Speaker 1: You know, saying with it's the same with crypto. Think
that because the volatility has gone down and the performance
has been so strong. You know, people who said, oh, no,
it's going to be an investable asset class, I think
they're just that's just wishful thinking. You know, we've never
really had a proper test of crypto. Yeah, I know,
there have been several instances where it's lost seventy eighty
percent of its value on all his bats back, but
we've never really been an environment where we've had to test.
You know, is this thing actually reliable as money?
Speaker 2: You're listening to Carrie. Let's as financial survival Network where
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Speaker 3: And welcome you are listening to and watching the Financial
Survival Network.
Speaker 1: I'm your host, Carrie Lutz. Well.
Speaker 3: Investing getting more and more difficult as debt escalates, as
volatility goes up, and so many challenges to keeping your
wealth intact. Somebody who's been able to do it through
the last global financial crisis. Stephen Diggle is with us
now and Steven you closed your fund number of years
ago after having weathered and prospered in the last financial crisis.
Now you're opening it up again.
Speaker 1: What led you to that? Well, thanks, Kerry, great to
meet you. So yeah, we at at Aartritis ran a
a very focused fund between two thousand and two and
twenty and ten. It was always long volatility, did a
number of arbitrage activities, but it's principal characteristics it was
always brought credit in the war, was always long volatility,
and during that period between you know, late two thousand
and seven and especially two two thousand and eight, it
was a very successful fund. We made our investors over
three billion dollars in that period when pretty much doubled
our NAV and our AUM, which made us by some margin,
the most successful edge fund in Asia, which was where
we were operating out of in Singapore at the time.
But you know, with the bailouts that came and and
the enormous amount of money printing that the the financial
the central banks felt obliged to do, you know, volatility
went down a surprisedly started going up, and by twenty ten,
you know, we come to the conclusion that they weren't
going to stop, and that the more liquidity there was
in the system, the lower the volatility would be, because
you know, essentially they're they're two sides of the same
Cointility only really spikes when liquidity is drained out the
system for a variety of reasons, usually a panic withdrawal
of you know, or margin equidation or whatever it is.
So with super abundant liquidity, we decided that this is
the style that this fund just wasn't going to work,
and so we made a decision to shut it down
and return investors the Romainian money, which was still over
three billion dollars. There's not many people voluntarily have closed
a multi billion dollar hedge fund down, but we just did.
We felt it was the best way of preserving our
track record, and we didn't think it was going to
be a successful strategy for our investors or for us,
And indeed that that's been the case. So, you know,
with the exception of maybe a few brief periods, especially
around COVID, volatility has remained pretty low in financial markets
for a long time. And the SMP in particular, and
US markets especially has had you know, spectacular run over
the last ten years, attracted an increasing amount of global
cap from all sorts of places, including Asia. We see
you know, an enormous amount of speculative money from Asia
at play in the US, especially in the tech space
and the crypto space, and really you know, a complete
lack of interest in speculating or playing in their own markets.
You know, there's some of these some of these stock
markets that used to be very hot we are back
in the Asian tiger days are now stone cold. You know,
the returns on some of these markets has been very poor,
and the level of liquidity is very poor because an
awful lot of that Asian saving base is now at
play and sometimes very leathered in the US. So we've
seen a gradual change in the market dynamics, and we
just feel now, given a confluence of characteristics in the market,
that the risk reward between the you know, the option
seller or the volatility seller the volatility buyer has moved
significantly in favor of the of the volatility buyer or
the auction buyer, and that right now that's not being
reflected in prices so after fourteen years of doing other things,
largely private equity, we've reopened these long volatility funds to investors.
And you know, we think that there are significant risks
in the marketplace right now that aren't being reflected in
risk prices, and that there are now fault lines in
the market that should give any thoughtful investor pause.
Speaker 3: Okay, so what do you think the cause of these
challenges that you see coming?
Speaker 1: What are the oka? In some ways, the market's done
really well. I mean, here we are on you know,
the US economy has never a bit bigger, We're still growing.
We haven't had a recession since briefly during COVID. Unemployment
at four point one four point two percent is pretty
low ish. You know, we've rained back inflation from that,
you know, horrific nine point two percent print in the
summer of twenty twenty two, you know, two point six
two point seventy two point eight. You know, maybe not
the official FED target of two of two, but it
doesn't feel like they're really wedded to that two target anymore.
So you know, maybe inflational level you can live with ain, know,
and then and then there's the market having had this
heart attack in the first three days of April after
the tariffs, you know, back at an all time high.
You know, vole price is pretty low, so you go, well,
this is a pretty benign environment, isn't it. But behind
that there are things that should make us know concerned.
One is the US. The returns on the sm P
of the last ten years are about you know, two
hundred and sixty percent, incredibly imbversive, but you know, you know,
profits are only up one to eighty percent, so the
multiples expanded, you know, twenty five times. The S and
P is definitely not cheap. And in a four four
four and a quarter percent interest radi environment, it really
leaves the equity risk premium back at pretty much zero.
And there's only one time in my career that it
was back at zero, and that was ninety nine two
thousand and after that the S and P halved, So
you know, there's a warning sign right there, you know.
And behind it, all you know is this ticking time bomb,
which is what it is of the US deficit. Now
a lot of people talk about it. It doesn't feel
like a problem because so far the US has managed
to increase that deficit very steadily and very and always,
you know, pretty much well, with a very brief exception
during the Clinton years, it's always been one direction. And
we're up to one hundred and twenty five percent of
GDP now at a time of peace and prosperity, literally
higher than it was in nineteen forty five, and pretty
much with no inten shouldn't by either party of bringing
that number down at some point that's gonna matter to
the bond market. Not yet, but you know, you just
can't be the reserve currency of the world and to
have your bond market being you know, sort of the
subsupposedly safe even asset of the world and continue to
you know, print money and extend your deficits without expecting
at some point there's going to be some consequences. And
what those consequences are going to be is difficult to predict.
But the US is already spending about a trillion dollars
a year service in that debt. Any sort of revolt
in the bond market is going to rapidly blow out
the budget and blow out that that that trillion dollar
number into any you know, anever bigger number. So that's
the kind of the background that is just ticking away
there and at some point it's go it will. I
think it will unleash some very significant unexpected consequences on markets.
They're unlikely to be good. And you can see that
in the dollar. You know this year that it does
as it's been widely observed that the dollars have this
worst start to a year since nineteen seventy three, at
stand ten eleven percent against most currencies. Hard to fathom
why given the things that look look they're going pretty
pretty well. It's that US stock market and all time high.
I think it's concerns about a this deficit which keeps
on going up. And secondly, there is definitely some concern
about the way in which the US A, as the
global Hegemen, is conducting itself on the global stage. You know,
the administration, this new administration has come in with an
explicit agenda that's going to shake up the world order,
and I think we should do it. Believe them. I
think I should believe them.
Speaker 2: Now.
Speaker 1: I don't want to get I'm not political. I'm a
I'm a market's guide. I don't have an ax to grind.
I'm either a Democrat nor a Republican. But you know,
I see an administration that's got a great deal of power,
not a lot of checks going on right now upon
what Trump wants to do, and with an explicit intention
of changing, you know, shacking things up. And as we
saw in three days, you know, in April, when the
market fell nineteen percent and the bond market started to
go in a little dou lally, and then you know,
the dollar wasn't behaving well. The capacity of this administration
to surprise people, not always in a positive way, I think,
is there. And you know, there's this idea now that
you know, coined by by one of these journalists, the
taco trade as Trump always tied chickens out, and so
no matter what he says, you just have to ignore
it and just carry on buying. I think that's a
really dangerous assumption. These are you know, these are these
are people who are quite determined to get what they
see as a necessary a deal for America. And I
can't blame them for that, but I think anyone who's
playing in this marketplace, particularly in a releveraged position, who
thinks that it's safe to play out there, you know,
is being reckless. Because this administration is going to be
a catalyst for volatility. If you're a strong believer in
what they're doing, you may believe that eventually, you know,
that's going to be a very positive outcome for the US.
Maybe not for everyone else, but in the short term
we should expect the unexpected, and market prices are not
doing that right. Credit defaultse WAPs are very benign, you know,
very low prices, you know, to bet against credit and volatility.
Germany is very cheap. So got some inquiry question.
Speaker 3: Yeah, uh, what you're feeling is about cryptocurrency, bitcoin in particular.
Speaker 1: A all right, you know, it's we were the first,
we were the first fund manager in single poor to
have a crypto fund, you know, as a as A
as A as A, as a guy who's always loved arbitrage,
I loved the fact that you had all this differential
price in out there. So we ran a moderately successful,
very unambitious crypto fund in Singapore during you know, the
a while ago. Now we did all right, you know,
because there was these very wild arbor charge opportunities, but
I got increasingly uncomfortable about settlement risk that we were
taking because you know, people talk about these places as exchanges,
but it was quite clear that they certainly worked. They
were more like they were more like those those curb
brokers in the nineteen twenties, I mean a lot of
them well, and then FTX obviously proved it a lot.
Even some of the bigger ones were very unsafe places.
So you know, ah, money is whatever people think it is, right.
Money's been weird things in history, right for several hundred years,
you know, comp shells were considered a safe form of money,
and in life arge parts of you know, Africa. You know,
gold has no value, yet it's been accepted as money
for four thousand years. Money is whatever people want it
to be, and as long as people believe it's money,
then yeah. But when people tell me they're investing in crypto,
you know, I get a little pedantic, and I'm like, no,
you're not. You may have, you may have bought crypto,
you may be speculating it or playing it, but you're
not investing in it because it has no yield, it
has no fundamental value and it has no residual value.
Now you may make money, and of course anyone's bought
it has made money, so they're smart. I'm done. But
you know, all money, all money is a Ponzi ski right.
I mean, ultimately, you know that that thing in your
back pocket that says it's worth a dollar isn't worth
a dollar. It's just a piece of linen. You know,
that shiny that shiny piece of metal you have in
your pocket is not worth three thousand, two hundred dollars.
It's just a shiny piece of bec And it's only
worth three thousand hundred dollars because someone's going to give
you that for it, you know, saying with It's the
same with crypto. I think that because the volatility has
gone down or the performance has been so strong. You know,
people who said, oh no, it's going to be an
investable asset class, I think they're just that's just wishful thinking.
You know, we've never really had a proper test of crypto. Yeah,
I know, there have been several instances where it's lost
seventy eighty percent of its value and all his bats back,
But we've never really been an environment where we've had
to test you know, is this thing actually reliable as money?
You know, argue it needs quite a bit of technology
to make it run. You know, if someone said I'd
like to buy your house and I'll give you crypto
for it, I'd say I'd rather have dollars.
Speaker 3: So here's a question for you, though, institutional adoption ETFs. Yeah, basically,
the number of coins out there, only seven percent of
the total number of coins that have ever been produced
actually trade and and more. It's getting gobbled up by
by entities.
Speaker 1: That aren't going to sell it unless oh and and
so and so in the short Yeah, in the short term.
You know, that makes a great dynamic for a bit
of a squeeze. But scarcity alone carry doesn't guarantee value. Right,
My toenails are pretty scarce. I've only got ten of them,
but you know what, they're not worth much. And you
know what, I'm ony chain. You might have something there.
You know that they're they're very limited in supply. There
ain't gonna be made any more of them, and they
grow pretty slowly. But you know, scarcity alone doesn't guarantee value.
You need a bunch of other things. And look, I've
always been fascinated by the blockchain, but you know, I
think it's as a solution to things like real estate,
for example, or or fractional ownership of of hard to
verify assets like like fine art or or fine, why
I think the blockchain could have immense value and impact.
I think has money. You know, I don't have any
problems moving money around the world, whether it's in yen
or dollars or or pounds. You know, it settles pretty easily. Yes,
it's Could it be more efficient, for sure it could.
Does the bank take more than it should? Yeah, for sure?
But you know it works okay, So so what you know,
I don't see. I'm not against crypto in any way,
but I'm not a believer because I don't see the
problem that it's solved. Now. I understand a great you know,
a great number of people have made a great deal
of money out of it, and you know, well done then,
But you know, I don't see. I don't have a
use for it, as in, you know, in the business
we run. You know, I can't really use it when
we when we traded it, we only traded it in
an arbitrageable way. In other words, you know, if someone
was prepared to painting it, you know, at the time
like eight thousand, you know, one hundred bucks for a
coin in Korea, and I can sell it for you know,
eighty two hundred bucks simultaneously in the US. I like that.
I didn't like the settlement risk I was taken, but
I love the arbitrage. But you know, is you know,
is it an important or a significant part of my
asset base? No? Not because I you know, I'm against it,
or I think it's worthless or I'm not. You know,
I believe it's a it's a scheme, but it doesn't
really solve any of the problems that I that I'm
looking to that I'm looking to, you know, solve. And
you know, do I see it as a potential cause
of volatility? Oh? Boy? Do I? I mean, what's what's
the value of it now? Is like thirteen fourteen trillion
dollars out there in terms of all cryptos. I mean,
it's a huge amount of value. Right, that's that's appeared,
you know, just like a mushroom. Right. And you know,
if people are really thinking, I've got, you know, I've got,
if they've really counted that as part of their permanent
asset base, I don't know what happens if there was
to be a severe challenge to it. The other thing is,
you know, at some point, and I'm surprised it hasn't
happened in more places than China. You know, given its
it's potential threat to the monopoly of money that central
banks have, that it hasn't experienced more legal challenges, and
I think, you know that's that's something that could at
some point come back to buy it. But you know, say,
I haven't really been involved for a long time. We
watch it, I think as a potential source of volatility,
both upside and downside, because as you point out, given
the size of the asset, of the of the asset
class now and the amount of liquidity in it, its
potential to move a lot is huge. Uh, the actual
experience volatility has been pretty low, but its potential volatility
is enormous. So you know, as a catalyst for volatility,
say both on the up and downside, I'd be very much.
I'd always want to be long the wings of a
bitcoin out there, and that there's a pretty decent option
market out there for it. But are we using it?
You know, no, we're not evangelists for it. We say
we've had a we did have a fun. We closed
it for various reasons, personnel being one of them. They
want to go off and do other things. I'm sure
they've done really well if they they stayed long. We
don't run crypto anymore. And you know, Singapore's Singapore where
we were running it. They've become a little more, a
little less welcoming about it. There's been a few scandals
there as ever to be there. We're being a new
asset class. And yeah, so you know, I see it
as an area where people have been very richly rewarded
for having faith, as an area where there's an awful
lot of speculation, and I see it as a catalyst
for volatility. But we don't use it. But I say
it's not because we're against it. We just don't really
have a use for it.
Speaker 3: Okay, all right, I'll buy that. So you're bullish on
gold and silver there.
Speaker 1: I'd certainly bullish on the volatility in gold and silver,
you know. I mean it's you know, it's fascinating to
me at a time when Nasdaq's at an all time high,
the SMPS of an all time high, the gold is up,
you know what, twenty five twenty seven percent this year.
I got a very strong suspicion that people chasing this
rally in the S and P and NASDAK are not
the same people chasing this rally in gold. I mean
maybe some of the algos, because you know, they're just
bet non momentum, but I think they're fundamentally the people
who feel that they need more gold are probably not
the people who think that nasdak's a bargain that you
know year up here, I think you so maybe maybe
indicative of a big bifurcation in in investor sentiment, and
this leads to a potentially very interesting trade. It's a
little nerdy, but you know, as an auction's nerd. Indulged
me for a second, which is that the correlation between
gold and the US stock market is very very low. Indeed,
in fact, Kate's chaotic. Sometimes it's correlated, sometimes it's negatively correlated,
very often has no correlation. Both the S and P
and gold are showing relatively low option pricing relative to
historic volatility, so particularly the US up depending on the
period you measure, because if as long as you include
the April period, you know, volatility is very cheap relative
to historic. So if you put those two together, if
you're long, let's say you're long out of the money,
put some calls on the S and P and out
of the money puts some calls on gold, you get
a very interesting payoff because you've bought things that are
pretty close to the historic volatility, and anything could could
happen that could dislocate those And in a sense, you've
got four ways to win and only one way to lose,
which is that everything kind of stucks around where it is.
So between the two of them, they represent a very
interesting way to be exposed to current markets shocks on
both sides. So you know, when the dollars we gold
is strong, okay, So that explains part of the part
of the problem. And just as you refer to the
very limited amount of liquidity in in cryptocurrencies relative to
the outstanding numbers, so it is with gold, right a
tiny amount of gold trades, tiny amount of gold trades
relative to the outstanding amount. So it's ability to move,
you know, very rapidly with relatively small changes and appetite,
you know, leads it to be a place that just
being long volatility alone is a great is a very
interesting trade, but the fact that from time to time
it has a big impact because other things are going
on geopolitically, also makes it a great place to play. However,
one thing to always remember about gold is that, like
everything else, you need a marginal buyer. And you know,
let's not forget that in two thousand and eight, when
everything was for their part, even gold went down. Now
it baounts back, but you know, gold is the ultimate
hedge against the market. Dislocation doesn't always work. It didn't
work in two thousand and eight, and if liquidity were
to dry up for any reason again, it might not
work again. It works really well as a store of value,
It's worked really well as an inflation edge. It's had
four thousand years of being accepted as money. I'm not
you know, I'm not a gold bug, people, and no
gold bug says it's a gold bug. But you know,
if I had to believe in one thing that was
going to hold its value through a dislocation, I'd rather
have this, this, this permanent, shiny yellow metal with four
thousand years of belief than this new fangled electronically dependent
one that's had, you know, fifteen years of belief. All right, Hey,
so it's been good talking with you, Steve. Where do
we find you?
Speaker 3: How do we connect with you on the web?
Speaker 1: Yeah, So we we're called Volpez Investment Management, we have
a website and you know we're very engaged with investors.
We're a regulated investment manager in by the most Authority
of Singapore or in Singapore, and that's probably the best
place to find us.
Speaker 3: Excellent and the links in the show notes to this
interview on Financial Survival Network dot com just ask when
you go there, please sign up for your free newsletter.
Speaker 1: Steve.
Speaker 3: It's been very enlightening speaking with you. Good hey, Kara
on the new venture, the new old venture, and we
will definitely talk to you again soon.
Speaker 1: Okay, KERRII thanks you very much, have a good day.
Speaker 2: Thanks for listening to Carrie Letz's Financial Survival Network. Your
solution to today's trying times. For the latest, go to
Financial Survivalnetwork dot com. Financial Survival Network
Speaker 1: Now more than ever,