Parrilla and Pal -- A Macro Masterclass in Portfolio Construction and Management >> Diego, good to get you back. It's been a while since you and I chatted. You've been on Real Vision a few times. I think maybe just to start, just to introduce people to what you do and how you look at the world, because I think it's a really interesting time and you've been coming on Real Vision over the years. You've built your thesis, and now it's all playing out. Let's go through a bit of that. First, bit of background. >> Well, thanks for having me back. It's been over five years, I think, since the first appearance in the early days of Real Vision. My background is, I'm an engineer. I'm a mining and petroleum engineer, originally from Spain. I did my thesis in mineral economics and specialized in real options. That really changed my life, changed my career. It gave me the opportunity to start an investment banking in London in the late '90s. I was trading effects and precious metals with JP Morgan, and then I was with Goldman and Merrill where I was eventually leading globally the business. On the commodity side, I was in London. I spent some time in New York and Singapore where I spent a lot of time with Grant, and then I moved on to the buy-side with my own firm, also with some large micro players, like BlueCrest or Diamond, before I eventually made it back home to Spain, where I'm Managing Partner for Quadriga Asset Managers. What got us together, I guess, it was my third capacity. So not just being on the buy-side and sell-side. It's been my capacity as a book author. As you know, I have two books. The first one was called The Energy World is Flat, which I co-authored with our good common friend, Daniel Lacalle, and that at the time was putting forward a very contrarian thesis to the prevailing consensus of the market, a $120 oil, 200 peak oil theory. I'm a contrarian by nature. I look at forces. I look at equilibriums, and there were a number of relationships and beliefs and misconceptions that they were just bound to break. The flattening of the energy world as a thesis not only survived, it's actually being reinforced with the passage of time. >> It's a brilliant call. It was a book that I read. It changed my mind immediately. I kind of, like, yeah, I get it now, and has been dead right and I think it will remain so for a long time. >> Yeah. You analyze the forces. It's more about the framework and how these forces interact. I mean, it was a fascinating process just writing it, and as I always say, you think you know it, until you try to put it in writing, and then you realize maybe you didn't know it that well. I certainly learned a lot through the process. That led to the second book called The Anti-Bubbles, where once again, I guess, I put forward what at the time was a very contrarian thesis challenging this idea of monetary and fiscal without limits and what had to give. The subtitle at the time, Opportunities Heading into Lehman Squared and Gold's Perfect Storm. Yeah, I think both books ironically started out, if you went to the airport, you can find them in the science fiction department. Then through time they made their way to current affairs, and some of them are going to go into history, because as you said, I think this is just a big game of chess. Some of us might be a little bit ahead of understanding these dynamics, or challenging, or trying to assess them. And, yeah, you see how the pieces are moving and how these developments either reinforce or not the thesis. You need to stay very humble and very flexible. Yeah, here we are in a historical moment with unexpected events, but nevertheless, they're part of the game. >> Talk us through. When you sat down to write the book, what was in your mind? You were looking forward thinking, look, there's some probabilities of some certain factors that you thought were going to create a lot of problems. Just talk us through the thesis, and then let's bring us up to date with where we are now. >> On The Anti-Bubbles, what really got me totally shocked, and this is the first line of the book, was negative interest rates. I felt that, to be honest, until that point, we were flirting with the limits of monetary policy, but within the boundaries of what was considered to be fair game or the existing rules. If you're talking about zero interest rates and printing a lot of money and buying government bonds, yeah, it's questionable, but it was certainly within the boundaries of the game. To me, negative nominal rates were just a complete change in the rules of the game. It had a number of implications. That's what really got me very worried, very much thinking about, is it as simple as this? Are there limits? Can they just continue to do this? How is this all going to end? As you start looking through a lot of those implications, of course, the minute you have assets that are discounting future cash flows, the PV of a cash flow in year 2200 is greater than the next years, is just like what are we talking about? This whole nonsense would clearly have an impact in asset valuations. I remember there were lots of things that were very early days. I remember well Larry Summers' article in the FT where he was talking about, it was called the prudent imprudence of fiscal expansions. I read it like five times, and I was like, what the **** is happening here? I mean, he was basically talking about, look, once upon a time, we had a world where, yeah, we had prudence, we had the budgets, the mass trick was based on 60 percent. This is history, because this was a world of five percent interest rates. At zero rates or negative rates, we can afford a lot more debt. I was like, look, you're building the house to the roof, this is complete nonsense, and what am I missing? As you think through this and you start scratching, you realize, effectively one of my favorite lines on the book is the way I would summarize the previous decade, which is effectively the transformation of risk-free interest into interest-free risk. This is really, in one sentence, what happened throughout the last 10 years. We went through a big crisis. Once upon a time, we had 10-year bonds paying your five percent nominal yields, and before you know it, 30-year bonds are paying you negative nominal yields. This transformation from risk-free interests where, yeah, we were legitimately earning five percent per annum with no risk. By the way, that 10-year bond at five percent, in the event of a crisis, as yields went to zero, would make your 50 percent, which meant that the whole construct of the industry of a 60/40 balance portfolio was based on this set of rules. What you've seen is the transformation of this risk-free, I mean, most people, I don't even know if they're still in the textbooks. I mean, they were there when I did went through this, but it was a pretty fundamental basic part of how you value things. Then you go now to a world where basically that risk-free is being totally distorted to a level that goes beyond any reasonable explanation with negative yields, and that's just the nominal terms. I'm not even talking about real, where the thing is very deep. This is deeply troubling. This transformation of risk-free interest into interest-free risk has done nothing other than delaying the problem. It hasn't solved the problems. It has kicked the can down the road, so it's delayed the problems. >> What is the problem? The problem is debt, I guess, right? >> The problem is, debt, I would say that is dependence on debt. But the problem, if we start going farther back, I guess it's this, you could go and start pulling the thread and how far can we go, but I would almost go to this belief. I mean, at the end of the day, a lot of our biggest bubbles are built on beliefs where the emperor had no clothes. One of the biggest ones is this idea that you can actually solve problems with monetary policy and fiscal. The biggest misconception around is you can actually print your way out of problem. You can actually borrow your way out of the problem. The debt problem only comes after artificially low interest rates. You would never have the problem of debt, whether it's a government level or any other, if we had interest rates price in reality. You start going back, and you see lots of things that happen. Every single crisis is dealt as such. Hey, we have emergency measures. Let's take some extreme measures that are meant to be temporary and exceptional, only to be permanent and totally standard down the road. I think monetary policy is at the core, and the system was doomed to fail from day one, because you are effectively given this. The printing press and the ability to distort the time value of money. As a result, anything that is cash flow related that required some discounting is distorted by bringing interest rates artificially low and having the ability to print that money. The left pocket lends the right pockets, so the Federal Reserve can lend to the US government. You are in that situation where once upon a time we have independence of central banks. Voltaire wisely said, paper money eventually converges to intrinsic value, to paper. He said it wisely a long time ago because they knew perfectly well that the system only would work under certain rules. We go back and we know where it all takes us to, but I think this all this domino effect of short-term measures where we are trying to get out of the problem with the shorter mindset. Politicians are there for the next four years if lucky and nobody wants things to fail in their face. So by this desperate and over confidence on monetary policy, you slowly create the process that is meant to be domestic, like the US QE 2008 response has been widely acknowledged as a big success. That's true if you're in the US, if you're in Europe, you saw Eurodollar going to 150, and how your monetary orthodoxy basically put you at a massive disadvantage. Not only versus the US, but also versus China, whose currency was pegged. So the 2012 crisis is nothing more than effectively a side-effect of the 2008 being transferred through currency wars and others. That shows you why monetary policies is a contagious and relative game. The only reason we have negative interest rates in Europe, let's not fool ourselves, is the Fed was at zero, and [inaudible] walked in, he had to do whatever it takes to save the euro. He had to effectively tried to devalue and we would have never ever, ever had negative interest rates in Europe if the Fed had been at 2 percent. Never. This is a relative contagious game that is sold as domestic, but there's a big global balance. >> Now we're in a really ****** up world where everybody's at zero, borrowing, India, South Africa and a few others. Basically, the entire developed world is at zero rates. So how does anybody manage anything without just going more and more extreme? Doesn't that delta of the extremity get even sharper? >> Absolutely. It's subject to this several dimensions. One is clearly the law of diminishing returns. >> Yeah. >> Even at a domestic level, think about how far those $700 billion of money printed got us in QA1. It was a pretty simple process. You sat the banks around the table and you said look, we have a systemic issue. Hey, Mr. Goldman, how big is your problem? Mr. Citi, Mr. Merrill, whatever. Collectively, if I remember correctly, it was 600 billion and he said, "Done. Let's print 700 billion." People were outraged at the time but it was much needed to print that money to avoid something else. But QE2, so I would argue QA1 was needed, QA2 was questionable, QA3 was a massive mistake. QA3 if you remember, was actually called QA infinity. They no longer could just do QA, they had to say, "We will do whatever it takes, infinite amounts." and the market didn't blink. It was already at the point where you need to do huge amount of printing to get very small benefits. When you do this, as you said in a multidimensional where everybody is doing the same thing, then it becomes even worse, and it explains things like negative interest rates, in that desperate effort to devalue your currency artificially to impact the current account versus capital account balances and things like that. At the end of the day, this is all a fallacy because we are not really solving any of those problems that we started with, whatever they were and they accumulate in the system. We are delaying them, we are certainly trying to transfer them through currency wars, we are certainly transforming them into things like inflation, and this is obviously one of the biggest areas of focus for us and what the next decade will be about, and ultimately enlarging those problems. This comes in multiple forums, whether it's inequality or bubbles or stagflation and many other things that unfortunately seems to be at the unavoidable path that we've taken. >> One of the things I've been looking at is, within this whole equation, is the Federal Reserve and the central banks understood a liquidity crisis? But we're probably in a solvency crisis because once you get to a certain level of debt and then we've got this extended period of slow growth, well, there's no way of generating the revenues that you need to pay off the debt. You feel like, how do central banks solve the solvency crisis? Well, the only way is to put it on the government balance sheet and then back onto the Federal Reserve. This becomes much more problematic I think. >> Well, they've actually gone further. Once again, when you think about the Federal Reserve just printing money to lend it to the government, who in turn will either spend it in some ways, that's fine. We knew that. They've actually gone way further because now they're actually buying high yield or even equities in some parts of the world. The money printing, and I think it's very interesting if you think about the recent crisis where we have effectively things exploding in every dimension. We have an energy crisis, we have the airlines, we have the consumers, the producers, we have everything, then employment. The debate what the US is doing, the Fed has figured out, they said, "Look, I have all these unemployment. I am going to have to pay for this one way or another." So the airlines blow up, that means there are layoffs, I'm going to have to pay for benefits, I have less income. "You know what? Instead of just closing that circle because I know the movie, I'll just print the money up front, give it to these guys and hope that those jobs are maintained." By basically going that way, one of the things that has been blowing my mind, and this is just a reinforcement of the thesis, is, what are the limits? What stops the Fed from just, in the oil market, you remember when oil prices were negative. The idea was, "Look, let's just print money and buy oil or just buy it off all you guys." and then he was like, "Well, what do we do?" "Well, we'll have to physically store it somewhere." Someone had this brilliant idea, it was already implemented, but he shows you this mindset of, "We'll just buy it off the ground from the producers." So at that point you realize that they just feel like they can print infinite amount of money and buy anything they want effectively in any form, whether it is government bonds or oil in the ground or bankrupt airlines, and the question is, what are the checks and balances? What's stopping this process? Is it really as simple as this? What you see in a way is there are couple of things that go. I mean, one is, if you are holding dollars as a reserve currency, you were doing it in the hope that you will get in Argentina or Zimbabwe or whatever. You say, there's some process, there's some control. But once the Fed blatantly tells you, I will do whatever it takes just to prevent this thing from imploding, two things will happen. One is the currency goes, so this is why the dollar has been under so much pressure, and the second is inflation. I think this is perhaps the most misunderstood part of the equation because, I have this debate all the time and people go, "Diego, come on, you talk about inflation but look at all the deflationary forces in the system. We have an employment, we have demand destruction, we have this over-capacity, we have technology, of course, we have demographics, we have all this deflationary forces kicking in the system. How in the world can you be talking about inflation being a problem?" What we need to understand is that inflation is 100 percent [inaudible] It's not about the value of your house going up, it's not about the price of bread going up. It's about the value of the money that you used to buy your house and bread going down. Once that clicks in your brain and you understand that effectively we are filling that deflationary gap, which is huge, and the central banks are fooling everybody by saying multiple things. The first one, that inflation is just one number. "Look,your inflation basket is different from mine, it's different from every single one in this." So don't fool yourself by inflation is 1.2, go to the supermarket and you'll realize it. So the inflation, that's not a real number, it's very different and it's already happening. You have this situation where the bigger the deflationary gap, the more room we're giving central banks to print even more money. They're doing it in a way where now the US is even blatantly walking away from the two percent target, talking about a symmetrical target, it's like "It's okay to overshoot on the upside." It's written on the wall, it's for everybody to see what's coming. I think this is really the way I would summarize the next decade is the transformation of bubbles because let's not fool ourselves, all we did with artificial low interest rates and this insane amount of desperate search for yield and lending and whatever, has create bubbles without precedents, and this is the new enemy. The bubbles are the new enemy. There's a change in the rules of the game where effectively central banks are no longer fighting inflation, they're fighting bubbles. In order to prevent those bubbles from imploding, they'll do whatever it takes, and that is the new degree of freedom. I think the next decade is the transformation of bubbles that are too big to fail into inflation. This is something that we're starting to see in my view and that will accelerate. >> What does that inflation look like? Because again, when inflation is a different beast in many ways. For example, I was looking at a basket of 27 currencies versus gold, and gold goes up. It shows that the basket of currencies is going down against gold. That's one way of showing it, but you don't feel it necessarily because wages aren't going up and stuff like that, because of this military devaluing. >> Yeah. >> Which I think is the important thing for people to get our heads around. How are you thinking that inflation is going to show itself? >> The first point to understand, I'll just emphasize the point I made earlier, is inflation is about the value of money going down. Now, you can think about that in multiple dimensions, many. Higher equities are just a way of inflation. You can think obviously about and the most obvious one which is real assets. It's about the balance of which the speed at which you're printing money, the currency A vs currency B versus real asset C. In the case of gold, there is an element of printing because producers do go out and I think the magic numbers, can't remember, 1.6 percent per annum. So theoretically if central banks were printing at that pace, the amount of dollars and the amount of gold would equal, but the problem is when this gets tipped off. So inflation has multiple dimensions, but it's really as simple as that, is the loss of value in that money. Yeah, that's why the view that I carry and the thesis that I carry has massive implications for asset allocation. Clearly in that team as I call it, you want to have your strikers, your midfielders and your goal keepers at all times. But your striker should be equities not credit. If in 20 years time, the €100 or a $100 that your corporate bond they're going to give you back, are not going to buy you much at all. Those €100 that you're going to get are not going to buy you much. So if you want a striker, somebody that will do well when the world does well, you want your equity risk. Because, yeah, perhaps the price of wheat goes up, perhaps the price of bread goes up, but the margin of the baker, and the multiplier applied to that margin will still be there. So the equity, I think, will participate a lot more than the credit. That's just one of the basic implications that I see in the portfolio. But there are multiple ways in which it will impact our lives. >> So one of the things I was looking at, I was writing Global Macro Investor over the weekend. I was using the G4 central bank balance sheet and then looking at different denominators. So when you look at it in equity terms, equities might actually done a pretty good job offsetting the printing. Now, with this recent printing it looks like it's breaking down. Gold did a pretty good job, but it was slow off the mark and then it's done very well. So you can definitely see it with certain assets, the one that did extremely well in this was bitcoin. It seems to be the only one that actually outperformed the central banks balance sheets over time. But yeah, I think that's really important for people to understand the current assets you need to own. Because as you said, credit is just not going to work in this environment. >> I think that the three, if you think about your football team being strikers, midfielders and goal keepers, I think the strikers, I would personally favor equities versus credit. This is what will work in a more benign environment where things is just long inflation or short inflation, basically. On the midfielder side, it's clearly real assets. By that I mean, things you can't print. You can put whatever you want there, I would favor real estate and gold or all those but real assets in general including many things. The guy to avoid is cash. Lots of people think about putting their money in cash, it's okay. Cash is a striker in the bench. You put your money aside, you're waiting for the opportunity, but if you leave your striker on the bench for three or five years, you will have a problem. But the other area to be mindful of is the defenders. On the defender side, I would argue that government bonds with this yields already zero or negative in many cases, they have very little defending power. So I joke and I call the bond Franz Beckenbauer. He was once upon a time this fantastic defender, world champions in 1974, but the guy is now 74 years old. So the ability for the bond to do any defending is much more limited today. So there you need to look for the anti-bubbles, you need to look for things like gold or the things for others. >> So does that mean portfolio construction overall is going to have to change? >> 100 percent. >> You've led the way in doing that by saying, listen, we need a different portfolio construction. But the whole industry is still 60, 40, and basically the 40 is bonds which is cash and some of it negatively yielding. It's doesn't cushion anything any longer, it's just cash. >> This is super important for investors to understand. We've grown into this mindset of the 60, 40 balance portfolio. What you've seen with this transformation, the risk-free interest, into interest-free rate risk is you had effectively parallel bubbles built both on the fixed income and the equities. You are discounting this cash flows artificially low levels, you are multiplying the piece with equity risk premia and all this stuff. As we discussed, the government bonds or fixed income doesn't have that explosiveness, unless you think interest rates will go to minus five in which case you're delusional. I just need to do a couple of numbers to understand. But Germany is more likely to borrow five trillion at minus 1, than one trillion at minus 5. Already at minus 1 for 30 years, you'll do your size. So there are limits to negative interest rates. The implications are huge and this goes into perhaps one of the biggest risks in this system and something that we emphasize a lot, which is the risk of false diversification. False diversification stands for this perception that you're diversified because look, I have a bit of fixed-income, a bit of equity, bit of credit, a bit of oil, a bit of whatever, and it looks like I'm diversified. The reality is when you have a big crisis, every single piece in the portfolio behaves the same way, it's all one trade. This idea, it's become very relevant, it's a byproduct of monetary and fiscal without limits. You've already squeezed the orange creating these bubbles, and no longer you created the bubble which means your problem is huge, you actually have no conventional defenders. What it means, and this is really the way we shape things up with my fund. I think it's not about the correlation, is not about being super smart and deciding, it's about playing your position in the pitch and we play goalkeeper. We add up 55 percent in the year with a certain of close to five, we're best hedge fund in the world in February, plus 10 percent, plus 19.1 in March, and then we've been up also in the last quarter. So you want to be in a situation where your strikers, you want them to be call options. You want your strikers, your equity or whatever to give you that upside, but have some limited downside. You want to choose your strikers to be call options, and you want your defenders and goalkeepers to be put options. You want things that will pay you a lot of money when there's a crisis, but they will protect the capital. This is really like in football. Barcelona and Real Madrid and all these teams, they don't win just because they have Messi, but they win because they have three chances and they score two and they shoot 10 times and they receive one. As simple as that, if your strikers do their job and your goalkeepers do their job, then magic happens, because then you get into rebalancing and this is key. So understanding the risk of false diversification, understanding what are the true strikers, what are the true goalkeepers and defenders? Then having the ability to embrace the stupidity of the market. Things like the VIX, as a clear anti-bubble in the system. The ironic thing, and just as a reminder of the concept of anti-bubble which I coined in the book as you know, and we've discussed it in previous interviews but I think it's worth perhaps revisiting. When you think about bubbles we're talking about assets that are artificially expensive. They are based on a belief that happens to be false, it happens to be a misconception, so this is Soros view of bubbles, the emperor had no clothes. What I looked at is I said look, I generalize the framework of Soros and said, misconceptions distort reality, but not only through artificially high valuations, you could also have artificially low valuations. So this concept of anti-bubble means three things. The first one is assets that are grossly artificially cheap; it means it's a matter of when, not if that they will go up, they're in form of extreme value. That's number 1. The second important dimension is the fact that bubbles and anti-bubbles are like distorted mirror images of each other: they're effectively two reflections of the exact same process. Is the same misconception that is driving, think about a medicine or any bit misbelieve up and down valuations of assets. So by construction, the moment the misconception is understood and the bubble bursts is the exact same moment that the anti-bubble reflates by construction, because of the same process. In fact, it's often the anti bubble that ****** the bubble, as we'll see in a second. So this idea that gives you a sense of, and this is why I called it anti-bubble, a bid like an antivirus or an anti-missile, is defense mechanism against the bubbles. When I said anti-bubble by the way I swear I meant more of a computer virus not COVID, but nevertheless it still work. The third dimension which is very important, and the point I was going to make is that bubbles and anti-bubbles are feeding on each other, so think about S&P and the VIX. I would argue that artificially low volatility feeds or contributes to artificially high valuations in equities, for example. It does it both for qualitative reasons, which is complacency, the perception of low risk, as well as quantitative reasons such as artificially low vol, to creating effectively CPA leverage the outdoor correlates and fits into their own trend. So effectively what you get is the beauty of risk premia, nobody wanted to buy put in the S&P at 3,410 vol. Well, a few of us, yourself included. But being a contrarian and effectively understanding the mirror image of this bubble equity and volatility, effectively it works wonders. The beauty is that the market is giving you the cheapest insurance when you need it the most, and that's the moment of most complacency. When you put everything together and you think about the anti-bubbles and you think about this dynamic and this portfolio construction, what we really need to do is look through, okay, what are the beliefs that are false? What are the bubbles we're building? What are the anti-bubbles? What are the rules of the game? In that sense, we don't claim to have a crystal ball, "Oh, equities will collapse or whatever." No. All you know is something has to give. I mean, look at this map. We have a very dire outlook with COVID worsening in many parts of the world, earnings, whatever, lots of issues, equities up 5.6 percent, and you look at the other side and you see that it's all driven by government bond yields. The only reason it's all about the risk premia, it's all about this equity valuation is largely about this distorted value of money. All you know is that if you build a portfolio that has bubbles and anti-bubbles, you're going to be much more balanced because you are effectively building something that is going to behave in a given way by construction rather than relying on asset class diversification, which is completely gone. >> One of the issues with this, and we'll go into how you construct some of those, but generally speaking, people think of this as like a long goal structure, most of those long goal structures bleed cash. So people are out of business and then they suddenly make good in a short period of time. How do you build a portfolio that doesn't do that? How did you get it so it does okay in good times, but then really acts as the anti-bubble in bad times? How do you do that? >> First of all, very important considerations and when we've build a strategy, we have pretty ambitious targets, which is capital preservation first. It's first and foremost. Second, as a goalkeeper, you want to create very big positive returns when the clients need it when things go wrong. Then you want to do that with neutral to positive carry and expectancy. >> Exactly. >> Now, to your point on many of the volatility funds, one of my criticisms of some of the use of volatility funds is that they're often U-type of payoffs. They're basically telling you, "Hey, if the market is down 20 percent, I'll make a ton of money. If the market is up 20 percent, I'll make a ton of money." My question to them is, "I'm already your strikers. I'm making a ton of money when the market is up 20 percent." Our job as goalkeepers is to give left-tail protection. It's not right there. The problem is that if you're actually trying to catch both sides, I will catch you the minus 20, I'll catch you the plus 20, you may not catch any plus, you may be bleeding way more than you need. It's a different game. I'm not saying it's better or worse is different. Now, the second comment I would make is we are long options. In fact, we have to differentiate between long options and long volatility. This is a very important concept and I could give you these two main schools of thought in options trading. In my strategy, effectively one of the things we've done is we're long things like gold or treasuries, but we have an option portfolio, and one of the things that makes us stands apart is that we only buy options. When you buy an option and you can only buy options, there's a lot of good things that happened. The first one is with 100 percent certainty, you know your downside. If I spend one percent premium in an S&P put and I'm wrong, I lost my one percent. When I was global head on the commodity side, I've seen a guy with one million dollars of bar lose 50. A lot of these things happen, in every crisis has lots of things that you could see, a lot of these blowups and I'm elaborating with some of the problems with conventional defenders is, of course, leverage. Don't get me started with leveraged gold miners and the JNUG and what happened in March, where a good idea turned out into a terrible outcome because of leverage. Today, the miners are up significantly, but the leverage plays worth still a few cents on the dollar. But it's really about hidden short bullet also beyond the obvious leverage is about hidden volatility and hidden correlations and how these things effectively behave in crisis. You could see the typical case. I know everybody loves Tesla on this channel too, you could say, "Look, Tesla is a terrible asset. I'm going to buy puts on Tesla and I'm going to finance those puts by selling calls." My point to them as a risk manager is, "Dude, you're not financing anything. You're long puts, you're short calls, and if you did it on a leveraged basis and this thing just went up, you are out." If you just bought your puts in Tesla and you were wrong, I lost my premium. But if you naively were caught into finance in those positions, effectively, within leveraged basis, you're bankrupt. So it's very important to understand what not to do and how not to blow up, and these are very well-known recipes such as no leverage, hidden volatility, hidden correlation, and things like artificial [inaudible]. What we do is, first and foremost, we only buy options. You might argue, "Wow, that's very restrictive. How much are you bleeding?" Then I would give you, again, an example. There are two big schools of trading in options what I would call the Black and Scholes boys and girls, and the Monte-Carlo boys and girls. Let's think about how these two options operate. The Monte Carlo boys and girls think about options and the premium represents effectively the trade-off between time value, your Theta and Gamma; how much you make by playing the Delta neutral position. It's about implied versus realized volatility. It's about the path dependency of the payoffs. I could give you a very simple example. You buy puts on the S&P for one month, you spend whatever, one percent, and then you as a Black and Scholes person, you tell me, "Diego, I want you to trade the S&P vol." Let's say that you're telling me, "I wanted to trade the vol, I don't want you to be directional." It's like, "Okay, fine. I'll Delta hedge it." So I have my put, I Delta hedge it. Let's assume for the sake of argument that the market goes down one percent every day for the next one month. You as a Black and Scholes guy, market goes down, you have a bit of Gamma, you buy a little bit of the market and you buy, buy, buy, after a few days there's probably not a lot of Gamma left, you did not have a single chance in the entire month to sell back the Gamma that you bought, the realized volatility of a straight line is zero and turnstile that potentially you could have even flattened out or even lost money. You come to me and say, "Diego, the S&P is down 25 percent in the month, you're a vol guy and the reality is, well, I bought it at x percent implied, it realized zero. Yes, I had some Gamma, but it's possible that I even lost money." Now, this is the Black and Scholes world. It's the market makers and it's the way the market operates. It thinks of that this way. The other way to think about options is more like Monte Carlo. Those who are familiar with the method is Monte Carlo, the casino. You basically look at 100,000 iterations of what the price could do based on your implied volatility and correlations and forwards and whatever, and then you look at the expected value of your option. In this case, the put on the S&P, and surprise, surprise, magic happens. Ex-ante, Black and Scholes and Monte Carlo will give you the exact same valuation. The expected trade-off of this Theta and this Gamma, it's exactly the same as expected value of the option. But there's a big difference. If I bought that put option and I went on holiday for a month and I came back and I asked what happened in the market and the market is down 25 percent, you make 25 times your money. When you think about the market as a Monte Carlo person, you think about premiums. You don't necessarily think so much about volatility. Thinking about premium is very important. If you're playing long-dated FX forwards, for example, you could see such a massive interest rate differential and such a position that when you apply the forward to the vol to the skew, effectively, you have multiple ways in which you would get the same price subject to different variables, so volatility means less. In fact, you have incredible opportunities to buy artificially cheap optionality. You could find, and what I'm going to say sounds a bit shocking to some people, even to some professional options traders, but it is perfectly possible to buy options that are cheap. The three things we look for are cheap, that have very explosive payout, 5:1, 10:1, 20:1, and that are actually neutral or even positive carry. Of course, it's not that obvious. You may need for certain things and this comes sometimes in vanilla form with big FX forward. >> FX forwards were great for a while. >> It's a very good example. Long-dated and things. But then you have also a more exotic payouts and correlation place. This is something that for the sake of argument we can show people. Let's think about, I'm the goalkeeper. My view is I want to be things that are, for example, we could bet on gold higher or S&P lower. Let's take just a case study here briefly to see what would we do. You could do the vanilla option or we could do what is called a digital option, something very simple. Black or white, heads or tails, pay, yes or no. Let's start with gold. If you have the spot price, you take your forward, and if you bet market lower, higher or lower than the forward. That's roughly 50/50, that's roughly 2:1. In a very low-vol environment. If you go a little bit further out and you say, what are the odds of gold being, in one year, five percent or higher?Obviously, it's not. Fifty percent is less because the market now needs to go up. So for the sake of argument, let's say that that's three-to-one. It depends on the volatility. The lower the volatility, the bigger the payout and the higher the volatility, the farther out you need to go. >> Yeah, and the time, volatility and time. >> Time, and time, and these are real numbers more or less. One year, five percent out, it was three-to-one. So pick, it would've worked well. Now, you could do something similar on the SMP. You could say SMP, higher or lower, 50-50, two-to-one. Fifty cents will pay you one dollar. If you go farther out of the money, you got a little bit farther out, then obviously the put skew is going against you. But let's say for the sake of argument that you could also get three-to-one with five percent mode. So you and I could choose and say, "Hey, Raul, would you rather buy three-to-one gold, up five percents or three-to-one SMP down five percent and who knows? Perhaps we'd like one, perhaps we'd like the other, perhaps we'd like both. Now, the question for you is, how about both? How about gold up, SMP down at the same time? Here, the market needs to figure out the implied correlation. So what happens and what's driving things there? One of the things that the market has been doing lately is there's been a lot of demand as an inflation play and correctly for now, for gold higher, SMP higher. So the market is demanding and doing the raw products. So I'm happy to take, let's say the other side. I might say, "Look, I actually believe gold higher and SMP lower as a goalkeeper." Assuming zero correlation or even things have been priced slightly in our favor, here, the two events are considered uncorrelated, so you could do that at 10-to-1, so roughly nine-to-one, but you get a little bit of a pickup. So now you're risking, let's say one dollar to either lose it or to make 10. The idea here is that perhaps some of these bets are the same bet. A scenario where gold is flying might well be because there's trouble and even rates lower than [inaudible]. So when you create and you find all the tools available, you look at forward skews, time, implied correlations, equity higher, dollar higher. We did things during the crisis. I was accumulating this kind of stuff. You know who the defenders are, you know who the conventional guys are. It's gold higher, treasuries higher, dollar higher, VIX higher. You know who the guys are going to be under pressure is equities, it's credit, it's high yield, it's commodities, commodity currencies. How do you use your budget of options to buy this kind of bets in the most diversified and effective way possible? So right now we are about 550 million of assets under management in the strategy. We have a lot of these small bets placed, and then you benefit from things like equities down, dollar up. By buying these things are 80-90 percent discount to vanilla. Boom, these things could be very, very explosive. >> But isn't that a bloody difficult portfolio to run because you've got tons of implied correlation bets, probabilities, and yes, you have some structural framework in your head. But it's not an easy portfolio to run because you have so many moving parts. >> If you were dealt a hedge in this, it would be impossible. >> Yeah, you can do. >> You can do it. You would blow up. The beauty of this is that I only buy these options and I've sized these options. My average bet is 50 basis points. >> What time horizon is your general option structure? >> I have I have one option that is 30 years, just to give you a sense. But here, it's about finding the right balance between puts on bubbles, calls on anti-bubbles, finding the right mix of maturities, finding the right mix of underlines and stuff, so I have budgets. For the balance of 2020, I have five percent at risk. That's it, with 100 percent certainty, you're telling me, "Diego, it's bloody difficult to manage." No, with 100 percent certainty that five percent in options I bought in 2020 cannot lose more than 20 percent. What's hard to manage about that? Nothing. >> So let's say you closed an option, you'll just respend that risk bucket with the maximum five percent. You may not choose to do all of it. So let's say, the old option you have goes up and now, it's gone up to three percent of MEV. You trade it back down to 50 basis points. >> So for example, VIX, fascinating trade. We've talked about the VIX earlier and people are saying, "Diego, come on. The VIX is mean reverting, it's negative carry, it's impossible." Well, guess what? The VIX at the end of February was breaking 40. We have it at 40, 45, 50 and the market is indeed very used to thinking that the VIX is, first of all, every single spike in the VIX was sold aggressively. It's some mean reverting and stuff. The second thing the market was telling you is, this is going to be very short-lived. Now, you and I have been looking at the virus and many others and could realize that this is not something that's going to go quickly. This is going to be awhile. Now, your front contract in the VIX was trading 45, 50. May and June, we're trading at 27. We're talking about, call it rough numbers, 15 in the front and two contracts out. You have 27 and 25 on a forward basis. You could buy the future of 25 for June when the spot was at 50. So you had massive backwardation on the expectation the market was going to collapse. But from a vol perspective, you have the front trading at a 150, a 175 vol and you had the deferred contracts just two, three months out trade-in at 75 vol. So half the forward, half the VUL. What it meant is you could buy a $40 call, which we did, with effectively positive carry because if things stayed at 40-50, you were long at 40 for less than two dollars. So you have a low premium, but that was my worst-case scenario. If the market was to effectively roll and stays at 45, 50, you would potentially make five times your money just purely on a roll basis. If, as it was the case in our view, VIX would spike higher, then you're sitting in this thing. Now, that money that we spent, I had about, in dollar numbers, about three million of premium. Effectively, we like to exit in stages. So you exit in one-third, you exit two-thirds, you exit in full. By the time you sell your one-third of the position, you already paid for the entire option and more, so you're playing with free money. But we average those three million, I think we sold out for about 22 million. As you said, at that point with the VIX at 80, the opportunity in the VIX is not there any longer but you look to the right and you see gold has collapsed. You see the Chinese Yuan is looking very strong and you look at certain pockets of volatility. So my job is to redeploy that, to have a portfolio of goalkeepers. These things, some of them play, some of them don't play. But when they play and you monetize them, profits become capital, and so that capital becomes, in our case, gold, it becomes treasures, and becomes new options. Those new options are forward looking, and this is where people were a bit shocked at the beginning, and like okay, guys, you're up 45 percent in the first quarter, and then April came in. We have the highest one month move in SMP since 1987 and everybody was expecting a bloodbath. We were up 1.2. Then May comes in and we're at five percent. It was like, "What's going on?" The answer is look, you are playing this process and even within the options, there are opportunities. Not every single asset moves synchronously. March was a great example. We have effectively, the first leg of the move of you, as you remember, was volatility going up and funding currencies and funding trades. So OZ-Yen vanished, you went boom. Dollar-Yen goes from 109 to 101 and the OZ goes from 70s to 58 cents or something. Crazy move. So that was because the rally in the Yen didn't happen because necessarily people, they love Japan or the currency. This is like, "Okay, dude, I'm funding myself in a position, I have carry, I've been making all these little money." Then boom, they get taken out. Now, the next move with vol, and then the third week, you had gold and treasury is collapsing, big-time. But then you have the VIX flying. So having the right portfolio of goalkeepers truly diversified. It'd be pointless if I told you that all the 50 options or whatever I own are the same thing. In fact, we're actually long gold and the dollar and some of the trades that we do and this is beauty, gold up, dollar up. When you think about the market and you ask it. >> That correlation bet was one that I've looked at for several years. Fantastically cheap, because it shouldn't happen. >> It shouldn't happen, and in this things change. But the correlation is bipolar. Very often, it just goes. So what this options allow you to do is things like, if you ask the market, like the gold and SMP trade, you go and say, "Hey, gold higher, it gives you the odds." You say, "Okay, what are the odds? What happens to the euro if gold is at 3,000?" The mathematical model will say, "Come on, Diego, easy. Euro-dollar, gold at 3,000? 170." The model is wired to think that if gold up, dollar down, therefore it thinks gold up, Euro up or Yen up or Swiss Franc or whatever it is. Effectively, when you combine these pieces and it doesn't mean it works all the time or for every single thing or is easy, there's a lot of science in this process. But when you play options and you have the ability and the tools like you have, we've talked about this many times, in different capacities, you have the ability to actually decompose these probabilities and understand not only single asset, but conditional probabilities. What you're able to do is effectively achieve our objectives, which is reduce the premium, increase the payout multiple, and reduce the carry. Because if you think about the gold versus SMP trade, for example, that we discussed earlier, if you buy the dual digital or a worst off or whatever, if one of the legs works well, in this case, it's being gold and let's take it to an extreme. So that trade that we bought at 10-1, gold goes to 3,000. That condition is met. Gold is higher now. What your left is a vanilla put on the SMP, which you bought at one-third of the price of a vanilla. You can see how you can actually play with carry and you can actually do things by basically creating a framework of where as options specialists. >> I love that thought process of looking at things where there's an embedded assumption that everybody believes to be true that isn't. The one that I always fixate on is dollar-yen. >> I agree. >> Market has a total belief that dollar-yen is a risk asset. That the yen goes up every time there's risk. Now, my guess is, there is a set of circumstances which may be even playing out in Japan as we speak, which is it's now got a full second wave of virus. There is huge monetary printing that probably needs to be done by Japan to save their own economy and maybe dollar-yen becomes a risk of assets. Now, the correlation bets in that because it's so in people's heads, it's beautiful. >> It works really well. >> The funding because of the full words as well. I mean, the three-year options on dollar-yen, I meant virtually to throw them away free. >> First of all, I agree with your view. I think dollar-yen is bad money, these guys, there's good money and I think this belief will change. You also have another thing that I like about it, which is China. China is the biggest bubble in financial history, to put it mildly. When that goes, it's obviously going to go through the Yuan. Yeah, it's a degree of freedom in the system. In some way, if that happens, you actually know that Japan will get a first move, but then Japan needs to devalue and compete. I think it will fold for its own way. They could happen for different reasons, there could be different catalysts. But when you think about that correlation versus gold, it works beautifully. There are ways in which we might be right or wrong, but all we know is that we buy very cheap options. That's what we strive to do. You buy very cheap options that are potentially very explosive and have good carry. This is the reason why we have a [inaudible] of five. What is the Sortino of five? The crowd here is quite technical. We can elevate the dialogue a bit. When you think about a strategy and how good are you as a manager, mate. People start looking at certain things. The first and most obvious is absolute return. My strategy is up to 30 percent per annum. That's good. Okay, well done, mate. Fine. Now, the second thing is, how volatile are you? This is one, slave misconception in the industry. Would you rather invest in someone that has 20 percent return with 20 vol or 20 percent return with 10 vol? What would be roughly an information ratio or a sharp ratio of one or two? It's pretty obvious that with this information, only, you would say, come on, I'll give money to the sharp ratio two is higher quality return. The return per unit of volatility is higher. What's implicitly in this assumption, in this conclusion is that volatility is bad. >> Volatility is downside not upside. >> Exactly. I'm penalizing you because you are volatile. So I don't like that. I rather not have that. There are two problems with that. The first one is there's lots of strategies that have very unstable volatility and correlations. You could see someone that is selling tail, it looks very nice, very good returns very low vol and then boom, they implode. >> The other guy that I remember this from, I don't know if you remember him was Roditi, Nick Roditi. Roditi ran the Quota portfolio of Soros and he was easily the best performer at Soros. [inaudible] everybody. But his vol was different. He was like an 18 vol guy. Everyone was like, "Oh, my God." The 18 vol for him was, when he was bad, he'd lose 30 percent, when he was good he'd make 300 percent. >> Exactly. >> I said this massive skew in his volatility. So George was like, "Just do whatever you want, just keep doing it. I figured that you won't be big enough to blow up the entire fun. But if you make money, we're going to make enough money." >> This is the way we think. We do it in a way that downside volatility. Downside, you want to cap it. You want to know how much you have. In my case, the explosiveness comes from the options and there you can sleep at night that you're downsides there. But what you get is exactly the point that you made is not really about average. If the distribution was symmetrical, then average volatility would be a good proxy for risk. But many distributions are not symmetrical. In some cases, like ours, we have massive skew of positive. Some people have hidden negative skew. So you want to avoid that. But when you actually think about the correlation exactly the point that you made, look, nobody called me to complain when we're up 16 and a half in August or 10 in February, or 19.1 in March. Volatility in itself is not bad, is the drawdown volatility, is the negative volatility that's bad. But when you look at the return per unit of negative volatility, which is the Sortino, that's when you see this asymmetry and where we've been scoring close to five. In football equivalent terms, if you've scored five goals for every opportunity that the other team has created, it's very difficult to lose a match when you score five goals without a profile. I think what it shows you is this obsession. >> Is that Sortino stable over time, or is it observable in these current markets which are more volatile, even not just a headline level, whether it's some sectors or within assets. How stable is the Sortino? >> It's a realized number. Obviously, you have to do it on a realized basis so you say, I made 30 percent per annum and I did it with experts and downward volatility, six and a half or whatever. That's what gives you this sort of Sortino. Of course, it will change through time and you might have different dynamics. In my case, the stability of that is, where is that five coming from? It comes from buying effective insurance that is grossly, artificially cheap in our humble opinion. As you said, there might be long periods of time where you bought the right thing, you bought artificially cheap, you didn't payout. But eventually, you're still in the game and you're able to realize this. So probabilities eventually catch up. You have to stay very focused on this process. >> To get back to how do you stay in the game. How you explained to me is you only have five percent of NAV risk. So even if it turns to a zero. >> For 2020, yes. >> Yes, for 2020, that's your risk. >> In the options yes. >> In the options. So therefore, even if nothing happens, everything stops. You just lose the premium, you're down five percent in that part of the portfolio, and that's it? >> Theoretically, yes, except that some options, that's your worst-case scenario. It doesn't mean that that's what will happen if you stay here. If your stay here, there are certain options that might be positive carry. >> It's all in your favor. >> In our case, this is like, look, for us to lose in every single thing, you would need gold to go up and gold to go down. Or Euro to go up and Euro to go down. It's like, well, maybe one of them will happen, maybe not because you have a diversified portfolio. My point is you want to live in a world where from a risk management perspective, we're self-imposed the long-only option for multiple reasons. But one of them is this fallacy of finance. We want to sleep at night, we want our investors to do that. It brings discipline, trust me because you really need to see where you spend this optionality and then you find the right opportunities with the right premium. >> I think how you're going to think about buying these options is different to how most people, most people draw a few trend lines, have a view and so I think the S and P is going to 3500 over the next three months, right? By calls. You're not looking at it that way at all really, are you? >> I'm the goalkeeper. You basically told us, look Diego and this is the point I was making with some other volatility funds. I need you my portfolio to do saves when things go wrong, we have a correlation of minus one to risk assets every single time that the S and P went down. We can look at October 2010 and December, May, August. Every single time we make money and we made a lot of money. This is not something you achieve because you're smart, or because you're clever, or because you have a crystal ball, you do it because it's your mandate. So my mandate is protect the capital, make a lot of money in a crisis and try to preserve, to do it with neutral to positive current, that's a mandate. So when we think about these opportunities, we think about a certain usual suspects. The first decision we need to make is, do we spend our money in buying puts on risk assets or calls. Let's put some bubbles or calls on anti-bubbles. Okay, that's level one type of discussion in terms of how do we allocate this? I can have a view on that, but the answer is I will have both. We'll have some puts and we'll have some on S and P, and we have some Golds on Gold or the VIX or the treasuries. The question is, okay, what's the tenor what are the strikes, how do we combine them? So our job and the reason we perform systematically during those events is because we know, you know, what happens to S and P in a crisis. You know, what happens to the VIX? Gold is more tricky. Okay? Maybe it's prices, maybe not. But in fact, we liked that because it might be giving you different type of hedge under different things. Going back to the discussion of bubble versus anti bubble, it's not about ratios, it's not about numbers, is about beliefs. If you want to find the bubble, tell me the belief. In Spain it was like [inaudible] bricks never fall. There was this mindset and you talk to people is like, oh, house prices have been high like people looked at you like and they said [inaudible] bricks never fall. I was like, well, until they fall in your head. >> Yeah that's right. >> I mean, of course they can fall, but it's very often this mindset. In that sense as a goalkeeper, we know our job. This is very important because when you build a team, in fact, there are a bunch of people that are positioning themselves as uncorrelated/defenders. I'm going to pick on the CTAs as an example. Yes, they did well in 2008. That was a very different match. But if you go back to the football team and you ask, "Hey, what position do you play, Mr. CTA?" And the reality is you have someone there that is, look, when we attack on front row all in trying to score all the goals. So equity is up. You have a guy that is Max Long, probably on a levered basis, but the lowest level of volatility. So he's maximum. How can that Max Long levered position equities be a defender. It's not. The idea is when the other team counter attacks, when volatility goes and is forced to run and defend your telling the guy that is trying to score the goals to run really fast, put the gloves, do the saves, and then go on. This is what some of the CTAs have been caught and this is why they're getting destroyed. I mean, there were Max Long going into Q4, 2018, the market collapses, volatility explodes, they go short only to buy it back through the entire 2019 and go Max Long again, only to throw it all again and then back in. So when you think about a defender, it is about one of the questions you were asking. It's about behavior. It's about portfolio construction. You don't say I'm a defender because I did well in the previous crisis, and many macro guys are poker players. I mean, I'm more of a chess player, I play one medium, longer-term, and I'm not looking for the next move in gold. Our investors know that we have gold treasuries and options. >> Yeah, I wanted to talk a bit about that, that just as we wrap up. So I think we've got a great idea of how you look at options, it's not about looking for the next move. You're looking for that cheap bet. You're creating a value portfolio of options that give you outsize returns if you get it right or low losses if you don't, and you just build that bet repeatedly. >> Yeah,. >> What's the rest of the portfolio? Because if it's the five percent we the risk is that, what's the 95 percent? >> So portfolio currently they ignore strategy, which is a useful strategy, is about 50 percent in gold and precious metals, about 25 percent. >> Is that straight precious metals or miners as well. >> We have the flexibility to shift, but it is primarily gold. So call it 70 percent of that, please will always be gold, but we have the ability to go into silver, platinum, palladium miners, whatever. But it's a minor piece. The core view is on gold. This we buy without leverage. So it's a long position and we tend to add puts. Okay, ideally, the idea is to run a rolling synthetic called profile, which effectively gives you the known upside. If your top-ish and you buy that puts, as the market goes down, you monetize the put, buy more gold. It's a rolling synthetic goal. We run a similar piece, similar strategy in US treasuries for about 25 percent of your portfolio, which I'm going to discuss because it's very important. It touches on one of the misconceptions in the system. There's about 20 to 25 percent in options. So the five percent I mentioned was 2020. We have a bucket that is another 5-7 percent in 2021, 22 and we go all the way to 2030, so that 20-25 percent on 10-1 options could make you 2-300 percent. This is why we're so explosive. But let's look at the treasuries for a second. They're all defenders, gold treasuries. Now our view on the treasury's bucket. Again, no leverage. The neutral position would be 10 years, but we have the ability to change duration. One of the things we've done is we have a non-consensus view of zero interest rates and higher inflation. This shocks a lot of people. They say, "Diego, what are you talking about," I mean, look, the rules of the game say that inflation comes in, interest rates are going to go up and bonds go down. My point is, no the rules of the game have changed. Because if you're hiking interest rates is science fiction. It's not going to happen because the whole system collapses. So you're working on the basis that you can not hike to interest rates. Inflation is the answer to some of these exit. So for example, we have a meaningful part of that treasury component into 30-year tips. You have some reasonable amount of yield to pick up its tiny relative to where it was. But it's still 1.2 percent times 30 years. That's a meaningful upside, and we have a potentially risk overshooting on the inflation side, so about half of that treasury position is in 30-year tips, and then the other half is in nominal treasuries between 5 and 30. But we play that duration without leverage. Again thinking of as a defender. But on the option bucket that 30-year that I mentioned is a synthetic way of been very, very long 30-year Treasuries. So we bought through a very interesting relative value trade. You look to play that in option format. Everything we can do an option format, we will do in option format. You don't need to take as much delta one or linear risk if you can find a way in options. So that's the idea. We have this conventional defenders, primarily gold 50 percent. I mean, my book was called Opportunities [inaudible] angles perfect storm, 3,000 to 5,000 gold in the next three to five years. That article that I published in the front page of the FT, I still have that view, it's being reinforced. I think treasury yields might go to zero and you will have inflation. I think as we discussed, gold and treasuries may not be sufficient on their own as defenders, you need to find that asymmetry in the portfolio which you are not going to get from the conventional defenders, and the answer is options. Ideally, something that is- >> One day you'll realize that the answer is Bitcoin, but we'll have to get you there first. That has the most optionality in your terms, right? Even if it's wrong the optionality is so good. >> The biggest factor, in all my analysis, the biggest bullish reason in Bitcoin is the fact that you and a couple of very smart guys are bullish. Knowing how you think, I'm a little bit more skeptical. >> The Bitcoin Standard, the Saifedean Ammous book, Bitcoin Standard because it'll talk to you. It basically talks about the gold standard and why Bitcoin could be perceived to be a superior version of that. Even if you don't believe it's superior, you'll understand the optionality once you read it. >> I think Paul Tudor Jones' newsletter was also very telling, and I loved the way he thought about it. Talking about the fastest horse. >> Yeah. >> I think you guys are spot on and there's going to be a phase in this process where Bitcoin is going to be the fastest horse. We're now in a phase, and I think it's true for gold. I mean, many people might be telling their thinking right now, "Diego, come on." We're at historical highs in dollars by the way, and every other currency we met long before. What's next? Do we have retracements? Look, this is a whole new game. Gold is just a number. There are multiple ways you could think about the value. I know it sounded crazy when I was talking about 3,000 gold when it was at 1,200. But now, I'm conservative and almost left behind. Once you get into certain price levels, this becomes very exponential, and I have no doubt that Bitcoin, it's and could be one of the most asymmetric asset classes. I defer to you for the very smart guys, for the rationales. >> Bitcoin and gold, all for the same reasons. Let's come forward three years, all right? >> Yeah. >> Let's assume we are in an accelerated phase of bad **** happening. >> Yeah. >> The central banks are fighting as we expect them to do, doing what we imagine, same with governments, and gold is now at three-and-a-half thousand. What is the next phase of this? Because you have captured that phase, and in that environment, you have done very well. But once you get to that, and the system is now at the point of change, what is the next iteration? >> I think, when we designed these solutions, these strategies, there's a temptation to think certain asset classes have done their job and that's it, right? You could think about rightly about bonds. Have bonds completely lost their use or their value? Is there any value left in bonds? The answer is, well, I think they will continue to be a core allocation in parts of many insurance and many portfolios. There's going to be situations where perhaps there's a risk of sell-off with inflation scares and whatever happens. It's almost like the first phase, it's not "easy money" in any way, but certainly from very artificially low prices to more normal. I think there's still be a role to play, and we will see what it means. I think here, as part of the team and the portfolio, that through diversification comes from having lines that some will be green, some lines will be red, but that's where the diversification comes. I think from here to 3K, it's going to be perhaps faster or could be more explosive. You have no clear references technically, and it's just a number. Warning, because the draw-down is going to be brutal when it happens. You might get people who felt that missed out a 3,000, we will all be talking about 10,000 gold and then you will maybe go back to 2,000 in one day. Who knows? This is what we're getting into. If you're levered, you're dead, which means you should favor options or non levered ways or other ways to play about this, and do it in a portfolio context. My vision, and this chess game that is been reinforced has many variables. It's going to create a very polarized outcome. There are some clear winners, there are some clear losers. EM is going to be brutal in certain pockets, certain aspects of credit. Then depending on how bad it is, and how systemic, and whether they decide to bail it out, that will transfer the problem back to more inflation. Something's going to give. I don't have a crystal ball. All I know is that a scenario, for example, as their strategy has been doing. I might belong, puts on the S&P and calls on gold. But if both go up, your net make money, and then if the market decides to change its mind- >> You get a free option. >> -maybe you get the downside. In that sense, I think it's important when you think about building the portfolio, do something that is balanced. That requires a thinking in terms of inflation, in real terms more than nominal. We discussed that earlier. Then you need to decide what the right way things are. I think Howard Marks, someone emailed me one of his newsletters with a joke. It was like, "It looks like he read your book." He said something at the lines of, "For decades, I've been effectively looking to optimize between equity versus credit, developed market versus emerging market, growth versus value." All these dynamic which is really all about the strikers. It's a striker mentality. It's the mindset of, just position your strikers. He said something, "Look, I think the next few years, the important balances is offense and defense." This is the new balance you need to find. Because if you don't find the right balance between offense and defense, then your strikers won't matter. If you don't have a goalkeeper, then who cares whether your strikers are more on the left or the right? I think in that sense, it's very important for people to understand their own risk. Many of them are strikers. Many of them lost their jobs and their wealth in this crisis. You might be a striker to start with. Then how do you want that team to work and look for true diversification? Delegate to the right people those pieces and enjoy the stability of the market, enjoy the volatility, re-balance it. It's incredibly powerful. I mean, a portfolio of 8080 [inaudible] S&P re-balanced monthly. Just the re-balancing, just this idea that, S&P is now 3,400, now, it's 2200, and now, it's back to 3,250. Just going back to your neutral weight would have made an incremental 10 percent return. Instead of trying to pick the tops and the bottoms, and fight between bulls and bears and stuff, I believe in the team. In that team, I don't pretend to be everything for everybody. I don't it's the answer. They need to understand which position you're playing, and that's all you need to deliver to the investors. This is by the way the number 1 feedback I've received from the big investors, is you've done what he says in the [inaudible]. I think this is really going back to the points will be discussed during this conversation, which is delivering that portfolio construction, understanding those risks of the challenges posed by the abuse of monitoring fiscal, the implications or false diversification and portfolio construction, and how we need to adapt to a new decade, which would be my view very different from the previous one, with different challenges and different opportunities. Certainly, it's not about being bullish or bearish. It's about having the right team. For the American guys, it's not about Michael Jordan as a bull or Singletary as a bear, it is about having a team with both and re-balance in them. That way I think it's way more powerful and way less stressful than just pretending that this is about having a crystal ball, because it is not. >> Diego, fascinating. I think there's a lot of people going to be taking notes in there trying to figure out, how do I apply any of what I've learned here. I think it's really interesting. I think it's super valid what you're doing in this environment, particularly. I don't see any other way of navigating it, but it's not easy. Hats off to you for doing so well in a very complicated wells. Having seen it, again, like the energy world is flat, having seen this well in advance in a cohesive strategy that was capturable, it was really good. I wish you the best as ever and I look forward to catching up again soon to find out more from what the ****'s going on. >> It's been my pleasure. I thank you so much for the opportunity to share the thoughts. It's been great, and I wish everybody lots of health, most importantly, and we'll be in touch. Thank you again. >> Yeah. Thanks, Diego. >> Thank you so much. Bye bye. >> Hey there, since you got to the end, I'm guessing you like the video. That's probably because we don't just turn on a camera and film. We work really hard on getting the narrative flow just right. That's why many finance companies are actually now hiring Real Vision to make videos for them. One of our recent client videos just hit 100,000 organic views on YouTube, and there were no kittens in sight. If you want to find out how Real Vision can make a video for your company, just email us at customvideo@realvision.com.