What Is The Next Perfect Trade?

**Alex Gurevich** (0:01)
Welcome to the Money Tree Investing Podcast. Stock market, wealth, personal finance, value stocks. Invest in your life.

**Kirk Chisholm** (0:10)
Hello, Smart Money Tree Podcast listeners. Welcome to this week's show. My name is Kirk Chisholm, and I'll be your host. So today, I'm joined with returning guest, Alex Gurevich. How are you doing, Alex?

**Alex Gurevich** (0:20)
It's good to be back. Thank you for having me.

**Kirk Chisholm** (0:21)
Yeah, glad to have you in the show. We had a great episode with you last time, and happy to dive right in with all this going on in the world. So for those of listeners who didn't hear you before, tell us a bit about who you are in your background.

**Alex Gurevich** (0:33)
So I run a macro fund called Haunted Investments in the Bay Area. My background is actually in math. I went to the University of Chicago and got a PhD in mathematics.
But I was always interested in strategy, strategy games, and everything related to strategic thinking. So finance was a very natural place for me to go, and I ended up on Wall Street doing many different things on Wall Street, starting with customer derivative trading, moving to proprietary trading, and eventually running my own money and running hedge funds. So that's a very brief summary of my background.

**Kirk Chisholm** (1:08)
I love the fact you've got a background in the macro perspective. I know you had a book out around 2020, and you got another book out now.
How have things changed in your point of view in the last six years? From a macro perspective, how have things changed in your mind?

**Alex Gurevich** (1:26)
Well, the paradigms definitely changed. The fundamental principles of trading, I think, remain rather intact. But we definitely...
Paradigm changed a lot, I think, in 2020, or rather, like, maybe like in early 2020s, because the first 20 years of the century were dominated. In my real opinion, the macro was dominated by the risk parity paradigm. Really, the greatest trade of like the first 20 years of the century was the risk parity. The idea that when stocks go down, bonds go up. And bonds go down typically in the environment when stocks go up.
And that allowed people to build balanced portfolios. And I was one of the early adopters of this, though not the earliest. But I was one of the people who started it independently to do it back when I was at JPMorgan. The idea that you can have a portfolio, can be long stocks, and actually hedge it by being long bonds. Or even conversely, which was in my case in 2002, I hedged my long bonds position by being long stocks, because I figured that the only way that would tighten, many tightening surprised, but the only way that would tighten the stock market would go up a lot. So that was the paradigm, the way of thinking, which I eventually expanded to other asset classes too, which dominated like 2002 to 2022 But then the things started to really change. And we're seeing, for example, this year during this recent crisis, treasuries do not act as applied to safety instrument at all. If anything, on a daily basis, their trade is absolutely the opposite. What is interesting, they end up eventually in the same place, because eventually it doesn't matter whether people buy them for safety or not. Eventually, it all converges to policy, right? The funding rate on treasuries, right? If you call them to maturity, you fund them at whatever you fund them. The regime, this was such a profound change of regime that US treasury do not act as a flight to safety instrument, and we can discuss the reasons why.
But although some of them are obvious because of the fiscal dominance that emerged after COVID.

**Kirk Chisholm** (3:33)
I'd love to understand why, actually, if you don't mind, because we saw this a few weeks ago with the war where bonds and stocks all went down together. I'd love to understand that new dynamic.

**Alex Gurevich** (3:44)
Well, some of this could be just a matter of supply. I will say like this dynamic not always makes a lot of economic sense to me. Because for example, if you look at the war, yes, oil prices went up and this will lift headline inflation. But it's unlikely to create a lasting inflationary shock, unless the war is so bad that it will really destabilize global economy. But then there will be a big headwind as well. Oil going up, say, $200 and going back to $70 net-net, it really is not an inflationary shock, it's inflation and then deflation. And in fact, oil prices never actually even went that high, they're still way below 2008 levels, especially inflation adjusted. Maybe people think about kind of chain spiraling supply disruption, but really the fact that they started to price hikes in Europe and started thinking about hikes in Europe based on oil shock, that's kind of ridiculous because for Europe it's pure tax. At least in the US you can say that because we're producers of oil, it is actually inflationary because US companies are making money, right? But with a situation like in Europe, it's a pure tax and it would be really, to me, it's completely like out of this world to think that that should cause hikes. But people are always fighting the last battle and the last battle has been inflation. I don't think that's the battle of today. That's not my opinion, but people are still so stuck on anything, still triggered about anything indicating inflation. Now, inflation is caused by sending stimulus checks to everybody. Yes, that causes inflation. Oil shock probably and even increased military spending is probably not enough to cause inflation because it's offset by tightening of monetary conditions. Because what we had over the last three months is stabilization of dollar, higher interest rates and wobble in stock market, even though the wobble seemed to have passed. But a few months of level stock market, that's already also disinflationary impulse because a lot of impulse came from stock market rising. So I don't think it makes a lot of economic sense, but supply picture just supply demand picture for treasuries changed a lot. If you go back to 1998, the first kind of risk on risk of crisis when world learned how to operate when the world basically shifted to this correlation breakdown that all assets, all risk assets moved together. That was the early 1998 crisis when that became clear.