Podcast Transcript: Alex Gurevich On Trading COVID, Inflation and Games

This is an edited transcript of our podcast episode with Alex Gurevich, recorded on 2 November 2021 and first published on 5 November 2021. Alex Gurevich is the Founder and CIO of HonTe Advisors, LLC. Alex has been involved in trading for over 20 years; holding various roles on Wall Street that included the launch of fixed income derivative trading franchises as well as running the macro book at JP Morgan. In this podcast we discuss how to think about the current inflation debate, why equities don’t follow the economic cycle, how games like chess, go and poker can help your investing and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.

Introduction

Bilal Hafeez (00:00:01): 

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. For our latest analysis, visit macrohive.com. We’re getting great feedback on our weekly markets tracker, which tells you which markets are experiencing outsized moves. Recently we’ve seen five standard deviation moves in Australian bond yields and two standard deviation declines in natural gas prices. It’s been a big central bank meeting week as well, so check out our takes on the Fed and Bank of England meetings. And we’ve also updated our metrics for Ethereum, so take a read to see whether the rally will continue. And as a member of Macro Hive, you can get access all of this work, our webinars, transcripts of podcasts and crucially, our member slack room, where the Macro Hive team and members discuss markets all hours off the day. It’s refreshingly different from Twitter. And when you sign up at macrohive.com to become a member, the first month is free and then it’s only the cost of a few weekly cappuccino. It’s well worth it and many call Macro Hive the hidden gem for investors. Once again, sign up at macrohive.com. We also have a much more in-depth product for institutional and professional investors that features all of my personal views, the teams’ views, trade ideas, trading models, and much, much more. Hit me up on Bloomberg or email me on bilal@macrohive.com to find out more. 

Now onto this episode’s guest, Alex Gurevich. Alex is one of the most requested returning guests for our show. For background, Alex is the founder and CIO of HonTe Advisors. He’s been involved in trading for over 20 years, holding various roles on Wall Street that included the launch of fixed income derivative trading franchises, as well as running the macro book at JPMorgan. More recently, Alex has transformed his very successful family office into a global macro strategy suitable for institutional investors. He’s the author of The Next Perfect Trade, which was published in 2015 and the soon to be published The Trades of March, which we talk about in this podcast. Alex was born and raised in St. Petersburg, Russia, and earned his PhD in mathematics from the University of Chicago. So, onto our conversation. 

So welcome Alex. It’s great to have you back on the podcast. I have to say you are one of the guests that is probably the most requested return guests that we ever had. People are constantly telling me, “Get Alex back on, get Alex back on.” So, it’s great to have you back on as a podcast guest. 

Alex Gurevich (00:02:27): 

Thank you. It’s good to be back. I enjoy being on this podcast because there is a lot of thoughtful in-depth conversations here. 

Where it started for Alex Gurevich 

Bilal Hafeez (00:02:33): 

No, I appreciate that. And I remember when I first had you on last year, the one thing I didn’t do was I didn’t ask you about your origin story. I normally ask all my guests something about their background around, so it’d be good to get your background. So normally our listeners like to know which university did you go to and what did you study? Was it inevitable that you were going to have a career in finance and what were some of the important stepping stones to where you are now? 

Alex Gurevich (00:02:57): 

Okay. Well, I’ll give a brief summary, though inevitability is a very interesting question in itself. So my background is mathematics. I have a PhD in mathematics from the University of Chicago. People probably can tell from my accent that I was born not in the United States, I was born in the Soviet Union. I started college there, finished here, went to graduate school in the University of Chicago. What was interesting about my background, which I think shaped both my ending up on Wall Street and even my career afterwards is that I always had two things going on for me. I always loved kind of analytic aspect of doing maths, physics, and other scientific endeavors, but I also was very much always into strategy. And from early childhood, I played strategic games. Of course, since I grew up in Russia, I was trained in chess very seriously when I was young. And I’m not talking about playing like people play in chess clubs here, I’m talking about serious training. When from the age of seven each of your games I ever played was recorded and analysed. I never played a chess game, which was not analysed by my coach. Every game was part of a tournament. It was several hours every week, continuous training, right? And then I started to play even more seriously, in late as I started to play Go, which is a Japanese and Chinese games hence the name of HonTe Investments. It’s a term from the game of Go, which means to move. 

Bilal Hafeez (00:04:19): 

Okay. I’ve always wondered the origin of HonTe as a name. So that’s where it comes from. 

Alex Gurevich (00:04:23): 

The context of it is that it’s a strategy, which is not flashy, not immediately like the most aggressive thing, but I think it works gives you the best result on the long run, which is very appropriate I think for long horizon macro investing. 

How games like chess, go, and poker can help your investing 

Bilal Hafeez (00:04:36): 

I mean, just a question on strategy games, chess, I haven’t played Go, but I imagine Go is similar in one sense that these are kind of bounded games, there’s rules, the outcomes are kind of within a known distribution, you could say, whereas markets there’s feedback mechanisms, there’s endogeneity within markets. I mean, do you think that the bounded versus unbounded nature, there’s kind of a limitation to what strategy games you can transpose to markets? 

Alex Gurevich (00:05:03): 

I had those discussions actually with Michael Green a lot. We’ve had a lot of those arguments, whether, for example, AI systems that can play games very well can learn to play markets. And I think I fall on the side that the difference is not that big because the inputs and markets are still limited and structured, but my experience didn’t limit to these type of full information games. I’ve started to play poker seriously. I played in many poker tournaments. I played bridge. So, some of those games which, and interactive in a sense that they both have some probabilistic elements and some elements of understanding other people’s thinking and their responses. I also played a lot of strategy resource management games, which are more over niche games, more of the geeky community, but I’ve done a lot of them and I was ranked on many of them. I can’t even list probably all the games I played in my life seriously. None of those just casual playing. I’m not a civilian when it comes to game. Every games I’m studying, I’m developing strategy. 

Bilal Hafeez (00:06:03): 

You did this in parallel to your work career? 

Alex Gurevich (00:06:06): 

Work career and study career, all along. I still do. 

Bilal Hafeez (00:06:10): 

So how do you find the time? 

Alex Gurevich (00:06:11): 

Well, it’s like, think about, say if you are a professional boxer, how do you find time to train yourself? I consider it to be part of my training routine. 

Bilal Hafeez (00:06:21): 

Okay. Yeah. I can see that. 

Alex Gurevich (00:06:23): 

And what I think is very interesting, especially how I ended up being in the markets. I ended up being a global macro trader, which was not necessarily within go back to background and a little bit, but it’s not necessarily like the immediate and only path I could end up. One of the things about this is that I kind of have to look across all the world and all asset classes. By necessity, I cannot be an expert in many things that I trade. Many things that I trade I have relatively little knowledge of. Well, I mean, I try to have as much as I can, but there’s just too many products to be an expert in all of them. And I think the gaming background was very helpful to me, for example, even recently, I come to a party, I sit down, people teach me a new game. And if you are experienced resource management game play, you just know what questions to ask. You know immediately, okay, this is the path to victory. This is this, this matters. Okay. So probably need to focus on this. This will matter more at late stages of the game. You kind of try to think through certain like what resources you’re going to need, what you’re going to need, right? And same thing with trading. Many times, in my career, I had to start new asset classes. I came from fixed income derivatives background. So, my first job was on fixed income derivatives which was with the Bankers Trust. And then I had a very broad range of asset classes, and you have fixed income derivatives, which is various esoteric swaps. I did options. I did bond options and composite options and mortgage options, all sorts of staff at various trade. And then I got my first senior job to run, basically slow book at Chase and then I also launched agency bond assets for a franchise there, JPMorgan Chase together with Qin, who is currently working with me till now. We’re talking about 20 years later; she’s still working with me at my current firm. 

Bilal Hafeez (00:08:07): 

And just a question on banker’s trust. I mean, it seems like there’s a lot of very accomplished people who have that Bankers Trust background. So, in fact, on this podcast show, we’ve had Jim Leitner, we’ve had David Dredge recently a few months ago. What was it about banker’s trust that has created these people like yourself that think about risk in a certain way? 

Alex Gurevich (00:08:24): 

Well, I think some of it might just be kind of an illusion because there are also many people from Goldman, but some of it, I think Bankers Trust did have… In the ’90s, bankers trust was a very innovative shop, and they did have a very aggressive strategies and they were very aggressive on certain markets and derivatives. They had some setbacks as well. Some scandals associated with them, but there was a very strong trading culture there while other places had probably more like of a buttoned down type culture, Bankers Trust might have been more of a like cowboy culture, which was good probably to learn good and bad lessons early in your career. So that’s my best guess if there is any kind of disproportionate. And it was not such a small shop, it was not the biggest bank, but in terms of its presence, investment banking and derivatives market, it had a decent presence. So it’s not surprising that there are some alumni. 

But my biggest career… Most of my career was actually… On my senior, I was a junior person. I was at Bankers Trust, which became Deutsche Bank and my senior career was at JPMorgan Chase. And when I moved to the senior career, I started to trade broader range of products, and eventually when I moved away from doing franchise trading to proprietary global macro portfolio there, I started to trade currencies, commodities, equities. I started to do some trades that I’ve never heard about like hidden ratio trade, like the ratio between gas and electricity costs, all over the place. So how do you approach new market? And found that this is a lot like sitting down with a new strategic game. You’re kind of like, okay, what are the players? What are the resources? What are the bottlenecks and supply? What are the factors? How does it look in the long run? What’s going to work out on the long run. And very often it’s like as you start playing a new game, you’re probably going to make a lot of bad mistakes the first time you play a game. So, you kind of… I feel like just as you learn to win in a game, you learn to beat an asset class, and certain asset classes it took me a long time to beat. 

Bilal Hafeez (00:10:20): 

I can see that. Were there any particular asset classes that you found particularly difficult or took time? I would say. 

Alex Gurevich (00:10:27): 

Well, I think the most interesting example is USD/JPY. For some reason, first few years of trying to bet on USD/JPY, I was always confounded. It just kept not working out for me. I’m not saying I was losing a lot of money necessarily, but it seemed like I never could make money on USD/JPY. And up until 2012, it was an asset that tortured me. And then it became one of the most significant, biggest turning around profitable trades of my career, the short Yen trade when there was this political fall, rise of Abenomics, and I was already short Yen going into this, but I was suffering on this for a couple of years, but then when Abenomics rose, I really piled into this trade and I rolled it all the way Yen from like 70s to 120 plus career USD/JPY, right? And that was really a very turning trade in my career relative to the size of portfolio, it was probably the most profitable trade in my career. 

Bilal Hafeez (00:11:22): 

So it shows patients actually helps as well. Had you given up on USD/JPY, you wouldn’t have been able to make that career trade. 

Alex Gurevich (00:11:29): 

Yes. Patience and experience, and kind of looking for opportunities. A lot of playing the game I was looking for opportunities to find big moves and sometimes you get kind of splashed around a little bit, not getting things right. And you need to have some patience and risk management to go through periods when you’re not getting things right, but eventually you find that vulnerability point on an asset and ride it. 

Bilal Hafeez (00:11:54): 

You were at JPMorgan Chase for a long time then you went out and struck out on your own where you are now, HonTe Investments. What was the transition like from moving from a large institution to setting your own shop up? Was it from a trading or investment perspective? Was it the same, just a different packaging or infrastructure, or is there something of substance that’s different? 

Alex Gurevich (00:12:15): 

Well, this is kind of interesting. We have to go to Meta game here too, because it’s also like you have to… I just talked to you about beating asset classes, but you also have to learn to beat particular trading environments. First, I had to learn to be market maker on one product and another product, then I had to learn to be a senior person and actually run a franchise. Then I had to learn to run a proper portfolio and then I had to learn a hedge fund and that was actually a bumpy road for me because I had one hedge fund before that did not work out. I talked about this in my first book, The Next Perfect Trade about the events of 2007, 2008. And why, despite the fact of having right positions, I was not in a really good position to build up for business at that time and technical problems with my positions gave me a lot of pain at that time. It was a good learning experience. 

Then I went on to managing my own money and I had to beat that game, because that was a new game for me because I was used to be a bank trader, like personal account meant not nothing. You run so much money for the bank. What do you even care about your personal account, right? It was all about bonus and your bank portfolio. Then I tried to do hedge fund, that was bumpy. I did my own money, I learned to beat that game. And then I went back into taking client money a few years ago and I learned to… And then I was already more prepared for that game based on my previous experience. So a lot of things and a lot of mistakes that have been made before, so far at least, I don’t wanna be too arrogant, but so far I have not made and I’ve been able to survive certain things that would’ve been difficult in the past, like manage drawdowns and not get any kind of business side or client interactions distract me, make it productive instead of destructive, all their interactions with clients and actually give good performance over the last few years. 

Bilal Hafeez (00:14:10): 

But then from a Meta perspective then the important thing is to learn that you are changing the game or you have to learn a new game. So that remained the same throughout your career, just the game kept changing. So it wasn’t so much that you went from hedge fund to own money to getting clients in, at the Meta level, from your perspective, you were still doing the same thing each time, you were learning new rules of the game as you’re going along? 

Alex Gurevich (00:14:34): 

Yes. And the markets are still the same and you still have… My strategy, actually the core of my strategy didn’t change so much from, I would say 2002. Obviously, I tweak it. I find new ideas. I articulated better. I have more rigorous ways to formulate it, but the core of my strategy, what I’m really looking for is very similar, but the environments are different, and you need to make sure that you can, for example, I saw… Did you do an interview with Todd Edgar? 

Bilal Hafeez (00:15:04): 

Yes, I did. Yes. 

Alex Gurevich (00:15:06): 

And I was really thinking about his because I know him really well in person, we worked at JPMorgan together and I stayed in touch. And I was listening to him, and he was talking about doing 7,500 investor meetings and my head almost exploded. I had this conversation with him before, but he’s a very different person. He’s a great person. He’s market thinking is entirely different from mine and his business thinking is entirely different from mine. But then he built a really large firm at some point, right? He decided not to keep going with this, but he had a very big firm. So he was doing something right. 

Bilal Hafeez (00:15:39): 

You’re right. I mean the number of meetings he was having with clients, I mean, it was phenomenal. And then also he was telling me that what makes it even worse is that when you have a bad month, you are reminded of that bad month for the next month afterwards because the clients are calling you up to work out why was the previous month so poor? So there’s all these stress upon stress that you get from so many client interactions. 

Alex Gurevich (00:16:01): 

I have to say, I have really managed to, but first of all, I don’t have probably as many clients, and I don’t take as many client meeting. And I just have some kind of like a self-selection going on. I think clients who cannot deal just don’t stay and clients who stay can deal and they already been through some ups and downs and know how to weather them and knock-on wood. A lot of clients procured it for a few years, are up a lot of money, so they’re not quacking too much on every drawdown. I actually don’t mind communicating and discussing if I’m down, I like talking about… Financial markets is something I like. If I’m down, I don’t mind talking about what went wrong and why am I down? And what are the issues and what I think are the opportunities. 

Sort of the conversation that hurts me, it’s more the conversations where clients have to be constructive. You need to have clients who are supportive, investors who are supportive of you. They may ask you questions, what went wrong? What are you thinking? Are completely legitimate questions, but I have clients who start at this point asking, “Is everything you are doing even make sense? Are you just throwing darts? And is it just a zero-sum game?” You don’t want to have those conversations at the critical moments when you’re trying to manage your portfolio because you know it’s always like that. Whenever you are making a lot of money, it’s all skill, whenever you’re losing money, it’s all the dart game, right? So, you don’t want to be in that trap and you also need to manage it in a way that is okay. I don’t know how. 

He was talking about taking an average of three meetings today. I mean, I have no idea how you can manage any portfolio at this space. I mean, I don’t even understand, like do you have any time? See, my job is not to talk to investors. When people say like, “What do you have to do for a living?” I say, “I have to think.” My job is to think, to think you need the quiet, calm way. I need to observe the information and I need to think about what my strategy is going to be. 

Bilal Hafeez (00:17:51): 

You mentioned how you don’t mind speaking to clients about why a trade isn’t working because it’s almost like an intellectual exercise, but outside of speaking to clients, emotionally, how do you feel when you’re losing money? Because that’s one of the challenges everybody finds in markets where you feel unhappy, angry, depressed when you’re losing money and that often leads to poor behaviours in terms of your investment portfolio. Do you feel that as well? And how do you manage the emotional side of losses and draw downs? 

Alex Gurevich (00:18:18): 

Well, first of all, I will tell you, I don’t love losing money. 

Bilal Hafeez (00:18:21): 

Okay, good to know. You’re human. 

Alex Gurevich (00:18:24): 

Yes. I’m human. And there is also I’ve had quite a bit of experience in financial markets and minor setbacks don’t throw me off. If there is one down day, it usually does not affect me. If anything, I might say like, “Oh great, this trade move to better level I can act.” Right? Protracted drawdowns take toll on anybody. I don’t think anyone is immune to that because your identity is very much if you’re a trader, especially, if you’re passionate consumer trader your identity is very much wrapped up in your performance. So poor performance is a challenge, not just to your wallet, but to your very identity. It’s a very deep existential issue you need to perform. So, to pretend that you have no psychological pressure, I mean maybe there are a few people who feel absolutely no psychological pressure, but I doubt that there’s many of those, right? I think one of the keys is to structure your strategy around in such a way that psychological pressure doesn’t affect your performance too much. What some people do, for example, a very simplistic way of structuring your strategies you enter a trade, you set the exit points, whether it’s a stop out or a profit taking points. And very often I think of trades… I don’t have a lot of individual trade stops, I’m more like a portfolio manager, but generally I think of a trade as a bullet out of a gun. That’s how I like to say. I did the trade. I’m not going to overthink. The trade is done. And then we just play it out according to preset exit and risk management strategy. This is a little paradoxical because a lot of people tell you be nimble. The very market maximum is to be nimble. Take new information, take new data. I think actually with regard to existing trades, it’s paradoxical, counterproductive taking new data. You did your research; you did the trade. If it did not work out, onto next trade. 

Why sticking to take profits and stops is important 

Bilal Hafeez (00:20:14): 

What about managing the position? So, let’s say you have a take profit level in a given market, the market reaches that level, new information comes out, whatever type of information that tells you actually it could extend for another 5%. So surely you need to incorporate new information and that then extends the trade and so on. 

Alex Gurevich (00:20:32): 

Yes, I understand your question. And paradoxically, I find it much more productive to actually take profits at your preset levels, regardless of new information coming in. I really found it… And if you have stops, keep stops at the same level, do not change. I find it’s counterproductive because think about this in terms of say your stock investor, because it’s easier to understand for many more listeners and your stock is trading at 80, you think the stock is worth 100. Now all of a sudden, the stock comes out with good earnings and jump to 100, and that’s your profit target, but you’re thinking good earnings, it could go to 120. But the reality is the reason you invested in this company to begin with you thought they would have good earnings, that was your edge. Now that everybody knows that the earnings are good, your edge is gone. So, I find that almost always it is better to stick to your preset strategies for, whatever your strategy is, I’m not saying how you have to be in terms of profit taking, risk reductions. And again, and again, preset strategies, I could even have example of like this in the commotion of March 2020, which we’ll probably get later in this conversation, but preset target levels work really well. 

Bilal Hafeez (00:21:40): 

And I guess if you’ve exited that trade, you could still look at the world and say, actually I want to put a new trade on in that stock? 

Alex Gurevich (00:21:46): 

Might be a different one that has more value now, right? 

Bilal Hafeez (00:21:49): 

It stops you getting kind of too married, so-called, married to the position as all the saying go and you kind of look at everything with fresh eyes. 

Alex Gurevich (00:21:55): 

And if you structure your strategy so well, if things are going poorly, in the very least, think about this, say you are affected and your brain is not working as well when you are losing money or stress, it is unavoidable. Your cognitive function is getting impaired. So, the key is to make most amount of decision that your cognitive function is the best and least amount of decision when your cognitive function is impaired. So, if you have a mechanical process for risk reduction, for example, if my portfolio is down this much, I have to shrink risk by this much. And again, there could be different ways to do it, but say you have that. Then you can mechanically execute the risk reductions without thinking about it too much, and you can mechanically take any stops you need to take, any profits you need to take. Your survival is not hinging on you every second having the best cognitive function. Meanwhile, you keep thinking, of course, you keep looking for different ideas. Keep looking for how to take advantage of this opportunity. Maybe some trade you’re losing money on, but there is even better trade available. So, you need to get out of this trade you’re losing money on, book the loss, but do something which is even better value. And this is a very hard psychological decision to make, to get out of a trade, which you think is huge value, but is at a loss and moving to a trade which has even bigger value. That’s a very hard decision to make. But if for some reason you don’t see those opportunities and you don’t manage to function that well, you need to have some protection around it. You need to have some structure that will allow you to function if you are feeling stressed. 

Bilal Hafeez (00:23:33): 

And kind of another level then, you said you kind of look at risk at the portfolio level. At what point do you think that your strategy or your approach to markets is no longer working? Like say the worlds changed. I mean, you talked about some instances historically in the past where things that work out, how do you know your way of looking at the world is just fundamentally wrong now and the worlds changed? One way is a statistical way. You could say, okay, this is my distribution returns over the last five, 10 years, like an empirical approach. My performance recently has been outside of a distribution, so something’s wrong or it could be more theoretical, I guess, where you say, actually I’ve recognised a change in regime. How do you look at this? 

Alex Gurevich (00:24:10): 

Well, I would draw the distinction between my strategy and my perception of market regime because my perception of market regime definitely sometimes is erroneous or sometimes market is in a certain regime for several years and then the regime changes. For example, a good example that I start my new book with is we were in a certain regime up to 2018, up to early 2018 and then there was that moment in January, February, 2018, if you remember, when dollar sold off really sharply, bonds sold off really sharpy, bulls spiked, and this was a transition to very different market regime, it was transitioned from mid-cycle to late-cycle. And going on historically, you could find such events in previous late cycle transitions. I did not know that right away and it was a tough winter for me the winter of 2018, but I figured out what was going on in a few months and I recovered. So, it took me a while to understand the new regime and recognise all the signs that we just shifted from mid-cycle to late-cycle, and I need to trade differently. So that is about regime. 

Strategy is more like my broad way how I approach the market. Honestly, it’s hard to tell because my strategy has not been truly challenged in a sense, because my strategy is not about market focus or perception of market regime. My strategy is basically used on what I like to say irrefutable logic. That is my strategy is based on following the logic lines of implications in financial markets, and always going through nodes of most likelihood. So, it’s not about because I do not make certain forecasts about anything. I don’t make certain forecasts. I just look for positive expectation traits and I identified them by following very simple likelihood principles. 

So, I’d like to say in markets there is no certainties but certain likelihoods. So, it’s like in poker, for example, if I have a made hand and my opponent is drawing to flush, they have roughly like one and five and it’s not one and four. It’s more like one and five chance to get the last flush card because I’m the favourite, but they could still get the flush card. But I know I have a certain correct way of playing, which is to bet as much as I can to pay for the draw. So, the same thing, I’m looking for those things so the incontroversial, skill probabilities in my favour. 

Bilal Hafeez (00:26:36): 

How do you know what those probabilities are? Is it based on historical data or historical instances? So it’s derived empirically. I mean, how do you know what those probabilities are? 

Alex Gurevich (00:26:47): 

Well, I’ve talked about this in… So, this is basically the subject of my first book, The Next Perfect Trade. I discuss, and since then I’ve made it much more rigorous and much more numerical, but there are certain very simple parameters that make trades more likely to make money in the long run than not. One simple is secular trends. If you align to a secular trend, you’re much more likely to make money than to lose money. So being long stocks makes money more often than being short stocks, is a simple example. Same thing, being long treasury bonds makes money more often than short treasury bonds over the last 40 years, then there is carry. The single best predictor of long-term FX currency performance is nominal carry. So, if you’re going against… There is an evaluation pool, that is, if you have some incontroversial reasons to believe that something will have certain value five or 10 years from now, there will be some pull towards valuation, even no matter what people say about seasonals and adverse flows right now, those things are kind of usually disregard all those conversations about, oh yeah, it’ll be high in five years, but next spring, I think it’ll go down first. 

What people say this, all I hear is blah-blah-blah-blah-blah. I basically tune out actually. I know that because it’s highly speculative and doesn’t really register in my system. Those speculative conversations about current flows, positioning, seasonality, they basically… I’m not saying that they’re not valid and people cannot make money on them. They just don’t register in my system at all. 

Bilal Hafeez (00:28:15): 

But say on the value side, valuations have been quite a poor filter to use at least in equities in recent years last say 10, 15 years or so. 

Alex Gurevich (00:28:27): 

Well, I would argue that equities have no such thing as valuation pool. 

Bilal Hafeez (00:28:30): 

Oh, Okay. Okay. 

Alex Gurevich (00:28:31): 

Or very little. There is a certain valuation pool for equities, for example, who have really good ROE like if you just have really good, but equities have no valuation pool because there is no way to say where certain stock has to be 10 years from now. Bonds, however, have valuation pool. Valuation pool is the strongest and interest rate instruments because there are certain instruments, which is very clear, how they’re going to play out. 

Bilal Hafeez (00:28:57): 

Yeah. Because you have fixed coupons over time of the life of the trade. 

Alex Gurevich (00:28:59): 

I could point out trades and interest trade markets that would pretty much entering them right now at the current level, you have no precedent of losing money over the last 40 years entering any day into the trade, right? But it does not mean that the trade is easy because the carry is small and the volatility is high and the payday is high and all of this stuff. So that is where I look. Some commodities may have a valuation pool on occasion because of sudden supply demand, very clear supply demand issues. And again, remember those are not certainties. Jumping a little ahead on conversation, say you bought deferred oil at $30 in March 2020 for $35. You don’t know what’s happening to pandemic. You don’t even know what oil will be worth two years from then. Right? What will be the technologies and stuff, but you can kind of guess that probably 30, $35 was not a fair value. And the other way COVID will resolve an oil will go back to 60. You might have not guessed 85, but you could easily guess 60, right? That’s what I call a valuation pool. 

Bilal Hafeez (00:30:00): 

I want to talk a bit more about 2020 in your new book, but before we do that, just a question on the games. Are there any particular games you would recommend to people on the investment side? Is it chess? Is it Go? Is it, you should pick a new game every year so that you kind of keep agile? Are there certain games that you think lend themselves, especially well to people in finance? 

Alex Gurevich (00:30:22): 

Well, I think for poker is very important for training psychological fortitude. So you have to play some No Limit poker. Poker very strongly aligned with what I talked to you earlier about psychological pressure and making good decisions. I actually write about this a lot of my new book, imagine what happens often to poker players when they get stuck and losing money, they play really, really long sessions and keep losing more and more trying to get back even, and the decisions are most impaired. What I’ve learned… And I started playing poker like that and then I learned actually a very rigorous control. I will sit down at a poker table, I will buy in, for a certain buy, I will pass. I will buy in again and if I pass, I’m gone that night. If it means that I’ve only got to play 40 minutes, I’m gone. 

However, if I am winning, I never ever stop. Don’t stop when you are winning at all. Take breaks, go for walk, go to the bathroom, drink some water. You need to keep playing while you’re torturing all the losers at the table. Let them squirm, let them give you their rent money. These are usually not the people who have rent money that I’m playing with, but I haven’t played poker many, many years, right? But when you are winning, you have clarity of mind. If some hand is not going well, it’s not a big deal. You can let it go. Same thing with trade. If your portfolio is doing well and some one trade in this portfolio is just like, “Ah, I don’t know. Don’t really like this price action.” I’ll forget it. Out. Very easy. When your portfolio is down, it’s very hard to make those decisions, to lock in some losses, retrench. So poker teaches you this, how to push, press when you’re winning, and by pressing when you’re winning, not necessarily piling necessarily winning trades, but press your creativity, press your ideas when you are winning and how to be structured and defensive when you are losing and not get too much over your head when you’re losing, not get stuck on things, not get attached to things. 

Alex’s experience of trading COVID in March 2020 and lessons learned 

Bilal Hafeez (00:32:10): 

I can see sort of the quite strong parallels there. Now, you’ve mentioned a new book and you have a new book. I think it’s tentatively called The Trades of March, which will be out soon. 

Alex Gurevich (00:32:20): 

The title is locked. It’s The Trades of March 2020. 

Bilal Hafeez (00:32:24): 

That’s great. And it’s great to have you on, I think this may be the first interview where you’re talking about the book, and the book revolves around last year, 2020 in particular, the period around COVID breaking out and how you kind of coped and dealt with that as an investor around that time. Do you want to kind of tell us a bit, first of all, the motivation for writing the book, first of all? That’ll be useful. And then also we can then go into some of the sort of rough outline of the book as well. 

Alex Gurevich (00:32:50): 

Well, I think it almost started as a joke because at some point, because the trading in March 2020 was so intensive and we can go more into this, but it was like sleepless nights and just tons of… Everything was moving so much all the time that normally moves that you would wait for two years to happen were happening in like one hour. And there was so much stress that at the end of the month, it’s like the book should be written about just March 2020. And then I was like, “Wow, why don’t I write this book?” 

Bilal Hafeez (00:33:19): 

Yeah. And I think also it’s a year and a half on and I think we haven’t really properly reflected on that period either. We’re kind of so in the moment now, we’re constantly looking at whatever the theme is in markets. I don’t think we fully digested what happened in that month. So I think it’s quite timely that you are coming out with this book. 

Alex Gurevich (00:33:37): 

I hope it is good time. One of the people who was early readers of my book for reviews said that reading it this last summer was almost too early because he felt too much PTSD. This book was kind of giving him PTSD of the stress of markets of March 2020. So hopefully this winter will be just the right distance that people will feel a little calmer to reflect back on it. 

Bilal Hafeez (00:34:02): 

I could definitely sympathize with the PTSD. So if we kind of go a bit more into that period, first, I suppose before COVID, what were you thinking? And what was the mindset of the world at that time? Before coming into COVID, how were you positioned? What was the context of the period just ahead of COVID? 

Alex Gurevich (00:34:17): 

Well, as we mentioned earlier in this talk, really the coloring of the market at that time for me was that we moved into the late cycle. As we all know that played out in 2019, rates started to fall in 2019. I even kind of joked about that, that somehow inverted yield curve predicted in 2018, early 2019, there was an inverted yield curve and somehow it managed to… People say that those predict recessions, somehow it predicted COVID. So once again, and I don’t know if we would’ve had recession without COVID. What I really realised in 2018 and that’s not shape my thinking, that at some point, something will happen whether it will be ordinary recession, but rates will go to zero. They had no other path this time. But it was very clear to me when rates got to about 2% that they were peaking and nothing was going. They were not… In early 2018, it became clear that rates are peaking, that there were all the signs of late cycle. 

Bilal Hafeez (00:35:13): 

And so you were positioned accordingly then? 

Alex Gurevich (00:35:15): 

And I was positioned accordingly. So I was starting to bet on zero rates in 2020, regardless of COVID. You could say that it was fortuitous, but I also was already having a good year in 2019 and I was having a good month in January and February 2020 before the actual pandemic became a real crisis. So it was a right direction to be. And my biggest position at that time was to be long US and not betting on US interest rates, to going down both direct positions and options. 

Bilal Hafeez (00:35:48): 

And then COVID happened in March, and then what happened to your portfolio? Or how did the markets behave in a way you wouldn’t have expected? Had someone told you we were gonna have a pandemic shock? 

Alex Gurevich (00:35:59): 

Well, what I did was very interesting, what I tried to capture. So, the first thing I tried to capture in my book is the sense of how we descended into this, how it started, like that psychological thing from, “Hey, there is something in distant countries, something happening there. It doesn’t really concern us,” to, “Huh, this is a concern. And I bring up some examples. I was at the convention in the end of January, it was a convention in Florida, some kind of investment convention. And there was a panel of economist making projections for 2020 economic growth and I was sitting there, not one of them was saying anything about this building epidemic affecting the growth projections. That was not even one part of conversation. I was sitting there, “Hmm, zero, like nothing?” Not like they’re talking about 3.5% percent versus 3.25% global growth, nothing, on Wuhan whatever. 

But reality is, I was not that concerned personally about that. And then gradually as you go through different events, so every trip, I kind of went a little bit in describing my personal journey towards it too. How the tensions are slowly rising, how you stop shaking hands, start using hand sanitisers, feeling like, “Oh, it might affect us.” And then suddenly, “Oh, it’s here. We’re in it.” And that gradual path of descending into it, I think, in itself presents a very interesting psychological journey. And I think I broke down the month of March itself into four weeks and I have like four chapter… There’s a couple of chapters before March, which kind of leading up to this and it’s four chapters in the month of March itself. The first week I called it a victory parade and the reason is because our positions were working out. All good. We are making money on falling interest rates. Everything is great. Record month, record year, all going well. 

Bilal Hafeez (00:37:50): 

And just remind me in that first week of March, what was the general view on COVID? 

Alex Gurevich (00:37:56): 

Well, I think first week of March is when COVID started to get real then Europe was already in a very bad shape and there were cases here in U.S., but that was when there were really bad things happening in Italy. And I’d have to consult my book to actually give you exact string of events, but yes, things are starting to get serious. There was an emergency rate cut on first Monday of March, like March 3rd, I think. And then rates have fallen a lot. And first, dollar I think retreated, I think, well, again, you have to look at… but things are kind of making sense first week of March, let’s put it through the cycle. And then I call the second week of March, I call it the loss of innocence, and this is about us losing our COVID innocence. 

In the second week of March, we realised COVID is not something happening elsewhere for us, I mean, U.S. people it’s happening here as well, and markets are screwed up. And this is when the liquidity has started to disappear, and the funding started to disappear. And so, the trades, which economically made sense started to actually go against you. This is when equity started to go down hard, but treasury bonds started to go haywire, not necessarily in your favour because there were days when treasury first, they really rallied in the beginning of March. In the middle of March treasury bonds were crashing, which made no sense, but there was no funding. 

Bilal Hafeez (00:39:13): 

You talk about liquidity and funding. So, were there parallels to the 2008 financial crisis or not? Or was this- 

Alex Gurevich (00:39:20): 

There were parallels, there were definitely parallels. And what was… I’ve mentioned in the book there because my book is centred around my trading transcripts. So, what I really wanted to do in this book is to show people a real… allow readers to be a fly on the wall in a command centre of a hedge fund, because I feel a lot of people see movies, they read books, they see various interpretations, like read various interpretations, but many people are curious about what macro funds actually do. So, what I wanted to… It’s like, there’s a difference between reading some political commentary or hearing tape of a conversation of the president and somebody in the White House, right? So, what I wanted to do, I wanted to present the actual tape. What are we doing in our trading channel? Have all the full transcripts, so what are we talking day by day in March? What trades we’re actually doing? All of them. What are we executing? Whether we’re cursing, whether we’re celebrating, whether we’re befuddled, whether we’re confused. There’s this critical moment in the middle of the month, when I say, oh, we should really be careful about this because in 2007, that really went sideways. I don’t need to go probably into technical details, but that particular thing can really explode in our face. 

Bilal Hafeez (00:40:38): 

There was an echo from ’07? 

Alex Gurevich (00:40:39): 

There were definitely some echoes in ’07. There was sudden liquidity. What I realised, and this is the subtitle of my book is A Shield Against Uncertainty. Because my first book had subtitle, A Magic Sword of Necessity. So, my second book had a shield in subtitle. And the idea that there was really in certain in March, we didn’t know what’s going to happen to markets. We knew very little about actual virus, the pandemic, the policy responses. So, we had to separate what we do know, things like, well, two or three years from now, things will probably normalise one way or another and what we don’t know. And it was very easy to be tripped up on what you don’t know, which is when will Libor come down? When there will be funding, how soon Fed will solve the funding? 

This is probably like, well, because the title is The Trades of March, and so obviously in the eyes of March, and the eyes of March is actually March 15th. That was Sunday. And on that Sunday afternoon Fed made another emergency rate cut of 100 basis points. And I remember driving home at 3:00 PM on Sunday afternoon, and first I was like, “Great, we’re going make so much money.” And I was like, as I’m driving, “I’m not sure we’re going to make money. Things could get worse.” I had this sense of fear, sense of dread descending on me, literally, as I was talking on the phone about markets and getting to my screen because I was surprised. I was not even around for when the cut was happening. And say the third week after this, kind of called the dark day, and this is when the stock market bottomed on March 23rd. And right before that, there was this… So, despite the emergency rate cut, liquidity kept getting worse in the market. Eventually it was resolved. 

So, what I was repeating to myself as a mantra, pandemic will pass, liquidity will stay. So in other words, I knew that the central banks will keep adding liquidity till liquidity will become excessive. They will not stop till there will be enough liquidity, but what I could not do, what I would be wrong, and I was wrong every time I tried to is to time it. And I did make some is mistakes in March trying to time it, but thanks to the lessons about ’07, ’08, I quickly unlearned those mistakes and kind of retreated from positions, which are not working. 

Bilal Hafeez (00:42:49): 

And so, when you say you didn’t try to time it, does that mean you just had dialed down your risks significantly on the portfolio, or how had you positioned your portfolio in that kind of context? As you said, you know the liquidity will be there, but you don’t want to time it. So, the dark days week, how did you- 

Alex Gurevich (00:43:06): 

It was more about focusing on trades which are not dependent on exact timing of it. I like to give this example with oil, even though oil was not a big trade for me, but I think it’s just oil because of its crazy price action has a very interesting example. You could have four ways of playing oil, and I will tell you first three ways, which I did not. You could say in March 2020, “Oh, oil is trading at 20 bucks. This is ridiculous. It’s going to go up. Let me buy May contract of oil at like 20 or $15.” And then you would’ve closed the contract at -40 and would’ve been completely eliminated. You could have said, “I think things will probably resolve in about one year or so, and I’ll buy June 2021 contract,” and you would’ve bought that contract for maybe 30 something and closed it in like 74, 75. 

You could have said, you know what? You could have patient view because of COVID people will probably stop all prospect drilling and there will be supply bottleneck and energy will really go crazy. So let me, two or three years from now load up on energy and just run it. You would’ve made a fortune on that. Or you could have taken a fourth approach and say, “I’m going to buy deferred oil two or three years out. I’m going to buy at 35 and I’m going to close it at 65 when it reaches at fair value.” And that was my approach. So, I neither did the absolute jackpot trades, but I also avoided the pothole of May 2020. And this is what I called about a show against uncertainty. To me, it’s not always about getting the sharpest most precise trade. For me, it’s about trying to look through, let’s just say, take all those speculative things when COVID will be over how this will play out, what will actually happen, energy supply. Let’s put it all aside. Let’s focus on what is most likely to happen. And most likely will happen is normalisation. And if you go far enough, it’ll normalise. That’s how I try to focus my trading. 

So, in March, and this is another thing, this is things that I’ve discovered years ago that one of the greatest fallacies, I think, traders make in the times of crisis, and I’ve heard people say it again and again and I think it’s an absolute fallacy. When people say things like this, this market is super dangerous right now, it’s very volatile and uncertain so we can trade it only tactically. And I think it’s absolutely wrong. That is a time to trade it strategically because when there is huge intraday volatility and high uncertainty, tactical trading actually has less value because you could be getting in the trades, stopped out of trades. 10 minutes later, you can be chopped up. And if you’re in unknown environment, your skills of tactical trading are probably not that applicable. This huge intraday volatility gives you opportunities for trades. It so quickly shifts the levels that you can enter the trades of levels that two or three years forward look really good. So, you should be using this intraday crazy volatility to enter trades, which give you long-term good expectations, and you can enter them on sizes that are agnostic to the short-term utility. 

Bilal Hafeez (00:46:15): 

Yeah. I see. That’s a really good point, actually. Now that you describe it, it makes a lot of sense to say in that way. And actually, March probably presented lots of those opportunities thsn I imagine as well. 

Alex Gurevich (00:46:26): 

Plenty. Yeah. Again, going back to that mantra that central banks will add liquidity, so liquidities will become excessive, it was very clear what you needed to buy. You needed to buy assets. It didn’t really matter what assets you buy, you just needed to buy assets. 

Bilal Hafeez (00:46:40): 

And you talk about in March, the third weeks of the dark days, I think you called it. And then the fourth week? 

Alex Gurevich (00:46:45): 

The fourth week, well, I called it, the Asia wonder because things reversed so quickly. By April 20th, NASDAQ was unchanged on the year. 

Bilal Hafeez (00:46:53): 

That’s really quite amazing and remarkable. Who would’ve thought that? 

Alex Gurevich (00:46:57): 

Things reversed so quickly, and this is the thing, you could not wait. You could not say like, “Oh, I’m going to wait for things to stabilise to get back in markets.” No, there was no such opportunities. Things were snapping back so hard. 

Bilal Hafeez (00:47:11): 

Then at what point did you start to feel much more confident about the environment you were in and timing even? Was it that last week or was it more like April, May? 

Alex Gurevich (00:47:25): 

Honestly, I, at no point felt confident. I don’t even feel confident now about the environment. I mean, we kind of have to deal with trading in uncertainty. I never had confidence. I feel like at some point, and it might have been probably a little pretty mature, later in 2020, I started to lean a little less heavy on being long beta because I felt like the big beta play was over. And by long beta, I don’t necessarily mean long stocks, but long trade, which whatever, being in trades which have positive correlation, right? To economic recovery. In a sense that my fund is not relying on being consistently long beta to make money. I’m trying to make money in other ways that’s the design of macro portfolio, which should be the ones performing well in crisis, which should be the ones long-term uncorrelated to beta. When beta is the best opportunity, I want to belong beta. When I don’t think that beta being the best source of opportunity, then I should be doing other things. Obviously in 2021, beta was still a good source of opportunity. 

Bilal Hafeez (00:48:30): 

And the book you say it’s likely to published in a few months in January, hopefully? 

Alex Gurevich (00:48:35): 

Yeah. We’re targeting January level. 

How to think about the current inflation debate 

Bilal Hafeez (00:48:37): 

Okay. So, we kind of look forward to that. And before our call, I was telling you that as much as we can, we’ll try to gift the book as too many of our super fans who are the avid listeners to the podcast, as well as some of our clients as well. So, I really do look forward to the book. Now, I did want to pick your brain on the here and now as well. And one topic that’s obviously on top of mind for everybody is inflation. And there’s this endless debate at the moment around permanent inflation, transitory inflation, stagflation, stagnation, and all of these different sorts of permutation. How do you approach a question like this? We all see the same data and people have different interpretations, but how do you approach this? 

Alex Gurevich (00:49:17): 

Well, I think in this case, I’m going to Meta thinking. I have to accept the genuine dichotomy. I think that there is no intellectually resolvable way to answer this question. I think the arguments for inflation being transitory and inflation spiraling are both valid, and there are very smart people on both sides who will show you a lot of charts and a lot of data. And I might have my own biases, but honestly, I almost disregard my own view at such situations because there is this, what I like to say, there is like at least three levels of thinking. First is what I think is a very naive way of thinking. You probably sometimes see people say something like this, if this asset closes below X, Y, Z level on Friday, it’s all over. Instead, what should be said is there’s 52% chance of it falling down, right? Instead of all over. People get so convinced and excited about their views, right? 

Then there are probably more experienced people, most people who deal with the second level thinking that, say, okay, these are my arguments. This is my position. I know I may be wrong. I will listen to other people. I know that nothing is 100%, but this is the conclusion I reached and that’s how I’m going to structure the trade, but there is a third level of thinking if I reach those conclusions and you across the screen reached another conclusion, why am I thinking that… What makes me think that my conclusion is better than yours? Why should an alien looking from the sky at the two us choose, “No Alex’s right,” or is John Doe right? So, there are situations when they may be such result. 

For example, if I was arguing with somebody about a math problem and they were not mathematician, and I am a mathematician by education, objective observer from the side, “Ah, Alex is probably more likely to be right. I have no idea what they’re talking about, but Alex is probably right.” But if a person at least has qualified as me is making an argument in an opposite direction, then why my opinion even has any value at all. Why should I trade on my view if I don’t think I’m more qualified and people have the opposite view? So, I try to actually get away from trading too much from my views, or I give them purposely very little waiting in my strategy. There is actually a precise waiting for my view in my strategy and it’s like 10%. 

Bilal Hafeez (00:51:27): 

So, in this case then, does that mean that you won’t put on trades that are linked to inflation? 

Alex Gurevich (00:51:32): 

Oh, I will absolutely put trade linked inflation, but I will look for opportunities which have offered me superior risk reward in many different outcomes. For example, one of the trades that I’ve been in since March 2020 and very passionately is U.S. inflation index bonds. 

Bilal Hafeez (00:51:48): 

You’re long linkers? 

Alex Gurevich (00:51:49): 

Yes. And I’m still very limit long with really high level of conviction, even though they rallied a lot and a lot of people saying they were price, they think things they are tremendously cheap at this level. 

Bilal Hafeez (00:51:59): 

I guess that would benefit either from an environment where inflation does spiral? I suppose you benefit in that environment, but also you benefit if we’re in a lower growth environment, for example. So, you have different sort of parts here? 

Alex Gurevich (00:52:13): 

Yeah. So basically, there are several scenarios and they don’t work in… There are some scenarios you can find in which they don’t work, but in those scenarios, I find they’re other trade that might work. But the scenario in which we’re kind of modeling through inflation moderates next year and the growth models through in inflation might be 1.5 or 2%. And this is pretty conservative even in modeling through because the energy, the headline will give a lot of push out to inflation, but it’s an environment which I… By the way, this is my bias, and the rates will stay zero in this environment indefinitely. That is nobody’s going to be raising rates of inflation and modeling through with 1.5, 2% from this current high levels. It’s not unwinding this year’s inflation jump, but it’ll start looking like we had this jump and now inflation is kind of cruising and there are some weak pockets of growth. I feel there’ll be no need for them to raise rates. So, the actual yield will be like -1.5, -2%, which is an improvement from -1% or even higher than 10-year yield right now. 

If we have hyperinflation, chances are Fed will be behind the inflation curve and the yields could go really negative for a while, and that probably the carry yield will accrue from this original inflation push from which the Fed will be trying to catch up, will probably give a very good result. And there are different other examples. There’s like a Goldilock scenario in which maybe inflation is like 3% and tax raise to 5%, but I don’t think that’ll be sustainable. And that is a little bit about of our view, but I think most people when we talk it over agree that structurally 5% nominal rates will just break everything. The current debt structure in the world, so that’ll probably not last very long. And they have to get there to hurt us because in order for them to raise rates, the total inflation has to be somewhere around 3%, right? And to raise it past then to hurt us, they have to go way past 3% with Fed funds rate and rapidly. And that is, first, unlikely. Secondly, probably will break some things and I’ll have to go down again. 

US real yields could head lower 

Bilal Hafeez (00:54:11): 

And so, when you look at real yields or when you look at forward real yields, which look incredibly low, from your perspective, it’s not too low. It can go lower because I’ve had lots of conversations with sophisticated institutional investors who are looking at say the five year five year real yield and saying, “Look, it’s close to the COVID lows. And so, it’s going to go back up.” 

Alex Gurevich (00:54:30): 

I don’t think so. I think that negative for real yields is kind of the reality of our life. I don’t see them going away. I don’t see how they can go away because basically there are ways you can think of they might go away, but you’d have to really say rethink, this will be like a case. I can be proven wrong because there is no certainty, but it will involve some restructuring of the world, because for as long as we have certain inflation target and people do not agree, central banks do not agree to really low inflation. I feel like for real yields to go become less negative, Central banks have to agree to much lower inflation and I don’t think that’s going to happen, to agree to like zero negative inflation. As long as they’re trying to have inflation 2% or higher, the real yields will stay negative because it’s going be, with the global debt structure, it’s very hard for it to go far above those levels. And every time they’re going to go above them, they’re going to just hike, hike, hike and stuff is a go. 

Timing is hard to figure out, but typically this was one of the things that helped me trade 2018, 2019. A very surprising thing. Usually there’s only about six to nine months on average between last hike and next piece. So, there’s a hiking cycle. There is last hike when people usually still think of more hiking and then usually only six to nine months later, there is needs. 

Bilal Hafeez (00:55:49): 

Yes. I mean, so what about a scenario where, currently say U.S. inflation is around 5, 5.5% or so and headline, and let’s say next year, inflation ends up hovering around, say 4%, rather going down to 2 or 1% for whatever reason. So it could be that energy ends up pushing headline higher, or the much talked about OER, owner equivalent rent, suddenly surges higher for whatever reason and pushes up core much, much higher. So, in that environment, what do you think real yields would do? 

Alex Gurevich (00:56:21): 

Well, I don’t know what real yields will do. Fed will probably in that environment get close to hiking, especially core inflation is also high. By the way, headline inflation is 4% and core inflation is 1%. I don’t think Fed is hiking. That is more like a scenario that I kind of anticipate, but suppose core inflation picks up, yes, they’ll probably hike. But remember that 4% inflation will accrue so many gains for us. Think about this, if you own tips, it doesn’t matter maturity, if we got 4% inflation, they’re appreciating by 4%, we’re accrued 4% at the end. That’s a lot of gains to unwind. In this scenario, suppose Fed starts raising rates on a schedule, which is currently priced by the markets. By the way, right now I think markets, I’m surprised, because they’re pricing very aggressive Feds, which it will be in the case you are discussing, but I think that’s an extreme case. In all other cases, it’s going to go the other way. 

And if they’re uncertain, they have so much tapering to do before they have to hike rates, but with any uncertainty, my opinion, I could be wrong, that they will be cautious about hiking rates if there is any uncertainty, because they don’t want to be trapped the same way they were trapped in 2019. And they will just manipulate the balance sheet just to see what’s happening. It is quite possible that various schools of thinking will sway towards more aggressive phrasing rates and which case I would be wrong, so it’s far from certainty. But I think the odds are slightly skewed towards them being cautious, if there is any reason to be cautious at all and just deal with tapering, running of balance sheet before they want to raise rates. So maybe throw a hike in, but be very, very slow, but start hiking like we did in 2015, like one hike a year or whatever. Just be very cautious about this because they really… I think especially we don’t know if Powell will stay there, right? But they have these experiences of 2018. I really don’t think they want to do this again. So, we kind of priced for one side of the target, but it’s always like when one scenario is fully priced in, it’s better to bet against it. 

Recent front-end sell is overdone 

Bilal Hafeez (00:58:13): 

Correct. Yes. And more generally, I mean, what do you make of the sell off at the front end across the world over the last month or so? It’s been really quite phenomenal or how much front ends have sold off everywhere. 

Alex Gurevich (00:58:24): 

No. Yeah, it’s very big and I’m not going to lie, it was against my positions against my portfolio, but it doesn’t change my views at all. What I’m doing right now is again, shifting some of… because the levels are so extreme, I’ve been getting some optionality in my books because I believe that basically you can get kind of options that will pay like three to one in case Fed does nothing for a period of time. And if you think, that’s like a 50/50 scenario, that’s already a good payoff, right? In general, one of the… I recently did a Twitter about it, and I’ve been talking about this. Interest rates have negative predictive power. That is, the fact that some distance interest rates, which sold all does not increase, in fact, it actually decreases the chances of Fed actually hiking because the market did it for them already. 

And there is also a psychological aspect that people are talking about that don’t really want to flatten the curve because a flat curve is always bad news. It’s another reason why you want to be very cautious of hiking and manipulate balance sheet first, try to have the long in a treasury sell-off. And a lot of people were betting on stipend and got nailed, and a lot of it’s just positioning. Now, this sell off is significant, but it’s not at all unprecedented. This type of sells-off on the front end occurred multiple times in history and usually at the same stages and they were almost invariably wrong. Very strong example is end of 2001. And the second stage, beginning of 2002, when markets started to price hikes, essentially in 2002, the reality was still easy. That was kind of the birth of my strategy for me. That was my discovery of risk clarity in 2002, when I realised that there is no way they’ll able to execute all those hiking. So, like stock market goes way up. 

So instead of thinking, I’m going to buy stocks on hedge with interest rate futures, I said, I’m going to buy interest rates futures and hedge it by buying stocks. And actually, in my recent conversation with my former boss, he also remembered how essentially in 2002, I invented risk parity and proposed the balanced portfolio, balance by implied volatility, interest rate futures and stock futures. But 2002 was an amazing opportunity and it was… So, in book, The Next Perfect Trade, I made a claim that this was the greatest opportunity in all history of financial markets. And the second best, I claimed in the book was 2014 or at least in what I knew, obviously there might have been some opportunities in 1625 that I do not know about, right? But I really don’t know anything parallel to 2002, not even close. And 2014 is the next best, which was to be long bonds and long dollar. 

Australia could be a stand-out market 

Bilal Hafeez (01:00:57): 

And in terms of the recent sell off, I mean, are there certain markets outside of the U.S. that you think look really out of line, which look particularly attractive to go against? 

Alex Gurevich (01:01:06): 

Yes. I think Australia is the most attractive to go against. And this is where my risk is actually not so much and not so much betting on US though, not raising rates, but in Australia. They don’t have the same pressure as U.S. to raise rates. Immediately, they don’t feel like they have any kind of serious inflation burn right now. And again, the odds are working in this way that yes, if everything goes perfectly and the world is reflation maybe they will raise rates, but even so maybe not on the schedule they’re on right now, but if anything goes wrong, like for example, if China slow down proves to be more contagious than people think. There are a lot of concerns about China slow down, we don’t really know what’s going on there, but that seems to be a very good risk/reward way to play China slow down is just to bet on Australian rates, not going, not going up. 

Bilal Hafeez (01:01:52): 

And one way to think about this sell off in front end yields is to say that, okay, there’s a certain amount of expectations of rate hikes, but also there’s a term premier that’s been re-embedded into the curve. And so, could we have a scenario where people don’t necessarily expect aggressive rate hikes, but term premier keeps on building up. So we get the reintroduction of term premier back into the curve, or term premier just a residual for things we don’t understand? 

Alex Gurevich (01:02:20): 

I would probably lean toward the latter. I’ve been in interest rate markets, I’ve been trading U.S. since 1997. This was like 24 years, right? 24 years as a professional trader in interest rate markets, I still don’t understand term premium at all. The whole concept makes zero sense to me. And no matter how many times people try to explain to me, it just makes no sense. The term premium, I think is just complete nonsense. I see complete no use for this concept. I feel like bonds are assets. Their price is defined by where people are selling and if people are buying. If a bond trades at certain yields, it does not mean anything about inflation. It doesn’t say there is some kind of inflation expectation or temporary, but it means this is the price people buy it at and this is the price people sell it at and this is where it clears. I think it’s that simple. Asset price doesn’t have to be justified. And moreover, history shows that bond prices especially have no bearing to future interest rate paths or inflation paths. There is no relation to that. They have no predictive power, as I said, more likely negative predictive power. This is just where this asset trades today. That’s all it says. 

So, breaking down bond yields into some kind of maths thing to me is kind of completely meaningless. What my question is, I always ask myself if I buy this bond and I fund it to maturity, wherever I can borrow money to hold this bond, am I going to lose or make money? Now, that would depend on looking at bond yield versus trajectory funding rates for this bond. If its treasury bond, Fed fund rates are close approximation. There could be some variation. If it’s a riskier bond, there could be other funding considerations that I need to take into account, including potentially this bond becoming insolvent, which is equivalent of funding costs becoming infinite. 

Bilal Hafeez (01:04:08): 

Okay. That’s a good reputation of term premium and trying to over analyse the curve. 

Alex Gurevich (01:04:13): 

This is not to say that you cannot look at the curve and look for opportunities on the curve. I just don’t see what term premium brings the discussion to me. 

Dollar view 

Bilal Hafeez (01:04:20): 

Yeah. I see you where you are coming from. And one thing we haven’t talked about is the dollar in relation to the rates. Is this an environment where there is a dollar trend or not, or is a dollar kind of a secondary market in this environment? 

Alex Gurevich (01:04:34): 

I’ll be honest. I’ve been a little bit dumped by the dollar this days, in general, by FX in the last year. In the sense, as you can guess, I’m probably not losing or making a lot of money on FX, but it’s been just very difficult to decipher market. My bias has been to be short dollar, but I have to say my conviction is kind of weak because there are some arguments could be made for long dollar too, especially if rates and U.S. will keep going up as predicted. And you kind of have to… You cannot say, I want to be short dollar because the Fed will not do what is projected by interest rate market. This is a fallacy. You have to take current pricing of one asset to value other asset. But if you think this asset is mispriced, it’s like the same thing, you cannot say this option are mispriced because underlying is mispriced. It’s a logical fallacy. You have to think it through. Some people get confused with this. The market curve is pricing for Fed to get aggressive, but other banks also central banks are priced to get aggressive. 

Bilal Hafeez (01:05:31): 

Yeah. So partial versus general view. You have to kind of look at the system as a whole, rather than just one part of the system, so to speak. 

Alex Gurevich (01:05:38): 

Typically, given we’re in the cycle, I would normally expect dollar to be in a bad time and this thesis is not yet actually destroyed. It’s just kind of on hold because nothing clear is happening. I do have a positive view on precious metals, just on a basic assumption that central banks are likely to keep liquidity excessive than scarce. More likely to have excess liquidity than scarce liquidity and precious metals can actually continue rallying through hiking cycle as they have proved in 2004 through 2006 through 2007. And the risk reward I think is very good in some precious metal’s positions, but I think like, again, my bias slightly towards short dollar, but staking my life right now on USD/EUR would be hard. 

Why equities don’t follow the economic cycle 

Bilal Hafeez (01:06:23): 

And you mentioned cycle a few times and one thing I’ve been thinking about is, was COVID the end of the post-GFC expansion? And so since COVID we’re at the beginning of a new expansion or was it kind of an interruption of the post-GFC expansion? And so where right now, we are very late cycle because of the nature of COVID was such that it wasn’t like a conventional recession, people’s income went up, there weren’t huge bankruptcies and so on, but at the same time, you had a massive crash GDP-wise, so that’s obviously recessionary, but the trades wasn’t so conventional. 

Alex Gurevich (01:06:57): 

That’s a difficult question. Recently, I was in an investor meeting, we talked about how I saw signs of late cycle in 2018 and they asked me how many signs do you see now of late cycle? And I said, “None of them.” None of my indicators of late cycle are currently present, which does not mean that we’re not on late cycle, it just means I’m not recognising it yet. However, I think what happened, the very important thing, and I think what I did well in 2020 and which tripped up some other people, I recognised decoupling of stock performance from economic cycle. Stock market can do very different things from economic cycle. I think that was one of the keys to… I was thinking already about this. That has been on my thoughts, and this is experience comes to decades in my markets, I was thinking about this, why stock markets go down on recessions at all? If you ask this question, why stock markets go down on recessions? 

Now, particular kind of recessions hit particular sector sometimes, like for example, global financial crisis made some banks go bankrupt. Essentially, their equities were wiped out. Now those were not going to come back. You never recovered money on Lehman or Citibank, right? Even Citibank is there, but it was diluted so much. You’ll never recover. But overall, why stocks go down? Why would companies like Google which have no debt went down? 

Bilal Hafeez (01:08:13): 

The conventional view would be that in recession earnings go down. 

Alex Gurevich (01:08:16): 

Okay. But why company stock has to go down if earnings go down, if it’s a temporary thing? Discounting improves, right? Because of the rates going down, but the long-term earnings outlook doesn’t change. It just changes for the next year or two of the recessions, because if you assume a normal business cycle, right? If you don’t expect like a 38 depression, which is just really no particular reason to expect any of these times. So, the reason stocks go down is not because there is any economic reason for that, it’s because of the lack of liquidity. So, they’re all the sellers, if there is no cash, there is no buyers. So there is the experience of March 2020. I wanted to buy everything, but I had to worry about funding and liquidity and I was really stressed over that. And even with us doing well and being up on the year, volatility margins were going up, a lot of positions were liquid, and we had to navigate it until Fed provided enough liquidity that of the staff got relief. 

So, the difference between this cycle and the previous cycle is that previous recessions people had protracted liquidity squeeze. This time, there was so much money thrown in the system that liquidity squeeze was only in a few weeks and then liquidity became excessive. And once liquidity is there… So the asset cycle is not an economic cycle, it’s a liquidity cycle. The only reason, and I think people mistakenly thought of asset price cycle to be linked to economic cycle because liquidity cycle used to be linked to economic cycle. Now that it decoupled, there is no link right now between liquidity cycle and economic cycle, and hence I see no particular reason to expect asset price cycle to follow economic cycle. 

Bilal Hafeez (01:09:57): 

And what do you make about valuations in equities though? I mean, I guess earlier on you touched on how valuations aren’t that useful, but if P/E ratios of company or sectors go up to 50 or 60, is there something about value or how do you know when not to buy equities apart from the liquidity issues? 

Alex Gurevich (01:10:14): 

Honestly, I really don’t, but to me, I think I would just guess it’s an interest rate story and an inflation story. I think that the things that most threatens equity markets is that inflation will be high and rates will have to be raised. And that will, first of all, make a poor discount curve for the future earnings. And the idea that kind of, I think, surfaced in 2020, it does matter how much… If the yields are perpetually zero negative, then any stock that does not lose money could be just a good store of value. It doesn’t matter. It doesn’t matter when they’re talking about what’s the difference between Tesla, Bitcoin, or gold, you just put money in it and that’s just a store value. And then if you think this company is not going anywhere like the Googles of the world, the Amazons of the world, the Facebooks of the world, who cares about their earning, P/E ratios that perpetuate zero yield, you make any money, you have infinite price, right? If you just count on a zero curve any kind of perpetual earnings. 

So however, when that situation will change, possibly it could break some of those quasi-bubbles or quality bubbles. And on the flip side of this, what I’m always saying, if you are arguing for deflation, if you’re arguing that the economy will be slow and that there will be actually deflationary pressures on the economy, then you actually have no bare argument for asset. 

Bilal Hafeez (01:11:36): 

Because interest rates will remain low, liquidity will remain ample. 

Alex Gurevich (01:11:40): 

Yeah, if we’re going to go in some kind of disinflationary, deflationary world, we know that central banks will just keep adding liquidity. And in this environment, it’s highly unlikely that assets will just stop the secular bull trend. There might be of course, ancillary corrections, but I feel like if you just keep pumping liquidity, it’s the denominator factor. Every assets expressed on a dollar will have to keep going up because there’s more and more dollars on the system. 

Bilal Hafeez (01:12:03): 

That sounds quite compelling. You did mention China risks earlier. I mean, do you have a view on China or not? 

Alex Gurevich (01:12:08): 

Not very much in terms of short term. I’ve tried to have China views in the past and the timing on those views has been very dicier. I feel like I’m probably following the China’s skeptic category. I think China will have some serious problems in the long run, as it always does over the several thousand years of history. But I lack conviction in terms of what’s going to happen in the next year or two. However, while lacking this conviction, what I hear kind of objectively, I hear that there are some risks. So if there is no view here, this is more like recognition that there are certain risks. 

Bilal Hafeez (01:12:47): 

And you touched on crypto earlier. I mean, do you have a view on crypto or not? Everyone seems to be talking about it these days? 

Alex Gurevich (01:12:53): 

Well, for the moment I will restrict my view on crypto to saying this is an asset and when liquidity is excessive, money will start seeking assets, which have street cred, so to say, and Bitcoin, especially, and by now probably Ethereum have earned a lot of street cred. They’re viewed as… They’ve weathered a lot. They did not act like a bubble that burst and died. They acted like something that had corrections and kept coming back. So I think money will keep seeking those things as long as money is excessive. And it’ll be interesting to see how will they do if money will stop being excessive, if liquidity will be withdrawn, which it’s not my view that it will be, but if it were, it would be interesting to see how they would perform. 

Bilal Hafeez (01:13:35): 

And I wanted to round off our conversation with a few personal questions, which I like to ask all my guests, what’s the best investment advice you’ve ever received from anyone? 

Alex Gurevich (01:13:43): 

So, I’m not sure what the best specific investment advice, but there’s one conversation that stands in my mind from my times that JPMorgan Chase. So, I came to my boss once, I was still in a market making book, but took a lot of proprietary positions. I laid out an argument for this trade. It was a pretty complex structure trade. And he asked me, “Well, how money are we going to make on the trade, do you think?” And I said, “Well, probably 10 million.” And then he said, “Okay, let’s do twice more and make 20 million.” I think that was one of the most valuable investment advice I ever got. Sky is the limit. Being aggressive does not mean being undisciplined. You can be disciplined, but you should not set your targets low in financial markets. 

Bilal Hafeez (01:14:27): 

Yeah. That’s quite useful advice. And that kind of goes back to what you were saying about your adventures in poker. If you are winning, then stay at the table, don’t walk away. Run your profits. And then the other question was how do you manage your research or information flow? Because it’s quite easy to be overwhelmed with information, there’s Bloomberg chats, new stories, people bombarding you with analysis and you have your own analysis as well. I mean, how do you manage all of that? 

Alex Gurevich (01:14:54): 

I think over years I’ve kind of learned the triage. I look at headlines and for example, I see a few pieces of research every day and I see the headline, kind of summary of this research. And then I was like, “Oh, that’s looks like something I want to dig in.” But many of them, I don’t even read. It’s like, “I know what they’re saying.” “Okay. This is clear to me.” Or like, “This is just going to annoy me. I’m not going to read this.” So, I kind of triage a lot of it now for better or for worse. So, there’s always something to read. There is never shortage of research to read. 

Books that influenced Alex

Lord of the Rings (Tolkien), On Being Certain (Burton) 

Bilal Hafeez (01:15:22): 

Correct. And I can see you have a whole ton of books behind you, and so I have to ask you, are there any books that have really influenced you a lot either personally or in the work context? 

Alex Gurevich (01:15:32): 

Well, I think that will be two different answers because the book that influenced me personally most would be no question, The Lord of the Rings. My whole identity and personal is completely shaped by this book, The Lord of the Rings. No other 10 books combined come close to it. 

Bilal Hafeez (01:15:46): 

Oh, wow. Okay. That’s quite an endorsement. So, you do like your fantasy books? 

Alex Gurevich (01:15:51): 

Yes. But in terms of investment, the book I would recommend, I don’t read a lot of, I mean, I read obviously some, but I’m not a veracious reader of investment books, but one book that I will recommend, which is not an investment book, but I will plug it in particular because I know the author of this book well, is Dr. Robert Burton and he wrote a book called On Being Certain. So, he’s a very well-regarded neurologist and he wrote to book investigating how people form convictions and how people sometimes can reach deep levels of convictions, actually not having a proper basis for those convictions or how we can have memories, which feel clear and very certain and clear and precise and in effect being completely fallacious. I highly recommend, it’s not a long book. It’s technical, it’s kind of like with a lot of studies and preferences, but I recommend everyone who is in financial markets to read this book, go through the whole book, it’ll change your thinking. And it’ll let you… When you have issues with convictions, too high convictions, look through the prism of this book. I think it’s that kind of understanding, what Meta understanding, what my conviction actually means. Why am I certain? Not just I know this, but how do I know that I know this? 

Sci-fi book recommendations 

Hyperion (Simmons), Ender’s Game (Card), Rise of a Merchant Prince (Feist), The Dagger and the Coin (Abraham), Expanse (Corey) 

Bilal Hafeez (01:17:09): 

That’s definitely a theme that runs through our conversation, this whole idea about Meta thinking, going a step above. I know also you are into your sci-fi books as well. Are there any particular sci-fi books that you recommend to newcomers to the genre? 

Alex Gurevich (01:17:22): 

It’s difficult to say because it depends of on what genre are you coming from or what editory preferences that’s in. I mean, probably in science fiction, my favorite books in English would be Dan Siemens, Hyperion and also Scott Card, Ender’s Game, which most people have heard about. It’s a good book also for strategy. For people who are specifically interested in financial market, there are actually some fantasy books which deal with financial markets pretty well. I would recommend Rise of a Merchant Prince by Raymond Feist. There’s also The dagger and the Coin series by Daniel Abraham, the same person who wrote Expanse series. So those are the ones which I feel like deal with finances and banking very well. 

Bilal Hafeez (01:18:05): 

No, that’s great. Well, I’ll make sure to include those on the show notes. And also just as a side, have you seen the film Dune? 

Alex Gurevich (01:18:11): 

I’m going to see today. I’m behind the curve on this one. That would be my first movie trip since COVID. I have not been to movies in three years. 

Bilal Hafeez (01:18:18): 

Well, I won’t spoil it in any way, but I’ll reach out to you after you’ve seen it. And just for our listeners, obviously your book’s coming out in January, so we’ll make sure to flag it when it comes out. But if people did want to follow you, what’s the best way for people to follow your thinking? 

Alex Gurevich (01:18:31): 

So, you probably can get me on the… You’ll get the link to everything from my Twitter account. My Twitter account is agurevich23. So, it’s like it A, my first initial and my last name gurevich23. But even if you just Google my name, Alex Gurevich, it will pretty easy to find me. There’s a couple of Alex Gurevichs there, but I’m pretty sure you can distinguish me. I have a corporate website HonTe inv, like HonTe Investments, honteinv.com, http://www.honteinv.com. But all of those things are pretty easy to find if you just Google me. 

Bilal Hafeez (01:19:04): 

Okay, great. Yeah. I’ll include some of these links on the show notes as well. So, with that, thanks a lot. It was a very fruitful conversation. I learned a lot as usual speaking to you, and I genuinely am looking forward to reading the book as well. 

Alex Gurevich (01:19:15): 

Yes. Thank you very much for your support. It was a pleasure. 

Bilal Hafeez (01:19:18): 

Thanks for listening to the episode. Please subscribe to podcast show on Apple, Spotify or wherever you listen to podcast, leave a five-star rating and a nice comment, and let other people know about the show. We’d be super grateful. 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.)