Jeff Malec sits down with Josh Blanchfield of Avos to trace his path from physics at Harvard, poker pro, and 11 years at Bridgewater (including co-heading the trading desk during Lehman) to running a concentrated, risk-aware commodities and macro shop. Josh explains why China is “ground zero” for global commodities, detailing how its import cuts, stockpiling, and scrap policies have shaped oil, copper, gold, and uranium, and why understanding flows and participant behavior matters more than neat top-down supply-demand models. He breaks down how Avos blends macro with very granular micro, like Chinese spec flows around Lunar New Year, refinery outages, crack spreads, and uranium’s inelastic buyers, to build convex, options-heavy trades that aim to capture upside tails while avoiding the classic commodity-fund blowup.
Along the way, they dig into the realities of radical transparency at Bridgewater, the limits and promise of AI as a “research team we never hired,” the risks of an AI-driven labor shock, the true drivers of the dollar’s dominance and petrodollar fears, why he’s skeptical on small modular reactors but bullish nuclear, and how his Substack and broader investment philosophy challenge received wisdom on everything from munis to equity valuations. SEND IT!
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From the Episode:
- PODCAST: “Dr. Copper”: From Chilean Mines to Chinese Smelters to AI Data Centers in the US – with Kurt Nelson & Natalie Scott-Gray
- PODCAST: Going Nuclear: How Uranium is Powering Portfolios with Trevor Hall & Justin Huhn
- PODCAST: OpenSnow’s Joel Gratz built a Pod Shop for Powder Days: the PMs are Meteorologists and the Returns are Faceshots
- BLOG: The Definitive List of the Best Investing Movies
Follow along with Josh and Avos on LinkedIn and Substack, and be sure to check out avos.co to learn more about what they are up to.
Check out the complete Transcript from this week’s podcast below:
Why Oil Didn’t Go to $300, plus Chinese gold bugs, Copper Squeezes & Uranium Alpha with Josh Blanchfield (Avos Capital)
Jeff Malec 00:09
Welcome to the Derivative by RCM Alternatives. Send it. Hello there. I feel like I’m Meg Ryan in the closet and sleepless in Seattle. Bill Pullman’s about to come in. It’s late at night. It’s dark outside. I’m recording the intro because I forgot today. So magic of podcasting, you won’t know the difference tomorrow when it comes out. Welcome back, everybody. You found the derivative. Brought to you by RCM Alternatives, where we do a lot of great content. I hope. I think we mentioned about three other pods and a few blog posts on this episode today, so wanted to point you guys over to rcmalts.com/education, where all those podcasts, blog posts, white papers, infographics, all that good stuff lives. Go check it out. On to this episode, where I jump right in with the super smart Josh Blanchfield of ABOS talking China AI and uranium before even asking about his background, which is just you know Harvard professional poker player and Bridgewater, nothing to see there. So somewhere in there we covered his commodity focused macro slash micro strategy, micro slash macro, however you want to call it. We get into it. Send it. All right, everybody. We’re here with Josh Blanchfield. Did I get that correct? You did. You
Josh Blanchfield 01:28
got it. Thanks, Jeff. Relatively easy one. Yeah. And I know that’s not a real background, but you’re near the mountains somewhere. Yeah, I mean, I’m you know a mile out my front door to the trails here in Boulder, Colorado. Ooh, I love it. Love hiking, spending time in the fresh air. 300 days a year of sunshine. It’s not such a bad place to live. Yeah, it’s either bluebird or snowing, basically, right? Exactly, exactly. And then you broke my heart right before we came on, but you’re not a skier. I’m not a skier? No, I I live here for everything but skiing, basically. So I know that I don’t say that too loudly. I could get my Colorado citizenship revoked.
Jeff Malec 02:11
We could talk briefly. I was just there in June, May. I can’t remember for Dodger softball tournament, Colorado Springs, but we saw some friends in Boulder. But that between Boulder and Lewisville, I don’t know if I’m going the right way. That huge project of they’re just basically building a bike path for my brother told me like $100 million or something.
Josh Blanchfield 02:31
You know, the one first rule of government spending is if you have money, you spend it, and if you don’t have money, you also spend it. So I I don’t know $100 million on a bike path? Sure, why not? I’ll take two. Yeah, be beautiful.
Jeff Malec 02:43
But it’s just right in between the road. It’s like right in the like. Let’s spend that somewhere where you see mountains or something. Yeah, fair enough. Fair enough. And so, what do you do in the winter? Nothing. Hike, snowshoe?
Josh Blanchfield 02:56
A little bit of snowshoe, but honestly, not much. No, I’m I’m a bit of a gym rat and happy to spend the time indoors. I’m a baseball fan, so the winter is a dark time for me. But otherwise, no, I I don’t I don’t get outside a ton in the winter. This last winter was great for me actually because it basically never snowed.
Jeff Malec 03:16
I know
Josh Blanchfield 03:17
the you know the ski resorts obviously probably had a different view on it than I did, but it was nice to be able to just go hiking and walking and play outside without any any snow on the ground for pretty much all winter.
Jeff Malec 03:28
We had Joel Gratz, I believe, the founder of Open Snow, who does the app and like track where the pattern is going to be, came on the pod and told us not to worry. It was just a little anomaly, but
Josh Blanchfield 03:39
yeah,
Jeff Malec 03:40
I might be worried. And then where you were in New York, though, right? Before working, yeah.
Josh Blanchfield 03:44
Well, actually, you know, I moved to Boulder from Shanghai, so I was at Bridgewater for 11 years, and one of the things I did there, sort of the back half of my career at Bridgewater was was setting up Bridgewater’s operations in China, and so you know, I in 2016 the Chinese government sort of changed the rules and allowed for wholly owned foreign subsidiaries, and so of course we wanted one. I took a team over there, we stood it up, and then you know once that was sort of mission complete, I had to figure out where I wanted to raise my family and have my next chapter, and and so I flew from Shanghai to Denver. I bought a minivan over the internet that I had delivered to the airport, and took took my family to Boulder. And you know that was eight years ago, and now I can’t imagine living anywhere else.
Jeff Malec 04:34
Right? You’re just like, hmm. I’m going to go from how is Shanghai is pretty polluted and gross, but also lovely. It’s
Josh Blanchfield 04:40
it’s tough, you know. I lived in Beijing from 2012 to 2014, also working on sort of Bridgewater’s footprint there, and that was really peak pollution, where you know you couldn’t go outside a lot of days, and my kids had to wear masks all the time, and and it was it was pretty rough. But you know, one of the I guess. Pros of a of a of a of being ruled with an iron fist, I guess, is that a a country like China can can change those sorts of things fairly quickly, and once they once it was sort of no longer taboo to talk about pollution and it was an acknowledged problem, it’s amazing how quickly it it improved. So by the time I went back to China, living in Shanghai this time in in 2016, the air was fine. It was just you know incredibly humid and hot. But it was wasn’t like the pollution was worse than New York or you know any big city in the United States.
Jeff Malec 05:36
I can just see you though sitting on it, like looking at a map of the U.S. Like okay, nope, too many buildings. Nope. Not enough. This like Boulder. Perfect.
Josh Blanchfield 05:44
Yeah. You’re you’re not far from the truth. I literally dumped. I mean, this is this sort of gets into the nature of our investment process a little bit, which is I dumped every city in America into a spreadsheet and just started sorting and and cutting, filtering until there was sort of one left, and and that was Boulder, and so we moved here sight unseen.
Jeff Malec 06:03
So price per square foot wasn’t part of the model.
Josh Blanchfield 06:06
Yeah, well, I mean that’s expensive everywhere. Yeah, price per per per square foot adjusted for you know local schools and and green space. Yeah, that that might have been part of it, but you know it’s not like the places you want to live in are going to be cheap ever? That’s you know sort of how supply and demand works.
Jeff Malec 06:24
Quick story on setting up a Woofy. I think I told you this down in Miami at iConnections, but the Bobby Schwartz, my partner here, and we set up at RCM set up a Woofy, and he had to send his passport. I think instead of going, he had to send his passport into the embassy to get it certified or blah blah blah. So it came back FedEx. A few of us intercepted in the office. We opened it up, took the passport out, had our Chinese intern like write a letter in Mandarin, put it back in the envelope, and sealed it in like and a new FedEx and gave it to him. And he opened it. He’s like, “What does this say? He’s like, “Due to your illegal activity while in Beijing, we’ve seized your passport. You must return to the country to face. And he’s freaking out like, “Get the lawyer on the line! Screaming. We can only hold a straight face for about five seconds. Yeah, sort of that.
Josh Blanchfield 07:11
It’s too good of a joke. You have to not even be there when it happens to hold hold a straight face. Yeah, that’s
Jeff Malec 07:15
great. And so, what? Just off topic here a little bit, but on those Chinese commodity markets, like from when you first got there till now, you still look at it. I’m sure, like what? Oh yeah, yeah. How? What’s that growth been like? That liquidity been like?
Josh Blanchfield 07:28
Yeah, no. I mean, so if you want to trade global commodities, China’s ground zero. You have to understand it, and and I think, I think that’s always been true, and I think it’s only gotten more true. So you know, if you think about some of the big dynamics in commodity markets over the last 12 months, China’s fingerprints are all over them. So you know, kind of to start with that, to start with, you have the oil price during the war. I mean, if you had told almost anyone what was about to happen, we’re going to be at war for six months and counting, straight over Hormuz is going to be blocked. You know, people pick a number,
Jeff Malec 08:06
$300 oil,
Josh Blanchfield 08:07
$300, 400. I mean, who knows, right? And what happened was was was none of the above. And why why why did that why did that happen? It was basically China. You know, there’s other sort of SPR release here and a little bit of demand destruction there, but like the big thing was China. China cut their imports on a daily basis by the total amount that Germany, Spain, and Italy use.
Jeff Malec 08:34
Wow!
Josh Blanchfield 08:34
So they basically took the equivalent of those three economies and just took that oil off the board. And you know, I write a I write a weekly Substack, and I wrote one titled “Searching for DB Cooper. I don’t know. Do you know DB Cooper? Love that
Jeff Malec 08:48
movie. It’s one of my top top 10 movies. Yeah.
Josh Blanchfield 08:51
So I
Jeff Malec 08:52
think we had it on Laserdisc as a kid. Yeah, one of the six. We were not the. We chose the wrong path. We chose the Laserdisc instead of the VCR at first,
Josh Blanchfield 09:00
you’re right. You know the DB Cooper. When I think of DB Cooper, it’s the ultimate mystery that will never be solved, right? The guy jumps out of an airplane with the money in 1971, he and never heard from again. And you know when we do the kind of sharp penciled attribution of how did China knock down their import set that much, we can’t get there. And so you know, did they draw from storage? Of course they did. Did they cut some demand? Of course they did. You know they did all the things that people are talking about, but when you pencil out the numbers, you just don’t get close to getting there, and and so how how did they fill that last gap? We don’t know. We don’t think anyone will know, right? But it’s just an example. I raise it as an example because if you wanted to trade oil during this period, you had to have a feel for what was going on in China. You know the. Same is true in copper, so you know copper’s had a big rally this year, and there’s a lot of attribution to the rally that comes from AI data center build out, AI data center build out,
Jeff Malec 10:14
electrification, electrification. We had a we had a copper podcast. We’re going to mention a lot of the other podcasts here. Yeah, yeah, of course, yeah, go
Josh Blanchfield 10:20
for it. You know, when we when we look at what’s actually going on, what’s going on is that there’s a supply problem. You’ve got Codelco, you know, basically failing in in in Chile. But then, you know, importantly, the copper market and and a lot of metals markets are always held together by the scrap market. You know, these metals are infinitely recyclable, and China changed the laws around taxes on scrap, and so the scrap response to the rise in price has been tiny compared to what it would have been historically. And so, when we look at what’s actually causing the rise in copper prices, we see electrification as like a background factor, and the real factor is actually supply, both from the mines and also, you know, especially from the scrap. And then the other side of it being, you know, you basically are creating a Chinese, a sorry, a copper SPR in the United States, and you know, why is that happening? Well, because of the uncertainty around tariffs. I mean, put yourself in the shoes of of someone who needs copper to run their business, right? It’s cheap. Grab it as
Jeff Malec 11:32
much and as cheap as possible, right? As many, yeah, it’s cheap.
Josh Blanchfield 11:35
It’s cheap to store. It’s cheap to carry. And if you think there’s some risk that there’s a 25, 50% tariff coming around the corner. Why wouldn’t you stockpile it? And so the ambiguity around the Section 232 investigation and the tariffs around that have caused copper globally to just get sucked into the United States and basically stockpiled, and that’s created a squeeze. If you look at sort of global level supply and demand for copper-it’s not particularly strong. Global supplies are fine; they’re average, but the problem is where are those supplies? They’re all sitting in Comex warehouses as opposed to being spread across London and Shanghai and the places where it’s actually consumed, and that’s creating a shorter-term squeeze.
Jeff Malec 12:19
Which is weird, though, that then the comics delivered copper is rising as well, right? Like it seems like there should be an arbitrage there eventually. Or
Josh Blanchfield 12:27
well, the arbitrage is still open. It’s in in terms of moving copper from London to to the U.S. It’s smaller, and so you know how much longer it’ll be open. I think is still a question. But the reality is, is that’s that’s what’s happening. Copper is getting sucked out of warehouses around the world and shipped to the U.S. And that’s why you know if you look at U.S. inventories of copper, I mean they’ve just gone vertical.
Jeff Malec 12:51
So coming back, I’m thinking like when you say China is the big story, it’s like Jim Rogers with his bow tie back on CNBC of like China’s the whole story they’re building like, but different, right? Like that already happened. This super cycle stuff, if whatever you want to call that. Now you’re just saying like the details matter. The details matter,
Josh Blanchfield 13:10
and and you know the other thing is China, the Chinese government in terms of how they operate in markets is I think they’re unique, more or less unique across the world because they are traders. They buy, they they buy low and they sell high. You know, if you look at the history of how they’ve engaged in markets like gold, like some of the metals, and in particularly the oil market, you know they have traded it beautifully, and so they have acted as a sort of stabilizer in a lot of markets because when the price goes up, they sell, and when the price goes down, they buy. They’ve become sort of that marginal swing player who you know has basically depressed. They’ve had a meaningful impact on commodity volatility across almost all commodities over the last couple of years, and they’ve really compressed that volatility because they’ve cut the tails off.
Jeff Malec 14:05
Do you ever think or know that they’re actually like trading against their own announcements and whatnot? Right. It seems like they have the ultimate trump card-not to use that word, but the ultimate ace in the hole of like, hey, we know we’re about to say no more imports of soybeans, so we’re gonna like wait and buy them up after we announce that, or whatever the case might be, they could trade around that masterfully.
Josh Blanchfield 14:26
I’m sure. I’m sure there’s some of that going on. I can’t. I mean, obviously, it’s something I can’t prove or point to particularly. But you know, the other thing is that when you talk about something like the Chinese government, you know, what do you actually mean by that? The Chinese government is just a collection of people, 99.9% of whom have no like don’t know each other and have no coordination, and so there’s often going to be times I’m sure where you know the left hand is doing things and the right hand is doing their own things, and sometimes it looks brilliant when they come together, and sometimes it just seems random. But you know, there’s definitely a strategic there’s a strategic. Strategic underpinning to this, right? If you look at them stockpiling uranium, if you look at say the last six weeks in particular, you know China has stepped up big time to buy this gold dip. They are they are looking for deals. They know that. Well, let me put it this way: when you run a trade surplus, you’re left every month with a big pile of dollars, and you got to decide what you’re going to do with those dollars. Do you want to lend them back to the United States, or do you want to put them into commodities that you’re going to need?
Jeff Malec 15:31
And you’re not just saying dollars haphazardly. You mean U.S. dollars, literal
Josh Blanchfield 15:36
U.S. dollars. Yes. Right. Right. Global trade is in dollars. If you if you run a trade surplus, you’re left with a pile of dollars. And so one of the things that we study is who has those piles of dollars, who gets those piles of dollars every month, and what do they do with them? And more and more, when we look at that picture in China, what we see is commodity stockpiling. You know, it’s not random that China came into this war with an SPR four times the size of ours. That was them choosing to, for you know, for basically reasons of national security to to take those dollars and make sure that they weren’t going to be able to be squeezed for for energy. I mean, look what’s going on in Europe. So they’re making those choices across commodity markets, and it’s been a big driver of of basically the the lack of volatility in some of these markets, and what do you make now that we’re on that topic of the end of the petrodollar and all all that hubbub of like that can’t last forever. Of like these countries are going to figure out. I don’t want to have this big pile of dollars. I want to have. I want to sell it in one. I want to sell it in Whatever, yeah, I think that stuff is overblown, and and the reason I think it’s overblown is that because you know when you think
Jeff Malec 16:50
overblown for 10 years, yeah,
Josh Blanchfield 16:51
yeah, it’s been overblown for 10 years, so you know, but eventually it’ll be right. I mean, do I? Yeah, it’s not like the U.S. dollar will will run the world for for literally ever, but the reason I think it’s overblown is, you know, the fact that the world uses dollars to trade is actually only a little bit important. What’s really important is what is the currency that you want to save in. So we could create a new currency here today. We call them Jeff dollars. Yeah, and we could say all global trades in Jeff dollars, and so then at the end of the month, the Chinese would would have this huge pile of Jeff dollars, and then what would they do with them? Well, they would say, “There’s no bonds I could buy. There’s no equities that I can buy with this. I can’t buy commodities with it. I need deep. I need access to deep capital markets that are denominated in this currency. So they would just convert their Jeff dollars to the U.S. dollars and do exactly what they’re doing. the The thing that causes the U.S. dollar dominance is as much the depth and quality of our capital markets and our financial markets as it is the sort of historical artifact that this is how trade is done. And the two things don’t have to be linked.
Jeff Malec 17:59
Yeah,
Josh Blanchfield 18:00
but you think the buying up of gold is a bit of a hedge on that, right? Yeah, but again, you can only buy so much, right? You know, you buy as many you buy as many equities as as the U.S. government will will let you. You buy as much oil as you can store. You know, they’re building more storage facilities to you know basically increase the size of their SPR, metals are great because you can pile them up. But you also they’re small markets. You have a big price impact when you come in and do that. So you know they’re they’re stockpiling uranium now. They’re building a you know they’re greenlighting a new nuclear reactor every month, and so they’re stockpiling uranium to get in front of a of a increased sort of reliance on nuclear power, and so you know. Go ahead, sorry.
Jeff Malec 18:44
Just sorry, that’s crazy that they’re doing both simultaneously. Like, like we’re going all in on uranium, and we’re going all in on more oil storage.
Josh Blanchfield 18:52
Yeah, I mean, look, all hands
Jeff Malec 18:54
on deck.
Josh Blanchfield 18:56
An economy and a civilization is really just translating energy into activity, you know, at the bottom of the economic, you know, pyramid is molecules of energy. And if you’re China and you are not fully energy independent, you want to get there quick because that’s a that’s a place where you’re going to have to say uncle quickly if you get cut off. Civilization stops functioning. Economies stop functioning if you don’t have access to energy.
Jeff Malec 19:36
Go back to your beginning. How did you? Were you in school for this? Did you come out saying I want to know about Chinese energy prices? Like, give us the the origin story.
Josh Blanchfield 19:46
Yeah, no, very. I think most like most people, I took life as it came and and ended up in a place that I probably couldn’t have imagined when I started. Yeah, I I studied physics at Harvard. That’s my degree. I actually. I when I left college, I started a software company and internet privacy company that I I sold in 2005, and then around 2005 was when the poker boom really was starting to pick up speed, and I played poker for a living for three
Jeff Malec 20:15
years. Nice, live or on screen or both, and then
Josh Blanchfield 20:20
you know, and then there was the sort of crackdown on internet poker, and and probably more importantly, my first child was born, and I said I should probably get a grown up job. And Bridgewater had been recruiting me for a long time at that point. My my college roommate had had gone there straight out of college, and and they’d been sort of knocking on my door, and so finally I said, “I don’t know what a hedge fund is. I don’t know what Bridgewater is. I certainly don’t know anything about radical transparency, but I’ll, but I’ll, you know, I’ll take the leap. It turns out, you know, health insurance is useful when you have a newborn, and and so I joined Bridgewater in 2007. It was, I think, maybe 250, 300 employees at the time, and and that was a fascinating 11 years that I spent there. Got to wear many many hats. I I already mentioned the China stuff. So you know I lived in China for a total of three and a half years, and and got to meet a lot of with your
Jeff Malec 21:14
family. You took your family with my family
Josh Blanchfield 21:16
with my family. When I moved there the first time, I have four kids. When I moved there the first time, they were 531, and six weeks.
Jeff Malec 21:26
Boy, so
Speaker 1 21:26
my your
Jeff Malec 21:28
wife was brave. Thinking you’re crazy, yeah,
Josh Blanchfield 21:30
yes. And then when we came, we came back. I had to put my kids in ESL classes because they only spoke Mandarin.
Jeff Malec 21:37
Oh wow!
Josh Blanchfield 21:38
So, so did that, and then you know, sort of the other, you know, did a lot of research on commodities and on other asset classes. I I did have a particularly unique life experience there, where september 1, 2008, was my first day as the co-head of the trading desk. You might have heard about a few things that happened in the immediate aftermath. Is that it’s like you know I’m still trying to figure out where the bathroom is when Lehman fails. So obviously an amazing education there, and was able you know just an amazing learning experience about what is liquidity in markets. What does it mean to be to be in a crisis and having to sell and having the the sellers disappear? And you know we were the obviously the world’s largest hedge fund by by quite a quite a margin at that point and you know being able to figure out how to move our positions around and to react to circumstances that you know in retrospect look you know scary but not that scary and at the time it was like is capitalism dead is you know is
Jeff Malec 22:39
is
Josh Blanchfield 22:40
we are we gonna have a global depression? I mean, we don’t we didn’t know at the time, and so being able to be nimble and and understand what’s going on there and and actually execute through it was, you know, I got a PhD in trading, you know, pretty much pretty much for my first couple weeks, years
Jeff Malec 22:54
of experience in those weeks, right?
Josh Blanchfield 22:57
Exactly, exactly. Or you know, I’ll give you another example. You know, when you it’s it’s it’s very easy sometimes when you’re trading to just push a button and not think too hard about where that goes, but you know at Bridgewater we had automated counterparty systems, which were basically measures of who we want to trade with and who we don’t want to trade with, and you know, in a situation like that, you can imagine what they tell you. They tell you take your ball and go home. Yeah. So that’s not good enough. Yeah.
Jeff Malec 23:27
Sorry, folks. Park’s closed.
Josh Blanchfield 23:29
Yeah. Park’s closed. Right. So you know that’s not that’s not going to work. And and and so you know you just learn a very practical when you go through a period like that. You learn a very practical, real world version of trading that is sometimes easy to gloss over.
Jeff Malec 23:45
How much broke on your end versus seeing step break on other people’s end, right? What did expose warts all over and holes that had to be patched?
Josh Blanchfield 23:58
Yeah, I mean, I think I think there were holes all over. You know, I think one of the things that we saw coming out of that was more trading that went through exchanges that could have gone through exchange, particularly in like currency markets.
Jeff Malec 24:10
Could have happened before, and it did. Yeah,
Josh Blanchfield 24:12
yeah. And I also think that, and I don’t take any credit for this. Obviously, I was on the job for 10 minutes when this all went down, but Bridgewater was way ahead of the curve. I think in in understanding counterparty dynamics and counterparty risk, and you know, basically was able to get out of all the hairy names before the street sort of caught on. And you know what it cost to get out of those names was comical. You know, comically small relative to obviously, obviously what turned out to be true, and then also even what a reasonable guess ex ante of what was going to be true, and the street just you know I think was there was a fair bit of I I don’t know like I don’t I don’t complacency I guess would be the word
Jeff Malec 24:53
yeah
Josh Blanchfield 24:53
that you know of course a Lehman can’t fail it’s impossible well it’s pretty possible
Jeff Malec 24:58
yeah if you looked at
Josh Blanchfield 24:59
their balance.
Jeff Malec 25:01
My buddy was at Bear Stearns, and he was one of the lucky ones who didn’t use his shares in the company to buy his Hamptons house. Right, so all those a lot of those partners had like borrowed their shares to pledge as collateral for their 10, $15 million Hamptons house, and then got double double whammy.
Josh Blanchfield 25:20
It’s like they say. I mean, concentration makes you rich, but diversification keeps you there.
Jeff Malec 25:24
Yeah, and then for Bridgewater’s model, like you weren’t like it’s not day trading necessarily, so that probably provided some relief too. Of like, hey, we we’ve got our base model here. We don’t need to go do anything crazy.
Josh Blanchfield 25:37
Yeah, yeah. Though I mean, you have to
Jeff Malec 25:39
yeah, to rebound. Ask yourself,
Josh Blanchfield 25:40
you know. So at Avos, we do a mix of systematic trading and discretionary trading, and so we don’t have any place where the computer is sort of hooked up to the markets. The computer always has to go through humans, experienced humans, and then the trades ultimately get filtered that way. And so there’s that element of judgment that you can just never get away, away, away from. Maybe someday AI will. Yeah, I was going to say still. Yeah, yeah, yeah. I mean, that’s. I mean, that’s this whole conversation. I wrote a, I wrote a Substack last year titled “The Research Team We Never Hired” that got a fairly big response because we had raised a GP round for the firm that we were planning on using to buy, you know, researchers and and expand, and and then you know, Claude sort of tripped over this threshold where it was like, wait, what am I supposed to do with a 25 year old? So, but you know, so the the point being that there’s still judgment required, and so if you have some model for whether equities are going to go up or down that is built on some business cycle dynamics, and then Lehman fails. You know, you have to look at that and say, Do I trust this anymore? Do I trust any of this anymore? Do I want to hold more cash? Do I want to de-risk? Do I, you know, do I want to flip my views on any of these markets? And and so that that I think that was the real challenge. And and you know I got to see up close Ray Dalio and Greg Jensen in particular during that period how they navigated that and again just as a as someone still fairly early in my career just the education from seeing those guys work through all these problems and and come out the other side strong was was really something else and what did do you have a radical transparency approach at Avos? I would say it’s less radical. Look, I think. How do I describe this? The culture at Bridgewater, there was a like so many things. There was a kernel of it that was amazing. I like the fact that I could go to Greg Jensen and say, “I think you’re, I think you’re wrong about this.
Jeff Malec 27:49
Yeah,
Josh Blanchfield 27:49
and he wouldn’t just slap me. You know, he would say, “Tell me why.
Jeff Malec 27:54
Yeah, go back to your cubicle.
Josh Blanchfield 27:56
Yeah, right. No, no. It was like he was like, “Okay, let’s let’s hear what you have to say. And if Bob, you know Bob Elliot, who you’ve had on as guests before, you know we worked together for a long time. If if he said to me, “Hey, you’re screwing this thing up, or I said to him, “You’re screwing this thing up, the response was, “Well, tell me what I’m doing wrong so that I can do it better.
Jeff Malec 28:13
Yeah,
Josh Blanchfield 28:14
I mean that’s all great stuff. You know that’s what you need for sort of a high performing team to to really function, and then you get to like the iPads and the dots and all of the stuff around it. And honestly, that stuff I found to be mostly a distraction, an expensive distraction. And I do think that the firm, the success of the firm during that period, happened despite it, not because of it,
Jeff Malec 28:40
and because they were long bonds, yeah, yeah,
Josh Blanchfield 28:44
yeah, yeah.
Jeff Malec 28:46
But it’s weird to me. It’s like New York versus Chicago, right? Like a Chicago prop firm. That’s all everyone’s doing all day, every day. Like Jimmy, we’re totally doing. That’s a stupid trade, and they’re just having it out in real time, and then go back to their versus New York. Maybe it’s a little more like, well, you need to report to the vice president. Needs to report to here and bring your problem up the chain. Yeah,
Josh Blanchfield 29:04
and and you know, and I I do think that the transparency element, where you’re recording every call and you’re recording every meeting and such, you know, the there is a real benefit to that at the at the you know, in in so far as it it really did help with sort of the office politics.
Jeff Malec 29:19
Yeah,
Josh Blanchfield 29:22
but then the flip, you know, the flip side is is that we’re human beings. Yeah, and
Jeff Malec 29:27
think you become garden and what you like. You know, it’s being recorded, so you’re not gonna like dish on somebody.
Josh Blanchfield 29:32
Yeah, and also, you know, the it’s one thing to put your ego aside, and it’s another thing to become a robot. And most people aren’t capable, and or even want to become robots, and so you know when you’re getting feedback all the time on minutia, it just wears you down.
Jeff Malec 29:49
Yeah, the funny part is now like without trying AI and like AI note takers, right? Or just it’s all radical transparency. Everything’s like summarized in the AI note taker. And shared around the team.
Josh Blanchfield 30:01
Yeah, yeah, yeah. And you know, AI is. You know, I have a lot of thoughts. We we we’ve integrated AI really deeply into our investment process. You know, when I think about our investment committee now, when we make investment decisions, I think Claude has a seat. You know, but I love.
Jeff Malec 30:18
I’m an investor anthropic, so I love that you’re saying Claude has a seat.
Josh Blanchfield 30:23
Yeah, I mean Claude’s the best by
Jeff Malec 30:24
far.
Josh Blanchfield 30:25
Look, this can change tomorrow, but right now Claude is definitely definitely in front of the pack in our view. So yeah, these things will change, and and you know who knows.
Jeff Malec 30:45
While we’re on AI, and then I want to dive into the models a little bit more about my thesis. I’ve said on the podcast a few times of like we’re in for a massive AI fueled recession, right? Like you just said, you saved money on the researchers. We’ve saved hundreds of 1000s on lawyers and accountants and everything. Like to me, the the end game is deflation. What’s your thoughts on that? Like, can it can it overcome it, or is that the natural end to it? Or it’s either massively deflationary or massively overpriced, and it won’t cause all that labor disruption. And then it’s those stocks have to be cut by 80% or something.
Josh Blanchfield 31:20
Yeah, yeah. Look, I think anyone who expresses a very strong opinion about this is probably kidding themselves a little bit. I’ll tell you, I’ll tell you what my view is, and you know you can throw it in the bin of everyone else’s views and decide whether you think it’s worth anything. You know, in the past, technology has displaced labor, and that’s been okay because human beings can contribute to an economy in basically one of two day two ways. You have your brain and you have your muscle, and technology has disproportionately come for the muscle, and the brain has always been sort of where we we reign supreme, and so like nobody, nobody expected there not to be a huge fall in the number of farmers when we started inventing, you know, farm equipment. But there were other places for those folks to go, other muscle jobs, and then you know ultimately brain jobs. And I’m not saying that you don’t need your brain to be a farmer, but you get the you get the delineation I’m drawing. There’s no third thing, so you know if you the arts,
Jeff Malec 32:30
yeah,
Josh Blanchfield 32:31
right. So there’s no third thing, and by the way, there’s no reason to believe that like there’s something about art that AI couldn’t eventually do better. So if you lose the brain, if you lose the ability for for humans to contribute to the to the economy via their brain, there’s sort of you’re going to get a bunch of people running around whose marginal benefit to the economy is zero.
Jeff Malec 32:57
Yeah,
Josh Blanchfield 32:57
and I don’t say that you know in a pejorative way. I mean, it may it’s going to come for me someday, probably. Yeah. But but the reality is, is that’s different. That is different than other technologies that we’ve seen. You know, there’s obviously been technologies that have nibbled away at that whole brain vector for humans to add, you know, value to an economy. But the the chunks that it’s taking out of it are are scary, and so I don’t know. I don’t really understand the argument that it’s not going to cause a relatively large decline in jobs eventually. It hasn’t happened. It doesn’t show up in the data, but I don’t really see how it it couldn’t happen. And then what happens next is totally a choice, right? Because you’re going to have a bunch of folks who are who are unemployable, and then you have to decide whether you’re going to do something like universal basic income or whether you’re just going to let the you know torches and pitchforks out.
Jeff Malec 33:56
Yeah,
Josh Blanchfield 33:57
and you know, given how nimble and cooperative, our government is. I have no question that they’ll be able to just navigate it smoothly with no no issues whatsoever. But but more broadly, you know, the idea of technology being necessarily deflationary. I think if you look at the historical record, it’s mixed. It doesn’t have to be. It sort of depends on where the benefits, where the productivity accrues, if it just accrues to margins, then you know you don’t have to see any kind of deflationary pressure.
Jeff Malec 34:30
What I’ll I’ll combat you on that one a little bit. Like in commodities, technology seems massively deflationary, right? Like
Josh Blanchfield 34:37
totally, yes. We had peak oil
Jeff Malec 34:39
in 1972. Now we can drill 1000 feet down, 1000 feet over, get pockets we never even could have dreamed of, and then in agriculture and everything, like just every time the demand is up, they’ll find a way. Technology finds a way to get the supply to match. And
Josh Blanchfield 34:54
you you put your finger right on it. What made that happen was because they were commodities. The productivity gains couldn’t accrue to margins because you can’t claim more margin than I can claim for the same barrel of oil. Yeah, yeah. Right. So the question is, will AI be more like a commodity where the top 20 models are all basically the same, and so they can’t charge much more than their marginal cost for for them, or is it going to be more like you know other industries where actually Claude is just the best, and you’re willing to pay a lot for Claude, and Claude is able to charge fat margins because there’s huge demand and not good equivalent, not good equivalents.
Jeff Malec 35:37
But not, and then that brings up like, but not too much because then the human can replace it. Like it can’t get more than the human replacement, right?
Josh Blanchfield 35:45
Yeah, and and and so this is you know this is where I think it’s really good to have a macro perspective on on some of this stuff because you know when we look at the U.S. stock market, you know you can go company by company and you can talk yourself into it, with you know a few exceptions. I can’t talk myself into Tesla, but you know most pretty much every other company you can look at it and say, “Yeah, I understand the state of the world in which this thing is fairly priced. The problem really jumps at you when you aggregate those 500 companies together, and you realize that for all of them to win in the way that is priced in, the the implied macroeconomic outcomes, you know, specifically growth, are ludicrous. And so, you know, like I think this there’s this conversation, you know, is the U.S. equity market in a bubble or not, and which I think is more or less a pointless conversation because people mean totally different things when they say bubble. But you know, for us, if you if you were to define bubble as the aggregate economic conditions that are priced into the equity market are more or less impossible, then we would say yes. And that doesn’t mean it’s going to crash. It doesn’t mean you know go rational exuberance,
Jeff Malec 37:00
as someone once said.
Josh Blanchfield 37:02
Yeah, exactly. So you know the the the it’s important I think when when you’re when you’re thinking about these types of you know turning points in markets, things like you know here comes a big disruptive new technology that you have a granular understanding of what the thing is and how it works, but also you’re still connecting that back to the big picture, to the macro backdrop, and saying U.S. growth is going to be 15, probably not. Okay, so something going on here.
Jeff Malec 37:29
Yeah, but it seems like the market’s discounting that a little bit anyway, and they’re just like, who cares? Just own these seven names, and yeah, maybe the others fall by the wayside, but you’ll be fine in the in the seven names,
Josh Blanchfield 37:42
yeah. Which again gets you to the to your point, I think, which is like, okay, well, who, one man’s spending is another man’s income. One man’s income, you know, is another man’s earnings.
Jeff Malec 37:51
Yeah, who’s buying the the chachkeys when nobody has jobs?
Josh Blanchfield 37:55
Right. Exactly. Yeah.
Jeff Malec 38:06
So you run a global macro model. We met in Miami and was interested in your commodity model, which seemed a little bit different. Most a lot of commodity talk here on the podcast. So tell us what you’re doing with that commodity strategy, how it’s different, yeah. I’ll let you take it from there.
Josh Blanchfield 38:24
Well, we we yeah we trade commodities. We have a commodity dedicated commodity fund trades metals and energy, no ags. And you know, really, what we try to do is take our macro understanding that we built at Bridgewater and apply it to commodities, while also sort of meeting in the middle with a really granular bottom-up understanding of of the commodities that we trade. So, you know, we find that this is true in all markets, but we find it particularly true in commodities that the details matter, and that if you just have a good macro model in commodities, it’s not gonna it’s not going to end well for you. Avos
Jeff Malec 39:02
is, and what what do you mean by that? If I have like a price of production for oil is whatever $62, and it drops to 42, and I’m like, this is a screaming buy because of that cost of production. Like, no, there’s details of why it’s at below that. Yeah,
Josh Blanchfield 39:16
I mean, look, if you have a supply and demand model for copper, you’ve been short all year.
Jeff Malec 39:20
Yeah, yeah.
Josh Blanchfield 39:22
I mean, God knows what you’d be doing in gold. So you know, there’s there’s there’s a much more granular understanding that you have to connect to the notion of the macro notions. I mean, even you know, we used to talk about there’s this thing, Doctor Copper. Have you heard this phrase, Doctor Copper, right? It’s like Copper. Copper told you everything you needed to know about U.S. growth, and now when you look at what drives copper demand, it’s it’s you know it’s it’s China and electrification, and you know Codelco screwing up, and and there’s all these there’s all these sort of dynamics in the market that are more important for. Day price formation than sort of aggregate global supply and demand balances, which again, looking across markets, we think is more or less useless. So, so that that’s what I mean. That’s what I mean by that. And you know, part of that is is having a really granular understanding of flows and who’s doing the buying and selling and what are their motivations. You know, it’s funny on on some level, there are only two types of flows. There’s people who buy when the price goes down because they like a deal, and people who buy when the price goes up because the thing is going up.
Jeff Malec 40:32
Yeah, and Chinese and trend followers.
Josh Blanchfield 40:35
Exactly right. And so you know, like that’s why we we’ve gotten excited. So if you think, if you look at like the gold market, for example, we were long gold all last year, more or less. We were long gold through January, and then a few days before the crash, we actually flipped short. And why did we do that? Well, it was by understanding the dynamics around those Chinese, you know, basically speculators. Chinese New Year was coming up. People are not Chinese speculators. Do not like to carry risk across Chinese New Year, and so if you if you study that dynamic, if you study that flow, you’ll find that there tends to be a mean reverting nature to you know whatever Chinese speculators are long going into the holiday. They tend to take those that risk down, which causes selling, and vice versa. Straight out of
Jeff Malec 41:25
trading places, they got to sell that so I can buy a gift for for their little kid,
Josh Blanchfield 41:29
right? And also, the markets are closed for two weeks. You wanted to sit there and just carry risk that you can’t do anything about. So, you know, we that that’s always a dynamic. But being able to see how much bigger it was this time than it was usually because of just how crazy the speculative fervor around precious metals had gotten in in China. So not just gold, but also silver. And so we were able to get short, you know, basically in the lead up to Chinese New Year and catch that move. That’s that’s the kind of thing that that we do. And then you know when we think about the gold market moving forward,
Jeff Malec 42:02
and that’s a discretionary call. That this is all discretionary. Now you’re getting the inputs and then making the decision.
Josh Blanchfield 42:08
It was a discretionary read of the situation that we had systemized.
Jeff Malec 42:12
Yeah, yeah,
Josh Blanchfield 42:13
right. So we’re seeing the Chinese speculators. We’re asking ourselves how long before the exchange raises the margin requirements.
Jeff Malec 42:22
Again, we’re looking
Josh Blanchfield 42:23
at that and saying how close to Chinese New Year are they willing to get before they have to unload this risk, and the combination of those things causes humans, me and my other colleagues at Avos, you know, like I said, we were there, four of us were on the investment team together at Bridgewater, you know, to to make that trade, and then so then you know you play that forward, and this is why I brought up that paradigm, which is there are only sort of two types of flows. Once the market starts to fall, the trend followers sell, but the level of the price is still not necessarily attractive to the Chinas of the world. So you know, from for for the last few months, you’ve had, you know, more or less the central banks sit it out while the specs and trend followers did their thing. Until you know, basically six weeks ago, China said, “Okay, I like where we are now, and now the central banks have come roaring back. They’ve reestablished a new trend, and we expect the specs who have already started to pile back on will continue to pile on, and we think we’re probably in the third or fourth inning of a of a nice gold move here. Do like is that part of your flow analysis of like the central banks will follow one one another? The they the central banks definitely have similar reaction functions to price. Yeah, there are there are certainly differences across them, and China is obviously the most important one. So if you get China right, you more or less you know you’re more or less are going to be okay. The other the other thing is it comes back you know the other thing you have to think about in the backdrop of a war is that you know if global trade is impaired, then trade surpluses can be impaired as well. And again, it comes back to the paradigm we described before, which was you know you’re you’re left with a pile of dollars and you got to do something with those dollars. You’re going to buy gold. You know, China we think spend about 11 on average of their dollars ends up in gold one way or another, something between seven and 11% and and so if you know global trade is shrinking because you know I don’t know there’s a war, you know that’s a that’s a dynamic that you have to weigh as well.
Jeff Malec 44:36
Yeah,
Josh Blanchfield 44:37
yeah, because literally things can’t move, right? Exactly because you know fuel for those ships costs twice as much, and you know they they’re afraid of hitting a mine. Then yeah, of course. Then there’s going to be fewer dollars to invest, and we were picking up some of that dynamic earlier in the war as well.
Jeff Malec 44:52
So it seems to me like I want to rename it micro commodity trade, right? Like that’s a very micro thing. Like maybe you’re calling it macro, but. It’s no, but you have the macro view, and then you’re saying no, but the micro is what matters,
Josh Blanchfield 45:04
right? And so you have this macro view on trade balances and global trade, and that’s taking, that’s giving you, that’s sizing your pile of dollars that then you can filter through in a very micro way into the behavior of these central banks.
Jeff Malec 45:18
And then what’s that look like? That was a you have different conviction levels. You’ll put X percent of the portfolio on that trade, and then you. What does all that sizing look like?
Josh Blanchfield 45:27
You know the you can’t talk about managing commodities without you know acknowledging the elephant in the room, which is that commodity funds blow up all the time.
Jeff Malec 45:36
Yeah,
Josh Blanchfield 45:37
and we think there’s a couple of reasons for that. One of them is, I think,
Jeff Malec 45:42
a man named Philip Andoran. Yeah, yeah. Outside of him, it’s much less percentage-wise.
Josh Blanchfield 45:48
Yeah. Well, you know, you get a lot of folks who enter the commodity space whose background is in the commodity. So, you know, I worked at Cargill for this number of years. I know more about soybeans than anyone else in the world. I’m going to set up a fund, and then what happens is you end up one way or another with like really concentrated positions, and then you know it rains three days in a row in Brazil, and suddenly your fund blows up. Yeah, the spread has never been this wide. Yeah, yeah, exactly, exactly. And so you know when we thought about building the strategy, we it took probably a year before we actually launched the strategy to really build a robust, tailored risk management model. The things on the shelf are way too reliant on assets that behave well, and commodities do not behave well. You need to just take as a reality the tails and build that in. We try to profit from the tails. We do a lot of you know sort of convex bets, which you know out of the money options on various things. When we think that there’s a squeeze happening in in commodities, and squeezes happen in commodities all the time. But the reality is is that you need to run a tight ship on the risk side to survive, and you know the thing is, is that there is alpha in these markets. If you keep the ball in the fairway, you’re going to do great. If you if you have that alpha, but the the commodity markets are conspiring to get your ball in the rough.
Jeff Malec 47:18
Yeah, and and so you know immediately grow over the fairway,
Josh Blanchfield 47:24
right? I mean, just in the the strategy has been around for you know 333 plus years now. You know, you had your biggest ever single day move in gold, your biggest ever single day move in copper. You had you know obviously your biggest single day move ever in silver, and then you know with
Jeff Malec 47:40
Iran, right,
Josh Blanchfield 47:41
and and by the way, Russia Ukraine. I mean, that has been a sneaky, I would say, a sneaky lid on the oil price has been Ukraine deciding that they’re going to, you know, play more offense and actually attack the refineries on on Russian soil,
Jeff Malec 48:03
a lid or a floor
Josh Blanchfield 48:07
for actual crude. It’s put a lid. I don’t buy crude. You don’t buy crude.
Jeff Malec 48:13
Yeah, yeah.
Josh Blanchfield 48:15
Refineries buy crude, and the 12 bigger refineries
Jeff Malec 48:18
on fire. They’re not buying any crude.
Josh Blanchfield 48:20
They’re not buying any crude, and so crack spreads have blown out to the highest level ever because refineries around the world are burning. But it’s put a lid on crude demand. I mean, you got you’ve got Russia exporting oil and importing products now. I mean, that’s a pretty big change.
Jeff Malec 48:40
Yeah, yeah,
Josh Blanchfield 48:42
yeah, and you know. So again, like there’s a macro thing that there that you know you have to understand in terms of oil demand and and growth levels and these types of things. But at the end of the day, if you have a bunch of refineries on fire, you’re going to get demand destruction through crack spreads, not through the price of a barrel of crude. Why just metals and energy battles cars from ag markets, or just said like let’s? It’s just what we know. It’s just what we know. We’ll trade anything if we think we have alpha in it. And one thing I’m pretty confident in is that I’m no good at predicting the weather, and I feel like it’s tough to trade ags without without a better handle on the weather than certainly I have. I mean, I you hear these stories of Citadel launching their own weather satellites and stuff like that, and it’s like okay, know who else is at the table when you’re playing, and and that’s that doesn’t seem like fun to us.
Jeff Malec 49:46
And then talk so all sorts of metals, industrial, precious. You even said uranium.
Josh Blanchfield 49:52
Yeah, we love trading uranium. We think is uranium
Jeff Malec 49:54
a metal? What is your?
Josh Blanchfield 49:56
Yeah, I think uranium is a metal. Yeah,
Jeff Malec 49:58
sure.
Josh Blanchfield 50:00
Uranium to us is just is great, and you know the the reason it’s great, I think, is just just it’s not big enough to really attract the attention of the Bridgewaters and the Citadels and the you know of the world. It can’t move the needle, and so that’s one thing that we think a lot about in terms of our our strategies is capacity, which is you know we think about we basically want our strategies to be small. We put I have 100% of my own wealth in our own firm strategies. I want the performance to be good, and that means that we can’t be too big to trade the markets we want to trade, and when you look at the uranium market and sort of nuclear energy more generally, I mean there is so much rich opportunity for alpha. There’s so one of the, I mean, sort of step number one, sort of like the first thing you look for in a market, if you want to find alpha, is are there people participating who don’t care what price they get? Yeah, and this is the classic thing: trading currencies against central banks. Right, they have things that they’re trying to accomplish, and the price they get is the price they get. If you’re ready,
Jeff Malec 51:20
argue the U.S. stock market of all those 401k contributions coming in. Yeah, I
Josh Blanchfield 51:24
mean that’s that that that’s an example. It has its own nuances to it, but that is an example. But you know, when you think about running a nuclear power plant, you know your your fuel costs are a relatively modest part of your overall opex. You know, are you going to not you turn the plant off because somebody is trying to sell uranium to you for 90 bucks instead of 89. I mean, come on, right? So you have these sort of captive buyers, and you have captive sellers. You know, like if you are Camaco and you pump a bunch of uranium out of your mines, like what are you going to do? Just like put it in your garage? Yeah, you know, so you have a lot of inelasticity in the system that creates a lot of a lot of opportunity. And there are actually some hedge funds that we don’t trade at the physical, but there are hedge funds who sort of broker both sides of the market, and and they’re able to sort of pick up on those elasticities as well. We do it through the public markets. They do it through the physical moving of the uranium. But there’s there’s a lot of alpha kind of circulating in in in in uranium specifically.
Jeff Malec 52:31
Yeah, I’m waiting for the CME to get on the uranium futures, make it a bigger product. But the we did the pod with the uranium guys. They were saying it’s basically trades like futures now. Like people are buying a year out. The physical basically trades like a forward already.
Josh Blanchfield 52:45
Yes. Yeah, and then you know the forward price ends up being embedded in the price of a lot of the equities, and so that creates sort of opportunities there as well. The ETFs are so large relative to the size of the underlying companies that a lot of times the individual names just get whipped around by ETF rebalances and ETF flows, and so if you understand that in a very micro way as well, it’s just another way to sort of extract alpha from the same you know sort of family of markets.
Jeff Malec 53:16
I was really upset with that learning on that podcast. I’m like the future small modular reactors, like every college will have one, right? It’s been fueling naval ships for decades. Like, no, it’s like the size of a large parking lot. It’s not like I’m thinking like it’s a little ball like this, and they’re like it’s large. Yeah, no, and just not like three mile island large. It’s like the size of a parking lot. It’s still
Josh Blanchfield 53:39
big. Yeah, that’s the that’s the that’s the funny thing is that SMRs small modular reactors are not small and not particularly modular. So you know it’s like a
Jeff Malec 53:48
great name though that got me yeah
Josh Blanchfield 53:50
yeah yeah seriously. But you know especially when you look at the power needs, you know, assuming we’re going to do all this AI data center build out, you know SMRs aren’t going to scratch the surface. You’re talking about, you know, data centers that are pulling, you know, three, four gigawatts. You know, you need big, big, big reactors and lots of them to power something like that.
Jeff Malec 54:11
LMRs,
Josh Blanchfield 54:13
yeah, yeah, yeah. LLMRs, yeah, yeah, yeah. I mean, it’s it’s and you know the other thing I would say about SMRs is you know I’m I’m reasonably skeptical about the whole SMR story. I’m super bullish on the nuclear story, but skeptical in the SMR story in particular is because I think we have China as sort of the canary in the coal mine here, which is that they have, I would say, a very build-friendly regulatory environment as it relates to nuclear. They can build whatever they can build whatever model they want, and what are they doing? They’re building the big boys, and they’ve cut the cost down meaningfully. They’ve cut the time down meaningfully relative to, you know, how much it costs and how long it takes everywhere else in the world. And that comes with practice, of course. And you know, they’re kind of providing a roadmap that, to me, is is relatively bearish SMRs. Relative to you know, kind of traditional reactors.
Jeff Malec 55:03
Love it. I’ll bring us back on topic. From it, the so capacity wise, what does that mean to you? You want to stay small? That’s under a billion, under 500 million. What does that? Yeah, I
Josh Blanchfield 55:12
mean, I think you know one of the lessons from the from the financial crisis, of course, is that capacity is a mix of art and science,
Jeff Malec 55:21
yeah,
Josh Blanchfield 55:22
and you know the the the way I the way I sort of imagine it is you know doing your trading, and it’s a little bit like driving behind a truck. You know, when you’re getting closer, you slow down, and when you’re getting further back, you can speed up a little. So, yeah, I mean, I think a few 100 million dollars to start, and hopefully let performance take us to a billion would be kind of the good a good situation. But we’re going to be we’re going to be very you know we have other strategies that have much bigger capacity for trading things like uranium and gold and copper. There’s so much value in being small,
Jeff Malec 55:58
but you know the normal playbook is just like well, we’re at capacity now. We’re adding softs. We’ve added now. We can increase capacity 33% I know, and you know, I so you’ll reserve the right to do that if it comes. Well,
Josh Blanchfield 56:15
yeah, I I also well anyway. That’s a that’s a longer that’s a much longer conversation about the incentive structures for financial for for basically asset management companies and
Jeff Malec 56:25
yeah. So how many markets overall you trading inside? There’s like 15 inch or
Josh Blanchfield 56:40
yeah, and we trade. You know, we we’re not just taking a view on flat prices. We do a lot of volatility trading. We do we do trade equities as well. In so you know, we trade basically all energy and metals. We trade the futures, the equities, and options on both. And so
Jeff Malec 56:56
it’s not a base model where you’re just like we want to be long. We want to be short that gold? You might buy puts. You might sell GLD or something. Who knows? But right, so you’re looking at it of like, what’s my best asymmetric payoff? Which instrument should I go back to?
Josh Blanchfield 57:11
Exactly right. And you know, and and we also we use options a lot to create asymmetric payouts. We also use it a lot for risk management. And you know, there are definitely situations where futures are better than options, and there are other where options are better than futures for expressing directional views as well. And and you know we we move between those, and then we’re able to trade the sort of underlying commodities relative to the equities in those commodities, in you know either the spread trades or we can express that the, you know, for example, we we we were long Valero for a big part of the year. We thought that the strength in crack spreads was underpriced in the stock. That turned out to be a good trade. So we can do things like that as well. We’re we’re relatively unconstrained, which also puts us in a little bit of a weird place from a fundraising perspective because we tend not to fit neatly into into one bucket, which is fine. We can live with that. As Bridgewater guys, you know, we’re always a little bit off, right?
Jeff Malec 58:06
And then you’re not so per that you’re not trying to track commodity prices or be an inflation hedge or anything like that. You’re just like we’re giving absolute return, and just these are the vehicles we’ve chosen to do
Josh Blanchfield 58:18
it. Yeah, and and you know, yes, with an asterisk, which is, I do think that we’re trying to capture the big upside moves in commodities. That’s kind of like point point A, and the other thing that we’re really trying to do is we think about our strategy as in terms of how it fits into portfolios, and it’s important to us to be at most uncorrelated to say U.S. equities, where you know the the bulk of our clients’ risk tends to live, and so we’ve been negatively correlated to the U.S. stock market, and so we think that that’s an important characteristic that we, to some degree, we manage towards. So you know, for example, during the kind of the early throes of the war, when you know all global markets basically, I mean certainly all global commodity markets ended up with like a correlation of one. You know, you could look at the oil price in the morning and know whether gold was up or down, and copper was up or down, and everything else. You know, in that environment, we knew that the chance of an accident looked horrendously underpriced to us. We we knew that if that happened, that equity markets everywhere were going to puke, and so you know we put on a lot of upside convexity in oil that you know obviously you know lost money, but that’s the kind of thing that we would think about in in terms of our process. Which is okay. We’ve got we’ve got a double whammy here. We’ve got a negative correlation to the stock market, and we have something that we think is materially underpriced. That’s going to be a big trade for us.
Jeff Malec 59:57
And then talk through that up versus down dynamic. That’s. Just simply like it can infinitely go up, and it can only go to zero on the downside. I guess crude showed in 2020 it could go negative, but yeah, conceptually, yeah,
Josh Blanchfield 1:00:10
yeah, conceptually, yeah, that that was its own thing. By the way, China happened because of China, so I mean, you know, that that’s it all comes back. Yeah, I mean, like we we we don’t sell options. We buy options for risk management. We buy options for convex payouts where we have the premium at risk, and we can make 10 times the premium if we’re right. And if we’re right, you know, if if if something is priced at 10, and we think there’s a 20% chance it’ll happen, then we’re going to buy a lot of it, and we’re usually going to lose. And when we win, we’re really going to win.
Jeff Malec 1:00:43
Love it. So we would say the overall book is positive skew, right? Like you’re yeah trying to be it. Yeah,
Josh Blanchfield 1:00:49
yeah, yeah, yeah.
Jeff Malec 1:00:50
Love it because a lot of like to your point, a lot of those ones that blow up are negative skew, like option sellers and commodity clothing, essentially, right? Like
Josh Blanchfield 1:00:59
look, we we bought a lot of options that expired worthless over the course of this war, and somebody sold them to us and made a pretty penny for some of that. Of course, you know, of course they were hedging and such. But there’s a lot of of naked option selling out there that looks really good until it doesn’t.
Jeff Malec 1:01:18
What else? What else you got for us? Anything I missed?
Josh Blanchfield 1:01:21
No, I I write a Substack every Sunday. If folks are interested, it’s free. You can just Google my name on Substack. We I write about investing this week.
Jeff Malec 1:01:29
Show notes as well.
Josh Blanchfield 1:01:30
Yeah, I this week I wrote a piece that caused a little bit of a stir. The title you might be able to tell what I wrote about from the title. The title was “Munies Are Overrated, where we basically went bond by bond across the Muni market and calculated like a actually apples to apples benefit to owning them, and and it’s not a particularly pretty picture. So we write about that. We have a net of,
Jeff Malec 1:01:55
but the taxes they’ll say, but you’re a national. We did a net of taxes.
Josh Blanchfield 1:01:59
We did a net of taxes. Yeah,
Jeff Malec 1:02:00
yeah.
Josh Blanchfield 1:02:01
Our pencils are sharper than that.
Jeff Malec 1:02:03
Yeah,
Josh Blanchfield 1:02:06
we have a an equity strategy, an ETF. I don’t know what the rules are around mentioning it, but the ticker is our company name, and so we write a lot about equities and equity valuations. And
Jeff Malec 1:02:17
yeah, who who got on your wrong side that you were wanted to attack muni bonds, like or people calling up with like, well, I’m looking at your absolute return commodity program, but I’m doing munis instead.
Josh Blanchfield 1:02:29
Well, you know, the seems like two separate universes. We work with a lot of high net worth individuals, and you know, they they see us as someone who can trade commodities, but they also see us as having a broader, you know, capability around investing, and so you know when we get the balance sheet of a high net worth individual and it’s 20% munis, you know we see stuff like that all the time, and you know there’s I think what makes munis in particular an interesting sandbox is that there are so many things in finance that are just believed to be true. You know, private equity is going to outperform public equity. That’s just a thing. It’s like religion. It’s just true, right? And then you start to dig into these things, and you ask yourself, is it really true? How would I know? What does the data show? Who’s incentivized to, you know, sort of sell this message? And you pretty quickly get a lot of these narratives falling apart. And you know, honestly, a big part of what I what I’m grateful for, you know, Bridgewater was a was you know it takes its pound of flesh, but I’m unbelievably grateful for my time there and the education I got there, the people I got to know, and I’m particularly grateful that when I read a story in the Wall Street Journal or in Bloomberg or whatever, my first reaction is almost invariably, “Really?
Jeff Malec 1:03:54
Yeah,
Josh Blanchfield 1:03:55
you know, it’s sort of like you know, an embedded a skepticism in me, which I think is extremely valuable for being a being an investor, being a trader. But I think also our clients, you know, appreciate it too because we’ll call balls and strikes on things that are just kind of assumed to be true.
Jeff Malec 1:04:14
It’s the old I’m going to butcher the name. I think it’s a Gelman amnesia effect or something, right? Like, right. If you’re reading about we see this all the time, like natural gas prices sold off 6% because rebounds or whatever, and we’re like, no, we know an ETF that just blew out and had to sell it. Yeah,
Josh Blanchfield 1:04:30
right. So it’s
Jeff Malec 1:04:31
like completely wrong. And then on the next page, you’ll read like something about like nickel or something like, oh, that’s really interesting, but it’s like the same source, right? And just I know for a fact that one’s false, but I don’t know this one until I just take it and believe it. That’s why I a stupid trick of the human brain. Like what? It’s
Josh Blanchfield 1:04:49
totally, and you know that’s why I’m sure you know Matt Levine over at Bloomberg.
Jeff Malec 1:04:53
Yeah,
Josh Blanchfield 1:04:54
he his column. I think the reason why I’ve become such a a firm believer in his. Because whenever he wrote about Bridgewater, he did an incredible job, and it was basically spot on. And I was like, okay, that’s the thing I know about, and he’s on top of that. I’m willing to trust his takes on lots of other things.
Jeff Malec 1:05:10
And my beef with Bridgewater for years was that they reported they were in a managed futures database as part of their assets, and you guys were so huge. So I’m like railing. I was writing blogs and everything, like, hey guys, managed futures assets isn’t really 800 million because 350 of it is Bridgewater. Like we need to subtract that out of there and then like talk reality.
Josh Blanchfield 1:05:33
Yeah, and also Bridgewater Bridgewater does has nothing to do with managed futures. Exactly. I mean, we traded
Jeff Malec 1:05:39
futures, but we managed
Josh Blanchfield 1:05:40
futures, but we didn’t. You know, there was no like the typical things that you think about with managed futures. It was not at all what we did. So, yeah, funny.
Jeff Malec 1:05:50
I’ll put you on the spot to end since you mentioned pursuit of DB Cooper. Maybe I’ll frame it as top five movies you’ve put in your Substack as as part of writing material.
Josh Blanchfield 1:06:02
Top five movies. Well, look, I I get a question that I get a lot is I’m 22. I’m trying to figure learn about markets. What should I What should I do? What should I read? What should I watch? And I always tell people, having lived through the the global financial crisis, Big Short like nails it. I love that movie.
Jeff Malec 1:06:23
Yeah,
Josh Blanchfield 1:06:24
and I’m a baseball guy, so I would put Moneyball on that list. You know, nothing too creative. And then you know the the the sad truth is that I’m a huge comic book nerd. So you know I was excited that you know the new Green Lantern show started up
Jeff Malec 1:06:39
on Sunday. Green Lanterns one.
Josh Blanchfield 1:06:41
Yeah, yeah. I don’t get it.
Jeff Malec 1:06:43
There’s two of them. What do they? What do they do?
Josh Blanchfield 1:06:45
The first episode was great. Well, there’s in the comics. There’s been lots of folks who have
Jeff Malec 1:06:50
oh, they just had
Josh Blanchfield 1:06:51
to
Jeff Malec 1:06:52
pass the ring around.
Josh Blanchfield 1:06:53
Yeah, or there’s more than one ring at a time. So that that you know, the intrigue here, sci-fi
Jeff Malec 1:06:59
nerd, but I’ve never actually gotten into physical comic books.
Josh Blanchfield 1:07:04
Yeah, Green Lantern was always my favorite when I was younger, and so seeing that seeing Green Lantern, I’m excited about the possibility that Green Lantern is going to be done well. One movie I will not put on my list is the Green Lantern movie from what was it 10 years ago, whatever, with Ryan Reynolds. I mean, that movie is a complete mess, but I have higher hopes for Kyle Chandler and the and the and the crew on HBO that’s going on right now.
Jeff Malec 1:07:28
So we have we have a best investing movies of all time list that I’ll send you.
Josh Blanchfield 1:07:33
Yeah, I like to see that
Jeff Malec 1:07:35
it includes Pretty Woman. That was about a private equity like guy that was holed up in the hotel, going over his numbers, right? Yeah. If
Josh Blanchfield 1:07:43
you if you squint hard enough, pretty much everything can be called an investing movie. Exactly.
Jeff Malec 1:07:47
Awesome, Josh. We’ll leave it here. Thanks so much for your time. It’s been fun.
Okay, that’s it for the pod. Thanks to Josh. Thanks to RCM. Thanks to Jeff Burger for producing RCM for sponsoring. We may be on break next week, or may do a solo six-pack for you. Haven’t done one of those in a while, or maybe bring on a friend of the pod. So, which is to say, I don’t have anything planned yet. But stay tuned. We’ll see you next time. 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.
