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Welcome back to another episode of Ford Guidance. And joining me today, I got a bit of a roundtable here with a couple of fin-to-it legends here, but also legends in their own right, aside from that. For those who have seen the show already, you'll recognize in the middle here, David Cervantes.
Pineburg Capital, who was on the show about six months ago, I think, and had a really great call talking about a potential growth slowdown that was going to occur that would go into a false signal of the song rule. into a reversal of that. And that was a very pressured call. So props to you on that one. And then also on the show here is DCP or otherwise known as Donnie, who is a long, multiple decade long veteran trader.
Born and raised in the pit trading many years ago and is now into the digital age and has some really interesting insights. So really stoked to have you both on here. How are you guys doing? All right. Thanks for having me. Doing well. Thank you. Donnie, good to see you. My pleasure, David, as usual. Same thing with you, Felix, as well. Obviously, you two as well, Felix. We won't forget you. Thanks, man. I appreciate that.
Yeah, Donna, I'd love to just let you, you know, open up the floor here and just give a little bit of background in your history. Obviously, I gave a look. a couple key points there. But yeah, just depending on your history from where you started and what kind of markets you focus on trading and how you think about things. I started out as a clerk at the Mercantile Exchange in the, I think, 84.
A couple of years out of high school, got a summer job between freshman and sophomore year. We're working for a guy in the T-bill pet. He was a filling broker. So I did that. At the end of the summer, he asked me if I wanted to have a full-time job and stick around. Much to the chagrin of my father, I said yes. So I started clerking in the T-bills.
Slowly accumulated some good customers, developed relationships with the guys on the Morgan desk, the Plaza desk, the Merrill desk, did some stuff with the Drexel guys. We had a brokerage group that consisted of an old guy, Joe Fox, who owned Fox Deluxe Foods. And we had guys in the bellies. in the currencies, mainly the Swiss, the T-bills and the Euro dollars as the Euro dollars started to take off. I started trading in 1986.
actually 1987. I got a seat, started filling some orders, started trading my own personal account, made some money in the crash. That was my first real exposure to pain and violence. Blew up my account thinking I was all that. I had to go back into clerking. Ended up working for one of the Board of Governors, PJM. Clerked with him for a year and a half.
I brought him the Plaza business, the Salomon Brothers deck and the Air Dollars, which was a huge account. And the deal was, you know, pay me X. And after a year or two, if you get the business established and it works, put me back in the pit. So he put me back in the pit right before the Gulf War, right before my first daughter was born. And I went back into the third and fourth month Euro dollars, which was starting to really grow.
Had a lot of open interest, good volatility. And I started trading my personal account. And I stayed at the Merck until 2000. Got into trading mortgage backs. Ended up with GE subprime unit for a while, trading their book, doing securitization, packaging stuff up and taking it to auctions. That obviously blew up in quite an interesting way.
Good stories I could tell about those days. But then I started trading on the screens. Got destroyed, didn't know how to do it, which was very humbling to try to have to figure out. Without all the sensory inputs of the floor and without the directionality of the mortgage business where you just had to place stuff, it became very, very challenging for me.
because I'm more of an EQ type trader than I am an IQ type trader. I would say David's more of an IQ guy than I. So it took me a while. It cost me some money. We eventually got that rolling. And then I started a couple other businesses along the way to have a food service catering company, a Montessori school. And then we started a brewery about a year and a half ago.
I mean, you're in a couple months ago. So I spend most of my time staring at the yield curve. I'm really comfortable in the sofa market. And I'll venture out on the long end and then I will scalp ES and maybe position trade ES every now and then as well. I don't trade a retirement account. I let somebody else do that.
My feelings are if the market really goes to shit, I'll make enough money trading that I don't have to worry about the losses and it'll eventually come back because pretty much this market always comes back. So that's a short history of me. Beautiful. I love it. We'll ask Dottie one question. When you said we were talking about the belly, do you mean pork bellies or the belly of the curbs? Pork bellies. Pork bellies. Yeah. So it started as a meat packing company.
And then they ended up going down to the Merc to the old man did. And he set up in the bellies so he could hedge his packing business. And there's still Fox Deluxe trucks driving around Chicago dropping off meat. The business, they've divested. They're out of it all. Joe passed away years ago. But that was a good group. We had a good, talented group of people in that group.
It was fun. My father-in-law or my brother-in-law was one of the brokers. That's the guy that brought me down there. I was dating his sister. Yeah, literally. And his mom was so pissed that they brought me down there. I was even more pissed when I dropped out of school to go chase my dreams of being a trader. But her dad, my wife's dad. was actually a managing director at Bear Stearns back in the 60s and 70s in Chicago. So there's a long history of traders on my wife's family side.
I was the first fool of the Philipses to go into the trading environment. And David, correct me if I'm wrong, but to characterize how you trade and view markets, you mostly figure out on if you can nail the top line economic data. So understanding where GDP goes, understanding where's inflation going, where's the labor market going, and then trying to understand.
what's the market pricing compared to the tension of what you're seeing? Is that mostly how you view things? That's pretty much it. I mean, trading, just to be clear, trading high frequency macro data is really, really hard and not a lot of people can do it. or do it consistently to stay profitable over time. I don't really try to play the CPI or the PCE or NFP for that matter.
I try to look out three to six months. That's kind of what I'm doing. I look out three to six months and just look at the growth and inflation matrix. going to accelerate and decelerate at different rates. And that creates pockets of value based on current pricing. So that's kind of the meat of what I do.
Well, you know, maybe since we're recording this the day after what was a pretty eventful day yesterday with the FOMC meeting, we can maybe use that as a case study to explore like how the both of you, you know. went into that day, how you're looking at things and how it actually happened and how the different styles of time horizons and trade expressions that you both look at actually ended up.
Donnie, you went into that meeting. I know you had a tweet out there mentioning that you expected to cut 25 and to also price for 2025 just two cuts, which was, yeah, that was a pretty pressing call. That's pretty much what happened. And that's where...
What I understand is where a lot of the hawkish surprise came from. So I'm just curious, you know, maybe we can start with you. Just how are you thinking about things going into that and how did it end up actually occurring? You know, I mean, basically, if you take a step back and look at the macro. You know, what's the best way to say it? This market on stir has been off sides so many times in the last three years. I don't know if it's...
that there's a lack of old school traders in it, or if, you know, Stouffer's kind of new. I mean, I grew up in Euro dollars, so we had to always deal with LIBOR and all that stuff. But for me, we had sticky inflation. The market pretty much crapped out after the little pop at $1.2013, I think it was, in the ZB on unemployment. A lot of people, I was long that market for, I was long that market a couple of times over that rally up. And it just felt to me that.
The market needed to come back and correct itself a little bit. And, you know, I mean, jobs are not the problem. The economy is not the problem. Inflation is an issue. David can speak to that more than I can, but there was just no way in the world we were going to get all those cuts. If you look at the Z5 SOFR contract, I think it's taken on a full.
full basis point in cuts in the last month and a half, two months. So that implied to me that the Fed was likely going to be more deliberate. I mean, the best base case would be... We're data dependent. The worst case would be a hike. I think I tweeted that out before CPI, like, you know, a really hot CPI could really mess with everybody if we get a pause or we don't get a cut.
But you knew the market was totally priced in. I think it was 96% going into the meeting that they were going to cut. So that would have been throwing a grenade into a gas station if they didn't cut. So he had to get hawkish. And I think that the market took his comments worse than reality, per se, because he didn't have a smooth presser.
And normally he's pretty smooth. And so I think there was that and there was two dissents, if I'm correct. So both of those kind of, it just led me to a pause. I really just think they need to pause here. You know, it's funny that on the backside of that, literally yesterday afternoon, I'm watching some people and they're like, well, you know, all the interest rate markets are now sensitive to price data again.
For surprises, for surprises of softening. So we went from, you know, risk off to risk on to risk off to risk off. And now we're now we're positioning or looking for weakness so that we can risk on again. So the market is going to do this same overreaction trade. I think Shrub calls it the monkeys. And I, you know, I mean, I see it a lot.
When I started on the floor, I would trade, you know, four or five hundred dollars, you know, as a position size, maybe get up to a thousand or something. But I was always looking to make a tick or two. You know what I mean? If you flip a thousand lot, it's 25 grand. You had a pretty good day if you can flip a thousand lot. You can't do that off the floor. You know what I mean? It's just...
It's too hard to find that support and resistance. It's too hard to find where that size is. So you've got to be a little bit smaller in size and you've got to extend your timelines. Nice. Yeah, David, how are you looking at things? I need to take a step back and kind of discuss the mental framework that I approach the problem set with. And that is, you know, I try to understand the Fed's strategic mindset. Like, what's the overall?
goal? What do they want to do? The Fed is really trying to... It's got to... two constituencies, two little demons on its shoulder. You know, on the left side is the labor market demon and on the right side is the inflation demon. It's also known as the dual mandate. So contextualizing the dual mandate, you know.
on paper and in practice are two different things. So to get back to the analogy that's probably been used and abused at this point, the landing, the soft landing, sticking the soft landing. The Fed is looking forward and looking at the most likely trajectory of where things are going because of the lag.
In other words, there's lags in monetary policy. There's uncertainty. We don't know. There's feedback loops, blah, blah, blah. So they can't just look at spot data and say, oh, you know, today inflation is at 2.8 year over year.
or 2.60 a year, and that's bad. What they do is they look forward, and they're somewhat shooting in the dark, but what they're trying to do is... uh manage these two rates the inflationary rate and and and the uh you know the growth rate to try to manage the labor market um and that's what they're trying to do so i went into this thinking yeah
To Donnie's point, yeah, hard yes, a cut. Not because we necessarily needed it, but because that's what was priced and a disappointment would just be, you know. throwing the grenade into the gas station. So, yeah, I went into this. Yes, a cut. I went into it also with a pause where I was probably. What I was thinking beyond the pause was good shot at more cuts for next year, but backloaded. So two cuts was what the street had in mind.
And I was thinking maybe three or four cuts, but they'd kick it to the back second half of the calendar year to give themselves time for this to play out and see if those four cuts were warranted. given the evolution of data. So that's kind of how I went into it. I did take it long. I went long on the 10-year futures contract. uh at uh i had a position at three at 439 earlier in the week and then uh 449 for the average price of 444. so that's where i am now so i i think
Now, ironically, I do think that now the Fed came out swinging hawkishly, that should dampen the last embers of inflation. That last mile that everyone has been talking about, we've made huge progress in the past 18 months. With inflation, we have the last mile issue. I think that last mile now with this newfound hawkishness should be easier to put out. And that will, I think, put a bid on bonds.
So, you know, question is when, hopefully sooner than later. Definitely not today yet. Not happening today. It is not happening today. And, you know, the first day or two is always, you know. People are trying to make sense of what happened. There's position squaring. So, you know, the day or two after an event like this is always noisy and hard to, you know, it's hard to draw a firm conclusion on it.
the day after. That's just, that's just trading. That's noise. And tomorrow we get, we get a PCE for November. I'm at 0.101 core month over month. That's a little softer than consensus. I think consensus is 0.13. But, you know, tomato, tomato, it's really, I think we're gonna have a soft month. But, you know, we'll see what we'll see what the.
how the data evolves between now and the next meeting in January. But that's kind of how I went into it is just to summarize. It's not so much what's going on today. It's what do they expect to happen tomorrow? And what do they expect? to have it tomorrow versus their intentions. The SEP, it's not really a forecast. People say, oh, the forecast, it's always wrong. They can't forecast better than anybody else. It really comes down to...
It's their statement of intent. It's what they want. It's their wish list of what they want within the realm of what's possible. So that's how I view the SCP. The SCP and the projections are simply that, statements of intent. You know, there's information that's revealed in those statements of intent, right? With the updated PCE projection for next year, they raised the projection.
And there's valuable information in these projections because it tells us what the reaction function is going to be and how they're going to approach data as it evolves. So anyway, that's just the... The way I went into it, and that's what I'm thinking right now about the Fed. Donnie, I'd be curious your thoughts. You mentioned earlier in there about how... The stir market, which, you know, for those that aren't in the weeds in that world, it's just like the short term interest rates market.
which where you can like basically, yeah, trade the SOFR curve. And you had mentioned that it's been wrong so many times over the last year and just kind of websiteing, whether it's just, you know, like a lack of sophisticated traders, or I'm also curious, like, you know, to David's point about things like the dot plot and SEPs and.
press conferences and all these modern day fed tools that we use for, for guidance, you know, compared to, you know, back in the day when it was, there was none of that. And you're training your dollars like. How do you think about these new modern-day tools that the Fed uses to try to guide things and how that gets priced into curves? I mean, I grew up trying to decipher Greenspan, for God's sake. So, you know, I mean, that guy was insane.
You know, we didn't have that forward guidance, right? It was, you know, there were surprises. You know, they would do surprise rate hikes and rate cuts and they would. They would rattle the market when they felt they needed to shake things up. Now it's, you know, the Fed. doesn't want to surprise the market. They want you to see where they want it to go. They want to be transparent.
I think inflation is a great example here, right? People conflate inflation with high pricing, but the Fed's concerned about the rate of change and the directionality. So you can see this overwhelming bearishness in some of the doomers, whether it's the S&P or whether it's bond prices and Fed actions. The reality is, is the data just didn't align the way that Fed thought it would. But the market participants took it a step too far. And I think that happens all the time.
I was thinking this morning, I was looking at the ES charts, I was looking at the long end charts, and I was like, was this an algo trade or was this a personal fear of getting me out of the market trade? And it sure feels more like an algo trade than it does a capitulation to get me out. And so I think that when you're looking at stir now. You have to conceptualize, as David says, three to six months out versus what you're hearing on the street. And, you know...
There's a few really smart folks out there that you can listen to. I mean, I was very intrigued by your conversation with most of the other day. That was a really interesting conversation. Um, I agree with some of that. I disagree with some of it, but, um, in, in the end, I'm just trying to get an edge and, and my edge is I can, I can.
Trying to process some differences that I see in market price action versus upcoming expectations and releases of economic data. And then I like to utilize momentum. That's really the only indicator I use is momentum. And so it's kind of a... It's kind of that crazy meme where the guy's got all the strings on the board and he's like, you know, I got it all figured out. That's kind of my brain. I mean, I tweeted out last night my chart on, you know, where I thought rates should be.
And I'm like, okay, well, if we don't get two cuts, what should D5 be? What should D6 be? Where should we be pricing right now? And that curve is so tightly priced. There was no deviations out from 6 to 7 to 8 to 9 to 10. It's the same interest rate. So it's very interesting. And then the other thing I would also say is I like to keep an eye on the overnight interest rate swaps.
and that market relative to the SOFR market. Because I think if you look at the spreads between that and SOFR, you can kind of see when the market's getting off sides. Because it's 10x the market in SOFR, in OIS than it is in SOFR. So all the big banks are playing in the iOS market, OIS market, and guys are speculating in SOFR.
So I like to keep that as perspective, as a check and balance of where I'm at as we cycle through a regime. And that's what this is really about. I mean, we're going into a new regime change, right? We got... Trump coming in. We couldn't have a more different government process flow coming into place than we've had the last four years. And I think a lot of people missed the narrative, which David highlighted so well.
on how Biden's policies were so stimulative. And now we have to get into the weeds on what are Trump's policies going to do for us? How is that going to impact the market, right? I mean, we round tripped the bond market entirely since the election. I mean, that's a big deal, man. When the 30-year moves five bips up and five bips down, I mean, five full points up and five full points down. three, four weeks. That's offsides to me. We were oversold, we were overbought. And I remember I tweeted out
in a non-farm that I was long 100 ZB going into the number. And I tweeted out maybe an hour later, I could get laid out for 300 grand on this trade if this thing's just craps. And so I was right in my overall anticipation of a market rally. It's just the data didn't give me that last push and I was lucky to get out where I got out and make some money on that trade. Yeah, I remember that day. It was a pretty big reversal day.
I was long ZN, the 10-year futures contract. I think my cost base there was, gosh, it was $430-something with the reference yield. And I got on at 4.13 and a half. I mean, really just got really lucky. But it was the same thing. It was kind of like, this is too much, too fast. And that was just like, I didn't need to. you know, sweat about it. So I just, I got out too. Yeah. I mean, I, I bought the bottom on the, on the election at one 15, 13 in the D's.
added to that position a couple of times, ended up with a couple hundred on and got out around 118, 119. And that was a really great trade. And then we backed down again, and I was like, all right, we're going to try one more time to see if we can get this thing up to 122. And it just peaked out. I think it was 1, what was it, 1, 2018, maybe 1, 2015 was the end of that non-farm day. And I'm kicking myself for not shortening.
to be honest with you. What I find so interesting about this conversation is how you guys both have such, you know, different approaches to how you... get to a point but you know so you know david like you mentioned like you have a forecast on on pc tomorrow and that sort of thing versus you know don you're saying it's a it's a constellation of things that sort of you can you can
bring forth together in sort of this like developed intuition over many decades of doing this, that gets to a point. But, you know, correct me if I'm wrong, but you both are seeing some similarities today to, you know, the business cycle of the mid 90s, right? or maybe that has changed, but I'm curious. No. So like what, what's so similar to that day and age and just like the contrast, the two different views you guys have of getting there. The big thing with the nineties.
For like a wonky nerd standpoint, the big defining characteristic of the 90s was productivity. And the other thing was productivity is... you know doing more with less but in order to do more with less you need to have certain conditions to allow for that so you know in other words if you want to um you know let's say i don't know produce more of whatever widget
You need the tools for that or you need the environment for that. You need the right lighting for that. You need whatever. You need other conditions besides productivity in order to really. monetize that team management. So what the 90s had was full employment, a really strong labor market, low cost of energy. Right. And gosh, I'm having a break for the other thing. I just wrote a big note on it. Anyway, you had three different elements of...
Macroeconomic elements that allowed for productivity to really flourish. I know the third one, non-residential fixed investment. So basically, you know, all the... you know, just massive investments in capital. And we're kind of having that right now. Productivity in 2023 was off the charts. And it went against everything we were supposed to do.
we were supposed to expect. We're supposed to expect falling productivity as the labor market matured. As people come into the labor market, you know, just simple math, more people working, similar output, you know, mathematically productivity falls. And instead, we got this productivity boom. And there's a lot of theories as to why, and we can twist ourselves into pretzels trying to figure out some of those theories. But I think it's just easier to focus on these big macro drivers.
And that has led me to believe that we are kind of in an economic renaissance similar to that of the 90s, where, you know, we are actually experiencing a pretty big boom economically. You know, the Q3GDP just got raised up. This whole year completely outperforming. In the beginning of this year, people are still talking recession at the beginning of this year. And that just never even came close to happening. And the labor market is solid.
And because of IRA and chips and all these infrastructure programs, you can bash them however you want politically, but the reality is money is flowing from the government to the private economy. And so we've got a boom in a fixed investment. We've got strong productivity, strong labor market. And hopefully, the new government doesn't really...
mess with the secret sauce. Hopefully, you know, the media gymnastics aside that Trump is known for doing, hopefully that's, you know, more noise than anything. Hopefully. They don't screw this one up because this is a great performing economy. And if they don't screw it up, I think we're going to have a great year next year if they don't screw it up. Scale is shaking up the blockchain game.
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We went through a cutting cycle. They got a little overaggressive on the cutting cycle. The market, that productivity that David's talking about kicked in. The market started taking off. Inflation risk came back. hyper vigilant on inflation coming back out of the 70s and the 80s, right? So when you look at those 90s, it's remarkable. How similar the rate cut cycle, the market response, that dynamic, it's rhyming very strongly with that. And I mean, I've been for a year.
wondering, are we late stage or are we mid cycle? And I'm not, I'm not the, I don't have the brain set or the training that David does. So I defer to him on that kind of stuff when we chat, but you know, I think the market is, I think a lot of people think it's late stage. And I think a lot of people are missing the fact that we are probably more mid-cycle than we are anything else. And that impacts your...
Your thought process, right? I mean, we wanted to start this conversation talking about keeping a mindset and optimism when you're trading. You know, if you believe that the narrative is wrong. that's going to give you a negative bias. And if you take that negativity with you, it's going to cloud all your judgments. You know, so from my standpoint, I'm a day trader, whatever happened.
It happened. It's done. If I lost money, I'm not expecting to get it back the next day. I'm not trading for revenge. I'm trying to clear this slate, get back to neutral, and then go see where I was wrong and move forward. and try to keep it neutral to optimistic on a regular basis. And I see, you see it in crypto, right? You see the haters in crypto. And do I know if there's viability in crypto? No. I do know it's one great speculative vehicle.
And it is a, I mean, it's a, it's a trader's nightmare or a daydream, you know, I mean, it's, it's awesome. If you're in that, in that space. If you're an old fart like me, you're like, I don't see the viability of that. And the US dollar, we're not going to buy it in dollars. And the Fed's not going to do this and blah, blah, blah. Negative, negative, negative.
you're better off not even being in the space. You're better off just, you know, backing off and doing something that fits your lifestyle, you know? You know, and then we get fart coin and it just adds to that negativity and certain people and you're like, what the hell? You know, actually, she had a lawsuit brought against her today.
Oh, really? Thank God. Yeah, somebody finally filed suit. Yeah, I think to Dali's point, I think we're very much mid-cycle. I don't think we're late-cycle. You know, just everyone's, you know. Even stock, just a very simple heuristic is equities and stock market. A lot of what 23 was about was really catching up from 22, right? Even though 23 was a great year, it was just kind of recovering some of those losses. So we haven't really, you know, maybe this year we're truly starting to get going.
I hate the word bubble, but in terms of anything that even resembles a bubble, if it is a bubble, it's barely starting. We're not even close. My simple metric is... If it's not a double in three years, it's not a bubble. That's kind of the way I look at it. And we're not even anywhere close to that. So this is, yeah, we're very much mid-cycle.
Credit markets are tight, but that's just a vote of confidence on the business cycle, I think. We haven't had these spreads since 1997. So going back to my 90s analogy, credit spreads are, it's been... 30 years since we've been at these lows and they get there for a reason, which is a strong economy. So yeah, I think, I think we're very much mid cycle.
And then the Fed came out today and just did that new reverse repo because there was starting to be some structural problems on the back end. So, you know, they're anticipating removing those challenges as fast as they can. And I think SOFR has done a good job of it too. Yeah, they're quick to react. Like, you know, Conk's put out that article breaking down why there might be issues by the end of the month. And within a couple hours, they already had the standard repo ready to go.
Yeah, the best tweet I saw on that was, well, looks like J-PAL is reading Conks again. Maybe Conks is J-PAL. You never know. I actually think I know who he is, but I'm not going to tax him. Yeah, but I mean, I don't know, to your point, like about the optimism thing, that's, you know, really what kind of catalyzed this conversation to start. You know, like I feel...
I'm a pretty anti-Doomer type of guy. Like I don't, I fall, I've been through that, you know, just as, as, as a young guy on this chapter, you're like been through those motions of coming in and being like thinking, Oh, I'm so smart. Everybody's so dumb, you know?
the feds factor these ideas that are really easy to nab onto and that just feel really sexy to to absorb in and then you know as you go through the motions you realize that the world's been more nuanced from that and then you know you go further down the rabbit hole and you realize that you know to your point like things things aren't always as good or bad as they seem um but at the same point like
if you just look at the people that are in the macro world these days or on Twitter, like it could not be more different from that. You know, there, there, there's always the next big scary boogeyman around the corner. And just curious, like, how do you guys.
personally manage those emotions um and also you know compared to when you see so many every day trying to you know just basically rile up this this fear and emotion as well i mean me personally i i just you know i i think you know this is where
It helps me an old fart where I've been doing this for a long time. When I came up the ranks a couple of months after starting at J.P. Morgan was the... the Russian ruble crisis and long-term capital management and all these horrific things that we hear about. dot com, housing, housing market, and just on and on and on. And then, you know, I think, you know, when zero hedge was spawned, I think that just like gave that.
constituency such a loud microphone to broadcast all these things about just conspiracies or misinformation and having seen it played out. play out i just honestly literally just ignore it and focus on the fact that in this country Hundreds of millions of people go to work every day and they're trying to do the best with their family. We have a government structure that is mostly okay with that and wants to just let people do their thing, live their life. And when the whole country is...
legally as well as culturally focused on economic growth, it's kind of hard to be, you know, it's kind of hard to be short America. It really is. And so I just focus on, you know, obviously there's challenges, there's always a challenge, there's always a problem popping up. But in the grand scheme of things, in the grand scheme of the size of this economy.
Most of these things really don't matter. They just don't. They matter for selling clicks and matter for selling headlines, but they really don't matter. What really matters is what I said is, you know. A lot of people go to work every day to try to provide for the best they can for their family. And that collective effort usually yields a pretty positive productive outcome. And so I just focus. That's why, you know, my.
My weekly or semi-weekly publication, Signal and Noise Filter, it just really tries to focus on growth and inflation because that's ultimately what we get paid on is growing and discounting that future growth back to the present. So for me, it's all about growth and inflation. And anything that doesn't really affect that is kind of just noise. It doesn't matter. My take on it is probably more of a life lesson.
I remember, so in 08, 07, we had a couple billion dollars worth of treasuries, or not treasuries, mortgage-backed tranches to sell for GE. We went out to New York to sell them at auction. We got hit with all our buybacks. We didn't sell any of it. We came back with twice as many, twice the book that we had gone out with. We went out the next month over this, I think just August, September, October.
So I knew, I knew the plumbing was broken, right? I mean, I knew it, you know, I still had an active trading account and it went, you know, it took three months. for this to actually get out. I mean, you can see the big short where Michael Burry is screaming and pounding on the drums because he knows he's right, but the market's not giving yet. It's not caving yet.
And then on the back side of that market, I got short. I made a lot of money. I started trading my own book really aggressively after the thing with GE blew up. When we started bouncing, I fought it. I was like, no, this is really bad. This is really systemic. This is this, this is this, this is this. And what I didn't realize was how much. the Fed and the Treasury and Obama were actually going to do to flood the market with cash to just stop this, to prevent the contagion from continuing to go.
And I think people, you can get locked into a view of negativity and be so convinced you're right. That you literally it's self-harm. You literally blow yourself up trying to prove that you're right. And I don't need to be right in trading. I need to make money.
You know, I mean, it's really simple. I tried a long this morning in ZB. The market didn't feel right. It didn't give me what I wanted. I bought some piece five sofa at the same time. The sofa, the short end has got a bid to it. I like that a lot. Long end proceeded to puke out a little bit more. So, you know what I mean? Okay, I'm out. You know, if my level doesn't work, I'm out. I don't need to have this golden.
belief system in myself that I'm some genius. I mean, if anything, I'm a pussy and I'm afraid of losing money. So I would much rather find a price level that works. find a narrative that's supported by what's going on around me and then add to a winning position over time. So you build into something that's got value. I mean, every now and then I'll take a shot.
you know buy a couple hundred right out of the gate but usually i'm i'm trying to work into something that's well thought out and that's usually based around A long process flow where I rethink ideas, where I look for David's opinion. I read some other guys on Twitter that might have some input. I talk to... business owners, I talk to friends, I talk to old traders, and I try to formulate an opinion that gets me on the right side of the trap. And then if that doesn't work, I'm out.
I mean, I think people are afraid of being wrong. And I think they don't want to admit they're wrong. That's probably a better way to say it. You're so much better as a trader just saying, you know what? I was fucking wrong. I am out. Yeah. You know, I will. And not only that. I just got direct feedback on why my position's wrong. And maybe I should be considering changing my position and my mindset because I just got that direct feedback. I mean, your P&L can really...
show you a lot about where you're thinking. I'm curious, like, after going through that in 08, how you traded 2020, March 2020, because as somebody who for me, that was my first, you know.
big crash and you know to go down and then you we start to recover and you get you know qe infinity and those sort of things and you see the talk of oh it's a dead cat bounce you know look at this fractal of 1929 and i felt plight for that for the beginning i managed to flip my bias fortunately in time but i could feel it as it was starting to occur and then i was like okay wait you know the game has changed but i'm curious like how did you
And also, David, if you have anything to add as well to that. I mean, for me, it was really simple. They came for the market hard in 08. The Fed did everything they could do possibly to prevent that from happening. they refined everything, they refined the back end of the financial plumbing system.
They had their little spooky window in 2018, 2019, when there was this credit crunch that Conx was talking about this morning, starting to formulate it year-end. That immediately changed their positions. and the media became accommodative. Silicon Valley Bank was another example. So when COVID hit, I knew instantly. that there was going to be a huge rush to stabilize and provide a backstop for support. I mean, this has been going on since 1987. I don't know if there's any truth to the rumors.
But I've heard plenty of rumors that the Fed was buying bonds on that day. And were they? I don't know. Was the Fed buying S&Ps that day? I don't know. I have no proof to support it. But they've sure been doing it since.
They've been buying corporate credit. We know that for sure. Yeah, and they're buying mortgage-backed securities, and they're flooding the market with capital, and they're making sure liquidity has not become a crisis point that triggers additional liquidations. I went into 2020 kind of with the... Again, Donnie's a true trader. I'm like a piker, Donnie. I also have just different interests. And going into 2020, what stuck with me was...
how horrible the prior decade was for the labor market and how it took. We didn't recover the pre-global financial crisis levels of employment until... late 2019, I think it was. It was like a lost decade. And then, you know, you started hearing stories like, you know, hollowed out communities, manufacturing going abroad. You know, suicides by young males just skyrocketing. You know, male unemployment under whatever age was horrific. Just a lot of bad econ, social.
stats that were bad that we finally kind of got over by late 2019 and all of a sudden we're staring down the this barrel of like oh god not again and then when the government started floating around these um Stimulus packages. I was like, holy God, this is World War II style. The federal government basically said.
We are not going to have it again. It doesn't matter. We're going to throw the kitchen sink at the problem, and we're not going to have a repeat of that lost decade. We're not going to do this again. Unlike the GFC, government efforts were really... focus on propping up the financial system and you know the economy would figure itself out would figure itself out and the economy did probably it took a decade and and so i think the government had kind of a
You know, they had a mandate of not letting this happen again. And like I said, these stimulus packages, I think all in were about 20% of GDP. We haven't spent that much money since World War II. At that point, I'm like, they're going to cram money down people's throats if they have to and get them to spend it.
And for me, that was the game changer. It was really those it was those two things. There was a public appetite to not repeat the post GFC labor market. And that would provide the political support. for these big stimulus programs. And once you had the political support, then that stimulus would come gushing out and flood the economy with money. And from there, the boom was born. And both of them did it too. I mean, Trump started it.
Exactly. That was bipartisan. 100%. 100%. And the money drops, I mean, it was insane. It was crazy. And obviously there's always second and third order effects. Some of them good, some of them bad. We're still dealing with the inflation. But that was the game changer for me was really understanding. Just that effect. For 2008, I was a lot less experienced. But for me, the game changer was, I think it was March 9th.
2000, 2000, 2000. God, I forgot what year. When the S&P, Donnie, when did the S&P bottom? What year? 2009? Yeah. It was 2009, right? Yep. The US Congress rewrote the rules for banks to not mark-to-mark their bond holdings, especially the stuff that had garbage in it. And the day that passed is the day that the S&P 500 bottomed. And right there was my kind of like, this could be it. This is it. This could be it. I mean, I will not claim.
that I traded that and made money off that and went all in on that day. I didn't, I didn't, but. To me, that was kind of like the light at the end of the tunnel. Maybe this is it. Maybe we can have a bounce here and sustain that bounce and keep going. And that's, in fact, what happened was it was that. So understanding kind of for me, Donnie is very much a trader price guy. I'm kind of more of a, you know, wonky dork. And.
I was looking at the change in the laws and the regulations, and I was like, all right, they've changed. They rewrote the book. They rewrote the rules, and now whatever the problem is, they've just legislated it away. So that to me was a turning point. So it was the same kind of approach to 2020 of like, all right, what's the problem?
And what are the, what are the, what's being written to deal with the problem and, and, and will it get to the core of the problem? And if it does, then, then we, then the balance will stick. And that, that framework seems to, seems to work for me at least. Right. And so now I think one of the funniest things about optimism, if you look at inflation expectation surveys by party.
That just happened after the Trump election. They literally just went, right? I mean, what changed? Nothing. Right? We've got a new president. Okay, cool. Do we know any of his policies? No, we know his rhetoric from his campaign speeches. But immediately, inflation is no longer an issue and I'm an optimist versus, oh shit, the world's over, we're all going to die. Those are two things that a trader can take advantage of, but two things a trader should never.
jump into and make it a core belief, right? I mean, I am in this for me. You know, I don't wish doom and gloom on anyone. I don't want a market crash. But I'm a better trader in a bear market. just because I've traded more of them. You know what I mean? So I'm not afraid to hit a bid. And then we've got this totally different cycle. I mean, if you buy the ES...
If you buy the ES in 1987, if you buy the Spooze in 1987, you're doing really well if you just bought it and hold it, right? Because they constantly add profitable companies and they get rid of the garbage. And it's designed to go up. It's a really smart momentum index. It's really what it is. Yeah. And if you want to trade and speculate.
That's great. You can try to pick a top or a bottom in the S&P 500. But if you really want to be a trader, trade commodities, trade bonds, trade something that... is pretty much going to be a range bound object. It may, it may be a 40 year range. It may be a 40 year cycle, but you know, you can pretty much get an idea when people are off sides.
You should just be investing in the schools, you know, for the most part. You guys both mostly focus on bond futures. And yes, I'm curious, like if you had to pick one of the two that you could only trade, which one would you choose? Depends on if we're in Zerp or not. Right? I mean, if we're in Zurb, there's no vol. Now you gotta... So that's actually really interesting on the floor. It's the reason I left the floor.
We started going to half ticks. And then there was talk about 10th ticks. And then there was talk about computerized trading. And then there was talk about counterparty risk. And I mean, I was on probable cause. I was on floor practices. I was on pit committee. I mean, I worked for a board of governor for a long time. I mean, I, I was in these meetings and back then I was.
one of the larger traders in the third and fourth month euros. And I knew all the, I knew all the brokerage groups. I knew all the guys on the desks because I had clerked for years and I literally sat in a meeting and the Merc was like, we're going to have ticks. And I was like, they're going to get rid of the floor. It's just a matter of time. Floor traders are done. And the reason for that is because.
Let's say I go into an unemployment report and the broker that gives me favorable trades during the week, he looks to me instead of other people because I'm making a market for him. Well, he's going to be looking at me on unemployment to make him a market, right? So I might have to eat some shit along the way to continue this process. But if you just cut my tick size into quarters, my risk is the same.
but it's not as profitable. I can't flip it a tick. I can flip it a quarter of a tick, maybe a half of a tick. So if I'm taking a thousand lot in a slow, quiet market, And I did it right. I bought it right. I got the level. I'm in. I got support behind me. I can see orders around me. I know I'm in even bid. And there's another 2,000 bid at even. I'm offering at one.
Well, now I'm offering it a quarter. But if that market goes against me, it's not going to trade in quarter points. It's going to go right to the dollar, right to the next tick, right to the next tick. So I'm basically cutting my profitability when my risk remains the same.
And if the market's less volatile, I have to trade larger sides to be as potentially as profitable on that trade. Or I have to shift my style entirely, which is what I ended up having to do over the long run when I left the floor. which took a long time to learn how to do that from trading size for a small profit or for a small incremental change, I should say. Whereas now I'll trade a 10th of what I traded on the floor and volume wise.
But I'm looking for 10x, the point move that I was looking for on the floor. So if we go back to a ZERP environment, I mean, I would probably revert to trading ES more. If I have... If I have a choppy, active Federal Reserve, there's no better in the market. No better market in the world than trading stock. And if you really want to be a D-gen, you can trade Bitcoin or you can trade crude.
Because those are the other crazy markets, right? I mean, for me, it's just bonds, fixed income. That speaks to what I'm comfortable with. Yeah, I don't have a lot of... short-term trading edge. And I prefer, you know, the bond market moves slowly. I mean, obviously you have quick moves like yesterday, right? for the most part, the bond market moves pretty slowly. And it's kind of contemplative. And that's kind of just fits my personality. I'm kind of a, you know, I'm not a, you know.
shoot from the gut kind of person. I kind of just sit there and think things through, go on walks a lot, think about things, go on bike rides, think about things. And the bond market kind of gives me the, it's kind of my preferred habitat. It's where I like to be. That's my place. Yeah. You know, if you're trading in STIR, if you're trading in SOFR, you can take rate expectations and extrapolate it out into price, right? I mean, it's quarter point price moves in the Fed funds rate.
So, you know, if it's straight in, you know, 95-90, or if it's straight in, let's say it's straight in 96 even, right? If you're going to lean towards a cut, you know... you're gonna see a trade into the 87 range, right? And then you get the cut and then it goes to 75. So you can kind of see how the market's leaning just by looking at price action.
Just seeing where it's priced out, you can see what the market thinks. And then you can back into that in overnight interest rate swaps. And then you can also take a look at the curve itself and in its entirety. So you can zoom out, you can zoom in, you can give it a counterparty risk theory. You can look at what the big dogs are doing. And then you just read what the treasury guys are saying.
And they talk so much. It's great. They literally talk too much. It's perfect. They really do. Yeah. No shortage of that these days. Cool. Well, I want to wrap up this conversation by just getting how each of you are thinking about this first quarter going into next year. So, you know, the way I'm seeing.
happened yesterday with the fmc meeting and okay you know january has been a pause and price like that for quite a while and it's all but confirmed now no meeting in february sort of feels like we're in this interesting little pocket here until march until any sort of meaningful change so i'm curious how you're both thinking about
that context as we head into the holidays here. And then the first quarter next year, I think we're going to get what three, we're going to get three sets of inflation data before the next step when we see meeting, we're going to get three jobs reports, maybe four. So we're going to have a lot of data to roll into. I would say that I have no idea what Trump's going to do versus what he campaigned on. So we need to see what the first 100 days looks like there.
that's going to be a real interesting moment in time. We're going to get 100 days of the first new presidency. We're going to get three to four cycles of jobs and inflation data. We'll get a lot more clarity. I would say with the bonds and the sofa market being sold to these levels now. That there is probably more risk to a surprise upside move off of a weakening in jobs and data or a change in unemployment. But I don't see those things happening.
So I almost expect we trade sideways for a little bit here. Not so much on a risk, but more along the lines of the economy and bonds. I think the thing with the labor market, even though it's great and strong, it's always on the precipice. It's always a very thin line. So what do I mean by that? Right now, we're at 4.2 rounded. Unrounded, we're just shy of 4.3. The Fed's comfort zone is 4.4. We can go from being kind of on paper really strong to all of a sudden.
the Fed is once again, you know, behind the labor market curve. And that can happen in the space of one or two meetings really quick. So, you know, my thinking is non-farm payrolls, they've been strong, but they've been weakening. And we're pretty close to being below the rate at which we need to be adding jobs to keep unemployment steady, the U3 rate steady.
And if that falters, it can go from strong labor market to weakening labor market really, really fast. And that creates a lot of risk to the broader economy. While the labor market is strong, I think it's a thin line that separates it, and the feds will be very attuned to that because, especially Powell is –
You mentioned – I think Donnie mentioned he gave a pretty shitty presser yesterday. He had some egg on his face. He had some inflationary egg on his face. He obviously – he probably would have wanted to be anywhere but there on that yesterday explaining why inflation was – why they were raising their – their e-targets for next year. I mean, that must be like hell on earth for him. I hope he went home and had a couple of drinks. But despite the little inflationary, I got another phase.
they're still very focused on the labor market, and that can change really quick. So my thinking is now with the hawkishness, this new kind of, you know, this hawkish rhetoric and communicating a pause. ironically, that opens the door for more cuts. So I think, you know, right now, market's priced for two.
I think that could shift on a dime really quick. And when the market, as we saw yesterday, when the market reprices, it doesn't stop and ask questions. It just gets it done. So that's kind of more broadly speaking what supports, you know. Donnie the traitor, he's probably looking at me and saying, man, DC's crazy holding on to this tenure note contract.
But that's kind of what I'm thinking is, ironically, that trade just got more supported, I think, in the intermediate term with a more hawkish Fed because that will, like I said, raise the risks on the layer market, which will reprice everything. Yeah, I mean, shit, like the unemployment rate forecast for 25 is what, 4.3 and we're at 4.2 right now. Like the bar is way lower now. So I totally agree. We're at 4.2, like something. Yeah, yeah.
So it's really three decimals out and it's a thin line. Yeah, I think it's just about navigating from here until we get to that point of deterioration where I'm trying to figure out like, yeah, just how to get to that point. But it does seem clear that the... counterintuitively there's actually a higher likelihood of more cuts next year than what was even priced a couple days ago well it's just not priced in yeah right i mean we just took that out so
Now it's okay. How bad does it have to get for us to go higher end rate? Well, that and the other thing I'm watching too is the housing market. The housing market is a complete disaster from the sales standpoint. Construction employment is still up. But once construction employment flips, that's... That's a problem. And, you know, with mortgage rates, just, you know, ask anyone who's house shopping right now. It's just, it's just, it's awful out there to try to get a mortgage.
And you'll get one, but you'll pay a lot for it. And so that's going to keep a lid on housing construction employment. I think the question really there is, you know. down by how much and by when it's that's that's that's really the issue there and you know once that happens then yeah it's a different ball game but for now housing construction employment is still strong so we're okay for now but
Yeah. And you know what? We're just going to get rid of a federal budget and we're just going to get rid of all that deficit ceiling stuff. And we're just going to, we're going to just keep stimming our way out of this baby. You know, I just found that hysterical that he asked for that this morning.
I want to cut taxes. I want to raise tariffs and I want to dig baby drill, baby drill. And oh yeah, I don't want a deficit. I don't want a debt ceiling problem either. I would say that for me to get bears, the spooze. I would need to see fiscal restraint. And I don't think we're going to see that for a while. That would be my risk off in indices in that market sector would be, hey, we're really serious about fixing the debt. Totally.
And I think to your point, like the Doge thing is more just like meat for the base versus any sort of substantive move. Like if you look at what they could actually cut versus like what needs congressional approval, like it's not going to move the marker. No, no, no, no. That's just optics. And I get it. You know, I mean, he literally said I got elected because of inflationary data. I got elected again because of groceries. You know, and I'm...
I'm weird. I got super right-wing friends. I got super lefty friends. I'm pretty much in the middle. I'm a trader. I don't really fall in love with either of these groups. You know, I'd like to see a responsible government. But, you know. like we said, with the sentiment charts on inflation data with a new incoming president. We'll just have to see how it shakes out. But the good news is it'll be tradable, right? I mean, we...
How and when do you make money being long the DS5 sofa is my focus for the new year? Well, look, guys, that was a ton of fun. We'll have to do this again sometime. I really enjoyed that, but cool to just chop it up. And next time we do it, Donnie, I think you need to send us beers from your brewery so we can showcase them. I will do that. And we'll have to do like a four o'clock meeting instead of a one o'clock meeting.
Yeah, we'll have David's sub stack in the link. But, you know, next time instead, you can just send us beers from your brewery and we'll just have them. Yeah, shown right there as well. I think that's, I don't know if I can send your, you're up in Vancouver, right? I don't know if I can send beers across the government. I'm just going to have to try and make the trip. There you go. Chicago is beautiful in the summer. Yeah. Cool. Yeah. All right. Well, yeah.
Happy holidays, guys. Wish you both a Merry Christmas, Happy New Year, or Kwanzaa, or whatever it is that you – or Happy Hanukkah, whatever you celebrate. I wish you all the best and the best for next year as well. Thank you. Thank you, everybody. Cheers. Looking for a blockchain that combines high performance with zero headaches? Scale is your answer. With its advanced parallel processing and modular sharding.
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