Alpha Exchange

For the landscape of elevated asset prices that defines today, nothing may be more consequential than changes in the inflation outlook. And for Barry Knapp, the founder of Ironsides Macro, the Fed is off-track with respect to its understanding of inflation in a post-pandemic world. While the Covid shock brought market volatility comparable to the breathtaking levels experienced during the GFC, the inflation aftermath of these two crises could not be any different. In Barry’s rendering, while the GFC left household and financial sector balance sheets in disarray amid a damaged credit channel, consumer leverage is extremely low and lending is unimpaired in the post pandemic period. By crafting today’s policy as a function of the disinflationary decade post 2008, the Fed also fails to account for the positive supply shock in energy that was the Shale revolution as well as the decades long period of goods disinflation that resulted from China’s admission to the WTO.  The result, especially as supply chains are being restructured, is the risk that the Fed runs consistently behind the curve over the coming year. As our discussion continues, Barry shares his views on the inevitability of a risk-off resulting from the Fed’s attempt to normalize policy, a consequence of the degree to which market prices have become increasingly sensitive to even small policy changes in the post-QE era.  I hope you enjoy this episode of the Alpha Exchange, my conversation with Barry Knapp. 

With a position in rate strategy at Salomon Brothers in the late 1990’s, Subadra Rajappa developed an early appreciation for how market risk can be transmitted from one part of the world to the other through the 1997 Asian FX crisis and the LTCM debacle a year later.  Over the course of a career spanning more than 25 years, she’s developed a macro framework that is underpinned by an assessment of growth and inflation variables that help drive interest rate fair value models. Derivative market pricing and fund flows also make their way into her framework.  Specifically, Subadra looks at the interest rate vol surface with special attention to the price of out of the money options, and, to track the money, keeps an eye on positioning in futures markets. Our conversation considers key recent events that shape where we are in the monetary policy cycle. In this context, Subadra shares her views on the integrity of market pricing signals amidst the large participation of the Fed in the market.  We also explore inflation and here Subadra points out that while some components of the rise in inflation will be transitory, others, like wages, tend to be more persistent. A vulnerability that results is a the potential of a less market friendly Fed in 2022. Lastly, I solicit Subadra’s perspective on the degree of progress in promoting the career growth for women in finance. To this, she sees more attention to recognizing women and hiring them but there remains a lot of work to be done on the retention front. I hope you enjoy this episode of the Alpha Exchange, my conversation with Subadra Rajappa.

If you asked yourself, “what are the odds?”, Denise Chisholm can probably tell you insofar as market outcomes are concerned. A Sector Strategist at Fidelity Investments, Denise leverages historical data as part of a probability framework that helps her evaluate risk and opportunity in the equity market. Our conversation explores episodes when her process uncovered overlooked relationships that were hiding in plain sight. During the GFC, for instance, Denise connected faltering housing prices with default implications on Country Wide’s mortgage portfolio. Her work on probability is sometimes multi-layered. For instance, in evaluating the reaction of the long end of the yield curve to Fed tightening cycles, Denise found that conditional on the Leading Economic Indicator Index falling the 10 year yield increased only 30% of the time when policy was tightened.More currently, we discuss what Denise sees in markets today. Here she observes a strong recovery in wages from the Covid bottom as correlated to outperformance of cyclicals over defensive. Lastly, she shares a strong view on the energy sector linked to a combination of low capital spending and high free cash flows. As we round out our discussion, I solicit Denise’s views on the state of progress for women in the field of finance. And here, unsurprisingly, she’s focused on the numbers, viewing plenty of upside in the 20% of women that comprise senior leadership roles in financial services. Progress here can result from showing women at a young age just how interesting and rewarding a career in finance can be. I hope you enjoy this episode of the Alpha Exchange, my conversation with Denise Chisholm.

For Jeff deGraaf, financial markets have always been about figuring out who moved the pieces in a chess match and why. Early exposure to the discipline of technical analysis and its focus on prices and probabilities helped Jeff begin to develop a framework that concentrates on finding bets with favorable odds. Our discussion considers the market events that have played a formative role in how Jeff thinks about risk. Particularly influential among the big risk-off events was the LTCM debacle, especially as it illustrated the power of the Fed to bring an end to a de-risking process.A decade after founding Renaissance Macro in 2011, Jeff and his team continue to view the policy response as both inevitable and critical and in this context, we discuss the evolution of the interaction between markets and the Central Bank. Today’s much more activist Fed is one example of how historical pricing relationships, while a valuable tool to understand the present, must be interpreted with care. The shifting correlation profile of the Treasury market to various segments of the equity market is a ready example of this change. For Jeff, predicting the future is difficult and time is better spent on the study of price. Here, his process leads him to a lengthy checklist of indicators that allow the market to speak. And while, in his words, the market "fibs often", a wide enough swath of charts across asset classes and geographies is bound to provide clues on where both value and vulnerability are hiding.Lastly, we talk about life on the sell-side and Jeff's perspective on running a client centric business through the pandemic. Here, the take is an optimistic one with Jeff and team deriving value from connecting with clients virtually in order to deliver insights in an efficient manner. I hope you enjoy this episode of the Alpha Exchange, my conversation with Jeff deGraaf.

Initially trained as a lawyer and consultant, Peter Cecchini's career spans a few decades across the buy side and sell side, focused on both bottoms up and top down analysis of risk and opportunity. Now the head of research and strategy at Axonic Capital, Peter shared his insights on the Merton model and the linkages between credit spreads, stocks prices and asset volatility. In the context of this discussion, we explore episodes of dislocation between equity and credit markets, how to spot them and the implementation of trades to capitalize on them. In Peter’s view, the better risk signal has traditionally emanated from the credit markets where bondholder obsession with being paid back dominated the sometimes lofty upside scenarios entertained by equity market investors. Over time, however, the degree to which the equity cushion has risen so markedly may lead to credit market complacency, leaving Peter sometimes more focused on stock price fluctuations as the cleaner risk signal.Our conversation, of course, covers the Fed and it’s ever increasing interactions with market prices. We consider the hard to ignore breakdown between nominal interest rates and the concurrent inflation and here Peter believes the Fed is in quite a difficult spot. Inflationary periods, in Peter’s view, result from inorganic demand surges, coupled with supply disruptions and a burst in M2. On these three metrics, the risk that today’s strong recent price increases may not be entirely transitory is real. Lastly, we touch on the Meme stock craze and Peter shares his work on opportunities in the capital structure in AMC.  I hope you enjoy this episode of the Alpha Exchange, my conversation with Peter Cecchini.

Few professionals have the depth of perspective on the many market risk events that were missed by the models as Rick Bookstaber. Trained at MIT where he received a PhD in economics, Rick would become Morgan Stanley’s first risk manager in 1984.  There, and also at Salomon brothers, Rick was among the quants on Wall Street that developed early pricing models for interest rate derivatives. In this capacity, he had intimate knowledge of the challenges that complex products created for dealers looking to hedge them.  And related to this, he also had a front row seat to the early debacles of modern markets including the crash in 1987 and the LTCM unwind in 1998.  Across two excellent books, Demon of Our Own Design and End of Theory, Rick explores the characteristics of markets that make them inherently fragile, including the notion of tight coupling.  Here, feedback between trading, price changes and subsequent trading based on the price changes can give rise to instability. Today, Rick is the founder of Fabric RQ, a firm delivering risk management solutions to the RIA community. Among the issues Rick worries about today include SPACs, NFTs and the concentration of richly valued tech stocks in indices like the S&P 500.  I hope you enjoy this episode of the Alpha Exchange, my discussion with Rick Bookstaber.

With many years experience trading and risk managing derivative exposures, Simon Ho is now the founder and CEO of T3 Index, a financial research and technology firm doing some interesting work in the arena of complex index and product construction.  An avid user of VIX products during his time on the buy-side, Simon loved everything about the CBOE suite of vol products but the cost to use them. He set out to create a similar, but more economical product that could compete for the growing user base of investors who sought direct exposure to volatility. With this, SPIKES was born and so too began the journey for Simon and his team to bring a new volatility option and futures product to the market.  Next, we explore the newest creation from T3, the BitVol index.  Recognizing the interest from investors in trading volatility directly, Simon sees promise in an index that gives end users direct access to implied volatility in Bitcoin. While exploring this, we discuss the characteristics of vol surfaces for assets like Bitcoin, drawing similarity to gold and volatility itself.  Lastly, Simon is excited about T3’s work on interest rate volatility, having developed an index he hopes will become a leading instrument to manage risk in this important asset class.  I hope you enjoy this episode of the Alpha Exchange, my conversation with Simon Ho.

Now the Global Head of Macro at Schonfeld Strategic Advisors, Colin Lancaster has always found top-down investing a fascinating discipline.  Trained as a lawyer but finding his way to the buy-side in the 1990’s, Colin has spent the last 25 years in markets, allocating capital and building teams focused on macro.  Over his long career, he’s traded through his share of vol events, each a challenging experience but also formative from a risk philosophy standpoint. Our conversation is a retrospective on the nature of risks that investors are forced to confront, how discontinuities in asset prices materialize and that ever elusive search for the positive carry hedge. Exploring seismic episodes of risk-off, we also spend time on the need to anticipate the inevitable and typically overwhelming response from the Central Bank and how, post both the GFC and now Pandemic, the Fed’s interventions have increasingly crowded out the integrity of market price signals.  Lastly, we spend time on Colin’s fast paced and insightful book, “FED UP!”, a project he undertook in 2020.  In it, Colin brings to life the frenetic, all-consuming world of global macro investing in which an unwelcome portfolio move is always a bad tweet away and decisions must be made quickly and based on a vastly incomplete information set.  Weaved into “FED UP!” is a statement of concern about the widening gap of wealth inequality in the US.  In a world in which asset prices are increasingly the outcome of Central Banks who mean well but whose actions vastly benefit some versus others, a certain rethink may be in order.  I hope you enjoy this episode of the Alpha Exchange, my conversation with Colin Lancaster. 

From a young age and learning from his humble and hardworking parents who immigrated from South Korea, Paul Kim developed an appreciation for the value of capitalism and the pursuit of the American dream.  Finding his way into the investment industry first in an investment banking seat at Lazard where he learned by fire, Paul would ultimately spend time at PIMCO and then at Principal Global Investors where he launched and built the firm’s ETF business. More recently, Paul co-founded Simplify Asset Management, a firm committed to delivering innovative products in the exchange traded landscape. Our conversation is focused on how derivatives can be used within an ETF to augment the purely linear exposures provided by traditional instruments like the SPY. By overlaying a put option, for instance, an investor can protect against extreme downside risk in equities like that which materialized in March of 2020.  We discuss as well important and exciting new developments in the ETF industry, one of which allows for the utilization of OTC derivatives. In this context, Simplify has created a ground-breaking product that seeks to hedge interest rate risk for end users, work developed by derivatives pioneer Harley Bassman. In an environment in which fiscal and monetary policy are acting powerfully in tandem, such a product can easily prove critical to defending the potential inflation that may already be surfacing. Lastly, Paul and I touch on the fast moving world of cryptocurrencies and how his firm is thinking about giving investors access to this new asset class and the potentially diversifying role it may serve in a portfolio. I hope you enjoy this episode of the Alpha Exchange, my conversation with Paul Kim.

In the investment world, few if any products have experienced as much growth as the exchange traded fund. And within the ETF business, no firm is as large and as important as BlackRock. In this context, it was great to welcome Samara Cohen, Managing Director and Co-Head of EII Markets and Investments at BlackRock to the Alpha Exchange. Through our discussion, we learn of Samara’s start in the industry as employee 134 at BlackRock before attending business school and then spending 16 years in fixed income at Goldman Sachs. Here she developed a keen understanding of bond market plumbing and the implications of post GFC regulatory reforms for the design of future products. This focus on bond market structure strategy paved the way for her return to BlackRock in 2015. Samara shares with us some of the key milestones in the ETF business, including the electronification of bond market trading that came from the first fixed income ETF in 2002. Important as well for the ETF industry  has been episodes of significant volatility during which investor demand for liquid and transparent macro assets surged. Our conversation next considers the business coordination required among Samara’s team members to support the roughly 800 ETFs offered by BlackRock. Central to running a business at such scale has been substantial investment in technology and automation and these proved especially critical during the market crisis of 2020. It was during this incredible surge in volatility – both in the stock market and bond market – that investors utilized ETFs for price discovery and risk transfer in tremendous size. Lastly, we spend time on the people aspect of the business, a topic on which Samara is particularly passionate. She is proud that her team of investment managers within the engine is mostly women and plays an active role in the discussion among leadership around BlackRock’s commitment to a broadening the racial and ethnic make-up of the firm. In addition to being strongly motivated by efforts to increase inclusion, Samara looks forward and is genuinely excited about the prospect of bringing hundreds of millions more people into the markets and investing.  I hope you enjoy this episode of the Alpha Exchange, my discussion with Samara Cohen.