Gurevich: Zero Interest Rates Not Off the Table, Why Deflation Is Coming, & the Next Perfect Trade
Summary
Market Outlook: The guest sees a higher-than-priced probability of a return to very low or even zero interest rates driven by stealth labor market deterioration and deflationary pressures.
Deflation vs Inflation: He argues the near-term regime skews deflationary, with potential policy responses (fiscal stimulus) capable of flipping it back to inflation later.
Precious Metals: Precious metals dominated macro volatility; gold tends to lead, silver follows, platinum next, with sharp corrections typical after parabolic moves.
AI Impact: AI could simultaneously boost productivity and eliminate jobs, enabling low rates amid strong asset markets, and may decouple employment from growth.
Energy Demand: AI-driven computation will massively expand energy demand, potentially overwhelming supply; fossil fuels won’t suffice, and even fusion may not fully meet needs.
Japan Opportunity: He highlights a developing setup in Japan—long yen vs long JGBs—as an asymmetric idea depending on BOJ rate path and currency response.
Rates Dynamics: US rates are “pinned” amid mixed data; curves often steepen early in easing cycles, and the Fed will key off employment more than equities.
Risk Management: Emphasizes the power of carry, learning from regime shifts post-2020, and maintaining discipline as historical indicators can break.
Transcript
I am leaning towards increased likelihood of going back to extremely low interest rate environment. So I think zero interest rates are not off the table. I have to admit the economic data in the US is not weak. It's mixed. I think in the background I'm seeing the path to deterioration of the labor market and paradoxically the less visible it is the worse it's probably going to be. Alex Gurovich, CIO of Honte Investments, author of multiple books, and you're out with the latest, the second edition of The Next Perfect Trade Guest from episode 24 on this podcast. It is so wonderful to welcome you back to the show. Great to see you, Alex. Really appreciate you taking the time and congratulations on the second edition of The Next Perfect Trade. >> Yeah, thank you. It's great to be back and congratulations on this podcast taking this show taking off. Yeah, I I think I guess I was one of the earlier guests. >> Yes, you were. You were one of our earlier guests and so I appreciate you, Alex, giving me a chance um in those early days and your episode was a hit and I really enjoyed the conversation and I also really enjoyed rereading the next perfect trade with the 2025 updates and notes. >> I'm going to show them. Absolutely. Um, it just came out the other day on the January 27th and this audience, this wonderful they will definitely go pick up a copy and we'll plug it. But Alex, let's start and let's just set the table real quick for folks since it has been a while and I know you as a macro guy. I know you as you know your bread and butters in fixed income. So before we even dive into the book and the updates, let's just set the table here when it comes to more of that big picture macro view. What does that view look like for you today? Um, where do you see things headed? What is on your radar? And as you know, Alex, on this program, you can take all the time you need to set the table when it comes to that macro picture. >> Well, it is interesting. You, as you said, my bread and butter was always interest rates. That's where I come from. I come from interest rate, derivatives trading, most of it at JP Morgan Chase. So I started at I started at banker trust which became Deutsche Bank but started at uh client business they went to proprietary trading. So I kind of always view things through the lens of US interest rates. That's my starting point of the whole world. I look at what's happening with US economic data with US what's happening to US interest rates and I go outwards from there. But of course, needless to say, over the last few months for macro people, all the fireworks were in commodities and really all the action was on precious metals. Everything else was just kind of like background noise like your currency positions, your interest rate positions. If you had any precious metal position, that's your volatility. It was an interesting situation. However, having said that, it doesn't have to be always like that. And I think the interest rates had very low volatility in the US over the last few months. Extremely low volatility even with uh various news coming out all the other things reacting. For example, if you noticed uh last week's price action based on Kevin Worsh nomination, there was a huge volatility in precious metals, significant but not huge volatility in dollar and almost no volatility in interest rates, which you would think the Fed chair selection would be the first thing to move would be interest rates in US. But at least that would be kind of your first gut first uh flinch reaction uh affecting fat policy, right? However, interestingly, interest rates are kind of pinned in US right now between this two opposing views and nobody really takes any data seriously because all the data is mixed and confusing. I do have my views and I'm happy to share them, but I'm just setting up as you say the background. interest rates are a little bit in a state of pinned confusion, I would say. >> Yeah. Okay. Well, share your views. >> Well, I'm leaning towards I'm leaning towards increased likelihood of going back to extremely low interest rate environment. So, I think zero interest rates are not off the table. As I point out to people, I'm not saying that that's what's going to happen, but what I'm saying there is a disproportionate chance of that happening. >> Mhm. And uh for me what I see is a slow labor market deterioration. And I have to admit the economic data in the US is not weak. It's mixed like there are patches of weaker and stronger data. Inflation data is also mixed and there is always debates around whether inflation going up or down. But I think in the background I'm seeing the path to deterioration of the labor market. And paradoxically, the less visible it is, the worse it's probably going to be because if we saw a visible deterioration in the labor market, we would have aggressive fat cutting, maybe stimulus. Like for example, if it was already obvious that AI is leading to massive job loss, which is, by the way, not obvious yet. It's still a speculation that it's going to happen. But if it was visible, people would be starting prepare stimulus, monetary, and fiscal. But right now, it's kind of quiet. We're sitting in close to neutral interest rates, uh, stimuluses, whatever it is, but like there is some fiscal impulse, but it's not tremendous. We're kind of stuck in a fairly steep yield curve. Dollar is kind of mid-range historically. I would say dollar is still on the stronger side historically. Actually, most people have been talking about weaker dollar this year, but it's not historically weak right now. If for example it's historically strong versus yen, it's historically medium versus euro. So the impulses are all kind of sitting in the middle and in with that background if we are seeing under the hood deterioration of the labor market there is nothing to stop it from spiraling. >> Okay, this is a fascinating frame up. Um let me just pull in a few threads here. I think this notion of it being a paradox is really interesting. And Alex, would it be fair to say that um your views are they a bit more divergent from the rest of the market? Because you're kind of pointing out like not many people recognize this. The data is mixed as well. >> Well, there is definitely a faction of people and you know how like people tend to group by their biases. So I don't know if I I know a few more people who calling for lower rates and for disinflation, but I would say yes. what what you hear in the most chatter people still concerns over inflation and uh there are a lot of people who saying like oh it's ridiculous that 10 year note is trading at 4% yield when precious metals and stock market is alltime high and inflation r is 3%. And uh they think that 10 year note yield should be much higher. I think that when the job growth is negative 10ear yield should be much lower regardless of all other factors. So I So some people say like who's buying them at 4% and I'm saying who's selling them at 1% yield. >> Um let me ask you this again like I pointed out fixed income your bread and butter. What do you make of the way we have seen the behavior in rates uh let's call it over the last 12 to 18 months um when we had also been in a rate cut um environment. What do you make of the behavior that we've seen especially maybe on the you know longer bonds? >> So that is actually pretty typical behavior in my history. People always surprised. So I've been trading interest rates for almost 30 years now. And uh people always surprised when Fed cuts rates and longdated rates don't go down or even go up. But if you go back to historical precedents, usually at the beginning of rate easing cycle, long end resists and the curve stiffens. In fact, there was quite often and converse happens very often like when there was a lot of tightening in 04 to07 the long end was actually doing well and I think Greenspan even called it a conundrum in the famous his famous phrase about the conundrum that long end rate stayed low. Conversely, even like in 01 02 when there was a huge rate cutting cycle, the long end stayed very reluctant to rally and the curve steepened a lot. So that type of reaction is actually seems quite normal and quite historically in line. >> Okay. So maybe um on your thesis too with uh it looks like you're thinking we're going to head back toward zero for rates. That's correct for the thesis. >> I think there's a high chance of that. It's not like my central scenario, but it's much more much higher probability than priced by the market. >> Okay. What does um what does that mean for like the trajectory of the economy? I heard you talk about like there's labor market weakness. maybe that's not recognized in the the um in the data. You also mentioned AI which I don't even think we talked about in our prior conversation which would have been like fall of 2020. I think we spoke pre- chat GPT um when our first conversation but yeah talk to me about what does this say about the trajectory of the economy maybe some of the implications the forces at play >> well I think uh what you're pointing out is a very important fact that if you look at like three different things stock market economic performance maybe even four different things stock market economic performance job market and interest rates And they used to I think pre2020 there was this very strong feeling that they move roughly in sync. Stock market sells off we're likely to get a recession. We're likely to get job weak job market likely to get low interest rates. I think with the fiscal impulse of 2020 kind of broke that relationship. It demonstrated that this relationship was purely by appointment. There was no particular reason for example when if there is a recession there is no rule there is no law that stock market has to go down in recession because if we're having a recession the only reason stock market goes down in recession if there's low liquidity because there's no particular reason to sell stocks if there is a recession unless you need cash because all of us know that recessions come and go and like mega cap companies are not going to go bankrupt during the down cycle right so why would to sell them. However, people sell because recessions in the past caused monetary tightness. Now, now that the government is willing to eliminate monetary tightness during crisis and recessions like they did in 2020, there is plenty of liquidity. So, stocks could even go completely in the opposite direction of the economy. Now, the next interesting thing is job market versus economy. Indeed, typically they're correlated. But if we're having massive growth because of AI and massive job loss simultaneously, we might not even get this. We could have very bad employment situation and very strong growth. Now, I'm skeptic of this a little bit for the moment. It's not that is not my central scenario. I'm just saying that it's possible. I'm a little skeptic yet of how much actual growth will be in the very short horizon from AI because there certain things might from AI could prove to be headwinds and if we do get the demand slowdown from job losses it might slow down the economy. So I'm kind of the jury is open for me how much what will win in the short horizon. In the long horizon AI probably will lead to cosmic whatever card of scale growth but that's not yet here. I'm looking looking out for the next five years. I'm not I'm not sure yet how much growth will be there. So I think recessions are still possible. Now the fourth item is interest rates. I think they linked much more to job market than to economic growth or to or to at least at first or to stock market because in the end first of all it's Fed's mandate employment at Fed's mandate not stock market and not economic growth. >> So the Fed is likely to respond to weak job market by cutting rates. First of all it's as simple as that. Second, job losses will probably if they do occur, they probably occur to the rise of productivity which is deflationary. So you can very easily see the scenario of robust economic growth, robust e asset markets, weak job market and low interest rates. I don't see this scenario as I'm not saying that that's what's going to happen, but that scenario doesn't hold a contradiction for me. Mhm. That's fascinating, too, because it still feels like um there are a lot of folks that are very much in the inflation camp. What I'm hearing from you, Alex, deflation. >> Deflation. Yeah. I think again I think I think we're heading towards very strong deflationary environment which however could be countermanded by political and fiscal actions. So what could I I feel like what's going on is almost unavoidably leads towards immense deflation. However, any deflation could be countered by fiscal impulse. If the government starts printing money and sending checks to people like they did in 2020, any deflation could be turned into inflation. There is no fighting that because you cannot fight the Fed printing money. No amount of AI, no quantum computing, nothing will beat Fed printing money. >> And doesn't that just kind of restart the cycle then if you >> Yeah, it could. So the Yeah, it's just a question of timing. >> Will the will the deflate my sense is that they're going to be a little reluctant to print money and send stimulus checks because of that fear of inflation that is still sitting there. So I feel they will not come to that game as fast as they did last time. That's why I'm leaning towards deflation uh deflationary pressures for the next few years. I don't think the governmental actions will be as drastic to counter it as they will need to be. However, eventually it's it's like the pendulum. It will swing towards deflation and then the government will probably issue too much stimulus and then swing towards inflation again. That's what that's how it works. Hm. I wonder if it's because of the recency too of like we saw what happened with the stimulus especially around CO um and then seeing inflation move up like it did. Okay. Interesting. Um >> yeah, I think people are too burnt. It's like people have like if they're closing the barn door after the horse is out. So I think people will be worried about doing massive stimulus. Now >> um before I even get into the book, just a couple more questions too. Like in the book you you kind of write about like the way you look at macro the different areas all the other all the potential places you can trade. You did acknowledge in the book that you monitor precious metals um but you don't cla you don't claim expertise in in commodities and you said you know very little about agricultural commodities but um just on the precious metals front because you did bring that up at the top of the conversation around just the price movements that we've seen. What do you make of it? Like what does it signal to you? >> It's a tough one. I'll be honest. Understanding precious metals movements is has been always like a mystery to me. why they specifically move and when they what sense of the catalyst like for example prices of silver and platinum were sitting flat for like a decade and then suddenly for no particular well there might be some reasons but why did the silver price decided to like sevenpple suddenly it is very hard to pin that pin there are some reasons but like not for seven toppling from the lows of 2020 right so um something Because sometimes precious metals just catch momentum. What I find is useful most useful with precious metals just look at historical ranges and patterns because they follow certain patterns like instead of I'm not big on charts otherwise but in precious metals I think looking at charts is useful because they trade in a certain way in a certain multi-deade cycles and there's like gold like for example gold usually leads and silver starts rallying after gold. So in that way the silver rally was predictable. >> Mhm. >> Um and I think platinum comes next. So in this way it was predictable that platinum will catch uh fire too. Then um severe corrections. Well with something goes up that much you do get over speculation and of course you're going to have corrections. So it's like all of those things you can kind of understand a little bit from looking at historical patterns. But if I if you were to tell me what is the fair price, if you were to ask me what is the fair price for gold or what is the fair price for silver, where should they go? Honestly, I have no idea. All I can look is where it was the last time high, how it relates to the current highs and but that has no economic substance. >> Hey everyone, I hope you are enjoying this interview. If you can take a quick moment and hit that subscribe button. We are on a mission to hit our next goal of 100,000 subscribers and your support could really help us get there. Thank you so much and enjoy the rest of the interview. All right, let's get into the book. Um, you published The Next Perfect Trade, the first edition 2015. Um, so it's been been 10 years. You didn't really change the content of the book. I know you added commentary around it, but you you really left a lot of the original book in there with commentary that you wrote around it. I guess like the obvious question that everyone's going to ask you, like why why the second edition? Like what was it that made you want to come back and revisit this material a decade later? >> Kind of to keep intellectual honesty. I will be say uh there in 2015 when I whenever someone writes a strategy book. So I wrote that book like 2014 2015 I was writing it after a streak of some good trading bad trading and good trading but more good trading than bad trading I if I may say so myself right so and when you when a person write a strategy book they invariably talk about their successes of the past no matter how honest they about pointing the mistakes of the past there is a survivorship bias to it if you did not make money people don't read your books right So typically we read books by people who have ended up making money but all of those refer to strategies that had been working up to that point and it's always there's always a question is it some kind of bad back feeding of the data right that survivorship bias right so I delineated some strategies in 2015 and some ideas so what I wanted to do now is to go back to it and say well did they work did I use them correctly was I disciplined And that is why I did not change the original content too much because I wanted to people see what I said back then versus what I say now. not what I will pretend I said back then like they will not I don't want to be saying didn't I tell you to buy whatever Nvidia in 2015 right so you I I I I kept all the original text of the book with just a little bit maybe just a few grammar fixes and like a little nicer type set but I kept it also people could see exactly what I was thinking back then and compare to what happened afterwards. Yeah, I think it's cool because it's almost like getting a glimpse into like even your trading diary as well with some updated commentary. And I like what you just said too about like mistakes. Um because in one of the the section on you know the trend chapter for for example, you said it was a bit too arrogant of me to make fun of traders who failed to follow um trends I had capitalized on. The fact is in subsequent t in the subsequent 10 years, I also disregarded trends that were obvious to other investors. Notably, I struggled with the long bond duration after the 2016 election all the way to the last quarter of 2018 as well as in 2021 and 2022. And you also gave another example around missing the yen depreciating trend between 2021 and 2024. And the reason I bring that up is I feel like I've read a lot of investment books, but you don't often read investment books where um they have passages where the author like admits like arrogance or an error. So I guess the question is like why why was that so important to you? And when you look at those specific misses, if you will, um was there a common thread in any of them where you struggled with those particular traits? Just kind of like more of a retrospective. Well, part of it is uh we all grow, right? So, you have to show growth. Like in all areas of our life, we grow. Like when we're teenagers, we're awkward, right? When we're asking someone out first time on a date, we're really awkward. Maybe 30 years later, we get a little better around that, right? Or conversely, good opposite could happen to we change. Maybe growth is not always the correct way, right, to say it, right? But we I think it is good for if you're an investor for example or if you're just a person reading a book wouldn't you want the manager to show that they're like actually evolving and growing and changing and not just because you if you stay the same your performance will be deteriorating because markets will be changing. you have to evolve quite a bit just to keep your performance the same way like constant just to achieve constant performance you have to reflect a lot on the mistake mistakes you made in the past and adjust a lot so that's that's a big portion of it I'm not ashamed of the fact that I have not been doing everything right and to your other question yes there are common threads in my mistakes I make I have certain weaknesses I have certain strong points in a trader and certain weak points in a trader Just because I recognize them, it does not mean that they go away immediately. Like it's like personality. If you have certain personality flaws, you can you try to learn to control them, but you cannot just meditate them away. >> Okay. Reading your book, I I can tell you're also a Lord of the Rings fan, which I am also a Lord of the Rings fan. >> Not to geek out here too much, but um you had the >> the um the one chart to rule them all um in the book. So, you called shorting US bonds in 2020 in 2014 the worst trade ever. Um, and you also present your one chart to rule them all. Um, but in your 2025 notes, you acknowledge the one chart continued to work until 2020. It broke to the upside in 2020. That should have been a warning to me because subsequently it broke to the downside in September 2022. Um, looking at that chart today, where do you think we are in this cycle? And is this 40-year bond bull market, is it definitively over or could you see could we Yeah, I just Let's start there. >> Okay. First of all, I will say yes. I think uh the 40-year bond bull market is definitively over and we had a bare market from whatever 21 to 24 or whatever 21 20 to 23 was a definitive bare market. It does not mean that there couldn't be another bull market but that would be not the same bull market. >> Mhm. >> Because it's clearly not the same chart, not the same corridor, not the same trend. We used that chart was very the good thing is that when I identified this chart in 2014, it still had five or six good years of life for it. But now it's a new chart, new trading corridor. If there will be a bull market, it will be a very different one. There is no way I can claim that chart anymore. >> The one thing that was a little interesting too, and I feel like it's probably applicable across asset classes, but you mentioned like it broke to the upside first. before it broke to the downside. Is that like I just thought it was like an interesting way of like understanding bull markets and maybe how they ultimately end. >> Yeah, I think that's the that's how that's what happens if you think about like the classic NASDAQ bubble of 99 2000. It didn't really break down till it went parabolic up, right? And more recently look at silver market, right? Silver was going up and up and up and up and then eventually it got completely unhinged, right? Silver was like looked expensive at 50, looks expensive at 60, but it kept grinding high and higher and then suddenly just went completely ballistic. And I'm not saying that the bull market in silver is over, but the strong correction did not arrive till till we really went flying to the upside. And I think there are multiple examples of that. I think that's typically what happens. You have a if you have a steady increase gradually people get comfortable with it over and over overleveraged and then it starts jumping up and then there's a huge correction. >> Mhm. Yeah. No, it's I was just looking at the silver chart. Yeah. It went up to like 115 and now it's at like 78 right now. Um but it's such a good observation. Um you also wrote in your 2025 notes. Um many years ago I made an observation long persistent rising trading channels rarely break to the downside. Instead they revolve in any vertical rallying rally sorry instead they resolve in any vertical rally breaking the channel to the upside only after that the channel is free to break to the downside which I think highlights exactly what you're talking about. Um, okay. So, you saw bonds go parabolic in 2020. Um, which according to your own rule was the signal the bull market was ending. Um, why why didn't you did you act on your signal? And do you see any markets today exhibiting like a similar or same pattern um breaking up in that way that might precede a breakdown? I think you just alluded to silver is one of them, but yeah. Well, I did not act properly clearly. That was part of my notes. I I was I was doing it well in 2020. I did not stay like long. If anything, I was like um buying some protection on long bond positions trying to play a little bit for potential downside. But when this first wave of downside realized, I thought I really got this idea that interest rate that inflation was overpriced and that the rate hiking cycle is way overpriced which was clearly a mistaken idea right and I wrote a lot about this afterwards like why wasn't transitory what was wrong with my thinking and which parts of my think not all parts of my thinking were wrong but which parts of my thinking were wrong and I did not really see that much of like it really the scope of the rise in inflation and scope of fed response to it caught me by surprise. >> Mhm. So and what I what I did not do correctly if you look in retrospect maybe following this rules I should have been more much more cautious on interest rates in general if I but if I took that chart signal right the break to the upside it should have made me much more cautious than I've been I've been cautious I did not put it all out I survived but obviously if I was just all out long bonds in 21 and 22 I would be carried out because it's like the biggest sell off in price levels of the bonds on the I don't know in recorded history of very very long time right so clearly I managed it but I could have managed it better if I was if I took even more warning from this chart >> that's why I think this is so helpful because when you're sharing this you're helping other people like learn um and get better too along the way um there are a lot of concepts in your book that I'm not familiar with because I'm not a trader um And you also kind of distinguish between like investor and trader and and whatnot too. But you you write about um this kind of underappreciated power of Carrie. I guess for the listeners and viewers who do not trade professionally. There are some that do trade professionally for sure. Can you explain why Carrie is so underappreciated? Give us a sense of how much of your returns of your career have come from Carrie versus like discretional bets. You know it's a hard to it's hard to quite pinpoint how much of it from carry because things quite mixed in there. However, what I do know that when I was looking at performance of some specific trades like for example dollar China when it was the period when it was trading negatively the performance was much worse than the performance when periods in the carrying positively. Uh so the carry is basically the cost of holding an asset. It could be positive, it could be negative. Like bonds might have positive carry if borrowing money to buy this bond is the interest rate to borrow money to buy this bond is lower than the yield on this bond. That means bond has a positive carry. Uh if it's the other way around, it's negative carry currency position. Typically, if you're long currency with high interest rates and short currency with low interest rates, you have positive carry. For example, long dollar, short yen typically has positive carry. And if you flip that, long yen typically has negative carry. Negative carry trades are not necessarily bad trades. They're often very successful trades. For example, precious metals have negative carry because not only you have to borrow money to hold them, but also you usually have to pay storage costs. >> So, it's like double negative carry. However, of course, if you took silver to $100 from like 20, you're not going to complain about a little bit of negative carry, right? >> Yeah. >> However, however, if you hold portfolios for a long time, Yeah. the the thing is why it is underappreciated because carry is so little over overnight. Who cares if you pay like 3% carry over one day? It's one basis point if you divide it into the whole year, right? 100th of a percent. It's nothing, right? It seems like it's nothing but if you hold it over the whole year that becomes 3%. Now you have a position that can make or lose 10%. But you actually earn 3% on this position holding then suddenly when you lose you lose 7% but you make you make 13%. So the odds are getting that it's it's carry I compared carry to casino rake >> to what? Sorry what >> to casino. Casino rake >> to casino. Yes. It's like what you have to pay. Interesting. >> The term is a rake, right? Yeah. The house you >> Yeah. You >> win or lose like say if you bat like red or black on the roulette or whatever, the swings will be very big. And that time when it's zero and it's neither red and black, but you still lose are very rare, right? But over a long time, casino wins because every time you give a little bit of your expectation to the casino. Mhm. >> So my one of my intentions as a trader is to try to be the casino, not the gambler. >> Yeah. >> So I want to I want to be traded that little bit of extra edge and then my speculation sometimes will be right and sometimes will be wrong. Like if I'm wrong, no carry will save me. It's more just overall as I do trades over my career when I accumulate this edge. >> Interesting. Okay. You'd rather be the house than the gambler then. That's interesting. Okay. Um, all right. Another uh I thought this was an interesting indicator in the book that the corporate borrowing rate indicator which is like a framework to understand like equity allocation. Look at corporate borrowing rates when they shift significantly up reduce your equity exposure. Conversely, when rates fall, load up and stay loaded. Can you explain Okay, explain that indicator to me. Um, yeah, I thought that was so interesting. And what is it kind of signaling now? >> Well, it was interesting. That's another indicator that works really amazed really amazingly well till the beginning of 20120s and then started to break down. Studying 22 23 this indicator started to break down. So it it was extremely successful for decades. So the indicator is well it's very it's kind of the idea is that if companies can borrow money cheaper then they can invest expand their balance sheets hire people grow their business. If their corporate borrowing rates go up, it becomes harder to do business, more expensive to do business and then consequently earnings will go down and corporate sector will get less aggressive. That will affect other corporations because there will be less cap capital capac and so on, right? So, but that also affects final demand in the economy and it kind of becomes the down that's how interest rates eventually one of the ways interest rates work through the economy. So what I've noticed a while ago that there is this pattern if you look at the interest momentum in interest rates if you look backwards and see like oh over the last two years interest rates have gone down that predict that over the next two years stock market will go up. Now converse and that actually that relationship actually didn't break down that has been almost invariably true with maybe some variations on timing. uh when interest rates go down eventually stock market goes up that there hasn't been too many counter examples to that however what happened in 21 to 23 interest rates went up but stock market didn't go down now because stock market tends to go up in general there are there are other counter examples in a sense that when interest rates go up it does not always lead to stock market going down however the recent example was very extreme. We had extreme rise in real interest rates between 20 and 23 like almost unprecedented sharp rise in interest rates and stock market did not flinch at all in the beginning you could say like oh up to 2022 real interest rates were still very low because of high inflation. >> Mhm. So, so even though the borrowing rates nominally were going up, but if you borrow, if you pay 5% to borrow and inflation is 10% for your business, you're still making out like a bandit building, borrowing money and building your inventory, right? So, business. So, not surprising up to 2022, it was not surprising that stock market eventually would have good impulse for the next two years. But as that died out, as real rates, as inflation stabilized, interest rate rates went up, real rates became higher, you would expect some negative impulse, but so far it has not materialized. Stock market is doing just fine. >> H interesting too. Um you also had this other area too, the negative predictive power of rates and the Fed where you wrote in 2015 that the negative predictive power of central bank opinion um where you argue that the Fed expects if the Fed expects higher inflation they'll act to suppress it. So markets should price lower inflation but in your notes for 2025 you note that this framework got tested and reversed. Um it one I will get you to explain that. Yeah, explain that one real quick and then I have a follow- on question for some of these. >> Well, yeah, there was a So, that is that framework worked very well for me. Um, and in fact, it would have worked very well in 2000 2020 2020 when there was this zero rates forever mentality. And it should have given a s another signal in addition to the upward break of the one chart that a correction is likely because if you think of negative predicting power you can think if the market predicts interest rates very low they're likely to be high so that actually played out rates ended up being very high but what I was saying maybe in terms of this framework not quite changing is what what I when when the market started to predict high interest rates they actually still ended up high right and and in some sense recent ly uh over the recent years interest rate futures actually did a good job with their predictive power like interest rates would end up roughly roughly as priced by the futures which is actually very rare phenomena like having interest rate futures end up where they were priced like having actual settings of interest rates being where they were priced two years ago two years prior is a very rare thing but it was kind of the case for the last couple of Mhm. From Okay. So, like looking back over the last decade, has the investing world like for macro especially, has it just has it changed? >> Well, there's always something changing, but I think there is that is um almost like a stamp of macro, right? You part of trading macro is seeing the world going in different regimes. I mean, decades ago, we had gold standard. Clearly it was a different regime for currency trading than it is now. Right? They had all those like big shifts in currency regimes. There were shifts in interest rates regimes. This kind of concept of fiscal dominance >> is relatively new, right? The balance sheet is expansions for central banks. a lot of those um moving from like uni-olar world to bipolar world uh like bit with with China rising um maybe diminishing of European economic power all of those and now we have AI and whatn not all of those are new paradigms that macro has to cope with so yes there is a lot of new things but it's not new to have new things >> when you think about like the kind of new regime that we're entering like what do you think gosh let me think how I want to ask this. What do you think will be maybe one of what do you think is like right now probably the most underappreciated force like from a macro perspective that you think is going to have implications that maybe in a few years from now will seem really obvious but like right now would feel like a bold prediction. Well, well, obviously my predictions about low interest rates if it if it came true will look very obvious in hindsight. I think if we do end up with zero like big job losses and zero rates in two years from now, people will be like, "Duh, wasn't it obvious that with whole categories of human labor being eliminated, there will be a job loss?" Like with whole categories of human labor being replaced. But um and anything that but honestly there's a conundrum here. A lot of changes right now are related to if you look at the changes related to AI um quantum computing or other extreme technological advances. It's almost like by definition I cannot predict what they would be. My mind is not a quantum computer. But you do have a mathematics background from the University of Chicago. I think you got your PhD there. >> Yeah, I'm as close I'm as close as one can get to it. >> Yeah. Yeah. I would say you're very you're a quant. So >> yes, I know. But even Yeah. I'm I'm as close as close as one can get to it, but I'm still not there. I cannot by by almost like by definition I cannot estimate what it is that's going to happen with when AI starts becoming a really dominant force not just on the fringes of the economy but throughout the economy. I think uh taking kind of if you just mathematically continue the charts that have been I mean I've been following singularity and AI charts for decades. So for me this is all not a surprise. It just came a couple of years earlier than I thought. I was thinking it would come closer to the end of 20120s and it happened like a little earlier which is but I I started to follow singularity predictions about 20 years ago and about 10 years ago I became completely convinced. I was first skeptic but about 2016 was a turning point when I became convinced that singularity is coming and that it's nearer not just near but nearer as the last book of Ray Kurt file says uh so none of this is a huge surprise for me but it's happening very rapidly and I still cannot figure out and if you continue those charts and even the most even the most passionate what I want to point out that even the most passionate AI proponents Even the most passionate singularity people still moderate what they predict. I will tell them none of >> because they would sound absolutely crazy. If you just actually look where the charts take you, you would sound absolutely crazy. >> There is just you almost they almost have to moderate what they're saying so that people would take them seriously. But so far everything they're saying has been coming exactly on schedule. So >> from an investor perspective, like thinking about the macro and I know I know you trade and stuff, but like do you have to start to like think about what are these scenarios? How do they potentially play out? I don't know if it's too early to think about, but are you starting to think about that? What are the scenarios? Like imagine you said you've been following this for a couple decades now. Like what are what's what are how does this play out in your mind? Like what are these scenarios? Well, I think like the interesting the interesting scenario and it's it's not new discussion, but I think it's still not fully fully absorbed by the public is how much energy AI will consume going forward and the thing is that the energy efficiency will be increasing at tremendous speed. However, the demand will just continue increasing at such overwhelming super exponential and possibly evenational growth that um it will overwhelm any kind of energy supply. What I feel like computational demand would overwhelm any type of energy supply. That is uh to me an interesting theme for the future like and fossil fuels will not even begin to like touch it. This is my opinion that I'm I'm not even sure even if we discover fusion which I think fusion will be come online faster than people think and the reason is not because I have any scientific background for that is because it's like AI is a predator that needs to eat and eat this energy it will make the fusion comes online fusion come online but even with fusion we will not have enough energy for AI even with all those like crazy Dyson spheres and which I don't think how technologically feasible they are. By the way, I did some computation calculations long ago. What it would take to dice on the earth, that is to absorb all the energy of the sun. It's like we're talking about much more money than exists in the world. Let's put it like this. >> Wait, did you see more energy than the sun? >> Well, more energy than Earth receives from the sun, but I think in the very near future, more energy than the sun. Yes, I think we will get I think definitely in this century. When I say that in this century I am being extremely conservative that's actually not my opinion. I think much faster than that our energy demand will >> exceed the energy output of the sun. It doesn't mean that we'll be able to collect that energy but that means that will be the bottleneck. What I'm saying is that energy is almost unavoidably will become a bottleneck at some point. >> Is that a would that be a trade at some point? Like that be like an old like it sounds like that would be a massive trade opportunity. um the energy trade or I don't know that >> yes but it's not so easy to say what to trade based on that because like are you going to like buy oil but oil will be almost irrelevant it will be like a drop in the ocean any all the oil reserves of the earth will be a drop in the ocean in the future energy demand it won't even matter >> so what uh if we're talking about like if we're talking about like collecting energy of the sun which I again I don't know how we're going to do it I don't know if it's possible AI I on no way AI I don't know if it's possible to do massive energy of the sun collection right so um so but what I do see is the demand for computation growing and I see it continuing to grow so I feel like the growth conundrum will soon kind of and I don't think that's some people think that energy efficiencies increasing and our energy sources are getting better but I kind of feel that computation demand will overwhelm all of it. >> Gosh, I feel like there's probably a whole individual episode on that. But I guess a final question before I let you go here. Um, kind of big picture going back to the macro thesis, deflation, rates, the higher probability of rates headed back to zero. Um, from an macro investing standpoint, like what is the perfect trade, if you will, or how do you kind of think about if that's the backdrop in the environment, what can you share about how you would play that? Well, it's very hard to find a perfect trade. The whole like if you look at my book, the next perfect trade, I only found a couple of them in my career. What I think is like might be interesting and I I really don't have the scope to like go into details, but the Japan is becoming really interesting with the extreme rise in interest rate and extreme weakness in currency. There might be some interesting opportunity because being long yen versus being long Japanese bonds is becoming to be interesting. Because either if they never raise interest rates in Japan, then you just keep making money on the bonds. If they raise interest rates in Japan, then yen will rally. I don't know if I yet at the point to put everything on the table there. But this is becoming like an if you really follow the thinking in the book, I would recommend start thinking about yen. >> Start thinking >> y interest rates. >> Yeah. Um I love this line. If you think of investing as a battle, you need to prepare for it thoroughly. Get into proper shape, learn your moves, acquire your armor, your shield, your helmet, and your battle horse. A magic formula or magic weapon in this context will be wasted if you get killed by the market's first arrow. But with proper training and equipment, this weapon may give you a devastating advantage. Um, Alex, wonderful second edition of the book. I'm going to link it for the folks watching and listening to pick up a copy. Um we always appreciate when folks like open up and you know share um lessons. Before I let you go though, parting thoughts for this audience. Anything that you would like to leave them to think about? Anything that you would like to share like where they can find more of your work? Um or follow you on social? The floor is all yours. >> Well, uh yeah, the easiest way to follow me is to follow me on X at a23. I'm I'm pretty easily foundable on X and then you can find all the relevant links if you want to find like where what I what you can read. There is also my company's website honte inv.com. It's uh there is an external part of the website which is available for public. Internal part is available only for investors who only take qualified purchases. So this is not for investment purposes but like there is a lot of public information about what I'm doing on on our com company website that people are welcome to visit and yes I just recommend and to the listeners I just find your own magic weapons. It doesn't have to be necessarily mine but I I'm happy to share what I do know but you may have your own magic weapons and yes stay alive though in the markets. >> Yes. Alex Gerovich, CIO of Honte Investments, author of The Next Perfect Trade. Thank you so much for being so generous with your time, all of your knowledge, your wisdom, helping us all learn and give better. Really appreciate you and great to see you again, Alex. Thank you so much. >> Thank you very much for having me. It was a pleasure.
Gurevich: Zero Interest Rates Not Off the Table, Why Deflation Is Coming, & the Next Perfect Trade
Summary
Transcript
I am leaning towards increased likelihood of going back to extremely low interest rate environment. So I think zero interest rates are not off the table. I have to admit the economic data in the US is not weak. It's mixed. I think in the background I'm seeing the path to deterioration of the labor market and paradoxically the less visible it is the worse it's probably going to be. Alex Gurovich, CIO of Honte Investments, author of multiple books, and you're out with the latest, the second edition of The Next Perfect Trade Guest from episode 24 on this podcast. It is so wonderful to welcome you back to the show. Great to see you, Alex. Really appreciate you taking the time and congratulations on the second edition of The Next Perfect Trade. >> Yeah, thank you. It's great to be back and congratulations on this podcast taking this show taking off. Yeah, I I think I guess I was one of the earlier guests. >> Yes, you were. You were one of our earlier guests and so I appreciate you, Alex, giving me a chance um in those early days and your episode was a hit and I really enjoyed the conversation and I also really enjoyed rereading the next perfect trade with the 2025 updates and notes. >> I'm going to show them. Absolutely. Um, it just came out the other day on the January 27th and this audience, this wonderful they will definitely go pick up a copy and we'll plug it. But Alex, let's start and let's just set the table real quick for folks since it has been a while and I know you as a macro guy. I know you as you know your bread and butters in fixed income. So before we even dive into the book and the updates, let's just set the table here when it comes to more of that big picture macro view. What does that view look like for you today? Um, where do you see things headed? What is on your radar? And as you know, Alex, on this program, you can take all the time you need to set the table when it comes to that macro picture. >> Well, it is interesting. You, as you said, my bread and butter was always interest rates. That's where I come from. I come from interest rate, derivatives trading, most of it at JP Morgan Chase. So I started at I started at banker trust which became Deutsche Bank but started at uh client business they went to proprietary trading. So I kind of always view things through the lens of US interest rates. That's my starting point of the whole world. I look at what's happening with US economic data with US what's happening to US interest rates and I go outwards from there. But of course, needless to say, over the last few months for macro people, all the fireworks were in commodities and really all the action was on precious metals. Everything else was just kind of like background noise like your currency positions, your interest rate positions. If you had any precious metal position, that's your volatility. It was an interesting situation. However, having said that, it doesn't have to be always like that. And I think the interest rates had very low volatility in the US over the last few months. Extremely low volatility even with uh various news coming out all the other things reacting. For example, if you noticed uh last week's price action based on Kevin Worsh nomination, there was a huge volatility in precious metals, significant but not huge volatility in dollar and almost no volatility in interest rates, which you would think the Fed chair selection would be the first thing to move would be interest rates in US. But at least that would be kind of your first gut first uh flinch reaction uh affecting fat policy, right? However, interestingly, interest rates are kind of pinned in US right now between this two opposing views and nobody really takes any data seriously because all the data is mixed and confusing. I do have my views and I'm happy to share them, but I'm just setting up as you say the background. interest rates are a little bit in a state of pinned confusion, I would say. >> Yeah. Okay. Well, share your views. >> Well, I'm leaning towards I'm leaning towards increased likelihood of going back to extremely low interest rate environment. So, I think zero interest rates are not off the table. As I point out to people, I'm not saying that that's what's going to happen, but what I'm saying there is a disproportionate chance of that happening. >> Mhm. And uh for me what I see is a slow labor market deterioration. And I have to admit the economic data in the US is not weak. It's mixed like there are patches of weaker and stronger data. Inflation data is also mixed and there is always debates around whether inflation going up or down. But I think in the background I'm seeing the path to deterioration of the labor market. And paradoxically, the less visible it is, the worse it's probably going to be because if we saw a visible deterioration in the labor market, we would have aggressive fat cutting, maybe stimulus. Like for example, if it was already obvious that AI is leading to massive job loss, which is, by the way, not obvious yet. It's still a speculation that it's going to happen. But if it was visible, people would be starting prepare stimulus, monetary, and fiscal. But right now, it's kind of quiet. We're sitting in close to neutral interest rates, uh, stimuluses, whatever it is, but like there is some fiscal impulse, but it's not tremendous. We're kind of stuck in a fairly steep yield curve. Dollar is kind of mid-range historically. I would say dollar is still on the stronger side historically. Actually, most people have been talking about weaker dollar this year, but it's not historically weak right now. If for example it's historically strong versus yen, it's historically medium versus euro. So the impulses are all kind of sitting in the middle and in with that background if we are seeing under the hood deterioration of the labor market there is nothing to stop it from spiraling. >> Okay, this is a fascinating frame up. Um let me just pull in a few threads here. I think this notion of it being a paradox is really interesting. And Alex, would it be fair to say that um your views are they a bit more divergent from the rest of the market? Because you're kind of pointing out like not many people recognize this. The data is mixed as well. >> Well, there is definitely a faction of people and you know how like people tend to group by their biases. So I don't know if I I know a few more people who calling for lower rates and for disinflation, but I would say yes. what what you hear in the most chatter people still concerns over inflation and uh there are a lot of people who saying like oh it's ridiculous that 10 year note is trading at 4% yield when precious metals and stock market is alltime high and inflation r is 3%. And uh they think that 10 year note yield should be much higher. I think that when the job growth is negative 10ear yield should be much lower regardless of all other factors. So I So some people say like who's buying them at 4% and I'm saying who's selling them at 1% yield. >> Um let me ask you this again like I pointed out fixed income your bread and butter. What do you make of the way we have seen the behavior in rates uh let's call it over the last 12 to 18 months um when we had also been in a rate cut um environment. What do you make of the behavior that we've seen especially maybe on the you know longer bonds? >> So that is actually pretty typical behavior in my history. People always surprised. So I've been trading interest rates for almost 30 years now. And uh people always surprised when Fed cuts rates and longdated rates don't go down or even go up. But if you go back to historical precedents, usually at the beginning of rate easing cycle, long end resists and the curve stiffens. In fact, there was quite often and converse happens very often like when there was a lot of tightening in 04 to07 the long end was actually doing well and I think Greenspan even called it a conundrum in the famous his famous phrase about the conundrum that long end rate stayed low. Conversely, even like in 01 02 when there was a huge rate cutting cycle, the long end stayed very reluctant to rally and the curve steepened a lot. So that type of reaction is actually seems quite normal and quite historically in line. >> Okay. So maybe um on your thesis too with uh it looks like you're thinking we're going to head back toward zero for rates. That's correct for the thesis. >> I think there's a high chance of that. It's not like my central scenario, but it's much more much higher probability than priced by the market. >> Okay. What does um what does that mean for like the trajectory of the economy? I heard you talk about like there's labor market weakness. maybe that's not recognized in the the um in the data. You also mentioned AI which I don't even think we talked about in our prior conversation which would have been like fall of 2020. I think we spoke pre- chat GPT um when our first conversation but yeah talk to me about what does this say about the trajectory of the economy maybe some of the implications the forces at play >> well I think uh what you're pointing out is a very important fact that if you look at like three different things stock market economic performance maybe even four different things stock market economic performance job market and interest rates And they used to I think pre2020 there was this very strong feeling that they move roughly in sync. Stock market sells off we're likely to get a recession. We're likely to get job weak job market likely to get low interest rates. I think with the fiscal impulse of 2020 kind of broke that relationship. It demonstrated that this relationship was purely by appointment. There was no particular reason for example when if there is a recession there is no rule there is no law that stock market has to go down in recession because if we're having a recession the only reason stock market goes down in recession if there's low liquidity because there's no particular reason to sell stocks if there is a recession unless you need cash because all of us know that recessions come and go and like mega cap companies are not going to go bankrupt during the down cycle right so why would to sell them. However, people sell because recessions in the past caused monetary tightness. Now, now that the government is willing to eliminate monetary tightness during crisis and recessions like they did in 2020, there is plenty of liquidity. So, stocks could even go completely in the opposite direction of the economy. Now, the next interesting thing is job market versus economy. Indeed, typically they're correlated. But if we're having massive growth because of AI and massive job loss simultaneously, we might not even get this. We could have very bad employment situation and very strong growth. Now, I'm skeptic of this a little bit for the moment. It's not that is not my central scenario. I'm just saying that it's possible. I'm a little skeptic yet of how much actual growth will be in the very short horizon from AI because there certain things might from AI could prove to be headwinds and if we do get the demand slowdown from job losses it might slow down the economy. So I'm kind of the jury is open for me how much what will win in the short horizon. In the long horizon AI probably will lead to cosmic whatever card of scale growth but that's not yet here. I'm looking looking out for the next five years. I'm not I'm not sure yet how much growth will be there. So I think recessions are still possible. Now the fourth item is interest rates. I think they linked much more to job market than to economic growth or to or to at least at first or to stock market because in the end first of all it's Fed's mandate employment at Fed's mandate not stock market and not economic growth. >> So the Fed is likely to respond to weak job market by cutting rates. First of all it's as simple as that. Second, job losses will probably if they do occur, they probably occur to the rise of productivity which is deflationary. So you can very easily see the scenario of robust economic growth, robust e asset markets, weak job market and low interest rates. I don't see this scenario as I'm not saying that that's what's going to happen, but that scenario doesn't hold a contradiction for me. Mhm. That's fascinating, too, because it still feels like um there are a lot of folks that are very much in the inflation camp. What I'm hearing from you, Alex, deflation. >> Deflation. Yeah. I think again I think I think we're heading towards very strong deflationary environment which however could be countermanded by political and fiscal actions. So what could I I feel like what's going on is almost unavoidably leads towards immense deflation. However, any deflation could be countered by fiscal impulse. If the government starts printing money and sending checks to people like they did in 2020, any deflation could be turned into inflation. There is no fighting that because you cannot fight the Fed printing money. No amount of AI, no quantum computing, nothing will beat Fed printing money. >> And doesn't that just kind of restart the cycle then if you >> Yeah, it could. So the Yeah, it's just a question of timing. >> Will the will the deflate my sense is that they're going to be a little reluctant to print money and send stimulus checks because of that fear of inflation that is still sitting there. So I feel they will not come to that game as fast as they did last time. That's why I'm leaning towards deflation uh deflationary pressures for the next few years. I don't think the governmental actions will be as drastic to counter it as they will need to be. However, eventually it's it's like the pendulum. It will swing towards deflation and then the government will probably issue too much stimulus and then swing towards inflation again. That's what that's how it works. Hm. I wonder if it's because of the recency too of like we saw what happened with the stimulus especially around CO um and then seeing inflation move up like it did. Okay. Interesting. Um >> yeah, I think people are too burnt. It's like people have like if they're closing the barn door after the horse is out. So I think people will be worried about doing massive stimulus. Now >> um before I even get into the book, just a couple more questions too. Like in the book you you kind of write about like the way you look at macro the different areas all the other all the potential places you can trade. You did acknowledge in the book that you monitor precious metals um but you don't cla you don't claim expertise in in commodities and you said you know very little about agricultural commodities but um just on the precious metals front because you did bring that up at the top of the conversation around just the price movements that we've seen. What do you make of it? Like what does it signal to you? >> It's a tough one. I'll be honest. Understanding precious metals movements is has been always like a mystery to me. why they specifically move and when they what sense of the catalyst like for example prices of silver and platinum were sitting flat for like a decade and then suddenly for no particular well there might be some reasons but why did the silver price decided to like sevenpple suddenly it is very hard to pin that pin there are some reasons but like not for seven toppling from the lows of 2020 right so um something Because sometimes precious metals just catch momentum. What I find is useful most useful with precious metals just look at historical ranges and patterns because they follow certain patterns like instead of I'm not big on charts otherwise but in precious metals I think looking at charts is useful because they trade in a certain way in a certain multi-deade cycles and there's like gold like for example gold usually leads and silver starts rallying after gold. So in that way the silver rally was predictable. >> Mhm. >> Um and I think platinum comes next. So in this way it was predictable that platinum will catch uh fire too. Then um severe corrections. Well with something goes up that much you do get over speculation and of course you're going to have corrections. So it's like all of those things you can kind of understand a little bit from looking at historical patterns. But if I if you were to tell me what is the fair price, if you were to ask me what is the fair price for gold or what is the fair price for silver, where should they go? Honestly, I have no idea. All I can look is where it was the last time high, how it relates to the current highs and but that has no economic substance. >> Hey everyone, I hope you are enjoying this interview. If you can take a quick moment and hit that subscribe button. We are on a mission to hit our next goal of 100,000 subscribers and your support could really help us get there. Thank you so much and enjoy the rest of the interview. All right, let's get into the book. Um, you published The Next Perfect Trade, the first edition 2015. Um, so it's been been 10 years. You didn't really change the content of the book. I know you added commentary around it, but you you really left a lot of the original book in there with commentary that you wrote around it. I guess like the obvious question that everyone's going to ask you, like why why the second edition? Like what was it that made you want to come back and revisit this material a decade later? >> Kind of to keep intellectual honesty. I will be say uh there in 2015 when I whenever someone writes a strategy book. So I wrote that book like 2014 2015 I was writing it after a streak of some good trading bad trading and good trading but more good trading than bad trading I if I may say so myself right so and when you when a person write a strategy book they invariably talk about their successes of the past no matter how honest they about pointing the mistakes of the past there is a survivorship bias to it if you did not make money people don't read your books right So typically we read books by people who have ended up making money but all of those refer to strategies that had been working up to that point and it's always there's always a question is it some kind of bad back feeding of the data right that survivorship bias right so I delineated some strategies in 2015 and some ideas so what I wanted to do now is to go back to it and say well did they work did I use them correctly was I disciplined And that is why I did not change the original content too much because I wanted to people see what I said back then versus what I say now. not what I will pretend I said back then like they will not I don't want to be saying didn't I tell you to buy whatever Nvidia in 2015 right so you I I I I kept all the original text of the book with just a little bit maybe just a few grammar fixes and like a little nicer type set but I kept it also people could see exactly what I was thinking back then and compare to what happened afterwards. Yeah, I think it's cool because it's almost like getting a glimpse into like even your trading diary as well with some updated commentary. And I like what you just said too about like mistakes. Um because in one of the the section on you know the trend chapter for for example, you said it was a bit too arrogant of me to make fun of traders who failed to follow um trends I had capitalized on. The fact is in subsequent t in the subsequent 10 years, I also disregarded trends that were obvious to other investors. Notably, I struggled with the long bond duration after the 2016 election all the way to the last quarter of 2018 as well as in 2021 and 2022. And you also gave another example around missing the yen depreciating trend between 2021 and 2024. And the reason I bring that up is I feel like I've read a lot of investment books, but you don't often read investment books where um they have passages where the author like admits like arrogance or an error. So I guess the question is like why why was that so important to you? And when you look at those specific misses, if you will, um was there a common thread in any of them where you struggled with those particular traits? Just kind of like more of a retrospective. Well, part of it is uh we all grow, right? So, you have to show growth. Like in all areas of our life, we grow. Like when we're teenagers, we're awkward, right? When we're asking someone out first time on a date, we're really awkward. Maybe 30 years later, we get a little better around that, right? Or conversely, good opposite could happen to we change. Maybe growth is not always the correct way, right, to say it, right? But we I think it is good for if you're an investor for example or if you're just a person reading a book wouldn't you want the manager to show that they're like actually evolving and growing and changing and not just because you if you stay the same your performance will be deteriorating because markets will be changing. you have to evolve quite a bit just to keep your performance the same way like constant just to achieve constant performance you have to reflect a lot on the mistake mistakes you made in the past and adjust a lot so that's that's a big portion of it I'm not ashamed of the fact that I have not been doing everything right and to your other question yes there are common threads in my mistakes I make I have certain weaknesses I have certain strong points in a trader and certain weak points in a trader Just because I recognize them, it does not mean that they go away immediately. Like it's like personality. If you have certain personality flaws, you can you try to learn to control them, but you cannot just meditate them away. >> Okay. Reading your book, I I can tell you're also a Lord of the Rings fan, which I am also a Lord of the Rings fan. >> Not to geek out here too much, but um you had the >> the um the one chart to rule them all um in the book. So, you called shorting US bonds in 2020 in 2014 the worst trade ever. Um, and you also present your one chart to rule them all. Um, but in your 2025 notes, you acknowledge the one chart continued to work until 2020. It broke to the upside in 2020. That should have been a warning to me because subsequently it broke to the downside in September 2022. Um, looking at that chart today, where do you think we are in this cycle? And is this 40-year bond bull market, is it definitively over or could you see could we Yeah, I just Let's start there. >> Okay. First of all, I will say yes. I think uh the 40-year bond bull market is definitively over and we had a bare market from whatever 21 to 24 or whatever 21 20 to 23 was a definitive bare market. It does not mean that there couldn't be another bull market but that would be not the same bull market. >> Mhm. >> Because it's clearly not the same chart, not the same corridor, not the same trend. We used that chart was very the good thing is that when I identified this chart in 2014, it still had five or six good years of life for it. But now it's a new chart, new trading corridor. If there will be a bull market, it will be a very different one. There is no way I can claim that chart anymore. >> The one thing that was a little interesting too, and I feel like it's probably applicable across asset classes, but you mentioned like it broke to the upside first. before it broke to the downside. Is that like I just thought it was like an interesting way of like understanding bull markets and maybe how they ultimately end. >> Yeah, I think that's the that's how that's what happens if you think about like the classic NASDAQ bubble of 99 2000. It didn't really break down till it went parabolic up, right? And more recently look at silver market, right? Silver was going up and up and up and up and then eventually it got completely unhinged, right? Silver was like looked expensive at 50, looks expensive at 60, but it kept grinding high and higher and then suddenly just went completely ballistic. And I'm not saying that the bull market in silver is over, but the strong correction did not arrive till till we really went flying to the upside. And I think there are multiple examples of that. I think that's typically what happens. You have a if you have a steady increase gradually people get comfortable with it over and over overleveraged and then it starts jumping up and then there's a huge correction. >> Mhm. Yeah. No, it's I was just looking at the silver chart. Yeah. It went up to like 115 and now it's at like 78 right now. Um but it's such a good observation. Um you also wrote in your 2025 notes. Um many years ago I made an observation long persistent rising trading channels rarely break to the downside. Instead they revolve in any vertical rallying rally sorry instead they resolve in any vertical rally breaking the channel to the upside only after that the channel is free to break to the downside which I think highlights exactly what you're talking about. Um, okay. So, you saw bonds go parabolic in 2020. Um, which according to your own rule was the signal the bull market was ending. Um, why why didn't you did you act on your signal? And do you see any markets today exhibiting like a similar or same pattern um breaking up in that way that might precede a breakdown? I think you just alluded to silver is one of them, but yeah. Well, I did not act properly clearly. That was part of my notes. I I was I was doing it well in 2020. I did not stay like long. If anything, I was like um buying some protection on long bond positions trying to play a little bit for potential downside. But when this first wave of downside realized, I thought I really got this idea that interest rate that inflation was overpriced and that the rate hiking cycle is way overpriced which was clearly a mistaken idea right and I wrote a lot about this afterwards like why wasn't transitory what was wrong with my thinking and which parts of my think not all parts of my thinking were wrong but which parts of my thinking were wrong and I did not really see that much of like it really the scope of the rise in inflation and scope of fed response to it caught me by surprise. >> Mhm. So and what I what I did not do correctly if you look in retrospect maybe following this rules I should have been more much more cautious on interest rates in general if I but if I took that chart signal right the break to the upside it should have made me much more cautious than I've been I've been cautious I did not put it all out I survived but obviously if I was just all out long bonds in 21 and 22 I would be carried out because it's like the biggest sell off in price levels of the bonds on the I don't know in recorded history of very very long time right so clearly I managed it but I could have managed it better if I was if I took even more warning from this chart >> that's why I think this is so helpful because when you're sharing this you're helping other people like learn um and get better too along the way um there are a lot of concepts in your book that I'm not familiar with because I'm not a trader um And you also kind of distinguish between like investor and trader and and whatnot too. But you you write about um this kind of underappreciated power of Carrie. I guess for the listeners and viewers who do not trade professionally. There are some that do trade professionally for sure. Can you explain why Carrie is so underappreciated? Give us a sense of how much of your returns of your career have come from Carrie versus like discretional bets. You know it's a hard to it's hard to quite pinpoint how much of it from carry because things quite mixed in there. However, what I do know that when I was looking at performance of some specific trades like for example dollar China when it was the period when it was trading negatively the performance was much worse than the performance when periods in the carrying positively. Uh so the carry is basically the cost of holding an asset. It could be positive, it could be negative. Like bonds might have positive carry if borrowing money to buy this bond is the interest rate to borrow money to buy this bond is lower than the yield on this bond. That means bond has a positive carry. Uh if it's the other way around, it's negative carry currency position. Typically, if you're long currency with high interest rates and short currency with low interest rates, you have positive carry. For example, long dollar, short yen typically has positive carry. And if you flip that, long yen typically has negative carry. Negative carry trades are not necessarily bad trades. They're often very successful trades. For example, precious metals have negative carry because not only you have to borrow money to hold them, but also you usually have to pay storage costs. >> So, it's like double negative carry. However, of course, if you took silver to $100 from like 20, you're not going to complain about a little bit of negative carry, right? >> Yeah. >> However, however, if you hold portfolios for a long time, Yeah. the the thing is why it is underappreciated because carry is so little over overnight. Who cares if you pay like 3% carry over one day? It's one basis point if you divide it into the whole year, right? 100th of a percent. It's nothing, right? It seems like it's nothing but if you hold it over the whole year that becomes 3%. Now you have a position that can make or lose 10%. But you actually earn 3% on this position holding then suddenly when you lose you lose 7% but you make you make 13%. So the odds are getting that it's it's carry I compared carry to casino rake >> to what? Sorry what >> to casino. Casino rake >> to casino. Yes. It's like what you have to pay. Interesting. >> The term is a rake, right? Yeah. The house you >> Yeah. You >> win or lose like say if you bat like red or black on the roulette or whatever, the swings will be very big. And that time when it's zero and it's neither red and black, but you still lose are very rare, right? But over a long time, casino wins because every time you give a little bit of your expectation to the casino. Mhm. >> So my one of my intentions as a trader is to try to be the casino, not the gambler. >> Yeah. >> So I want to I want to be traded that little bit of extra edge and then my speculation sometimes will be right and sometimes will be wrong. Like if I'm wrong, no carry will save me. It's more just overall as I do trades over my career when I accumulate this edge. >> Interesting. Okay. You'd rather be the house than the gambler then. That's interesting. Okay. Um, all right. Another uh I thought this was an interesting indicator in the book that the corporate borrowing rate indicator which is like a framework to understand like equity allocation. Look at corporate borrowing rates when they shift significantly up reduce your equity exposure. Conversely, when rates fall, load up and stay loaded. Can you explain Okay, explain that indicator to me. Um, yeah, I thought that was so interesting. And what is it kind of signaling now? >> Well, it was interesting. That's another indicator that works really amazed really amazingly well till the beginning of 20120s and then started to break down. Studying 22 23 this indicator started to break down. So it it was extremely successful for decades. So the indicator is well it's very it's kind of the idea is that if companies can borrow money cheaper then they can invest expand their balance sheets hire people grow their business. If their corporate borrowing rates go up, it becomes harder to do business, more expensive to do business and then consequently earnings will go down and corporate sector will get less aggressive. That will affect other corporations because there will be less cap capital capac and so on, right? So, but that also affects final demand in the economy and it kind of becomes the down that's how interest rates eventually one of the ways interest rates work through the economy. So what I've noticed a while ago that there is this pattern if you look at the interest momentum in interest rates if you look backwards and see like oh over the last two years interest rates have gone down that predict that over the next two years stock market will go up. Now converse and that actually that relationship actually didn't break down that has been almost invariably true with maybe some variations on timing. uh when interest rates go down eventually stock market goes up that there hasn't been too many counter examples to that however what happened in 21 to 23 interest rates went up but stock market didn't go down now because stock market tends to go up in general there are there are other counter examples in a sense that when interest rates go up it does not always lead to stock market going down however the recent example was very extreme. We had extreme rise in real interest rates between 20 and 23 like almost unprecedented sharp rise in interest rates and stock market did not flinch at all in the beginning you could say like oh up to 2022 real interest rates were still very low because of high inflation. >> Mhm. So, so even though the borrowing rates nominally were going up, but if you borrow, if you pay 5% to borrow and inflation is 10% for your business, you're still making out like a bandit building, borrowing money and building your inventory, right? So, business. So, not surprising up to 2022, it was not surprising that stock market eventually would have good impulse for the next two years. But as that died out, as real rates, as inflation stabilized, interest rate rates went up, real rates became higher, you would expect some negative impulse, but so far it has not materialized. Stock market is doing just fine. >> H interesting too. Um you also had this other area too, the negative predictive power of rates and the Fed where you wrote in 2015 that the negative predictive power of central bank opinion um where you argue that the Fed expects if the Fed expects higher inflation they'll act to suppress it. So markets should price lower inflation but in your notes for 2025 you note that this framework got tested and reversed. Um it one I will get you to explain that. Yeah, explain that one real quick and then I have a follow- on question for some of these. >> Well, yeah, there was a So, that is that framework worked very well for me. Um, and in fact, it would have worked very well in 2000 2020 2020 when there was this zero rates forever mentality. And it should have given a s another signal in addition to the upward break of the one chart that a correction is likely because if you think of negative predicting power you can think if the market predicts interest rates very low they're likely to be high so that actually played out rates ended up being very high but what I was saying maybe in terms of this framework not quite changing is what what I when when the market started to predict high interest rates they actually still ended up high right and and in some sense recent ly uh over the recent years interest rate futures actually did a good job with their predictive power like interest rates would end up roughly roughly as priced by the futures which is actually very rare phenomena like having interest rate futures end up where they were priced like having actual settings of interest rates being where they were priced two years ago two years prior is a very rare thing but it was kind of the case for the last couple of Mhm. From Okay. So, like looking back over the last decade, has the investing world like for macro especially, has it just has it changed? >> Well, there's always something changing, but I think there is that is um almost like a stamp of macro, right? You part of trading macro is seeing the world going in different regimes. I mean, decades ago, we had gold standard. Clearly it was a different regime for currency trading than it is now. Right? They had all those like big shifts in currency regimes. There were shifts in interest rates regimes. This kind of concept of fiscal dominance >> is relatively new, right? The balance sheet is expansions for central banks. a lot of those um moving from like uni-olar world to bipolar world uh like bit with with China rising um maybe diminishing of European economic power all of those and now we have AI and whatn not all of those are new paradigms that macro has to cope with so yes there is a lot of new things but it's not new to have new things >> when you think about like the kind of new regime that we're entering like what do you think gosh let me think how I want to ask this. What do you think will be maybe one of what do you think is like right now probably the most underappreciated force like from a macro perspective that you think is going to have implications that maybe in a few years from now will seem really obvious but like right now would feel like a bold prediction. Well, well, obviously my predictions about low interest rates if it if it came true will look very obvious in hindsight. I think if we do end up with zero like big job losses and zero rates in two years from now, people will be like, "Duh, wasn't it obvious that with whole categories of human labor being eliminated, there will be a job loss?" Like with whole categories of human labor being replaced. But um and anything that but honestly there's a conundrum here. A lot of changes right now are related to if you look at the changes related to AI um quantum computing or other extreme technological advances. It's almost like by definition I cannot predict what they would be. My mind is not a quantum computer. But you do have a mathematics background from the University of Chicago. I think you got your PhD there. >> Yeah, I'm as close I'm as close as one can get to it. >> Yeah. Yeah. I would say you're very you're a quant. So >> yes, I know. But even Yeah. I'm I'm as close as close as one can get to it, but I'm still not there. I cannot by by almost like by definition I cannot estimate what it is that's going to happen with when AI starts becoming a really dominant force not just on the fringes of the economy but throughout the economy. I think uh taking kind of if you just mathematically continue the charts that have been I mean I've been following singularity and AI charts for decades. So for me this is all not a surprise. It just came a couple of years earlier than I thought. I was thinking it would come closer to the end of 20120s and it happened like a little earlier which is but I I started to follow singularity predictions about 20 years ago and about 10 years ago I became completely convinced. I was first skeptic but about 2016 was a turning point when I became convinced that singularity is coming and that it's nearer not just near but nearer as the last book of Ray Kurt file says uh so none of this is a huge surprise for me but it's happening very rapidly and I still cannot figure out and if you continue those charts and even the most even the most passionate what I want to point out that even the most passionate AI proponents Even the most passionate singularity people still moderate what they predict. I will tell them none of >> because they would sound absolutely crazy. If you just actually look where the charts take you, you would sound absolutely crazy. >> There is just you almost they almost have to moderate what they're saying so that people would take them seriously. But so far everything they're saying has been coming exactly on schedule. So >> from an investor perspective, like thinking about the macro and I know I know you trade and stuff, but like do you have to start to like think about what are these scenarios? How do they potentially play out? I don't know if it's too early to think about, but are you starting to think about that? What are the scenarios? Like imagine you said you've been following this for a couple decades now. Like what are what's what are how does this play out in your mind? Like what are these scenarios? Well, I think like the interesting the interesting scenario and it's it's not new discussion, but I think it's still not fully fully absorbed by the public is how much energy AI will consume going forward and the thing is that the energy efficiency will be increasing at tremendous speed. However, the demand will just continue increasing at such overwhelming super exponential and possibly evenational growth that um it will overwhelm any kind of energy supply. What I feel like computational demand would overwhelm any type of energy supply. That is uh to me an interesting theme for the future like and fossil fuels will not even begin to like touch it. This is my opinion that I'm I'm not even sure even if we discover fusion which I think fusion will be come online faster than people think and the reason is not because I have any scientific background for that is because it's like AI is a predator that needs to eat and eat this energy it will make the fusion comes online fusion come online but even with fusion we will not have enough energy for AI even with all those like crazy Dyson spheres and which I don't think how technologically feasible they are. By the way, I did some computation calculations long ago. What it would take to dice on the earth, that is to absorb all the energy of the sun. It's like we're talking about much more money than exists in the world. Let's put it like this. >> Wait, did you see more energy than the sun? >> Well, more energy than Earth receives from the sun, but I think in the very near future, more energy than the sun. Yes, I think we will get I think definitely in this century. When I say that in this century I am being extremely conservative that's actually not my opinion. I think much faster than that our energy demand will >> exceed the energy output of the sun. It doesn't mean that we'll be able to collect that energy but that means that will be the bottleneck. What I'm saying is that energy is almost unavoidably will become a bottleneck at some point. >> Is that a would that be a trade at some point? Like that be like an old like it sounds like that would be a massive trade opportunity. um the energy trade or I don't know that >> yes but it's not so easy to say what to trade based on that because like are you going to like buy oil but oil will be almost irrelevant it will be like a drop in the ocean any all the oil reserves of the earth will be a drop in the ocean in the future energy demand it won't even matter >> so what uh if we're talking about like if we're talking about like collecting energy of the sun which I again I don't know how we're going to do it I don't know if it's possible AI I on no way AI I don't know if it's possible to do massive energy of the sun collection right so um so but what I do see is the demand for computation growing and I see it continuing to grow so I feel like the growth conundrum will soon kind of and I don't think that's some people think that energy efficiencies increasing and our energy sources are getting better but I kind of feel that computation demand will overwhelm all of it. >> Gosh, I feel like there's probably a whole individual episode on that. But I guess a final question before I let you go here. Um, kind of big picture going back to the macro thesis, deflation, rates, the higher probability of rates headed back to zero. Um, from an macro investing standpoint, like what is the perfect trade, if you will, or how do you kind of think about if that's the backdrop in the environment, what can you share about how you would play that? Well, it's very hard to find a perfect trade. The whole like if you look at my book, the next perfect trade, I only found a couple of them in my career. What I think is like might be interesting and I I really don't have the scope to like go into details, but the Japan is becoming really interesting with the extreme rise in interest rate and extreme weakness in currency. There might be some interesting opportunity because being long yen versus being long Japanese bonds is becoming to be interesting. Because either if they never raise interest rates in Japan, then you just keep making money on the bonds. If they raise interest rates in Japan, then yen will rally. I don't know if I yet at the point to put everything on the table there. But this is becoming like an if you really follow the thinking in the book, I would recommend start thinking about yen. >> Start thinking >> y interest rates. >> Yeah. Um I love this line. If you think of investing as a battle, you need to prepare for it thoroughly. Get into proper shape, learn your moves, acquire your armor, your shield, your helmet, and your battle horse. A magic formula or magic weapon in this context will be wasted if you get killed by the market's first arrow. But with proper training and equipment, this weapon may give you a devastating advantage. Um, Alex, wonderful second edition of the book. I'm going to link it for the folks watching and listening to pick up a copy. Um we always appreciate when folks like open up and you know share um lessons. Before I let you go though, parting thoughts for this audience. Anything that you would like to leave them to think about? Anything that you would like to share like where they can find more of your work? Um or follow you on social? The floor is all yours. >> Well, uh yeah, the easiest way to follow me is to follow me on X at a23. I'm I'm pretty easily foundable on X and then you can find all the relevant links if you want to find like where what I what you can read. There is also my company's website honte inv.com. It's uh there is an external part of the website which is available for public. Internal part is available only for investors who only take qualified purchases. So this is not for investment purposes but like there is a lot of public information about what I'm doing on on our com company website that people are welcome to visit and yes I just recommend and to the listeners I just find your own magic weapons. It doesn't have to be necessarily mine but I I'm happy to share what I do know but you may have your own magic weapons and yes stay alive though in the markets. >> Yes. Alex Gerovich, CIO of Honte Investments, author of The Next Perfect Trade. Thank you so much for being so generous with your time, all of your knowledge, your wisdom, helping us all learn and give better. Really appreciate you and great to see you again, Alex. Thank you so much. >> Thank you very much for having me. It was a pleasure.