeff Malec 1:06:48
All right, great. Slash, fine dining worldwide, Jason, you go first
Jason Buck 1:06:53
so and maybe if we go back and forth, that’s just too much. It takes too much time. But, like, I think about Blue Hill at Stone barns in New York is one of the best dining experiences I’ve ever had. Another one semi related to that, on this fine dining three Michelin star side is the French Laundry is back. The French Laundry probably spent a decade going down, and it is back with a vengeance in the last few years. It’s really crushing it. Obviously, there’s tons of choices in Chicago, but I’ll leave that to Zed, but I will say what’s interesting, I thought when you posed this question, is like fine dining. Great dining is like, I think we may all be in agreement here. There’s nothing better than three Michelin star quality service execution, but done in like, a bib gourmand style, right? Like, just where you can go in there, casually, jump in there, jump out. Just order a few things. Get the hell out. Not do 23 quarters. You know exactly. I know some. I’m like, Bourdain used to write about that as older age. It’s just like, I’m not interested in that, that kind of, you know, death march marathon anymore. So it’s really about, how do you get that high quality execution in a casual setting where you can just order a few items and have a drink and go? And that’s why I think, like the places like Charter Oak that I mentioned earlier, you know, there’s, like, dozens of places in Chicago we could put up there, and that, that’s more zed’s domain, but it’s just trying to find those little spots these days. That’s that’s more on point. It’s almost like Jeff reverends was that talks about, it’s like, you got to know, like, what kind of vibe you’re looking for. You can’t just recommend random restaurants. It’s like, Who are you with? What’s the night about? Like, all of those things truly matter. Yeah.
Zed Francis 1:08:18
So I’ll go shot come last like,
Jeff Malec 1:08:21
real quick on the courses, real quick. We’re going to Barcelona for Thanksgiving, because nothing says pilgrims like the epicenter of Catholic persecution. But anyway, my wife’s like, Hey, you want to go to this? It’s Michelin star. It’s it’s a little expensive, but it’s only 10 euros per course. I think it comes out to so it’s pretty good. I’m like, oh, that sounds good. But like, how many courses are the kids? She’s like, Oh, there’s only 27 course. 270, Euros per person with the kids. No, right? We’re done. And also the time of that, right? Like, how long does it take 27 course? Anyway, all right? Zed,
Zed Francis 1:09:00
yeah. So it’s both you guys are leading perfectly into my list. So the relaxed, amazing dining that I had a decent amount in our neighborhood is schwa. I’m a huge fan. I been around for probably pushing 20 years now, to be honest,
Jeff Malec 1:09:15
I haven’t been there in like 10. I gotta go back, all right, schwa, but still, byo,
Zed Francis 1:09:19
I just spectacular, different every time. You know French, you know, leaning, but yeah, and can’t be the environment very unique there, I think weirdly, the best, specific fine any meal I’ve ever had, which is a rarity for these types of restaurants. But, man, probably 10 ish years right when next open, they did an ode to El Bulli, because El Bulli had just closed, and Grant had worked at El Bulli early on in his stint. And so he, you know, got access to the full, you know, 20 out. Years and did the best of and I think they did one course per year that El Bulli was open, and they just nailed it. Like they actually had a lot of the elBulli staff flown in. So like, you know, this wasn’t people, like, making their dishes. It was like it was the right folks doing it all. But that was probably, like, the most out of this world meal, whatever
Jeff Malec 1:10:21
for next in Chicago. Brilliant idea. They changed the theme every three months or so, three or four something, and you buy tickets to it, so it it’s but my problem with next I was, is they should change the decor also, like, I think everyone would pay 1015, 20% more on their bill if you totally change the restaurant. Yeah, every time you came, and then it’s right, and one, one time was your mom’s food your room as a kid, like 1926 stay count, right? And they have dates and time. So you’re not only a type of food, but like a date to it as well, which is cool. Sorry. Interrupting now,
Zed Francis 1:10:56
Quintanilla in Mexico City, we thought was absolutely out of this world. Spectacular. It was better than Pujol. Pujol was much cooler restaurant in terms of your decor there. Jeff Quintanilla was spectacular. The best dish was this duck confit tamale that my wife Neve after it came out. Was like, that was so good. And the guy was like, Oh, do you want us to bring in another one? Like, at the end, like, we’re gonna, you know, go through the full sequence, but like, do you want, like, an extra dessert of a, basically, a duck to comfy to probably, to go. And we’re like, yeah. And they, sure enough, did it. It was great a second to hit. And then now, this is me, completely unhelpful, Jeff, but there’s a mystery restaurant that I’ve never been able to find ever again in Barcelona, and I didn’t tell you, it’s near, it’s near the night club suit by two, three blocks away, I’d say, like South East. I’ve been back to Barcelona many a time. Can never find it.
Jeff Malec 1:12:01
Oh well, we couldn’t find it. How am I going to Oh, no, You
Zed Francis 1:12:03
never know. Just look for a random tapas place. But it was we went to the hotel Arts in Port Olimpico. We went to, you know, the front desk. And we’re like, where should we go to dinner? And she tossed out a bunch of like, Bs, tourist places. We’re like, no, no, where would you go to dinner? She’s like, okay, like, really tough, but I’ll phone call it in. She just literally called us a cab. We got a cab get to the place. The guy just had, you know, post it notes, you know, of reservations, if you will. And it was me and three buddies, so four, you know, loud Americans crashing their bar waiting to get seated. And because we were so annoying and annoying, the locals, they sat us quickly, rather than, you know, two hour wait that it was supposed to be. But we ordered the entire menu at the end of it, like, they’re like, Do you want anything else? And we’re like, run the whole thing back. Like,
1:13:01
so good, all of it, yeah, times
Jason Buck 1:13:03
two. But I’ll reiterate what Zed said that’s fascinating is, like, Mexico City is arguably the best food city in North America. It’s so good, it’s ridiculous. And you can get all types of food, not just like Mexican cuisine, and they really hit on those things we’re talking about, of like, really high execution, with very casual environments. And, you know, like, the weather, everything’s amazing kind of and they, they source the ingredients from all over Mexico and all the different regions. So it’s hard to beat that. The one I forgot to mention, because you think about you guys homers in Chicago, is Curtis Duffy, who used to he’s now ever when he was at Grace. That was one of the best meals I’ve ever had when we are at Grace like he can, he can execute with the best of them. And then seeing how you go in all this Homer Chicago stuff, I have to give that shout out to Philadelphia is arguably the most underrated food scene in America. More James Beard award winning restaurants than ever before I’ve taken is that out in Fishtown. And then the density of restaurants in Fishtown from Eastern Mediterranean to it’s the best Thai food in the country to the best pizza, and then fry satsun Is my like, penultimate restaurant for that, like, really high Michelin starred upstairs, but then you can sit at the bar and eat downstairs, and it’s just absolute perfection.
Jeff Malec 1:14:06
Do you think that we’ve lost in America? Like there’s no longer, right? I get off the exit taking my kid to some baseball game in between here and Indianapolis. Maybe a bad example, there’s really nothing between here and but right? You’re there’s not like a little local restaurant with some good food. It’s like Applebee’s Chick fil A, right?
Zed Francis 1:14:25
Like those, the Cracker Barrel,
Jeff Malec 1:14:27
yeah, the lower budget stuff is all now exactly the same. So to get that real, true flavor of a city, and now this, you need the fancy you need the fine dining, the expensive stuff. I mean, maybe you can say dive bars, and that stuff still holds some stuff, but I don’t know to me that’s where, if you really want that flavor of a city, you have to kind of go upscale.
Jason Buck 1:14:48
Jason would be fair. That’s probably fair. But the nice thing about that, though, is the diaspora from places like New York City and LA and Chicago is like, when rents got like, too high, pre pandemic or during the pandemic. A lot of these chefs went back to their hometowns. Now those smaller tertiary cities have just amazing food cultures because people were trained in major cities and came back and
Jeff Malec 1:15:07
neither of you were putting a linear on the list. Too stuffy.
Zed Francis 1:15:12
I really like Olivia. It’s not my top four though.
Jeff Malec 1:15:15
All right, fair enough. All right. If there’s anyone still listening, we’re now going to do dive bars quickly. This is where the
Jason Buck 1:15:23
crossover is going to happen. I’ll let that go first. I don’t want to steal so
Zed Francis 1:15:26
I don’t know. I lean in heavy Midwest. So my number one dive bar, because it’s the place that makes me happier than anywhere probably in the world, is the buck snort in North Woods, Wisconsin, because my snowmobiling trip. That’s always our first stop. And you go in there and you get a Bloody Mary with, like, you know, two bratwurst and a wedge of cheese in it, and it’s just very, very happy place. Locals, I love Archie’s chip in inner town, I probably hit up lemmings the most due to ease near daycare. But, yeah, really good locals. And then, like, you know, best intentions, I don’t think really is a dive bar. It’s on the edge. But also a very good burger, best intentions. And then, like, you almost see, like, a whole new category for like, slash ease, Jeff, like, you know, like, are they actually dive bars? Or? Like, probably not. Like, they’re their own unique specimen.
Jeff Malec 1:16:26
What is, I swear?
Jason Buck 1:16:29
Is that made up this word? He swears, yeah.
Jeff Malec 1:16:31
What do you mean a slash,
Zed Francis 1:16:33
whereas packaged goods? Oh, got
Jeff Malec 1:16:35
it slash, the famous one where they still smoke here in Chicago, on the Milwaukee and, well,
Zed Francis 1:16:40
Richard, that is a slash, like, you could go in there and buy us. He’s got that little
1:16:45
cool that, yeah,
Zed Francis 1:16:49
never closed during the pandemic. Love it this, this
Jason Buck 1:16:52
the hardest part of this question. Like, I knew said, and I would have crossovers with best intentions in Chicago. But like, is that truly a dive bar, right? Like, if you take a dive bar, and then, yeah, yeah. But you make a great cocktails and great food. Is it still a dive bar, or are you going there to, like, you know, get your mic, Ultra, whatever it is. I mean, like, it’s that’s like,
Jeff Malec 1:17:10
right? The the ambience feels like a dive bar, but the service, the food and the drinks are not dive bars. Good point. All right, right. So
Jason Buck 1:17:17
if we can cross over into that, you can forget about your entire Mount Rushmore. The best dive bar in the world is ernie’s tin bar outside of Petaluma, California, that says ventu as well. Like,
Jeff Malec 1:17:26
we’ve all been there, I agree that is the best dive bar. Yeah, and,
Jason Buck 1:17:30
and I my 1b would probably be best intentions if we’re going that. But then there’s a, there’s a place in East Austin called La Perla that that’s the true dive bar. Let’s like, you get like a Mick Ultra with Tabasco on the on the on the top. When you open it up, the Tabasco falls in like it is truly a shit hole die bar and but it’s phenomenal. And it’s surprising still there, as everything is getting torn down in Austin. And then I’m sure, yeah, throughout the Midwest, there’s just tons of great dive bars. But it’s even surprising, like I was saying Ernie Tim bar, Northern California, northern California, because it has all those old roadside bars in the 50s. To your point, Jeff, about you can’t pull off the roadside where, in Northern California they still have great roadside restaurants and dive bars. Like, there’s like, this place called, like, uh, Thompson’s corner Saloon in Cordelia, California, by
Jeff Malec 1:18:13
regulation, or no. Like, are there other places not allowed, or it’s too sparse, they don’t have the foot it’s probably just,
Jason Buck 1:18:18
they just stayed around. I don’t know why, but like, you can find shockingly good like roadside restaurants and dive bars still in, like Northern California.
Jeff Malec 1:18:27
I love it, all right, we’re going to leave it there. Any last thoughts, go to a dive bar. Support dive
Zed Francis 1:18:33
bar. That’s right. Support local restaurants and dive bars. Yes,
Jeff Malec 1:18:38
that will keep inflation in check, and then you won’t have to buy the heck out of your 10 years. All right, thanks, guys. This has been fun. We’ll see you well, we’ll see you before then, but virtually on a podcast, we’ll see you next year. This is it for the podcast for the year we’re going to take off Thanksgiving till after the new year. So thank you guys and listeners. Have a great holiday season. Okay, that’s it for the show. Thanks Jason. Thanks to Zed. Thanks to RCM for sponsoring. Thanks to Jeff Burger for producing, as mentioned at the top. That’s a wrap for this season. Season Four, I believe we’ll be back in the new year for season five and 25 have a happy and safe holiday season until we talk again. Peace.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
