Episode 205

full
Published on:

7th Jun 2024

Alfonso Peccatiello: Unveiling the Macro Endgame: The Wealth Illusion Paradigm

In this episode, Alfonso Peccatiello, a renowned macro investor, joins the ReSolve team to delve into the macro end game, the impact of leverage on the financial system, and the potential paths forward. They also discuss the role of politicians in managing fiscal interventions and the increasing volatility in the macro environment.

Topics Discussed

• The concept of the macro end game and the unsustainability of the current financial system

• The role of leverage in offsetting dwindling structural growth and its implications for the global economy

• The impact of central banks' decisions to stimulate economic growth by lowering interest rates

• The wealth illusion effect and its implications on the U.S. economy

• The potential paths forward considering the high levels of debt and low interest rates

• The shift from anti-cyclical to pro-cyclical use of fiscal policy by politicians

• The need for a global macro framework in asset allocation considering the current high-leverage, high-interest rate environment

• The launch of Alfonso's global macro hedge fund and its strategy to navigate the increasing macro volatility

This episode is a must-listen for anyone looking to understand the complexities of the global financial system, the role of leverage and fiscal policy, and strategies to navigate the increasing macro volatility. Alfonso's insights provide valuable strategies for navigating the uncertain financial landscape and understanding the potential paths forward.

This is “ReSolve’s Riffs” – published on YouTube Friday afternoons to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.

Transcript
Alfonso Peccatiello:

So in 2022, we saw the rise, I think, or the comeback,

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I should say of trend strategies.

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So these are strategies that, you

know, basically make money when

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there is a clear breakout in prices.

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And when does that happen?

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Well, when there is a lot of macro

volatility, you would expect that

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there are more convex reactions in

prices and therefore trend strategies

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can actually benefit from this a bit.

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And you can see that trend strategies

tend to do pretty well during inflationary

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bouts exactly for this reason, because

you need to restructure the way

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you think about interest rates and

equity sectors and commodity prices.

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And so you have a lot of trends

developing and you can benefit

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from an allocation to trend.

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Mike Philbrick: All right, welcome to

another episode of Resolve Riffs where

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we have today one of our most popular

guests that we have on a regular basis.

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Alfonso Peccatiello is joining us today,

otherwise known as at MacroAlf on Twitter

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and is the publisher of the Macro Compass.

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Alfonso, welcome back to Resolve Riffs and

it's great to have you joining us today.

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Alfonso Peccatiello: One of my

favorite shows, regular listener.

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So always a pleasure to be here.

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Mike Philbrick: Love it.

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You have been a busy beaver

as they say in Canada.

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I know you've got a fund you're working

on that looks like it might be an idea

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that might be coming to fruition in Q4

and you have been continually writing,

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as eloquently as you do and as, I think

you have such great explanatory power

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in your narratives and things like that.

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So let's jump in and talk about

You know, how did we get here?

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The fiat system and the end game, you

released a video just today, actually,

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which I thought was a wonderful way

to sort of set the table of what

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we've been going through over the

last 50 years, you know, contextually,

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maybe in a broader sense of how

fiat currencies have come about, how

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they've developed and you coined a

phrase, the wealth illusion paradigm.

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Which I thought was a really,

really interesting concept.

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So why don't we start there, talk through

that recent piece you had, and then we'll

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continue through the, through the rest of

the show and we'll get to, the fund you're

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working on and how it's going to position

itself within that framework and how asset

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prices might respond and all that stuff.

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Alfonso Peccatiello: All

right, let's do that.

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So the piece was called the macro

end game, because I think, you know,

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macro investors in general, investors,

we're always inundated with daily

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news and noise and data, and now

that the market is pretty boring, we

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can maybe take a step back, right?

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We take a step back and we can look at.

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The big picture, answering the

million dollar question, you

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know, what is the macro end game?

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Because I think it feels a bit

unsustainable for many looking at the ways

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we have structured our financial system.

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When you look at wealth inequality,

when you look at asset prices, it often

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gives you that feeling that it's not

really a very sustainable equilibrium.

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Right.

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It's a bit what Minsky would

say, artificial stability breeds

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instability in the system.

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That's how many people feel about it.

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That's why maybe they want to have some

gold or for, you know, more, digital

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age oriented people, maybe Bitcoin.

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that's the feeling I think.

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Right.

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And I wanted to try and

explain how did we get here?

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Why do you have this feeling and

whether this system can actually be

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resistant or whether it actually breaks?

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And if it breaks, what's

the macro end game?

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That was the idea behind the piece.

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And so it all starts, in 1971, when

Nixon ends the, gold pack, right?

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It basically, collapses the gold standard.

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And what he does back then is it

basically ends the convertibility

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of gold into dollar at the fixed.

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exchange rate.

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And what happens back then is basically

that all banks and governments

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in the world that were creating

new money, and I will explain in

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a second what I mean with that.

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They were also creating new money

before:

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limit, a hard peg to this because

you would create dollars out of thin

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air like a government or a bank does.

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But then there will be a fixed

price at which you could convert

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these dollars back into gold.

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And so you had to be careful

with the amount of fiat money

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you would create, right?

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There was a balancing

mechanism in other words.

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And after 1971, that's

not the case anymore.

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So in our system, it's not central

banks that create inflationary money.

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And that comes as a news for many, but

it's government via fiscal deficits

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and banks via lending that create

the inflationary form of money.

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We can actually spend and how it works.

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It's pretty simple.

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The government is the

issuer of the currency.

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So the United States government

issues dollars, they control issuance

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of the dollar and what they do when

they do fiscal deficits is they

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decide to basically, let's say,

blow a hole in their balance sheet.

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So reduce their net worth around

deficits and inject this net

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worth into the private sector.

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So in 2020.

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You could open your mailbox and

find a 5, 000 check from the United

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States that had become basically

the issuer of this 5, 000 for you.

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And you became richer because you could

cash in 5 thousand dollars at J.P.,

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Morgan and have this spendable money

now all of a sudden to spend without

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having a liability attached to it.

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You didn't have any debt,

any mortgage, any loan.

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Nothing.

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So your net worth went up because

the United States government decided

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that its net worth had to go down.

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So it's a simple balancing mechanism

where the government decides to blow a

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hole in their balance sheet, issue new

spendable dollars, and you as the private

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sector will be the beneficiary of it.

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And the second way is bank

lending, where you want to buy

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a house of a million dollars.

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You don't have a million dollar

cash in your bank account,

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but what you have is a job.

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Or a business.

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So you will produce cash flows over time.

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And therefore a bank can look at

your future purchasing power and

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give you credit against that now.

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So basically credit your bank

account by a million dollar

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money you didn't have before.

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And now you can go and buy a house

with the newly created million

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dollar from the bank, right?

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And the seller of the house will now

have a new bank deposit of a million

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dollar who he didn't have before.

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So the creation of credit.

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Basically allows the balance sheets

to grow and it injects money into

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the system, although it comes with

debt as well, because you have a

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million dollar, but you also have

a mortgage of a million dollar now.

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So that's a bit the difference,

but it still allows you to spend

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more all of a sudden to have more

inflationary spending power than before.

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And after 1971, both the banks

and the governments were more

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free to actually create new fiat

money without having to convert.

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Or check the convertibility of this new,

of the quantity of the fiat money versus a

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dollar because the gold peg was basically.

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Gone.

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And when you look at

this, you say, okay, cool.

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But the fact that they can,

doesn't mean they will create a

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bunch of new fiat out of nowhere.

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And this is true because if you think

about why would government run a lot

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of deficits or the private sector

demand a lot of credit from banks,

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you would do this if the organic

growth in the private sector, if the

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structural growth of the private sector.

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So if you see your structural ability

to generate growth going down, what you

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will be doing is look for an offset.

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And that offset is credit,

deficits, more money being created

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to offset your inability to

create strong structural growth.

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And that inability started

to surface in the 80s.

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Because the inability, and I can

share the screen here to show what

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are the drivers of long term economic

growth, And they're pretty intuitive.

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One of the re the ways that you

can create organic growth in an

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economy is through demographics.

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Pretty simple.

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If you have more people working

productively, then your structural

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GDP growth will be higher.

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So one of the ways to create

strong organic GDP growth

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is through demographics.

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So pretty simple.

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If the amount of working age population

as a percentage of total increases,

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so you have more people actually

contributing to your working, to your

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labor force, then you can have more.

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Structural growth.

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Vice versa, if your working age population

shrinks, then you will have less people

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contributing to active economic growth,

and your organic growth will also shrink.

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And as you can see from this chart,

whether you take the United States

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or even Japan or Germany or Italy,

up until the 80s, the amount of

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working age population was increasing.

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So you add basically a demographics boom

in the post second world war era that

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led 20 years later, because to make a new

worker, you actually need 20 years, right?

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They need to be eligible to work.

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in the eighties, you had the peak

of this working age population

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growth as percentage of total.

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So you had.

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happen.

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So All countries basically ranging

between 65 and 70 percent of working

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age population as percentage of total.

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But in the eighties, we peaked,

basically demographics peaked.

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They remained healthy between the

eighties and:

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growth, the marginal benefit from

better demographics had exhausted.

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And if you look at the next 10 to 20

years, of course, this projection, these

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projections look blicker and blicker.

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So in the eighties, you had

demographics peaking, and you also had.

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The second factor that stands behind,

structural growth, you had productivity

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also peaking because at the end of the

day, you can have better demographics, but

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if those workers aren't productive and if

the use of capital isn't productive in the

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economy, you're still going to struggle.

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Now, the good news is, as you can see

from this chart, that if you look at the

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decades, like the fifties, the sixties

and the seventies, and all the ways until

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the eighties, Productivity growth on a

10 year rolling basis was increasing.

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So you were becoming.

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more productive year after

year, and the marginal rate of

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productivity was also increasing.

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But once you reach the eighties and

the nineties, this productivity growth

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was still there, but it started to

decline on a second derivative basis.

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So you were still more productive,

but the productivity growth

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benefits were mostly exhausted.

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And so what happened basically is that by

the eighties and the nineties, you were in

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a situation where the gold peg was gone.

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You could create new money.

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without having a hard pack to gold

and your structural growth forces.

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Driven by demographics and

productivity were declining.

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And so politicians had to basically

find an offset, a way to offset this

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dwindling structural growth to make

GDP growth socially acceptable again.

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And how would, how were they going to eat

their 3 percent real GDP target each year?

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Well, with the use of leverage.

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And therefore they said, you know what,

we are going to start doing it and we're

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going to lever up the system because we

don't have a hard peg anymore and we can

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create as much fiat money as we want.

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And so you go into a situation, as you

can see here, where whatever country

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you actually put, you can use the US

or Europe or Japan or China, as you can

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see in this chart, as long as you look.

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At the total leverage in the system.

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So you look at the private sector,

as we said, bank lending, private

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credit, and the public sector combined.

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If you look at the use of leverage

you can make throughout the economy,

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all biggest economies in the world

went through the same process

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between the eighties and 2020.

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They all levered up their economies

from about a hundred, 150% of

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GDP, all the way to 300, or in

Japan case, even 400% of GDP.

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Yeah.

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Mike Philbrick: right.

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Wow.

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So that's public and private data as

a percentage of GDP that you've got on

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this and you can just see, in particular

what's striking is that, that run in

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China from, you know, sort of post

:

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to 300, just sort of catching up to

the rest of the developed nations in

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the world, truly, truly staggering.

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Alfonso Peccatiello: Yeah,

it's quite impressive.

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I mean, China caught up to the game.

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They had demographics, tailwinds

a bit later than the others.

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so they, they lasted a little bit longer.

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They had a big productivity boom by

joining the WTO so they could gain

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share on the global manufacturing

market and the global trade market.

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They became more productive.

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But all these exhausted for

them, let's say 10 to 15 years

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later than it did for the others.

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So somewhere around 2005, 2010, they

actually had to lever up and they did.

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So very,

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Mike Philbrick: did they ever,

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Alfonso Peccatiello: they, they went

ballistic, you know, in basically 15

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years, they covered the ground for

three decades when it comes to leverage.

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And so basically you went

to a situation where.

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Politicians had found the fix.

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The fix was, well, if demographics

are coming down and if productivity is

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coming down, we're going to do leverage

and everybody's going to be fine.

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Now, one issue with leverage is that it

makes a system, of course, a bit more

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fragile and also to be used as a recurring

system, more leverage and more leverage

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and more leverage, you need to make sure

that the next guy who's levering, the next

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generation who's levering is able to do

so at a marginally cheaper interest rate.

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So if you lever up the

system more, more and more.

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And your salaries aren't increasing

in real terms and your structural

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growth is not that strong.

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The only way to sustain, to basically

have a servicing, ability for this

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high level of leverage is to make

servicing costs pretty low, is to make

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interest rates as low as possible.

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And so you went into a situation

where the system got more leverage,

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often unproductive to be frank.

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So this leverage went into

real estate and asset prices.

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It wasn't really used to.

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generate innovation and structural growth.

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So you had this system, these lowered

economic activity as the entire

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economy was basically burdened by that.

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And so central banks decided to stimulate

economic growth and make the system more

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sustainable by lowering interest rates.

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This was the trick to continue

levering up the system.

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Without having effectively the leveraging

episode like we had, for example, in

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Japan, a system which was highly leveraged

to the real estate market in the eighties.

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And when the bank of Japan, Japan raised

rates, you then had a deleveraging

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episode who lost it for decades.

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So the West didn't want that.

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And they said, well, you know what?

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We're going to cut rates and

accommodate this process as we speak.

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And that's what we did.

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Mike Philbrick: Yeah.

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And so that it obviously, well, it's

unlikely that that can go on forever.

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but maybe also walk through the steps

of the wealth illusion effect that

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you talk about and how that continues

to go through maybe the stepwise

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example that you used in the house

purchase and to let people sort of

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get their minds wrapped around that.

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Alfonso Peccatiello: Yeah, correct.

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So one chart before we walk through the

example to visualize what I just said.

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If you look at the U.

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S.

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and you look at government and private

sector debt as percentage of GDP,

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which is in blue on this axis inverted.

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So the lower you go, the more private

and public sector debt in the U.

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S.

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right.

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We were at 180 percent in 1998 in the U.

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S.

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Real interest rates in orange.

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On the right hand side, were at about 4%.

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So with the US running 180% of private

and public sector data, percentage of GDP,

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we could run in the US with about three

and a half to 4% real interest rates.

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Okay, let now, as the US became more

and more leveraged and more and more

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leveraged, let's say all the way

until today with the US running 250%.

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of private and public sector, that as

percentage of GDP, real yields have been

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for the last decade, somewhere around

1%, roughly 50 basis points to 1%.

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Now the Federal Reserve has hiked

interest rates much further in this

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specific economic cycle, which makes the

system Arguably a bit fragile, right?

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Because what you're having is a decent

level of leverage in the system with

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real interest rates that are higher than

what the equilibrium of the last 30 years

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between these two variables would suggest.

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But real, really, the other effect

of doing this is boosting house

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prices or asset prices in general.

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So I'm now sharing part of the article

I wrote just to make people visualize

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as well the figures that I'm using.

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If you bought a house in the US, let's

say in the early nineties, right?

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let's assume for a second that the

bank would have lent you a hundred

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percent of the purchase value.

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That's not standard, but please bear with

me just for the sake of the assumption.

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Okay.

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So let's say, In the nineties,

you wanted to spend 1, 000 a

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month in mortgage installments.

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Okay.

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And let's say that in the nineties,

the actual third year mortgage

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rate back then was about 10%.

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Okay.

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So you had to pay a 10 percent

nominal mortgage rate for 30 years.

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And with a 1, 000 mortgage installment

budget per month, that meant at these

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interest rates that you could buy a

house worth about 120, 000 a month.

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dollars back in the nineties.

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Okay.

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Now let's bring this back

30 years for, forward.

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Okay.

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And let's go specifically to 2021.

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I just want to show you the

peak euphoria of this, wealth

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illusion paradigm, as I call it.

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Let's say that you are in 2021 and you

still want to spend a thousand dollars

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a month in mortgage installments.

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That's your budget.

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But your 30 year mortgage is now 3%.

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So you do your cocks and all of a sudden

you can afford a house worth 240, 000.

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This is double the price in the nineties.

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So effectively by lowering nominal

interest rates over time, you

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have allowed another generation to

lever up more and more and more.

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Specifically to double the amount of the

90s and be able to afford the same price.

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And so what you have achieved is a

continuous use of leverage and injection

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of leverage into the economy, which makes

not only the new buyer feel like he can

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afford new credit simply because interest

rates have gone down, specifically the

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old buyer, particularly happy because

his house price is now doubling price.

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and still can find a buyer

because interest rates are much

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lower than they were in the 90s.

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So the combination of lower interest rates

and injection of credit into the economy

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makes this offsetting effect basically,

or what I call the wealth illusion

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paradigm, actually go further and further.

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And the reason why I call it the

wealth illusion paradigm is that

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where you're forced to rapidly reverse

this interest rate story and move

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back from 3 percent to 7 or 8 10

percent and stay there for a while.

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So find a new equilibrium borrowing

rates, a bit like it happened in Japan

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in the nineties, you're facing the risk.

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Yeah.

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That you have to reverse this

wealth effect and basically

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deleverage the entire system.

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Mike Philbrick: So how do you see, what

are the potential paths forward on this?

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I mean, we've got the

tremendous amount of debt.

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I'm sure the other thing that

comes to mind for me too is

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the initial conditions, right?

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So again, you started with that many

years ago with very low interest rates.

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much lower debt across both

public and private sectors.

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So you've got this space in

front of you to lever up.

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You've got high interest rates

going to low interest rates.

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So you have this sort of perfect

storm of opportunity to create

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the wealth illusion effect.

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What happens going forward from here?

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When we're at 5 percent interest rates,

do we need a massive productivity growth?

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are we going to see, you know, some sort

of, the classic, there's three ways out

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of it, you know, debt, you can be austere.

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Nobody likes to do that.

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Nobody gets elected.

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You can default, or you can sort of

debase the debt and inflate it away.

364

:

So those are kind of the three

paradigms that people talk a lot about.

365

:

How do you see us resolving this

in the past forward, given the

366

:

current set of circumstances?

367

:

Alfonso Peccatiello: I mean, what, what

politicians are doing right now is while

368

:

the central bank is trying to act somehow

responsible by raising interest rates

369

:

to fight inflation, that puts a lot of

burden on a highly leveraged system.

370

:

And so what's happening on the other

side is that governments are coming

371

:

in with fiscal injections, right?

372

:

They're being much more friendly on

the fiscal side, hoping to basically

373

:

balance out this tightening from The

Federal Reserve and other central

374

:

banks and come in support in the

private sector on the other hand of it.

375

:

Now, can this work?

376

:

Again, yes, it's a fragile equilibrium

as long as bond vigilantes and markets

377

:

don't start questioning this gigantic

use of fiscal stimulus in a pro cyclical

378

:

way and start wondering, you know,

let's put a premium on long bonds.

379

:

Let's see what happens there, for example.

380

:

So this could be a release valve

for how the system becomes all

381

:

of a sudden very, very fragile.

382

:

But going forward, let's even assume.

383

:

that we go back to a situation where

you have a perfect soft landing, it's

384

:

disinflationary, so the Federal Reserve

can cut rates all the way to 2%, right?

385

:

So we go back on this treadmill basically

of let's try to put new leverage

386

:

at cheaper interest rates, okay?

387

:

Even if we go towards that, okay?

388

:

There are limitations because as you said,

the private sector is much more leveraged

389

:

than before in general, not specifically

in the United States, but if you look

390

:

around the world, that is the case.

391

:

you are in a situation where

you then slowly, but surely move

392

:

back towards low interest rates.

393

:

So your ability to lower

interest rates further.

394

:

Right.

395

:

So there are obvious limitations

and this is why I think people

396

:

feel uncomfortable with the system.

397

:

Right.

398

:

They feel it needs to crack.

399

:

So then my, my, the piece was there

to try and answer the question,

400

:

what is the macro end game?

401

:

What are the solutions to this?

402

:

Right.

403

:

So I see three.

404

:

The first one is.

405

:

Politicians would show up and say, sorry,

guys, we're going to clean up the mess.

406

:

So we're going to go with

a gentle deleveraging.

407

:

They would like to be gentle, but with

a deleveraging process, I think that's

408

:

pretty much politically unviable because.

409

:

You would have to deleverage a wealth

illusion effect system and a levered up

410

:

system that has benefited two generations.

411

:

That will be a disaster.

412

:

And even if it's true that let's say

after:

413

:

voters isn't going to be The boomers

or the people who benefited most

414

:

from this still, they would account

for like 40 percent of the voters.

415

:

So I'm not sure that any

politician would volunteer to

416

:

actually deleverage the system.

417

:

Would you agree with me?

418

:

Mike Philbrick: Yeah.

419

:

And I think that the

political system in the U.

420

:

S.

421

:

is quite unique with all of these,

baby boomers and even older generations

422

:

holding positions of power politically.

423

:

And you have this massive voting

group called the millennials

424

:

and why are they going to endure

austerity for their grandparents?

425

:

Like, what, what's the motivation

for them to eat this particular shit

426

:

sandwich so that, that older generation,

which is clinging to power in a

427

:

political sense and driving the bus

still, and still votes predominantly

428

:

much more than the millennials vote.

429

:

it's a very unlikely scenario where

we get the, you know, austerity

430

:

deleveraging without some sort of,

War, some sort of call to action

431

:

that, you know, sort of solidifies

the population across the generations.

432

:

So I agree.

433

:

Alfonso Peccatiello: I think you're right.

434

:

And specifically China has recently

tried to deleverage a bit their

435

:

system and they're not doing

particularly well as a result.

436

:

I mean, the Chinese real estate

market was valid at I think

437

:

trillion dollars at the end of 2021.

438

:

That's bigger, a bigger market

cap than the U S stock market.

439

:

And then Xi Jinping said, well, you

know what, that's a bit too much, right?

440

:

Should we try to deleverage this sector?

441

:

And China, which is a centrally planned

economy, still got a lot of backlash from

442

:

this, you know, attempt at deleveraging.

443

:

So it's very hard in general to

deleverage a very leveraged system.

444

:

And on top of it, it wouldn't really

benefit the status quo, I would argue so.

445

:

Politically unviable, low, low likelihood.

446

:

What's the second solution?

447

:

The one we were suggesting, hinting at

before, which is wealth redistribution.

448

:

So what you do there is you don't try

to necessarily deleverage the system,

449

:

but you simply try to shuffle around

basically the wealth distribution.

450

:

So you do targeted fiscal policies to

make sure that some of the wealth that

451

:

has been allocated to a certain cohort of

the population gets moved around basically

452

:

to another cohort of the population.

453

:

So wealth redistribution.

454

:

That's it.

455

:

In my opinion, this is more politically

viable simply because the majority of

456

:

voters will be very happy with wealth

redistribution, let's be frank, but

457

:

it is also a very volatile outcome

because when you redistribute wealth,

458

:

you're also changing basically the

consumption patterns in the economy.

459

:

So you're moving money

towards the right direction.

460

:

the higher core, the cohorts

of the population that are the

461

:

more, they have the highest

propensity to consume basically.

462

:

So what you're doing there is you're

really applying tectonic shifts at

463

:

our economic resources are allocated.

464

:

That's a very volatile

outcome, which I think is still

465

:

politically viable and likely.

466

:

And what this does is it brings

more vol, more inflation risks, more

467

:

stagflation risks to the economy.

468

:

So I think this is an

outcome where this could be.

469

:

The macro endgame or a step

towards the macro endgame.

470

:

And I think that investors aren't

necessarily prepared in their

471

:

portfolio for more periods of inflation

vol, more periods of stagflation.

472

:

I think this could be one of

the most likely solutions.

473

:

What do you say?

474

:

Mike Philbrick: Yeah.

475

:

I think that, that was also talked

about a little bit in the, fire and

476

:

ice by HL man piece, if anyone wants

to look that up, where they looked at

477

:

inflation volatility previous to sort of

:

478

:

today, and, you know, correct me going

from memory, but inflation volatility

479

:

has been post 1990 has been half of

what it was in the previous period.

480

:

So, you know, you had a couple of world

wars, you had a great depression, you

481

:

didn't have quite the coordinated central

bank efforts, and you didn't have this

482

:

wonderful starting place where you'd

ratcheted rates up to 18 percent to purge

483

:

the system of debt, and then set the stage

for a wonderful, levering of the economy.

484

:

So, you know, yeah, I think that's,

that is, that's An interesting scenario.

485

:

What always triggers my thoughts in

this is the really rich seem to figure

486

:

out ways in which to work around

a lot of these, these situations.

487

:

So, you know, as much as you have smart

people in government trying to think

488

:

through ways in which to, make the tax

system more fair and redistribute wealth,

489

:

at the same time, you have very wealthy

individuals who have, you know, legions

490

:

of lawyers and tax structures set up.

491

:

To simply counter, counteract those

policies and programs, but it's

492

:

not to say that it's not possible.

493

:

It's just, you know, you kind of

have to have buy in from everybody

494

:

that we're going to do this.

495

:

and then you've got, you know, the

geopolitical side of things where,

496

:

nations are competing with one another.

497

:

You have the Japanese scenario

where you've got the yen falling

498

:

through the floor, making that

particular economy pretty competitive.

499

:

And then what are the, What's the game

theoretic of all the economy economies

500

:

of the world trying to redistribute

wealth at the same time, but also

501

:

trying to compete with one another.

502

:

Alfonso Peccatiello: I

think you're totally right.

503

:

It's much easier said than done.

504

:

Nevertheless, a potentially likely

outcome or more likely than the first one.

505

:

The third

506

:

Mike Philbrick: Well, there's

going to be levers, right?

507

:

I don't think any one of these,

is going to be the thing.

508

:

The other thing is it's probably going

to be a combination of, some of these

509

:

three things together in some way, shape

or form, but definitely more of this one.

510

:

Alfonso Peccatiello: the third one is

simply kick the can down the road, right?

511

:

So pretend that nothing's going on and

have the system lever up a bit further,

512

:

maybe try to cut interest rates or try

to control the situation like today

513

:

where interest rates are high, but fiscal

deficits are trying to pick up the slack.

514

:

And I think that's what this is.

515

:

politicians probably go the most

for because their objective number

516

:

one is to preserve the status quo.

517

:

So as you said, there are like three,

ways to face this going forward.

518

:

And I think number three, preserving

the status quo is what politicians want.

519

:

but it's going to be a bit more, you

know, interval by, step number two,

520

:

which is wealth redistribution policies

to try and gain more voters and try to

521

:

make the system a bit more balanced.

522

:

So what I'm looking at is situations

where if you think about how to.

523

:

Positioning a portfolio

for something like that.

524

:

There's a chart in the article that

shows the, LCTM, NAV, the net asset

525

:

value of a dollar invested there.

526

:

and, you know, if you would understand

straight in:

527

:

doing was basically, levering up on,

on illiquidity and relative value,

528

:

that really was more illiquidity,

illiquidity premium than anything else.

529

:

You would say, look, if these guys

keep doing this, At some point,

530

:

they're going to blow up, right?

531

:

There's going to be a situation

where they're going to blow up and.

532

:

You had to wait four years

until that payoff came, right?

533

:

There is a chart that says you can

basically mirror it if you're trying to

534

:

bet against them and you will lose money,

lose money, lose money, lose money,

535

:

lose money for four years, and then

you would make a ton of money, right?

536

:

And then I say, look, if you

want to Time or trade the micro

537

:

end game as a binary outcome.

538

:

Basically what you're looking

at is potentially a few decades

539

:

of under performance on the

performance on the performance.

540

:

And none of us are in the business of

underperforming for more than actually

541

:

a few quarters, unfortunately, how the

financial industry is set up nowadays.

542

:

So, so we have to find ways

to incorporate, I think, these

543

:

probabilities into a framework,

into a portfolio so that.

544

:

You can build something that is

relatively well balanced that doesn't

545

:

necessarily underperform while you

preserve some convexity towards a

546

:

scenario where one of the, of this macro

end game solution actually pops up.

547

:

Right.

548

:

And I think that's the aim.

549

:

And it's important to pass

it through as a message.

550

:

Don't binary trade something, which is

potentially decades to go because it's

551

:

going to cost you a fortune to do that.

552

:

And maybe the payoff comes way

too late for you to actually

553

:

be able to benefit from it.

554

:

Mike Philbrick: Exactly.

555

:

and there's a lot in that.

556

:

so LTCM, the Thai bot, the Russian

ruble, and then the Fed's decision

557

:

by Greenspan to loosen because the

financial global system was in jeopardy

558

:

was probably one of the causes of

the NASDAQ going from:

559

:

Right.

560

:

We have the correction in 98.

561

:

LTCM gets worked out.

562

:

There's a massive injection

of global liquidity.

563

:

And then you have a technology bubble

that is to some degree what the U.

564

:

S.

565

:

may be facing yet again, in that if

we have something that causes a global

566

:

breaking of something, and then the U.

567

:

S.

568

:

has to decide whether prioritizes

the global stability over.

569

:

The U.

570

:

S.

571

:

inflationary stability.

572

:

So how much will the U.

573

:

S., if it had to loosen rates

because something breaks globally,

574

:

what are the implications for an

inflationary situation for the U.

575

:

S.

576

:

population?

577

:

And for those, that large swath of voters

that isn't rich, you know, if you're

578

:

living paycheck to paycheck, 25 percent

increase in the cost of living is, is

579

:

extremely difficult and is heartfelt.

580

:

And you have a vote in that.

581

:

So there's lots of, Unintended

consequences that come from the central

582

:

bank's interventions and these three

levers that they're trying to work

583

:

through, kick the can, slightly de lever,

redistribute wealth in a world where

584

:

inflation volatility goes up dramatically,

which then of course, I think as you're

585

:

alluding to, and I will, second is that

now you need a framework that considers

586

:

all of those issues, that considers

the implications to asset prices.

587

:

How are you going to

balance those exposures?

588

:

How are you going to?

589

:

Add a global macro framework to

your asset allocation system because

590

:

we are not today starting at 18

percent interest rates going to zero.

591

:

We're not sitting at a

very lowly levered economy.

592

:

We're sitting at, you know, high

rates at a high levered economy.

593

:

Sure.

594

:

We've got some ability to cut, but that is

what makes global macro so popular or so

595

:

potentially profitable in thinking through

how you might balance your exposures.

596

:

And as you say, you don't want to bet

on these things in a binary fashion.

597

:

You want to think through the

probabilities of them and probability

598

:

weights, some of your thinking, and

you probably need a base portfolio

599

:

to think through, to think about bets

against a base portfolio as well.

600

:

Alfonso Peccatiello: Yeah, so I would

say the first step to do here is to

601

:

say, if I get somewhere along the

road, a higher probability of one

602

:

of these macro end game outcomes to

become more likely, how is my portfolio

603

:

going to react to a mental stress

test basically of one of these, right?

604

:

So let's say that, for example, let's not

even talk about the macro end game, but

605

:

the simple situation where inflation picks

up and in:

606

:

and 2021, not wealth redistribution, but

simply fiscal interventions to make sure

607

:

that, you know, that the system could

continue to exist during the pandemic.

608

:

And so the result was

inflation because the U.

609

:

S.

610

:

ended up doing too much and there were

supply bottlenecks and so on and so forth.

611

:

So what happened back then?

612

:

Well, as my friend Dan Rasmussen from

Verdat Capital, he has a very good chart

613

:

where he goes back, I think, 150 years

and looks at the three year rolling

614

:

correlation between bonds and stocks.

615

:

Right.

616

:

And then he looks at, that

level of correlation pending.

617

:

or conditional of the level of core

inflation that is prevailing, right?

618

:

And then it's a very simple

chart where you see this negative

619

:

correlation existing, mostly in

periods where inflation is between

620

:

one and two and a half percent.

621

:

You know, when inflation is between

one and two and a half, bonds and

622

:

stocks are negatively correlated.

623

:

It makes all the sense in the world

because if something goes Poor, let's

624

:

say in earnings or in the real economy,

the central bank will cut rates.

625

:

You know, they have inflation at

their target level with actually

626

:

even maybe lower, so they can

and will cut the interest rates

627

:

and this will benefit bonds.

628

:

And therefore this negative

correlation exists very, very well,

629

:

very well documented through decades

when core inflation is between

630

:

one and two and a half percent.

631

:

But the chart also shows how,

the correlation turns positive.

632

:

when core inflation is above 3 percent

and particularly when it's very

633

:

volatile, you know, and ranging between

two and four and three and five, and

634

:

then the correlation becomes positive.

635

:

And that's exactly what

we saw in:

636

:

So stress testing your portfolio mentally

would basically bring you to a situation

637

:

where if you're running only bonds and

stocks, I'm sorry, but you have two items.

638

:

They're both going to go

down at the same time.

639

:

And I'm going to, I'm going to also say

that the 60 40 portfolio is 85 percent

640

:

equity ball in the first instance.

641

:

And so, you know, your job is also

somehow correlated to the business

642

:

cycle and to equity and to earnings.

643

:

And so if everything is falling down

and your job is more at risk and

644

:

your portfolio is facing a 20 percent

drawdown, I'm going to argue that is not

645

:

necessarily a robust framework to invest,

especially if you think these vol events.

646

:

So let's say wealth redistribution, fiscal

deficits, high inflation, low inflation,

647

:

more volatility is going to pop up, right?

648

:

You need something else.

649

:

You need to mental stress your

portfolio before we even talk about.

650

:

Sources of uncorrelated returns, so

alphas like carry or trend or global

651

:

macro, we first need to fix the beta.

652

:

Like do you have exposure to, different

beta elements that will contribute

653

:

to stabilize your returns if the

macro environment is not what you

654

:

have seen for the last, 10, 15 years.

655

:

So this inflationary growth driven

by the U S if you have any other

656

:

outcome, which is maybe inflationary

growth or deflation or growth outside

657

:

the U S is your portfolio from a beta

perspective, prepare to really benefit

658

:

from this environment, different lenses.

659

:

Mike Philbrick: So, so, so right on

the mark there, Elf, the way you get to

660

:

the current situation we're in is you

have this positive reinforcement, this

661

:

recency bias where investors have been

treated so well by a disinflationary

662

:

growth environment, market cap

weighted strategies are now way over

663

:

in the disinflationary growth camp.

664

:

If we take the S& P 500

and say, well, okay.

665

:

You know, we use a lot of

energy in our global economy.

666

:

And, you know, it's said that an

AI search now takes 17 times more

667

:

energy than a Google search once did.

668

:

So we have a very energy intense economy.

669

:

Yet, if you look at the S& P

500 at the moment, 4 percent

670

:

of the S& P 500 is energy.

671

:

2 percent is materials.

672

:

So what is your hedge in the

situation where we get into a

673

:

stagflationary environment where

the cost of inputs to production

674

:

energy and so on are rising rapidly?

675

:

That takes profits out of the rest

of the 96 percent of the S& P 500.

676

:

And you've got nothing in your portfolio

that is adding positive returns if

677

:

you're in a stagflation environment

where growth is threatened by maybe the

678

:

cost of inputs or debt or other things.

679

:

So you have a totally

imbalanced portfolio.

680

:

You're basically letting the

maniacs run the asylum here, right?

681

:

But it feels okay right now.

682

:

2022 was just like a little

appetizer in that scenario.

683

:

So, I mean, people have this recency bias.

684

:

What has been the, you know,

sort of Pavlovian or habit based

685

:

response that they've had over

the last 20 years, they've been

686

:

trained very well to buy the dips.

687

:

I think, you know, you probably get a

Pavlovian response in a growth, threatened

688

:

environment where bonds do rally.

689

:

In some way, but I don't think that

rally is going to be what it has

690

:

been in the past because if you're

injecting that stimulus, then on the

691

:

other side of the equation is, okay,

well, who's going to pay off the bonds?

692

:

Like how do we pay off all

this debt that's accumulated?

693

:

And what's the credit

rating on those bonds?

694

:

So how do you fill out the portfolio?

695

:

Like we have this, you know, largely sort

of, maybe we've reached peak passive, peak

696

:

market cap, which has been dominated by a

disinflationary growth environment, which

697

:

means largely US equities are the largest

piece of any sort of market cap portfolio.

698

:

How do we protect ourselves going forward?

699

:

What do we need to incorporate?

700

:

And what do we do in a global macro

framework from your perspective

701

:

in order to round this out?

702

:

Alfonso Peccatiello: Look, I

think on the betas, your most

703

:

famous betas are equities bonds.

704

:

And I would say there is commodities

as well as a beta you can try to

705

:

achieve and potentially the dollar,

which is an interesting beta as well.

706

:

And then you can, you know, just look

at, for example, on equities, you can

707

:

do a internationally diversified to

protect you against the outcome that

708

:

growth comes from outside the U S.

709

:

you can do, equal weight rather than

market cap weighted to make sure

710

:

that, you know, you have a broader

exposure to the equity market.

711

:

And on bonds, you know, you can do.

712

:

different points of the curve.

713

:

So especially through futures, you

can use very little cash to get your

714

:

bond exposure and get, a certain

amount of volatility out of the bonds

715

:

because often, you know, in the 60,

40, you will target intermediate bonds.

716

:

They have very low duration, very low

sensitivity to move to interest rates.

717

:

And therefore you will need a ton

of them to make sure that they

718

:

contribute actively as a defender

in this inflationary environment.

719

:

So again, through futures, you

can structure that in a more

720

:

interesting way than just targeting

your five or seven year bonds.

721

:

And then you have commodities.

722

:

And then we go towards the

more defensive side of things.

723

:

Okay.

724

:

What if there is inflation, for

example, so how do we work around that?

725

:

If there is inflation, you can think

of commodities, but you can even think

726

:

of strategies that actually benefit

from inflationary environments.

727

:

So in 2022, we saw, the rise,

I think, or the comeback, I

728

:

should say of trend strategies.

729

:

So these are strategies that, you

know, basically make money when

730

:

there is a clear breakout in prices.

731

:

And when does that happen?

732

:

Well, when there is a lot of macro

volatility, you would expect, right,

733

:

that there are more convex reactions in

prices and therefore trend strategies

734

:

can actually benefit from this a bit.

735

:

And you can see that trend strategies

tend to do pretty well during Inflationary

736

:

bouts exactly for this reason, because

you need to restructure the way

737

:

you think about interest rates and

equity sectors and commodity prices.

738

:

And so you have a lot of trends

developing and you can benefit

739

:

from an allocation to trend.

740

:

So we are now moving from the structuring

the beta in a smart way, sizing it

741

:

correctly through futures, looking

at international diversification

742

:

into more Let's say the alpha

side of things or the uncorrelated

743

:

stream of returns or the defenders.

744

:

And so when you look at defenders,

I think trend does a great job

745

:

at being a potential defender.

746

:

And then there are strategies

that are a mix of defenders and,

747

:

uncorrelated stream of returns.

748

:

And I think global macro is in that

category because a good global macro

749

:

strategy, what it does is it looks at.

750

:

idiosyncratic opportunities

popping up around the world

751

:

because of macro volatility.

752

:

So it doesn't necessarily need a trend

to develop somewhere, but it needs a set

753

:

of idiosyncratic opportunities available.

754

:

These might be in the

shape of the yield curve.

755

:

You know, interest rates are priced

between countries, maybe Europe versus the

756

:

US, maybe in equities versus each other.

757

:

So Chinese equities versus US equities.

758

:

It just needs a set of idiosyncratic

opportunities that are popping up.

759

:

because of more global

macro volatility, right?

760

:

And so it's a strategy that can do well,

let's say in normal times, but it's

761

:

expected to do particularly well when

there are clusters of volatility, right?

762

:

And that's, it's a mix between a

relative value, neutral type of

763

:

strategy and a defensive payoff,

which tends to do well, particularly

764

:

when macro volatility is picking up.

765

:

So you think of all this potential

stream of returns and you guys with the

766

:

return stacking concept are popularizing.

767

:

That worked very well, I think,

because you basically are very

768

:

optimal in how you spend your cash

to obtain your beta, your SMP, your

769

:

bonds, your standard beta, right?

770

:

You obtain that with little cash,

and then you all of a sudden freed up

771

:

some of your notional to invest in the

strategies, which you, as you correctly

772

:

say, you can stack on top of your betas.

773

:

And then you have your standard balance

portfolios betas, plus your SMP.

774

:

Your new attackers, your new uncorrelated

strategies, your new defenders in an

775

:

alpha format because you have freed

up the cash to allocate to those.

776

:

Mike Philbrick: Love that.

777

:

And so for those who might be listening

that aren't sure or don't know what

778

:

managed futures are and that sort of

thing, there is on the Return Stack

779

:

portfolio solutions, webpage, we published

a managed futures trend following sort

780

:

of a educational piece to help, you

know, elucidate some of the things that,

781

:

that, ALF's talking about here as well.

782

:

And the other thing in trend is

that you can be long or short.

783

:

And I think that's another thing

that benefits as well as the position

784

:

sizing you talked about, right?

785

:

So it's, you know, it's not

a, capital allocation of 40%.

786

:

You do it on a risk allocation.

787

:

So you can size your bonds to

have an impact on your portfolio.

788

:

That's beneficial during those dark times.

789

:

One other string I want to pull back

into this to make it very clear for

790

:

people out is we were talking about

inflation volatility previously.

791

:

When you have very low inflation

volatility and you have a stable

792

:

environment from the late 80s

until:

793

:

a lot of these dislocations.

794

:

They just occur less often, and it

makes those types of managed futures

795

:

and trend following strategies,

they just have less opportunity.

796

:

But if you look outside of those periods,

pre:

797

:

get are these dislocations created by

fiscal policy, central bank policy, the

798

:

realities of debt and leverage in the

system, where these types of strategies

799

:

that Alf was talking about Actually

have more of an opportunity to import

800

:

that important value to the portfolio.

801

:

So not only do you need to structure

your beta thoughtfully to think

802

:

through all of the allocations and

the different regimes that may occur,

803

:

but then your hedge or your explore

portion of your portfolio that that

804

:

attackers and defenders actually has more

opportunity to provide greater value.

805

:

In this current paradigm.

806

:

Alfonso Peccatiello: Yeah.

807

:

Also the reason why I am launching

my global macro hedge fund as well

808

:

in the fourth quarter of this year.

809

:

If you look at how politicians are

using fiscal, it used to be actually a.

810

:

anti cyclical, lever, right?

811

:

I mean, politicians would

look at the economy.

812

:

If it would weaken, they

would do more fiscal deficits.

813

:

It would, if it would strengthen,

they would pull a little bit back.

814

:

Now it's not the case.

815

:

It seems to be more a feature than

a bug or an anti cyclical tool.

816

:

It's just all over the place.

817

:

And this increases the chance that there's

going to be more macro ball down the road.

818

:

And if you look at changing demographics

and you look at, you know, the green

819

:

transition, there are so many moving

parts out there for which I think.

820

:

Macro vol is going to increase.

821

:

And so you look, if you have this

view that macro vol is going to

822

:

increase, then as you said, you

not only have to look at your betas

823

:

very carefully, but also consider an

allocation to other strategies, more

824

:

on the alpha side, let's say that

are able to diversify your return.

825

:

So global macro, for example,

did particularly well in:

826

:

a year, which was very, very

volatile for macro in general.

827

:

And then it saw your betas

do particularly poorly.

828

:

So that's bonds and equities.

829

:

They did particularly poorly

and global macro did very well.

830

:

If you expect more years ahead that

are as volatile potentially, then you

831

:

need stabilizers in your portfolio.

832

:

I personally expect a lot of macro

vol, and that's the reason why my

833

:

macro hedge fund launches in Q4.

834

:

Mike Philbrick: Yeah.

835

:

And let's talk about how you've

thought through the structure there.

836

:

We've got about 10 minutes left to

kind of sit and explain to us how

837

:

you've thought through your betas.

838

:

And well, first of all, are you

stacking betas and alphas together?

839

:

How are you thinking

through the beta side?

840

:

How are you thinking

through the alpha side?

841

:

And then how are you combining the two?

842

:

And I think if you can, you know,

enlighten everyone on that and then

843

:

Obviously, if you do see this and you

are interested in, in what MacroAlf is

844

:

talking about for later this year, make

sure you get in and send them a DM or,

845

:

you know, get on Substack and get on

the macro compass and let them know.

846

:

and, yeah, make sure you're in line

for when, when the launch occurs.

847

:

But yeah, take us through the structure.

848

:

Alfonso Peccatiello: Yeah.

849

:

So, so for me, the aim is the following.

850

:

If I launch a global macro strategy,

do you need me to run beta for you?

851

:

The answer is no, you don't.

852

:

You don't need me to run beta for

you because I'm not paid for that.

853

:

You can achieve beta, for example,

to return stacking products in a very

854

:

cheap and efficient way or in any other

way you prefer, but it's generally

855

:

pretty cheap to get intelligent

exposure to beta, I would say.

856

:

So, I instead am running

strategies that are market neutral.

857

:

They try to have a filter for S& P

500, treasury beta, the standard beta,

858

:

to have as little beta exposure as

possible in the fund, and to instead

859

:

deliver a stream of return, which is

positively skewed as we would define it.

860

:

And it benefits the most during

clusters of macro volatility.

861

:

So this is a strategy that Basically

looks at idiosyncratic opportunities.

862

:

It looks at interest rates, at equity

markets, at currency markets, at commodity

863

:

markets from a global perspective, and

it tries to identify this location.

864

:

We think in probabilities.

865

:

So we always look at different scenarios.

866

:

We have various models that look at.

867

:

Scenarios and how markets are pricing them

in probability terms where consensus is.

868

:

And we try to look at potential

catalysts for these locations.

869

:

We say, look, if the market, for

example, from let's take a look

870

:

at the Fed funds today, right?

871

:

And what the market is thinking about

the distribution of these returns

872

:

of these outcomes for the Fed.

873

:

I think it's a good example

for how we think about it.

874

:

So if you take a look at this chart

right here, it shows the distribution

875

:

of probabilities, the top chart here for

Fed funds future in 12 months from today.

876

:

So we're looking at what the market thinks

Fed funds will be in 12 months from now.

877

:

But instead of looking at

one number, we're looking at

878

:

the probability distribution.

879

:

Okay.

880

:

So I derive this by looking at options

that are underlying the future contracts.

881

:

And what it's telling me now, if you

look at the summary table here, is

882

:

that the recession in the U S or cuts

that are in line historically with

883

:

the recession in the U S are priced by

the market at a 5 percent probability.

884

:

5%.

885

:

So what do I think about that probability?

886

:

Well, historically you have

a recession in any given year

887

:

with about a 10 percent chance.

888

:

You have a recession

every 10 years in the US.

889

:

Okay.

890

:

So now you're getting this tail

price at the 5 percent probability.

891

:

That's relatively cheap, I would say.

892

:

And also you, you start thinking

like, I don't think the U.

893

:

S.

894

:

will be in a recession necessarily

in one year, but if you think in

895

:

probabilities, you just need this

distribution to shift a bit over

896

:

time your way and you can structure

option payoffs that will pay very

897

:

handsomely if that transition happens.

898

:

And then you look at this and you

say, Hey, the modal outcome of this

899

:

distribution, the most observed

outcome is actually zero cuts.

900

:

So the market is fully gone in

now on the idea that the Federal

901

:

Reserve will not cut interest rates

at all over the next 12 months.

902

:

Actually, there is even a

tail right here for hikes.

903

:

So now the market is starting to price in

a relevant probability that the Federal

904

:

Reserve might hike rate, a modal outcome

of no cuts at all, and an only 5 percent

905

:

probability of a recession going forward.

906

:

So now how do you think about this?

907

:

It's like, okay, if I need

to take a position here.

908

:

Then I can think of an, of a

structure that might bet on the idea.

909

:

The economy may be weakens

a little bit going forward.

910

:

It doesn't need to end in a recession,

but as long as this distribution shifts

911

:

to the left over time, shifts towards

more cuts, you can benefit from it,

912

:

even if ultimately you don't have

a recession, just by understanding

913

:

our consensus position, how the tail

surprised and thinking in probabilities.

914

:

That's what we do a lot in the macro fund

and in the framework we have created.

915

:

Mike Philbrick: Right.

916

:

And you're doing that across, I'm

assuming, the rates, some stocks,

917

:

but not, not in a correlated sort

of beta buy and hold type of thing.

918

:

All the commodity space,

919

:

Alfonso Peccatiello: Currencies.

920

:

Correct.

921

:

So, so we trade mostly futures because

it's the most liquid way to do that.

922

:

We will then do swaps and other

derivatives where it's the most

923

:

optimal way to express this, but

we will do it correct across asset

924

:

classes and across geographies.

925

:

And the idea is to identify

these dislocations and see how

926

:

the market is, the consensus

is pricing certain distribution

927

:

finds this dislocation and get in.

928

:

So if there is macro ball, if there

are these classes of volatility,

929

:

you have positions on that might.

930

:

Allow you to benefit from it and

actually You serve the role in the

931

:

client portfolio and the role is, and

when your betas are not working because

932

:

of that cluster of volatility, you are

there to offer them diversification

933

:

benefits and actually upside returns.

934

:

Mike Philbrick: And then last question,

I know because we're running out of time

935

:

here, but how do you think about the

assembly of that, sort of, set of trades?

936

:

So you're going to see some

stuff in the rates world.

937

:

You might see some opportunities

in commodity space and then a

938

:

currency trade or two, something

in, in equity vol world or.

939

:

You know, relative value or

whatever, whatever it comes up.

940

:

How are you thinking about positioning

those trades across the entire portfolio?

941

:

Alfonso Peccatiello: So what we do

is we apply a inverse volatility

942

:

mechanism to size the trade.

943

:

So we are looking basically at having

a set of uncorrelated trades in the

944

:

portfolio, all contributing the same

amount of risk and volatility to the fund.

945

:

And the idea is very simple.

946

:

You never know when you're

right and you'll never know

947

:

when you're wrong, right?

948

:

You only set positions on based on your

initial idea that your expected value

949

:

is positive, but ex ante, we're going

to see what's positive or what's not.

950

:

So the idea is you size them all in a

way that they contribute equally to the

951

:

risk of the portfolio because As a macro

manager, you are right 50 to 55 percent

952

:

of the times, unless you're selling

volatility, which is not what we do.

953

:

You are right.

954

:

50 to 55 percent of the times.

955

:

So what you want is that when you are

right, actually, the specifically,

956

:

sorry, when you're wrong, each

of these uncorrelated trades can

957

:

contribute Only to a maximum capped

amount of loss in your fund, right?

958

:

But when you are right, you have

strategies in place, either through

959

:

an option payoff or a trailing,

profit strategy to be able to extend

960

:

the right side of your returns.

961

:

And so by doing this, even being right,

only 50 percent of the times, as long

962

:

as the portfolio construction and the

risk sizing process is accurate, you

963

:

actually can get positive, positively

skewed returns at a fund level.

964

:

Mike Philbrick: absolutely.

965

:

And that's a bit of an ensemble as

well, where you're taking many, many

966

:

sources of information and sources

of return, combining them together.

967

:

You get the noise canceling out,

you get some signal in there,

968

:

you get some positive returns.

969

:

And, and you've got a very diversified

portfolio that is quite different

970

:

from traditional betas that make

it so complimentary in a portfolio.

971

:

Alfonso Peccatiello: Yes.

972

:

And for me, it's really simple.

973

:

I'm a, an open book over to being

on social media through research.

974

:

So also for this,

adventure, pretty simple.

975

:

If anyone is interested, they can shoot

me an email, fund at the macro compass.

976

:

com is the address.

977

:

The macro compass is the symbol

that you see there on my back.

978

:

So you can't miss it.

979

:

Fund at the macro compass.

980

:

com.

981

:

You send me any message,

I will take a look at it.

982

:

We can have a chat.

983

:

I'm very open.

984

:

Part of the diversification, I

would say of this fund is that.

985

:

I will be the opposite of your

standard macro manager who you only

986

:

hear during tax season, maybe, and

through some investment letters.

987

:

I'm very open to discuss the ways

I can help potential investors.

988

:

So just send me a message

and I'll pick it up.

989

:

Mike Philbrick: Amazing.

990

:

Thanks so much, Alf, for your time today.

991

:

And, as he said, the Macro Compass

on Substack, as well as, at MacroAlf

992

:

on Twitter is where you can find

this, brainiac of the macro world.

993

:

And one of our favorite guests, I'll

thanks so much for joining us again today.

994

:

And, we look forward to

chatting in the future.

995

:

Alfonso Peccatiello: It's been a pleasure.

996

:

Thanks again.

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About the Podcast

Resolve Riffs Investment Podcast
Welcome to ReSolve Riffs Investment Podcast, hosted by the team at ReSolve Global*, where evidence inspires confidence.
These podcasts will dig deep to uncover investment truths and life hacks you won’t find in the mainstream media, covering topics that appeal to left-brained robots, right-brained poets and everyone in between. In this show we interview deep thinkers in the world of quantitative finance such as Larry Swedroe, Meb Faber and many more, all with the goal of helping you reach excellence. Welcome to the journey.

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.