Alpha Exchange

A nearly 30 year career has given Jon Havice exposure to just about every strategy across the spectrum of asset markets. A freshly minted Wharton graduate with a major in engineering, Jon came upon O’Connor Associates in the early 1990’s where he cut his teeth trading listed currency option markets. Pre-euro, Jon would experience seminal FX vol events like the ERM unwind,Tequila crisis and Asian contagion in short order, gaining an appreciation for the impact of positioning on currency vol surfaces.As his career progressed, Jon would manage the gamut of arbitrage strategies, focusing on exotic options, convertible bonds, capital structure and muni bonds and dispersion. Our discussion brings to life the lessons to be had from trading through market crisis periods, including the importance of counterparty risk and the degree to which asset prices can stray from fundamental value. We also dive into the vol risk premium, exploring its attributes and how it has evolved over the years in light of the heavy hand of Central Banks. In a world of exceptionally low rates, Jon worries about the glut of yield-chasing capital in private credit and the potential that valuation distortions have resulted.Today, Jon is CIO of DGV Solutions, a firm he founded in 2014 to offer customized investment management products in a transparent and cost efficient manner. His firm deploys its expertise with a purpose, partnering with clients with inspiring missions that Jon and his team feel very connected to. Please enjoy this episode of the Alpha Exchange, my conversation with Jon Havice.

Earning his chops as a macro economist on the sell-side, Alberto Gallo has seen the pendulum of risk swing from extreme fear to euphoria.  During his tenure at Goldman Sachs and then at RBS where he ran the Global Macro Credit Research product, Alberto provided buy-side clients with key insights on seminal volatility events like the Global Financial Crisis and the Eurozone Sovereign debt crisis.  Now, as a Partner at Algebris Investments, Alberto leads the firm’s Macro Strategy effort, a credit-oriented portfolio designed to navigate the ever tricky terrain of present-day markets. Our conversation considers portfolio construction in a world starved of yield, of low cross-asset risk premia, and one in which the potential for more drastic policy response may be on the horizon.  Alberto’s views on today’s regime of monetary policy point to the side effects that result from negative rates, as the banking system suffers, and investors are deprived of income. On the changing nature of volatility in markets, Alberto provides thoughtful insights.  He points to the increasing degree of forward guidance employed by the world’s large Central Banks, a factor that has depressed volatility and led to more days of sun for market participants.  But since there’s no free lunch, days of rain, while fewer, have become more substantial storms.  Alberto details the increased frequency of flash crashes and sharp risk-offs during the post-crisis period, perhaps the result of investors being forced to embrace carry at skinny margins for error.On inflation, Alberto points to a bottoming of CPI in the US even as structural drivers of low inflation, like demographics and technology, are likely to remain going forward.  As the view that monetary policy has lost some of its punch and may be responsible for increasing income inequality, Alberto considers the trend towards lower Central Bank independence and greater cooperation with governments on the fiscal front.  Will this work?  In Alberto’s rendering, it might, but it’s all about how a more unified version of fiscal and monetary policy is deployed. I hope you enjoy this episode of the Alpha Exchange, my discussion with Alberto Gallo.

In 1999, as a new century was nearly upon us, the Euro was born and the US tech bubble was in full sway, Louis Gave hung a shingle to start an independent research firm with his father, Charles. Twenty years later, Louis remains CEO of Gavekal, a firm that has helped institutional clients distill global market risk throughout different cycles. Our conversation focuses a good deal on China, an economy that Gavekal has carefully studied. Calling China the biggest macro story the world has ever seen, Louis and his team have had a front row seat on the economic transformation in China and the manner in which 400 million citizens have been lifted out of poverty. Through our discussion, we learn more about how China interacts with the global economy and specifically the stabilizing role that the country played during the financial crisis,  as well as during the growth recessions of 2012 and 2016. Our conversation also focuses a good deal on inflation. Amidst the well-worn narrative that inflation shortfall is a global issue, Louis has interesting insights on the social tension that is resulting from higher inflation. He points to riots in Hong Kong, Chile and the Green Jacket uprising in France, all linked to inflation. In the US, Louis is skeptical that inflation is as hard to come by as commonly reported, noting that core CPI is essentially at a 10-year high. As fiscal and monetary policy are both working in the same direction around the world, is the price of inflation too low? Louis sees recency bias at work and a failure of market participants to appreciate the regime shift that may be in motion. He views the price of crude as critical to watch insofar as the outlook for inflation is concerned. We finish our discussion with Louis’ views on portfolio construction, citing caution for the long treasuries / long growth stocks allocation that has rewarded investors during the post-crisis period. Please enjoy this episode of the Alpha Exchange, my conversation with Louis Gave.

Fascinated by markets at a very young age, Ben Melkman has spent his investing career thinking through the intersection of politics, macroeconomics and the price of options.  After earning a degree from the London School of Economics, Ben hit the FX desk at Morgan Stanley, quickly establishing himself as an invaluable resource for the largest macro hedge funds who sought his counsel on how best to structure trades in light of vol surfaces on offer across asset markets.  After a highly successful run at Brevan Howard, Ben established Light Sky Macro in 2016.  Our conversation is about large vol events.  With respect to the Global Financial Crisis, Ben dove into the complexities of credit derivative markets, concluding that the price of insurance was outlandishly cheap relative to the actual risks and the potential for contagion.  In our discussion, Ben makes highly insightful points around the inherent risks of over-reliance on modeling, the degree to which correlation assumptions can lead to gross underestimation of risk and the vast interconnectedness of the financial system.  Ben’s views on the interaction between politics and markets and the manner in which investors sometimes fail to anticipate regime shifts is fascinating.  He points to the onset of Abenomics in 2013, a massive campaign that aggressively pushed the yen down, Nikkei up and volatility up.  In the period prior to this wholesale shift in policy, option prices were all skewed in the opposite direction.  As we finish this excellent discussion, Ben looks forward to the potential that the combination of more aggressive fiscal policy in conjunction with accommodative monetary policy might cause a re-think of the inflation shortfall that has characterized the post–crisis era, at the very time when inflation is a highly unloved asset class.  Lastly, Ben offers thoughts on the 2020 US election, excited about the potential market action that may arise from the starkly different views offered by the Democrats and Republicans.  Please enjoy this episode of the Alpha Exchange, my conversation with Ben Melkman.

In the mid 1980's, and recently graduated from Marquette University, a young Jim Bianco scored an accidental meeting for a position with First Boston. Most fortuitously, his resume wound up in the wrong pile, leading him to be mistakenly invited in to interview for a spot supporting a senior analyst. As luck would have it, Jim got the job and so was launched a more than 30 year career in markets. In 1998, amidst the chaos that was LTCM, Jim boldly launch his own firm. And more than two decades later, Bianco Research continues to provide differentiated advice on markets, Central Banks and the economy to its clients.My discussion with Jim focuses on monetary policy, global disinflation and the unholy impact of negative rates on the banking system. Jim’s perspective on the big picture, slow moving yet powerful forces of demographics illustrates how the excess of global savings leads to greater demand for safe fixed income assets. He points as well to the downward pressure on prices due to technological advancement. In this context, he is skeptical that more of the same easy policy from Central Banks is the right medicine to address inflation and growth shortfall.Lastly, I solicit Jim’s views on advancements in research being made possible by Neural Linguistic Processing. Jim and his team have used NLP, for example, to analyze word choices in Fed policy communications to score the degree of focus on growth, inflation, financial stability and other important variables. As data is made more available and at a cheaper price, new techniques like NLP provide exciting opportunities to gain insights on risk. Lastly, we touch on Modern Monetary Theory. While not a fan, Jim acknowledges the momentum of the MMT front, especially as the 2020 election comes into view.

On this episode of the Alpha Exchange, it was my distinct privilege to be joined by Glenn Stevens who resided over the Reserve Bank of Australia as Governor from 2006 to 2016. Considered one of the most gifted Central Bankers of our time, Glenn successfully navigated Australia’s economy through the crisis without a recession. A 36 year career at the RBA has imparted him with an appreciation for the inherent challenges in economic forecasting and in this context, we touch on Glenn's decision to tighten in early 2008 as inflation in Australia rose, only to sharply reverse course a few months later as the Global Financial Crisis began. Our conversation is a retrospective on the fast moving, unnerving time that was the GFC, a period that demanded and benefited from policymaker coordination. In Glenn’s view, the interconnected nature of markets and the economy during the crisis also forced Central Banks to view asset prices in a more endogenous light, assigning more weight to the impact of financial conditions on the real economy. I also solicit Glenn’s views on how the RBA’s goals and considerations may be shaped by unique attributes of the Australian economy. Lastly, we spend time - of course -on the puzzle that is Inflation and the related phenomenon of negative interest rates. I’m excited to bring you this episode of the Alpha Exchange, my discussion with Glenn Stevens.

The onslaught of Tweets regularly lobbed at Fed Chairman Powell assumes at least some part of the mosaic of today’s unique and vibrant risk climate.  But is Trump much different from previous Fed Chairs?  In “The Myth of Independence”, Sarah Binder and Mark Spindel provide an important account of the political history of the Fed.  And in this episode of the Alpha Exchange, it was a pleasure to have Mark, the Founder and CIO of Potomac River Capital, share his expert views on this subject as well as the macro environment in which Central Banks operate today.  Our conversation considers historical market stress events including the square off between Soros and the BoE, the Fed’s surprise tightening in 1994 and, of course the Great Financial Crisis.Mark also provides valuable perspective on the early days of the Fed, from its post-panic creation in 1912 through the onset of WWI, the high inflation volatility of the 1920’s, and then of course the 1929 crash and Great Depression.  Our conversation helps frame the chronology of how the Fed got to where it is today and the politics that inevitably influenced this path.We wrap up the discussion with Mark’s survey of today’s growth, inflation and asset price outlook.  His assessment of inflation shortfall and the risks of Japanification, lead him to the conclusion that the Fed must be vigilant and that Central Bank coordination with the fiscal arm is a theme that will likely be subject to growing consideration.Please enjoy this episode of the Alpha Exchange, my discussion with Mark Spindel.

Nancy Davis, founder of Quadratic Capital, has spent her entire career trading options of all shapes and sizes and across all of the asset classes. She’s traded them listed, OTC, vanilla and complex in rates, FX, commodities, credit and equities. Over the course of nearly 20 years, Nancy has developed important perspective on risk cycles, trading through the dotcom era, the GFC, the 2011 sovereign crisis, the 2016 Brexit referendum and, more recently, the VIX unwind event of early 2018. Over these risk episodes and the quiet periods in between them, Nancy has developed a philosophy on utilizing optionality as a core vehicle to implement long or short directional exposure. Our conversation explores the fundamental question – “are options a good deal or not?” in light of the demonstrated premium of implied to realized volatility over time set against the numerous options blow-ups that have occurred in markets. As a prominent woman in the derivatives space, I also seek Nancy’s views on the state of female representation in the finance industry and work she’s doing to advance the cause of having more women on the investing side of the business. Lastly, we discuss IVOL, the Quadratic Interest Rate Volatility and Inflation Hedge ETF, an innovative product that Nancy recently launched. In a world in which options on the yield curve cost very little and next to no one sees the potential for appreciably higher inflation, Nancy sees IVOL as a valuable portfolio diversifier. Please enjoy this episode of the Alpha Exchange, my discussion with Nancy Davis. 

A voracious reader and a market professional for more than 30 years, Barry Knapp has seen his share of bubbles and busts. Starting his career in the early 80’s, he soon after experienced the crash of ‘87 and the mini crash of ‘89. The experience of multi-sigma events like these, overlaid on his careful study economic history, armed Barry early on with an appreciation for the complex ways in which monetary, fiscal and regulatory policy interact with the financial cycle of risk taking. In our conversation, Barry shares his recollections of covering institutional derivatives clients through the tech bubble and the growth of capital structure arbitrage trading in its aftermath. We spend some time on the financial crisis and I gather Barry’s perspective as a senior risk taker at Lehman during that time. And lastly, I solicit Barry’s views on monetary policy in the post crisis era and just how we arrived at interest rates no one could have ever imagined would clear the market. His unpacking of the sell-off in Q4’18 reveals a fragility that may be present for years as Central Banks try to get off zero. Now the founder and Managing Partner of Ironsides Macroeconomics, Barry is bringing his insights to clients weekly, helping investors better understand a truly unique time period in economics and finance. Please enjoy this episode of the Alpha Exchange, my discuss with Barry Knapp.

At first blush, market volatility and fragility would appear to be two sides of the same coin. But for Ben Bowler and his global team at BAML, the last 5 years has uniquely seen muted overall daily volatility punctuated by occasional but extreme market outbursts. In Ben’s role as global head of derivative research, he has studied this period - one in which market kurtosis, that pesky 4th moment, has been substantially high. Perhaps owing to the conditioning wrought by the heavy hand of Central Banks, investors have, in Bowler’s rendering, increasingly competed for “dip Alpha”. Thus, the market’s growing tendency to lurch from calm to calamity as crowded positioning is unwound and then ultimately re-established once the Central Bank asserts its desire to see easier financial conditions. The result is a remarkable change in the character of market volatility post crisis. In addition to exploring the notion of market fragility, my conversation with Ben considers the volatility risk premium, the value of signals from the landscape of cross-asset vol, and the impact of vol selling on the market’s gamma profile and resulting level of realized index volatility. We also broadly discuss the impact of risk control funds, the speed with which exposures can be de-risked and the greater incidence of flash-crash type events. Ben's insights are excellent. I hope you enjoy this discussion as much as I did, my conversation with Ben Bowler on this episode of the Alpha Exchange.