The Illusion of Safety: How Markets Became the Economy | U Got Options | Ep.7

Summary

• Emerging Markets: EM FX carry/vol portfolios highlighted as attractive, with detailed discussion on Brazil’s high rates/vol and South Korea’s flow-driven setup amid structured-product dynamics.
• Gold: Short-term positioning seen crowded with upside calls rich; preference for risk reversals and context from the 60s–70s showing gold’s top returns but high volatility and value of long-dated calls.
• Oil: Range-bound and CTA-driven with notable event risk; historical vol patterns contrasted with the 60s–70s and opportunities to tactically trade via options amid reflexive OPEC-related flows.
• Equity Volatility: Structural back-end richness enables carry by shorting longer-dated vol versus owning front-end, hedged with VIX call strips and short-dated variance swaps for convex tail protection.
• Long Volatility: Portfolio construction pairing passive equity beta with actively managed long-vol exposures to balance right- and left-tail risks and improve compounding through convexity.
• 60/40 Breakdown: Equity-bond diversification questioned using long-horizon data; case made for complementing or replacing bonds with convexity, trend, and greater allocation to real assets.
• AI: Rapid labor-market impacts and increasing options adoption; ML effective for median outcomes but weak on tails, reinforcing need for options-based defenses and tighter risk controls.
• Crypto and Real Assets: Crypto and precious metals framed as non-correlated “dollar off-ramps” with strong right-tail convexity and growing AUM, supporting broader diversification beyond traditional beta.

Transcript

[Music] You got you got your trade. You bet. You bet. You bet. You bet. Your money just got made. [Music] >> Welcome to You Got Options, an exciting series right here on Top Traders Unplugged, hosted by none other than Jim Carson, one of the sharpest minds when it comes to understanding what's really driving market moves beneath the surface. In this series, Jen brings his deep expertise and unique perspective honed from years of experience on the trading floor to candid conversations with some of the brightest minds in the industry. Together, they unpack the shifting tides and underlying forces that move markets and the opportunities they create. A quick reminder before we dive in. You got options is forformational and educational purposes only. None of the discussions you're about to hear should be considered investment advice. As always, please do your own research and consult with a professional adviser before making any investment decisions. Now, what makes this series truly special is that it's recorded right from the heart of the action on the trading floor of the SIBO. That means you might catch a little background buzz, phones ringing, traders shouting as Jim and his guests unpack realorld insights in real time. We wouldn't have it any other way because this is as authentic as it gets. And with that, it's time to hear from those who live and breathe this complex corner of the markets. Here is your host, Jim Carson. Welcome back to another episode of You Got Options from the SIBO floor brought to you by Kai Media and Top Trainers Unplugged. Today we come to you from the RMC floor in Munich, Germany. I get to talk to three different guests uh that were there for the conference. We cover some amazing things from emerging markets to volatility surfaces and the role of artificial intelligence. First, I talked to Keith Darluchcci, the CIO of the Melkart Macro Fund. Talks about all the emerging markets and different commodity trades that you can use to diversify your portfolio. Next, we talked to Patrick Casley, president of One River Asset Management. Uh, he talks about how 6040 is dead and a lot of the diversification that once used to benefit portfolios no longer works. Last of all, we talked to my friend Hari Christian, author of The Second Leg, and he gets into the weeds and the future of AI and how that's going to change markets for the long term. Hope you enjoy this one. Yo, live it up. Don't settle for less. You got options. Put your skills to the test. It's your call. Time to strike. Make your move. Grab the mic. >> You got You got You got execute your trade. You bet. You bet. You bet. You bet. Your money just got laid. from the straight to fade. It's the nexus of the game. [Music] >> Hello and welcome to another episode of You Got Options today from the RMC floor. We're going to walk through a couple different uh 20-minute conversations to talk about what's hot, what's happening here on the floor. Um and so with some of the best practitioners uh around today, we get Keith De Carluchi. Thanks for joining us, Keith. >> Thank you for having me. uh if you don't mind leading us off, giving uh the crowd a little bit uh of of background on on what you do exactly and then we'll dive right in. >> Sure. Um so I run a uh I'm the CIO of a macro fund that's um trades cross asset uh almost exclusively in derivatives. Um so we trade FX commodities and equities uh with the exception of we don't do rates like most other macro funds do. >> Very cool. And no better time than the present to talk about macro. I think you know in the last 40 years, you know, it's hard to find a a period where there's more going on in in macro >> for sure. >> Um you mentioned you do FX uh commodities, equity indices. Uh talk to me a little bit about uh each of those. What are some of the things you're most focused on right now and where you see some of the most opportunities? >> Sure. I think um what we see is most attractive on on on the FX side is you know uh investing in some of portfolio effectively of EM currencies. Um so things like Brazil, MEX, Mexico, uh South Africa and uh Korea. Um those have all benefited from what has been perceived or is perceived and has been weaker data coming coming out of the US and uh softening against the dollar or the dollar softening against everything. So they have an attractive profile from uh the interest rate perspective on the currencies as well as the volatility perspective um because uh most of those are have a fairly high risk premium attached to them. So between the volatility and the rates um it's quite an attractive portfolio. You just have to make sure you hedge the dollar portion of it. >> Yeah, absolutely. And let's talk about each of those a little bit if you don't mind. You mentioned Brazil. What do you like about Brazil in particular? I mean you mentioned the rates but talk to me a little bit more. I mean, it's going to for that it's going to be the rates in the vault that that's the highest that on both sides that that that's out there, I think. Um, that's that's alongside of, you know, what's been a fairly constructive domestic story. Um, and you know, once you got sort of liberation day out of the way, uh, you know, the flows have been quite quite strong. Um, it's getting to the point where it might be a little bit stretched at this point. But we we've we've switched from having, you know, options that had the volatility and the rate portion attached to it to um more like just put spreads in dollar put spreads on Brazil because it's kind of coming down towards the end of of where we think it can go. But it's still pretty attractive on a on a daily basis. >> You got to love the commodity profile of the country too given the inflationary backdrop etc. Right. >> Which is true for South Africa as well. you mentioned uh we had a really good bet on this here in Australia for similar reasons there >> different type of economy a bit more >> um but uh but yeah South Africa is interesting too and then you mentioned Korea talk to me a little bit about Korea it's a little bit different uh in some ways >> yeah I mean Korea is is a is a bit of a different story first off it's it's not positive carry versus the dollar like everything else is but it's it's much more that story is much more of a of a flow related story uh you it it had been um one of the favorites of the macro community being long long Korea. Um and uh so much so that that when it became overpositioned like we were we were the other way short Korea >> and then it has massively retraced. So then we use that to um uh re-enter on the other side and and it's a tiny bit technical but um you know we did that by selling upside calls so Korea uh Korea upside >> uh in the in the kind of two-month area and that's because there's there's seven holidays coming in between there. >> So that just an extra little kicker. Yeah, Korea's super interesting as a location, FX aside, just because of all the autocallables and all the structured products in the space, historic vault compression. Talk to me a little bit about if that plays into anything that you're doing or dynamics there. >> Well, certainly on, you know, things like the auto calls and stuff certainly play into what we look at on the equity index side because it affects all of that. The the structured flow is, you know, it's coming back. It it took, you know, quite a big hit in 2020 and and it's taken a while to come back. But it, you know, you you now have a a different risk transfer happening that, you know, used to be a lot more of uh hedge funds taking that that risk off of banks on the auto call side. And now what you have is you have people like Jane Street just taking the auto calls directly. Um, which is a big change in the structural dynamic of that market. But it's certainly something that we have to look at. Um, and you know, I think obviously with all all the chip related things that that are in Asia, you know, that that also plays into Korea. But how much of the macro bets that you guys are putting on are a matter of kind of being a little bit more agnostic and just finding things that are cheap or expensive relative to history and how much of it is actually making a macro kind of bet on on outcomes? >> Yeah. Yeah, I mean our macro strategy itself is is is you know called macrotactical and is much more trading oriented. So it's usually against positioning flows often times you'll see things like that are uh where the the direct direction of travel has been quite consistent such that CTAs and systematic fully loaded on that on that direction. Um and you get you know the last bit of people buying options in that direction on top of that. So the skew goes the opposite way that you can take the other side, get paid to take the unwind. You're not you don't even necessarily have to be making the bet that it's going to retrace back. It's just conditionally if it retraces it's going to be much more violent on that direction than the other. >> Playing the distribution which is what's wonderful with V obviously >> that is that is the wonderful thing. >> Yes, absolutely. You mentioned commodities as well. Talk to me about what you guys are doing in commodities and where you see opportunities. Yeah, I mean I think um so right now uh it's a good example of um gold has has had quite the run even in the last week. Um to the point where you know people are now paying for upside calls and volatility is going up on on the top side in gold. Um it's very this is one of these things where it's very steeply positioned at this point. Um that we're going to we're the other way around on the on the unwind. Um, and you get paid to have the, you know, sell calls, buy puts, risk reversal, >> um, a decent amount. Um, it's very difficult to find any coverage people, papers that aren't bullish gold at this point, right? >> So, usually when that happens, we're the other way. So an interesting point uh uh from the data we've done historical analysis on on different commodities uh particularly during the uh last period of rising interest rates 60s and 70s >> um you know 65 to 82 type period >> uh just to kind of study what what does best and how does it perform what's the distribution a lot of people know >> that gold was the best performing asset from 65 to 82 right that that's pretty common knowledge what most people don't know is it was also the most volatile asset Yeah. >> And so the thesis to to own longdated calls was a wonderful one, right? Especially 300% ago. >> Yeah. >> Um and I think as from a macro perspective likely will be if you believe the longer term pressures of rising interest rates etc that are out there. >> Um but I agree with you from a short-term basis it function of volatility itself is still quite cheap in gold >> relative to the outcomes and it can go both ways. I think that's what people have lost. Yeah. >> side of >> Yeah. I mean, as I said, we're we're trading oriented. We're I I can't tell you where anything's going to be in six months time, but >> Right. And and how long is that bet that you're thinking about when you talk about, you know, the >> So, those are between one and two months. >> One and two months >> durations. Yeah. >> Yeah. That makes a ton of sense, especially with what's going on in the next couple months. Um, really interesting. Outside of gold, any other commodities that you're thinking about playing? >> We're we're in and out of oil a lot. Um, and that's that's more transparent story than gold because gold can have many different drivers. Um oil has been um you know tends to be dominated by the CTAs and the systematic side on positioning as as it goes one direction or another. Um so we've you know have been up into the early '7s we were short now we're now we're not. Um but it's it's kind of been trading it's bit range trading for quite a while now while >> with with a lot of event risk at you know sitting alongside of it. Totally. Um, and here's another aside, 60s and 70s, >> um, oilvall, which most people would have think would have been really high >> was actually one of the lowest >> uh, volatilities of commodities and commod and and as far as commodities go relative to longerterm history is actually lower during that period, >> which is again something not that you would think counterintuitive >> but very much like gold was bullish bullish but in a very different way. a trade in the 60s and 70s was to be long gold calls and short oil puts. >> Two very different trades. >> Very different. >> Um and I think we're starting to see that play out. We've been talking about that for a couple years, but that that's an interesting longer kind of mid mid to longer term dynamic that >> Yeah, I think I think the go the the oil story is, you know, as I said, it's the short-term stuff is dominated by CTAs and systematic positioning. Um, the long-term story is always going to eventually be fundamentals, but it's it's, you know, I very different from 15 years ago where you could count barrels and have a position in oil. Like the counting of the barrels doesn't tell you anything about the next two months. >> Absolutely. Sometimes opposite often times. >> Yeah. I mean, you get I mean, if you look at any OPEC decision, it often goes the opposite direction of what the decisions are. >> Yeah. And that's not a coincidence. Honestly, people position for what they think is going to happen and then reflexively those flows tend to have opposite outcomes. That'll be interesting to see what happens if the Fed doesn't deliver tomorrow. >> I know. >> Great. Yeah, exactly. With everything priced in, it's almost priced to perfection, right? >> Uh, completely agree. >> You mentioned when we were talking offline as well that um that you trade relative value. You know, when I think about opportunities in the V space, >> I really think uh you know, you can can't get rid of risk, right? You can transform risk. >> Um, it's really about finding the right opportunity at the right time. So market timing A and then B, you know, relative value as we kind of discussed what's cheap at a moment and what's expensive and those are hard bets, but if you've been in the markets for a while, if you have a good look on history and and what might be happening, you you can find real opportunities. So we kind of talk macro and market timing a little bit. Let's talk relative value. Where do you see relative value opportunities in equities and other products and how do you approach that part of that? Yeah, I mean historically, uh, equities have been our biggest part of our our our relative value bucket. Um, generally, uh, you know, we don't have anything super secret in how we look at that, but we do have models and things that say like how much is it out of line and where the macro part comes in is this is out of line, is it likely to persist? If so, why? And that's how against the macro backdrop. So for instance um we consistently right now will have you know short longer dated V and equity indices and and long shorter dated V. So one month two month versus 9 month kind of spreads and collecting kind of six seven balls in some of those um which is um you know very attractive carry. You just need to protect it whenever things you know April comes along or something or August of last year. And it's it's hard to find things more attractive than that in other asset classes because it doesn't doesn't get distorted that much. You know, you have the change in the structured market and has left less supply of back-end volatility which keeps it elevated along the way. So you want to be able to try to capture that as much as you can and that really doesn't take place in things like commodities or you know FX. you just roll it into macro >> and and the theoretical basis for that which I know you know but I want to tell the audience a little bit is um you know this is a wellestablished theoretical construct short-term volatility historically because of mean reversion >> um is actually higher >> than long-term so if you play yeah you know uh short-term V it's actually better but historically because of risk premia longerterm vault trades at a much higher implied V this was actually the thesis behind long-term capital management uh not to not to say that that's a bad No, no, no, no. I don't I actually a great trade. >> Yeah. >> Um the key is structuring it in a riskmanaged way >> so that you don't face an outcome like long-term capital advantage. There's a reason Scholes, >> right, uh made um uh that that bet. Um and the reality is they ended up being right in the long term. >> They were just uh they just couldn't hold the trade um and uh and didn't know how to manage risk properly, candidly. Um, so the the reality is theoretically it is a long-term positive carry trade. Incredibly positive return over the long run and has a lot of great dynamics. I'll add to that and and again I didn't mean that as a negative at all because it is a great trade but it's important to understand that it's a it's a wellestablished trade and that there are risks to it and and it's very important to to manage it uh properly and to manage the risk on it. Um I I would add to that an interesting point again back to data historically. Um during that 60s and 70s period the last time we saw interest rates secular going higher again not a oneweek one month one year bet even but if we think there are pressures with kind of the Fed takeover and all the structural geopolitical issues we're seeing of potentially higher interest rates that 6070s per period is a very important one to understand. And one of the things we find during that period is equities are even more mean reverting than any other time in history from 68 to 82. I don't know if you know this or not, equities actually went nowhere >> in nominal terms. Yeah. >> So long-term volatility was awful in terms of a hold, right? Long-term volatility was a massive sell, >> but short-term volatility due to all the geopolitical crisises and everything that happened in between was actually higher than history. So there is actually a macro framework that would that could say if interest rates go higher you could see increased short-term volatility but due to the nominal illusion yeah >> of of equities um being priced in nominal nominal dollar terms you could really see a lot more mean reversion. So a really compelling tra trade actually this >> I mean we we've we've been through lots of wars and lots of crises and uh I think I think we have a pretty good handle on how how to hedge it largely will be long uh convexity in the front end as a as a starting point to hedging as well as um strips of all the way up the curve of the VIX options uh to protect the the the term structure. Um and I'm talking like up to the 100 strike calls in VIX. >> Yeah. Let's talk about the longtail part actually a little bit more. Um, so you said you're doing uh a strip of longdated uh longdated calls. >> No, no, no. Short shorter dated calls, but but higher >> higher strikes. The really teeny stuff that explodes in an April and that kind of stuff. Y >> um >> as you and I know, the price of those don't even matter at the end of the day. It's uh it's the most convex moment on a distribution. >> And uh when something does actually happen, the price of those is uh you know, bid at offered at nothing, right? like at infinity. Um so uh couldn't agree more. Those are things that people try and >> sell to buy something else on a relative value uh uh basis, but but more often than not don't realize that uh it's the ultimate imbalance in supply and demand on the planet. >> Um so so um yeah tend to outperform >> yeah on those type of moves. Um and then what else do you do against those or >> and then and then so that's for very deep crises like you know this little bit of April that happened or 2020 2008 um and then we need to protect sort of like the five standard deviation kind of moves and for that we we use a product called varian swaps where we're long very shortdated variant swaps so one month and under duration and short some plain vanilla strip of options against it to neutralize the the outright volatility exposure. So that leaves you with a convex profile of the swap versus the linear profile of the option. Um so that works very well and um >> yeah and and again very few people understand that in the general public but again a great kind of wellestablished trade that does really uh uh give you >> on a relative value basis a really nice convex tail without the carry most times. Um uh and I would add it also uh another thing that it does that tail strategies have a problem with is it monetizes because you rehedge every day at the close and that effectively monetizes every day what everything that happens in a day. >> Um so you don't end up with like a March 20 happens and you're up 35% by year end. You're flat, >> right? No, there's a perfect match between the two strategies in terms of duration and timing. That's a that's a great point. Um >> yeah, really compelling stuff. Uh a last question before we go. uh if you have one uh one opportunity that you think is particularly compelling in the next year and we'll we'll talk about it next year at RMC if you're here. Is there anything uh anything on your mind? >> Um I mean we already sort of talked about it. I really think it's consistently trying to harvest the carry in the in the term structure of the equity thing. It's been very persistent. I mean it's not as good as it was in 2021, but it's still pretty good. Um and I I don't expect it to change because it's fairly structural. Yeah, >> you just need to be able to hedge it. >> And as we mentioned, particularly in this environment and when you get that kind of match, that that's really compelling. Thank you, Keith. >> Thank you for joining us. [Music] >> Welcome back to You Got Options. Uh I get Patrick Casley here today from One River. Uh one of the bigger thinkers in the space. Uh I've actually been looking forward to this conversation for some time. Thanks for joining, Patrick. >> Yeah, thanks for having me. It's it's always nice to get here in Munich and around October Fest. I I forced a nice pun on stage yesterday about a beerstein and that was wellreceived. So >> I like that. The the bubble popping out. >> The bubble. That's right. So >> you want to you want to tell everybody what that was just so >> Yeah. It was a reference to the optimism in invol in equity volatility specifically, but just markets more generally. You you tip the beerstein and I was referring to the classic German movie Beerfest 2006. And >> classic. >> Yes. goes back to the uh so anyways you you you tip the the the beerstein or or dos boot. It's a glass boot and you can visibly see a bubble forming in the toe of the boot and that air absess as it travels from the toe to the main funnel creates this gurgling. It overwhelms the drink or you fail the the boot chug. Um so you kind of try to turn it to prevent that. And I think that's just a good metaphor for people and how they think they can see the bubble forming in markets. And there's any number of metrics one could pick to to elucidate that bubble, but they think they can get out of the way. So, there's no need to preemptively hedge. I'll just react. >> Yeah. Welcome to Vault Vaulttoberfest. Um, yeah. No, I I think it's clear like uh valuationwise, you know, we're we're uh we're in some type of a bubble. Speaking of bubbles, but but uh I think there's a lot of academic research out there that that clearly states that that trading and any period less than a decade based on fundamentals uh is an incredibly poor indicator. >> Yep. >> I like to think of it as uh a riskmanagement tool. Valuations I've given this analogy are like you're on an airplane. It's your elevation off the ground. >> Okay. >> The elevation doesn't really uh determine which way you go. >> Liquidity or gas does, right? at the end of the day. Um, but once that gas stops for whatever reason, which it invariably will, >> yep, >> then all that matters is how high off the ground you are or how uh, you know, how high that elevation is. We're full of metaphors today. Um, but, uh, but I do think that's a really good way to think about it. And, and I agree that bubble's kind of in the boot. Um, the question is, you know, when and how will that come? And that's that's where risk management comes. Yes. And that's why, you know, RMC, that's why we're here all here. Um you know the big question is uh how do you manage risk in the context of not really knowing um uh when that bubble is coming down and uh uh you know let's talk about that a little bit. How does one river do that? How do you guys think about risk? Uh let's dive in. >> Yeah. You know one river is we're a hedge fund but we're we're also a uh I would say allocation advisor to an extent. So um my title is president head of solutions. So it's we do that. We concoct solutions all the time. So the real kind of if you were to make it into a problem set, you would probably say, how do I create one pool of capital such that I don't care if we have a right tail or left tail? And that's kind we're in a two-tailed distribution right now where people can really we've witnessed and seem to continue to be witnessing with this Oracle announcement this right tail meltup the ability for large cap stocks to gap up 30%. Um it's just not normal but but it could be our normal for a number of quarters or even years. Um so you can't really afford to abandon beta. Certainly can't afford to abandon beta and lead against it at the same time. The foregone compounding could be too great, right? Especially in this benchmark aware world, right? However, whenever the dam breaks, it's probably going to break violently. So the the metaphor I also used on stage was sumo wrestling. I think I've even heard you reference this one. You have deadlocked heavyweight opponents. You have bulls and bears. Um, no visible kinetic energy, loads of potential energy in the markets. Um, it's it's it's a very apt one. It's very true. Um, so the way that we navigate that is we actually say it shouldn't matter where you are in the cycle. How do you create one pool of capital that doesn't care? So for us, we think I try to find high average return negatively skewed assets. You need look no further than equities. You want to be passively long those in a low leveraged way and then against that you want to be actively long positively skewed assets and you want to do that in a leveraged way and you do those together. What's beautiful about that is you can you can convert those equities into futures be very capital efficient. So a $100 of equities maybe you park $7 in margin you have $93 to play with. you can buy VIX futures, VIX options, uh S&P straddles, uh equity index straddles, a host of things that are defensive. Um put those together. >> So, you know, for us, that is the the way to do that. Um your your leverage on the equity market's beta 1 >> and you can be very active and so ideally you have skill on the long ball side, so you can be dynamically participating, reduce the beta drag, but even if you're not great at that, you're probably going to compound pretty well. >> I I tend to agree. I I think the one uh you know it's always good to have a little bit of disagreement uh and we all have different perspectives. Uh I think I think the one part of this that um I want to have people think about more in this environment. You mentioned the right tail right >> um you know in this environment um not only is institutional short interest or there the underweight is significant which tends to happen right before in a bubble. Yep. for obvious reasons. Y >> um which in a supply demand basis is more likely to drive a squeeze higher um you know if we are to go higher um but on top of that VA is very compressed partially because we've slid you know 40 35 40% off the lows um which has driven us allow a lot as well uh with all the ETFs right that are issued all the call writing everything that we're seeing out there has also driven this va compression all the structured product issuance so you put that all together coming out of a summer. >> Yep. >> Um into an end of year where there's a lot of releveraging effects and and all the things that we know that drive a lot of that seasonality. Um and you can't help but think that going into a midterm year with historic, you know, policy coming out of not only the the Treasury, but likely the Federal Reserve merging. >> Sure. >> It's hard to say that the right tail is properly valued at this point given all those things. And so instead of operating from a beta perspective >> uh and then taking in convexity on the downside, I think there's a great argument for replacing equity with out of the money calls and right tail. If you look at that distribution, you know, equity markets are left skewed. >> Yep. >> So you're getting a discount to get a right tail that you could argue. >> Yep. >> Could actually be bigger than the left tail, although the left tail will eventually come at least in some medium-term outcome. So um agree generally speaking that V I think we agree that V and using that dynamism of V is is critical in this juncture and kind of uh given how it's structurally compressed relative to to the potential outcomes in this environment. Y >> I think we both agree on that. But I think in this environment that right tail is is is really at a discount globally. Yeah. >> Um in a lot of assets by the way not just equities. Um uh but but yeah and and a lot of people when they you're right in that a lot of people also don't appreciate that when you go buy an equity future you do pay away cash to own that future. So you're going to have a pretty discernable 4% drag on that. So the S&P is up 10. The future is up you know 7 and a half right so you get that headwind as well. For us, I think the important caveat is the client said we advise large institutions, sovereign wealth funds, they are anywhere between 85 and 95% of their risk coming from equities already, >> right? And so for them, I would say it would be pretty silly to engage too much right behavior. For the typical retail investor, I'd say they're actually more underinvested than overinvested at this point in time. So, you know, for me, and I use the F1 car report, too many metaphors, but >> I love David Judge as a metaphor. Go ahead. Let's let's let's hear it. Yeah. >> You know, if you're going to embrace positive convexity, negative correlation, um you you shouldn't just put really good brakes on a car and drive at the same speed. Otherwise, you're just slowing yourself down. You need to drive faster as well. Yeah. >> So, you could do that through additional leverage on the long length um to kind of compensate for some sort of beta drag or theta bleed um or in your example by out of the money calls. Right. Right. And then you then you're convex to the right and left tail. >> Absolutely. Yeah. You can do it a couple different ways. And I think you make a really good point for a lot of people um you know for somebody like me that it's easy to deploy but if you're already long equities uh there tax considerations to selling there also mandate issues right um but but to your point uh and David Dredge who we'll have on later as well talks a lot about this you need you don't just need the goalies right you need a heavy attack to pair with that and I think particularly in this you know leptocritic uh kind of fat tail environment uh I think that that's critical Let's let's pivot a little bit. Uh we've talked kind of generally assets uh equities. Um do you guys have uh views on outside of equity land? Do you guys play in commodities, interest rates, FX? Talk to me if so about what how you guys look at that and and and how you play in the space. Yeah. >> Yeah, we we do high level. We're we're about 90% equities because our clients are about 90% equities. Um but across our firm we do um less convex but more defensive stuff like multiasset trend following. We have 160 markets. We trade more or less everything under the sun. Credit commodities FX. Um but the way we calibrate our trend models is to be defensive. So we're not trying to be the highest sharp ratio trend follower. Far from it. We're actually trying to be the most complimementaryary to convexity. And so we're, you know, if you look at the reliability of a long volatility, our style of long volatility, we're really good. The instantaneous, the big drops, um, the reliability will fall off if something gets more long in the tooth. 2022 is the prototypical example. Luckily, we wrote a paper in 21, so we look pretty smart about it to say that you should complement trend with convexity for the reason of a prolong erosion of portfolio value. So um we think macro assets are actually best rewarded over that kind of time frame. I call it the slow twitch muscle. So you have the fast twitch muscle of convexity there in the concurrent draw down. The slow twitch muscle which is there for the erosions. Um so we're constantly long kind of implicit out of the money options through these kind of trend following portfolios that will really ride the wave pretty aggressively. So, uh I think you you've heard the sumo analogy that I gave and you you mentioned that earlier. I'll take one from you. I think I heard a couple years ago or maybe a year ago is we live in a world of nominal illusion. >> Yes. >> Um and uh the reality is I think very few people realize how critical um uh inflation and real uh interest rates play into to risk. You mentioned correlation equity bond correlation breaking down in 2022. um people have broadly for the last 40 years and really it didn't exist until 40 years ago. I want to be clear about that. Yep. >> This 6040 portfolio and the concept that those two uh things are countercrelated and will protect you in risk is is is really an artifact of the last 40 years. If you take 125 years of history, you actually will find that there is zero correlation benefit between stocks and bonds which blows most people's minds actually. >> Sure. uh 0.35 uh uh sharp for a full equity portfolio for 125 years and 0.35 sharp >> for a 60/40 portfolio over 125 years. So almost no difference essentially no difference >> and we've seen two times that since you know over the last 20 30 years.7 sharps absolutely >> which is obviously not the norm right and we understand why that is right historic Federal Reserve policy um >> you know the question is can that continue uh into the future and there's a lot of big question marks about that and I don't think we need to dive into the structural arguments of why that that may or may not be the case but I think you have to realize that you know there are structural factors um that that could very well lead us back to a normalization to more long-term trends. Again, looking at the last 40 years, interest rates top left to bottom right and using that as your data set, I think we can all agree is is probably not uh the right data set to be analyzing. >> I think sometimes the simplest charts are the best. And we make this chart that's just a rolling uh 15, 10, and 20 year S&P excess of cash return. Yeah. >> And simplest chart, but it gets us a lot of engagement. We've over the last hundred years we've been where we are now twice. Yeah. Once was the tech bubble. Okay. We we know the best allocation choice would have been to hide under your desk for for 15 years. Embrace convexity and trend for sure. Um the other time, however, was in the 50s post World War II recovery. And we spent the subsequent decade crashing through all-time highs. >> Yep. >> More or less incessantly. So, you know, it just goes to show that just because we're at all-time highs that this is your right tail argument. And I think you're absolutely right. So whether your construct is levered passive beta out of the money calls, you need to find a way to not run away from beta and be defensive at the same time. >> Otherwise, you're going to be making a short-term call on long-term data. And that's one of the worst things you can do, that mismatch. So, I started in '98. So, I started right as um kind of that the tech bubble was going and uh I think this will bring full circle some of that right tail argument for the last two years into the tech bubble. The best trade by far and the easiest was to own longdated calls and equities like out of the money. Yep. >> Right. U those those calls were way too cheap. Market up va up didn't happen just in brief instances like we've seen more recently, but it literally happened eight out of 10 days for 2 years, right? Um, so it was a great way to capture right tail, make money on the way up, hedge, by the way, you could sell stock against it, um, on the way up and then eventually make money on the way down. Uh, you got a bit kind of a general megaphone into into increasing rallies, which is what tends to happen for a lot of the reasons we've just discussed, right? So I think I think that again, not to hammer on that idea, but that that is a compelling argument. If you look to the 60s and 70s though, to your point about the 50s, yes, we did >> hit a lot of highs along the way starting in the 50s. Um, but again, nominal illusion, a lot of that was just a function of structural inflation. If you look at 68 to 82, 14 years at the end of that that cycle, uh, in nominal terms, we went nowhere. >> Yes. >> A lot of rallies, a lot of drops. However, we did lose up to 50% like towards the end of that 50% was the the max. I think it was a 13-year uh period 50% real terms decline. >> Yes. >> I mean, that's not many people here could sit around and imagine a 14-year period where they lose 50% of their buying power by being in a 6040 portfolio. And and um and again, so valuations themselves aren't deterministic, but over longer periods of time, >> yes, >> in real terms, and I think that's the key, not nominal, >> uh it tends to be very predictive. Yes. um uh you know so a lost deck in a sense isn't just nominal necessarily >> um it's really a question of real >> yeah I think I think when stocks and bonds fall at the same time draw downs become >> the the real draw down becomes pretty eye watering pretty quickly yeah >> um 2022 the peak draw down there was about the same trough as the GFC entirely different composition >> right >> on the 6040 completely but in fact you know the bond standard deviation was much more significant obviously right >> um but the the the draw down for that portfolio was the same right and I think if you revisit things like 73 and those types of the Yam Kapoor type uh draw down if you put if you shock portfolios today with that you know we we've raised the hypothetical there's four quadrants of economic growth and inflation you say well there's you know inflationary growth which is intuitive and deflationary recessions are intuitive there's deflationary growth which we've lived through how about inflationary recessions and and when when you kind of see prices meet that that marginal elasticity to their peak, but they can't go any lower because people are not going to operate at negative margins. It's irrational. >> Yeah. And you can't you can't help but see some of the stagflationary pressures that would drive Yeah. Uh and so agreed that that's a an outcome that not many people have thought about much for 40 years. >> Sure. >> Um but you can't help but uh but see that at least the probabilities of that are higher than they than they in the past. >> And I and I love the the euphemistic language that slips in. You talk about inflationary recessions and 95% of of people I talk to come back with stagflation. I'm like, no, that's stale growth >> and inflation. I'm talking about a recessionary inflation, which is which is more in the 70s what we saw. >> Correct. And that's exactly what you end up seeing 607. >> Yeah. You're going to see some real real growth assets lose ground at the same time nominal prices increase. >> We need a new term for that. Yeah. What's another another >> we'll have to come up with that. Um but uh last thing I want to kind of touch on before we kind of wrap up here is um I think an important idea that very few people are looking at in terms of risk. Um you know these days we have $500 trillion. Let that sink in. $500 trillion of long assets. That's stocks, that's bonds, that's private equity, private credit, real estate. >> That's globally. That's a eyewatering number. Um and at the same time we have as non-correlated assets and that's hard to define exactly but in that number I put precious metals I put uh crypto which is arguable um and then uh structured products and things that fall in the structured product umbrella. In that I'm including all the new ETFs, all the buffer funds, all the you know things that uh people that are all at this conference do >> and then um I'm adding in uh hedge funds. Okay. Right. Broadly and I get hedge funds are again tend to be more correlated than not but they have a generally non-correlated >> seven correlation but low beta. Yeah. >> And so you start um you start putting those all together those assets are only about $15 trillion now. >> Yeah. >> Now the caveat to that is people will be like wait a second uh precious metals are 25 trillion. How can that be? about 20 trillion of precious metals is underground in safes. Sure. >> Untouched, not accessible, uh, broadly. >> So, I'm really counting that as five. All of that, that 15 is up from five just 3 years ago. >> Okay, got it. >> And the reason I say all this is they're all, they all have about doubled or tripled in the last three years. And that doubling and tripling of assets for all those is not a coincidence. They all coming in my opinion from the same sources which is people looking to manage risk and diversify in a world where bonds do not diversify risk. >> Yep. >> So big picture 500 trillion on one side. >> Yep. >> Five to 15 on the other side. where do we think we are in that in that and and so I I want to highlight you know solutions like we're talking about which is an element of that that you can put that in the structure product hedge yes kind of uh uh part is critical and I think increasingly critical people are just early adopters are figuring that out >> sure >> but we've yet to other than 22 see any real reckoning there and and I think I' just want to highlight that as as a major risk >> yeah I think everything every asset in a in a sense can be viewed as a trading pair with the dollar Yep. Right. And when you have dollar stability or regime stability, mean reversionary forces kick in. If something pops, it tends to come back. The dollar will rally against it. And that's another way of saying it lost value. But when you're in a reflexive regime, which is the opposite of a mean reversionary regime, you see this tripling of of non-dollar assets over a very short time period. And that reflexivity tends to give raised rise to more reflexivity. And then there's some sort of crescendo, right? And I don't think we've seen the crescendo personally, but it's also the hardest thing to predict in markets. >> 100%. I I think it's safe to argue, at least I think so, super early given the uh 500 to 15 kind of trillion type reality and the fact that we've yet to really see >> um any of that mean reversion yet. And like you said, it's a pendulum. >> Yep. >> So once it starts to swing, it can really uh get going in the opposite direction. >> Yeah. So all these dollar offramps and the exuberant price moves we've seen, I don't I don't love forecasting asset returns. And so I really don't. But I think if you're looking to hedge real losses, equities are tempting, but real assets have to be a big part of your portfolio, certainly bigger than they've been. I remember going back to 2015 when commodities were a bit of a swear word. We had ris parity portfolios that I was, you know, helping kind of manage and and market on behalf of AQR and nobody wanted to touch them because it was basically just levered bonds and the only other thing you were embracing was real assets. >> Those types of portfolios, especially anything that elevates the presence of real assets in the portfolios, it's probably a decent allocation regime to think about in a reflexive dollar off-ramp regime, which is what I really think we're entering. to to your point, uh, you know, hard to say with conviction that it's definitely going higher or that it's it's an incredible bet, but what I think is is fair to say is it's a great diversifier at this point. And and uh markets don't respond to fundamentals uh over a short period of time, but they sure do respond to supply demand, right? >> And when you have that kind of supply demand imbalance, uh probably not a bad place to be allocated. >> Yeah. And you see I mean just forward multiples at what 24 on the S&P trailing multiples flirting with 30. I don't know where the cape measure is, but it's got to be flirting with 40 now. Um which is basically all-time highs. Everything else is 50 to two times its median or average. Um we're clearly on borrowed time, of course, with the caveat that borrowed time can last quarters and years sometimes. So, and that's in a period of time that matters for investors, especially when real when nominal costs are rising the way they are, right? And so, it's a very tricky time to make pivots. Um, I do fear that people will lean a little bit too hard into the equity risk aspect, fearing the right tail and but fail to kind of appropriately calibrate the left tail. And that's broadly what we've seen with a lot of allocation shifts of late, not ubiquitously, but just on average. So we'll see. >> Yeah. No, there the key is thinking about it distributionally, right? And I think that's what's really hard for people to do when when they think about beta. They either need to reduce their beta or improve their beta. The reality is you can maintain the allocation. Yep. Right. Uh uh maybe even get leverage to the right tail while still protecting your left tail. And I think that's where we are in this cycle. And and u wonderful talking to somebody who gets that. Uh Patrick, thanks for hopping on. >> Yeah, thanks for having me. I appreciate it. [Music] Welcome back to another episode of You Got Options here at the RMC floor. Um, third conversation for today. We got no other than Hari Krishna. Uh, I remember uh almost nine years ago reading his uh the second leg down. Uh, incredible book. Uh, written a bit since then as well. Um, but no better person to talk about tail hedging. uh market dynamics and and where we're going than Hari. Welcome, bud. Good to see you. >> It's great to see you and um couldn't be happier than to be in Munich and to be chatting with you. So, >> yeah, we got to go get a beer together after this. >> Oh, at least one certainly. So um one of the things I actually just uh there was a session on um was AI AI and options trading uh kind of the effects it's having where things are going and uh I know you have some opinions on that. Uh I do too and I think they're all kind of uh you know really speculating about uh current circumstances, how fast this is moving and the effects it's going to have. But I'd love to dive in for the next 20 minutes and kind of focus primarily on that if that sounds >> Go for it. Yeah. Yeah. Sure. So um couple things just to give you a sense of how fast AI is moving broadly. Um in the uh demographic of uh high sorry college educated men uh in the US specifically unemployment has gone from 4 and a half 4.7% to almost 9.5% in the last year and a half. specifically um nothing has happened to the 4 and a.5% unemployment rate for uh college graduated women and for high school or non-ol graduated men and women also 4 and a.5%. Uh very few people can understand fully why that is. I think it's pretty clear if you look at the data and where it's happening that that's happening specifically to those working in fields that are using um you know technical expertise um uh not nursing jobs, not service jobs, not teaching jobs really um really programming, accounting, uh legal um you know across the board there. So massive wave and it's happening way quicker than people realize I think. um here in the derivative space I think it's it's so uh important and and we're seeing a lot of quick changes as a function of you know options being relatively complex you know people like you and me uh have have studied or worked for decades right to kind of fully understand these things and and to rise kind of to the >> um the the the middle top or the top or whatever of our fields and and be able to kind of discuss these and understand these these products but their growth is uh is tremendous um as people look for more non-correlation and understand them more and there's more network effects um my view is that AI is really going to help the broader audience move more away from a a two-dimensional stock bond commodity investing type um exposure to really access more the distribution of each product to be more precise with their positioning and adopt what I feel like and again I know you drink the Kool-Aid as well um a a superior way to position a more precise way and and flexible way to position. Um, so I really see it as a coming revolution not just for AI but for um, uh, options, structured products, anything that involves dimensionality um, and democratizing it in a sense. I know that's may probably going to sound like a little bit of wishful thinking or the question is about timing, but tell me tell me what you think about that, how you see it. I know you have a little bit different view, but but would love to hear your thoughts. >> Well, I have a strong view. It might be incorrect but again I don't have a crystal ball. Um if you think of machine learning there's kind of a wide variety of fields where it's applied always getting wider and in some areas it's been conspic conspicuously successful. Autonomous driving if you are able to control for the impact of mistakes all the way down to finance. Finance is actually the the kind of the frontier or financial returns predictions is the final frontier in some sense of machine learning because the signal to noise ratio is very low and so teasing more out of the data is immensely powerful. Now you know as well as I do that if you trade just futures forget about the options for a second if you can be right 52% of the time and trade a lot your sharp can be immense. >> Yep. But even getting to that is tricky in lower frequency contexts using machine learning. So it's a challenge. >> Yeah. >> And one of the big challenges is as you build a machine learning model, you're always playing a trade-off between something called model variance and bias. So in finance, what that means is you don't want a model to be too biased in the sense that you don't want it to always be long or always short. you want it to change its positions dynamically. Uh conversely, you don't want a model to be too unstable. So if you input a slightly different data set, you don't want the model to do something totally different. Right? The trouble is that um for markets which tend to go up like the S&P at least in recent years um model variance is a big issue and models simply want to be long a lot of the time. >> Yep. >> So I know there's a passive revolution. I know that there are lots of other factors driving. I know that liquidity measures and so on are indicators of ramping up equity markets. But I think the technical models that are increasingly used maybe we're under the ML guys have that as you put it earlier momentum aspect to them momentum and long bias to them. So finding that bias is um a real challenge. >> Yeah. And options allow you to do that. >> How much of that is just a function of the data set? Right. I mean obviously any intelligence of any kind >> when only given a certain amount of information uh will have uh you know poor outcomes if they don't have the full picture. Um and I how much of the argument that it's not good is is that we just haven't had enough data points or that the the tales in particular are under reppresented. Um, and what if we were to take a much wider lens and at least uh drive enough simulations to create a broader data set? I don't know. Just would love to well tail risk which is a topic close to your heart and my heart and Dave Drudges who will come on at some point. >> Yeah. >> Um, that is one of the areas which is hardest to apply machine learning to because machine learning tries to tease out fine structure in a massive data. So you need tons of realizations. The stuff that occurs at the tails doesn't happen much by definition. >> So machine learning models don't have much to grab onto and so buying the tails which is something that I guess most respectable market makers dealers will do just to keep going um is the defense against statistical unknowability I guess. And so that's an area where you can combine machine learning and options. Mhm. >> So you could have a futures program where you do all the statistical stuff. >> Mhm. >> You aggregate huge masses of data. You do cross-sectional pooling blah blah blah. But then at the tails you just play defense. And that's the cost of doing business. And I get the suspicion that a lot of people in the industry who are sophisticated using these models are doing exactly that. And you might not see it in terms of options activity at the tails, although that has increased, but more clearly in terms of very tight risk controls. So positions that have been working and no longer work just get flushed out very quickly, not only to the downside, but to the upside. And that creates a sort of um interesting situation where options add even more value, >> right? based on the fact that more is predictable within the narrow not the narrow but within the belly of the distribution and everything else is non modelable at least knowing in current conditions. >> Yeah. And do you think uh I think what you're implying is that those participants who are increasingly using these things are not only uh poorly modeling those things or can't use them well to model them but because they can't are reinforcing >> Oh. Yeah. >> Absolutely. I mean if you have an edge and your edge doesn't apply to outsiz moves you just get out. >> Yeah. You just cut your risk and that obviously just forces >> we're seeing a lot more of that. >> Yeah. Um, and we discussed this previously as well, but um, short selling has become more difficult or at least index shortselling or short bias strategies have become more difficult as a result because cutting risk doesn't only apply to the downside, right? >> It applies somewhat symmetrically to uh, up moves as well. >> Yeah, absolutely. You know, I think uh it's particularly relevant given that you know, the last 40 years have been really up until just a couple years ago in 22 maybe have been fairly one node. I mean if you there have been short periods of volatility but volatility has come and gone quite quickly. Um we haven't seen uh also a until 22 a major breakdown in any way with correlation. um there have been ways to manage risk and to uh handle things which is quite unique honestly the longer history I mean if you look at hundreds of years of of market history uh not just in the US but also outside of the US you know the last 40 years is a bit of anomaly in the context of the bigger picture >> and it explains a lot of the dynamics we're seeing now so we see a rich VIX term structure why because I think there have been more instances of the VIX popping from a low teens level in recent years than we saw previously. >> Absolutely. >> And so people are playing defense there and that is not contiguous and it's not consonant with what's going on in S&P options. So there are lots of dislocations where VIX might be rich but S&P offers value either on the upside. >> Yep. >> Perhaps or even on the downside in certain spreads. And that's created a lot of interesting um situations that may not be resolvable. They're not really arbitragees because um the players who could do the arbs um are not positioned in such a way to do those particular ones. Yeah. I >> I mean I think I always find the uh 1987 uh event that drove essentially the creation of skew in the indexes >> as fascinating. Most people don't know that there was no skew priced in to the S&P 500 until the crash in 1987. >> That's right. Yeah. >> Options were created in 197. The SIBO was created in 1971. Hood options were created 1973, but there was no skew in the S&P 500 till 198788. >> Yeah, that's a great comment and it is historically true. Um, I wonder if there is an analog today with the call skew for the S&P. That's right where I was taking this. Absolutely. >> Well, you kind of tipped me off, so I'm going to give you credit for that. >> No, absolutely. I mean I I think uh we've started to see a significant um you know compression of the upside that um as a result of not seeing any structural inflation of any meaningful lasting time um uh due to a very stable monetary policy and regime um and and a broad uh geopolitical regime really for the last 30 40 years. It's interesting that we're seeing those things that stability of policy change dramatically but without a reaction. And I really does do think it'll take an event to do that. >> And that's a great point because if you go back only to the 80s, let's say, and you try and look at um S&P earnings multiples as a function of inflation, you see something that looks a bit like a bell curve. So high inflation is bad for equities. low to negative inflation is bad for equities and there's a sweet spot of 2%. I'd say and it all fits beautifully together with the Fed's recent thesis and so on. Um but that could all change. That's not a written in stone fact at all. Even as it is, it's statistically noisy. >> Yeah. >> And so um high inflation could actually be quite good nominally for the for equities. >> Uh agreed. It all depends on what kind of inflation, right? Uh and and we're also talking >> valuation. That's great, >> right? Especially in a regime, by the way, when 10% um of all the top 10% of all earners constitute more than 50% of all consumption >> in the United States. That would that that could be something that where the wealth effect is more important than ever. And if you drive liquidity to the top with lower interest rates, that >> and there's a double whammy though because if the top 10% are generally older, which they are, and it was previously assumed that older people consume less, the effect is even more dramatic than than that. >> Yeah. >> Um >> um I started in the business in 1997 and so my first several years were uh market up, Volup. uh probably the >> probably the only other than briefly in 07 outside of the US um really the the only time I really saw that at for a continuous long period of time and again it was almost 2 years of market up volley which most people don't fully appreciate um so I've kind of been uh wondering if if and when that would ever come back again um and I can't help but feel um that slightly different circumstances some things run like Federal Reserve policy and and whatnot, which we can get into, but really the amount of short interests, the amount of um retail involvement, obviously the power of narrative, uh you know, all bubbles are built on a very uh believable idea that this time is different and where you're led off with AI. Like I can't think of a more powerful driver of that narrative. Um so in the face of that narrative, retail involvement, um very uh aggressive uh coming monetary policy likely given that the administration is taking over uh the Federal Reserve. Um you know, all the ingredients are there again. >> Well, I' I'd like to make a cheap comment about that this time is different. I'm actually quite sympathetic to young people because if they didn't believe this time is different. >> Yeah. What >> they might think that we're going to get old, we're going to get old and sick and then we're not going to do very well at >> Oh, yeah. >> So, they have to feel this time is different. It just doesn't really apply to uh financial cycles which outlive all of us. So, u Yeah. >> And by the way, it could be different. We were talking about tales, right? Like you you you know, the reality is there may not be enough data. Um, uh, it's possible, but that's that possibility is what drives the exuberance and the and the drive to some extent. >> Well, I think one of the most interesting case studies will be what happens to the cryptovall surface over time. >> That is a very nent surface. It used to be flat and high. >> Yeah. >> What contours will it take? >> Yeah, let's talk about that a little bit because I I don't play as much in crypto of all. >> Nor do I. So speaking a little bit out of field, but >> I I I definitely think by the way, and this is a little tangential what we're talking about, but that there is a massive right tail convexity as we've seen in crypto, but also extending not just to crypto and now again, we've seen it recently in precious metals. We talked about platinum. >> Yep. Um but across any asset that is really perceived as any type of a diversifier you know people don't realize the growth that we're seeing in structured products which I often talk about and when I in structure products I mean also the ETFs and the buffers and all the things right yeah all very related um that's gone from 500 billion to 2 trillion in just 3 years which is pretty amazing Um, hedge fund assets broadly have gone from 2 trillion to 4 trillion in about 3 years. Gold has tripled in 3 years. Crypto has tripled in 3 years. What I don't think many people have connected is all those things are connected. >> Absolutely. Yeah, >> I mean even if you take the hedge funds piece, if the bulk of the flows are going into the pot shops and the pot shops have very tight limits, risk limits in each pod, what are you going to do other than chase a winning strategy and uh bail out if it or get bailed out if things go against you, >> right? >> You have to do that. You can't be a long-term player. That's where the opportunities lie for some of us, frankly. >> Absolutely. But all of that's, you know, you have 500 trillion on one side and now you have up from 5 trillion 15 trillion of diversified assets, but that's all happening in the context of a just a warning shot in 2022. Not really. I mean, >> and it was a mild decline. I mean, it was significant um in terms of distance, but not in terms of speed. >> Right. That's exactly right. So, I mean, I can't help but but feel like uh you know, talk about right tail events. We're already seeing it in those assets right now. And that's before the liquidity push coming from an activist Federal Reserve likely coming um uh and an active administration. Um so you can't help but wonder, you know, how fat should that right tail be and how much of that can u not just continue in those assets but even translate across all assets going forward. Um uh and uh all the time in the context of structurally compressed V on that tail. Uh you know it's the harder part honestly is is owning the the left tail because it's expensive. Everybody needs it. Everybody's long assets. Everybody needs it. The cheap part is the right convexity. And because of that um structural imbalance of long assets for short assets, we have compression on the call side. But again, I think that is uh that's exactly at the moment, >> right? >> Yeah, it's the place to play. Um anyway, we kind of moved off of the AI uh piece a little bit, but I I do think that uh AI also could potentially play a role in that. >> Well, Frank, just to summarize the AI piece from my perspective, we do a ton of AI or machine learning, I won't glamorize it, >> um in various guises, but it's always dedicated to median return outcomes. So the options, the need for options never goes away, >> right? >> You have to look at median return outcomes because you're these are pre-lever numbers and you don't want to be glued too much onto rare events, >> right? >> Because machine learning requires very repeatable patterns that occur many many many times. Fine structure cannot be found >> from an a simple set of T. >> Yeah. No, I agree with that. The question I guess ultimately is is uh how durable is that weakness uh in the models and uh you know like you said before I I don't know that that um our uh our edge our views the contextual thinking that you need outside of an AI model uh will go away in a year or two but I think it's safe to say with stronger models better data um uh that you could in theory also start modeling more complex things like that which are actually more valuable >> you know in the sense that it's it's hard for most people to access that maybe even you and me at times >> I think it's hard for me as well but it's of course there'll be windows of opportunity in these spaces the reflexivity of markets though >> we'll always create something new >> that is not going away that we hope >> that we can agree on >> awesome conversation as always thank you >> thank you sir always a pleasure >> you got it >> thanks for listening to Top Traders Unplugged. 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