Zed Francis
In this episode, I talk with Zed Francis, co-founder and CIO of Convexitas. Convexitas is a fiduciary that works with families and institutions to maintain balance and flexibility.
Convexitas is more than a manager or a product – they provide tools that bring balance to your allocation process.
When you know Convexitas will provide liquidity during times of distress, you are free to make better allocation decisions and avoid becoming a forced seller.
Liquidity enables proactive opportunity capture without the fear of inopportune liquidations to service capital calls, charitable obligations, or financing lifestyle.
Zed and I talk about the current rhetoric that is still focused on buying the dip. We talk about his recent essay The Storm Provides, what happens when you have end of day rebalancing creating vol smashes. His thoughts on: housing market, inflation affecting correlations, and cash efficient portfolios.
I hope you enjoy this conversation with Zed as much as I did…
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Have comments about the show, or ideas for things you’d like Taylor and Jason to discuss in future episodes? We’d love to hear from you at info@mutinyfund.com.
Transcript for Episode 31:
Taylor Pearson:
Hello and welcome. This is the Mutiny Investing Podcast. This podcast features long form conversations on topics relating to investing, markets, risk, volatility, and complex systems.
Disclaimer:
This podcast is provided for informational purposes only, and should not be relied upon as legal, business, investment or tax advice. All opinions expressed by podcast participants are certainly their own opinions and do not necessarily reflect opinions of Mutiny Fund, their affiliates or companies featured. Due to industry regulations, participants of this podcast are instructed to not make specific trade recommendations nor reference past or potential profits. Listeners are reminded that managed futures, commodity trading, Forex trading and other alternative investments are complex and carry a risk of substantial losses. As such they’re not suitable for all investors, and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making a decision on the appropriateness of such investments. Visit mutinyfund.com/disclaimer for more information.
Jason Buck:
Welcome to the Mutiny Investing Podcast. I’m Jason Buck from Mutiny Funds and my special guest today is Zed Francis from Convexitas coming at us all the way from Chicago. How’s Chicago treating you today Zed?
Zed Francis:
It’s actually pretty miserable outside my window. We had a pretty nice March, but man, April’s been not good.
Jason Buck:
I’ll have this send you this thing I saw the other day, it was the 13 seasons of Chicago and they’re all like second winter, third winter, pollen season and that summer was just like a blip on the radar, right?
Zed Francis:
Yeah. I mean, ultimately the last, I don’t know, decade of we’ll call it seasonal shifts that are going on everywhere in the world, the main thing that’s happened here is this spring has gotten worse and worse and worse, but the fall’s gotten longer and longer. So it’s like last, I don’t know, third week of December, I was playing golf with my dad in shorts and short sleeve. It was like 72 degrees. So it’s like, it’s just shifting. So mentally, you’re like, I’m broken by March. And the answer is no. Now that’s like may and you’re completely broken.
Jason Buck:
But also we’re recording this on April 20th, but didn’t you guys have snow last week? Did I see that as well from some of my friends, like just a crazy random snow fall?
Zed Francis:
Safely mix of both. My house and the office are close enough to the lake and so that shield us from actual snow happening, but yeah, like 10 miles away from the lake. Yeah, they got more than a dusting, I heard.
Jason Buck:
That’s crazy. But for those of you, international listeners, and if you’ve never been to Chicago, one highly recommend it, but also highly recommend going in the summertime because nobody does summer better than Chicago. I mean the outdoor cafes, but more importantly, the rooftop patios, it’s unlike any other city in the world, I think for the amount of rooftop, balconies and everything that get used for those few months at summertime. It’s quite extraordinary to see.
Zed Francis:
My wife is Irish. Her whole family is still over in Ireland and the in-laws have been in town for almost three weeks now. And they do it because my wife’s mom, Jeanette is a teacher. So they call it spring break, plus Easter break and then she took a week off or whatever. So we worked on the calendar and I tell them every year, I’m said, “Guys, this is not the time to come.” I get, it works well with the teaching calendar. They’re like, wait for the summer vacation. They’re, no, but we go to France and this and that. I think this one finally broke them. They’ve been here long enough. And they’re like, okay, there’s no reprieve and we’re all trapped at the house and getting sick of each other. So I think I finally moved their annual trip from April to June.
Jason Buck:
I think last time I was in Chicago was October, November. And I’m just a romantic. So every time I travel, I’m like, man, I could live here and I start imagining what it’d been to like to live there. And I was like, I was say, “Man, I could, I could really live in Chicago.” And then I turned the corner and caught the wind off the lake. And I was like, “Nope, Nope, can’t do it. I cannot do it.”
Zed Francis:
Way too soft with your Northern California lifestyle.
Jason Buck:
Exactly. But as you know, I grew up in Michigan, not too far from Chicago, but obviously I left when I was 15. So yeah, I can’t do winters anymore. So let’s obviously transition, talk about markets a little bit, but what I want to bring up maybe to start with is you recently wrote an essay on your website and I love your website. It’s just convexitas.com, just to make sure it’s correct?
Zed Francis:
Yeah.
Jason Buck:
Great. And then the essay was called the Storm Provides. So maybe if you want to kind of give us synopsis and we can kind of go from there and what you’re referencing with the Storm Provides.
Zed Francis:
Yeah. I mean, essay is way too strong of a… It makes it feel like you’re saying for a white paper or something. It’s just a simple post. Essentially, the impetus of it is Harley Bassman was bothering my business partner, Devin Anderson about why basically the curve was shifting so dramatically. Just call it, we had a month there where twos, tens, steeping, flattening, steeping, flattening, steeping, flattening really aggressively. It seemed out of whack, especially in comparison to all other things that were happening in the market over that time period. And Harley had a thesis that was related to some structured note product that was out there, residual things like stuff issue, call it from 2009 through 2012. So I asked Harley to just send me a couple of the prospectus, these structured notes, so I can digest what the heck he was talking about and make my own view.
Zed Francis:
But if anybody’s actually gone through, especially the details of those structured note prospectus, they’re not exactly fun. And I printed out about, I don’t know, five or six of them to make sure I have a broad view of what he was talking about. And I went to a little local pub near my house called Estelles with an old fashion as the best means of understanding all the fundamental details of these notes. The notes themselves were way less interesting than even I thought possible. And ultimately didn’t think that they were as a market movie as potentially intended. But what happened at that pub is it was the first day where we’ll call it, headline reported 30 year mortgage rates were above 5%.
Zed Francis:
And at this pub, there was two guys that just got off a construction shift, probably in their forties. There were two guys that were probably 22 years old living in some cheap apartment down the street, starving artists in Wicker Park or something like that. The bartender and the fry cook. And while I was enjoying my old fashion and not enjoying reading these structured note prospectus, I overheard separately and all those folks, they mention how aggressive mortgage rates have gotten. All of them were like, I can’t believe, 5%. And so they kind of woke me up to like, is this finally the number that people start caring about? I mean, rates obviously for a good couple months here have been pretty aggressively selling off, bonds have been selling off, rates have been going higher, but these very different folks from financial services industry, all of a sudden it got onto their radar.
Zed Francis:
So then I put it in the back of my mind. And then the following morning, my new daughter happened to wake me up at about 03:00 AM. So after feeding her, that provided me with some time to go ahead and think about how to produce that experience into a simple post. And that’s what you mentioned, Storm Provides. Ultimately, the theme of it is everybody, any time we’ve had any sort of sneeze in markets and risk assets falling pretty much over our whole careers, people focus on why and when to buy the dip, if you will. The way we had, obviously, the somewhat surprise invasion of Ukraine and if you heard everybody talking about it, they were like, no, this past terrorist event or X, Y, Z geopolitical, how many days does it take to get back to where you were prior to the event taking place?
Zed Francis:
Nobody was like, things have fundamentally changed, this is problematic. It’s like, if you buy the dip, how long should it take for you to get all the way back to where you were and how much money could he possibly make? That’s been the general theme. And in my view, the reason for that over the last kind of 40 plus years, I had most people investing in careers is that concept of the Storm Provides. So nasty things happen, the storm, but we have mechanisms, mix of monetary, fiscal, maybe just communicative of, we might be there to help and maybe they don’t actually do anything, but they might be there to help that causes asset prices to appreciate quite quickly back to where they were and maybe even surpass where they were previously.
Zed Francis:
And obviously COVID is a great example of that, right? You have a distress environment. They shoot crazy bazookas out of every possible outlet they possibly can. And not only do we fully recover quickly, we rally another 30% beyond previous all time highs. And so the backs top of that of the Storm Provides is that concept that we’ve been trained, that when really nasty things happen, we get all this support, which then provides the ability for asset prices to greatly appreciate. And the question of course, is that going to be the experience over the next 10 years or not? And everybody can argue back and forth. I’m not necessarily saying it’s over by any means. I’m just saying when you’re starting from a place of extreme accommodation with pretty significant inflation, the snapshot reaction to provide benefits is probably a little more difficult for both monetary and fiscal powers out there than it is otherwise, but that’s, we’ll call it, the quick version of how we got to the post Jason, not a white paper or an essay.
Jason Buck:
There you go. A screen written down from thoughts from old fashion and great fried food. Maybe that’s a better example. I technically get a lot of those from you in text form. So it was nice to see it in, what we’ll call, a thought piece form. So there’s so many things I want to pull out of there that you said. One, I was just thinking about the structured notes. There’s got to be some like Michael Burry out there, right? He was pulling on all the CDOs and looking into what, see, what were their shittiest versions. Somebody’s got to be out there reading all those structured notes. Like you said, they’re so boring, but I wonder who’s finding of the worst of combos or whatever, and the vintages they’re struck at, but there’s got to be somebody out there trying to figure out all that structured product market that’s bored to tears, reading those all day long. And so maybe that’s not you now, after reading a few of them, you’re like this is pointless.
Zed Francis:
I’ve read tens of thousands over my career. I do think there’s valuable information in them, but you got to definitely filter because it there’s only valuable information, 1% of them. You got to find the 1%.
Jason Buck:
And I think you were hinting at it is like we, or you’re in an environment of TINA or BTFD, buy the fucking dip, all that thing. And that’s the Storm Provides like you’re referencing. And you were referencing as well, even during the start of the Ukrainian invasion is like how many things we saw on Twitter and Fintwit and other posts where people are showing the historical invasions and how the stock market rallied from there. And as part of that, and I was just watching Cathie Wood at Arc the other day in Miami was readjusting her future projections right after Arc just went through a massive drawdown. Now her future expectations are even higher for the fund. And so do you think that’s just-
Zed Francis:
Must project. She kept them exactly the same. It’s just your starting place is lower so the percentage is higher.
Jason Buck:
Exactly. To recover. She just raises the percentage by 10 points to hit that recovery over the next few years. But I wonder, like you’re saying is like, do you think that’s what we’ve conditioned that TINA, BTFD over the last decade, and I’m probably leading the witness here and that’s why and then everybody’s just stretching, looking for better data to show this is a better time to buy the dip and that structure is just still rampantly in place. Is this is what people want? And so once again, we’re always looking for confirmation bias.
Zed Francis:
Yeah. And I mean, behaviorally, obviously we’ve been very well trained and thus to break it is difficult. They’ve been trained for something for generation plus to expect anything different is hard for folks to digest or even think is possible. The only thing that breaks these types of situation or forced events, any time you end up in a situation where you don’t have the choice to either put more capital to work or hold on because you know things are going to get better at some point in time it’s when you’re actually forced to go the other way, when there’s any sort of forced liquidation type events, that’s what breaks that construct of that focus of how long is it going to take to recover? It’s like, it doesn’t matter. I need cash. We’re pretty well levered as a society. So there’s landmines out there to create those forced unwind type events. But we obviously haven’t seen it, haven’t seen it yet, but you never know exactly what the cause of it is. If because you knew then, then it’d be easy to avoid.
Jason Buck:
Yeah. I can’t. I just got asked on a panel too, like what’s the next Black Swan event? And I’m like, by definition, I don’t know. But everybody wants you to define it so they could take advantage of it. But one of the little pieces that you had in there too, was a chart that showed, I think it was the average American wealth and it was from 2017, but it was a little surprising, not necessarily, but it showed that the average wealth almost, it was equal amounts held in the stock market or investing portfolio as was held in their homes and their home equity. And I think probably since 2017, since from 2017 to now, it’s probably even more equal.
Jason Buck:
So I was wondering, thinking about the amount of wealth that’s held in housing, because like you said, we’re all talking about the market, when to buy the dip in the market. Everybody always just, every form of news punditry and everything is all about the market. When you’re referencing these most of people’s wealth now is it probably held in their home and now we’re seeing rates over 5% on a 30 year. And then I was trying to look up the other day. I was trying to find good data on it about like equity lines of credits, not necessarily just refinances, but like equity, cash out refinances, taking out the equity in their home. And it was in 2021, there was 250 billion. And I think since COVID, I’m trying to find good data on it, but [inaudible 00:15:12] almost half a trillion of equity cash outs and we’re running Q4 last year and Q1 in this year is the highest rates of like HELOCS and equity cash out refinance. And I wonder if that’s kind of what you’re hinting at or something that you’re also looking at.
Zed Francis:
Yeah. So the first part, unsurprisingly housing is a significant portion of household net worth. Super benign. US equity market is about 50 trillion. US fixed income market is about 50 trillion. US housing market is about 50 trillion. It’s about a third or third or third. And those are like the very boring, basic asset classes people would hold, equities, bonds and their house. And as you go beyond, we’ll call it the top 10%, the other 90% of folks, they’re predominantly their house. And it’s like that is their main asset. And so ultimately even though it’s, call a third of total assets in the US, it’s probably the more important one because it’s the one that the consumers actually hold. It’s not just the rich guys like this is the people that actually buying things and making the economy run, that’s their most important asset class is their home.
Zed Francis:
And so, do I necessarily think that they’re aggressively tapping their home equity line to invest other places? I think it’s probably more the higher end of folks for, to be frank. I know many, we call it finance person, that’s just basically viewing it as a structuring conversation of I can borrow termed out debt. Not now. A year and a half ago and like 3% and take a half a million bucks out of my home for no taxes. It’s a no-brainer. And that’s just a structuring decision. Now whether they went, bought equities with it or whatever they did, they’re probably adding significant leverage to their lifestyle. But the more important one is just in general the average consumer in the US has their wealth tied up in their house.
Zed Francis:
Housing prices going up in theory would be a benefit to the consumer. They feel like their wealth is increasing. The issue is we start getting to the point where the cash flow situation trumps the kind of we’ll call it net worth appreciation scenario. And what I mean by that is really simplistically, if you had a house in 2019, and now it’s worth 20% more than what it was in 2019, it’s about the national average. Obviously, certain places are more than that and certain less, but 20% is natural average. What does that mean for you? That means that your real estate tax bill is probably up about 20% as assessments are coming through. That’s a negative cash flow effect, even though your asset may be worth more like that’s coming out of your paycheck, if you will.
Zed Francis:
And home maintenance is a 1%, 2%, 3% of house valued expense. And to say that’s up 20% in the last three years is probably an underestimate. We all know how difficult it is to get anything with your house fixed, built, even finding a skilled contractor to be able to perform that service. So ultimately, yeah, if you had a half million dollar house and it’s now worth $600,000, it may make you feel good, but you’re probably sending out the door a significant amount more cash, every single month, quarter to the tax man and general maintenance. And so, we’ll call it stimulus that was provided by the acceleration of housing values and people potentially taking money out of their house via Refire, HELOCK or so on and so forth.
Zed Francis:
That was very substantial in 2020, 2021 with [inaudible 00:19:07]. But now we’re probably experiencing the other side of that, which is money’s going out the door for continued maintenance and, or the tax man. And stay in Chicago, the tax man always come with [inaudible 00:19:18], tax man was like 40% higher than when we bought the darn thing and contesting it and best of luck. But it’s a difficult asset, especially when it’s for 90% of folks the largest asset in their portfolio, because most people think of assets as positive carry assets and housing is not that.
Jason Buck:
How dare you say that Zed? You’re saying something so sacrilege. So I’ve been around real estate my whole life from commercial real estate to residential flippers. And one thing I do know is I’ve always brought up is like, they don’t actually do the math of what their bottom line is. Everybody’s like, well, I bought this house for 500,000. I flipped it for 700,000. I made 200,000. It’s always like, wait, not so fast. And you have to actually go into their actual costs and nobody really line items it. And so to put a fine point in what you were saying in the article is you said, I think that on average, it was like, if they locked in the lower rates, they saved about $500 a month on average, but then the inflation of the home prices with taxes and maintenance basically ate up that entire 500.
Jason Buck:
But as you and I both know, everybody thinks they’re paying $500 a month lower because like I said, once again, people don’t necessarily do the math and think about all of their implicit costs. I mean I’m sure there’s, it’s probably single digit percentage of people that actually set aside 1% to 3% of the house’s value for maintenance every year. I mean, I know you think about that differently, but I’m sure a lot of people aren’t necessarily doing that. And that was what I thought was an interesting piece of that discussion is actually breaking out homeowners costs because that’s the other thing when people flip or if they talk about the value of their house, not only do they not subtract the maintenance and financing costs over time, they also don’t extract the realtor costs, the closing costs, the taxes, et cetera. And once again, those percentages of these massive flips that we always hear about actually come down to single digit percentage returns on a IRR basis over the longer term.
Zed Francis:
Yeah. The only reason it’s interesting from an investing standpoint is a leverage you can accumulate.
Jason Buck:
Exactly.
Zed Francis:
And as an individual, without a doubt, it’s heavily subsidized for the government. It’s ridiculous to lend to an individual for 30 years money at frankly, probably anything less than like 8%, like that. If it was a free market with no subsidies, that’s probably where stuff would clear. If only 20 cents down like equity markets, you can only do two X. [inaudible 00:21:42] you’re going four X. You’re like max leverage, termed out financing, really low rates. It’s heavily subsidized and that’s the only reason why it really kind of usually ever makes sense.
Jason Buck:
Yeah. Like you say, it’s the leverage, it’s the for saving plans. And then that assumes though that then somebody pays it down over like 30 years or 15 years where the average time in house now has come down. I think it’s now into six years. Last time I show you was seven to eight years and I think it’s down to six years. So the idea that like, it’s that for saving plan, you’re actually just paying interest even if you have a fully amortized mortgage.
Zed Francis:
Oh yeah. You went down 20 cents, six years later, you got 26 cents. Great. So you’re really hoping that the asset value of the 74 cents you’re still borrowing just went up a bunch. That’s the hope.
Jason Buck:
I think about… I’m curious, do you have any thoughts on this? This is, I’m going to venture us out way into speculation territory here. And I’m wondering if I’m just, I’m surrounded by what I see here at Northern California or other markets I look at like South Florida is you’re just seeing a ton of cash purchases. And one of the anecdotes I read is that a lot of boomers that say have a house in the Northeast and are looking to move to Florida because they finance that house a few years ago, like 2%, 2.5% on a 30 year. They’re like, why should I sell this house? I’ll just buy the one in Florida because this one up North is costing me nothing. So now they’re buying second and third homes, but they’re not selling their original home. And sometimes they’re not even renting it out because the financing costs are so low, they just don’t care. And all their other asset classes have gone up over the last 10 years. That’s pure speculation, but I’m curious about your thoughts on it.
Zed Francis:
Yeah. I wouldn’t be surprised if there’s a, we’ll call an accelerated snowbird effect going on with a mix of everybody feeling wealthy and people not wanting to live in their Northern cities because they’ve decayed a little bit over the last two and a half years, but-
Jason Buck:
That’s contracting supply too though. If they’re not selling their original house, that’s also part of that supply contraction.
Zed Francis:
Yeah. But I think the more interesting bet is the concept of all cash offers. I think that likely is a pretty big fallacy that it’s not borrowed money. It’s just different kind of borrowed money.
Jason Buck:
Right.
Zed Francis:
And the borrowed money that I think is buying those homes and [inaudible 00:24:02] offers is. I got 3 million bucks in S&P 500 in my Morgan Stanley account and my advisor just said, oh, you can take out a million bucks cash at fed funds plus 75 basis points. And you’re like, ah, geez, that seems like nothing, that’s like a percent in a quarter. I can go buy this house and just be like, I got a million bucks cash and I can make sure I get it. And in theory, what you’re supposed to do at that point in time is you buy the house as soon as it clears and you move in, then you’re supposed to term out that debt.
Zed Francis:
Now, you’re like, okay, I use this as like a bridge. Now, I’m going to go ahead and refinance it into a 7/1 ARM through your fix, whatever the heck that is. But my gut is a lot of people didn’t do that simply because the headline interest rate of now, was 3.5, 4, now 5, whatever the heck it is, is a lot higher than your fed funds plus 75 basis points. So really you’re creating the classic issue of a liquidity trap of… Your debts are all short term and your assets are all liquid in long term. And the carry trade is awesome when it works. 9 out of 10 years it works. And so it gets pretty easy to get sucked into it. But that 10th year where it doesn’t work, that’s when you start having these ill liquidity crisis and forced unwind type events.
Jason Buck:
That’s great. And I think Mike Green’s talking about privately, I’m not sure publicly yet about the idea too, of you just said, it’s like, it’s all about collateral these days and especially on the lending side and the boomers are the ones that have the collateral that they can borrow against. And if you are a millennial gen Z trying to buy that first home, it doesn’t really, they’re not even financing loans, no matter like what you can put down, it’s much more that collateral. And interestingly, I think that they raised Fannie and Freddie or conventional loans up to like 750,000, I think now, but a lot of millennials and gen Z, if they’re trying to move to Chicago, Northern California, Florida, that’s out of their price range. So they need unconventional loans and nobody’s willing to lend to them, it seems, but they are willing to lend against collateral. Like you said, that then the boomers are using to buy the house and hopefully return that debt. But I wonder if that’s part of it too, is just like the structure of lending has kind of changed and now we’re almost getting into money velocity and what the banks are really willing to create to be generous.
Zed Francis:
Yeah. I mean, it not like this is anything new, but it’s easy to get money when you have money and it’s really hard… Yeah. It’s like, that’s financialization of the world, that’s the end result you end up with, but to me, always the most interesting is mismatch tenors of assets and liabilities and one of those being hyper liquid and one of them being illiquid because that’s what just sets up the potential unwind events. And by no means, do I think, you have any clue of which one of these landmines is the one that creates the big issue in markets, but what I’d like to keep track of is how many landmines do I think are out there. And so the odds, higher or lower, that’s one little sneeze can create a cascading event or do I think everything, there’s not enough landmines out there so you’ll be able to snuff out things after the second domino and without having fall to the third.
Zed Francis:
Where I think we’re at probably right now is there’s a lot of landmines and historical conditions, if you will. And there was lot of landmines out there in 2019 and I think COVID was a way to cover up a lot of the actual problems that were happening underneath and allowed everybody to use the aggressive support because it was under the guise of this is for everybody. This isn’t just, we’ll call a financial crisis 2.0 type of event where we’re bailing out the people that are tough for the average citizen to stomach. You’re like, if it’s COVID, it’s for everybody, and it’s easy to go ahead and start cutting those checks. And what took place from 2020, 2021 was, of course, we didn’t solve any of our problems. Nobody ever does that. We just paper over them. So they’re all still there. And we probably added a few more along the way. So it’s like, I think we’re in that situation where, because we never hit the full reset button, we didn’t cleanse the system of the problems that were already baked in. We really just aggressively papered over them. And we’re probably in a seat where there’s more of these hidden landmines now than normal or average.
Jason Buck:
But like you’re saying too, like with the Black Swan and you said the sneeze, or I think about the camel that breaks the straws back, it’s usually due to some sort of leverage in the system that gets unwound. But it’s hard to see where that leverage is. Like, we’re referencing, if you can’t get good data, like we hear they’re buying houses cash, but then like you said, if they refinance on the back end, that’s not going into the data you receive. And this there’s always a granularity of data or like a hierarchy in problem where we can’t exactly see. And they say, the US consumer has their highest savings in history, but there’s a lot of data that goes into did come out of a HELOCK or something.
Jason Buck:
And to get speculative again, I’m just curious, because one, I can’t wrap my head around the amount of cash purchases is just mind boggling to me and I’m trying to find better data on it because I can’t understand it and that’s not pro or con. I just can’t understand it. The second one I can’t understand is almost like the great resignation. And so I started thinking about maybe this half a trillion dollars in equity refinances, since COVID, maybe that’s helped where you can resign from your job, moving to your parents’ basement if they’re willing to supply you with food, shelter and clothing. And I don’t want to be spec… And I’m saying pro or con. I’m just trying to… That’s one I can’t wrap my head around too is kind of the great resignation. I’m just curious what your thoughts are.
Zed Francis:
Well, the great resignation is way more boring. I don’t understand why people don’t [inaudible 00:29:56]. Basically, post great financial crisis, what was the stunning thing for central banks across the world? It was, we have low unemployment rate, but yet wages don’t go up because somehow we just keep finding 200,000 people every month. And they were all mystified. They’re like, where the heck are these people coming from? And the answer was simple. It was old people. It was people that were told that they could retire. And then their asset portfolios went down 60% and they’re people living off those assets. So they don’t get to just hold on and wait for the recovery, which obviously took several years. So they’re liquidating every month and wait 8 or 9, 10, 11 to go ahead and live off of those assets.
Zed Francis:
And they get to the point where they’re like, shoot, I was told I had enough money to retire, but I definitely do not now, I need to go back to work. And so that was filtering in. Those folks that were, we’ll call it nicely in retirement that were forced out of retirement due to the fall in asset prices. What happened post 2020 is literally the exact opposite. You had all these old folks that all of a sudden, holy cow, I was living in this thing that I bought in 2004 in the suburbs of Connecticut and I was never going to be able to get out of this. And then all of a sudden, wham, I just sold it for an actual positive return. I never thought that was ever going to be possible. This allows me to actually retire, oh my 401k’s up 30%, 40% from where it was December 2019. I now have enough assets to retire.
Zed Francis:
And so all it was is we pulled a bunch of people out of retirement from a dramatically falling asset price market and them actually needing to live off of them. So they’re slowly liquidating to survive. And we now gave them an out. We gave them liquidity of their house that they never thought that was possible along with obviously the retirement portfolio is healthy in comparison to what it was. And so now they can retire. And the unwind of that is sadly one of the potential hidden landmines out there is because the only reason they come back to the labor force or likely to come back to the labor force is if asset prices fall. So, and if asset prices are falling, well, that probably means that unemployment rates naturally rising because something is going on. That’s not great for the broader economy. And so you’re going to have that additional weight, if you will, of, we naturally are going from a 3.5% to a 7% unemployment because something bad’s happening and then, oh shoot, now 5 million people just showed up too that we didn’t expect anymore. So we’ve built a society with a lot of these rubber band issues, if you will.
Jason Buck:
Well, and part of that, once you get the other, there’s always broader aspects. There’s so many variables and one of the confounding variables, I was trying to find good data on the other day, I couldn’t, is our net immigration since COVID. It’s obviously down, like closing the borders, COVID et cetera. So, and that’s obviously accelerating like a price wage spiral, but trying to find data on that, once again, it’s not good and is that, like you’re saying that what you have retirees that are fully retired, you have Central Americans and Mexicans not necessarily coming across the border anymore, like all of that creates constraints. And then like you said, what happens if they all show up again, then you’ve got now not only 5 million, maybe 10 million people looking for jobs and what does that do on the price pressure?
Jason Buck:
And I’m just curious, do you see that reverting at all? I wonder, when I’m over on the East coast, I talk to a lot of people that work 9 to 5 jobs and they’re talking about their [inaudible 00:33:47] together, because they want to stay work from home. They don’t want to go back in the office. And I can’t help, but think that if we do enter a recession and more people are looking for jobs, the first ones to get fired are probably work from home because you don’t have to look at their face when you’re firing them. I don’t know if you kind of have any thoughts on that.
Zed Francis:
Yeah. I mean, I sound like grumpy old man, like [inaudible 00:34:08].
Jason Buck:
Me too. That’s true. We both [inaudible 00:34:11].
Zed Francis:
I don’t think work from home works very well if you’re anything that’s detail oriented and when you’re, well, say, in this environment where you can’t find any replacement folks, it kind of doesn’t matter. You’re going to be able to maintain that control or force to work from home even if the performance is not going well, but as soon as there’s either other bodies or you need less bodies for whatever’s going on, those folks will probably be the first out the door. I would agree.
Jason Buck:
And then part of what you referenced and in both the Storm Provides, and then you were actually talking about a little bit earlier, is this idea of maybe with a 60/40 portfolio stock bond correlations and then how inflation is the compounding variable that which may change those correlations where stock bonds kind of go in lockstep and then we’ve actually kind of seen it a little bit year to date. And it’s interesting, I think for a lot of people to see a 60/40 portfolio being larger drawdowns than just S&P 500 which doesn’t happen very often. And we’re in one of the worst drawdowns in bond history, depending on which treasury, what tenor you pick, but I’m curious your thoughts are. And part of that and this is the worst I’m going to ask. It’s two part question is that with the rising rate environment and like what you’re referencing with people’s houses and everything, and then we’ve seen retirees portfolios skew more towards equities and bonds in the last several decades, especially target date funds, does rising rates mean that they can start skewing back and we see a rotation back to bonds because people are looking for income in their retirement years?
Zed Francis:
So two part question, as you said. So first off, we have a heavily financialized world. What that means is flows are dramatically more important than fundamentals. It’s like where do you find your next buyer or seller is way more important than the liquidation value of whatever asset that you’re talking about. And what that means in that world is that structuring is very important. How you’re building some sort of structure to extract value and the flows generated from that structuring are incredibly important. And whenever you have structuring involved, that means there’s financing involved. Everything is financed from something else and that’s part of the construct of all assets and, or frankly people are building their own household wealth. It’s like the financing side is almost the most important lever within there. And what that ultimately means is that rates are embedded in everything.
Zed Francis:
If why anything has value is how you created the correct structure and financing associated with that structure means when you get dramatic moves in the cost of financing, you’re either cheaper or more expensive, both ways, that you should expect all assets to be highly correlated because the asset prices are there or are sitting where they are due to flows that are generated from how folks have created the best structure to finance access to those types of asset classes. So ultimately when you get to, we’ll call it far ends where you’re like really high rates or really low rates, financing becomes such an important factor into how everything is valued that everything should become very correlated. All asset prices should become very correlated. And so when you see dramatic moves, it should be not overly surprising that everything moves in concession with each other. What was your second half of your question?
Jason Buck:
No, it’s fine. Do we see a great rotation, almost German style back to more bond like income for retirees?
Zed Francis:
That was a good question too. The answer is no. The number where people start caring is so far away from here that there’s still no natural buyers of fixed income. And so you’re like, well, we’ll go institutional down to individuals. So a corporate pension plan, they’re now all pretty darn close to a 100% funded. The average is above 100, obviously there’s dispersion but as a baseline, they’re like a 100% funded. What does that mean? It means they’ve already locked down their liabilities. They’re very boring. People like to talk about pension stuff. Corporate pensions are doing very little rebalancing, everything, because they’re already a 100% funded. It’s just locked down. They’re trying to sell those liabilities, insurance company via pension risk transfer and be done with it. So they’ve already gotten small, but now that they’re a 100% funded, they’re really boring. They don’t contribute too much flows. They’re already in the seat that they’re in.
Zed Francis:
You got to end down to public pensions. Public pensions have returned bogies of 7%, 7.5%, 8% because it’s the only way for them to optically look well funded in comparison to what the reality is. And because of that, if they’ve returned bogies of 7%, 7.5%, 8%, do they care if treasuries are 1, 2, 3? No, they don’t. When they get to 5, maybe 6, sure. That wakes them up. Okay. My actuary tells me that equities are in 8% a year and I’m willing to go ahead and de-risk some of that into fixed income, but I need the absolute return that I could potentially receive for fixed income to be enough to go ahead and hit my return bogie of that 7, 7.5, 8. So way far away before they become natural buyers.
Zed Francis:
And then you get to insurance. Insurance codes are set up for somewhere in the like 4.5% to 5%, 5.5% zone is where their fixed liabilities sit. And so again, until they get to that type of potential absolute return, they don’t really care. We’re 100, 150 basis points away in treasuries before they’re going to become natural buyers. And then you get to an individual. An individual says, okay, obviously I earned zero on cash on my bank account, that’s not great, but what’s more important is they’re thinking about how much more expensive is my lifestyle going to be going forward? And we’re obviously getting inundated with the individual saying, holy cow. Inflation 7%, 8%, 9%. It feels persistent. It’s getting embedded in their brains. I think over the long term, maybe 5% inflation is what we’re going to see for the next 2, 3, 4 years. And if you’re an individual that’s thinking about fixed income, a distribution to support your lifestyle, and you think that your lifestyle’s going to get 5% more expensive every single year, you sure as heck don’t care about 3% tenures. Again, you’re not a buyer until you get to that 5%, 6% zone. You get to there, sure, a bunch of people show up, but that’s far away. We’re not anywhere close to that yet.
Jason Buck:
It makes me think. You were born raised in Chicago, you rub shoulders with all those commodity trend followers at the different watering holes around Chicago. They’ve been obviously shooting the lights out for the last six to nine months, but it’s really interesting to me always. We’re not hearing a lot of people ask about it or talk about it and maybe people think, I don’t know, it’s transitory or they really are just performance chasing. They want to see like two to three years of those returns or people are just hoping and praying that inflation comes back down. I’m just, curiously random thoughts on commodity trend following it in an inflationary environment.
Zed Francis:
I mean, in general, those types of folks do well during regime shifts. And we definitely finally had one of those regime shifts. I mean, it’s kind of silly. We had the regime shift from low inflation to high inflation, like 18 months ago, but it was only like 3 months ago that people started believing it. So it was like, again, flows over fundamentals. Fundamentally. It happened a long time ago, but it didn’t [inaudible 00:41:51] asset prices until people finally committed to, or maybe we’re wrong. So, I mean, I think they’re probably in a good seat for the next half a decade, because it does feel like an environment we’re going to have possibly several regime shifts that take place in a reasonably short period of time.
Jason Buck:
So going back to the 60/40 discussion, at Convexitas, your actual expertise is hedging with tail risk solutions as overlays and I’m curious of when you’re having conversations with clients, do you even try to get them away from the bond exposure? We’ve tried in the past, maybe this is your new 60/40, or ideally in 60/40 people have really just reduced their equity exposure because that’s where the actual risk is. But sometimes if you have a tail solution overlay, now you can say, look, you can take much more equity exposure, but have that structural negative correlation. So I’m wondering if you’re trying to talk them out of their bond exposure or do you just kind of, now we’re overlay against your equity exposure?
Zed Francis:
So Jason, I mean, we don’t hedge. That’s not the purpose [inaudible 00:42:51] existing. We’ve created a tool to allow folks to rethink portfolio construction. And so that literally is our point is why the heck are you relying on historical correlations to provide diversification for you within your portfolio? And when those traditional diversifiers are negative expected real returns and pretty aggressively. So now you got to ask that you’re expecting to lose money on, and you’re not very confident that it’s actually going to provide any benefit. Why the heck do you own it? And the answer is we’ve all been trained that this is the portfolio that you should hold.
Jason Buck:
For 40 years. It’s been a positive carry and negatively correlated for 40 years. So how do you talk them out of that?
Zed Francis:
[inaudible 00:43:35]. And so it takes a while to retrain folks, but the reason we built this business’ exact point is rethink portfolio construction, have all your assets in long term expected, positive, real return allocations, whether it’s PEVC, equities, something along those lines and allow us to become that diversification agent and us as a diversification agent, we’re not saying that we’re uncorrelated and we’re not relying upon assumptions in the correlation or basis risk arena. We’re saying we are 100% negatively correlated to the S&P 500 and the point of us being involved in your portfolio is not hedge, dirty word that you said Jason or protection or anything like that. It’s liquidity. It’s the point of having any sort of diversification agent in your portfolio is to rebalance when things go haywire. I mean, if otherwise you should hold your nose and be the one that just, it has a max risk portfolio for 40 years. The point of having assets that move in different directions in your portfolio, as for when those nasty event happens, you have liquidity to redeploy, and that is the ultimate enhancer of wealth over the long haul is being able to buy a significant portion of your portfolio when prices are lower.
Jason Buck:
I was actually just thinking about that. A lot of times we talk about liquidity or inventorying liquidity or inventorying risk and I just thought about while you were talking to me, I was wondering, this might be a terrible analogy or metaphor, so you can feel free to correct me is like your long GDP assets, your long equities, VCEPE is like running just in time manufacturing and then you’re inventorying the tail risk solutions as far more of a robust resilience inventory. So you have the best of both worlds. You’re running just in time, and then you’re running a surplus of inventory when you’re actually going to need it the most. Did I try too hard on that one?
Zed Francis:
No, it’s not I didn’t like it. No, it’s like the old or the other way to say is like, you basically own the wings. You have a bunch of assets that perform well in good times, really well in good times. And then you have an allocation or a couple of allocations that perform incredibly well in the bad times. And the whole world, I think because basically demographics and where the wealth sits, has constructed strategies and allocations and the exact opposite. None, nobody wants the wings. I’m retired and I got enough money and I just need distributions to go ahead and support my lifestyle. So that’s the antithesis of the wings. We want very boring right in the middle regimented returns. And so unsurprisingly, those are the worst assets to hold.
Zed Francis:
If everybody wants… If flows matter more than fundamentals, and everybody wants that type of delivery of returns to the portfolio, those are probably the assets that are the most mispriced. And with much more opportunistic is to create a portfolio that in theory is going to deliver that type of experience from a realized volatility perspective. We understand you’re living off the assets, you’re expecting distributions. That’s A-okay. But we’re saying the better way to construct that is own the wings and have that balance be liquidity providing when nasty events happen, but then have a portfolio that is expected to do incredibly well in all the other times.
Jason Buck:
And that’s why, especially if you want to go hard into that, that right wing is like, the VC is an excellent example of that, but rarely do VC’s pair it with the left hail. And you referenced several times, flows over fundamentals. If people are looking at fundamentals, they look at portfolio construction over years or multi decade time horizons. A lot of these involve space or option space. It’s been very interesting since the start of the pandemic and so a lot goes on under the hood, especially on a daily basis even. And so we’re talking about those flows and you and I were texting on Monday, just for reference again, when I’m talking about Monday, April 18th, where at that close on Monday, there was just a wall smash at close. That’s much more of a flows basis and maybe structuring the players around that flow. So tell me kind of what you were thinking or saw, and we’ll get into maybe the way that the news interprets that, maybe completely off base. But tell me about kind of just the structure of the wall smash going into close on Monday.
Zed Francis:
Now, to be really boring, a lot of people sell volatility, something that’s benchmark or looks very similar to the Cboe Indices. And so what you do, the PUT index, for example. All it is, is every expiration, you sell a new at the money PUT, so S&P 500 4400, you’re going to sell as of last Friday, April expiration, you’re going to sell the May expiration 4400 PUT, and then you’re going to do it again the next month. Now, if you’re doing that in actual Cboe product, the SPX product, it’s cash sell. So it’s kind of boring. You do it, you either made money or lost money the following month, and then you do it again. So mechanically, reasonably simple and in theory about how the averaging methodology works is we’ll call it about 45 minutes after open on expiration. Everybody that’s doing that type of mechanism goes and sells a bunch of new PUTs. There’s a little bit of a wall smash expiration Friday 45 minutes, an hour after open.
Zed Francis:
This type of, we’ll call it strategy has proliferated a much broader group in recent years. And again, it’s driven by folks that are looking for income streams that look higher than, optically look higher potentially are higher than the 2%, 3%, 4%, 5% that they’ve been receiving in all traditional, we’ll call it income oriented assets over the last decade. And because of that, the folks average allocation might be smaller and, or from a scale perspective, you want to be able to build your system to be able to handle accounts lower than several million dollars because again, if you sell an S&P 500 option contract, one contract is whatever, $448,000 notional. And so you’re just limiting the amount of players you can sell to if that’s your denominator for going ahead and providing a product.
Zed Francis:
So what you do, you do the 10th of the size product, and something people feel more comfortable. You sell PUTs in SPY instead of SPX or XSPs. So that’s one 10th the size, and now you can do 40,000 increment allocations, which means now you can scatter it across the entire investible universe because it’s sized appropriately to go down any stream. The difference between obviously SPX and SPY is one is cash settled, one is physical settled. So that means SPY, if it ends up in the money, you actually get delivered those shares or have to deliver shares of any [inaudible 00:50:43] but it’s physical. You actually deliver something versus just ripping up the piece of paper. Somebody made money. Somebody lost money. You got to move on.
Zed Francis:
Last Fri, I guess Thursday. Sorry. It was Good Friday. Last Thursday, what happened was you started the day with, we’ll call it 50/50 coin toss whether those SPY PUTs were going to be in the money or not. They’re right there at the open, but what happened throughout last Thursday, we sold off. So now everybody that’s operating these strategies took delivery of those SPY shares. So now you are hired to go ahead and have an income related type of product that’s selling monthly PUTs as the driver of that “income”, but now you own SPY shares and you got to get back to where you’re supposed to go. So, I mean, sometime on Monday you need to sell all your SPY shares and then you need to go ahead and sell a bunch of new PUTs. So what ends up happening is because again, it’s across so many different custodians and so many little accounts and all this kind of thing you don’t really get, we’ll call it the [inaudible 00:51:50] effect.
Zed Francis:
People don’t really slowly do this throughout the day, because operationally that’s painful. The easier thing to do is to do it all at once. And along with that, the easier thing to do from a communication standpoint is to not do it at an arbitrary time during the day is to do it on close because that way you have a reference point that everybody understands you don’t get chopped up if something happens between whatever you trade in the end of the day and have a poor communication or optics, if you will. So they all try to do it on close. So what you have throughout the day is people figuring out how they’re going to sell their SPY shares, making sure it settles, making sure there was cash in the account and then on close or approximately on close on Monday, they went and sold all those new at the money SPY PUTs.
Zed Francis:
So as you say, how people interpret it, if you will. I think some folks try to see these option flows and try to decide how they’re influencing the direction of the S&P 500. I would argue that more than 9 out of 10 times, the S&P 500 is an incredibly liquid deep product. It takes a lot of flows to move it in any sort of substantial way like, I’m moving things 10, 20 basis points, some random timeframe. Sure, for sure. But it’s hard to really peg that. And if you’re trying to make 10 basis points on a expected move, they don’t have the exact time and a headline comes out and you move like 1% the wrong direction that eliminates a lot of the benefit of the ones that you thought you had edging pretty quickly, but where it really shows up is in option pricing. So you go ahead and sell all these SPY PUTs on close. What happened? SPY volatility on the front end collapsed. It was a lot of folks selling wall. And that market is a lot thinner in terms of fair, implied volatility. And those types of folks can actually move implied volatility sometimes dramatically when they’re this concentrated. But it is way more to do with changes in the wall service than it has anything to do with directionality in the market.
Jason Buck:
I think about even like just basic punditry on financial news and even, or on Fintwit is when they see that, whenever anybody sees that wall smash, they think it’s a bullish sentiment for markets. And I’m just like, maybe that’s even part of it too. It’s like the simplicity of that and you’re like, what are you even talking about? But that’s what always surprises me, but the other one, I’m curious your take, so any of us have traded commodities and everything with physical delivery, we learn to close out our contracts before we get into the physical delivery phase. So do you think this is kind of a new phenomenon and then a new phenomenon in size because people want granularity and then why are they taking the physical delivery? I mean, obviously it’s not as difficult as getting physical commodities showing up at your door in tanker loads or rail card loads, but would it be easier for them to close it out or do you think it’s just as easier for them to do that on the Monday and just [inaudible 00:54:52] it at the end of the day?
Zed Francis:
Yeah. I mean, rolling options is probably more difficult operationally than selling an equity and selling a new option, to be frank, for most of these operational constructs. So I actually think what they’re doing is probably technically operationally easier for them, even though optically it would appear to be the opposite of that. Along with the simple marketing pitch of, hey, this is what we do on expiration. We don’t have discretion. We’re delivering a formulaic return profile and that’s easier to do on a market determined timeframe rather than something that a PM team ad hoc or something along those lines was constructing because all it does is lead to questions. They’re like, well, this is the benchmark industry does it on this day, why do you do it on a different day? And you’re like, I’m trying to sell a 20 basis point product, stop asking me questions. It is where it comes from. So let’s see. Ease and distribution is a lot of where you end up where you are too.
Jason Buck:
So I’m sure you guys are tracking on a monthly basis. Is this something like, you’ve seen the rise of and so not necessarily concerning for you or not necessarily an alpha generator, but it’s something where you have to just be cognizant of your book on these Mondays after expiration about how you’re going to restructure or re strike your book. Is that basically the way you’re looking at it?
Zed Francis:
Yeah. It’s to be very aware that your expectation is Thursday, Friday, Monday around expiration, that shorter date to apply volatilities are likely to have some pressure. That’s the extent of it. It’s a potential known that you’re aware of and maybe you’d dance a little bit with your maturities to either avoid or take advantage of it, but not a straight up aggressive RV stance that you’re trying to take. Now that Cboe’s all excited because of course, the only thing an exchange cares about is more securities to trade. Now we have Mondays and Wednesdays and Fridays and hey, now we’re going to have Tuesdays and Thursdays. I’m not saying you do some sort of calendar wing trade where you’re buying the Thursday before you’re selling Friday and Monday and then now you’re buying the Tuesday or something along those lines. I don’t think it’s aggressive enough to fight through all that. But yeah, it’s something to acknowledge and be aware of.
Jason Buck:
Yeah. I thought it was just more of that. Maybe Zed has an extra espresso on those Mondays after operations just to pay a little closer attention at the close, but then you just referenced it. Now that they’re rolling out daily options, do you think that gives you a finer paintbrush or you just think it’s much ado about nothing?
Zed Francis:
I mean, ultimately, I think that if you were a high frequency market maker, there’s probably some fun stuff to do because the off normal cycle tenors are probably going to have a bunch of really junky markets. And you’re the one that gets to sit out there and have your machine. This is no human involvement. And you have the machine saying, okay, there’s oddly like a .2 wall spread between Tuesday and Wednesday, go ahead and make that mark and try to collapse it. There’s probably something to do there. There’s a reason why the prop shops around town over here always support the exchange new products, because that means, hey, this is new opportunity, but like-
Jason Buck:
Exchange loves more volume as much as they can get.
Zed Francis:
That’s right. So it’s like, do I think somebody’s going to be able to extract some edge and gets people with $10 million a year tech budgets, it’s not going to be me, but…
Jason Buck:
Exactly. And then you reference it as programmatic, which is, I think a really nice way of putting it the other way. When people are trying to basically rebuild basic strategies, like you said, PUT or [inaudible 00:58:59] at index and just rolling these structures, but programmatic is one way of saying. Another way to say is it’s actually a structure, not a strategy. So I’m not sure I necessarily have a question here, but it’s like open and open forum of how you think about people just rolling structures instead of actually having an active strategy, especially when you’re trying to take advantage of structurally negatively correlated products to somebody’s overall book.
Zed Francis:
Yeah. I mean, ultimately I think the biggest transition and everything goes in cycles. So we’ll call ’90s, 2000s was the decades of portfolio management teams and then post the great financial crisis through, at least now, we’ll see how long it goes, it was the influence of distribution teams. And so the market naturally goes through this cycle of, oh, what’s most important is alpha and then, oh, no, what’s most important is scale. And we alternate back and forth when alpha doesn’t deliver and things blow up. Screw through those guys, let’s focus on products. And when product creates a bunch of issues over the long haul, screw those guys, let’s focus on alpha. And with us being still in an environment where distribution is in the controlling seats of large firms, rather than, we’ll call it traditional PM/investor types, I just don’t think it matters. It’s what is the easiest product or structure to go ahead and build and distribute and if there’s slippages, that’s fine as long as they’re not dramatic enough to make the product fail. And it takes a lot to make a product fail. Once the product has a momentum and real assets, it takes a heck of a lot to disrail that momentum that it has.
Jason Buck:
And I can’t help, but banging my own drum here is also the idea, like you referenced of just what happens on Mondays that close after expiration, or whatever is like wall surfaces are constantly changing and undulating. So to me, it’s like blast bash in an active management. Like you said, right now, people are looking for AUM and beta strategies. But I think they [inaudible 01:01:04] eventually, right? They’re like, this is a place where you actually need to active management because wall surfaces and playing in the wall spaces with options and derivatives is much more difficult than people realize.
Zed Francis:
Yeah. I mean, well, it’s more difficult maybe, but like you said, at least there is an opportunity set that you can extract in a reasonably short timeframe. If you’re a fundamental stock picker, you might be right but it might take 20 years to be right and then it doesn’t matter. At least because options, they expire, we have like finite move, like timeframes of us trying to obtain value. It’s an easier job from that aspect.
Jason Buck:
Or I think it’s in a perverse way, it’s like the alpha’s actually in diminishing the bleed and then when shit does hit the fan, it’s like, how do you roll and protect it against the second leg down? So your two forms of alpha aren’t really being seen too often. It’s like, congratulations, you did your job.
Zed Francis:
Well, for a negatively correlated strategy, the most out performance, if you will, that you’re trying to achieve is during all those times when you’re losing money.
Jason Buck:
Right. Exactly.
Zed Francis:
It’s not exactly appreciated and easily acknowledged.
Jason Buck:
Yeah. You’re like, I bled less than I should. Like, it’s not like a stab wound. It’s more like a paper cut.
Zed Francis:
And I was only down three and a half. High five me.
Jason Buck:
Exactly. I’m going to totally change tact on us. And I thought it was really interesting. Just recently, so serendipitously your mother, Cheryl was on the Growth from Failure podcast and shout out to Yinh Hinh. It’s great podcast, but I’m really curious. I’ve always told you before, your age always surprises me and I’m trying to think of the best way to say this. It’s like maturity or wisdom beyond your years, but I’m wondering if you have ever thought about, you were raised by two parents, highly academic, your mom has an unbelievable history, fortune 500 companies. My mother doesn’t quite have that academic background or the fortune 500 background, but she’s always been a bootstrapping entrepreneur. And I’m just wondering, how do you think that affected you being raised by two people in the business sphere, highly educated? Does it create a different kind of educational background, which maybe makes us mature a little bit quicker than most, or maybe I’m just being [inaudible 01:03:26]?
Zed Francis:
Obviously, having education, be not only what you’re receiving at school, but pretty aggressively what you’re receiving at home definitely helps you accelerate your learning curve just because you’re doing it 18 hours a day versus 8 hours a day, that’s obviously helpful. And we’ll call it very fortunate part of the whole situation is twofold. When you see people succeed, it’s easier to believe that you can succeed. That’s in my experience. Whenever we do some, my wife and I do some events around Chicago with kids, that’s always the day that’s most important to them is when you bring them into the city, into the office and kind of do the this can be you. And they can see the big buildings from three miles away, but they’ve literally never been to the city. It seems like this walled off place that’s not attainable to them.
Zed Francis:
So just having that ease of success is achievable for you. I mean, you hear that and see that every day is huge and then obviously very lucky that having successful parents always allows you to have that psychological backstop of if I fail, I won’t be begging for money on the street, there’s always a little bit of support there. So there’s obviously things that were good from a, we’re going to help train you earlier in life with a bunch of skills that other people might not have, but then obviously the support aspect of you can really go for it and fail a bunch of times and take that risk where others can’t is probably the most beneficial thing that’s too bad because it’s like, how do you bottle that and get that to more people [inaudible 01:05:24].
Jason Buck:
Exactly. I always like to think about, it’s like, kids watch what you do, not necessarily what you say. So if you have parents that are entrepreneurs or are dealing with entrepreneurial struggles or business struggles, you learn a lot just by watching them and not necessarily what they tell you to do with your life. And, also to clarify, it wasn’t exactly always up until your right for your mom. There’s always trials and tribulations. And in the end, it all kind of works out. And, but you did have that foundation with having both of your parents there, but I’m curious, if you ever really thought about when you have a mother that’s such a high achiever and, or sometimes the breadwinner are not quite the ultimate breadwinner in the family, but has those entrepreneurial business tendencies. I hope that happens to more and more people moving forward and it looks like it does, but I’m curious if you’ve ever even thought about that and how it’s structured the way you think about life.
Zed Francis:
Yeah. I mean, at least hope that it foundationally makes me think of people based on what they can actually produce rather than anything else. I always, at least hope, people think I treat folks reasonably, equally, then that means everything. And then, honestly, through life, what that’s ultimately resulted in me is probably conflict in the situations where I’m in larger institutions, because I tend to hold people above me very accountable for further actions because I’ve seen like what good management and C-suite is and can identify, I think from a little bit of that experience, folks that maybe are not. And so I always think I’ve been somebody that has had probably additional conflict with senior folks and hopefully folks that are up and [inaudible 01:07:12]. Felt like I was always willing to give them time and help them along their way, because you can’t expect everybody to know everything, but you just need somebody that’s hungry. And that’s always exciting. Those people you can work with all day long and you’ll figure it out and whatever trials, tribulation, error, doesn’t matter, as long as they’re going to put forth that effort. But when people are in the big buck seats and they do a crappy job, I was always the person that was not afraid to call them out.
Jason Buck:
Well, and part of that, like your mom’s focused on now is also helping female C-suite executives and supporting them and helping them in their careers. And one of the takeaways I got from the Growth from Failure podcast was how much for both your parents, like their faith has informed their immense amount of charitable contributions they’ve done to the Chicago community. And I’m just curious, like how has that passed through to you and seeing that as a child, and then thinking about it now with building a new family for yourself, how do you navigate that with the complexities of having a startup business, being a full-time trader, and then thinking about your contributions to the Chicago community at large?
Zed Francis:
I mean, I’m a firm believer that it’s very important to give. Money is helpful, but time is way more important. It’s actually visiting, we do decent amount stuff, we’ll call it like elementary-ish age kids and actually physically showing up and just, you’re kind of performing a lesson, if you will. So along those lines, but ultimately it’s just a sounding board and trying to get them talking and thinking about aspirational things along those lines. So that’s definitely been my wife and I’s focused is, we call it Younger [inaudible 01:08:58], and really trying to give a little bit of our time to hopefully expand their experience horizon.
Jason Buck:
And then you and I text each other often. I think people would hopefully think it would be about derivatives, but most of the time it’s actually about food and because we both are deeply passionate about food in general. And what I found over the years is my cooking’s become less and less and it’s more about the restaurants and that’s what we text each other about. Where you’re nicely, equally proportion from going out to the best restaurants in Chicago, but also cooking a lot at home. And I’m just curious, because I always ask you how you navigate this with kids and especially a newborn. And then I’m thinking like, when you’re making your famous pasta sauce, are as you’re stirring the sauce, are you thinking about gamma or like, how do you manage [inaudible 01:09:40] complexities?
Zed Francis:
Cooking is relaxing. It’s not only fun, but it’s kind of where I can zen out partially for like a minute. Now it’s great because my three year old, just, obviously she wants to do everything that you’re doing, but she loves cooking. So it’s like, I give her a like a plastic disposal knife. I’m like, all right, sous chef cut up that tomato and she’s just over there pretending to hack away and then we’ll throw it all in there and all that kind of stuff. So it’s a nice mix of true zen time along with becoming more and more family time as the kids get older, so less market thoughts and more just empty space. That’s my meditation.
Jason Buck:
Nice. I love it. So if we start talking about food, we are going to have to need an entire other episode so I’ll save that for another time or maybe you and I should just start a food podcast and maybe that’ll be our claim to fame and nobody cares about the trading side. They just want to hear us talk about food all day. I always like hearing your macro thoughts and I think we’ve actually talked quite a bit about macro in the first, maybe half of this conversation. And so I was almost going to give you the floor for macro, but I want to save that for maybe another time. But one thing, if I’m racking my brain, I’m not sure you and I have ever talked about crypto. So I’m just curious to what your general takes are on crypto, your hot takes of whether you hate it, you’re interested, you’re curious, that sort of thing.
Zed Francis:
No, again, well, it will sound like the old Grizzle guy down the street of like, I don’t get it. I don’t have anything against it and I understand the business use case of the infrastructure that’s being built. I’ll never understand why the tokens have any value. That’s my… Just don’t get it. And it doesn’t mean I have strong opinion one way or the other of where anything’s going. It is just like, I don’t understand why these tokens should have any value in the long term. So I just, I don’t really get it. I do think from an investing standpoint, broadly, that the main crypto tokens and I’ll just say Bitcoin, Ethereum are very useful metrics on general market liquidity.
Zed Francis:
So I got that in my like background and +/- 3% days who that cares, but when there’s serious moves, this might actually tell you like a little bit of something. And I do think that there’s more, I mean, it’s the ultimate size is still too small to be truly market moving in terms of total crypto assets. But I do think there’s a lot of leverage in that space. So it doesn’t take much to have it do little spillovers. I wouldn’t necessarily say that I think crypto is going to directly influence the direction of the S&P or something along those lines but I think it can have a little bit of spillover effects in specific publicly traded tech equities and things like that, that people are overly levered to on both sides, but not [inaudible 01:12:52] boring.
Jason Buck:
Do you think, mainly in a liquidity cascade, like March 2020 when we have a VAR shock, or do you think even like, if there were just something to happen with tether and that base collateral gets re-priced to 70%, it sets off a liquidity cascade on crypto, which then when everybody starts running out, the baby with the bath water can lead to that contagion, almost like you’re saying with the sneeze earlier, we don’t know where the Black Swan’s going to kind of come from.
Zed Francis:
Yeah. I mean, the entire crypto market is probably not big enough to really and it’s probably not cross collateralize enough with other assets to be that trigger. But I do think it does give you a little bit of signal of risk on, risk off from a pure, is it faucet open or closing type of indication.
Jason Buck:
So with that small size, over 90% of crypto derivatives are traded outside the US due to our regulations. So you’re not necessarily chomping at the bit to allow you access to crypto’s options and derivatives to be picking off retail clients because it’s just the size is too small for you? Or…
Zed Francis:
I mean, I obviously want to have a successful business, but I want to have a successful business for 10 years. And picking up people off for 18 months is probably going to be hugely lucrative for certain folks, but definitely not the intended focus. Now, Devin and I, do we bitch about it some random night of like, oh, this is so hard, why don’t we just do the easy thing? But we tell ourselves in five years time doing the hard thing is going to be totally worth it.
Jason Buck:
And that is, people don’t know you guys do the hard thing. And I feel the same thing. We try to do the hard thing, even though there is some nights having a few drinks here, why didn’t we just do the easy thing? But something’s wrong with all of us where we are just like smashing our heads against the wall or something. And so we do the hard thing day in and day out.
Jason Buck:
But I want to thank you for coming the podcast. I always enjoy our conversations. I look forward to all our future conversations, especially all your text messages of what you’re thinking about. But before we go, tell everybody where they can find you, what’s the easiest place to locate you and Devin in Convexitas or to read about your work.
Zed Francis:
Yeah. The easiest thing to do, just go to our website, www.convexitas.com. Pretty much nice little overview of who the heck we are. That’s where we try to post everything so we know who’s looking at us, but that’s the easiest way to find us.
Jason Buck:
And one of the best designed websites in the derivatives game. And just to clarify for everybody, C-O-N-V-E-X-I-T-A-S.com. And like I said, you can read their writing, which he’s not going to call an essay. He’s just a thought experiment.
Zed Francis:
No, nobody has time for more than three minutes. Got to be quick.
Jason Buck:
Exactly. All right, thanks Zed. I appreciate it.
Zed Francis:
All right. Thanks much, sir.
Taylor Pearson:
Thanks for listening. If you enjoyed today’s show, we’d appreciate if you would share this show with friends and leave us a review on iTunes as it helps more listeners find the show and join our amazing community. To those of you who already shared or left review, thank you very sincerely. It does mean a lot to us. If you’d like more information about Mutiny Fund, you can go to mutinyfund.com. For any thoughts on how we can improve this show or questions about anything we’ve talked about here on the podcast today, drop us a message via email. I’m taylor@mutinyfund.com and Jason is jason@mutinyfund.com. Or you can reach us on Twitter. I’m @TaylorPearsonMe and Jason is @JasonMutiny. To hear about new episodes or to get our monthly newsletter with reading recommendations, sign up at mutinyfund.com/newsletter.
