Alpha Exchange Dean Curnutt

The study of correlation is valuable, informative and, likely an over-indulged in activity on Wall Street. That said, there are important risk considerations when it comes to how significantly assets move together or do not. The task at hand in this short podcast is to illustrate and contemplate the diverging paths of two important correlations: that between the stock market and bond market and second, between equities themselves. If the stock market is diversifying itself in real-time, there are reasons to think it cannot last indefinitely.  I hope you enjoy.

With option prices in the doldrums, your host provides some thoughts on why and in the process reflects on the skinny levels of risk premia a decade ago. I finish with some cautionary observations around what might go wrong. I hope you enjoy this short pod!

It was a pleasure to welcome Raghuram Rajan back to the Alpha Exchange. Raghu is currently a distinguished professor at the Chicago Booth School of Business and is the former head of the Reserve Bank of India. With a deep understanding of the intersection of markets, the economy and policymaking, he is among the most important voices on Central Banking.

With this in mind, our discussion explores his recent book “Monetary Policy and Its Unintended Consequences”, the title alone of which is entirely through provoking. Raghu shares his assessment of the tendency for policy towards increasing asymmetry – where the Fed acts as a lender of last resort during a crisis but finds itself unable to achieve normalization during non-stress periods. We talk as well about the distortions that result from forward guidance and asset purchase programs during non-emergency periods.

Lastly, we talk about policy spill-overs, specifically the impact that the Fed’s actions can have on emerging economies. As head of the RBI a decade ago and as India experienced the impact of Bernanke’s 2013 taper tantrum, Raghu has much to say on this subset of unintended consequences. He argues that the Fed’s remit will continue to target domestic growth and inflation, consideration of the international impact of policy decisions should conceivably be a part of the policymaking conversation.

The second half of our discussion focused on Raghu’s most recent book, “Breaking the Mold”, in which he reviews the progress and challenges in India. Here, he documents the diverging paths of India and China and makes recommendations for how India can learn from what China has done while recognizing both the constraints and opportunities associated with today’s global economy. He argues that India is uniquely positioned to provide high value-added services in a digital and remote work economy.

I hope you enjoy this episode of the Alpha Exchange, my conversation with Raghuram Rajan.

Corporate Fraud is an unfortunate, costly and seemingly never-ending aspect of the world of business. In the best case, fraud is prevented or, at least caught before harm is done. All too often, however, these cases of deception lead to large financial losses, impacting the lives of many - shareholders, individuals and certainly those that are courageous whistleblowers.

A little more than 15 years after the unwind of the Madoff Ponzi scheme, I invited Harry Markopolos back to the Alpha Exchange. Harry is often simply referred to as “the Man Who Knew”. He chased Madoff for years, serving up a comprehensive slew of evidence to the SEC that was mind boggling in its degree of logic, rigor and scope. Our conversation looks back on the lessons of this Ponzi scheme and also zooms out to consider other examples of corporate fraud including Theranos and FTX. Throughout our discussion I seek to gather Harry’s insights on the commonalities in these cases, how to detect them and also, importantly, how to prevent fraud. He points to a few areas of progress on the enforcement front but makes a strong case that the penalties associated with being caught need to be considerably larger.

I hope you enjoy this episode of the Alpha Exchange, my conversation with Harry Markopolos.

It was a pleasure to welcome Kris Kumar, CIO of Goose Hollow Capital, to the Alpha Exchange. Our conversation starts with Fed policy and the manner in which the 500bps of policy tightening is impacting the economy. To this, Kris argues that the propitious starting position for households and corporates in this cycle has been quite different than in previous ones, thus blunting the impact of rate hikes. He points as well to loose fiscal policy with the unemployment rate so low. For Kris, what happens next depends more on fiscal than monetary side.

We next consider the backdrop for valuations, starting with fixed income. Kris sees safety that comes from a coupon on 2’s that approaches 5%, noting that there are positive real yields generally in most of the world. From an earnings yield perspective, however, US equities have zero premium to bond yields and Kris points to the concentration of earnings growth coming from the top of the SPX, which, in turn, is a bet on generative AI. Should this growth not materialize, the lofty multiples currently awarded these stocks could be re-rated.

Within equities, Kris makes the argument that we’ve invested a lot in bits but not in atoms and, going forward, investment dollars may move away from tech into areas associated with energy demand. How else to satisfy all of the incremental power to run all of the data centers built?

We finish the discussion with an assessment of the price of vol. Kris points to the epically low implied correlation on the SPX, a result of the bifurcated market in which a small but valuable subset of the index is a bet on AI. He sees scope for the still elevated level of rate vol to come down but upside in vol on commodities like copper as a function of all the spending on infrastructure that will ultimately come as a function of the AI boom.

I hope you enjoy this episode of the Alpha Exchange, my conversation with Kris Kumar.

The “rule of 72” tells us that a good approximation for the time it takes to double your money can be arrived at by taking 72 and dividing by the interest rate that capital can compound by on an annual basis. Implicit in the calculation is that the initial stack is left untouched and is not vulnerable to a drawdown. In this context, it was great to welcome Jerry Peters, the Managing Partner of Smithbrook to the Alpha Exchange. Providing a risk-managed equity solution to its high net worth clients, Jerry and team are focused on managing downside risk, utilizing an option overlay strategy to mitigate some of the invevitable swoons in equity prices.

Our conversation walks through how index put options – when acquired at the right price – can create gains that help offset portfolio losses during times of stress. Acknowledging that the long term expected value of buying insurance ought to be negative, Jerry walks through how a protective strategy can interact with long risk exposure to create long term return enhancement. Here, he points to how gains from insurance during sell-offs can underpin the “rebalancing bonus”, where capital is moved from winning to losing assets on a systematic basis. We also talk about some of the subtle aspects of financial asset taxation and efforts to maximize not just the pre-tax but also the after-tax return of investment decisions. Jerry walks through some straightforward tax loss harvesting strategies that can add meaningfully to investment outcomes on an after-tax basis.

I hope you enjoy this episode of the Alpha Exchange, my conversation with Jerry Peters.