Welcome to trade ideas. I'm Alex Rosenberg here with Alexander Campbell founder and CIO of blacks. No capital Alex
Welcome to the show
and since you're new to our viewers tell us maybe a little bit about
Who you are what you do and what black snow capital is all about? Yeah, definitely
Thank you for having me. You know black snow is an attempt to kind of combine a couple of different experiences
I've had as an investor
I got my start as a prop trader convertible bonds guy lumen brothers, you know
Saab kind of the the what it looks like for a financial system to kind of disintegrate from the inside
After that, I was fortunate to work at Bridgewater for a handful of years directly for you know
the top three guys as the commodities guy and
learned a lot about systemization a lot about kind of how to use modern data infrastructure to take a process and systemize that process and
so Blackstone Capital, what we're trying to do is kind of bring those two experiences together and
Take a systematic approach take a macro approach, but look at markets that are a little bit more Nishi
Look at more option structures that kind of stuff. And so yeah, that's what we're trying to bring to the market
All right, very good. So, let's see how you do it here because it's been kind of a crazy week
We're at the tail end of what's a really shaky inner news centric week two weeks
actually, if you go back to the powell, press conference and
When you look at this market environment, where do you see the biggest opportunities for investors now?
Yeah, you know we look a lot of history
we try to look at what we call deep history, and I'm
You know part of that Lehman experience made me very focused on on banking systems. And so we've done a lot of work on
historical financial crises and they all kind of look the same have the same characteristics you have, you know a
technology or a
New market opportunity that creates a bubble capital flows into that you get leverage flowing into that system
the financial systems that support it tend to get over levered and brittle and when you get tightness either in the reserve currency or in
That that that liquidity pool
small banks start to go under and when small banks start to go under then the
Medium-sized and the big banks that have lent them money
tend to tend tend to
Create systemic risk and this prompts a conversation between the political system and the financial system
About who's gonna get bailed out when how and in what order?
The reason Lehman failed wasn't necessarily the market the market was punishing all the banks
It was that they were the one that the Fed decided, you know could go and so we see
When we look at the world
We see the biggest risk and also the biggest opportunity coming out of China coming out of the the huge leveraging that they've had
the the degree to which they have a bunch of sketchy banks kind of kind of very very
Interdependent on the bigger banks providing liquidity and we think it all play out in a historical fashion. Where
liquidity events due to you know losses in the periphery kind of
go to the core and and the state has to make some hard decisions and
That in that moment. We think that they'll print we think that historically government's print and they print a lot and that actually
What's happening now and what we're kind of seeing in the market today in the last
Even couple of months is the question is not well the Chinese print
It's well the Americans print it's well the dollar print to follow them down
And so we really like gold on a basis of there are you know thirty trillion dollars of deposits in Chinese banks right now?
It's about double the deposit base of the US
And if you just take the the net new credit creation the new money creation that comes out of that if just one in ten
Of those dollars goes into or RMB go into gold go into buying gold
Which they have a circle demand for that's all of last year's gold demand
you know one percent of the deposit base is all of lashes gold demand ten percent of the the new
Money creation is is all of lashes gold demands
So we see a huge potential for the outflow of capital from the banking system in China into you know liquid
small diversified bars of gold essentially and and then from a Western perspective
The question becomes well do we print?
And if we print do we follow them down and so we if you can get it we like gold denominated in RMB
You know straight about ten five
It's up ten percent since the Trump tweet about a week ago and then the diva, you know
We think it has a lot of legs
so they'll probably be a little bit of a consolidation but we think that you win on the gold if
the US prints and you win on the currency if
just China prints and so help me understand the mechanics here a little bit more because it strikes me that if
The trains economy is doing well more people might have money that they throw in Goldin
So if you're worried about a liquidity event, it might might tamper down certain forms of gold demand
So help me understand the part of the gold demand that's going to be increased by an adverse event in China
yeah, I mean it depends on where the money goes where the capital flows and and we think that
in moments of
panic or an institutional
Worry that that you know, if you talk about capital flight gold is a great way to have capital flight
Right because it's a physical object. You can buy it. It's hard to prevent the import and export of it
and so we think that some of the people who get burned by mm P's or you know,
Sketchy Bank and in in in in landing province, some of them say, you know, I don't know what's going on
I just I wanted to Versa Phi a little bit out of our ambien and into and into gold and into dollars as well
But into both China is not famous for letting people kind of choose their own path to their money and gold
You know a benefit that people often town around gold is that it's less government controlled it
It's you know, the government often doesn't know how much gold you have in etc. Is that is that even a possibility for Chinese?
And Max - really - you know import a ton of gold and throw a lot of money into gold
I mean
it's it's it is it is easier -
It's harder to track them some things but it's easier to track then you know
Bitcoin is the obvious way that Chinese seem to be getting money out of the country or out of the financial system
So just kind of help me out with the mechanics there. Yeah, I think I think you know Bitcoin does provide an alternative
It's a lot more risky a lot more technical you're now dealing with a whole set of different
quasi financial institutions and it is possible to try to restrict the flow of
Metal right. I mean it during the Great Depression and the I think it was you know
The the president basically banned private ownership of gold
so it is hard to
Totally prevent the trade of that thing though because it is so valuable relative to its weight and well ative to its mobility
You know, this isn't to say that we think that everyone's gonna put all their money in gold
It's just that it's that people don't appreciate how big the stock of money is
And how just a small change change in people's
You know investors households preferences for where they denominator savings is just such a big flow
and so it's interesting because a lot of people are looking for some kind of adverse event in China some people and you know,
Perhaps in the US perhaps leading to recession and there's two camps among those people though
I think there's some folks who think that central banks can go to zero rates or below and and really try to you know
Save the system whereas other others think that you know, it's sort of a bit of an endgame situation
which which camp would you say your
when I first heard looking at China and first where look at the financial system
I thought that maybe they would take the tight path and they would it would allow banks to fail and they would draw a hard
Line and that you know, the system has enough control in it and enough ability to stimulate monetary and fiscal
Outside of the kind of worrying banks that they could carve out the cancer as it was
And and and kind of deal with the problem that comes as a result of that
I
Realized over time that I just didn't know enough about China and I didn't know about the history of China and the culture of China
and you know
We went and looked at things like the history of conflict in a bunch of different countries and you know of all the major powers
China is the only one that spent way more time in civil war than an external war
you know they have this did historical legacy of the central will not hold give this expansionary impulse and then
Whether it's you know, they lose the Mandate of Heaven or you know, rice prices go up by fifty percent
The people realize that the kind of autocracy doesn't have as much legitimacy as they thought it did and and you have an internal system
a kind of reboot and and I think that if you're a policy
I don't know right but I think if you're a policy maker in China
That's the first thing you worry about and then Taiwan Hong Kong
Japan Korea or in America or the kind of second thing and with that lens?
It becomes much more obvious that of course, you're gonna bill everybody out. You're like you can't risk that downside
You shouldn't risk that downside and so you should print money and kind of paper over the problem
They have enough assets to do that
I think the thing that people miss and the thing that hasn't really been well kind of understood
Is that were they to do that?
They probably have to let the currency go and not only probably do they have to look the currents ago
They probably want the currency to go at that point. They probably want depreciation
They probably want their exports to regain competitiveness and to reset wages relative to the West it would be a good thing for that for
The Chinese people if their currency was lower
I mean you see Trump kind of fighting that on the other side and saying no they're going to be you know manipulator
But we think to the degree that they need stimulation that you know falling currencies and depreciated currencies
Are you're pretty good way of doing that does the system get out of control? I don't know
I I don't know exactly the whole system
I just know that I see an economy that needs stimulation has some tools, but the
Size of a problem they're about to deal with and they're slowly trying to deal with you see, you know
changing Bank who we've been short on for a while get build-up by Evergrande and then go
Suspended, you know Bank of genzou just went under baoqiang went under they're providing liquidity while trying to take out the small guys
There's some big guys coming up, you know industrial bank looks fine
But by all of our metrics, it's kind of the sketchiest big bank
You know min Qiang is kind of not that far behind them if you start to get those banks under question
the liquidity that they have to provide to offset the the deleveraging the the
Negative liquidity from bank runs will be so big that
I think the question of do you want to keep seven is obvious and usually no who cares like
Let's have it go down and let's stimulate the economy
I think the crux II thing and the thing for the trade then is well, do we print money as well?
Does the dollar then follow them because they're bigger economy almost now and financial wise and in some sense like, you know PPP wise
and in that case you think about negative interest rates you think about the fact that inch rates go back to zero and that's a
Great ball case for gold it's kind of lay out that
in a little more detail in terms of is it is it sort of a
which part of the situation where you're playing because you know you could you could
It rises in times of fear as it's risen
You know over the past two weeks it some say it rises in times of inflation
I think the jury is a little more out on that one
and then of course it maintains its value well over time if you know if everything really goes away and you know
Gold bars will become less valuable the time but probably maintain some that value through the crisis as well
So which sort of gold play which flavor of gold? Yes, I'm I'm a I'm a volatility guy
so I think in distributions and I think that you look at gold and you think of it as
Probably a negative carry asset but one that has a unique property and that it prepares you your portfolio for
very inflationary and very deflationary environment that it's actually a tail hedge on both sides of the inflationary spectrum and
When you look at the data and you try to chart, you know look at the charts
It's a little bit hard to suss out mostly because gold is denominated in dollars
and so the dollar flow into in and out of dollars as people panic and as they have to make do on their
You know emerging market dollar debt can obscure what gold is doing relative to everything else
That's why we like to strip out the dollar from looking at gold and if you look at like 2008 gold in
Dollars actually didn't do that great right deleveraging people selling assets, but the dollar was room
So well that relative other currencies gold is doing great
if you did want to play this just by yeah using gold which is you know easier to
Play and you know use options around then Chinese currency
How would you kind of lay out that that trade tactically?
Yeah, so we we were in that position actually when we put on a you know
An option structure to basically take advantage of upside to gold and be a little bit indifferent between staying put and downside
We did it through a call butterfly where we buy a call option a little bit higher than the spot price
We sell to call options further out and then we buy the deep tail all the way back for GLD
we did a 145 160 175 jan a
Call butterfly and you know, we did that with about a year plus maturity on it
partially because you can actually
It has really nice properties partially because you get long-term capital gains when you do longer than a year option
That option is now almost at the money, right? So we've come up a lot. We've got a lot of piano out of it
It's no longer like a 15 13 to 1. It's probably like a 7 to 1
So we recommend for people kind of new to this theme to look at those kinds of trades
Look at trades where you're buying a little bit of upside selling some further further deeper upside
But but covering your, you know, your max loss to the premium that you're paying
So, you know
You could look at 150 s 150 5 s on the first strike and then and then move the whole structure up
So it sounds like it was very good trade because the gold options. I mean just the the implied
Volatility
The apples and oranges but has risen dramatically over the past few weeks a few months even so would you still look at buying
You know basically being long
vega and options in gold or at this point
Would you look to maybe just buy the you buy the outright at this point rather than well?
That's why I like the sell the buying one and then selling two because you can actually get your Vega almost flat, you know
I think we had it depends on where you are relative to strike
But our theta is very very low because you're selling that in our case 160 and you know
I feel pretty good right now being short of 160. And so I'm actually not even hedging the Delta
I'm just letting it ride and
and hoping that I get to that point where my theta goes super positive and I kind of crawl up to that 160 a
160 strike
You have to do a little bit of the math to know that you're not taking a huge vol bet
I think people who aren't bald
Experienced shouldn't you know you must be license to drive this car?
But you know call spreads are another way to do it where you it's not too crazy
right
You you you put down a dollar to make for you put that on a dollar to make five and you know
You probably gonna lose money
but the thing that's nice about these kinds of structures is that you know in the last we've had a great last week and
For some other people they've had the worst week of their ear worse because they're they're career in some cases. That's diversification, right?
That's a thing that if you have exposure to US equities or tech or emerging market you want in your portfolio
You want something that does really well when everything else is kind of hidden floor as it were
And so I don't think what their entire portfolio in this, you know, we put a small
Measured percentage of our book in this and more so than we think most people should because we have conviction
But I think that the the case for to even just a cold long in your portfolio
You know watch the positioning. It's getting a little bit fluffy
You know, but that's that's what you get when you buy in the gold you get big run ups
yeah, you get you get a little bit of crack and
Some consolidation and then you know, if you don't pay attention, it's running up again, like like Bitcoin, right?
And so just to let's give people a little that five hour course you need before you get a license so called
Butterflies, you're buying one call you're selling to higher strike holes and then you're buying any right? I you're further one
So you get like a triangle, right?
Just buying a triangle where you say if it goes to 160, you know
I make 15 bucks and I can buy the first call for 3 bucks and the
162nd sell for like a buck 25 and then I buy the third call for like, you know
50 cents or something
and so you have a ton of exposure to it going to that point and you have to be willing to just to be like
155 165 I'll be okay just with the payout but you actually you know
You you don't get in a situation where if you do a like a 1 by 2?
Where you buy one call and you sell two more calls up
Where if it really starts going?
Then you're you know, your margins guys are coming after you or your risk people are coming after you or you you know
There was a ditch bank guy back in the financial crisis who was right on the credit spreads
But you know one by twos can get you carried out
So, you know, it's a little bit of just precaution and just to get that deep deep call and and you know
You say look the worst thing I can do is table stakes. Like I can I can lose what I brought in
Yeah, I would say the viewers
don't sell naked calls unless you really really know what you're doing because the price can run up to infinity and then
Then you're you owe infinity, which is it
Take me at least a week to make that back and in terms of the expert maybe talk a little bit about why you chose
Jan and
If you were putting on the trade now, is that is that still what you would look for?
Would you roll it out a few months or how would you think about that?
Yeah
I think for this kind of trade you want maturity actually you want when we first put on it was a year and a half
If as you go to expiry, you will get theta burn you will get negative carry
When you're you know out of the money
But if you take a deep out out option something that's you know, a year 18 months if you can get the liquidity
You know, you really don't pay that much data. You don't pay that much negative carry for quite a long time
It's most most of the the negative
theta comes in like last three months from from a trade like this the risks to the trader very well laid out because
Because we know exactly what risking going in and if it's a five to one winter, we only need it to work out
You know four times there we got the money right like yeah, you can do math too, which is even better. So
What are the risks perhaps to the thesis is there? Is there a risk that you know, China China data improves?
we do have a trade deal and you know, then maybe this was a
Insurance code I mean, what do you think about the on the economic side the risks? Yeah
I think I think things don't look that bad actually from the economic machine
Place in China. It's not like
Activities crashing, you know, the prices of financial assets are going down, but they're not going down super fast
They've been pretty healthy over the past, you know year and a half the biggest risk to
This diversifying trade is you know return to normalcy growth goes up
We don't have any inflation easy monetary policy can continue to be easy and that most traditional
Financial assets go for a ride, right?
I think most investors already have that in their portfolio in some way or another if they don't you should get some right you should
Have some exposure to positive growth
Outcomes, you know positive risk outcomes. And so really we like to think about this as the you know,
This is the part of the portfolio which is protection
This is the part which is the cookie jar for when everything else is
you know is
Cracking and and you get a little bit of a green on your screen that makes your day a little better, you know, okay
So I says well Alex. Thanks so much for bringing us this idea. And thanks for joining us here on the real vision. Absolutely
Thanks for having me
So Alexander likes buying gold here specifically if you're able to buy it
Denominated in rememb II that's the best way to do it
If not, you can just buy call spreads on the GLD ETF with a long expert
If your trade it is, I'm Alex Rosenberg
You