YouSaid · the spoken record

Hari Krishnan

lines on the record: 94
first: 2022-11-21
most recent: 2022-11-21
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“Yeah, well, I'm not really in the stock world. I'm more in the futures world. So just as a point of clarification, I'm not just an equity vulgar guy. I'm kind of a pan asset vulgar. But having said that, in the futures world at least, forgetting options for a moment, you might put down five or ten percent of the notional value of a contract in cash as margin The margin requirements pretty small when you put the trade on. So you would be foolish to go to a broker, any broker pretty much. And by a contract whose notional value is one hundred dollars and put seventy five dollars in to support the trade. You will put a buffer in, there's nothing wrong with that, but you don't want to overfund it, because if you overfund it, then if the price The broker goes out if it goes under.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Definitely. Just on the prime brokerage business model. So I know that. If I buy a stock of Apple on Robin Hood, The sock of Apple is there, and that if the stock of Apple is not there, that's a problem, and that Robin Hood has a lot of problems. Like FTX's has problems. But you can do something with the cash, right? You can, if I have $130 in an Apple stock, but also $130 in cash and just caching my account, Robinhood can do stuff with that. And I actually think a lot of brokerages income now that there's no commission trading comes from that yield on cash. And in some cases, even more than from payment for order flow, which is a big factor, but not the biggest.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Well, that's the world of money for you. It's so fluid you have to just keep going in this business and try and do the best you can. There's no point. I used to think, oh, if I got X in the bank, I could just sit back and have this static image of myself. sitting in a cafe or lying on a beach and that would be it. Life just isn't that way. You have to keep learning and so on.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“But a lot of that came from clawing money back from people who got their money out early, which is psychologically, it must be so brutal. It's like, oh, I just dodged a bullet. It's like, no, you didn't. The bullet's here.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“It's one of those standard stories where. People do get their money back in parts over time, but it takes so long that it's no longer in the news. I remember with Fairfield Sentry, the Madolf, France some decent fraction was recovered, it might have been fifty percent, sixty percent.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“I don't think traditional finance should be wagging its finger at crypto because, you know, traditional finance, as you and I know, Hari, it's not a bunch of Boy Scouts. Traditional finance has definitely had its own blow-ups, but by the same token pun intended, traditional finance has learned its lesson. And crypto is in the process of learning that lesson. And I don't know about you, Hari, but I feel like for most times throughout crypto, I feel like I'm not at all a technology person. People talk about protocol this, Uniswap that, whatever. It's way over my head. But when I do see.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Revco is another pawn brokerage house It's happened over the years various prime brokers have gone under for various reasons. I'm not saying Refco was the same as MF Global by any means, but people are aware that if you park too much cash at your prime broker, if you don't have a decent treasury function to sweep excess funds outside or at least to make sure that they're held in your name instead of in some commingled omnibus account, it can be problematic, and so people knew that in the traditional. Well, in the standard finance world, but obviously they didn't know it here, and I don't blame them, because you have to get maybe not slapped around, but you need to work with people who've been around to know this stuff. And if no one's been around. What are you going to do? I sympathize greatly with the people who have been hit by this.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“I think so. People trusted the, well, integrity is a strong word. I know a lot of people said stuff face to face, but I think there was a public belief that Large institutions were more honest than the belief is today, even though it may be the case that nothing has changed. So it was a real scare, and it did lead to a push for more advisory type activities for people to say which platforms are safe, which are less safe, this, that, and the other. A lot of people were hit by that. A lot of people were hit before the crisis by REFCO. This has happened from time to time.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Strict in their examination of authority figures. Sometimes in my humble opinion they go too far with this in its character assassination, but I think a lot of things that used to be taken for granted that politicians always had the best interests of people at Harris, that they weren't corrupted by money, that there weren't forces working nationally and internationally to effect outcomes that should be democratically determined that Those have all come into question now, and the MF Global case was a real back in two thousand ten when people were less overtly most people were less overtly critical about institutions, but Really was a slap in the face. A lot of people got hit. Even though you did a good”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Now people forget this, you know, they think, oh, it was obvious he was a fraudster and this and that, but um. How much higher can you be? And I think people will make the assumption that if you're that high up. Either you're untouchable or there's no way you can be doing stuff because it would have been found out. But I think in the modern Twitter world and so on, people realize that that's no longer the case. People are much more”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Can hide corruption underneath it Madolf is a great case. I think he was the chairman of the Nasdaq. True, if I'm not mistaken.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Well, again, this is kind of like spitbowling a bit, for lack of a better phrase. There was an element of trust in MF Global that also existed here. The trust there is that John Corzine had been, you know, he had a distinguished political career, he had a distinguished career at Goldman Sachs, he was very high up And I don't want to pass judgment on anyone, but the notion of using client funds to make even high alpha expected alpha trades is one of the worst things you can do in our business. The whole prime brokerage set up, the whole separately managed account set up, is designed to make it impossible or well near impossible to use client funds for other purposes. But the sad thing is that sometimes the Connections to power”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Some protocol to buy and sell. And I presume, again, I'm just at average Joe when it comes to crypto, I presume that the A lot of money was held at various exchanges and continues to be, including FTX. And we know from the standard finance world that prime brokerage houses do go out of business. It may not be that there is Of course there are centralized exchanges which are backed by the government and so on, but you can have your money held up at an MF global or something, and if you're not careful in your treasury management, you can get into trouble.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Under Sagai on the street, but what I will say when it comes to this, but what I will say is that there seem to be two things going on. One is ownership of crypto, which can be done in a very clean and well defined way, and the other is transacting in crypto, which forces you to go on to some exchange or some platform.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“I'm going above my expertise because I don't do these transactions myself. But there are various legs. You have to finance the treasury purchase, and then you have to engage in the swap spread on the other side. There are two different kinds of contracts that you're engaging in. There is a bit of a mismatch in terms of liquidity, counterparty risk, this and that. And then the edge is not massive. It's not as though you're picking up one percent. My example was a bit excessive. It's less than that. And so maybe it's just not worth the while. Do the trade when you can do other stuff”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“They shouldn't be, and they have been for a while. It's because banks simply cannot absorb the extra balance sheet risk To squash the spread. That's the only logical explanation If you are The analog of SBF, known in the international crypto markets, whether that story is true or not is another question, but in the swap spread versus treasury markets. You have a margin cull, or you're close to hitting your risk limit, you can't do the trick. You need to have enough balance sheet capacity to do the trade. Whether it's a question of risk, which is more likely, or regulatory limits, which is less so. It doesn't matter. It just free money will be left on the table if no one has any cash or access to credit or willingness to engage in a risky trade.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Well, it's tied to Libor, or sulphur. Whatever, but it's based on, it does have a term. meaning that you engage in a contract with some fixed maturity And if you pay fixed and receive floating, let's say You are receiving libor at periodic intervals or softer at periodic intervals, and then the average rate that you received is with a time averaged rate is tied to the profit or loss on the trade. So if rates And you're receiving the floating race You win. Maybe it's a hedge, but you win in isolation, and if the reverse is true you lose.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“answer to that, which is that if treasuries yield and I can borrow at three percent. another bank And I can borrow at three percent by the treasury, collect the four percent, and do it until the cows come home and I'll collect something not too far away from one percent for no risk. I hope that's clear.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“You did a great job, Harb just because it's so complicated. I just have a follow up question. I feel like we're so deep in it already, we may as well just really go deep. If I party A, if I party A want to get exposure to a fixed income security, I can buy a treasury or I can do something with another bank, enter into a swap spread. In that swap spread where I'm basically getting the equivalent of a treasury, which part of the trade am I on? Am I paying fixed receding floating or paying floating receiving fixed?”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“An anomaly. It's kind of an arbitrage opportunity because Can get compensated for getting the treasury yield, for owning the treasury or financing the treasury versus Borrowing money from another entity. I hope I explained that well. There are a lot of moving parts”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“So if you're on side in the trade and your counterparty goes out of business, then you don't collect. So there's a little bit of credit risk in that. Whereas an equivalent duration treasury, if you bought that treasury, in principle there is no credit risk. The government will print or do whatever it takes to pay that back, you own a virtually riskless security, at least in theory, so you should be receiving less of a yield for buying that security. Then for engaging in a swap spread, in a swap. So the differential between the yield you would get from buying and owning a treasury or financing a treasury where you would capture the coupon. and the yield that you receive from taking from lending money to another bank, the treasury yield should be lower in principle than the yield you get for lending, and if it's higher, that's a”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“So there's a market for interest rate swaps. It's an interbank lending market and there's a term to these swaps so you might lend over five years or whatever, ten years and so on. And basically The swap rate is based on a fixed versus floating payouts. So let's say the swap rate is 4%. That means if I'm receiving floating, I pay 4% and I receive the floating rate over time. And so some average of the floating rates I receive over time minus the amount that I paid, which is four percent consistently, determines my PNL on the trade. But there are two entities borrowing and lending from each other, at least in principle, at least in terms of P and L swings. So that's a risky loan because your counterparty may default.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“And so it's unclear what's going on other than that banks are willing to take less risk, and you see that all over the map, whether it's negative swap spreads which should be an arbitrage for banks because they basically can collect a treasury yield, land at a lower yield, and they have the more secure asset. So they're actually long default risk and collect and carry for that.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Well, again, it's a question of incentives. If in theory in whatever textbook I used to look at, if interest rates go down at the short end, banks should, in theory, be incentivized to borrow money. Short and land long, that's classical banking. It's that duration mismatch that defiance standard banking, being able to borrow at a low rate, roll over the debt, and then lend it a longer rate, and so there it should incentivize banks to be more aggressive in offering loans because the spread is bigger. The reality is that two things have been operating across purposes since the GFC, which are increased regulations which hamstring banks, which And all of these monetary policy incentives which incentivize, which should, in theory, make banks want to lend more, but the things are fighting against each other these two factors.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Well, yeah. And again, I don't want to parrot other people. But the real issue in securitized lending is liquidity. It's not credit. I know the credit and liquidity are linked, but even though treasuries have duration risk, they're highly liquid. And the tenure on the run is more liquid it trades at higher volumes than any other security. Any other treasury security, so even though it's riskier than a tea bill, It's more liquid, so it's more effective as collateral because if someone is accepting that tenure note as collateral. They're not that worried about whether yields again. widened over the next six months they're worried about whether they can sell that security tomorrow. Without price impact So the security that has the least impact in the fire sale, the least discount in a fire sale or in a large scale.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Prior to the great financial crisis, tons of collateralized lending that was backed by crappy collateral, whereas now most of it is treasuries, which, I mean, some could say it's crappy on the interest rate risk. But in terms of credit risk, it's pristine.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“and so on, but that doesn't mean the risk is gone. It just means it's moved either offshore or off the regulator's grid a little bit. And so it's actually more complex to understand what's actually going on. I'm not really an expert in the scope of the shadow banking system. I know that it's very big, it's very diverse, and it's hard to measure how big it is. But if you just make assumptions like how much size of standard bank balance sheets Whereas what's the total amount of debt in the global system? You'll see a big discrepancy.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Oh it consists of anything other than a bank that provides lending like a hedge fund, even corporate treasuries do some of this, large sovereign wealth funds. And so on. So there are entities that are able to provide many of the functions that banks used to provide when they could take more balance sheet risks. And yet they're not listed as banks. So they don't have the same capital requirements, they don't have the same oversight necessarily. And yet they do the same thing, at least some of the function. And these entities, probably the risk has just moved from the standard banking system, so you don't see any headline defaults with savings and loans.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Lots of good comments there too, Jack. Obviously, we've moved risk partly from the standard banking system to the shadow banking system. So yeah, I agree, I mean with Dodd Frank and the various regulations post two thousand eight.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, yeah, yes and no. I mean, there's a lot of complexity here because If a healthy bank, everyone thinks the bank is healthy in it, goes and into the discount window and borrow his funds. That's fine. If a bank is known to be in trouble And then it tries to borrow money directly from the Fed, that could be the worst thing. It might do because everyone's going to know it's on its final legs. And so this notion that the discount window supports the markets, it does if the banks that are relatively healthy are willing to borrow funds at the window and then lend the mouse to banks in trouble, but if they're too scared to do that, I don't think the window works. Everyone's going to know that there is a wounded animal out there in the banking world and that it's ready to be attacked.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“really from the nineteen thirties to the present. The only difference is the amount of balance sheet expansion that they engaged in, and the jump was far bigger in two thousand eight than ever before. And not only in absolute terms but in percentage terms. So clearly it worked then, and I think the tentative conclusion was that you need to do quite a bit to do anything in percentage terms to get any result. And with such a big balance sheet as what we have today, you have to do a huge amount in dollar terms. Basically, if you give the patient enough medicine it will survive, right? At least this go around. If you apply high enough electric shock, high enough voltage, it'll probably spring back to life.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“What I looked at was Periods where the central bank balance sheet size increased by more than a threshold. What the impact was on credit spreads or risky assets in general. and I found that there was a lag, as expected, because central banking does operate with a lag, other than in the perception space, and that generally spreads did come in and it's been no different.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, well, yeah, that's true. Of course, you never know where the extreme is, and so that actually is implicitly an argument that the methods may work because if they are always getting in at the extreme, that means that they blocked out the even bigger extreme. Either through perception, as I said, or through real action. And I think there's a lot of debate, and anyone who's honest with themselves, or at least in my case, I can only speak of myself, don't really know where on the spectrum central banks' effectiveness lies. I don't think it's possible to say that central banking doesn't work, nor that it is very effective.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, that's kind of what I was implying that. spreads at least most of the time are being reverting. You know, volatility is mean reverting or risk indices mean reverse. Over what horizon it's hard to say and whether they're going to mean revert quickly enough, for you are a levered short position, let's say in the Vicks, to come in, that's another question, but they do mean revert. And so it could just be that the natural order of Humans, as applied to the markets, is mean reverting in that space.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“The biggest critique of the power of central banks with regards to credit spreads is that they get involved at the very worst time. So they get involved when credit spreads are at their peak so that credit spreads can do nothing but decline. So it's sort of just a correlation not causation.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“So the critique, and you know, Jeff Simer is a great example. I have a lot of respect for his thinking, that quantitative easing in particular, central bank action in general, but quantitative easing in particular, has very little effect. I think it's very accurate with regards to bank lending, sort of the old school financing of I'm a bank and I'm lending to you, Hare Krishnan, you have a business. I'm sort of commercial and industrial lending, but in the modern day economy with securities, it's all about bonds, right? It's all about stocks and bonds. And the Federal Reserve can buy a ton of treasury bonds and mortgage-backed securities, so government securities or government agency-backed paper, and basically cause those to trade extremely rich. And then that people have a ton of cash. And then those banks from whom the Federal Reserve bought those securities, they go and buy it from their customers. And now the customers have tons of deposits. And now that's...”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“their balance sheet by enough. Whether that did or didn't have an impact on risky assets directly, credit spreads did come in within twelve or so months, so historically they have been stabilizing. Now the reality is short of buying assets outright, going in and buying credit, this, that and the other, the sort of maiden lane stuff It's hard to say that frankly is very hard to say, and the more people become skeptical, the more Jeff Snyders of the world there are. The less effective I would presume the central bank will be.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“The strongest form is that by varying the rate that they lend to banks or to certain banks and having an impact on bank reserves, which by the way are not usable in the real economy but which do exist on a ledger, they encourage banks to lend, and they can improve financial stability in times when it's needed. That's the more strong version. Now, even if you believe in the stronger versions, there are still a few issues which is can they control yields and currency rates simultaneously? Can they control employment or unemployment and inflation simultaneously or their jazz in the context of a complex system is questionable? But in the book what the data showed was that at least historically in the few cases that we have, if they go”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Okay, great question, Jack. Let me just say one thing, that classical finance has adapted over time so that fat tales are included in many of the distributions and so forth. But my point in the book was that these are kind of bolt ons. They're not fundamental. They're not not. Explained in any rigorous way, or in any meaningful way, which is what the book tried to do. Now what do central banks do their many theories? I'm kind of torn between them. One is that central banks do nothing other than drill boning. They set expectations and the market believes they're important, and so they are important. If the market believes valuations are important, they are important. If they believe that I don't know diversification is important than it is. And these things persist until they doubt. That's the weakest form of the central bank puss.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Okay, so basically, traditional financial theory has returns over certain time period being a normal distribution. So a hump in the middle that scales in a mathematical way such that a 7% crash in the stock market is pretty damn close to 0%. But in actual fact, we find that these things happen a little bit more frequently, in some cases much more frequently than the models would suggest. So a lot of that has to do with forced liquidations and dumping by large players. So some of those are dominant agents. I guess that's kind of to the negative, causing distributions to be fatter, causing the tails to be fatter. What about central banks, though? What role, I feel like this is something I didn't actually hear a lot of talking, people talking about before your book came out of central banks as a dominant player, do they suppress this volatility? Do they make the tails less fat?”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Game stop and so on a year ago ETR providers in illiquid assets and things like that. So it's basically trying to identify who the major players are that may not always be active, but if they're forced into action. Will have an impact on the distribution of returns. They can cause fat tails, surprising outcomes, and so on”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“And it's been clear that those classical portfolio theory methods don't work because the tales of real distributions are fatter than those models would predict. The interactions are more complex, and there are times when there are things like fire sales or short term liquidations, and they simply are not explained by that. And really what goes on in the system is that yes there are random shocks, you know, news events, political events, and so on. These are largely unpredictable, but the network effects can be predicted if you know that there are some very big levered players in the system who will be forced to get out, or conversely forced to provide liquidity given a large enough random shock. So it's a book on positioning risk. That's what it's about. It was intended to cover central banks, options market makers with the melt.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Okay, well, it's a thing. I'm not going to assign an attribution to it, but Dominant agents are kind of whales, so classical finance theory says that you have a big network, and the lots of transactions and lots of agents, and lots of leverage providers or some leverage providers and so on, and they trade, and markets are somewhat efficient, and if you boil down all of the interactions along the network, you can basically model everything just with the historical distribution of returns.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT
“Been very well, I mean, without focusing on crypto too much I'm like the Spanish banks were in two thousand nine. In other words I was so far behind the curve in crypto land that thankfully I actually missed a lot of the recent carnage, so through no skill of my own. So I'm hanging in there and I hope other people are too.”
2022-11-21 · Forward Guidance · Learning From Market Tremors | Hari Krishnan · IDENTIFIED FROM THE TRANSCRIPT