Podcast Transcript: Bilal Hafeez on Inflation, Crypto and Investment Lessons

This is an edited transcript of our podcast episode with Bilal Hafeez being interviewed by Andrew Simon, recorded on 9 December 2021 and first published on 10 December 2021.

Bilal Hafeez (00:00:00):

Welcome to Macro Hive Conversations with Bilal Hafeez. Macro Hive brings you the best analysis to successfully invest in markets from crypto to equities, to bonds.

There’s so much going on in markets at the moment, we had a huge flash crash in Bitcoin and other crypto markets over the past weekend, and we have a piece giving our take on what caused these moves. We also give our latest take on Omicron as well. On top of all of this, we resume our annual tradition and publish our grey swans for 2022. These are not quite black swans, but rather risks for 2022 that we can imagine, but have a low probability of occurring. We have 14 grey swans in total, which range from a U.S. recession happening in 2022, to COVID disappearing, to crypto killing Facebook. And we also have some really outlandish ones like Elon Musk selling all of his stock to end poverty, Manchester United winning the Champions League, and the New York Jets winning the Super Bowl. Actually, I should add that the last one is more like the black Swan. You can read all of this and more as a member of Macro Hive, you also get access to our webinars, transcripts of all our podcasts, and crucially our members’ Slack room where Macro Hive team and members discuss markets all hours of the day. It’s refreshingly different from Twitter. Membership to Macro Hive costs the same as a few weekly cappuccinos, so go to macrohive.com to sign up now. And if you’re a professional or institutional investor, we have a more high octane product that features all of my views, model portfolio, trade ideas, machine learning models, and much, much more. Hit me up on Bloomberg or email me on bilal@macrohive.com to find out more.

Now on this episode, the tables have been turned and I am the guest, my partner and COO of Macro Hive, Andrew Simon interviews me on everything from what I’ve learnt during my banking career, to my views on inflation in China and crypto, to my personal routine and book recommendations. It’s the most in-depth interview I’ve ever had. You’ll hear about my background in the interview, so no need to go over that now. But in terms of Andrew’s background, Andrew has spent over 25 years in finance on both the buy-side and sell-side. He co-founded Eschaton Opportunities Fund, a $100 million hedge fund focused on global thematic value investing. Earlier, he led JP Morgan’s institutional sales business across foreign exchange in EM for Europe. He also spearheaded initiatives around tail risk hedging and cross asset structuring. And before JP Morgan he ran Lehman’s global derivative sales business and at Deutsche Bank, he managed the European currency option trading and Deriv’s research business. And he started his career Cooper Neff, BNP. Now onto my interview.

Andrew Simon (00:02:45):

Hi, Bilal. We’re trying something a bit different, speaking about two years of Macro Hive, which is to turn the tables. And instead of you doing your interviewing, which by the way, pretty much every guest certainly I’ve talked to has really appreciated the whole experience, called you a real pro. So it’s a lot to live up to. So maybe we’ll start… As I know you like to start, and I feel like it’s a good way for people to really understand you because probably people have gotten the information, they’ve heard you on the podcast, but they don’t really know you certainly like I know you and everyone on the team knows you. So maybe start off talking a little bit about your background, and as you like to say, were you always destined to be going into financial markets and doing what you’re doing?

Bilal Hafeez (00:03:29):

No, thanks, Andrew. It’s great to not have to ask the questions and have a chance to speak myself. And it’s great to be interviewed by you as well, Andrew, and I’m sure we’ll talk a bit more about how we first got to know each other and worked together with Macro Hive as well throughout our conversation. But yeah, in terms of my background, from a young age, and I never really had an idea about financial markets growing up. I mean, I grew up in Oxford, which sounds very well educated and very upper middle class, as you say.

Andrew Simon (00:03:56):

Yeah, for Americans, it sounds very academic, maybe even very posh.

Bilal Hafeez (00:04:00):

Yeah. It sounds very academic and very posh, but I actually grew up on the wrong side of Oxford. So there’s two sides of Oxford. There’s the posh side with the university and all the academics, and it’s also very nice. Then there’s the other side of Oxford, which has council estates, like in America you would call the projects. Those sorts of things and there’s areas which just are working class, typical immigrants move to those areas. So I kind of grew up in one of those areas, it’s called Cowley. And as it happens, Cowley now, when you go to Oxford today has become super hipster, has lots of these sorts of things that have developed here. So I kind of grew up in that type of area. So in my world growing up I had no idea about the financial markets. I didn’t even know like lawyers or accountants, the professions even.

So it was a very kind of working class area, but my parents had a very education sort of focused mindset. So originally they’re from Asia, they moved to the UK in the 1960s to Oxford. And I was born and raised there, but being from an Asian background, they obviously had this idea that education is everything. And so my parents, from a very young age, they instilled in us this thing to study all the time. So we had this routine, we’d come home from school, we’d be allowed to watch TV for an hour or two, and then it would be studying. Whether we had homework or not, it didn’t matter, we’d be given a textbook, usually maths, forget about the arts, it was all about maths, just do drills. And so academically that really helped me become very strong.

Andrew Simon (00:05:28):

Was there more focus on you maybe becoming a doctor or a lawyer or finance was fine?

Bilal Hafeez (00:05:32):

Yeah. Yeah. I mean, the idea was to enter the professions of some kind. But my parents didn’t really, and I didn’t really know what that would entail. So it may be a doctor, an engineer, something like that, but it was kind of a vague idea. The main idea was go to a good university, and then once at a good university that will then open the door to a good profession. So I did very well academically and I ended up getting a place at Cambridge and I picked economics. And the reason I picked economics was at school I just loved the subject for whatever reason. I picked the subject for my, what we call GCSEs in the UK and then A-Levels. So you know what you do in your teenage years and your final years in high school. I just love the subject.

And I think one of the reasons I really liked the subject was because my economics teacher, Mr. Drake, as I call him all those names, Tony, he was excellent. I mean, he really took me under his wing. He really encouraged me to study the subject. He interacted with me a lot. And so there’s always this saying that a good teacher can transform someone’s life, he really was one of those characters. And so that really helped me go on the path of economics. But even though I loved the subject of economics, I didn’t really know what types of professions economics was associated with. And so I did economics at university. And while I was at university, you then have all these careers fairs and things like that. And then that opened me up to sort of the different worlds that you can go into.

Bilal Hafeez (00:06:57):

So typically economists at Cambridge, they would go into management consulting with the top tier would be like McKinsey or Bain or Boston at the time, so this was in the 1990s. And then the other one would be investment banking, so that would be like Goldman, JP Morgan, and Morgan Stanley, Merrill, all of those guys. Or accounting, that was another popular route as well. Now, initially, when I was at uni I was thinking about professions, I actually didn’t want to go into banking. I actually had some ethical issues around, I thought banking just seemed really… Just didn’t seem like a nice profession to go into. So I tried to avoid it, and at university, at Cambridge, you have this system where in your penultimate year, just before your final year, you do an internship, which is usually the way you get a graduate job. And I applied for consulting internships and accounting internships.

And for whatever reason, they all rejected me. I didn’t get a summer internship, which was really quite stressful because people around me were getting all these internships and that’s your stepping stone to getting a job. So I then applied to banks and I ended up landing an internship at JP Morgan in currency research as it happens, which ended up being the area I really focused on. So I did this internship, JP Morgan loved the job and everything, got a graduate offer. So I had an offer while I was at university, which was quite common at the time.

Lessons learned at J.P. Morgan, Deutsche Bank, and Nomura

Andrew Simon (00:08:14):

Any quick advice for people who are entering a training programme, say at a bank right now?

Bilal Hafeez (00:08:19):

Yeah. Now, that’s a really good question. And I would say a couple of things. One is banking is such a diverse field and it’s really hard to know which area will work really well for you. And so I would say, don’t get too bogged down into saying, I want to be in this very specific area rather than another area, because frankly you just don’t know because your experience up until that point would be just school and university. And that’s very, very different from working at a bank, let alone just working in general. I mean, going from being at school or university to working anywhere is just such a big shift, and then on top of that, there’s the profession of finance. And this is something I learned myself because when I got my graduate offer at the time, the hottest thing in banking at that time was mergers and acquisitions in the tech sector, like tech M&A was the biggest thing.

And so when I got my graduate offer, I said, I don’t want to do currencies because it wasn’t so sexy or anything. In markets at the time, credit derivatives was a big thing, but M&A was the biggest thing. These big deals were going on, technology M&A. So I said, I want to go into tech M&A. And so they allowed me to switch to that. And when I started at JP Morgan, I did tech M&A, and I hated it. It was kind of one of the worst starting periods of my life, working crazy hours, I hated the work. And so the lesson for me was don’t get caught up in the hype of what process area to be in, think a lot about, does that type of work suit you, is that type of thing something you’re interested in? Just don’t get caught up in the glamour of certain areas.

But the other thing I would say that’s also very important is to look at who your manager will be. And I think that’s really, really important. So even if the area may not be the most glamorous, if you have a really good manager early on, that makes a huge, huge difference to your career. And Andrew, I’m sure you found that as well with your career.

Andrew Simon (00:10:07):

Yeah, 100%. I always give people that same advice starting out. Don’t hate the area you’re in, but if you have somebody who’s really going to take the time to teach you and want to teach you and also give you a good amount of responsibility early on.

Bilal Hafeez (00:10:20):

Yeah, absolutely. And for me, that made a huge difference because after being in tech M&A after three, four months, I basically said, “Look, I want to leave that area.” And I spoke to the graduate recruitment people and said, “Can I move back to markets? And is there any role available?” And they said, as it happened, they need a graduate in the currency research group, the group that you did an internship in because the head of that group had left, he had gone to another bank. So they were headless at the time and they said, “You can go to that group, but there’s a risk that the new guy who comes in may not like you. So you’re taking a risk in.” I said, “Fine, I’ll do that.”

And actually one of the reasons why tech M&A was so bad for me was I was engaged to my now wife while I was doing tech M&A. So I met my wife at university, and so we got married after I graduated. And so being in a relationship when you were in M&A was impossible because your weekends were destroyed, your evenings were destroyed. And that was also exacerbating the pressure for me being in M&A.

Andrew Simon (00:11:16):

I saw glimpse of that from that show that was on TV, I forgot, that you kind of advised for a little bit, right?

Bilal Hafeez (00:11:22):

Oh, Industry.

Andrew Simon (00:11:23):

Industry, yes.

Bilal Hafeez (00:11:25):

Industry is this HBO sort of show. It’s a really good show about sort of trading and markets and some of the interesting things that people get up to in the social lives. So I was at JP Morgan, I’d moved back to currency research, the group didn’t have a head. But they appointed a new head who was Alfonso Prat-Gay, who was actually one of our podcast guests from last year. So he’s Argentinian, and more recently he was a finance minister of Argentina.

Andrew Simon (00:11:49):

Well, it’s just an amazing reputation by the way, in the market. And even at JP Morgan, when I was there he was… Still talking about him, he was a legend.

Bilal Hafeez (00:11:56):

Yeah. So the amazing thing about Alfonso was that he was exceptionally bright. He was an amazing person when it came to markets, so he was running currency research and he had great views, clients loved him, but he was very humble in character. And at that time, my whole notion of being successful in banking was that you have to be some character out of Wall Street, the movie. You have to be super aggressive, you have to party hard, work hard, be mean to people. And there were a lot of people like that in banking who were very successful and you’d look up and think, how can that guy who was good for the bully be elevated so high? And Alfonso was the opposite, he was a very sort of high level, but he was a really humble nice guy. And so that set a template for me of how I saw a path of being in banking, where you could retain some humanity and still do well.

Bilal Hafeez (00:12:44):

And like that teacher I had at school, he took me under his wing and really encouraged me and mentored me. And that made a huge, huge difference. So an advise to any graduate here is just look at who your manager will be. And one key thing I always tell people is you shouldn’t necessarily look for that person to be super successful themselves, although that’s nice. You should look to see how people underneath them have done later. So often you find these superstar guys who are head of departments, and then the people underneath them come and go, they get destroyed, and none of them do well later. And so you don’t want to join that person, even though he’s a rockstar, you want to join the guy who you can see people who join him end up going on to do great things.

Andrew Simon (00:13:24):

Yeah. That’s interesting. I like how you always think of the second order derivative of a situation. So, okay, cool. So you got this job, you have a good manager, you’re at a pretty good bank, definitely one of the most respected banks. Yeah, how did things progress from there?

Bilal Hafeez (00:13:38):

Yeah, so I loved the work I was doing there, so I was building models. Actually, I should also add that the type of work I was doing in currency research. When I did my internship, which was 1997, the work I was doing was building models to predict emerging market currency devaluations, because in the summer of 1997, there was a huge Asia crisis. And I was doing all this modelling work using econometrics and all of these sorts of things to predict market devaluations. And then the funny thing there, just as kind of a side note, was I was using all the econometrics I knew and trying to build these really complex models.

And it turned out the best prediction of whether a given Asian market would blow up was whether another agent market had blown up a month before. And so that variable outperformed everything else. And we were trying to squeeze some explanatory value out of anything more complex, but in the end it was just contagion that was the important thing. So when I was working for Alfonso, so I was basically building models as well, especially on carry trades and risk appetite and such things.

Andrew Simon (00:14:35):

That’s not a cool thing that you focus on through, even to now it’s not crime.

Bilal Hafeez (00:14:39):

Yeah, yeah. Even into this day, that’s something I’ve always had a keen eye on, this idea of carry which is one of the central features of investors. And then regime changes because what we know with carry is that you make money most of the time, but occasionally you get wiped out. So how do you know when you’re going to get wiped out? And this is kind of an ongoing drama we all have in finance. So I was at JP Morgan for about three or four years, and what happened was Chase Manhattan, which was this other giant U.S. bank took JP Morgan over. And so there was a merger and a takeover. So that was my first experience of being part of a merger. I’d previously been at M&A but I’ve never actually been part of what it was like. And that was a difficult time because it is clearly a Chase takeover of JP Morgan. They were the bigger bank, we were the smaller bank.

Andrew Simon (00:15:24):

I joined JP much later. We could feel the tension between the original JP Morgan people and then the Chase people.

Bilal Hafeez (00:15:30):

Yeah, so that was a big source of tension. And so that was tough because the department I was in, foreign exchange, all the people I’d worked with started to leave because they didn’t like the merger or they found better opportunities elsewhere. And then also at that time, Alfonso left as well, less because of the merger but more because at that time, this was in the early 2000s, Argentina was going through crisis and he wanted to go back to do something to help the country. And he later went on to become… Within a few years, he became the governor of the Central Bank and helped stabilise the country. So he left and my mentor left, the merger was happening. So then I was really thinking maybe I should leave as well. And at that time, Deutsche Bank was really moving aggressively into investment bank, especially fixed income or markets on the market side. So they were hiring aggressively to build up this huge markets, a franchise. And they approached me because they’d seen some of the work I’d done in currencies. And so they hired me into Deutsche.

Andrew Simon (00:16:23):

What year was this?

Bilal Hafeez (00:16:24):

So this was 2002. Yeah. So then I was at Deutsche from around 2002 up until 2015, so that was a long stretch I had. The first half of my career there, I was in currency research and I did really well early on because one of the things I did really well was I kind of pioneered in many ways what we now call Smart Beta for FX. So I built these models that would replicate the performance of an FX carry trade. So for the benefit of the audience, a carry trade essentially is where you buy high interest rate currencies and you sell low interest rate currencies. So you know that over time you’re going to earn the interest rate differential or what’s called carry.

So if there’s a 5% differential, you know you have 5% in the bank, so to speak on a given year. And then you have to hope the currency doesn’t move in a way that offsets that carry. And often the currencies move in a way to enhance your carry. So I built a carry model, I also built a trend following model, and a value model in currencies, which at the time wasn’t really that well established this idea that you could have a trading model around valuations. So combine them together, and I said, this is the beta of FX markets. And at the time there was no other benchmark for the performance of currencies. So the idea by that time in the early 2000s was if you were a trader in currencies or a currency manager, if you made more than zero, then all that return was viewed as alpha. That meant that you had skill.

But my argument was no, there’s some basic sources of beta in FX, which are just there. And to show that you have alpha, you need to outperform that beta just like you have in equity markets or in bonds. And so I built those indices, probably the first of its kind and it was tradeable. So clients could buy that index as well. And that became super popular, we have a billion in euros and dollars following that. And through that work, it really accelerated my path within the banks. So I became the managing director at a very young age. I ended up running the team at very young age as well, because I was one of the few researchers who had come up with something that was very practical and relevant for investors. So that really sort of turbocharged my career within Deutsche and then it kind of allowed me a lot more freedom. So that was kind of my pre-financial crisis career there.

Andrew Simon (00:18:37):

Were you known much more as a strategist then? Was it more clear what people just think of a researcher and often when they think of a researcher it’s more of economics and especially in FX, how were you?

Bilal Hafeez (00:18:49):

Yeah, yeah. Now, that’s a good question. I was clearly viewed as more of a strategist, and more than that I was viewed as somebody who was into kind of models and indicators. So that was my reputation at that time. So I would say there’s two types of strategists generally. In research in general as you write your points out as the economists, there are kind of the guys who say the Fed’s going to do this, growth is to come down or up. Then you have the strategists who come up with market views. Then there’s two types of strategists. There’s the model guys, that was me at that time. Or there’s the more narrative based strategists, who basically say, “Look, I think stocks are going to crash next year because of this or that, or USD/YEN is going to go up or down.” So they’re kind of storytellers, and they make their reputation by being right during a pivotal time in the market. So I was much more known at that time to be more the model side.

Andrew Simon (00:19:42):

And I do remember that you won… When we overlapped, I remember that you kept winning this best FX strategist and I’m assuming for the models and a little bit of narrative.

Bilal Hafeez (00:19:54):

Yeah. I mean, I used to get embarrassed with these sorts of things. But yeah, I mean, there was all these awards for best currency forecaster, best currency research team, and I won it 10 years in a row. Pretty much every year I was running currencies, I kind of won that award, which was nice. Although awards are good, but I find in the end when I speak to investors, they don’t really care about your last call, it doesn’t matter about the legacy so much.

Andrew Simon (00:20:17):

What I remember about the experience when we overlapped at Deutsche was you always were clear about your view and you were very direct with clients. And I think you were good about understanding the fact that clients, they may even agree with you. When I say clients usually it’s kind of hedge funds asset managers, but they still want to really kind of poke holes and understand where their views can be wrong. And I thought you were better than any strategists I had seen in kind of going through that process along with the client. And that’s what I think a lot of clients really appreciated.

Bilal Hafeez (00:20:50):

Yeah, that’s, I mean, it’s kind of, you’d say that, but yeah, that’s also just part of my personality is that I genuinely want to understand something and learn something. And there’s again, different types of personalities, even let alone strategists, which is, I have views on the world, but I don’t think I’m necessarily right. And I’m really open to understanding all sorts of views. And so I really do want to learn about different things. So there’s this natural curiosity I’ve always had and this has gotten a need to learn all the time. And so when I speak to a client, while it’s always a bit stressful when you’re speaking to a client, because you can get questions about anything, I find it really invigorating because you end up going on a certain chain of thought, which is really interesting. Then later on you think, okay, let me look into this a bit more. They were right on this point, maybe I’m wrong on that. And then there’s something I can improve, that’s in the end, I’ve learned something I can improve.

Andrew Simon (00:21:42):

Yeah. I feel like it’s kind of somewhat putting your ego or a lot of people’s natural defensiveness and putting over that and instead, putting forward the ability to learn about a situation or better understand a situation maybe even in a way you hadn’t thought about. Because the other thing I always remember was a lot of clients would always say, “Well, obviously you’re getting a lot out of this just as much as I am.” And I’m thinking it’s because I was also a good listener and was actually going through the thing. I don’t think you could have that same discussion with a lot of other researchers. And my feeling was the end client would not be saying that. By the way, it’s true. But I think that it kind of helps both parties. And to be honest, I still feel like we do that today, which I think a lot of clients really appreciate.

Bilal Hafeez (00:22:27):

Yeah, absolutely. And when I look at how I’ve sort of conducted client meetings over the years, it’s really evolved to a point now where, when I meet a client in a meeting while I may have a presentation, I don’t go through the presentation to start with. Because in some ways that presentation is like, “Okay, this is what I want to tell you.” The first thing I do with a client is what do you want me to talk about? What’s your biggest issue right now? And then we can start with that. And so obviously there’s more pressure when you do that because you don’t know what they’re going to ask, but at the same time, then you can really understand what is it that they’re focused on right now? And then you can address that to start with, and then you can have this very open discussion that’s really mutually beneficial, then it really helps the client.

And that’s the way I like. If somebody came to present to me, I’d want that as well, rather than them just mechanically going through their presentation, which I can just read anyway. I don’t necessarily want that.

Andrew Simon (00:23:16):

So Deutsche was always a colourful place, and you were there for many years. Yeah, so how did your experience there and career evolve?

Bilal Hafeez (00:23:24):

Yeah, so it was a super colourful place. I mean, it had all sorts of issues with this culture, which is kind of quite well known. I mean, thankfully the department I was in at least early on, foreign exchange, had a really nice culture, had really good sort of people. Some of the other areas of the bank were a bit more aggressive. The teamwork wasn’t prioritised as much as other things then that was more challenging. But thankfully I was always able to kind of sidestep some of those issues. But from a career perspective, the global financial crisis was a big turning point as well for my career as it is for anybody. When you speak to people in finance who have been around for a while, it’s almost like you say pre-global financial crisis and post-GFC. It’s like a BC/AD in terms of time. It’s something that’s, we all have the scars, it’s been a traumatic event for everybody. It’s like, oh. But that was before the crisis or that’s the chapter that sort of marks the change there.

So that really changed the way banking was going to be conducted, but also the way I also looked at markets as well. So from that experience, it really forced me to look much more into history than I was doing at that point. So before the GFC, I was more quantitative and data-driven. Then during and after the global financial crisis, it forced me to really go into history a lot because there just weren’t any parallels in the recent past for the GFC. You had to then go back to the great depression and the banking crises, and so I really immersed myself in deep economic history and philosophy and just the arts, the humanities, which is something I just really hadn’t engaged with as a younger person or even before that.

Andrew Simon (00:24:57):

Back at Cambridge roots.

Bilal Hafeez (00:24:58):

Yeah, reactivating those roots. So I really got into that and then I changed the style of my research, where I became what we call macro. So I had the quantitative side already, but then I really started to come up with bigger market views based on combining all of these things together.

Andrew Simon (00:25:16):

Is this part of your basis of your 400 years of inflation data for UK?

Bilal Hafeez (00:25:22):

Yeah, yeah, yeah. And which I’m sure we’ll talk about. I mean, I love looking at all those sorts of things. And one of the things I did within a few weeks of the global financial crisis at the end of 2008, I made this market call that Dollar-Yen, which I think at the time was trading I think 120 or 110 or something like that. I said, basically the Yen would be the top performing currency in the world for the next three, four years. And I said, Dollar Yen will go to a new all time low of around 70 or 75. And at the time people laughed sort saying, no, that’s not possible. The U.S. systems crash, then Japan’s going to be the next one to crash, they’ve got massive debts. And my view turned out to be correct. Well, Dollar Yen did end up going down a lot. And my thesis at the time was Japan’s already gone through what the Western countries are about to go through. So Japan had already been printing money and cutting rates to zero and all of that. And now it was a turn of Europe and the US to go through the same thing. So that means that the Dollar and the Euro would end up falling against the Yen and that really kind of gave me this reputation as being the guru in FX markets.

So that was kind of an important point soon after the financial crisis, but then a few years after, I then thought, let me broaden my experience and work in a different region and at that time, obviously, China was growing and becoming bigger and bigger and bigger. And after the financial crisis, China really was viewed as the top dog because the Western economies have been crushed. China seemed to be doing really well. So I asked Deutsche if I could move to Asia.

Andrew Simon (00:26:51):

And this was?

Bilal Hafeez (00:26:51):

This was 2010, 2011. Around that time.

Andrew Simon (00:26:55):

I remember that time, I was trying to… Well, JP Morgan was having a lot of discussions about looking to buy a way into a Chinese bank or into a more Asia focused bank because it was such a huge focus.

Bilal Hafeez (00:27:07):

Yeah, I mean, that was kind of everything. So then I moved to Singapore and I was basically responsible for research-based in Singapore for Asia. So I was focusing on all Asian markets a lot more, especially China. I still was looking at developed markets, but that period really allowed me to learn a huge amount about China and Asia in general. So I’ve travelled to China a lot. Actually, I was advising the PBOC a lot, the Chinese central bank a lot on how to liberalise a financial market. I was giving them guidance on how the sequence moves from a command economy to a free-market economy and how to use derivatives. I was giving all of this advice to them as well, which was really interesting.

And I think they really appreciated it. But what you learn from that time is that there’s a tension where the PBOC the central bank is actually quite progressive. They want to liberalise, but then the other bureaucracies in China are the opposite. They don’t want to. And so there’s this internal tension that you have there. So I spent a couple of years there, but in the end, I and my wife and the family didn’t really enjoy living in Singapore so much. It was not necessarily anything to do with Singapore, per se. It was more to do with, our family, friends, parents, cousins for the kids, we’re all in the UK and in London. So then we moved back to London and then I took on two roles at Deutsche.

This was around 2012, where I set up a new research group, which was cross markets, multi-asset research. So I set up and built a new research team, which looked across markets, which is global Macro, but looking across equities rates, FX, and so on. Then on top of that, I then also was part of another group, which was providing research for the CEO who at the time was Anshu Jain. He’s kind of a well known figure in finance. But one thing he had was he really valued research a lot. And so he wanted his own effective private research team to help give him guidance on speeches or planning and so on. So I ran a research group.

Andrew Simon (00:29:07):

The CEO of a major global bank created his own research team which you were leading, that seems pretty exciting, I think.

Bilal Hafeez (00:29:14):

Yeah. And it was fun. I learned a lot during that time. It allowed you to look into the C-suite, what’s it like running the bank during a time where banks are being heavily regulated and Deutsche Bank was under fire for lots of scandals and things at the time as well.

Andrew Simon (00:29:29):

Do you feel you learned more about how a bank functions too? Like what their concerns are globally?

Bilal Hafeez (00:29:36):

No, you definitely learn a lot about how a bank function functions, but probably more than that, how a big organisation functions, because we forget sometimes that banks have tens or hundreds or thousands of employees and it’s a bit like politics as well I think when people always look up to their head, the CEO or prime minister say, okay, why can’t they just change this? But you realise there’s only so much power they have because it’s like a super tank sort of ship. It’s hard to turn it around.

So often the CEO might have a certain view and they’ll want to implement it, but then it just doesn’t happen. The execution doesn’t happen because something falls through the cracks or there’s something lost in translation as it goes down the organisation. And you realise if you really want to transform an organisation, there has to be an approach around how do you inspire and motivate lots of other stakeholders. You can’t just say, look, this is what I want and expect it to happen. There’s a lot of cultural transformation that you have to do to make an organisational change.

Andrew Simon (00:30:34):

Yeah, it’s a good point because a lot of people in I would say mid to upper level in a large organisation, look to the leader and say it’s up to you. You just set the tone and people don’t realise that it’s so hard to really implement major changes, especially in approach and policy. And you have to create the right incentives. You also have to have the good managers underneath you that take on board and follow through be because you could obfuscate if you want. And you know, oh, I’ve tried, but it can’t. But that’s a good point, that probably gave you a unique opportunity to really understand all those risks. And hopefully, you’ll be able to use a lot of those skills as Macro Hive grows.

Bilal Hafeez (00:31:17):

Yeah. No, absolutely. I thought a lot about this and at Macro Hive, I’ve learned this from studying how companies grow is like the way you run a company. Like Macro at the moment we have around 15, 16 people, working in total for Macro Hive around the world, running a company with say 20 people is very different from running a company with a hundred people versus running a company with a thousand people. Everything breaks when you make these big jumps. Because at the moment, the size of our company is such that we can know everybody.

So you don’t need as much structure you could say, because you can just talk to people, but there comes a point where you may not know everyone who’s working for your company that well. So then suddenly process and structure becomes more important, which goes against the startup mentality, which is like, okay, we’re flexible and so on, but you have to think deeply about that, and then as you get really big then something as amorphous culture becomes really important. You know for me, culture is the things you do, which aren’t specified in the rule book. So when there’re no rules or guidance around what to do in a situation your culture then tells you what you should do.

So for example, if the culture is such that the customer’s always right, then that will be your philosophy then in engaging with a customer when a new situation comes up or the alternative could be we always want to make sure the workers of the company, our employees, are treated really well. And so that will then guide you on what you can do. And there’s no right or wrong answer. It’s just so one needs to become aware of what’s the culture and what the stories we tell ourselves about the company, what things are allowed or not allowed. So that becomes very important.

Andrew Simon (00:32:53):

It feels like another podcast, a whole another podcast you really need to think through.

Bilal Hafeez (00:32:57):

Yeah, absolutely. Yeah. Yeah. But just to round up the JP Morgan story, and I know the audience probably wants to listen to at market views as well. I then left Deutsche at the end of 2015 and that was because I’d spent a long time at Deutsche and I just wanted to change. And I moved to Nora the Japanese bank based in London, and I ran strategy and the research there out of London for about three years. It was like cross markets. Again, Nora was a much smaller bank compared to Deutsche or JP Morgan, but it was very trading-orientated. So like Deutsche, I would say there was a big client franchise, lots of client work, the Nora was much more trading focused. So that really fine-tunes your trading abilities and so on.

But then, after three years there, I thought, it’s time for me to leave working for a big bank and start something new. I always had this entrepreneurial spirit. So this was the time I thought that it was time to start my own company. And I also found that doing research in a bank was less enjoyable as time had gone on. After the financial crisis, there was huge amount of regulation, compliance, and less risk taking by companies and by banks. So every time you came up with a new idea, let’s do this research in this way or let’s do this or that, it would be the first answer you would really be no. And I was finding it was harder to come up with really good mark insights sitting inside of a bank because you just aren’t able to have the resources you need, you aren’t able to communicate or talk to other people in a way that will generate ideas. So I thought let’s try to create the ideal environment to come up with research and analysis that will help investors, and that was the idea behind Macro Hive.

Andrew Simon (00:34:35):

And also, I know you always like to point to also the idea of being outside of a big organisation or outside of a big bank, it gives you an opportunity to leverage network approach as well, to really have a series of relationships with experts across different markets, across different products. And that helps all those inputs, which we can talk about managing that later. All those inputs help you and the team form different views.

Bilal Hafeez (00:35:04):

Yeah, absolutely. Yeah. I mean, this comes again back to philosophically how does one like to generate ideas? And when I look at researchers, there’s often two kinds of approaches researchers take, one approach is I have all the answers and just come to me and I’ll give you what I think is the right thing, and it’s more for kind of a black-box approach. And when you look even on the independent research space, there’s lots of independent research companies that have these walls around them to say that look only the top clients in the world can access this for a high price, and no one can talk to us because we’ve got this amazing secret, we’ve got the holy grail that we will reveal to you if you want access to it. Then there’s another approach, which is my approach which is the opposite, which is fundamentally networked and almost biology-based, which is that the way you come up with ideas is through interacting with lots of smart people.

And it’s these often accidental interactions and ideas and triggers that come up that you end up having this herd, like a hive intelligence, which is part of the reason why we have Macro Hive in the name. You know, I wanted hive, something biological in nature, because I think nature does this really well if you look at the way bee colonies work in hives or trees and their roots, everything’s kind of connected and networked together and through the network, you get this network intelligence. And so philosophically Macro Hive and the way we’ve set it up is really as open as possible. So we want to be embedded in multiple different networks and we want to be the node in all of those networks so we can be at the centre of this information and idea flow.

So while we have an internal research team, which is very sizable and experienced, we basically also have a larger network of experts and other researchers and traders, and it’s really interacting with those guys that I get so many ideas and then people know this themselves, you can never know everything about everything yourself, you don’t have time. It’s through the interaction with people who bring their insights, that you end up getting these great insights and that help you work out what the next big theme that’s in the market or timing like, okay, is this the right time when you get a sense of, okay, everybody is one way in the market through all your conversations, then it helps you with timing.

Andrew Simon (00:37:21):

Yeah. And people can’t be experts on everything. So it’s great to hear a variety of experts across different stuff. And a lot of the most successful investors in the world where people would think, oh, that person has all the answers, they themselves love going to these round table dinners or these two-day events where other investors are that they interact with and hear what other people are thinking and really exchanging ideas. And you’ve taken that on an even larger scale, which I would say even two, three years ago was not where research seemed to be heading. And today’s world the more let’s call it open source approach definitely feels like a somewhat winning strategy. But to clarify, you still help investors get to the holy grail in the end anyway?

Bilal Hafeez (00:38:08):

Yeah. I mean, that’s the thing, the irony here is that to get to the holy grail, you need to be as open as possible to arrive at the holy grail. And the trick there is to be at the centre of that network, rather than at the periphery.

Andrew Simon (00:38:22):

Okay. So can we talk a little about markets?

Bilal Hafeez (00:38:24):

Yeah. Let’s do that. Yeah.

Views on inflation and why yields are low

Andrew Simon (00:38:25):

Okay, perfect. I don’t want to say the last six to eight months that if there’s any kind of thing, I feel like investors particularly think about when they think of Macro Hive and even you is probably your views around inflation and interest rates. Do you want to give everyone an update of where your thinking is, and maybe even slight progression over the last couple of months?

Bilal Hafeez (00:38:48):

Yeah, sure, absolutely. Yeah. So, obviously, this year there’s been a huge amount of focus on inflation and there’s lots of been scare mongering going around how high inflation has got and so on. But my view is that fundamentally, we’re still in a low inflation regime. And when I say regime, I’m particular there, because you can always have some volatility within a regime. So you can have spikes of high inflation for one or two years followed by periods of low. But fundamentally, you need to know, are we in a prolonged period of widespread inflation like we had in the 1970s where it was everywhere, every single sector of the economy had rampant price increases. Inflation was running five, 10, 15% year after year. And it’s widespread across the world as well. So for me, that’s an inflation regime. Low inflation regime is one where inflation generally gravitates at very low levels between zero to 2% and you have volatility around that.

So fundamentally, my view is that we are in this low inflation regime and in a moment I’ll go in to talk about why I think that, but what that means is that when you look at interest rate markets, which are in some ways an aggregation of what’s the long-term expectation of inflation, 10-year bonds is 10 years out. If you fundamentally believe that we’re still in this low inflation regime, that means that interest rates are going to remain low. So one of the strongest views I’ve had this year is that whatever the moves in inflation because structurally we are still in this low inflation environment, interest rates will be low. And this has been one of the big paradoxes for people this year, which is that, okay, inflation’s so high, but interest rates are low. So why this discrepancy?

So from a trading perspective, this has allowed me over the last six months to pivot from being short rates at the start of the year because I had this view that we were in reflation environment to a view later and from April and May onwards to say, actually, now you want to go for flatteners and lower interest rates because we are actually not in this high inflation environment, the market got too caught up in that which has worked out really well.

Andrew Simon (00:40:51):

It worked out well. And people are always asking, what are your non-consensus views? I would say you’ve been pretty non-consensus. This is from the spring, I think when people are calling for 10 year at two and a half percent, maybe a bit higher.

Bilal Hafeez (00:41:05):

And the reason I have this view on inflation is number one, I’m going back to the historical point. If you look at inflation over the last 1000 years, the Bank of England has some data on this. Obviously, it won’t be so precise, but over the last 1000 years in the UK, inflation has averaged around 1%. So over the very long run inflation tends to be very low. But what you find is that it’s punctuated with periodic bouts of very high inflation, which usually occurs around wars. You know, when governments issue debt, print money to fund the war efforts and capacities destroyed during the war, and then you have this rampant inflation. And so that’s normally the periods we have our high inflation, but the tendency is for inflation to be very, very low. So that’s my base case that generally inflation should generally gravitate towards zero.

And if anything, if you look historically, you have periods of very high inflation and you have periods of deflation. So if anything, over the last 30, 40 years, we had this very high inflation in the seventies and we’ve been falling since then, but we haven’t really had any periods of deflation. So if anything, the risk in the next 10, 15 years is that we have bouts of deflation, which is what you see on 1000 years basis. That’s kind of the risk. So that’s one observation I would make.

Andrew Simon (00:42:19):

Would you think that’s been mainly driven by technology or just large amounts of debt?

Bilal Hafeez (00:42:24):

Yeah. So I think the reason why you’ll see lower inflation is a few reasons. One is if you look at the inflation we’re seeing today, it’s very narrowly focused. So for example, this year on average, US inflation has averaged this year around four and a half percent. But if you look at core inflation, this year it’s been closer to around 3.7% or so. But if you look at core goods or if you look at the energy components, that’s gone up 20% this year. Core goods, which includes the famous used cars has gone up 6% this year. On average in the last 20, 30 years, core goods has gone up about 1% a year. So this year you’ve had a multiple standard deviation move up in the price of core goods. Yet core services, which make up a larger component, this year is averaging around two and a half percent. Over the last 30 years, it’s averaged around 3%.

So this year we’ve actually had lower than normal kind of inflation. So what all of this tells you is that in reality this year, what we’ve seen is we’ve seen rampant inflation in energy and rampant inflation in certain components of the goods sector. But then if you step back and look around the world, if you look at the US, as I said, this year headline inflation is averaged around four and a half percent this year in the US. China, the second-largest economy in the world, how much has inflation been? 1% this year. Euro-area, third-largest economic block in the world, two and a half percent inflation. Japan? The fourth largest economic region, minus 0.2%. So this idea that in this super inflation environment, just isn’t verified in the data.

Andrew Simon (00:44:06):

Is it because the market or the media so focused on a US centric view or it’s just like that and the Fed?

Bilal Hafeez (00:44:14):

Yeah. I mean, I think there is this bias in the media and the financial media to focus hugely on the US. Yet, the US isn’t everything. But also it’s a good story to tell, inflation sells. It’s policy makers like pundits, high inflation sells, you’re going to get headlines. We find that when Macro Hive, when we publish a piece on inflation, we get a high hit rate than one when we don’t have it on inflation. So that’s another thing about this all, but the reason I mentioned this cross-currency comparison is that lots of people are saying, oh, because of de-globalisation or because of supply chain and all of these sorts of things. We’re having this rampant inflation. If that’s the case, and if it’s structural, you should see that everywhere in the world.

And you’re not really seeing it at the same scale as you kind of think. But more than that, I think that the reason the US has had higher inflation than other parts is that the nature of the US fiscal response has been very different into other countries where the US essentially gave cheques to people. The US fiscal response, which made people’s income go up during the recession, which in other countries didn’t happen and people had cheques and they weren’t able to spend it on going to a restaurant and going on holidays. So they ended up buying goods, which ended up leading to this global supply- demand imbalance of goods prices going up around the world because of how strong the US is. But other countries didn’t do that. Other countries did, what’s called furlough schemes, where the governments were paying companies to keep people in employment, which meant that their income stayed the same. And so you didn’t have the same consumption boom. And so as these effects roll off in the US, then you’ll start to see that those pressures start to roll off too.

How to understand the market impact of COVID

Andrew Simon (00:45:53):

I guess let’s just quickly touch on COVID and general views on global growth.

Bilal Hafeez (00:45:57):

Yeah, sure. Obviously, COVID is still with us, which is quite sad in many ways. And we have the Omicron variant, which we’re still in the midst of understanding, but for me, the two important things about COVID are number one what markets care about out is how governments respond to the virus. So obviously, the virus is terrible from a health perspective, that’s a given, but what we are talking about here, and this conversation is about what is the market impact? And the market impact is related to the government restrictions. And so you could have a rampant pandemic, but if the government doesn’t make any restrictions then the economy and markets may just actually do fine. And that’s actually what we’ve been seeing that each successive wave we’ve been getting of different COVID variants, the government response has been less aggressive.

There’s been less lockdowns and so on. So that’s one general observation there. What matters now with the Omicron variant is how are governments going to react to it? You know, will it lead to some aggressive lockdowns or not now? With the Delta variant, governments, especially in the US and say the UK some extent the Europe as well basically said, actually, we don’t need to do a lockdown, which allowed the economy to rebound nicely. Now with Omicron, there’s two features of it that could lead to more aggressive lockdown measures. Number one, that in terms of being infected vaccines appear not to work so well with Omicron. So we’re going to have a lot more cases right now of people who have been double vaccinated who get infected with Omicron, which wasn’t the case with Delta. So that’s going to cause a problem for governments.

Like how do you respond to that? Because you’ve been saying vaccines are the saviour yet I’m getting infected with Omicron. Then the other part, which is a bit blurry right now is young children. It seems like Omicron is affecting young children under the age of say nine more than Delta or Alpha beta the original variants. And so there’s a potential there. If you suddenly start to see hospitalisation of young children, that could cause a government response. So that’s a key thing I’d be focusing on with COVID, so understanding how our government is going to respond to it and how aggressive they will be. The other part of government response is okay, even if they don’t respond, people may respond themselves. People may get scared and adapt their behaviour. We saw that with Sweden where they basically didn’t have very aggressive government restrictions, but people just changed their behaviour. So that could be an effect that we could see with COVID.

Andrew Simon (00:48:26):

A quick question. So has Omicron or the risks and the different possible path that this could take. Is this changing your general framework in thinking about markets or it’s more in the monitoring stage right now?

Bilal Hafeez (00:48:41):

I would say that it has changed my view in the sense that I think this provides some downside risk to growth. It did seem like we were in a nice bounce in growth going into Q4 this year and early next year, but this suddenly dampens a lot of that. So in general, I’ve been positioned quite defensively for the last four or five months. And I was thinking of winding down some of those defensive trades on US markets. But now I’m going to keep those defensive positions on because I think Omicron is something that adds some downside risk. Another part of that, I think also is that the Fed’s become a lot more hawkish as well, which doesn’t help either.

Andrew Simon (00:49:22):

Yeah. Because I guess traditionally people viewed slowing in growth. Is it bad for risk or good for risk? Often it would mean, oh, that’s maybe good for risk, because that would keep very accommodative policies in place or even more accommodated from the fed, and then that seems like maybe that link has been broken. And do you believe that has been broken and will continue to be broken?

Bilal Hafeez (00:49:44):

Yeah, I mean, I think it could be broken. I mean the one issue with all of this is it depends which risk markets we’re talking about. Some risk markets will be very sensitive to short-term interest rates if the Fed’s very hawkish. So for me, that would be more the small caps for example, and some of the riskier ends of the market would be more sensitive, whereas tech companies, some of these larger companies that are more sensitive to long-term interest rates, they’ll actually do okay because if we’re in an environment of weakening growth, but an aggressive Fed long-term interest rates will stay lower than you would’ve expected as the curve flattens, and that ends up helping these large cap companies that cash-rich that will benefit from for flows into them as interest rates fall.

Tech booms and crypto

Andrew Simon (00:50:27):

Maybe even continues to accelerate and move towards technological solutions to issue as well with tech companies.

Bilal Hafeez (00:50:35):

Yeah. I mean, we didn’t talk as much about this before with inflation, but I think one of them for me, I think a lot of people when they about the consequences of COVID, they’re looking at the wrong thing. They’re basically focusing on supply chain disruptions and that on shoring that will be the big outcome. For me, that’s almost trivial. I mean maybe some of that will happen, but that’s not the big story. The big story is the digitalisation of the world. What COVID has done is, it has accelerated technological adoption. It’s forced people to work in the digital world a lot more than they would otherwise have, whether it’s through zoom calls, through having to use teams or slack or whatever, to interface with other people. It’s forced people into this world and using the cloud a lot more than before.

And not only that, but what COVID has done is that it has basically shut down essentially the service part of the economy, either the parts of the economy which requires humans to be involved. And so suddenly companies have had to say, okay, how can we offer a service to people without people? The answer is technology. So the manufacturing sector over the years has been massively disrupted by technology. So to run a factory, you need much less people today than you did in the seventies because of robots and so on. The service sector’s still quite labour-intensive. So whether it’s restaurants or supermarkets or musical concerts or whatever. It requires all sorts of people.

Andrew Simon (00:52:05):

Doctors.

Bilal Hafeez (00:52:06):

Yeah, doctors, all of these. Now suddenly with COVID, companies are now saying, ‘Okay, without people, how can we offer these services?’ and you’re seeing all sorts of clever ways of doing this. In supermarkets, this trend was happening anyway, but there’s self-checkout tills, less people involved. With restaurants, what you’re seeing is delivery services are becoming more popular. What’s interesting about delivery services are that traditionally, restaurants would occupy the most expensive real estate. They’d be in high street. So you’d have a restaurant and the kitchen there. Now what’s happening with delivery services are saying, “Okay, we’ll have the brand name of the restaurant, but the kitchen will be in a cheap, industrial estate in what’s called a dark kitchen, like a warehouse. We’ll cook everything there in a central location rather than having 20 kitchens in 20 different parts of the city. Then we’ll have an army of little mopeds going around, delivering the food to people.” That’s much cheaper for a restaurant to offer that service than to have to have the real estate in expensive part to have all of that.

So suddenly, the restaurant business has been disrupted in that way. All of these things are just adding on top of each other. That, in the end, means that this for me is disinflationary, profoundly disinflation for the service sector. I think this is something that’s not really being appreciated. Another part of this is how it’s flattening the labour market in the sense that if a company is remote, it doesn’t need to only employ people who live in the same area as the company operates. We find at Macro Hive as well. When we first started before the lockdown, our bias was to hire people in London and New York. After lockdown, we suddenly said, “Actually, we’re all remote. Let’s just see where we can hire people.” So we have a super smart machine learning person who lives in the Midlands in the UK, web developer in Berlin, great economist in California rather than New York. It just opens up the market. Again, that’s something that’s disinflationary in the long run.

Andrew Simon (00:53:59):

Definitely, yeah. By the way, a lot of your core ideas, your general framework, for me, I always find this one the most interesting because I really think the idea that technology advances have probably, I think I’ve heard you say in the past, have been condensed from maybe even five years into one year. There is absolutely long-term impact from that. People have such a myopic view when they listen to what things on Twitter and oh, I paid 20 cents more for milk, which absolutely for a lot of people is an issue, but the general approach towards inflation and especially for trying to think about things often hard to do, but trying to think about things especially around people’s investments over a five and 10-year horizon, at least my impression, that this is a core thing that people should be thinking about. Okay. Maybe we’ll quickly touch on, and I think you did a little bit around China and obviously, you have some pretty unique experience from, as you said, with interaction with PBOC, what’s your general view on China, and then we’re going to go to everyone’s favourite topic, crypto, right after.

China’s challenge

Bilal Hafeez (00:55:12):

Okay, yeah. On China, my sense on China is just based on my experience of interacting, of spending a lot of time in China, interacting with policy makers there is that China, in some ways, the same as any other country. We’ve got this habit in the West of thinking China is this special country that can build superfast train tracks in two days and they can do things much better than everybody else. The answer is no. They’re just like any other country. So all the challenges other countries have, they have it as well.

Andrew Simon (00:55:40):

This I’ve definitely never heard. Okay. Sorry about that.

Bilal Hafeez (00:55:43):

Yeah. They have rampant corruption in lots of parts of the economy. They have developed some parts of the economy, but if you look outside the east coast of China, like further inland, there’s massive levels of poverty. If they were so good at developing everything, the whole country would be developed, and it’s not. So just like we have challenges in the West where you look at, like in the UK, London looks great, but then economically, north of England doesn’t look so good. Or the US, like Dakota. South Dakota isn’t as wealthy as California. China has those problems as well. That’s one general thing I would say.

The second thing I would say is that COVID has provided an opportunity for China to finally deleverage the economy in a way that they’ve been trying to do for the past 10 years. In some ways, the story of China in the recent period has been that they did this massive fiscal stimulus after 2008, which allowed China to grow while the rest of the world was contracting. But that led to massive overcapacity and all sorts of leverage problems. Ever since, say, 2009, 2010, they’ve been trying to get rid of the excesses they built. It culminated in 2015 where the economy essentially went to recession. They panicked and restimulated the economy. They devalued the currency that year as well and they’ve had this stop-start approach ever since. They see some froth in some part of China and then they try to slow the economy. Slows too much, then they give up. They stimulate. But I think COVID is a structural break in the sense that it’s allowed them to more seriously engage in these reforms.

Now, why is that? Number one, because the economy collapsed so much, the growth in China and everywhere else, once the economy reopens, you’ll have this big bounce. So even if you slow the economy down from reforms, the bounce is so strong, it’ll cover any of the losses you get on one side. The other benefit you get with the lockdown is that your society is much more willing to take orders from the government during COVID because of the lockdown. You have a higher ability to control the population. The border shut down as well. In that way, you could control dissent a lot more or you can use COVID as a cover for other reforms that are going on. You’re seeing some of that in Western economies as well, so that’s another reason.

Andrew Simon (00:57:55):

What about all the actual liquidity that Japan and Europe and the US have put into the global economy? I’m sure that’s benefited China somehow.

Bilal Hafeez (00:58:02):

Yeah, absolutely. If you look at the structure of Chinese growth over the last year, year and a half since COVID, what you find is that domestic demand like internal demand within China has been really weak. So if you look at retail sales, just all the internal metrics have been weak, property even, but their external numbers have been great. Exports have been off the charts. China has been essentially producing all the stuff around COVID and exporting it to the rest of the world. COVID equipment, I should say, not the virus. That’s another conversation. So they’ve benefited from the rest of the world bouncing and that allows them to have this cover. The other thing that has become apparent during COVID is the power of tech companies in China. Just like we’ve seen in the West during the COVID period, we’ve had to use tech companies a lot more. China had to as well. That made it clear to Chinese authorities, the power of tech companies. China’s in the process of centralising power around President Xi, and so any alternative power blocks have to be curtailed.

So all of this is providing the perfect backdrop for an aggressive reform programme. One of the key things, I think, on the leverage side is that China did do some credit easing during the COVID period, but it didn’t lead to as much growth as it historically would have. So just to give some numbers to this, before the global financial crisis in 2008, for every dollar the Chinese provided in credit, you’d get one dollar of growth back. Today, after COVID, to generate one dollar of Chinese growth, you need $12 of credit now because the amount of leverage in the system is so much that essentially, so much extra borrowing just goes into servicing bad debts that are already on the balance sheet. It doesn’t go into doing anything new. They recognise this, so they have to de-lever the economy, which has to be focused in the real estate sector which is the biggest source of leverage in the economy.

Andrew Simon (00:59:50):

Just real quick, what’s the best way to play that? How would an investor think about protecting their portfolio or influencing their portfolio if that was important?

Bilal Hafeez (01:00:03):

I would say there’s a couple of ways of playing to China slow down. My core view is that China is in a midst of slow down. There’ll be some bounces here and there, but fundamentally, China’s going to be slowing next year, the year after, and so on. So you want to play China slow down in some form or another.

Andrew Simon (01:00:17):

When you say slowing, like 4% of the next couple years or?

Bilal Hafeez (01:00:21):

Yeah. I think we could easily get to 4%, maybe 3% or so, those sorts of levels. Now, the official numbers are one thing, but we built our own proprietary models, which track the Chinese cycle. That gives you a more true estimate of growth then and it will be lower than what people are forecasting. Now in terms of how to play China, we’ve crunched numbers. Essentially, from an equity perspective, it turns out that Chinese equities are not a good way of playing a China slow down. Now one reason for that is often when China slows down, they do some credit easing. They inject liquidity into the economy and that liquidity ends up in equities. Another reason is that often when Chinese stocks fall sharply, mysterious buyers of Chinese equities suddenly turn up. The authorities have ways of propping up Chinese shares. So it’s less pure play. Instead, other Asian stocks are better play on Chinese growth cycle like Korea especially is very tied. Korean stocks are very tied to the Chinese cycle because there’s a trade tech exchange between the two countries. There’s tourism flows between the two as well. So equities, that’s the trade.

The other trade is rates. What you should expect for China over time is that Chinese interest rates, long-term interest rates should fall over time. Already, Chinese real interest rates are actually very high. Other countries around the world have negative real rates, but China actually has positive real rates. So real rates should fall and nominal rates in general should fall. So being long Chinese bonds, looking for Chinese yields to go down is another way of playing it. Perhaps the quickest one is the currency where in general, my sense is that the Chinese renminbi acts more, almost like a countercyclical currency like the Japanese yen now. So when China slows, I actually think the Chinese yuan will strengthen, and that’s one of the things we’ve seen this year. People have been surprised about the currency strength, and that’s been one of our biggest views. I think that’s part of this overall story.

Andrew Simon (01:02:14):

Yeah, that definitely has been a contrarian view all year because all year, a lot of people have been concerned about a slowdown in China, but I guess what the impact and how that will impact markets, people had different views. I know for years, people have been looking to bet on a 15% blow up in the Chinese currency. Even this year, I feel like clients have been asking that question. You’ve been pretty consistent in thinking and I’ve clearly been right so far that A, the currency could even strengthen slightly, but B, in a deleveraging period, the most important thing, and when you said it, it makes a lot of sense, it is lower vol and just projects stability as the core thing.

Bilal Hafeez (01:02:58):

Absolutely, yeah.

New frontier of the digital economy

Andrew Simon (01:02:58):

Okay. Can we go on to, for all the crypto bros out there, yes. As I know, Macro Hive has moved much more into the space over the past year. Maybe give high-level, obviously this could be a whole different podcast in itself, but maybe high-level what your views are.

Bilal Hafeez (01:03:14):

Yeah. I think a high-level my view on crypto is obviously, I’m coming to this not as a technologist, which obviously a lot of people are technologists on this side. I’m coming to this as somebody who’s been in markets for a while and is familiar with cycles and so on. My sense is there is some real innovation on the technology side with crypto. I think fundamentally, I think the most interesting aspect of crypto from a technology perspective is that the ability to assign property rights, digital assets. In the past, when you are in the digital world, when you’re on the web or in gaming or whatever, it’s difficult to know who owns that particular asset. So in the digital economy, if one can term that, if you are able to have some ability to know who owns that particular set of pixels or that contract, that’s super powerful and that’s a real innovation.

Obviously, there’s a decentralisation component on crypto as well. That’s very interesting. So I think there’s definitely some real technological innovation there. At the same time, I think it’s so, so early right now. We aren’t quite sure what’s the best use of that technology. It reminds me very much of the early days of the internet where initially, there was a lot of what people call skeuomorphism, this complicated word, which basically means that when you basically try to copy the physical world in the digital world, it’s called skeuomorphism.

Andrew Simon (01:04:42):

I feel like people are still using that now.

Bilal Hafeez (01:04:45):

Yeah, exactly. I think that’s a fallacy of what the use case will be. When the internet first was created, a media company would say, “Okay,” like New York Times or somebody, “we’ll create a webpage and the webpage will look exactly like my print copy.” Now what we learned was that was not the final use case. The final use case was actually that New York Times and media companies will be destroyed by social media companies who basically found a way of getting users to generate content on a platform and getting users to post articles of further media companies onto that platform, which completely destroyed traditional media companies. So the end game was not that you’ll be able to have a website with a media company and that was the future, the future was actually, they’ll be something that will completely destroy the media industry through a platform. That was the end game.

We’re in that stage right now where I feel like a lot of stuff that’s happening in the crypto world is just trying to copy the real world. A classic one of that is some of the things we’re seeing in the virtual world side, Decentraland and all these sorts of things where you create a world that looks like roads and buildings and you’re saying, “Okay, that’s like a real estate market, like the real world.” Now, while there might be some interest and markets may go up or down and around that all, fundamentally, that’s not the end game. In 10 years, that’s not going to be where the use case is.

Andrew Simon (01:06:08):

Yeah. I heard from another podcast, they were talking about when Mark Zuckerberg and Facebook were talking about some of their initial thoughts and approach towards meta, towards the metaverse. They’re saying, “Well, if it’s having two people play chess in the metaverse, that’s not really taking advantage of where the technology can provide a very different and a much more fruitful experience.

Bilal Hafeez (01:06:31):

Absolutely. I think the point here is that in the end, what you find is that there’s a new technology gets invented. It goes out into the wild. Lots of people use it, and then somehow, something happens and then you realise, actually, that’s the thing that’s going to really take off. Just going back to the Decentraland and these sorts of things, the fundamental problem I have with these virtual world ideas of saying, “Okay, you can replicate the real world,” is that you can’t replicate the real world if you can’t use all five senses of your body. When you enter these virtual worlds, you’re using sight and hearing, but you’re not using touch, smell, or taste. To really get a virtual world, you have to have those things. Because when you go to any new city in the world, it’s smells, the tastes, touch, all of these things that are really, really important. So just saying you can replicate the real world, you can’t. That virtual world will always be subpar, so you’d have to create something else that other advantages off of that whole space. So that as a side point.

The other general point I would make is that things that change the world doesn’t mean that that will necessarily make you money. For example, say something like the internet. The person who invented the internet, I’m not sure if that person is the richest person from the internet. It’s basically all these side things ended up making money, not necessarily the thing that you think that would make money. If you look at it or put it another way, we had this massive dot-com crash in 2000, yet the internet did change the world. So there’s a big run up in value. It collapsed. If you looked at the collapsing value, you’d think, okay, the internet doesn’t mean anything, but it has. It’s changed the world. But what happens is when you have the initial technology shock, things go a bit crazy. There’s a crash, but that technology does change the world. So that’s the other point I would make, yeah.

Andrew Simon (01:08:15):

Yeah. I heard an interesting thing where a guy was talking about, say the internet, and one of the things was that there was just so much overbuilding of underwater cables and so much broadband technology and stuff, but eventually, the world moved into that. His view is just like railroads. Railroads became a hugely profitable business, but for a long time, there was overbuilding. People understood this because they’re better way to travel, so that’s very interesting if you think about it.

What economists get wrong about tech

Bilal Hafeez (01:08:49):

Yeah. Then the other related point to this is, and this is a more of a challenge to economists in finance theory, is that we don’t really understand the digital economy that well or the platform economy that well. I think this has been one of the challenges for understanding the valuation of tech companies, where say, let me give you an example. If you look at the price to book of say, Facebook, Facebook looks expensive because what’s its assets? It’s got some buildings, some computers, but it’s valuations are like… The value of the company is super high, but the asset of Facebook, the true asset is not the buildings and all of that. It’s the fact that it has a two-billion network. The question is that two-billion network, where does that sit on the balance sheet? It’s not on the balance sheet anywhere. So from an accounting perspective, Facebook is spending money on marketing, which is an operational expense and that marketing lease more users coming onto the platform. Rather than viewing that as OPEX, that’s actually capital expenditure because it’s actually an expense on building up an asset, which is the users.

So actually, there’s been a misclassification from an accounting perspective around what their asset is, which is the two-billion network. The issue with networks is that there’s a nonlinearity about network. Having a network of 10 versus 100 is not that 100 is 10 times better. 100 is 1,000 times better because you have many more possibilities than a 1,000 to a million is not 1,000 times better. It’s like a million or billion times better. So you end up in this network economics almost, network economy, where to understand the valuation of a tech company, you need to understand the scale of its network and how that leads to what’s called a flywheel effect or a network effect.

And that’s, I think, lots of people who use value to trade in equities have completely missed all of that and use a traditional value metric, which works really well for widgets manufacturing companies, but when you enter the digital realm, everything changes. It’s like classical physics versus quantum physics. That’s the issue here where we are talking about this digital world where it’s unbounded in some ways. The reason I mention all of this is that changes what we can think of as things that will have value as well. Because whenever we look at all of these things that people are doing in the crypto world, we think, “Okay, that looks silly or that doesn’t make sense,” but that’s how people may want to engage in economic activity in the alternative world in different forms.

Andrew Simon (01:11:12):

Yeah. I know there’s a lot of focus on community building. Obviously, Macro Hive, there is a pretty significant community of thousands of users. Do you have any views on this idea where it seems like a lot of platforms are issuing tokens for their users to get early access to something to be able to influence through voting rights how the community involved. What’s your thoughts?

Bilal Hafeez (01:11:39):

Yeah. I think that’s a super interesting area. People want the utility tokens or social tokens. We’re looking at that ourselves. I think there is something here, something in here around how you can create a relationship with your members where they feel they have a stake in you and they have a say in what you’re doing. The question is whether issuing a social or utility token is the best way of doing that versus an alternative where you just have a membership agreement with people in your membership. I think the nice thing about the social token is that it just makes things more clear on terms of what people can and can’t do and it allows some ability to transfer that membership to where the people in a very efficient way so you can get this market dynamic within them all. I think there is something in it.

Hopefully, we’ll do something in this space and understand it better. I think if you look in the artistic world like music, artists, and so on, they’re doing some interesting things in this area where at the moment, if you think about in the music industry, if you’re an artist, your music has played on Spotify and you get pennies from Spotify if every time someone plays your track. If you are a super big star like Taylor Swift, or Adele, you are able to get a lot of money from Spotify. But if you are in the long tail where you have a 1,000 or 2,000 fans, you can’t monetize that that well. Spotify essentially doesn’t give you anything, but this social tokens, utility tokens will allow you to have a direct, allows you to disintermediate Spotify, have a direct relationship with your fan. Then the fan could basically say, “Look, I bought this token for $1,000,” say. Same could apply to Macro Hive. As a result, I get early access to an album or some release of some research or something or some special webinars or something like that, and there’s something appealing about that all. Actually, one of the thing I do want to say about crypto, which to balance all of this, is that I do think there is a Wild West component to crypto as well, where a lot of shady things are going on as well. Because of the absence of regulation and in some ways, lots of things that aren’t really allowed in financial markets are happening in crypto markets, whether it’s certain large players or whales influencing the market in ways that wouldn’t be allowed in financial markets or ways of exaggerating the amount of volumes that are on platforms through wash trades and those sorts of things. So there is a whole side of it that is quite negative, which you need to balance it up, that there is a lot of stuff that’s going on, which in some ways, is regulatory arbitrage.

Andrew Simon (01:14:14):

You’re thinking about things. You’re looking to understand where the opportunities are, where the people are utilising things in the most interesting ways, say, like utility tokens, social tokens, NFTs around helping contributors or artists, musicians, and how that could benefit them, but also at the same time, thinking about helping investors also even just to better understand price action. Obviously, a lot of institutional investor we know are looking more into the space and you’re building a lot of tools and frameworks around that as well.

Bilal Hafeez (01:14:52):

Yeah, absolutely. We’re really trying to approach crypto as, I only use scientific as to-

Andrew Simon (01:15:01):

Financially rigorous.

Bilal Hafeez (01:15:03):

… yeah, financially rigorous way where we want to understand this and we want to make sure that we try to understand the long-term dynamics of all of this. We don’t want to get too caught up in these get rich quick schemes within all of this and try to dissect it all and apply. For me in general, I think there’s this interesting thing where there’s a lot of new interest into the crypto market, but the level of financial sophistication’s very low. So there’s lots of people who talk about crypto prices and crypto markets, yet the way they talk about the market price action and just the way things are done, it’s very unsophisticated. There’s people who have been in markets will understand market dynamics in a way that you can apply it then to crypto, and that’s a very powerful combination.

Andrew Simon (01:15:49):

Yeah, that’s very interesting. I would assume a lot of clients are liking that Macro Hive is making a much bigger presence in this field because understanding the historical experience of how to approach markets and how to overlay a lot of those skills into the crypto market. One other thing. I guess, last thing we’re going to talk in general was I know the team does this thing called grey swans. By the way, I didn’t know what a grey swan was before, but I know we’ve been doing it for two years. It’s always one of the most popular things that we produce and get a lot of funny, interesting topics and explore some. Well, why do you explain a little bit what a grey swan is?

Bilal Hafeez (01:16:33):

Yeah. We’ve been doing this for a couple of years. I actually started doing this when I was at Nomura actually, grey swans. It’s super popular with clients. The idea is people know about black swans, what Nassim Taleb popularised, which is these really unexpected events that have a massive impact on everything. That, by its very nature, we can’t predict because if you’re predicting it, then it’s in the realms of the known. The unknown unknown, known known knowns, and the Rumsfeldian phrase. So grey swan is somewhere in between. Grey swans are events that we can imagine, but are unlikely to happen, but if they do happen, they’ll have a big impact. So what we’re saying is we’re not being so bold to say that we can predict black swans, which is just completely unexpected, but we can try to look at grey swans. These are tail risk events to just to broaden our imagination of what could happen next year. We’ve been doing this every year.

Andrew Simon (01:17:27):

Two to four standard deviation, kind of.

Bilal Hafeez (01:17:29):

Yeah. It’s like a multiple standard deviation event. So come up with 12 or 13, and I won’t talk about all of them, but a few of them, I think, are quite interesting, which I’ll just share now. One is that, this is our number one grey swan, is that the US enters a recession next year, and nobody’s looking for a recession in the US next year. What we’ve done is we’ve said, “Okay, what things would need to happen for the US to enter a recession next year?” It turns out that two of the best predictors of US recessions are Fed raising interest rates and oil price shocks. And what’s happened recently? Oil prices have doubled. Last year oil’s trading negative and now we’re at $70-$80 and the fed is hiking. So, almost always, when you have those two things happening around the same time, the US almost always enters a recession. So, you could see a scenario and you throw into the mix that China’s a bit weaker as well, the Omicron virus, then you could see a scenario where suddenly the US loses momentum and you enter into a recession. You have to remember, Japan just had a negative quarter of growth just this past quarter. It’s not outside the realms of possibility. That’s one. Another one, which is on the other side is, what happens if COVID just disappears?

So, what happens if this Omicron virus is such that it’s not so dangerous, it becomes endemic and it’s just like a flu and then COVID completely goes away? That’s something on the other side. Another one that’s going back to the crypto theme is that we have one which talks about how crypto destroys Facebook, kills Facebook. This idea being that what Facebook’s big advantage is that all users and creators go to Facebook, but what crypto does is it says, actually you don’t need to go to Facebook anymore. You can directly go to your users who now have a stake in what you’re doing through decentralisation and crypto and so on.

Andrew Simon (01:19:19):

I’m sure they’re thinking about that.

Bilal Hafeez (01:19:20):

Yeah. I would say that one of the things people mix up when they think about crypto is they think that it’s Silicon Valley that’s behind crypto, and it’s not. The interesting thing about crypto is it wasn’t invented by Silicon Valley. We don’t actually know who Satoshi is, but it’s not a Silicon Valley story. It’s around the world story, Asia, all these Russian Canadians and so on, but big tech is actually in opposition to crypto. It challenges the big tech model. So, when I hear about in the US all these regulators or politicians saying, okay, we’ve got to bring down big tech rather than thinking about regulation, the thing to do would be to really turbocharge crypto, because crypto is a disruptor of big tech, and I think that’s something that could be interesting. And then the other really more fun and almost silly ones are one that’s close to my heart is football, or soccer as it’s known for the American audience.

So, we have one grace, one which will come out soon is we have a Manchester United fan who’s written this who says that Manchester United will the Champions League. So, Manchester United was a once great team. It’s had a terrible season so far. They’ve changed managers. They’re doing terribly in the league. They’ve got Ronaldo, but it’s not really working, but what happens if Manchester United win the Champions League? It could work, because Ronaldo does very well in Champions League. They need to make one or two changes to the team and they could end up winning it. And then the other one, I have to also say I’m a Liverpool fan, by the way, so I don’t want that case one to occur. We also have John Turek’s writing a US one where, Andrew, you’ll have to help me with this, but he’s going to write one on the Jets winning the Super Bowl. So, from my understanding, the Jets is the New York based football team, which just doesn’t seem to win anything ever. Had they ever won the Super Bowl?

Andrew Simon (01:21:07):

They’ve definitely won one, and I think that they got to another one. It was 1969, ’68, ’69. Listen, they have a good defence. They have a good young quarterback, but I have a feeling that’s close to a black swan even for next year. I think Man United is probably closer.

Bilal Hafeez (01:21:24):

Yeah. Actually John said that’s even blacker than a black swan. So, I told him that’s like a black hole swan. It absorbs all lights.

Andrew Simon (01:21:42)

That’s blacker than a black swan. I would say a grey swan my favourite team, Los Angeles Chargers maybe if they win it, which they could. They’re a middle of the road. That’s super interesting. Everyone should definitely check out the grey swans. We may even have a webinar talking about all of those together. Okay.

Favourite investment lessons

Andrew Simon (01:21:50)

A couple quick things, again, bit more personal, what’s the best investment advice? I always hear people saying this, and to be honest, it is a great question. So, what’s the best investment advice you’ve ever gotten?

Bilal Hafeez (01:21:59):

I’d probably say there’s a few pieces of advice I’ve got over the years, which I found really helpful. What one is that patience is really important to do well investment wise. So, don’t feel bad if you’re just making five, six percent a year, but if you do that year and year out, you’ll do really, really well. For me, that’s been really helpful because every year there’s always, I hear somebody making a thousand percent or something, a hundred percent on something, and it’s easy to get caught up with FOMO and ditch all your discipline and go into it. So for me, it’s if I make five, six percent a year, that’s fine.

Andrew Simon (01:22:30):

Especially in a close to zero interest world.

Bilal Hafeez (01:22:32):

Yeah, and then it compounds over time, the Warren Buffett effect. That’s one piece of device, I think, I’ve really held close to my heart. The other one is two pieces, which are related is it’s okay actually to sometimes not be invested in the market, and cash is sometimes an important asset to hold because sometimes you just don’t know what’s going on. So just stay out, don’t make mistakes. If you do have cash when there’s certain distress in the market, if you have cash, you can come in in pounds and buy something, get very fractured levels. This kind of appreciation of having cash is not necessarily a bad thing, even in the zero rate world, because in some ways it’s optionality.

Andrew Simon (01:23:11):

That’s an interesting one, because I know first-hand from post the US election last year and also the announcement of your trades and model portfolio, pretty much I think there were zero. No trades at the time besides having a good year. I also was like, what are you doing? Let’s get in, let’s get in. I should take your advice on more myself and that after the announcement of the vaccines and US election results, I think either way, just taking away that uncertainty, that was probably the most pro risk that I’ve ever seen you. Obviously worked out amazing.

Bilal Hafeez (01:23:46):

Yeah. Yeah. You’re right. Yeah. Before the US election, we basically, I exited all of our trades in our portfolio, and then after the election, we went fully, fully loaded on risk, went long equity, short bonds, long oil, everything, and kept that until March, April, and then started to switch out of lots of those trades.

Advice to new starters in finance

Andrew Simon (01:24:07):

I was going to ask you about your best advice for people just entering the markets, and maybe also just say they’re entering finance.

Bilal Hafeez (01:24:14):

Yeah. What I would say is that today, in some ways there’s some amazing tools available to you to arm yourself with to enter finance. Number one, immerse yourself in the world of market. So, you can read the traditional media, like the FT and Economists and Wall Street Journal or those things, but also Twitter is great, but if you can find the right people to follow, just avoid the noise, there’s a lot of really good insights you can have on Twitter. There’s some people who put threads down where they explain how the Fed balance sheet works, or somebody talks about crypto something. So, just learn, learn, learn, and then build up some knowledge of finance theory. So, get some textbooks or something and learn what are the different instruments in markets? I would say the basics would be learn how fixed income, like bonds work, learn how equities are valued and then learn something about option theory.

And then the other thing I would say is these days, I think it’s becoming more and more important is learn to code in Python. You don’t need to become a super expert and there’s lots of libraries you can get access to, which have the code of already for you, but just have some understanding of Python. In many ways, I can’t really code that that well, so this is more advice for new people, but when I was starting out back in the nineties, Excel was the thing that if you were a wiz on Excel, that really turbocharge your career.

Today, I think Python is a new Excel. If you’re a newbie, you really need to be a wiz at Python, because if you’re able to use Python, it just opens up a whole world of automation and so on. So, instead of skills, I think all of those things are very important. Then the other side is network, because of social media and like at Macro Hive, we have a community as well. It’s so easy just to reach out and be part of communities or reach out to senior people, and lot of senior people are actually happy to talk to youngsters.

Andrew Simon (01:26:02):

Yeah. I think that’s a total misnomer that people are like that person’s so busy. They’ll never want to talk to me, but a lot of times if you’re serious and you’re a good listener, a lot of senior, very successful people love to give back, and I even see a lot of people, even on our Slack room, in the Macro Hive Prime Slack room where very successful people have long careers in finance, people ask a question, especially if they’re either new to markets, or it’s not really their focus, they have a different career path, but they want to understand markets and people really take the time. That’s a great piece of advice.

Productivity tips

This one I probably would love to hear is around how do you manage your information flow? I know you asked this question, but everyone in Macro Hive knows that you consume so much research and information and studying and books yourself. How do you manage all of that input on a daily basis?

Bilal Hafeez (01:26:59):

Yeah. Over the years I’ve refined my approach and I have a very structured approach, which starts from the time I get out of bed where the first thing I do when I get out of bed is I make sure I don’t check any electronic devices when I first wake up.

Andrew Simon (01:27:15):

Except your phone.

Bilal Hafeez (01:27:16):

Probably my phone. Yeah. The reason for that is I want to be able to note down all the ideas that have been mulling in my head, I’ve slept on. I want to capture them unfiltered. So, when I have my shower, so first thing I have my shower, inside my shower, I have a waterproof notebook where I write down all the stuff that comes to my mind when I wake up.

So, I also often a million ideas when I wake up in the morning, but I actually look at this, I look at it. So, I note that all down, then I do a little workout in the morning, just a really basic one, and then depending on if I’m coming into the office or not, so we have an office in central London, which people are welcome to who come by to say hi to us. On the commute in, which normally takes about 40 minutes or so, I break that down. Part of that, I listen to a podcast. So, I’m a massive podcast listener. So, I listen to podcasts. It could be on macro, it could be on crypto, could be on tech, could be on anything. So, I listen to that at the one and a half to two times speed.

So, half my journey I’m listening to a podcast. Then the other half, I start to check all my messages, I process all of that, and then go through Twitter and stuff like that, and keep aside pieces I want to read. And then during my work day, I try to as much as possible, although I’ve lost a bit of my discipline here, in general, I only like to check my messages or emails or Slack messages three times a day. First thing in the morning, once at lunch, and once at the end of the day. In between, I basically don’t want to be impacted by that at all. The reason I say that is when you start a task, let say I’m starting to write research note or something like that, most people within five, 10 minutes, they go to Slack or their email and check something.

The problem with that is number one, you’ve just started something. You then check that thing, and then that thing pushes you down some little rabbit hole that you weren’t thinking about before. It forces your mind to switch to a different topic. You end up going down that rabbit hole, and then you realise, actually I got to finish my task. You come back to your task, it takes you about five minutes, 10 minutes to get back into that mode, and then you’ve ended up becoming massively inefficient, and so what I find is you have to single task all the time. So, what I do is I split my day up so that in the morning, I’m a morning person, so I do more of the intensive research stuff, uninterrupted. So, you can just power through it all.

That increases your productivity, I would say, four, five fold. Somebody who would interrupt their day would end up… Even if they in theory spend the same number of minutes as me on a research thing, I’ll probably produce four times as much as they do. That’s one of the reasons why you see my output is so prolific, even though I work nine to five. I’m very tight with my time. Then I check my messages at lunch and then I set time aside then for different tasks. So then I set a time aside, all my emailing I will do now between these hours, all my calls are do. So, I group tasks together in that way then on the way back home…

Andrew Simon (01:30:12):

And obvious lot of client interactions I know you always like to have in that period in the afternoon, UK afternoon.

Bilal Hafeez (01:30:19):

Yeah. Yeah, exactly. So, afternoons are more everything on that side. Then on the way home, I normally start reading. That’s the point I start reading. So, normally I either listen to a podcast that’s not related to finance and I start reading whatever book I’m reading. Then when I come home, normally it’s this family time, which takes priority to whatever the family want to do. I just do that, and then in the evening I might squeeze in like an hour of reading in the evening and I can speed read as well, which kind of helps, so I can get book through really quickly, and I usually have two books running at the same time. One is a fiction book and one’s a nonfiction book, and then on weekends, I usually squeeze in a couple of hours a day reading. That’s generally my structure. It’s fairly disciplined. Take notes of stuff as I go along and you end up with a lot of productivity.

Books that influenced Bilal

Andrew Simon (01:31:03):

Most people in today’s world have that as an issue is, how do you better manage your time? How are you most effective in consuming information and being most productive? So, I guess, last question, you mentioned books. Any books you feel that have influenced your thinking towards markets or business the most?

Bilal Hafeez (01:31:22):

Yeah. Yeah. When it comes to books, I’m going to give a long list now because I love books and people often ask me as well, so I might as well just give a long list of books, but in terms of books related to markets and finance and doing my job, there’s a couple of books that I found really influential. One is Nassim Taleb’s books. He’s written a series of books. The Black Swans is probably the one that I found really useful. The main takeaway from that book was unexpected things happen a lot more than you think, and lots of smart people don’t know what they’re talking about. That’s the punchline of his book, which is what quite powerful. Now, his personality is very grating. That makes him entertainment, but it’s quite fun to read.

I think that’s definitely a very good book. The other book, I think, which I only discovered in recent years is a book by the Oxford physicist, David Deutsch. He’s wrote this book called The Beginning of Infinity, which is a really an amazing book about how to think about science, the difference between scientific explanations and purism. What is a scientific theory? The power of creativity in humans, what makes human special? Really eye opening book. So, I recommend that book. Another book by Phil Tetlock called Superforecasting. He’s done a lot of work in how to forecast well, great book. Another one would be JK Galbraith. He was a great writer in his time and he wrote this book or The Great Crash 1929, where he goes through what happened during the great crash, stock market crash for ’29,

it’s a great financial historical book. It’s written really, really well. Liar’s Poker, great book by Michael Lewis. Many people from my generation read that. It’s about the early days of Salamon’s some junior guy joins the trading desk there and it talks all the crazy stuff they did there. Then another book which actually goes back to the productivity side is there’s this book written in 1940 by this advertising guy called James Webb Young called The Technique for Producing Ideas, where he talks about how he systematically generates ideas. Great, great book. So, on the market side, I’d recommend those books.

Then on the startup side, because I read a lot of books on startup before I set up Macro Hive and there’s two books that probably stayed with me the most, one was booked by Jason Fried, who’s the CEO and founder of Basecamp, which is a rival to Slack and it’s called Rework, and he came up with later book, which called It Doesn’t Have To Be Crazy At Work. His whole idea was when you start up a company, especially a startup, it’s really easy to get caught up in the whole VC, get broke quickly mentality, but he said, actually, no, don’t do that. Go for patient growth and steady growth, and in the longer run that will work out to be better. That really stayed with me. The other book on the startup side was Bloomberg written by Michael Bloomberg, where he talks about his life story, and what I liked about that book a lot was he was a big shot at Salamons in the seventies and he left Salamons to set up Bloomberg.

So, he talked about the transition of being a big shot at big bank to becoming the startup guy, setting up Bloomberg, and he talked about he’d have to go to offices with a screwdriver and screw in and put someone’s terminal into a second rec bank. Before that, he was this big shot at Salamons. So, he really talked about the hard grind of a startup. That was really important for me when I started Macro Hive where I’d been a senior guy at big banks, and suddenly you are having to do things that you haven’t thought my level of seniority, whatever, I shouldn’t be doing this. You’re having to pitch to people you thought, did I ever have to pitch these people? That was quite humbling and a really good perspective. That was a good book on startups.

Then I want to mention another bunch of books on the more personal side, because I think that it’s very important to make sure that you do some internal work in life in general, but also even in finance. So, there’s a few books that have really impacted me at the personal level in terms of personal growth. One is the works of Rumi. So, Rumi is this 13th century mystic Sufi poet around lived in Turkey, and he’s when these reams of poetry. What I like about Rumi is that he talks about the mundane, the day to day stuff you do, working or studying or whatever it is. He turns that into something more sacred in some ways or more powerful. He’ll talk about don’t forget the purpose of life when you’re doing day to day work.

How do you avoid being a judgmental person. The way he talks about it is so clever that it stays with you. He’s one of the most well widely read poets to this day, and there’s reason for that. The other is the works of Shakespeare. I think Shakespeare’s amazing in terms of understanding human nature. I like the tragedies more than the comedies or the histories. Othello is my favourite, but the way he talks about how people can just self-sabotage is really quite amazing. Always where there’s Othello, Hamlet, Macbeth, King Lear, there’s all these characters who are in really powerful positions, and then they do stuff that completely sabotages themselves. He talks on themes of jealousy, insecurity, paranoia, all of these sorts of things. Now, obviously Shakespeare isn’t that accessible to a lot of people, because the language is quite difficult to read.

So, over the years I’ve found ways of accessing Shakespeare differently. So, there’s one series of books called No Fear, Shakespeare, where it has the original text and then it translates into modern English. That was quite an easier way for me to read. There’s actually a Manga series, comic book series of all the Shakespeare plays, which is really good. Then also there’s film adaptations of Shakespeare that are very good. So, a classic, a basic one is Lion King is actually based on Hamlet. It’s actually pretty much the same story as Hamlet, but the two best films on Shakespeare are actually Asian films. There’s one Indian film called Omkara, which is based on Othello, which is really works well because India has a cast system. The play with Othello who is black in a white world works really well.

And there’s this Japanese film called, Ran, which is based on King Lear, which was made by Akira Kurosawa, a famous director, which is an amazing film about King Lear, which is quite accessible. Those are some books on that side. I would also throw in Marcus Aurelius’ Meditations. So, he was the second century AD philosopher king of Roman empire. He’s the archetype of what a philosopher king could be. He appeared in the movie gladiator at the beginning, the father of Commodor was Marcus Arelius, but his meditations are great. It’s part of the stoic tradition where it talks a lot about the way you think about things. It’s almost like the reality see in the world is how you think about the world. So if you change your thought process, like cognitive behavioural therapy almost, you’ll change the way you see the world and that’s in your control.

So, you don’t need the world to change. If you change your mindset, that will change your experience of the world. And then finally, I just round this off with a couple of more self-help type books. But one book I found really, really helpful, and this will really appeal to men, I think, is How To Improve Your Marriage Without Talking About It by Patricia Lowe. Fantastic book, where it talked about how often when you have a rough patch in your marriage or an argument or something, there’s this notion that you should talk it out, but often that is the worst thing you can do because for lots of different reasons, you have to read the book to do that, but it’s a really, really good book of how to get through the rocky parts of marriage or relationships.

The other good book is a book called Nonviolent Communication by Marshall Rosenberg. An amazing book about language, how you can use language in a way that’s not violent to the other person, isn’t judgemental to the other person, and then the final book is two books, Raising Boys and Raising Girls by Steven Buddulph, where he talks about how you should raise either boys or girls and different ages, what you should do at different ages and things like that. Really, really, really, really good stuff there. So, anyway, so that’s the really list.

Andrew Simon (01:39:08):

That’s a lot, but of course we’ll have all that stuff in the show notes. As always, I think we’d love to hear people’s feedback. Some of those books sound super interesting and I don’t know if I mentioned to you, I’ve been trying to learn a bit more about stoicism itself and I find that super interesting. So, I think I know the answer, but make sure everyone knows is what’s the best way to connect with you or see on a consistent basis your thought.

Bilal Hafeez (01:39:35):

Yeah, sure. The easiest way to just go to macrohive.com. That’s where you see a lot of my work, but not all of it. So if you are a member of Macro Hive, you’ll see the output of the team, especially on crypto, equities and some macro, then for all of my more deeper market views, models, all the stuff I talked about earlier, we have a higher product for professionals and institutional investors. If you’re more of a professional investor or institutional investor, we have a product where you can just email me and I can tell you how you can receive that, and that basically has all the model portfolio, the trade ideas, regular chats, Bloomberg chats. It’s a very high end product that’s comparable, if not better than what you get from the sell side if I don’t say so myself. That’s one thing, then I’m on Twitter, LinkedIn, and so on as well.

Andrew Simon (01:40:23):

And also, the internal Slack room people can even reach out to you.

Bilal Hafeez (01:40:28):

Yeah, so if people want to reach out to me, email, bilal@macrohive.com. I’m on Twitter, LinkedIn, and then on Slack as well. You can reach out to me on Slack or in Bloomberg as well.

Andrew Simon (01:40:36):

Okay, awesome. It’s been super interesting. I feel like I’ve learned a lot. I’m sure a lot of traditional podcast listeners over the last year and a half, what we’ll find this, hopefully they’ll find this very interesting, but also very informative. Awesome. Thank you.

Bilal Hafeez (01:40:51):

Great. Thank you. Thanks for listening to the episode, please subscribe to the podcast show on Apple, Spotify, or wherever you listen to podcast, leave a five star rating and a nice comment. Let other people know about the show. We’ll be super grateful, and finally, sign up to become a member of Macro Hive at macrohive.com. We’ll be back soon. So, tune in then.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)