Diego Parrilla: The Stagflation Endgame & How to Protect Your Portfolio
Summary
Macro Outlook: The guest argues the endgame is stagflation driven by relentless monetary and fiscal expansion, eroding purchasing power over time.
Fixed Income Risks: Bonds are seen as poor long-term defenders in real terms, with correlation breakdowns and potential yield-curve control undermining their diversification role.
Inflation Hedges: Preference for assets that are long inflation, notably real estate, infrastructure, and precious metals, while staying mindful of taxes and policy risks.
Gold Strategy: Bullish long-term on gold but warns against leverage, consensus crowding, and risks of taxation/expropriation for gold miners.
AI Theme: Views AI as both a transformative productivity super-cycle and a bubble risk amid overinvestment and potential overcapacity, echoing dot-com dynamics.
Equity Approach: Advocates protected equity—own equities with systematically accumulated and monetized options protection to exploit volatility without leverage.
Positioning & Leverage: Emphasizes the dangers of hidden leverage and short options; prefers limited-loss structures and avoiding timing mistakes with cash or standalone hedges.
Regional Nuance: While risks are global, some emerging markets could fare better than developed markets if they’ve shown greater fiscal/monetary discipline.
Transcript
underlying the the whole thing there's this uh dilution of the monetary base this relentless monetary and and and fiscal printing and I think this entire party is is being financed by frogs in boiling water which are fixed income credit and and and cash investors. Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.comfree. With markets hitting all-time highs, now is a great time to stress test your strategy and be prepared for what comes next. Welcome to Wealthon. Maggie Lake. And joining me to discuss the outlook for the global economy is Diego Pereia, CIO of Quadriga Asset Managers and author of The Energy World is Flat and Anti-Bubbles. Hey Diego, it's great to see you again. >> Hey Maggie, thanks for having me. Great to be here. >> So um I boy I mean we it feels like every conversation I have we're talking about bubbles. So I think this is a great time to to talk to you. But when we spoke last April, you were concerned that we were heading into a stagflationary perfect storm. Is that still the greatest risk you see for the global economy? >> Yeah, I think uh stagflation is uh effectively the system is designed to to finish in uh stackflation in my view. Uh if you think about you know how uh central banks and governments are uh reacting uh to any problem uh call it a a pandemic um uh regional bank uh a war an energy crisis um slow growth really pretty much every issue we face you know tends to be met with a combination of uh printing and borrowing uh i.e. e monitor and fiscal. I think in in these scenarios the misconception is to believe that uh they're actually solving the problem which I I don't think is the case. I think all you're doing is is doing four things. You're kicking the can down the road. You're delaying those those problems. Number one. Number two, uh you are transferring those problems where currency wars and trade wars are manifestation. Three, you are transforming the problem. uh and here we talk a lot about a lot about inflation but I think it often gets confused or misunderstood uh relative to the loss of purchase power which is really what's what's happening you know those frogs in boiling water and and ultimately we're not really it's not a zero sum game it's is actually enlarging the problem so I think we've possibly passed the point of no return you know that those decades almost of monetary and fiscal abuse combined with the large level of debt. The impossibility of of reducing that and everinccreasing level of debt with the fact that uh you can't really let interest rates go to where they should be because then you're you're dealing with uh governments uh would be bankrupt uh insolvent. that effectively leads to the only way out which is just print more and and lend that money through perhaps yield curve control etc. So that to me is structurally the long-term picture. Now obviously on a cyclical basis and super cyclical basis we have a lot of other factors you know we have technology we have uh different uh dynamics but I think underlying the the whole thing there's this uh dilution of the monetary base this relentless monetary and and and fiscal printing and I think this entire party is is being financed by frogs in boiling water which are fixed income credit and and and cash investors who are sitting on on assets that you know in 5 10 20 30 years the the $100 if you have in in capital are literally not going to buy you uh perhaps a piece of chewing gum. So I think that that is the name of the game structurally and I think it's very much unchanged uh from a very long-term perspective. Um obviously I think as I said there are factors in AI and productivity and technology are arguably uh working in in in some ways in the in the opposite direction. Uh but I think the reality is that uh like a great philosopher of our time Mike Tyson you know when when uh when every time everyone has a plan until the market punches you in the face I think that's the reality we face you know once this exuberance disappears once this uh emperors uh you know appear the real way they might be then then I think you know what's coming and and and what's coming is more of the same and why um I think inflation and and and stockflation is it's a bit like the entropy of the universe, you know, it's it's kind of one way in my opinion and that's up. So I think you said something really important about inflation because uh so let's take let's take tariffs for example sort of in the news right now there's all this concern around liberation day when the Trump administration you know unveiled the fact that it would be looking to use tariffs and and now obviously we've seen some walk back some negotiated some you know and it's still going on so it's it's it's sort of unclear will us where this will all settle. But a lot of people worried it would be inflationary. So add that on to what you're talking about in the bigger picture and we would just see sort of hyperinflation runaway inflation and everyone's kind of looked around and said, well, you know, we see price pressures, but it's really not what all the doomsayers, you know, predicted. So maybe that was over, you know, overstated. you were kind of thinking about inflation in a different way which I think is super interesting and maybe the explanation of where that disconnect is. Can you explain can you talk about loss of purchasing power a little bit as sort of like the inflation that you see and why that's so dangerous? Yeah, I think the starting point is you know we use inflation uh in many context in in in different ways and uh sometimes in in in misleading ways and uh I think the first point I would make is that official inflation as uh a basket that has been handpicked uh is certainly not a reflection of your inflation or my inflation or anyone who's listening to us. It's uh to the point that we all have different inflation baskets. You know, someone with little kids might have nappies. Sometimes some others with kids in uni like me have university fees. We we all have there's no such thing as as this one single number that they make us believe is scientifically calculated at 2.357%. That's just uh the first point. I think uh based on on that the official inflation is is uh no reflection of real inflation. It's I think as a rule of thumb if it was my rule of thumb is at least twice the uh but possibly a lot more uh than than what is officially being published. The the third thing is uh inflation is it compounds exponentially. So, you know, the the 2% official inflation and back to the analogy of the frogs in boiling water, I think the 2% has been scientifically calculated so that as frogs uh stay in the broth, we don't jump because 2% doesn't look big enough, but it's uh it's big enough that over 10 years uh it's 20% plus compounding. Over 20 years is 40% plus compounding. And that compounding is exponential if we're talking about those those figures. So ultimately that uh inflation that worries me about is really about uh monetary printing. It's about debt. It's it's structural inflation that is eroding the uh the purchase uh power of our money. And that's why you know if you think about this uh disconnect between oh I don't see inflation being that high be it official or others I think when you look at your pocket and what your pocket is telling you >> uh whether it is you know going out for dinner or being able to go on holiday or to afford certain things that uh dilution is is relentless in my opinion and that's that's what really matters and in some ways the game that's been played is is how do I keep those frogs in that broth because the problems for the central banks start when when the the frogs start jumping off of the broth. It's like, you know what, cash is really burning my hands. I don't really trust that thing. Uh think about, you know, any friends you have in Latin America who would go, you know, and and would tell you, you go to the supermarket and by the time you're out, the price is higher than when you got in. I mean it's it's really >> uh about inflation expectations feeding on themselves and that's in some ways uh if you think about you know which I do uh about uh our friend you know Jerome Powell not not even thinking about thinking about hiking interest rates only to to do the the fastest and uh you know in in biggest uh hike in in history. uh you know I think it shows you how they're playing with these perceptions and how uh once the frogs start jumping once, you know, the the market is really calling that bluff uh they're really forced to react because uh those frogs jumping out of fixed income uh can create uh really serious problems. So I think ultimately you know the cyclical side of inflation I'm a commodity guy by background right I understand cycles I understand commodity demand might be up or down I understand super cycles where you know you have decades of underinvestment and then over uh this is normal course of business but it has nothing to do with the actual bad inflation which is driven by by this monetary uh printing technology uh demographics uh there are many factors that that also drive inflation and deflation and I think ultimately my my take is that uh central banks and and governments will take whatever you give them. So periods of crisis they need to print and periods of of of of strength or others, they're always going to try to to to print as much as they possibly can uh without getting as frogs uh jumping. And and that's why sometimes, you know, uh again when when you have a crisis that should in principle be deflationary because demand is is going down ends up being stackflationary because they they they actually printed even more. uh and and and that can create the perception that things are okay in nominal terms but in real terms uh which again is very hard to observe because you need to observe your own pocket not what the official >> uh temperature is saying I think that's that's relentless is one way and I think that's how the system is is is designed is is this is the the game we're we're in and and and I think it's important to to take that long-term perspective to see effectively what's what's really happening to to our money, our our savings, and and and the major differences that could be uh whether you are in an asset that is effectively long or short inflation, whether you're in bonds or real estate over a 20-year horizon could make a dramatic difference. If you're looking for a simple, secure way to invest and own physical gold and silver, visit our sister company, Hardass Assets Alliance, at hardassetsalliance.com. That's hardassallalliance.com. Yeah, I think there are going to be a lot of people. Well, I I I I love explaining it like that because I think that it it it kind of connects um a story that we haven't fully been able to wrap our head around because as you said, you know, the official data has sort of been telling us one thing, but you're right, we all feel it. We all feel the pressure of it. What there going to be some people listening to this that are awful awful nervous because there are, you know, the traditional portfolio even though we've been having a lot of conversations certainly here at Wealthon about what diversification looks like. The traditional portfolio is still in the US anyway, mostly stocks, bonds, and cash. And depending on how you've been feeling, you've been sort of upping or changing that diversification. From the way you're describing it, it sounds like bonds are not uh not a safe haven and maybe a question mark over whether they're a viable investment at all at this point. >> Absolutely. I think um you know if you think about the conventional 6040 uh balance portfolio that was built on the premise that uh you know if equities went down and uh central banks were able to cut rates and effectively bonds would go up that that negative correlation that existed uh you know was was based on the premise that you know interest rates would have room to go in both directions and would have would in some ways a reflection of some sort of realistic type of scenario. I think once you start grossly manipulating uh interest rates or or not being able to uh adjust rates according to the real risk and they start introducing things like yield curve control or operation twist or any any other way. Um I think fixed income has uh multiple issues. The first issue is the one we just discussed is uh and I think I would I would link this to you know what I call the three levels of of of the game, right? I mean le level one is you you you're playing a game that is based on nominal returns. So I give you $100 Maggie and you you invest them and you make 10 or two and you're like oh I made 2%. It's like yeah that's great. Um and and that 2% nominal uh works very well if uh real inflation and and it's is zero. Uh so you actually made your 2%. H in level two when inflation or you know your own inflation is is 5% that 2% doesn't look that great. uh you're you're now at minus three in real and and then uh level three you know it's is it's is what can you do uh in in in real terms after taxes which is is kind of the how we square the circle right uh which is coming so I think in that sense on a level one basis bonds look okay level two they don't >> uh but I think that first problem is you know how are we measuring our returns. How are we benchmarking our returns? So, I think uh back to the analogy of the frogs, uh benchmarks are like handcuffs to to the bowl. So, if you if you know any uh pension fund that is effectively or any investor that has a a fixed income benchmark, they might be underweight. They're kind of getting their neck a little bit out of out of the water and they feel great because I'm underweight. The reality is you're you're getting uh boiled. Uh so I think the first point is is really this dilution in real terms. Uh the second is uh is is is that correlation risk is that is it actually a reliable uh defender? Will I see that negative correlation when I need it? And we've already seen what happened in 2022 where you had the synchronous uh or code draw down of equity down, fixed income down. And that effectively led to people being a little bit more aware of of of that false diversification that idea. And I I call false diversification. You know, people confuse a portfolio with many things with a diversified portfolio. What really matters is, you know, how do you do in in in in March 2020, right? How how do you do those extremes? is is your portfolio truly diversified or did everything correlate to to plus one or minus one. So I think uh in that sense um that correlation uh is is a consideration. The the third point I would make is is in a world of structurally high inflation, is it realistic that we can send interest rates back to zero or even negative, right? Which means how much defensive power do we really have in uh in 10-year yields in in the US or Europe or Japan? uh is it is it really realistic that we'll go back to zero when uh inflation is is a concern or is maybe 2% a new floor or where are we so I think net net whether is the real terms or the the reliability as a defender or how much protection is there um I think the u the answer is you know is is the case is is not as strong in my opinion and and furthermore uh I would add to it may not only be part of the the solution, it's actually part of the the problem itself um because of the level of debt and uh and budgets. So I think in that in that sense uh the real Trump put that we saw in April wasn't really the the equity market. It was it was the fixed income market. That's when things really cracked >> and and that's where it hurts and and uh and that's when the bluff was was called. So I think that issue is not going away. I think you might pretend that you know the Fed's coming to the rescue but then the curve is steepening. The front end can go lower because central bank can cut them but the back end is not really reacting that way. And I think if if the situation was to to worsen uh I give it a almost 100% probability that the back end is going to be uh intervened is going to be manipulated through again operation twist yield curve control or some other mechanism that prevents that uh long end of the curve to to collapse. And let's not fool ourselves. You know, by doing that, you're not really solving the problem. You're just transforming a credit problem into an inflation and currency devaluation problem. And and let's not fool ourselves. That's not just a US problem. So when people talk about the dollar being, you know, in in deep trouble, I I I I don't necessarily disagree, but uh but I think the situation in Europe or Japan or China is certainly not uh supportive for for such strong uh currencies or fixed income markets on those markets either. So I think that's kind of the premise that I put forward in in my second book, you know, gold's perfect storm uh back in 2017 18. I think the writing was on the wall and if anything the situation is worsened and and that uh level one to level two has become obviously exacerbated by the pandemic and and other measures that have been taken but I think this is this is part of the both questions that you asked me with stackflation and fixed income are are very much related. So, do you anticipate that we are going to have uh a sort of Liz trust moment uh a sovereign bond crisis somewhere else in the world? Maybe a series of them based on what you're describing. >> It could be. I think it depends. um the list list moment which uh I had this Donald trust moment you know that was my newsletter in uh in April a Donald trust moment which basically we can define as the the triple whammy of equity down fixed income down currency down >> and fixed income down hard like the the wheels coming off you know like very rapid >> and the dollar and the currency and the currency I think that what you saw in the UK was you know the equity market down the fixed think on really uh as you say wheels off but the currency at the same time and I think one of the wakeup calls for the for the world really was the fact that the when you were long US assets uh you also long the dollar and for most of the crisis you would see a negative correlation so if you're a European investor and S&P was down 10% generally that was associated with some stronger dollar but getting you know the double whammy of of equity down, fixed income down, plus the multiplier effect on the currency has actually done a bit of damage. Um, so what that trigger is in some sort of the arrogance of coiness or or call it whatever you want of defying the markets with respect to, you know, I can do whatever I want. I can increase spending, cut rates, etc., cut taxes and and have this alchemy playing out and then when the markets start losing confidence uh it really spirals uh out of control and I think uh you know the governments and central banks are very aware of this. I think uh they um they they generally will will try to find ways in which they prevent this uh vicious cycle from spiraling out of control. uh but you never know I mean what what announcement what sort of measures is taken whether is proactively you know through overconfidence or or the opposite you know the people completely losing confidence for for whatever reason an election a war uh anything uh credit default >> any anything really uh but yeah I think some this is something we shouldn't we shouldn't rule out Um, but as I said earlier, I think mommy and daddy are are there and and they will do what they always do when we face these issues, which is, you know, kick the can down the road, uh, print and borrow their way out. And that's why stockflation is the endgame. You you don't know exactly what the crisis would look like, but you know how they would respond. >> Yeah. And the medicine is is less and less effective. That's the problem as we've continued to sort of, you know, kick this down. I think that's what some people are really worried about like are we at the end game where nothing is effective anymore. So one thing that people will say is uh I and I just saw something about the fact that while that all I think it sort of hits a raw nerve for a lot of us listening to that we did have see treasuries I think they're up something like 6% this year and them in the second half they've been sort of outpacing the rest of the world. We don't seem to have that massive shift or loss of confidence. What do you make of that? No, look, I think uh it it didn't look great at one point and uh I think uh the uh the market uh I think the the the Fed and the talk of the Fed I think helped uh the situation uh in some ways what what managed to prevent that that uh that collapse in some ways helped to to create a bit of trend on the other direction. I don't I don't think we're completely out of the woods. Uh I don't think they will let it uh spiral out of control. Um markets find pain. I think uh the the uh anyone that you know thought that 2 plus 2 equals 4 uh has been in some ways taken out in in in uh in both directions. And yeah, I I wouldn't call victory yet on on on that side. Um, but I I wouldn't call defeat either in in the sense that uh you know, I think the dollar for example has been down but not out. >> Uh I think fixed income has some defensive power uh with yields where they are. Uh so at the end of the day 4% nominal in the 10-year let's say if rates went to zero uh that's 40% of capital gain in nominal right if if that move was instantaneous uh just not you know doing a simple uh back of the envelope linear approximation but um but basically there are reasons to to to perhaps uh incentivize that that that flow to contain those things. But I I I think the pressure is on and and finding those those net buyers to refinance the system at those levels >> will require the confidence in the system and inflation and very few people >> today are worried about you know sort of the it goes hot and cold very very fast but uh I I again taking a long-term view I think you know the the issue is not is not resolved D. Um and right now we have a lot of uh tailwinds you know with with respect to very positive developments in the form of uh market capitalization in terms of investment in terms of uh growth expectations in terms of wealth effect and I think wealth effect as we know is a double-edged sword. It it can create virtuous cycles on the way up and vicious on the way down. So uh to to be to be ex to be watched. I think the next uh you know to to extrapolate what we've seen recently uh I'm I'm not entirely sure this is this is ne necessarily the direction we're taking. I think the risks are becoming a little bit more skewed. >> But that that equity downside risk could support the Treasury in a flight to quality. Um but but we'll see you know how much and and and in what extent. I think it's uh they're not markets you can judge in pure isolation. They go all all hand in hand. >> Yeah, you're absolutely right. I I want to ask you about the other the the other factor that you brought up and then we'll talk a little bit about sort of you know practically how people can think about this and how you're thinking about this. Um and that's AI. So are we in a bubble or is this some kind of technology super cycle, productivity super cycle? >> Well, uh both. But um let's start with the bubble. Um so I think the the first thing having written a book called the anti-bubbles um my I think we need to understand and def start with the definition of what's a bubble. Okay. >> And I think we we tend to use the word bubble very loosely. Um so for me bubble reflects an artificial valuation where which is driven by a misconception. So effectively the market has a belief that might be very deeply accepted but it's actually a false belief. In some ways the emperor has no clothes. Mhm. >> So the setup of a bubble is there's this misconception or or misconceptions that are supporting this this artificially high valuations. So by the time that misconception is proven to be effectively a false belief then the the valuation collapses. And the idea of the anti-bubble is that effectively misconceptions do not only create artificially high valuations, you could create artificially low valuations. And so bubbles and anti-bubbles are like mirror images of the same uh misconception. And by construction or by design is the same instant and catalyst that drives them lower and higher. and and furthermore they follow reflexive pro you know processes where they feed on each other. So effectively this uh setup of bubble and debubble I think is very applicable and um I think the question we need to ask ourselves is what are the beliefs uh that are driving this and what is the the what are they true beliefs and what are the misconceptions. So in that sense for certain there's a technological revolution that is dramatically changing both productivity as well as competitiveness. But I think we need to draw back on the lessons uh from 2001. And that kind of brings me to my first book uh which was called the energy world is flat which in turn was inspired by Thomas Freriedman's the world is flat published as a as a postmortem of the of the dotcom >> and I think what I found you know fascinating about Fritman's framework and and it's it's become an important part of my my how my brain is wired since is that uh what he described des back then is a four-step process. So step one was we have a gamecher technology back then was the internet and and broadband. Today it's called AI and ML and everything else. There's absolutely no question in in my mind or anybody's mind that this is a gamecher technology. There's a before and after. Now phase two is this gamechanging technology. This belief uh and this new reality is driving a huge amount of investment. And I think there are two factors there. One is um expectations and greed or whatever. And the other one is is is FOMO is uh is is is fear of missing out but not just on the investment is is is is being let out left out of of the race. So back in 2001 when you were wiring the oceans with uh broadband uh maybe you knew you were paying quite a lot. Okay, everybody knew it wasn't cheap whether it was the wiring itself or the uh money you had to pay at the auctions. The question is if you didn't participate and you were out you you might not survive. So in some ways there was strategic cost that you were willing to pay to be part of that uh that game. But I think ultimately what we saw is that wave of investments uh resulting in overcapacity. So uh think about you know uh how many charges do we need you know whether is a croc or gemini or claude or like there's a tremendous amount of duplication triplication you know quadruplication of efforts with people you know in the world and I'm just picking one example right that everyone is investing as if they were the only guy doing it partially because I need to stay in the game too because I'm going to make a fortune on the back of that without a huge amount of uh consideration to to the cost because obviously the revenue is going to be in infinity and the growth is going to be infinity and everybody's going to pay this. So the lesson learned in the.com is that eventually uh we reached uh over capacity. You know those expectations of returns >> did not materialize and as a result you have these huge asset writeoffs and that's when the magic happened. This is when stage four happened is you had a gamecher technology in huge size for free. And basically the example uh Fitman used in the book is if you were an accountant in India prior to the the dotcom you could only do the accounts for your neighbor in Bangalore but suddenly you could do the accounts for someone in in in LA. >> And I think the message was the world became flat you know suddenly and the other message that is very important is that the bubble effectively accelerated the impact of the technology. So what should have taken a long time to wire the oceans and make these investments happened very fast. So I think what we're seeing is a similar pattern of a gamecher technology with huge expectations with a strategic component of of being out being in and and and I think I don't know exactly where we are but I think the uh uh the world will be flat. It is already flat. think about education, you know, or a child in a village or a doctor in a village who now has access to the to the best advice in in in the world. >> Um, the world's becoming flatter, which is great news for the world, but um I I don't think that that necessarily means that the valuations that uh are are implied are going to be realized or that the expected winners and losers are the ones we're expecting today. I think there is plenty of room for um a repeat of what happened. Uh and so I'm very optimistic about what it means for the world in many ways. >> Uh but I I I think the the over capacity and the evaluations can give uh room to very very meaningful shocks. Um which ultimately again that that miracle is not like today is prohibitively expensive. is not the case. Uh but but certainly I think it'll be hard to realize uh many of these things. So I think we are uh in that sense the belief that demand there's infinite demand in any size at any price um and and that I'm the only guy doing this I I to the extent that it applies to certain names I think it's um it's it's a consideration and we we saw from uh the com how you know these valuations increase on the way down a lot of people disappeared you consolidation and then some of those guys came even stronger into into what they're today. But yeah, I think uh it's a game changer technology. The world will be flatter. There are huge winners and losers, but I think uh some of the expected winners today uh I I feel they they will not be and and some of the people that we don't have in our radars will be. So it's going to be a fascinating uh future ahead and certainly room for surprises and volatility and risk. Yeah, the great culling, right? Where we figure out who the people who really can optimize it or the companies or the entrepreneur out there who figures out how to crack this for for mankind and then maybe the the folks who helped build it, maybe not all of them will will survive. So when we when we think about this, what does uh an effective portfolio or an anti-bubble portfol portfolio look like? because clearly we don't know who the winners are and there's risk in the in the AI trade, therefore equities. Uh we've already established bonds, the issue with bonds. Same with cash if they're going to continue to devalue. I mean, are we left with precious metals? Is that it? Is that the only is that the only way to go? >> Um well, first of all, I agree and we talked a lot about fixed income. I think on a medium long-term perspective, um they are financing the party. It doesn't mean that there's no they don't play a role and they have some value but um I think it's uh in real terms and defensive terms they they have there a lot of considerations so I I would be fairly light uh in fact on the fixed income side um the second side of the equation is okay if I cannot if I have a problem being with assets that are short inflation cash income and credit the the corollary of that I want to be invested in things that are long inflation so that is infrastructure real estate precious metals and to a certain extent equities because my problem with equities in some ways is that uh you cannot not be long >> uh that's sort of the tricky situation right uh if you again if you're taking a 5 10 20 year perspective uh I'll give it a 99% probability that real estate will be higher then equities will be higher uh and it's not going to be because of their own merits is the is the demerit of of of the uh unit of of measure etc. So I think if you're playing in in a nominal game is one thing but if you're playing in a real game uh fixed income has a problem and real assets uh now beware of gold. I mean I love gold. I when I published the book it was around a thousand. People ask me what do you think? I'd be like well 3 to 5,000 within 3 to 5 years was my official line. And then I would tell people yeah but [laughter] it's not exactly what I'm really thinking. But if I told you what I'm really thinking you think I'm nuts. So already at 3 to 5k you think I'm nuts. and and I said, "Look, we'll be talking about 10K when we talk 3K and and I can extrapolate that now if if once we get to 10K." Um, so beware of the uh price action, beware of the consensus, beware of the leverage because the the draw down in these assets can be pretty huge. Um, the consensus trade, the hidden leverage, people precisely saying, "Oh, this is it. That's that's the only way and I'm I'm going to lever myself." And then if you have a $1,000 draw down, can you withstand it or will the market take you out? And then you feel uh pretty stupid uh uh by by by by being right and wrong. So m mind the leverage even if that conviction is very high. Um but I think when it comes down to equities um the challenge in what what what I do as you you know as a portfolio manager we we are effectively creating uh what we call protected equity uh protected rebalanced equity mandates and and and the idea here is you know you you are taking a a long equity position but the fact that the risks that we talked about you know the the bubble the many things what is great about markets is that there's a bubble anti-bubble relationship that exists between the equity and the and the volatility as a proxy for for protection. So in some ways what you want to do is is you want to accumulate uh portfolio protection uh during very benign markets say VIX under 15. >> You know you you want to accumulate protection and what happens is when those crisis come which in my opinion it's it's a matter of when not if uh then the protection is not there just to to give you a mark tomarket hedge. It's like, "Oh my god, thanks God that I have this." And then you you actually have to be proactive and have an accumulation and monetization plan. You have to be in a situation where you're going to use that those gains in your protection to monetize them and effectively buy even more of the equity. So you want to embrace the volatility of the market. You want to accumulate and monetize uh these assets. And in this exercise of protected equity, you are not just unilaterally thinking of of equities higher. You you effectively embracing that process. And so that's what we do. We run this these portfolios that effectively are an alternative to to passive equity which I think is hard to manage because the challenge when you're managing an equity portfolio you know I talked to a lot of wealth managers and CIOS and with all the uh good intentions in the world they might say oh my god you know I'm concerned about the market I'm going to get out of equities or I'm going to go underweight >> and my question to them is always so when are you getting back in what's to stop. You know, the profit on the bottom rarely gets materialized because everybody panics and the crisis and as the market starts running against you, then you you don't chase it. Uh and that creates this emotional drain on on on trying to time the market the crystal ball that I don't believe in. The other alternative which is you know buying protection and a standalone line item is is tough as well. you know you're you're facing uh paying the premium the carry and some people unfortunately uh use this completely the wrong way. They buy protection during the crisis and then they sell it out of fatigue. So my conclusion is you know let let's let's buy this do do it as a package buy protected equity that gives you that uncapped blue sky uh upside to the equity but with with some protection and that protection you you need to accumulate and monetize. So that that package uh what I call the green line you know blue equity and yellow protection I think it's the green is is a lot easier to understand or easier to hold. So in my opinion to summarize big issue with with cash fixed income credit in the long term in real terms uh definitely long real assets uh but mindful and equities but use it without leverage uh with protection >> and um and be mindful of taxes because I think that level three we talked about it's coming. So back to precious metals, um one of the key things to consider uh is you know most people think that gold and gold equities are the same thing. Uh in fact they think that gold equities are like call option on gold and I do agree to a certain extent but beware of taxation expropriation and nationalization. If you are half correct and gold is as strategically important as you think uh with golden 10k that gold mine that you own may not be yours. >> Uh you know we saw the movie in oil at $140 $40 a barrel in you know 2007 like and uh you know production sharing agreements had taxes of 99% of the upside. So I think it's um it's just a rel you know relentless uh monetary fiscal uh dominance that uh once you create this inflation it brings inequality it brings social unrest and it brings populism and then obviously you're going to tax the rich and whoever owns these assets. So I think taxation is almost the how they square this circle and uh is the easy uh you know even if the central banks and governments are the ones who created the inflation they will blame they'll find some scapegoat and the the the rich and and if you and the and the gold miners and and whoever is making all that money uh will be taxed and expropriated and nationalized. So I think it's um it's such a difficult game, you know, to to to [clears throat] position yourself >> and so real estate might look great, but you might have uh you know, not just wealth taxes, but the mansion taxes is it's just, you know, death taxes and and inflation, I think, are the the the the three levels I would say is very tricky. But yeah, that's that's how I would position the portfolio. Um you know, from from from our perspective. Yeah. you you were just um in New York at Bloomberg's volatility forum. We just were just talking about that. Uh do you think we I don't want to get super technical here, but the fact that we have retail options, so many people playing in that space, um the same day expiry, all of these sort of, you know, new instruments or new options out there for for participation. Has it changed the way you think about risk and convexity? Not necessarily. Um I think people were super worried about zero day options at first as is as if um everyone >> in the world was one way and and and selling them. Um I do think they create risks and it worries me that the amount of options trading is um you know I I don't think every single person trading options understands truly >> the nature of the risk particularly uh those who sell options. >> Um I don't have a real issue with anybody buying options because my worst case scenario is the loss of the premium. In fact, that's what I do as a self-imposed risk limit. We only buy strategies with limited loss. I've seen someone in my career with a million dollar value at risk lose 50. And I I ask my students at Imperial College, you know, hey guys, can you or anywhere really, any seminar, my my it's like so what's a million dollar value at risk? And generally there's someone you know who goes hey I think I know it's with 95% confidence you're not going to lose more than a million dollars and I go like almost it's you will lose at least $1 million and that includes 50. Um so I think when you when you run short options or hidden leverage in the form of long short okay think about you know we talked about precious metals earlier the you know as gold was flying uh into uh liberation day silver was collapsing right and people were scratching their heads it's like it's pretty obvious that someone had some sort of uh long short uh position thinking well if gold goes up, silver could go up more, and you do it in huge size, and before you know it, whatever, gold's up 10% and silver's down 20. Uh, so beware of open-ended risk, beware of short options, beware of anything that has hidden leverage because those are the things that will really literally financially kill you. Um, so in that sense, there will be, you know, being long options, uh, it's it's painful. you pay the premium sometimes but not necessarily they have negative carry. >> Uh been short options on a levered fashion. I mean how many times I'll tell you two two case studies that worry me a lot. One is when people talk about options as income that scares the hell out of me because uh they they sort of build the house through the roof. It's like well I want to make 10K. Uh what do I need to sell to to make 10K? It's like okay, you know, instead of saying how much risk do I want to take and how much is the market paying me, you're sort of starting through how much income do I want and then most people think it's okay if it gets down there, I'll I'll happily buy it. And then, you know, so it doesn't it doesn't work that way. I think you you get to see this uh income place often working for a while and then exploding in your face in a way that they can they can take you out. And and the second case study that I discussed in the in the V conference very um clearly is this gross mistake or misconception that I hear all the time that it's the idea of I'm buying puts financed by selling calls uh or some combination. Sometimes there's billions and billions of dollars in strategies that are doing these buffer trades where you buy put spreads financed by selling calls. And my point to that is if you want to spend a million dollars in or a dollar in uh in premium and you want to finance that, go to the bank, borrow the dollar and pay back 105 in one year. That's what it's called to finance uh an option if you want to finance it. But the moment you sell the call option, uh then you aren't really financing anything. Your long puts, your short calls, markets [clears throat] up 30%. Your 105 call cost you 25. And guess what happens? Those $25 need to come from somewhere, which generally comes from selling the long that you had. And >> so you see a lot of these products being grossly diluted and what started out with a 100 shares of S&P are now worth 50 shares. A little bit of what happens with the VIX ETF. You've been grossly diluted in a way that your capital base, you know, goes down, your participation goes down. So back to the options. Um, look, if you're starting, uh, start by buying them. Limit your loss. beware of um uh you know think carefully about the the risk of of shorting this stuff and finding any sort of hidden leverage. So to the extent that the this blows up happen, I think there'll be major winners and losers. Is it systemic? Not per se, but uh it can contribute to the acceleration of those vicious cycles when things really go wrong as as is always the case. I'm as worried about that as I might be worried about the market being just you know overextended in any asset from from gold to to anything else. So if you know one thing is crisis you know 2 plus 2 is not four it can be anything it could be it's a process where >> volatility going up compounds into correlation polarizing to plus one minus one and then liquidity drying out. So I I use this slide all the time, what I call the chronicle of a crisis for told, which analyzes the the three drivers of vault, correlation, and liquidity, and how you can quickly go from a portfolio that looks pretty safe uh in terms of low risk to to effectively uh risk that is literally off the charts. And I think it's very very important to understand all those drivers particularly if you're using leverage or you're using things with unlimited uh limited loss as it's short options or or long short. >> Yeah, that it's it's it's really important to underscore that um especially now. So it's it's maybe a good place to end because you know it feels like we have all these risks and as you say they they seem like there's everywhere. Um, you talked about the assets that you like that you think make up a a sort of anti-bubble portfolio. Is there a region or a country or a currency or a place where you feel like is a little more insulated than than some of the concerns or is this is this an everywhere issue? >> It's an everywhere issue, but crisis behave a little bit like dominoes and also snowballs. So I think the weaker guys will go first and how badly they drag the um the other guys uh it's it's second order but I think if you've abused uh monitoring fiscal uh you will go you know faster and further than if you haven't and so I think that discipline ultimately if you've abused the system I'm sorry you'll pay for it. It's kind of the the uh the idea >> and ironically um unlike other crisis it could well be that uh emerging markets holds a lot better than than uh than developed markets in certain areas and and and and why not ultimately if if they've paid [snorts] for uh and they're going to be heavily penalized and they've you know followed more fiscal and and monetary discipline. Um I think it could well be the case which brings me back to the point on correlation, right? I mean uh I think one of the biggest blowups during March 2020 was uh there was this structure sold by by the banks in the form of QIS and and uh stuff that was saying look buy EM uh equity vault and and short US equity vault because it's free money. uh when the markets are quiet you don't pay anything and in a crisis of course EM equity vault will go higher than US equity vault >> and then it looked so obvious as a way to to to buy synthetic optionality to buy something that you you have that asymmetry without any cost and trust me you know you don't know to the the like poker no if you don't know who the dumb person on the table is is probably you I think in some of these traits you know, sometimes there's some risk that you don't fully understand. And as it happened, those billions and billions and billions of of money that followed that trade as the crisis happened blew up in in their face. So, I think we need to be a little bit um careful about all all those uh dynamics and and and hit the risk and and again, who knows? You might think that the rear mirrors are telling you that uh EM is going to blow up more than uh France because that's the way every single crisis happened or the bond and and and and the French bond and the Spanish bond and the Italian bond and you put some relationship in place that the rear mirrors tell you it works and then on a forward-looking basis it doesn't. So that's why I keep going back to, you know, structures that have limited loss as a as a safer way to control your risk and and ultimately whether they behave the way we anticipate, whether gold rallies or sells off in a crisis, it will be in in a meaningful way a function of not only the fundamentals, but much more importantly the speculative position at the moment of that crisis as volatility increases and people are forced to cut. So it's um it's a game where you need to you know control the risk and and I think uh options in general and and long option in particular is a fantastic way to to accumulate and monetize that protection in the in the framework we we discussed earlier. M is there a I think folks are going to be listening to this and hopefully um try to go and take a look at their portfolio especially as we head into year end. We all tend to do that housekeeping. Um can you can you create a a sort of a a portfolio that can protect against some of the risk we talked about without using options? I mean, is the is the era of sort of plain vanilla diversification over? >> Well, certainly I think the the answer is yes in the sense that uh it depends what you're trying to achieve whether you want to uh lose less >> in a crisis or you try to make money in a crisis which is what what we're designed to do. So if you wanted to put uh if you're really concerned about the world and you put everything in cash um what's the problem? Problem is well uh nothing happens. The market keeps going and your purchase power has been diluted. So >> by being in cash you the clock's ticking sometimes and maybe you're wrong. Maybe it keeps going. So I that's that's tough that creates a a timing issue. um uh fixed income, we talked about pros and cons, probably some defensive power, but it may actually be part of the problem. So, who knows? But I think when it comes down to equities, obviously there are sectors, there are regions that are going to be more or less defensive. Um I I would say you know and I'm not the the expert on this this field but certainly uh back to the sectoral approach I I would say uh look look for the current beliefs and uh and perhaps how the unwind of those beliefs would would play out. I have some views but uh I think people will >> stick to also their own competence and so how how would the the world look like when if and when those so to a certain extent if you were to buy switch some equities that might be overextended to others that are perhaps being penalized in uh boring you know like uh I don't know I'm not gonna say names because I wouldn't know but but I'm thinking of boring businesses that have been left aside side because uh everyone wants to make multibaggers, you know, or however they're called. Uh I love that term, tenbagger. If you want a 10bagger, you know, and and you you drop something because it's too boring, >> I I think that that could be something that >> could actually even go up in a crisis. >> But um the biggest predictor of of how you behave in a crisis is is positioning. M >> and um yeah I I had this uh anecdote uh that that I I I talk about uh in my class uh which actually is it happened. It's real. Um I I used it as a as a as a joke once but it actually happened. So anyway, so you I looked at the entire the typical uh uh picture of I think they're called heat maps. you know, you have all the commodities >> and then you see things in green and red. And so in this crisis, everything was red. Every single commodity was down except orange juice. And uh and then I I asked people, "So what do you what do you think of this? What what uh so this this is what happened?" And everybody looks at it's like, "Well, I didn't know orange juice was a safe haven." And uh and I'm like, "Okay, what do you think that is?" It's like, "Oh my god, I don't know. Maybe in a crisis." And there were like all sorts of creative answers like obviously um and and the answer is no. It's not a safe haven. The reason oranges went up is because the the the market was short >> oranges. So in in a crisis >> uh if you're long gold most likely gold will go down at least as a first instance. It might well be that the response to that crisis is even more printing and more inflation in which case gold would do some sort of uh sell off and then rally which is why you want to be careful with the leverage and you want to be in a position where you can possibly even take advantage of those things. >> But uh but yeah with orange juice it just happened the market was short and as as volatility went up and margin calls went left right and center people had to to cut their positions and and if you're short it means buying it. So which brings me on to the point that I made as well in the volatility conference the yen when people think the yen is a safe haven it's like why >> well it rallies on a in a crisis and it's like yeah but why uh well reputation whatever but you know part part of the reason is uh carry trade you know the market is running Aussie yen and it's enjoying the the the beautiful carry between the Australian dollar and the yen and um and and and that works whilst the world is okay. But once you have this big uh sell-offs and and and force liquidation takes place and people need to effectively buy back the yen and sell the Aussie, whatever you made in a year's carry, you might lose in an hour. >> Yeah. >> Um >> I feel like we saw that last not this past August, but the prior year I think we >> that's the name of the game, right? So So I think you need to understand really back to your question on where do I go? It's it's not just about again fundamentals 2 plus 2als 4. is is is also about you know what is the position in the market? How do I >> what what is the hidden leverage and and and there are things that you know ideally you want to find stuff that again will will be truly diversified uh into that process and depending on your investment style your access to different investment products you might do one thing or another but uh but again the the the thing I I urge people to to be very careful about is leverage uh direct and hidden uh and and also positions with open-ended risk in in in a leverage form >> uh because th those can be extraordinarily difficult to to manage and handle and uh and can lead to force liquidation which ultimately is a pity because you might be right but uh but be taken out so >> which is the hardest is the hardest position to be in I think but we see it over and over again. Um, Diego, I I so enjoy these conversations. You gave us so many good parameters and ways to think about how to approach this beyond the really simplistic headlines we see um, every day. These are really complex times we're in and I think we all need to sort of dive in and think about it that way. No wonder you're a teacher as well and an author as well as a money manager. >> Well, you know what Cicero said? He said, uh, if you want to learn, teach. And, uh, I feel I feel very strongly about that. I think uh I encourage everyone to to teach uh and write you know I think uh it's a very humbling process uh and and yeah you you you really in my case I have a passion for you know for this the students are fantastic it gives you a lot of energy but but I I it's actually if you're really passionate about something I you know do do write about it do do teach and I think you will see that uh you actually learn in in the process >> I totally agree makes you really understand it. Plus, um, we need the next generation of trained investment experts and economists because somebody's got to figure out a way out of this mess. It's going to take it's going to take a lot of great minds. >> It'll be okay. It'll be okay, I'm sure. [snorts] >> Diego, thank you so much. Uh, and just a reminder, I mean, we covered a lot of a lot of ground here. So, if you have any questions or you want to take a look at your portfolio, you want to understand some of the concepts better that Diego talked about, you can get a free portfolio review from one of the adviserss in the Wealthon Network. You can hit the link in the description or go to wealthon.comfree. Thanks everybody for watching. Diego, thank you as always. >> All the best. Thank you Margie and team. All the best. >> We'll see you again next time. >> Thank you.
Diego Parrilla: The Stagflation Endgame & How to Protect Your Portfolio
Summary
Transcript
underlying the the whole thing there's this uh dilution of the monetary base this relentless monetary and and and fiscal printing and I think this entire party is is being financed by frogs in boiling water which are fixed income credit and and and cash investors. Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.comfree. With markets hitting all-time highs, now is a great time to stress test your strategy and be prepared for what comes next. Welcome to Wealthon. Maggie Lake. And joining me to discuss the outlook for the global economy is Diego Pereia, CIO of Quadriga Asset Managers and author of The Energy World is Flat and Anti-Bubbles. Hey Diego, it's great to see you again. >> Hey Maggie, thanks for having me. Great to be here. >> So um I boy I mean we it feels like every conversation I have we're talking about bubbles. So I think this is a great time to to talk to you. But when we spoke last April, you were concerned that we were heading into a stagflationary perfect storm. Is that still the greatest risk you see for the global economy? >> Yeah, I think uh stagflation is uh effectively the system is designed to to finish in uh stackflation in my view. Uh if you think about you know how uh central banks and governments are uh reacting uh to any problem uh call it a a pandemic um uh regional bank uh a war an energy crisis um slow growth really pretty much every issue we face you know tends to be met with a combination of uh printing and borrowing uh i.e. e monitor and fiscal. I think in in these scenarios the misconception is to believe that uh they're actually solving the problem which I I don't think is the case. I think all you're doing is is doing four things. You're kicking the can down the road. You're delaying those those problems. Number one. Number two, uh you are transferring those problems where currency wars and trade wars are manifestation. Three, you are transforming the problem. uh and here we talk a lot about a lot about inflation but I think it often gets confused or misunderstood uh relative to the loss of purchase power which is really what's what's happening you know those frogs in boiling water and and ultimately we're not really it's not a zero sum game it's is actually enlarging the problem so I think we've possibly passed the point of no return you know that those decades almost of monetary and fiscal abuse combined with the large level of debt. The impossibility of of reducing that and everinccreasing level of debt with the fact that uh you can't really let interest rates go to where they should be because then you're you're dealing with uh governments uh would be bankrupt uh insolvent. that effectively leads to the only way out which is just print more and and lend that money through perhaps yield curve control etc. So that to me is structurally the long-term picture. Now obviously on a cyclical basis and super cyclical basis we have a lot of other factors you know we have technology we have uh different uh dynamics but I think underlying the the whole thing there's this uh dilution of the monetary base this relentless monetary and and and fiscal printing and I think this entire party is is being financed by frogs in boiling water which are fixed income credit and and and cash investors who are sitting on on assets that you know in 5 10 20 30 years the the $100 if you have in in capital are literally not going to buy you uh perhaps a piece of chewing gum. So I think that that is the name of the game structurally and I think it's very much unchanged uh from a very long-term perspective. Um obviously I think as I said there are factors in AI and productivity and technology are arguably uh working in in in some ways in the in the opposite direction. Uh but I think the reality is that uh like a great philosopher of our time Mike Tyson you know when when uh when every time everyone has a plan until the market punches you in the face I think that's the reality we face you know once this exuberance disappears once this uh emperors uh you know appear the real way they might be then then I think you know what's coming and and and what's coming is more of the same and why um I think inflation and and and stockflation is it's a bit like the entropy of the universe, you know, it's it's kind of one way in my opinion and that's up. So I think you said something really important about inflation because uh so let's take let's take tariffs for example sort of in the news right now there's all this concern around liberation day when the Trump administration you know unveiled the fact that it would be looking to use tariffs and and now obviously we've seen some walk back some negotiated some you know and it's still going on so it's it's it's sort of unclear will us where this will all settle. But a lot of people worried it would be inflationary. So add that on to what you're talking about in the bigger picture and we would just see sort of hyperinflation runaway inflation and everyone's kind of looked around and said, well, you know, we see price pressures, but it's really not what all the doomsayers, you know, predicted. So maybe that was over, you know, overstated. you were kind of thinking about inflation in a different way which I think is super interesting and maybe the explanation of where that disconnect is. Can you explain can you talk about loss of purchasing power a little bit as sort of like the inflation that you see and why that's so dangerous? Yeah, I think the starting point is you know we use inflation uh in many context in in in different ways and uh sometimes in in in misleading ways and uh I think the first point I would make is that official inflation as uh a basket that has been handpicked uh is certainly not a reflection of your inflation or my inflation or anyone who's listening to us. It's uh to the point that we all have different inflation baskets. You know, someone with little kids might have nappies. Sometimes some others with kids in uni like me have university fees. We we all have there's no such thing as as this one single number that they make us believe is scientifically calculated at 2.357%. That's just uh the first point. I think uh based on on that the official inflation is is uh no reflection of real inflation. It's I think as a rule of thumb if it was my rule of thumb is at least twice the uh but possibly a lot more uh than than what is officially being published. The the third thing is uh inflation is it compounds exponentially. So, you know, the the 2% official inflation and back to the analogy of the frogs in boiling water, I think the 2% has been scientifically calculated so that as frogs uh stay in the broth, we don't jump because 2% doesn't look big enough, but it's uh it's big enough that over 10 years uh it's 20% plus compounding. Over 20 years is 40% plus compounding. And that compounding is exponential if we're talking about those those figures. So ultimately that uh inflation that worries me about is really about uh monetary printing. It's about debt. It's it's structural inflation that is eroding the uh the purchase uh power of our money. And that's why you know if you think about this uh disconnect between oh I don't see inflation being that high be it official or others I think when you look at your pocket and what your pocket is telling you >> uh whether it is you know going out for dinner or being able to go on holiday or to afford certain things that uh dilution is is relentless in my opinion and that's that's what really matters and in some ways the game that's been played is is how do I keep those frogs in that broth because the problems for the central banks start when when the the frogs start jumping off of the broth. It's like, you know what, cash is really burning my hands. I don't really trust that thing. Uh think about, you know, any friends you have in Latin America who would go, you know, and and would tell you, you go to the supermarket and by the time you're out, the price is higher than when you got in. I mean it's it's really >> uh about inflation expectations feeding on themselves and that's in some ways uh if you think about you know which I do uh about uh our friend you know Jerome Powell not not even thinking about thinking about hiking interest rates only to to do the the fastest and uh you know in in biggest uh hike in in history. uh you know I think it shows you how they're playing with these perceptions and how uh once the frogs start jumping once, you know, the the market is really calling that bluff uh they're really forced to react because uh those frogs jumping out of fixed income uh can create uh really serious problems. So I think ultimately you know the cyclical side of inflation I'm a commodity guy by background right I understand cycles I understand commodity demand might be up or down I understand super cycles where you know you have decades of underinvestment and then over uh this is normal course of business but it has nothing to do with the actual bad inflation which is driven by by this monetary uh printing technology uh demographics uh there are many factors that that also drive inflation and deflation and I think ultimately my my take is that uh central banks and and governments will take whatever you give them. So periods of crisis they need to print and periods of of of of strength or others, they're always going to try to to to print as much as they possibly can uh without getting as frogs uh jumping. And and that's why sometimes, you know, uh again when when you have a crisis that should in principle be deflationary because demand is is going down ends up being stackflationary because they they they actually printed even more. uh and and and that can create the perception that things are okay in nominal terms but in real terms uh which again is very hard to observe because you need to observe your own pocket not what the official >> uh temperature is saying I think that's that's relentless is one way and I think that's how the system is is is designed is is this is the the game we're we're in and and and I think it's important to to take that long-term perspective to see effectively what's what's really happening to to our money, our our savings, and and and the major differences that could be uh whether you are in an asset that is effectively long or short inflation, whether you're in bonds or real estate over a 20-year horizon could make a dramatic difference. If you're looking for a simple, secure way to invest and own physical gold and silver, visit our sister company, Hardass Assets Alliance, at hardassetsalliance.com. That's hardassallalliance.com. Yeah, I think there are going to be a lot of people. Well, I I I I love explaining it like that because I think that it it it kind of connects um a story that we haven't fully been able to wrap our head around because as you said, you know, the official data has sort of been telling us one thing, but you're right, we all feel it. We all feel the pressure of it. What there going to be some people listening to this that are awful awful nervous because there are, you know, the traditional portfolio even though we've been having a lot of conversations certainly here at Wealthon about what diversification looks like. The traditional portfolio is still in the US anyway, mostly stocks, bonds, and cash. And depending on how you've been feeling, you've been sort of upping or changing that diversification. From the way you're describing it, it sounds like bonds are not uh not a safe haven and maybe a question mark over whether they're a viable investment at all at this point. >> Absolutely. I think um you know if you think about the conventional 6040 uh balance portfolio that was built on the premise that uh you know if equities went down and uh central banks were able to cut rates and effectively bonds would go up that that negative correlation that existed uh you know was was based on the premise that you know interest rates would have room to go in both directions and would have would in some ways a reflection of some sort of realistic type of scenario. I think once you start grossly manipulating uh interest rates or or not being able to uh adjust rates according to the real risk and they start introducing things like yield curve control or operation twist or any any other way. Um I think fixed income has uh multiple issues. The first issue is the one we just discussed is uh and I think I would I would link this to you know what I call the three levels of of of the game, right? I mean le level one is you you you're playing a game that is based on nominal returns. So I give you $100 Maggie and you you invest them and you make 10 or two and you're like oh I made 2%. It's like yeah that's great. Um and and that 2% nominal uh works very well if uh real inflation and and it's is zero. Uh so you actually made your 2%. H in level two when inflation or you know your own inflation is is 5% that 2% doesn't look that great. uh you're you're now at minus three in real and and then uh level three you know it's is it's is what can you do uh in in in real terms after taxes which is is kind of the how we square the circle right uh which is coming so I think in that sense on a level one basis bonds look okay level two they don't >> uh but I think that first problem is you know how are we measuring our returns. How are we benchmarking our returns? So, I think uh back to the analogy of the frogs, uh benchmarks are like handcuffs to to the bowl. So, if you if you know any uh pension fund that is effectively or any investor that has a a fixed income benchmark, they might be underweight. They're kind of getting their neck a little bit out of out of the water and they feel great because I'm underweight. The reality is you're you're getting uh boiled. Uh so I think the first point is is really this dilution in real terms. Uh the second is uh is is is that correlation risk is that is it actually a reliable uh defender? Will I see that negative correlation when I need it? And we've already seen what happened in 2022 where you had the synchronous uh or code draw down of equity down, fixed income down. And that effectively led to people being a little bit more aware of of of that false diversification that idea. And I I call false diversification. You know, people confuse a portfolio with many things with a diversified portfolio. What really matters is, you know, how do you do in in in in March 2020, right? How how do you do those extremes? is is your portfolio truly diversified or did everything correlate to to plus one or minus one. So I think uh in that sense um that correlation uh is is a consideration. The the third point I would make is is in a world of structurally high inflation, is it realistic that we can send interest rates back to zero or even negative, right? Which means how much defensive power do we really have in uh in 10-year yields in in the US or Europe or Japan? uh is it is it really realistic that we'll go back to zero when uh inflation is is a concern or is maybe 2% a new floor or where are we so I think net net whether is the real terms or the the reliability as a defender or how much protection is there um I think the u the answer is you know is is the case is is not as strong in my opinion and and furthermore uh I would add to it may not only be part of the the solution, it's actually part of the the problem itself um because of the level of debt and uh and budgets. So I think in that in that sense uh the real Trump put that we saw in April wasn't really the the equity market. It was it was the fixed income market. That's when things really cracked >> and and that's where it hurts and and uh and that's when the bluff was was called. So I think that issue is not going away. I think you might pretend that you know the Fed's coming to the rescue but then the curve is steepening. The front end can go lower because central bank can cut them but the back end is not really reacting that way. And I think if if the situation was to to worsen uh I give it a almost 100% probability that the back end is going to be uh intervened is going to be manipulated through again operation twist yield curve control or some other mechanism that prevents that uh long end of the curve to to collapse. And let's not fool ourselves. You know, by doing that, you're not really solving the problem. You're just transforming a credit problem into an inflation and currency devaluation problem. And and let's not fool ourselves. That's not just a US problem. So when people talk about the dollar being, you know, in in deep trouble, I I I I don't necessarily disagree, but uh but I think the situation in Europe or Japan or China is certainly not uh supportive for for such strong uh currencies or fixed income markets on those markets either. So I think that's kind of the premise that I put forward in in my second book, you know, gold's perfect storm uh back in 2017 18. I think the writing was on the wall and if anything the situation is worsened and and that uh level one to level two has become obviously exacerbated by the pandemic and and other measures that have been taken but I think this is this is part of the both questions that you asked me with stackflation and fixed income are are very much related. So, do you anticipate that we are going to have uh a sort of Liz trust moment uh a sovereign bond crisis somewhere else in the world? Maybe a series of them based on what you're describing. >> It could be. I think it depends. um the list list moment which uh I had this Donald trust moment you know that was my newsletter in uh in April a Donald trust moment which basically we can define as the the triple whammy of equity down fixed income down currency down >> and fixed income down hard like the the wheels coming off you know like very rapid >> and the dollar and the currency and the currency I think that what you saw in the UK was you know the equity market down the fixed think on really uh as you say wheels off but the currency at the same time and I think one of the wakeup calls for the for the world really was the fact that the when you were long US assets uh you also long the dollar and for most of the crisis you would see a negative correlation so if you're a European investor and S&P was down 10% generally that was associated with some stronger dollar but getting you know the double whammy of of equity down, fixed income down, plus the multiplier effect on the currency has actually done a bit of damage. Um, so what that trigger is in some sort of the arrogance of coiness or or call it whatever you want of defying the markets with respect to, you know, I can do whatever I want. I can increase spending, cut rates, etc., cut taxes and and have this alchemy playing out and then when the markets start losing confidence uh it really spirals uh out of control and I think uh you know the governments and central banks are very aware of this. I think uh they um they they generally will will try to find ways in which they prevent this uh vicious cycle from spiraling out of control. uh but you never know I mean what what announcement what sort of measures is taken whether is proactively you know through overconfidence or or the opposite you know the people completely losing confidence for for whatever reason an election a war uh anything uh credit default >> any anything really uh but yeah I think some this is something we shouldn't we shouldn't rule out Um, but as I said earlier, I think mommy and daddy are are there and and they will do what they always do when we face these issues, which is, you know, kick the can down the road, uh, print and borrow their way out. And that's why stockflation is the endgame. You you don't know exactly what the crisis would look like, but you know how they would respond. >> Yeah. And the medicine is is less and less effective. That's the problem as we've continued to sort of, you know, kick this down. I think that's what some people are really worried about like are we at the end game where nothing is effective anymore. So one thing that people will say is uh I and I just saw something about the fact that while that all I think it sort of hits a raw nerve for a lot of us listening to that we did have see treasuries I think they're up something like 6% this year and them in the second half they've been sort of outpacing the rest of the world. We don't seem to have that massive shift or loss of confidence. What do you make of that? No, look, I think uh it it didn't look great at one point and uh I think uh the uh the market uh I think the the the Fed and the talk of the Fed I think helped uh the situation uh in some ways what what managed to prevent that that uh that collapse in some ways helped to to create a bit of trend on the other direction. I don't I don't think we're completely out of the woods. Uh I don't think they will let it uh spiral out of control. Um markets find pain. I think uh the the uh anyone that you know thought that 2 plus 2 equals 4 uh has been in some ways taken out in in in uh in both directions. And yeah, I I wouldn't call victory yet on on on that side. Um, but I I wouldn't call defeat either in in the sense that uh you know, I think the dollar for example has been down but not out. >> Uh I think fixed income has some defensive power uh with yields where they are. Uh so at the end of the day 4% nominal in the 10-year let's say if rates went to zero uh that's 40% of capital gain in nominal right if if that move was instantaneous uh just not you know doing a simple uh back of the envelope linear approximation but um but basically there are reasons to to to perhaps uh incentivize that that that flow to contain those things. But I I I think the pressure is on and and finding those those net buyers to refinance the system at those levels >> will require the confidence in the system and inflation and very few people >> today are worried about you know sort of the it goes hot and cold very very fast but uh I I again taking a long-term view I think you know the the issue is not is not resolved D. Um and right now we have a lot of uh tailwinds you know with with respect to very positive developments in the form of uh market capitalization in terms of investment in terms of uh growth expectations in terms of wealth effect and I think wealth effect as we know is a double-edged sword. It it can create virtuous cycles on the way up and vicious on the way down. So uh to to be to be ex to be watched. I think the next uh you know to to extrapolate what we've seen recently uh I'm I'm not entirely sure this is this is ne necessarily the direction we're taking. I think the risks are becoming a little bit more skewed. >> But that that equity downside risk could support the Treasury in a flight to quality. Um but but we'll see you know how much and and and in what extent. I think it's uh they're not markets you can judge in pure isolation. They go all all hand in hand. >> Yeah, you're absolutely right. I I want to ask you about the other the the other factor that you brought up and then we'll talk a little bit about sort of you know practically how people can think about this and how you're thinking about this. Um and that's AI. So are we in a bubble or is this some kind of technology super cycle, productivity super cycle? >> Well, uh both. But um let's start with the bubble. Um so I think the the first thing having written a book called the anti-bubbles um my I think we need to understand and def start with the definition of what's a bubble. Okay. >> And I think we we tend to use the word bubble very loosely. Um so for me bubble reflects an artificial valuation where which is driven by a misconception. So effectively the market has a belief that might be very deeply accepted but it's actually a false belief. In some ways the emperor has no clothes. Mhm. >> So the setup of a bubble is there's this misconception or or misconceptions that are supporting this this artificially high valuations. So by the time that misconception is proven to be effectively a false belief then the the valuation collapses. And the idea of the anti-bubble is that effectively misconceptions do not only create artificially high valuations, you could create artificially low valuations. And so bubbles and anti-bubbles are like mirror images of the same uh misconception. And by construction or by design is the same instant and catalyst that drives them lower and higher. and and furthermore they follow reflexive pro you know processes where they feed on each other. So effectively this uh setup of bubble and debubble I think is very applicable and um I think the question we need to ask ourselves is what are the beliefs uh that are driving this and what is the the what are they true beliefs and what are the misconceptions. So in that sense for certain there's a technological revolution that is dramatically changing both productivity as well as competitiveness. But I think we need to draw back on the lessons uh from 2001. And that kind of brings me to my first book uh which was called the energy world is flat which in turn was inspired by Thomas Freriedman's the world is flat published as a as a postmortem of the of the dotcom >> and I think what I found you know fascinating about Fritman's framework and and it's it's become an important part of my my how my brain is wired since is that uh what he described des back then is a four-step process. So step one was we have a gamecher technology back then was the internet and and broadband. Today it's called AI and ML and everything else. There's absolutely no question in in my mind or anybody's mind that this is a gamecher technology. There's a before and after. Now phase two is this gamechanging technology. This belief uh and this new reality is driving a huge amount of investment. And I think there are two factors there. One is um expectations and greed or whatever. And the other one is is is FOMO is uh is is is fear of missing out but not just on the investment is is is is being let out left out of of the race. So back in 2001 when you were wiring the oceans with uh broadband uh maybe you knew you were paying quite a lot. Okay, everybody knew it wasn't cheap whether it was the wiring itself or the uh money you had to pay at the auctions. The question is if you didn't participate and you were out you you might not survive. So in some ways there was strategic cost that you were willing to pay to be part of that uh that game. But I think ultimately what we saw is that wave of investments uh resulting in overcapacity. So uh think about you know uh how many charges do we need you know whether is a croc or gemini or claude or like there's a tremendous amount of duplication triplication you know quadruplication of efforts with people you know in the world and I'm just picking one example right that everyone is investing as if they were the only guy doing it partially because I need to stay in the game too because I'm going to make a fortune on the back of that without a huge amount of uh consideration to to the cost because obviously the revenue is going to be in infinity and the growth is going to be infinity and everybody's going to pay this. So the lesson learned in the.com is that eventually uh we reached uh over capacity. You know those expectations of returns >> did not materialize and as a result you have these huge asset writeoffs and that's when the magic happened. This is when stage four happened is you had a gamecher technology in huge size for free. And basically the example uh Fitman used in the book is if you were an accountant in India prior to the the dotcom you could only do the accounts for your neighbor in Bangalore but suddenly you could do the accounts for someone in in in LA. >> And I think the message was the world became flat you know suddenly and the other message that is very important is that the bubble effectively accelerated the impact of the technology. So what should have taken a long time to wire the oceans and make these investments happened very fast. So I think what we're seeing is a similar pattern of a gamecher technology with huge expectations with a strategic component of of being out being in and and and I think I don't know exactly where we are but I think the uh uh the world will be flat. It is already flat. think about education, you know, or a child in a village or a doctor in a village who now has access to the to the best advice in in in the world. >> Um, the world's becoming flatter, which is great news for the world, but um I I don't think that that necessarily means that the valuations that uh are are implied are going to be realized or that the expected winners and losers are the ones we're expecting today. I think there is plenty of room for um a repeat of what happened. Uh and so I'm very optimistic about what it means for the world in many ways. >> Uh but I I I think the the over capacity and the evaluations can give uh room to very very meaningful shocks. Um which ultimately again that that miracle is not like today is prohibitively expensive. is not the case. Uh but but certainly I think it'll be hard to realize uh many of these things. So I think we are uh in that sense the belief that demand there's infinite demand in any size at any price um and and that I'm the only guy doing this I I to the extent that it applies to certain names I think it's um it's it's a consideration and we we saw from uh the com how you know these valuations increase on the way down a lot of people disappeared you consolidation and then some of those guys came even stronger into into what they're today. But yeah, I think uh it's a game changer technology. The world will be flatter. There are huge winners and losers, but I think uh some of the expected winners today uh I I feel they they will not be and and some of the people that we don't have in our radars will be. So it's going to be a fascinating uh future ahead and certainly room for surprises and volatility and risk. Yeah, the great culling, right? Where we figure out who the people who really can optimize it or the companies or the entrepreneur out there who figures out how to crack this for for mankind and then maybe the the folks who helped build it, maybe not all of them will will survive. So when we when we think about this, what does uh an effective portfolio or an anti-bubble portfol portfolio look like? because clearly we don't know who the winners are and there's risk in the in the AI trade, therefore equities. Uh we've already established bonds, the issue with bonds. Same with cash if they're going to continue to devalue. I mean, are we left with precious metals? Is that it? Is that the only is that the only way to go? >> Um well, first of all, I agree and we talked a lot about fixed income. I think on a medium long-term perspective, um they are financing the party. It doesn't mean that there's no they don't play a role and they have some value but um I think it's uh in real terms and defensive terms they they have there a lot of considerations so I I would be fairly light uh in fact on the fixed income side um the second side of the equation is okay if I cannot if I have a problem being with assets that are short inflation cash income and credit the the corollary of that I want to be invested in things that are long inflation so that is infrastructure real estate precious metals and to a certain extent equities because my problem with equities in some ways is that uh you cannot not be long >> uh that's sort of the tricky situation right uh if you again if you're taking a 5 10 20 year perspective uh I'll give it a 99% probability that real estate will be higher then equities will be higher uh and it's not going to be because of their own merits is the is the demerit of of of the uh unit of of measure etc. So I think if you're playing in in a nominal game is one thing but if you're playing in a real game uh fixed income has a problem and real assets uh now beware of gold. I mean I love gold. I when I published the book it was around a thousand. People ask me what do you think? I'd be like well 3 to 5,000 within 3 to 5 years was my official line. And then I would tell people yeah but [laughter] it's not exactly what I'm really thinking. But if I told you what I'm really thinking you think I'm nuts. So already at 3 to 5k you think I'm nuts. and and I said, "Look, we'll be talking about 10K when we talk 3K and and I can extrapolate that now if if once we get to 10K." Um, so beware of the uh price action, beware of the consensus, beware of the leverage because the the draw down in these assets can be pretty huge. Um, the consensus trade, the hidden leverage, people precisely saying, "Oh, this is it. That's that's the only way and I'm I'm going to lever myself." And then if you have a $1,000 draw down, can you withstand it or will the market take you out? And then you feel uh pretty stupid uh uh by by by by being right and wrong. So m mind the leverage even if that conviction is very high. Um but I think when it comes down to equities um the challenge in what what what I do as you you know as a portfolio manager we we are effectively creating uh what we call protected equity uh protected rebalanced equity mandates and and and the idea here is you know you you are taking a a long equity position but the fact that the risks that we talked about you know the the bubble the many things what is great about markets is that there's a bubble anti-bubble relationship that exists between the equity and the and the volatility as a proxy for for protection. So in some ways what you want to do is is you want to accumulate uh portfolio protection uh during very benign markets say VIX under 15. >> You know you you want to accumulate protection and what happens is when those crisis come which in my opinion it's it's a matter of when not if uh then the protection is not there just to to give you a mark tomarket hedge. It's like, "Oh my god, thanks God that I have this." And then you you actually have to be proactive and have an accumulation and monetization plan. You have to be in a situation where you're going to use that those gains in your protection to monetize them and effectively buy even more of the equity. So you want to embrace the volatility of the market. You want to accumulate and monetize uh these assets. And in this exercise of protected equity, you are not just unilaterally thinking of of equities higher. You you effectively embracing that process. And so that's what we do. We run this these portfolios that effectively are an alternative to to passive equity which I think is hard to manage because the challenge when you're managing an equity portfolio you know I talked to a lot of wealth managers and CIOS and with all the uh good intentions in the world they might say oh my god you know I'm concerned about the market I'm going to get out of equities or I'm going to go underweight >> and my question to them is always so when are you getting back in what's to stop. You know, the profit on the bottom rarely gets materialized because everybody panics and the crisis and as the market starts running against you, then you you don't chase it. Uh and that creates this emotional drain on on on trying to time the market the crystal ball that I don't believe in. The other alternative which is you know buying protection and a standalone line item is is tough as well. you know you're you're facing uh paying the premium the carry and some people unfortunately uh use this completely the wrong way. They buy protection during the crisis and then they sell it out of fatigue. So my conclusion is you know let let's let's buy this do do it as a package buy protected equity that gives you that uncapped blue sky uh upside to the equity but with with some protection and that protection you you need to accumulate and monetize. So that that package uh what I call the green line you know blue equity and yellow protection I think it's the green is is a lot easier to understand or easier to hold. So in my opinion to summarize big issue with with cash fixed income credit in the long term in real terms uh definitely long real assets uh but mindful and equities but use it without leverage uh with protection >> and um and be mindful of taxes because I think that level three we talked about it's coming. So back to precious metals, um one of the key things to consider uh is you know most people think that gold and gold equities are the same thing. Uh in fact they think that gold equities are like call option on gold and I do agree to a certain extent but beware of taxation expropriation and nationalization. If you are half correct and gold is as strategically important as you think uh with golden 10k that gold mine that you own may not be yours. >> Uh you know we saw the movie in oil at $140 $40 a barrel in you know 2007 like and uh you know production sharing agreements had taxes of 99% of the upside. So I think it's um it's just a rel you know relentless uh monetary fiscal uh dominance that uh once you create this inflation it brings inequality it brings social unrest and it brings populism and then obviously you're going to tax the rich and whoever owns these assets. So I think taxation is almost the how they square this circle and uh is the easy uh you know even if the central banks and governments are the ones who created the inflation they will blame they'll find some scapegoat and the the the rich and and if you and the and the gold miners and and whoever is making all that money uh will be taxed and expropriated and nationalized. So I think it's um it's such a difficult game, you know, to to to [clears throat] position yourself >> and so real estate might look great, but you might have uh you know, not just wealth taxes, but the mansion taxes is it's just, you know, death taxes and and inflation, I think, are the the the the three levels I would say is very tricky. But yeah, that's that's how I would position the portfolio. Um you know, from from from our perspective. Yeah. you you were just um in New York at Bloomberg's volatility forum. We just were just talking about that. Uh do you think we I don't want to get super technical here, but the fact that we have retail options, so many people playing in that space, um the same day expiry, all of these sort of, you know, new instruments or new options out there for for participation. Has it changed the way you think about risk and convexity? Not necessarily. Um I think people were super worried about zero day options at first as is as if um everyone >> in the world was one way and and and selling them. Um I do think they create risks and it worries me that the amount of options trading is um you know I I don't think every single person trading options understands truly >> the nature of the risk particularly uh those who sell options. >> Um I don't have a real issue with anybody buying options because my worst case scenario is the loss of the premium. In fact, that's what I do as a self-imposed risk limit. We only buy strategies with limited loss. I've seen someone in my career with a million dollar value at risk lose 50. And I I ask my students at Imperial College, you know, hey guys, can you or anywhere really, any seminar, my my it's like so what's a million dollar value at risk? And generally there's someone you know who goes hey I think I know it's with 95% confidence you're not going to lose more than a million dollars and I go like almost it's you will lose at least $1 million and that includes 50. Um so I think when you when you run short options or hidden leverage in the form of long short okay think about you know we talked about precious metals earlier the you know as gold was flying uh into uh liberation day silver was collapsing right and people were scratching their heads it's like it's pretty obvious that someone had some sort of uh long short uh position thinking well if gold goes up, silver could go up more, and you do it in huge size, and before you know it, whatever, gold's up 10% and silver's down 20. Uh, so beware of open-ended risk, beware of short options, beware of anything that has hidden leverage because those are the things that will really literally financially kill you. Um, so in that sense, there will be, you know, being long options, uh, it's it's painful. you pay the premium sometimes but not necessarily they have negative carry. >> Uh been short options on a levered fashion. I mean how many times I'll tell you two two case studies that worry me a lot. One is when people talk about options as income that scares the hell out of me because uh they they sort of build the house through the roof. It's like well I want to make 10K. Uh what do I need to sell to to make 10K? It's like okay, you know, instead of saying how much risk do I want to take and how much is the market paying me, you're sort of starting through how much income do I want and then most people think it's okay if it gets down there, I'll I'll happily buy it. And then, you know, so it doesn't it doesn't work that way. I think you you get to see this uh income place often working for a while and then exploding in your face in a way that they can they can take you out. And and the second case study that I discussed in the in the V conference very um clearly is this gross mistake or misconception that I hear all the time that it's the idea of I'm buying puts financed by selling calls uh or some combination. Sometimes there's billions and billions of dollars in strategies that are doing these buffer trades where you buy put spreads financed by selling calls. And my point to that is if you want to spend a million dollars in or a dollar in uh in premium and you want to finance that, go to the bank, borrow the dollar and pay back 105 in one year. That's what it's called to finance uh an option if you want to finance it. But the moment you sell the call option, uh then you aren't really financing anything. Your long puts, your short calls, markets [clears throat] up 30%. Your 105 call cost you 25. And guess what happens? Those $25 need to come from somewhere, which generally comes from selling the long that you had. And >> so you see a lot of these products being grossly diluted and what started out with a 100 shares of S&P are now worth 50 shares. A little bit of what happens with the VIX ETF. You've been grossly diluted in a way that your capital base, you know, goes down, your participation goes down. So back to the options. Um, look, if you're starting, uh, start by buying them. Limit your loss. beware of um uh you know think carefully about the the risk of of shorting this stuff and finding any sort of hidden leverage. So to the extent that the this blows up happen, I think there'll be major winners and losers. Is it systemic? Not per se, but uh it can contribute to the acceleration of those vicious cycles when things really go wrong as as is always the case. I'm as worried about that as I might be worried about the market being just you know overextended in any asset from from gold to to anything else. So if you know one thing is crisis you know 2 plus 2 is not four it can be anything it could be it's a process where >> volatility going up compounds into correlation polarizing to plus one minus one and then liquidity drying out. So I I use this slide all the time, what I call the chronicle of a crisis for told, which analyzes the the three drivers of vault, correlation, and liquidity, and how you can quickly go from a portfolio that looks pretty safe uh in terms of low risk to to effectively uh risk that is literally off the charts. And I think it's very very important to understand all those drivers particularly if you're using leverage or you're using things with unlimited uh limited loss as it's short options or or long short. >> Yeah, that it's it's it's really important to underscore that um especially now. So it's it's maybe a good place to end because you know it feels like we have all these risks and as you say they they seem like there's everywhere. Um, you talked about the assets that you like that you think make up a a sort of anti-bubble portfolio. Is there a region or a country or a currency or a place where you feel like is a little more insulated than than some of the concerns or is this is this an everywhere issue? >> It's an everywhere issue, but crisis behave a little bit like dominoes and also snowballs. So I think the weaker guys will go first and how badly they drag the um the other guys uh it's it's second order but I think if you've abused uh monitoring fiscal uh you will go you know faster and further than if you haven't and so I think that discipline ultimately if you've abused the system I'm sorry you'll pay for it. It's kind of the the uh the idea >> and ironically um unlike other crisis it could well be that uh emerging markets holds a lot better than than uh than developed markets in certain areas and and and and why not ultimately if if they've paid [snorts] for uh and they're going to be heavily penalized and they've you know followed more fiscal and and monetary discipline. Um I think it could well be the case which brings me back to the point on correlation, right? I mean uh I think one of the biggest blowups during March 2020 was uh there was this structure sold by by the banks in the form of QIS and and uh stuff that was saying look buy EM uh equity vault and and short US equity vault because it's free money. uh when the markets are quiet you don't pay anything and in a crisis of course EM equity vault will go higher than US equity vault >> and then it looked so obvious as a way to to to buy synthetic optionality to buy something that you you have that asymmetry without any cost and trust me you know you don't know to the the like poker no if you don't know who the dumb person on the table is is probably you I think in some of these traits you know, sometimes there's some risk that you don't fully understand. And as it happened, those billions and billions and billions of of money that followed that trade as the crisis happened blew up in in their face. So, I think we need to be a little bit um careful about all all those uh dynamics and and and hit the risk and and again, who knows? You might think that the rear mirrors are telling you that uh EM is going to blow up more than uh France because that's the way every single crisis happened or the bond and and and and the French bond and the Spanish bond and the Italian bond and you put some relationship in place that the rear mirrors tell you it works and then on a forward-looking basis it doesn't. So that's why I keep going back to, you know, structures that have limited loss as a as a safer way to control your risk and and ultimately whether they behave the way we anticipate, whether gold rallies or sells off in a crisis, it will be in in a meaningful way a function of not only the fundamentals, but much more importantly the speculative position at the moment of that crisis as volatility increases and people are forced to cut. So it's um it's a game where you need to you know control the risk and and I think uh options in general and and long option in particular is a fantastic way to to accumulate and monetize that protection in the in the framework we we discussed earlier. M is there a I think folks are going to be listening to this and hopefully um try to go and take a look at their portfolio especially as we head into year end. We all tend to do that housekeeping. Um can you can you create a a sort of a a portfolio that can protect against some of the risk we talked about without using options? I mean, is the is the era of sort of plain vanilla diversification over? >> Well, certainly I think the the answer is yes in the sense that uh it depends what you're trying to achieve whether you want to uh lose less >> in a crisis or you try to make money in a crisis which is what what we're designed to do. So if you wanted to put uh if you're really concerned about the world and you put everything in cash um what's the problem? Problem is well uh nothing happens. The market keeps going and your purchase power has been diluted. So >> by being in cash you the clock's ticking sometimes and maybe you're wrong. Maybe it keeps going. So I that's that's tough that creates a a timing issue. um uh fixed income, we talked about pros and cons, probably some defensive power, but it may actually be part of the problem. So, who knows? But I think when it comes down to equities, obviously there are sectors, there are regions that are going to be more or less defensive. Um I I would say you know and I'm not the the expert on this this field but certainly uh back to the sectoral approach I I would say uh look look for the current beliefs and uh and perhaps how the unwind of those beliefs would would play out. I have some views but uh I think people will >> stick to also their own competence and so how how would the the world look like when if and when those so to a certain extent if you were to buy switch some equities that might be overextended to others that are perhaps being penalized in uh boring you know like uh I don't know I'm not gonna say names because I wouldn't know but but I'm thinking of boring businesses that have been left aside side because uh everyone wants to make multibaggers, you know, or however they're called. Uh I love that term, tenbagger. If you want a 10bagger, you know, and and you you drop something because it's too boring, >> I I think that that could be something that >> could actually even go up in a crisis. >> But um the biggest predictor of of how you behave in a crisis is is positioning. M >> and um yeah I I had this uh anecdote uh that that I I I talk about uh in my class uh which actually is it happened. It's real. Um I I used it as a as a as a joke once but it actually happened. So anyway, so you I looked at the entire the typical uh uh picture of I think they're called heat maps. you know, you have all the commodities >> and then you see things in green and red. And so in this crisis, everything was red. Every single commodity was down except orange juice. And uh and then I I asked people, "So what do you what do you think of this? What what uh so this this is what happened?" And everybody looks at it's like, "Well, I didn't know orange juice was a safe haven." And uh and I'm like, "Okay, what do you think that is?" It's like, "Oh my god, I don't know. Maybe in a crisis." And there were like all sorts of creative answers like obviously um and and the answer is no. It's not a safe haven. The reason oranges went up is because the the the market was short >> oranges. So in in a crisis >> uh if you're long gold most likely gold will go down at least as a first instance. It might well be that the response to that crisis is even more printing and more inflation in which case gold would do some sort of uh sell off and then rally which is why you want to be careful with the leverage and you want to be in a position where you can possibly even take advantage of those things. >> But uh but yeah with orange juice it just happened the market was short and as as volatility went up and margin calls went left right and center people had to to cut their positions and and if you're short it means buying it. So which brings me on to the point that I made as well in the volatility conference the yen when people think the yen is a safe haven it's like why >> well it rallies on a in a crisis and it's like yeah but why uh well reputation whatever but you know part part of the reason is uh carry trade you know the market is running Aussie yen and it's enjoying the the the beautiful carry between the Australian dollar and the yen and um and and and that works whilst the world is okay. But once you have this big uh sell-offs and and and force liquidation takes place and people need to effectively buy back the yen and sell the Aussie, whatever you made in a year's carry, you might lose in an hour. >> Yeah. >> Um >> I feel like we saw that last not this past August, but the prior year I think we >> that's the name of the game, right? So So I think you need to understand really back to your question on where do I go? It's it's not just about again fundamentals 2 plus 2als 4. is is is also about you know what is the position in the market? How do I >> what what is the hidden leverage and and and there are things that you know ideally you want to find stuff that again will will be truly diversified uh into that process and depending on your investment style your access to different investment products you might do one thing or another but uh but again the the the thing I I urge people to to be very careful about is leverage uh direct and hidden uh and and also positions with open-ended risk in in in a leverage form >> uh because th those can be extraordinarily difficult to to manage and handle and uh and can lead to force liquidation which ultimately is a pity because you might be right but uh but be taken out so >> which is the hardest is the hardest position to be in I think but we see it over and over again. Um, Diego, I I so enjoy these conversations. You gave us so many good parameters and ways to think about how to approach this beyond the really simplistic headlines we see um, every day. These are really complex times we're in and I think we all need to sort of dive in and think about it that way. No wonder you're a teacher as well and an author as well as a money manager. >> Well, you know what Cicero said? He said, uh, if you want to learn, teach. And, uh, I feel I feel very strongly about that. I think uh I encourage everyone to to teach uh and write you know I think uh it's a very humbling process uh and and yeah you you you really in my case I have a passion for you know for this the students are fantastic it gives you a lot of energy but but I I it's actually if you're really passionate about something I you know do do write about it do do teach and I think you will see that uh you actually learn in in the process >> I totally agree makes you really understand it. Plus, um, we need the next generation of trained investment experts and economists because somebody's got to figure out a way out of this mess. It's going to take it's going to take a lot of great minds. >> It'll be okay. It'll be okay, I'm sure. [snorts] >> Diego, thank you so much. Uh, and just a reminder, I mean, we covered a lot of a lot of ground here. So, if you have any questions or you want to take a look at your portfolio, you want to understand some of the concepts better that Diego talked about, you can get a free portfolio review from one of the adviserss in the Wealthon Network. You can hit the link in the description or go to wealthon.comfree. Thanks everybody for watching. Diego, thank you as always. >> All the best. Thank you Margie and team. All the best. >> We'll see you again next time. >> Thank you.