Boaz Weinstein on Investors' Unknown Risk

suggest as a interviewee? That was easy. I said, we just did this interview with Boaz six months ago. Everybody seemed to really like it. He's very much an outside the box sninker. Covers everything from credit derivatives, two spacks, two stocks, and bonds, but from an unusual perspective, not your typical investor. For for example, he's been an investor in spacks because he looks at it as a guaranteed uh fixed income return in a in a time of

zero with potential upside. Uh. So he's done that really really successful. He's one of the five largest spack investors in the world. He's the person in case you don't know who boas Weinstein is of Saba Capital. He's the person who made the bet against the London whale and then went to uh JP Morgan Chase and presented at one of their conferences and said, by the way, you guys, you have this person in London that's sucking up all of the energy options. It's a wildly lopsided bet and

it's gonna blow up. Oh nps, I've bet against him and lo and behold when the London whale blows up. Six months later, Saba Capital nets three or four hundred million dollars on the trade. Just an amazing story and incredible ability to look at risk and figure out when it's a fair bet or when it's an asymmetrical bet, where hey, if we lose, we lose a little bit, but if we win, it's a giant home run. Uh So, he's really an intriguing person. We did the interview at

the Bloomberg invest conference. So when you hear the audio of this, it's a live event. You'll hear the you'll hear the audience, You'll hear um people rustling papers. It's not the usual. Hey, we're in a studio that's pristine and you don't hear anything other than the two of us speaking and breathing. Uh. So this was a live event, but it was so well received and it was so interesting, and he just is such a fascinating investor. We thought

it would be perfect, uh for the holiday weekend. So, with no further ado, here is my live interview with Sabbath Capitals Boas Weinstein at the Bloomberg invest Live Conference. So this is the first time I'm wearing a suit and tie, and I don't know how long. Um, and I'm dead. He didn't tell me about the tie, sorry, guys. So, um, so we previously had a conversation. Um was it earlier this year? Last year? I can't even tell anymore. And there were a lot of really interesting things that that

came up. I think this audience would love to hear an update on what's happened since then. But but I have to start by asking. You were a highly ranked chess player as a young kid. You have your reputation as a killer poker player and a dangerous blackjack player. These involve making probabilistic assessments about an inherently unknowable future. Um, seems like you've been setting yourself up for tail risk

and derivatives and trading since you were a kid. You're giving me a lot of credit for having planned everything since I was I I think the only tail risk I was thinking about when I was five was was pinned the tail on the donkey to be to be quite honest, So you know, really I am. I enjoy games of strategy, and it turns out that Wall Street is the ultimate puzzle and challenge and and so. Yeah. So I've been working on Wall Street since I was fifteen, and I think, um, at a young age, I've already

seen a lot. So let's let's talk about what's going on right now. We've discussed and you've brought up how different this bear market has been from from recent bear markets. What are the similarities, what are the differences? What makes so unique? Yeah, So when you think about not only what's happened, but even the investor behavior that it that it um in genders um A lot of the tail events that I've lived through. I was trading while nine eleven happened. I was at the New York Fed the

weekend that Lehman was failing. A lot of those events, not all of them, but a lot of them were bolts from the blue COVID. You kind of had a month from when people knew is a thing before the market started falling, But they were bolts from the blue, and if you had not done anything about it, you had plenty of air cover to say, who who knew? Who knew this would happen? What could I have done

in advance? Whereas this one has been so telegraphed when it at least the initial part of it about inflation being transitory and then transitory, and then transitory and then not transitory, So there was a lot of time to get worried and very little places to hide to say, um, you know, it was not reasonable to have thought, what if this forty year bowl market in bonds not only

comes to an end but does a sharp reversal. Those were things that we and other managers we're talking about, where the the sixty forty plans that we're using treasuries as there, you know, as their antidote to a sell off. It turns out the treasuries were the poison, and so you know, this is this has been different in that respect. It's also been different because you have so many different problems swirling around some of them in conflict with each other,

so solve one at the expense of the other. And then the number of new things showing up, whether it's you know, um maybe untoward rumors about credit sweets or what's happening in the u K. Guilt market, um is, it just makes the number of balls in the air enormous in terms of things non unknowns that could really cause more than a sell off, but more like a crash. So so let's talk about that. You've discussed multiple problems

and multiple areas taking place at the same time. How do you distinguish between what's a genuine risk, what's unknown risk, and what's truly an unknown unknown? So usually you have your your known unknown like something is bad, we just don't know how bad, and you can respond to it. So, you know, nine eleven happens, it's not a good time to buy airline stocks. You know, COVID happens, not a

good time to buy airline stocks. Oh eight happens. Probably you should de risk from financials, even like the moment after it happened. And here you just don't know exactly what to do. So normally, for example, European investment grade trades five basis points lower than US investment grade. Now it trades thirty basis points higher, twenty five basis points higher.

Is that enough Europe is going to have a much more severe recession according to those that that that motificate and uh, And so whether or not you underweight or overweight Europe is all about what do you think happens with with Ukraine? Does it? Is there a chance it

gets asymmetric? What can be done to mitigate? And then at the same time you have these other theaters, whether it's zero COVID policy in China maybe extending well past the party congress um, continuing to cause disruption in the economy. So so really what's happened is people just feel risk all over. They felt it now for ten months, and they're de risking the things that are in their book. And that has led to some things that are I don't view as particularly risky blowing out as much as

things that I do view as risky. And that's that's created some interesting distortions, interesting opportunities. So let's talk about those opportunities. What has been overly d risks, What are are looking attractive after investors throw the baby out with the bath water, right, So not knowing where to focus your arrows and instead of focusing on de risking and the comments that Jamie Diamond made about bracing for a hurricane and another sea Yo said bracing for a tornado,

and someone else mentioned some other weather weather disaster. You know, like, what do they actually mean when they do that? How do they actually brace other than like, you know, other than a physical brace. What are they doing? They're a bank, they have loans. They go to their loan portfolio hedging group and they say, please increase the amount of hedging.

So what does the bank do. It looks at the loans that it's made, often to the best companies in America or in the world, and d risks where the risk is. And so we did a number of trades with banks where they're coming to us to say, in the middle of all this, we want to buy protection on Coca Cola, on Johnson Johnson, on Home deepo, Walmart, you know, a T and T, Verizon, these big companies that have a lot of dat outstanding in terms of revolvers and and not relative to their their balance sheet,

but but relative to just the quantity of debt. And so there are a bunch of names. In fact, I think everyone I mentioned where if you look at where it is today, it's above the worst day of COVID. So those names that are not even candidates for discuss us and about could the run into trouble as credits are above their worst day of COVID, whereas the index that they sit in UM is only trading at two thirds of the worst day of COVID. Why would those

names be worse? Why would they be at the wide the widest levels and the average be only a two thirds. It's because of this technical in the market. And I think technicals are the biggest force in the credit market now, much more than fundamentals, much more than any time in my career, where if somebody has something to do, which is to buy billions of dollars of Verizon one year or two year CDs, that's going to move the price to levels that just doesn't make sense from a fundamental

point of view. And so what we've been doing is going along those names, selling that insurance to fund protection on companies with a history of blowing out if actually there is a real recession or some other kind of crisis and UM and so that that would be found usually in consumer finance companies, UM, economically sensitive company cyclicals,

steel shipping, paper and UM. And so we've found it very interesting in the middle of this this problem to be able to find attractive long short trades because of the technical distortion. So so are you looking at the fundamentals of these equities? Are you looking at the technicals of how they're trading, or you looking at the credit spreads and saying, hey, people away too frightened beyond what

they should be. Yeah. So we, probably more than most on the credit side, do look at equities for clues. And sometimes there is one market above faster or slower than the other. But we're we're sourcing the tail protection that we provide our investors, which is one of the main things we do UM through the credit market. And we'll get to that, I'm sure. And we're paying for it because there are many investors that want it paid for.

They don't want to just bleed the negative carry through Some of these I view as ultra low risk trades in verising or Coca cola. Do we want to get more specific? Is it strictly an equity bed or is it equity combined with some derivative how you put intogether these paired traits. So you could look at the history and first you could use common sense and say, is this the kind of company that could run into trouble?

Is it not? And and the price is not efficient um compared to the past, where fundamentals were the biggest driver. We're looking at the credit a little bit about the fundamentals, but the fundamentals are sort of not in question. On the long side, it's really have these served us well and investor as well as tail hedges in the past. We look at oh eight and two thousand twenty, two thousand and twelve and say, is this the kind of company that regularly blows out from a hundred basis points

to foreigner basis points? Um. Take General Motors for example, they defaulted you know, eight problems with the U A W behind them. They've still been enormously vulable as a credit, as a as a as a company super exposed to the U. S economy and the global economy and the pressures. The credit in two thousand twenty went from a hundred to seven hundred back to a hundred, and it's had that of roller coaster, and so we look at and said that's a really volatile credit and when it's low,

that's really asymmetric. You could buy protection and if things change, it might move out a lot. Right now it's at two fifty. It has moved out a lot more than the index. And so we're looking at at like at histories to give us a clue. We're looking at forward looking UM models, equity voll Um fundamentals. But what we're at the end also doing. I should make sure I say this is we're providing liquidity to the banks that needed. And if they come and say they want to buy

protection on PEPSI or LVMH or Nestley, that's amazing. You've now given me UM the the ammunition I needed to go and fund protection on companies that really may run into trouble. So so let's talk a little bit about history. You mentioned away, Uh, we can also mention two thousand in the same sentence, UH, that we're fairly rapid and disorderly dislocations maybe might be the exception, and this you've described as sort of a slow motion implosion, and yet

it's still been very orderly. What makes this year so unusual compared to UM previous collapses that really seemed to to make a bottom and snap back pretty abruptly. Yeah. So so first, um, there's the market is still trying to figure out what it should most worry about. Uh and and so you know, it's like just when you think something, maybe we're at peak inflation, past us, maybe um, the supply chain problems are coming down, but then you have new things. And so there's just been this this um,

this sell off that continues to find new rationale. And then you have the FED um leaning on the market. Actually, and when when Powell sounded too devish, you know, first all of his peers came out to say, no, no, you know, the market we're gonna keep going. And they've

continued to say that, Kashkari most recently. So, so you have the FED kind of um intent on showing that they mean what they say and uh and so and it probably liking that the market is going down on an orderly way, even if it's created some disorder in

other markets. Look what's happening in the UK. And so I'm used to and we're we're all used to sell offs that are fairly quick that we know, even though eight was five or six months from Lehman to the lows of March oh nine, where at the end of it you can kind of wonder, is there an all clear sign? We have the Fed behind us quantitative easing.

Now we don't really know who the savior is because at the end of all of this, we're it's still going to have quantitative tightening and shrinking the balance sheet, and so whereas a lot of sell offs, we're just a prelude to a to a bowl market one or six months later. You know, this has the feeling to me like we're going to be worried about some number of these things or new things for potentially quarters and maybe even years to come. So no capitulation yet no

flush which gives us that all clear signal. How much of that is based on truly not knowing what the Fed is gonna do or is it We don't know which potential problem is real and which is fake news. I these things are so hard to predict. I even want to be cautious about, you know, um opining too much because it's just such a confusing market and there hasn't been a single thing to say, Okay, this is why the market is not enough. It should be forty.

Let's take inflation. If if you look at UM forward inflation, it's expected to come down a lot. So you could look at tomorrow's CPI print if it comes in a tent or below or high, and get excited about it. But the market is still telling you inflation is not going to be the problem that it is one year from now. Now. If a few months from now that conviction is shaken, then we're gonna have a real strong sell off. If somehow Russia haven't forbid becomes more asymmetric,

we're gonna have a real problem. And so we just don't know. We're in a fog, and we should not rely on the lessons that people learn, maybe incorrectly for this environment that we're good between oh eight and twenty and two thousand twenty two, which was UM the Fed is your put, don't fight the Fed, and UM dips should all be bought, and UH being short is is

fighting the Fed. You know this, this really UH does not feel like that environment in particular because of where the central banks are versus then so, but the one lesson that should carry through sounds like continue not to fighting the Fed when the Fed reverses their position I'm glad you said that, Barry, because because about nine years ago I had a prospective investor in my office where Long Invall funds. One of our main products is long volatility.

And I don't know if he didn't quite know that, because he kind of wagged his finger at me and said, didn't you know It's like, Sonny, didn't someone ever tell you don't fight the Fed just to be long volatility? When Mario drag said, trust me, I'll do whatever it takes.

That's a and uh and that. But that that psychology of don't fight the Fed, don't be short is, in my opinion, a lazy person's way of saying, let's always belong Because if you if that person were around today, I don't exactly remember who even was to to make that call back, I'd say, if you really believe and don't fight the Fed, how much of your risk did did you take down when the Fed said that they really meant business and we're going to be selling ussets

for years to come, and plus all of these problems that when you add up the number of problems in different theaters, I I can't think of a corollary that you know, it's it's to me, it does feel worse in many respects than than any other experience in the market I've haund So you hinted at UK guilt and what's going on over in London. Um, the strength of the dollar is another factor. How do you think about

those when you're considering tail risk and volatility. So we're not experts in UH in foreign exchange, but I look at the guilt market, for example, and you see, like the UK half a percent bond of two thousand sixty one. Somebody you know in two one bought a four to year bond that was gonna pay not someone, a lot of people, It's gonna pay half a percent a year

for forty years. And at the end of all that, the most you could possibly make was half a percent times forty minus some inflation and UH and that's so that would be twenty points without discounting. Without inflation, the things down seventy three points. So when you when you think about boundary conditions, you know, and I what I like to do and in the dirt of markets is look at boundary conditions to say how much can I make, how much can I lose? And where is there semisymmetry.

And by the way, we were not sure at any any UK bonds to be clear, but there are a lot of trades that looked like this kind of I can only lose a little bit, but just in case it's not transitory, or just in case there's an unknown known that is really problematic, you might be able to make eight to ten or twenty times what you might have lost and to see this move and it may continue of higher rates, whether it's the U S or Europe, where the investor loses three or four times what they

could possibly make at the end of the day with bonds. I think it it reminds me of how investors don't really think about um fixed income and equities in the way that that I do, which is, you know, equities gives you this unbounded upside. It could be Tesla, it could it could be uh, it could be uh Faraday Future or Fisker. But you know your your minus a hundred and your plus twenty and and that's and that's

the range. But in fixed income often there's so little to earn that when I see my peers talk about high yield at five percent is amazing because it used to be a three percent. I feel like, wait a second, how many defaults do we expect this year? There's a lot of companies in that index that are going to

run into trouble. So what are we really how excited can we really get just because high yield is you know, has widened by two percentage points and so so I think fixed income can end up effectively being an option, but people don't look at it as an option, and I view it often as asymmetric, as an asymmetric short. And that's one of the guiding principles of our tailheade strategy. So so let's talk about another UM credit related issue.

A couple of weekends ago, people were talking about the winding credit defaults on Credit Swiss um and surprisingly you came out and said, everybody, catch your breath. Credit Swiss isn't isn't Lehman brothers. Just look it at various ratios. What made that so attractive to shorts and and what led you to the conclusion that Credit Swiss was more or less Okay? Yeah, I didn't start out thinking I

want to say something public. I basically have zero Twitter followers before this, and then all of a sudden, Um, you know, it became a thing. I noticed that people with hundreds of thousands of followers were saying credit swite spreads are out their decade high. It's an imminent bankruptcy. UH,

imminent default according to secret sources. And when you see like people with a hundred followers thing that find but we have kind of at the same time almost this you could almost read that it was the same person sending it from accounts or team with with hundreds of thousands of followers, that this sounds like scare mongering. It sounds like someone trying to make something of about it.

And well, what do I know. I know that this quote it's at decade a decade high, you know, can be used as fake news to say therefore it's going to default. But if you look at the spread at the time, the five year credit spread of cs was two and a half percent. Now, if it defaulted back to our boundary conditions, it could go to zero, it could go to fifty. It would be like two and a half to lose or make to make or lose fifty to a hundred. It's still priced like to one right,

um and UH low probability, very low probability. But it's discussed as something that's about to happen, and so I kind of took offense to it. I I'm supposed to know a thing or two about CDs, so I wrote a little bit about it, and then I posted, um, Coca Cola, by the way, also at decade high is

better stock up on Coca Cola? And we had, you know, articles come out saying that I was saying Coca Cola they go to business, which you know, reminded me about sarcasm and how it doesn't necessarily translate to to at least some of the users. But this point of you know,

some things at a decade widest level there for a crisis. Um, I I just I felt took offense to it, and I UM, I don't have any special connection to Credit Suite, but I felt like weighing in and and so far Credit Swiss still hanging around right has has yet to default. I did get some very nice messages from the fine folk a Credit Suite. So yeah, so since we're talking about tail risks, let's talk a little bit about that and hedges. Um, why have equity puts or vixed calls

so disappointed this year? As insurance that's that's a brutal question actually, because there are people, you know. It's like if you say, look, I didn't study hard for the test. I didn't do on the test. Okay, Mom, dad, whatever, study harder. But when you when you study hard and you say I'm gonna be prudent, I'm gonna buy tell protection. I was there, I was there in January to buy it, and then it doesn't work. It's like, you know, it's a it's tailhedges have to be reliable because they serve

a greater purpose. It's not just how did this manager do unto themselves, it's I was counting on this tailhedge to do to do me some great service in my portfolio. And I think the real interesting thing is that the the VIX is cited all the time as the barometer of fear. Well, so I remember and probably many of you remember that in the period let's say we even talked about there was a single digit day for the VIX, it went below ten. It was often between ten and

twelve in good times. But something happened after two thousand twenty, which is, you know, we had COVID and that enormous volatility. It actually destroyed the people picking up Nichols in front of the steam roller a k. The short volatility crowd. They were no longer there after March UM and then came a new breed of investor that love to buy options, UM, whether it was options on meme stocks, and you saw

the volatilities go nuts there. Soft Bank set up a unit to buy options on short you know, on tech stocks, and culturally I think in this country, UM. On the investing side, things became fast. Think about you know when someone when your friend, because it wasn't me, would you would tell you that, um, some n f T went up by x and you'd say ten X, I would like one X in five years. I'd be really excited about that. And everything became fast, and options are way

to get there fast. So the long winded way to say, when we came into two thousand twenty two, the VIX, by prior measures was already at a forelarmed fire, we were at like twenty two to twenty eight on the VIX and that kind of number would have been a bear market the prior decade. But um, but we were at the peak for the SMP. So that so tail protection through equity options was incredibly expensive and it has

served investors very poorly. Whereas credit spreads came into the year near the lows that they were pre COVID, they've widened and they've done their job, even if there's still a lot of widening potentially to come. So let's dive a little deeper into that. So the end of people market and the VIX very very high. So how are investors supposed to put two and two together? What? What

did that signify? It meant that if you said I'm going to spend a certain amount of premium, like you think about with your car insurance or home insurance, Say I have this much premium, I'm gonna buy it, put struck five percent out of the money or ten percent of the money if I'm right, If this insurance was good to buy, what kind of payoff profile would I get? And you were getting nothing like you would get, not

just pre COVID. But you know, over the past let's say twenty years, you were getting pretty miserable payouts for for a blowe market. When times are rough and vall is high, you understand why you have to pay a lot. But but coming into this year, um volved was stubbornly high,

and so equity options were extremely expensive. We did a webinar for our clients where we showed that basically across assets, Bank Bank America put out some neat research that had the SNP and the NASTAC has literally, out of fifty assets, the two worst you could get interesting payouts from. And so those things are not necessarily undecipherable. But credit. In every sell off, credit has blown out. Whether it's the

credit crisis, of course, but even the flash crash. I I remember being surprised that the flash I was trading during the flash crash made two ten. Maybe I'll get the date wrong by a little bit and uh. And credit spreads because of a glitch on the New York Stock Exchange moved that day almost as much as they did the day of nine eleven. So credit is an option. This low spread thing can move a lot. You can get an option like pay out being short or be

exposed to the loss being long. Um and it is in my view of much more reliable tailhage that's been backed up in in academic research and UM and it also stands to reason that UM, you know, the credit is an option, whether you look at it a Merton model or you just think about I'm taking this little spread in return for exposing myself to a wider credit

spread environment or defaults. And this is um. Uh, this is why I feel very fortunate that my sandbox where I grew up in the credit sort of market, you know, is UM is a really viable forum for tail edging. So so I have a last question before we go to audience questions in the last few minutes. Um, given where we are, how wide have um credit spreads gone? And if the put side wasn't attractive on equities at the top of the market, how does the call side

look on equities today? Um? So the so credit spreads today are like in in absolute terms there slightly elevated. Like let's say it this way. Remember December two thousand eighteen. Uh, Trump and she were having a skirmish. The Fed was you know, being uh it was was was being tough on the market while while growth was was faltering. That seems like a walk in the park compared to now. And credit spreads then were roughly the same as they are today. So so maybe they shouldn't have been that

wide then, or maybe they're too low now. But but spreads now are elevated, but in my view, nowhere near Um what what the risks the hidden risks and observed drisks are are in the marketplace now? Um In terms of call options, you know, Um, there's moments where credit falls enough that it isn't asymmetric, that it's symmetric, or it looks like if you locked it away in a box,

you're gonna get a high return compared to defaults. We're not near that yet, and I still believe equities are much more attractive long even though there's going to be this sort of technical of people looking with loving eyes at a you know, five percent yield or six percent yield, and you can find in some investment grade corporates seven or eight percent yields if you go out far enough on the curve and um, and so there will be probably some people saying, I want the certainty of that yield,

but um, you know, but that also comes with plenty of interest rate risk, to say the very least. All Right, a couple of questions from the audience, starting with where do you see the largest realignments of capital coming in the next five to ten years. I don't know if that's really your sort of question. But I don't even know what's gonna happen in the next five months, so so five years with with with respect, I am I really,

I really don't know. But what I do believe is that the QT world, when all this is behind us, there's still a giant balance sheet, there's a head wind to the market is going to be really brutal for investors that have survived, meaning for trillion in fed assets that have to come off the balance sheets just in the US. And maybe they'll go slow or less slow, but um, but I think, um uh, this is going to be a period of much higher volatility than than

the last decade was. So future volatility is going to increase, whereas it was modest but not low over the past decade. Yeah, there were there were punctuated moments, but there was a long period of very low volatility. And and it seems like, um, that may be behind us, because even if some of the problems go away, you still have the undoing of QUI, which is more than just no qui, it's the opposite of QUI. Is is I think a really underrated continuous headwind.

And final question, and I'm gonna modify this. Given where tenure treasury reels are today, what does that mean for future GDP growth? What does that mean for the possibility of a recession either mild or more significant? So, uh, you know, until March there really weren't any any banks, um calling for a recession as as the most likely case it was. Around then maybe one or two banks,

obviously Larry Summers and others did speak out. Um, I think that, um, these kinds of forecasts are are really folly. Literally we're standing in a thick fog trying to like play tennis and we can't even see the ball. So so like when I hear people and by the way, that's a great question you asked, but like when people answer it, I kind of shut her. So I'm going to try to not shut her at myself and say say,

who knows. But what I know is that we should be aware that that this is not the market we were in and and this idea of thinking that still I can feel this thinking of you know, as soon as cp I misses and as we come in at seven something, okay, it's gonna be off to the races with the market. I feel like this is this is a personally, I think it's a Seldar rally market because people are not yet accustomed to all of the issues hanging over us. And anyway, that's my two cents. Thank

you Boas for being so generous with your time. We have been speaking with BoA's Weinstein, founder of Saba Capital. If you enjoy this conversation, we'll be sure and check out any of the four hundred previous ones we've done over the past eight years. You can find those at iTunes, Spotify, wherever you find your favorite podcasts. We love your comments, feedback and suggestions right to us at and might be podcast at Bloomberg dot net. Follow me on Twitter at

rit Halts. Check out my daily reads at Hults dot com. I would be remiss if I did not thank the correct team that helps put these conversations together each week. Mohammed Ramaui is my audio engineer. Sean Russo is my head of research. Paris Woald is our producer. Attika Valbronn is our project manager. I'm Barry Reholts. You've been listening to Masters in Business on Bloomberg Radio