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Benn Eifert On The Mania That Was Even Bigger Than Meme Stocks

Published Aug 1, 2022, 8:00 AM

When people think about the market mania we recently experienced, the most glaring thing that comes to mind is the meme stocks. In early 2021, the huge moves in names like AMC and GameStop exemplified this new Robinhood, r/WSB, crypto world. But there were activities much more egregious than some retail traders buying odd lots on Robinhood. Serious, professional investors and traders lost huge sums of money giving out unsecured loans to crypto hedge funds like 3AC, which then proceeded to incinerate their money. In other words, lots of people, with a range of sophistication, threw out some basics of risk management wholesale. On this episode of the podcast, we spoke with Benn Eifrt, founder and CIO at the boutique volatility hedge fund QVR Advisors, about how manias happen, and the big lessons everyone should learn from the market over the last two years.

Hello, and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway and I'm Joe. Wi isn't the Joe. There's been a lot of crazy stuff that's happened over the past couple of years. I don't know what what what makes you say that? Well, okay, besides literally everything, besides everything, the most remarkable thing is when when I think about this year and the bottom falling out of a whole bunch of stuff, is that this is exactly what everyone or what a lot of people said would happen. Right. People looked at text stocks, people looked at crypto and they said, this looks unsustainable. It looks like a bubble, or it looks like a mania. Why in the world are people buying this stuff? Well, you know, it's funny thinking back to the top of the meme market, like in ear and people are like, this has got to be the top, rights and it turned out to be exactly the top, And that never happens. But I guess if you say this has got to be the top enough, then eventually will be. But if you look at like some of those measures MOREGANA. Stanley puts together this great chart of like the cumulative p and L of Robin Hood traders since the start of the pandemic, and it basically peaked right in February one, and then it's been downhill ever since. It really was the top, right, I think retail investors basically erase any gains that they made from So looking back with the benefit of hindsight, it seems inevitable that all of this, you know, would turn out this way. But as we were describing, there are still people who jump into these things right totally in the grand scheme of things. It's like people always joke like hindsight is but I've never actually believed that's true. And we know that's not true because we look at history all the time and dispute what actually happened, right, and so there's never actually any agreement. Nonetheless, you know, with this sort of like cycle having played out, of all these people on during the market getting excited about some of the craziest stuff there is everyone calling a top and then a downturn, it's probably not too early to start asking the question, like, what did we learn the last two years about how markets work? Yeah, I think that's right, And obviously some stuff is still shaking out. But I think we have enough here to at least do a review of everything that we've seen over the past couple of years and how you know investors can avoid some of the mistakes they may have made in that period. Time to start learning. Yes, okay, the learning hour on All Loots. Well, I'm pleased to say we have the perfect person to discuss this. We're going to be speaking with Ben Eiffert, who has been on the podcast a number of times talking about retail investing, talking about derivatives, the impact of retail getting into derivatives on the market. He is, of course a managing partner at QVR Advisors, which is a boutique hedge fund that specializes involved derivative So Ben, thank you so much for coming back on all thoughts. Racy, Joe, it's so nice to be back. I missed you guys. It's been way too long. So maybe to begin with there are so many crazy things we could start with. But what do you think was the craziest thing that you saw in the market over the past couple of years. Was there a moment where you were just like, I cannot believe this is happening. The absolutely I think the craziest moments of the last few years is a really really really tall orator, right, I would say, actually, I found the sizes of the unsecured loans that very large. And you might have thought sophisticated investors and credit organizations were giving to three Arrows capital two and a half two and a half billion dollars in the Genesis alone with like no collateral, Right. I mean you come into this just thinking, look, these are these are big boys, These are are wealthy people who created a tremendous amount of money, and they wouldn't just do completely obviously crazy stuff like that, right, And then and then it turns out that the answer is and of course they do. Well, that's such a great answer, And I'm glad you said that, because obviously we did this intro and we talked about like, oh, the retail craziness and people buying AMC in GameStop on robin Hood. But of course you're right, like, actually these were pros. These were people who are like very successful and essentially like building an industry and lending billions of dollars unsecured to a crypto hedge fund that we know in retrospect was not doing anything particularly uh sophisticated. That's actually like way crazier than buying shares of game stop. Absolutely, I think retail gets all of the attention, and you know, we can talk about that all day, and there's all kinds of stuff there, but I think people forget that the role of institutional investors in this process, and the way that institutional investors start to buy into narratives and start uh and you start to develop this fear that they're missing some huge technological revolution um and then do incredibly crazy things in huge size is almost a more interesting story. Can you actually talk a little bit more about the psychology the sort of institutional fomo, because again, like sort of like retail fomo is really obvious. If your friend, you know, suddenly made ten tho dollars or a hundred thousand or more, like trading call options on robin Hood, maybe you want to get into it, but you probably assume in your capacity as a hedge fund manager, you probably talked to a lot of sophisticated investors institutions. You must see like the institutional fomo side in a way that the rest of us don't. How does that work? How does that thinking and how do they sort of like get in the brain space where they become comfortable or obsessed with like taking these huge risks. Absolutely, I think it's you know, on the face of it, institutions are probably better at no to saying things that just seem obviously crazy and silly. You know, They're less likely to buy into very poorly framed Look, you can make a thousand percent a month doing this kind of you know, kind of pitches. Right. Institutions have generally speaking, smart fook smart people, and they're able to recognize those kind of things very quickly. But what I think is really key here is that momentum is very dangerous for institutional investors precisely because it's a real financial markets phenomena, right. It's one that's had tremendous amount of proper academic research for a long time. It's clearly an effect that exists in a sense, and really and momentum is the tendency of things that have been going up lately to keep going up in the in the near future, right. And the best explanation really, I think for historical momentum effects is that something important is changing behind the scenes about the world, right, and it's poorly understood and skept eckle, old fashioned or grumpy investors try to fight it, right. Warren Buffett says, look, I can't own Google or Amazon twenty twelve because look at these pe multiples, they're kind of high. I don't really understand what these guys are doing. And then they turn out to be these huge transformative businesses. Right, And that's a real thing, and it results on average in various ways. In sometimes it makes sense to own things that have been going up, even if you don't totally understand why. Right. But the longer that returns momentum builds in some particular area, right, the more over time that even institutional investors that are generally sophisticated and skeptical feel the need to get involved, right because they start to think, look, I must be missing out. I don't totally understand this, but I must be missing out on something transformative. I can't be the guy who's sitting here in this room in five or ten years and say, yeah, I didn't own Amazon or I didn't get involved in that new thing, and I completely missed out, and everybody else made a ton of money doing this and I just didn't get it. At the time right um. And I think the institutional investors also probably have a pretty high tolerance and almost sometimes an attraction to complexity. Right It makes makes them feel smart, makes them feel in the know about something new, and often, of course, complexity can obscure the sources of risk that are actually being taken into an investment. So just on the idea of momentum, this is something that I feel was different about the past couple of years, maybe on the institutional side as well as the retail side. But it feels to me like people used to if they saw something that they thought was a bubble or didn't make sense, or you know, it was a mania in one form or another, I think people would shy away from it, thinking that this is a bad investment. But it feels like over the past couple of years, people sort of wholeheartedly just jumped in, knowing that a lot of the price action was it necessarily justified by fundamentals, but thinking that you could go in, you can make some money and then hopefully get out on time. In your experience, is that behavior that you've observed, Like, is it that nihilistic or is it really about the narrative and people just not wanting to miss the next big thing. I think there's an inherent cyclicality to it, just with human memory and institutional memory and the experience of of investors, right. I mean, there's just simple important factors here, like how long has it been since the last big mania that people were piling into that ended really poorly, right, allowing the collective consciousness of excess and crash to fade, and time for new narratives to build, and time for those new narratives to generate returns and to attempt new investors, time for new frontiers to emerge. That can we can create new narratives around. I mean, if you think back really to the last couple of decades, and it's been a pretty long, slow bowl market cycle since two thousand and nine. Right. We've had some minor disruptions, We had some European sovereign debt issues, and we had a few other things, but really things have gone really, really really well for a long time. And market participants, you know, the memory of the tech bust is pretty long faded, certainly in terms of actual institutional knowledge of investment organizations as opposed to just in lore of the old old people right, um, and that leads market participants over time to start taking more and more silly risks and to become more and more susceptible to creating narratives around you know, some of these new things. I think that, you know, I think it's going to be much harder, you know, in the next three or four years. Probably we won't see a bunch of you know, brand new, really you know, really crazy things developed famous last words, right, I mean, we probably will Because I said that something that I've been thinking about two and it really fits with this idea of like the sort of like last institutional holdouts, the people that fight the new thing, that people that are skeptical of tech, the people that are skeptical of crypto, and then like eventually they sort of get dragged along and then eventually many of them capitulate. Not only does it seem like many of them capitulate in some way or another, it seems like in the late stages of the boom or the bubble specifically, you get the most egregious behavior. And I don't remember the exact dates, but I'm thinking like some of these loans to like three arrows capital or some of these moves into like Luna, the stable coin ecosystem that crashed like they happened really late in the cycle. It seems like there's this effect where not only do the final folks get dragged across the line, they seem to really like do it in size at the worst possible time. I think that's totally right. I mean, if you look back again at this what has been a very long, slowish, you know, bullmarket cycle where things have been good, it was really only call it that was sort of the turning point where all of a sudden everything started to just go parabolic together at the same time, right across public markets, across private markets. You know, I think a big part of the institutional role in that really came from this huge psychology around private assets and private investments being this fantastic place to be. There's big sources of innovation, stable returns because you know, without park to market volatility. Right. You saw just really in the last few years, you see the formation of VC growth funds. Right. So you always used to think of venture capital as you know, these nerdy, weird engineers doing cool science experiments and backing these early stage companies to do really disruptive stuff, Right, whereas growth funds were all about raising mega institutional scale capital at full fees with long luck and plowing that into companies that were already valued at two billion dollars and just had a completely different asymmetry to the return profile. Right, And you had corporates like soft Bank and hybrid public private headphunes like Tiger coming in to compete for deals, to get those deals with startups by saying, look, we have bigger checks and we're not going to ask you any annoying questions. We're not going to do due diligence, like I want you to sign the storm sheet in twenty four hours that I just sent you, right, And that was really you know, where did that a lot of that came from. I mean I was and I think I had a Twitter post about this, But I would go to conferences with big institutional investors and the only thing that you would hear about was how big asset owners were taking money out of liquid alternative type of investments and put and moving them into privates because the returns and privates had them so high, and there was such a perception of such limited risk and privates. It also seemed tracy, like if you look at it Charter like soft Bank the stock Like that's how you erased like years and years worth. So it's like soft Bank is where it was seen, and it's like, yeah, if you like do these like big investments late in the game, you just like wipe out years of games. So actually, this is something that I want to ask. You know, a lot of the craziness that we've seen has been focused on tech stocks, either in the public market or tech investments in the private market through venture capital and things like that. And you were talking about narratives earlier and fear of missing out. Is there something about tech specifically that makes it more vulnerable to people getting very excited about it. I guess there's so much technology that has pitched as life changing or world changing in one way or another, it feels like it's easier maybe to build a big narrative out of it to try to get more people into it. I think that's exactly right. So, I mean, just to be clear, technology itself is not the problem, right, I mean, technology, disruptive tech, logical innovation is what drives the world forward. And you know, Silicon Valley and venture capital like plays a really important role in that and that's great, But the technology inherently has this characteristic right that you're not selling a current set of cash flows or a well trodden path of how you know that can be valued by people with spreadsheets and some kind of relatively formula. Wait, it's about selling a vision of the future and a vision of what could be and how that can play into future economics and trying to relate that to past innovation. And like that's a very nebulous thing in the end, right, And it's something that is inherently susceptible to hype and narrative, particularly when the I think, as you've seen in recent years, particularly when financial markets set up ways for people to get actually paid and to monetize that kind of narrative and hype, right as opposed to, Hey, I finished building this company, and then I it becomes a big company, and then I get really rich. Right when it becomes I sell this vision of the future that's really disruptive, and then I can issue a token and I can sell it to retail and I can make a billion dollars just by doing that without actually building anything, right, And I think that's you know, we're similarly out you know, in in technology. If I can create a startup that gets about value to three billion dollars, and then I can go into the secondary market and I can get liquidity as a founder and sell a lot of my shares to like institutional investors that want to get some right. And I think that's the inherent trick with technology is that it is inherently, by its nature much more susceptible to narrative driven you know, valuation and narrative driven thinking. Um, And that is what it is, right, That's that's not something that's going to go away, but it's something that investors have to be really cautious about how to differentiate. And you get it's like the early phases of a technology cycle, right, you get those nerdy engineers building really cool stuff in the garage, but then the NBA start to show up. Right, It's kind of a classic line and sell a valley, right, and you end up with a lot of huckster types coming in to kind of ride along the wave because there's so much money involved. And that's where you get the trouble. Can you explain arc to us, like what was that about? Because you know Joe mentioned the soft bank chart. If you pull up the Arc Innovation E T F it's pretty similar, basically erased like two years of gains. But you know, Cathy Wood was out there talking about how the technological revolution was going to increase GDP growth to like fifty, which I think is a number that has never been experienced in terms of GDP growth ever in the history of the global economy. But like, what was that about? And why did people seem to buy into a vision that you know, on the surface was pretty easy to pick apart. Yeah, I mean it was a perfect storm. I think narrative we have to have these like firew exchound to go off. It was this perfect storm of timing and compelling narrative, right. I mean, retail investors and individual investors were just starting to see this huge up surge in interest in markets and trading and participation in markets that we hadn't seen since the previous tech boom back in the nineties, right, And a lot of that interest was centered around new new era, new economy technology stocks, a lot of the smaller speculative type of names that were coming to the market through SPACs. And you know, Kathy did a really good job of capitalizing on that interest and offering a really simple way to get exposure, you know, not to any specific stock, but to this idea of disruptive innovation, right, And that's a theme that really appeals to a lot of folks, you know, a lot of young folks, but not just young folks, right. And she uh, you know, she's charismatic, and she doesn't did a great job on TV, and she was able to tracked huge inflows. And of course the trick with all of that is, you know, I mean, she's made a tremendous amount of money, and good for her, but on on management fees, on those on those vehicles, but if you look at kind of the net capital destruction in the process, that's been enormous, right, because she was you know, those inflows were partly responsible, among lots of other types of things for driving up the prices of many of those types of companies dramatically and and ultimately way way way out of line with any kind of probability of success and probability and monetization. I just had this sort of realization actually I've never really thought about before until Tracy's question about like narratives and wide tech, because it seems to me. The other area where you see this is commodities, where there's like incredible stories that people tell, Like peak oil was a huge one, the endless Rise of China was another one. We're not going to have enough copper and lithium for the demand for evs for the next ten years. And then of course you have all like you know, the hucksters and fine financiers who's like, you know, give us your money for this mining project up with the Yukon where we're gonna strike gold or whatever. It feels like in a way like commodities and now we're like in this commodity cycle, like and like tech are like these like evil twin brothers or like distant cousins where it's like, as a society, we oscillate between a tech cycle nineties, commodity cycle, two thousand's tech, the twenty tens, where we just sort of like passed back and forth between, Like are we in a tech story cycle or commodity story cycle. I don't know if that's a question, just sort of something I'm like, it seems like there's like these big, big swings that go back and forth between the two. It's totally true. I mean commodities since the beginning of time have been just the massive, most massive like cyclical boom bust area right where you have shortages and prices get driven up and people and companies hoarde and then eventually that leads to an economic downturn and commodity prices collapse and there's a huge gluts. And this is you know, not a new thing, and it's a perpetual thing. But to your point, it gets tied up in all kinds of narratives that people create around how you know, we're going to run out of fossil fuels and oil prices are going to go to infinity and then the and it goes back and forth and back and forth, and we're doing it again now of course, right, and I think, um, there's there. It's compliments in a in a it's in some sense commodities are like this very simple fundamental thing as compared to technology, right, But they get tied up in these macro stories, which you know, macro is always really hard, right because you know the world is changing, and you always can have some conception of you know, the way in which the world is changing and why it's going to lead to this huge extrapolation. So this actually sort of gets to my next question, how do you know who's just a storyteller in real time versus someone who is actually correctly identifying a new trend. Because you know, you mentioned Warren Buffett in the beginning. He was wrong and it's like not all of like the Curmudgeons on a certain area get vindicated in the end. He was wrong to dismiss the Googles and the you know, the facebooks in he ended up making a fortune on Apple and sort of like erased a bunch of like you know that compensated for a bunch, But he was wrong on this, And so like in real time, investors really are faced with a tough decision because, like sometimes the world changes, and it can be really hard to disambiguate in real time between who is like a huckster trying to like you know, sell their token or whatever versus someone who's like identifying a real change that's happening. It's really really hard in real time to your point, And I think that the reason it's really really hard is because again, like we talked about, momentum is a real phenomenon and structural change in the world, and technological changes is a real thing, right, And so you have to keep an open mind, and you can't take the curmudgeon approach, right where anything that's new or anything that people are excited about or that's going up in price sort of must be wrong. And you see a lot of that kind of thinking, kind of behavior. That's a wrong mental frame, right. I think it's easier to think about identifying and screening out the stuff that is fair has a lot of red flags and is fairly fairly clearly actually a bunch of hucksters as opposed to on the margin, So is solving the world? Who the Warren Buffett question? Right? You know, was Warren Buffett? Was there a path for Warren to figure out that Google and Amazon were real things? Back in there? Might there might not have been? Right? I think that identifying red flags of very likely problems, right. I mean, I think you get into things like, okay, do do we have projections of returns that are way way above historical equity returns? Or based on nonsensical statements like theckathy Wood one that we talked about, right, GDP growth because of artificial general intelligence? Right, you can fairly quickly say okay, I don't know exactly what's going on in the world, but like that's not real, right, Um. I think another one and and this I think is is very important and hits institutions more but lanes of returns significantly exceeding you know, the risk free rate, but with little or no risk, right. And that's the one I think that ends up leading to much bigger problems in financial markets and much bigger problems in the global economy. Right, because people with nice suits and ties and very big offices look at an eight or nine or ten percent relatively low risk return, and they think about how they can put leverage on that, and they think about how they could have a five year run making really good money and get paid a lot, right, And that's incredibly appealing. And that's actually the nature of a lot of the biggest losses that you saw on crypto and so forth. Right. It wasn't necessarily folks buying you know, doage coin and and losing a catastrophic amount of money. It was people saying, wow, this anchor protocol, this thing yields and hard. There's a Harvard business yeah, and there's like a Harvard professor that wrote the white paper and you know, there's all these credible bcs talking about it, and if I can get on that, and then if I can borrow ten billion dollars to do that, like I can get really rich really fast. Yeah, that didn't work out so well. Um, just on the topic of leverage, can you talk a little bit about what you've seen in derivatives specifically so your specialty. So, I know we had retail um jump into the options market and that helped to fuel a lot of the meme stock investing frenzy. But I'm curious what you've seen on the institutional side as well. Yeah, there have been some spectacular blow ups in the derivative space that were primarily institutional products over the last five years. Again, I think all the same root causes where you get just nothing bad haven't gone wrong really since two thousand and nine, and therefore more and more risk tolerance building up. So you know, you can think about, for example, all the unstructured alpha is a is a really good example where you know, this is a brand name platform, investor base was big public pensions and many tens of billions of dollars, and you have a case where and you can go read about it on the SEC website and the d J, where you know, the portfolio managers were taking more and more risk, selling leverage tail risk, using options in a relatively complicated strategy, and just outright lying about the risk they were taking in the positions that they had to investors in order to put up a return stream that looked pretty good and drew in more and more capital um and then eventually blew up in March of and resulted in a whole bunch of lawsuits and you know, presumably probably prisoned and so forth. Right, So it's the kind of thing that lots of big investment consultants had looked at that strategy and said, hey, this looks good. Lots of big institutional investors fell for it for years and years and years and just without asking that asking those questions about, well, how can this return stream exist? Is this applausible return stream given what trades are supposedly in the portfolio and and the answers absolutely not, But those questions are critical to be to be asked, right. I think similarly, you saw structured tail risk selling out of firms like Malachite and some of the Canadian pensions like aim Coode that manifested itself as good, steady returns, but then in March involved it's you know, spectacular blow ups and explosions, sort of taking on toxic tail risk that the banks didn't want, and again consultants backing these these kind of approaches and saying, yes, this is the smart relative value strategy. So I think it all comes back to what is this return stream coming from? What is the manager telling you about what the return stream is coming from. If the answer is it's really complicated, we're really smart. We can't tell you. It's not that that can't possibly be true, but it should raise a lot of scrutiny in terms of how much you feel you need to understand right about about the positions. You know, blask and I always say things like, look, you should be able to get a snapshot of historical positions, not necessarily current positions, and you should be able to understand exactly what the positions are, what the products are, what the risks are, and be able to understand return attribution. And if you can't do that, then you just shouldn't get involved. You should let the you know, let the momentum effect kind of walk away. I want to ask another question about the sort of I don't know. I guess it's the challenge of fighting the trend or the challenge of being skeptical. You know. Another one thing that we've seen in the sort of like inflationary maybe like peak postmania market is that certain investing strategies that really like did terribly in the twenty tents are doing well. And I'm like thinking about like some of the strategies that are employed by quants, like say like an a q R of like long cheap stocks, short expensive stocks, those did very poorly throughout much of the tens and then but not only did they do poorly, and they've now turned around at the very late stages, they did absolutely awful, and so they did really terrible in It seems to me like part of the problem for any institutional investor is not just that it's like costly to like hold out for things to revert to the mean or for a trading strategy to work out. It's that it gets especially costly in the late stages of the thing. So like your costs like really go up right before the time when it's about to work. Betting against manias is really really really hard, right you hear. I think about the success stories, like we all loved watching Big Short, and that was really fun. And you know, there is a a piece of it where it's arguably easier, at least to some extent, to bet against a mania or a bubble that has certain time dependent catalyst features, like Okay, these mortgages are actually all defaulting right now, and there's like a timeline for that to feed through into the payoffs on these instrument and some like we don't know the exact timing, but like you know, it's two thousand and seven and it's and it's go time. But even that, like a lot of people were early, right, and a lot of people you didn't hear about in the Big Short put those trades on in two thousand and five and got blown out right, seems to be the problem. You can't just wait, and that's actually the easier version, right. But when there's a mania in things that are equity like that have unlimited upside, right, it's not just that you're paying some premium to be to be to have an option or to be in a credit to follow swap or something, but you're trying to like short, gimmy that or or or anything else that's you know, short a crypto token. Um that you're the risk is wildly asymmetric against the short position, right, because that instrument could go up by five times or ten times or twenty times, and your risk grows exponentially in a short position as that happens. But you can only ever make if it goes to zero. You make like one time. Right. And so to your point, um, it's an extremely difficult game that not a lot of people try to play. I mean, we would just never touch anything like that, regardless of how crazy we think that the world is. And you know, there's things you can Okay, maybe I can do limited loss trades and options or something, but like options on really crazy bubbly things are very expensive for a very good reason. Right. So it's I think that's one of the inherent tricks. Right. And there's an academic concept called the limits to arbitrage that's really important here. I mean, and arbitrage is the word that gets thrown around way too much. It's kind of almost totally irrelevant to this, right, even if something is inherently worthless, there's no arbitrage short. One thing we haven't spoken about really yet is whether or not there was something in the broader environment or the macro situation that made the past couple of years again, I guess more vulnerable to these types of manias and frauds in some cases, and a lot of people will point to in the case of retail investors, people being stuck at home getting stimulus checks social media, you know, no commissions trading at robin Hood in places like that. And then of course you have the very broad backdrop of just low interest rates and the cost of capital being very low, the cost of money basically being very very low, and having plenty of liquidity slashing around the system. Is there something that when you look back on the past couple of years you would attribute to you know, something that is one of the reasons that we saw so much froth. I think there are a lot of different contributing factors, I think, and I think this is usually how things go. So I would say commentators tend to focus very, very heavily on low interest rates and quantitative using and so forth. I mean, I think there's a I think a role for cheap money on the margin, especially in areas like real estate. But I think that really the direct role of low interest rates or or QUI here is very overstated. I mean, you look at the history of interest rates and quantitative using geographically around the world for the last twenty years, and you know there's very little Japan has been doing quei for for a very long time. We had low interest rates in the US for a long time. Previous manias weren't necessarily associated with low interest rates. And one way to think about it is like with tech stocks going up a hundred percent a year and crypto tokens paying twenty percent yield, Like if you have to pay three or four percent to get leverage versus one percent, it just doesn't matter if you are in the frame of mind that like you want to do those kind of maastments, right, I mean that the idea and I joke about this on Twitter a lot, but you have the idea that, like the bitcoin folks would have just bought a bunch of treasuries if treasuries paid six or seven percent, is like, on its face ridiculous, and they would all tell you that, right, Um, well, wait a second, I have I have seen I've seen at least one person on Twitter claim that one of the reasons bitcoin is down is because everyone's buying um, those inflation protected it's it's it's pretty funny, right, I mean, I think it's much more about the collective perception of relative risk and return and the growth of narratives justifying that perception, and then the broad socialization of more and more people into that perception. Right. I do think where rates and Quwie comes in as perceptions of the role of cheap money coordinating investor expectations are kind of the money printer Gober, you know, buy everything. Mean, like, I think that's actually important. That's probably much more important than the direct impact of like rates being a little bit lower and being able to get leverage. Right, is this the contribution to the narrative that like all of this stuff just has to go up? And I do think I come back, you know, ultimately, And you pointed out other other phenomena that I do think have been important. When you look specifically at retail options trading and a lot of the aggressive market participation that has showed up over the last few years. I do think the pandemic played a real role. I think that the the there's a self reinforcing dynamic to the social internet aspect to it, right, It's not just people sitting at home in their brokerage account doing stuff by themselves. They're in They're increasingly in discords or on Twitter or in some kind of social group or read a Wall Street that's that's like a community that's fun where people talk about investing and they teach each other stuff and they you know, they overcome the activation barrier of like how do you open a brokerage account and how do you put money in it? And how do you actually click a button to trade and all this stuff, and like, once that's there, and once it's a fun, entertaining social thing and it has a gown group gambling component to it, like it becomes much easier to kind of get out of control and much longer lasting. Right then, you know it has all the power of the of the engagement, you know, click bait nous, of the of the internet associated with it. I think that was really important. I want to ask you follow up on it, but before I forget one point. You know, you mentioned this sort of like myth of like that it's all about cheap money, and a point that Mark Dow who's a trader very active on Twitter, often points out is like in the housing bubble in the mid twenty tens. You know, some of the most agregious like ninja loans and sub prime activity happened like two thousand five, two thousand six, well into the hiking cycle. So even in real estate, which we all sort of can accept it is probably the one area that's most linearly connected to interest rates, you still saw like manic activity well after the FED started hiking. You know, they got as high as like five percent in two thousand and six, and there was still all kinds of wild stuff going on then. But on the same and the same by the way, it was true of the eighties Japanese real estate bubble and Scandy real estate, right, So it's just it's not just like this like interest rate dial that sets the level of spectator frosth But on the question of call options, and I think the last time we talked, I think it was our one, and it was really about this question of like retail call buying activity and how it's changing markets. I don't want to say distorting, but maybe distorting or changing markets. Just curious, like what do you see right now? Are they still out there? How big of a presence are they relative to where they were last year versus where they were maybe twenty eighteen or twenty nineteen and sort of more normal market. And are they other people who haven't given up yet or haven't capitulated or still trying to do like playbook? What do you see now? Yeah, So I threw a chart up on that on Twitter, probably a couple of weeks ago, and it's you know, it looks a lot like the price sharks of Peloton and everything like that. Right, So, there was this huge surge in retail option trading activity, and not just retail, by the way, also institutional options trading activity and volumes. Retail kind of moved first, an institutional caught up. An institutional actually peaked a little bit later than retail. We peaked in in late one actually, so a little bit after you would think of a like the peak of the robin hood p and L. It was more like November, I think, um where And at that time, option trading volumes were in the like the ten to twenty times higher than baseline range, which is just unbelievable, right, And then what happened since was a pretty steady collapse, you know, with some some rallyback attempts. But now we're back to maybe only two x over baseline, so it's still it's still elevated, and I think it will remain somewhat elevated. I think back to the kind of the social gambling dynamic I think I can't get that has a long tail to it, right. People used to ask me a lot in Okay, how is this going to end? What's actually going to make individual investors, you know, and some of the fast money hedge fund types that are starting to trade like this, what's going to make them give up? And my view was always, look, it's not going to be obviously in March event where there's a fast, big market crash and then things recover, because that's a lot of this option option trading. It's option by right. It's kind of long convexity. You pay a small amount of premium to get a whole bunch of upside if there's a giant move, and that's perfect for crashes, right because you're like, oh, I lost you know, I lost my thousand bucks or whatever, and then I'll do it again tomorrow. The it's really the long, slow grind b market kind of sideways are down that eventually drives people out right, because they're spending money, they're spending premium, they're spending premium, they're spending premium, and it's you know, it's just burning for six months, for a year. And I think that's what we've seen. So speaking of driving people out, is there is there any craziness left or has all the sort of air been kicked out of the market's tires? What do you see? Excellent question. I mean, I think there's plenty of craziness left. So I think both in crypto and in tech, there are many funky crypto tokens that are down, but they can there, right, yeah, exactly as we as we constantly joke, right, um, but whose market cap is still billions and billions of dollars, right, and you know they're just jokes. So I think, you know, that's hard to argue that that that stuff doesn't eventually go to zero. Right. And then within what you would think of as like the Arc basket and you know, the Goldman SAX index of speculative software stocks, again, there were a lot of companies that experienced valuations in private markets and sometimes eventually in public markets of thirty dollars that just it's very hard to see them ever being worth anything, right, And a lot of those names are down a lot. They're down, but they're still worth five billion dollars or three billion dollars. Right. The things that have gone down the most are not always the cheapest, right. Sometimes they are, But in this case, I think it's not. That's not obvious at all. I think there's a great Kindleberger quote that the period of financial distress is a gradual decline after the peak of a speculative bubble that precedes the final and massive panic and crash, driven by the insiders having exited, but the suckers, outsiders hanging on and hoping for a revival and then finally giving up. Right, And it feels like that's where we are, sort of. The insiders have been kind of quietly and steadily getting out. There's apparently still quite a lot of demand, for example, to sell shares in the secondary market of startups that are down. Right, You've got founders that on paper, briefly we're worth billion dollars and now they're worth two billion dollars, and they're like, you know what, that's still pretty good. I don't want to see if I can turn that into cold hard cash. You know, speaking of crypto, what do you think about it overall? Because, I mean it's really tough, Like you have so many you have institutions, you have probably some of the smartest people you know or that we know, have gone into crypto. There are certainly interesting element of decentralization, etcetera. That I think are intuitively very appealing. And on the other hand, it's a space that's been absolutely riven with every red flag in the book basically since to day one. This is something that never ceases to amaze me about crypto, which is that like one person can look at it and go, this is world changing technological disruption, and another person can look at it and go, this is clearly a fraud and a pond z and you know, people are just throwing money into this useless thing. Absolutely So I have a lot of very smart friends in crypto, and I you know, I try to keep a pretty open mind. I mean, I think that my default is there's a lot of investment in infrastructure that you might have payoffs that are hard for me to predict and know, you know, which areas are going to really be important in ten or twenty years. And you know, there's a lot of work in that. There there are use cases in improving settlement and payments and god knows what, and like we'll find out in ten or twenty years. My mediaan case would be like there's some actually really valuable stuff that comes out of that. And again to your point, lots of really smart people working there. I think that part of the issue is really so much money got made or and attracted so much, so many followers on who're trying to get rich, right, and then that really came to totally dominate the space and everything visible about it, and a lot of the you know o g original Crypto folks like have been vocal about that too. I think ultimately, you know, everything has to ultimately derive value from real products and services that people spend money on in a sustainable way. But Crypto, I think at the core of it, Crypto really owned and brought to the forefront this idea that financialization is first, right, and that use cases sort of follow, and that you're supposed to have. It's this very like pure Chicago Department of Economics efficient markets idea, right that like if everything is priced a priori, the market is sort of all knowing and all seeing, and people will identify the things that are going to work and they're going to finance those in like the world is going to be utopia, right, And it's completely ridiculous. You know what actually happens in practices that if you can create a narrator to create a hype cycle around your company, and you get the right VC backing and whatever it is, and then you can create money by issuing a token and you can sell it to retail and humongous size, and you can make hundreds of millions or billions of dollars for doing absolutely nothing right. And that happened over and over and over and over again, and it was sort of institutionalized as a business model by like certain venture capital firms that you know are are big backers of this space, right, And I think that's the core issue. Well, I forget who like made this point, but yes, like you might say that crypto has attracted the best and the brightest of the last several years. But if they're the best of the brightest, they might be the best of the brightest at figuring out how to make life changing amounts of money for six months, which is not necessarily the foundation of a of a sound new industry. Yeah, you give you give people really strong financial incentives, and it's really hard to resist, right, Like it's you know, it's easy to obviously point fingers at the most egregious people in the space and Dokuan and all these guys that, like, if you create a world in which it's really easy for charismatic, hustle type people to get really rich by scamming people, like they're going to do that, and you have to expect that, Like that's just how the world is going to be. And I think that's what the incentives that we've set up in crypto have really done. So what's your big advice to investors or anyone listening to this podcast? How should they avoid the next mania? What should they watch out for? I mean, I think the things that I always come back to our again to really look out for people credibly trying to credibly claim these astronomical return profiles or pretty high returns with very little risk, because you just have to think of it as the world is full of a lot of very smart, very competitive sharks who run very big businesses that really like getting rich. And if there was an opportunity to make risk free in front of you, they would have already taken that away from you and done it first, right. And what it means if you see something like that is that it's not real, you know, and there's either some kind of fraud or there's some kind of extraordinary risk that you're not seeing. Right. You have to be really wary of extrapolation, right, and that kind of comes back both to the commodity story you were talking about and to know bitcoin and all kinds of things, right, sort of extrapolating recent extreme investment performance into the future. You have to really be very skeptical of overly complex investments with non transparent sources of return right where people are trying to tell you this is really good because it's it's really smart, and it's really complicated, and I know you don't totally understand it. And you have to also be ready to recognize the psychological tricks that the investment world plays on you. Right. Again, a lot of these things it seems like it should be so obvious, but it's not. Right. There's a lot of laundering of credibility, right, legitimization of investment schemes by the backing of authoritative people or people you feel like you should trust, because especially at peak cycle, people are very willing to lend their credibility to uh, you know, two things that aren't going to get them paid. You know, think of again the Harvard Business School professors writing the white papers for Ponzi schemes like anchor, using social consensus and group psychology right to normalize ideas and narratives, and to pressure people to stop asking questions, you know, big Twitter mobs telling you you're an idiot and you're not going to make it right. And and then very much so kind of scarcity or immediacly like, look, you're gonna miss the boat. You don't get it, and it's like time to get on board or or miss the boat. Right. That's I think really critical. Let me ask you one last question, and that the positive spin. And we've had guests say this and other people say this, that out of this will come a very sophisticated class of investors, people who learned about options trading. People love your kind, Tana. I saw you know, the Wall Street bets crowd like, uh, you know, loves when you jump on there and actually walks through the math and walks through some of like the risk taking frameworks of this stuff. Do you are you optimistic that there will be like a cohort of you know, people who maybe got scarred or burned, but also like learn some sophisticated stuff that will have a good combination of skills and knowledge coming out of this period. So I really hope. So, I mean, I'll tell you ten or ten or fifteen years ago, I remember working with a good friend who's now a VC on ideas for like investor education, and how do you get people that even care about financial markets and investing and pay attention, because back then it was like totally impossible to get the young generations to even think about this stuff, right. And it's really good that individual investors have gotten interested in investing, right, And I know I feel like, you know, sometimes I hope I don't give the opposite tone, right, because it's so easy for people to get tricked and all this kind of stuff, Like it's fantastic, but I think a lot of times people have to learn from their own experience, right, It's just really hard. I mean, you know, Hagel said we learned from history that we just can't learn from history, right, Um, people have to, one way or another, go through their own experiences of mistakes and things not going well to really internalize lessons. And what I really hope is that people are able to take hold of those lessons and you know, stay interested in financial markets and stay interested and invest in and learn how to make good decisions as opposed to like feeling so scarred by it that they just walk away. All right, Ben, it was lovely having you back on the show to talk about the lessons of history, recent history that I guess we won't necessarily actually learn, but it was fun to chat. Let's put it that. Yeah, that was funk you absolutely so, Joe. I really enjoyed that conversation. It's always great having been on because, like I feel like he gives good perspective on detail and also on institutional Yeah. One thing that struck me was just the last bit of the conversation about you know, things that are making money naturally attracting people who want to make money. And I guess it seems obvious in retrospect, but I do think it's a good reminder. No, it really is. And I think, like, look, if you're like really smart in any field, but if you're really smart. You might you know, people in this space are smart enough to like spot the inefficiencies, smart enough to spot the suckers, smart enough to figure out like what can make life changing amounts of money in a short period of time, And a lot of really smart people did. But it's really hard, and I think, like you know, going back to the middle of the conversation, in real time, I think it's just extremely hard to know where you are in a cycle and what's the difference between a bubble and a new regime or a new a new thing. Oh totally. And also even if you correctly pinpoint where we are in the cycle, you could still make mistakes. So I'm thinking of, you know, all the people who thought that inflation was going to rise over the past couple of years and they bought bitcoin and gold like that hasn't worked out so well. No, it's really hard, and you know, like again, a lot of the most the costliest errors come in the final stages, whether that's jumping in too big, whether it's trying to short the thing. I mean, that's like the crazy part. Like to think about crypto over the last year, there's two huge ways to lose money you could have gone really big in at the peak, or you could have like gone short, like a few months earlier and gone out of business within a few months. So like the ability on either side of the trade just tremendous opportunities to lose a fortune. Yeah, or you could have gotten out, you know, in like sen or something like you know what, you know, my red flag is for a scammer. I've told you this, someone with a newsletter. Yeah, but well, either a newsletter or fund manager who quote Greek philosophers up at the front. That's like the big red flag. It's like you see an letter in the beginning is like some like quote from Marcus Aurelius, I don't know, or like Cicero or something like that or whatever it is. It's like, stay away. That's that's my trick. It's worked for me. Don't we have a newsletter, Yeah, but we don't quote. We don't. We don't quote the ancients to volster our volster our claim. Alright, let's leave it there, all right, This is bending another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway, and I'm Joe wasn't, though you could have. Follow me on Twitter at the Stalwart. Follow our guest Ben Eiffert. He's on Twitter, Ben P. Eiffort at his two Ends in It. Follow our producer Carmen Rodriguez at Carmen Arman, and check out all of our podcasts at Bloomberg onto the handle at podcasts. Thanks for listening,

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