YouSaid · the spoken record

Zed Francis

lines on the record: 131
first: 2022-11-14
most recent: 2022-11-14
sittings or episodes: 1
sources: podcast

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“Yeah, so I mean, like, obviously, there are times where people get truly forced de risk and they just have to sell their longs and buy their shorts and go towards cash. But, you know, most folks have a little bit of hubris and think they're really smart and know the fair value of things. And so if you thought something was worth $100 and it was trading at 60, you're like, I got all this edge. Market crashes, it's trading at 30. I got even more edge. I don't want to sell that. If anything, I want to buy some more. I know it's worth $1 in two years' time. Like once we get out of this, I have so much edge here. And so because I have so much edge, like, but I know I need to survive. Like, I need to survive the next two years to see that edge come to fruition. How do I make sure I survive? Like, oh, I'll buy these puts. And like the puts may appear super expensive. I'm spending, you know, 5% of my total account value on these puts. But I have so much edge in my long positions.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Talking about tariffs catching, like, way out of the money, put options, flow's driven is the pricing from that. You need a panicky buyer of some variety. Point is the hedge fund community, that's not where it's coming from. If they're already de-risk from where expectations in general are, Mar goes down a bunch. They're not panicking buying those. I've got kind of a dump.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Well, I mean, I think ultimately they believe that this is a pretty well scripted problem. And they made the decision that they didn't love any other longs fundamentally or lots of them fundamentally. So the easiest thing to do is just take risk off the table. Like sell some of your lungs. They probably bought back some of their shorts too. Like they degross everything. But ultimately, like in that metric, you know, hedge funds, I think most people think are like a 0.8 beta, sorry, 0.7 beta to the market. And looking at like PB statements, like they're kind of running like a 0.2 to 0.3. I mean, they're very light market risk. Wow. So, yeah.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Right. And so let's say rough numbers that there's a hedge fund that had a delta the portfolio of the book they were running had a delta of, or sorry, a beta of 0.6. So for every dollar that S&P 500 went up, they made 60 cents. And they wanted to derisk that to 52 cents. So they could do that in two ways in terms of doing the delta. They could just sell eight cents worth of their portfolio or they could buy put options with that the total delta was like equaled that but then they'd also get the volatility exposure. So I guess why have the hedge funds sold their risk assets instead of keeping the risk assets but buying volatility?”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“To buy these options are very unlikely right now to be buying lots of puts. Like market sells 20%. They're not panicky crap like buying puts. They're happy probably. Right.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, but those ETFs and those mutual funds per their investment guidelines most likely don't have even the ability to trade options, right? So it's like if it's a flows driven market that we're talking about, you got to look at the folks that one can participate in it and then two will participate in it. And then finally, like, are they going to have any forced action? Right. And again, if you're the hedge fund community that has obviously discretion over their investments and have the ability to trade options in general, if they're already light market exposure in comparison to any historical metric, their risk is not the market falling. It's the market rising. And the reason they would look to utilize options is much more likely to protect themselves from a market rally rather than a market sell-off. And so those players that have the ability”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“But mutual funds, those sort of passing, if you want to not pass it, but boring allocations, they're way bigger than the hedge funds that like to move their weight around. Hedge funds are only two or three percent of the entire market, but they do move in size. So you're right to focus on them, but they are somewhat of a kind of a small player in terms of total assets under management, not flows.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“It's definitely your hedge funds and like CTAs are the ones that are running very light risk in comparison to their normal steady state. And they're the ones that have the most discretion, right? They're not really benchmarked to anything specifically. So they have the flexibility to take much bigger views versus just being like, yeah, a mutual fund that has discretion is probably benchmark to the S&P 500. And they'll take security selection risk, you know, like rather than owning all 500 securities, they go really heavy on the 30 that they like. But their market exposure in general is pretty darn close to S&P 500 because they're trying to beat it by, you know, 2% every year. That would be a home run.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“This active community active versus passive is kind of a style, and then there's different rappers. There's like ETFs, exchange trader fund, like Kathy Wood's ETF. That's an example of an actively traded ETF. A lot of ETFs are passive.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Between now and your end, like that's their risk, which by the way is a side comment that's probably why when we've had big rallies, you've seen volatility go up. That's their risk. They have to buy calls. They don't have to buy putts. This active community.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“So there's two different things. So, one, we'll call it active managers versus passive investments. Like that balance has shifted dramatically towards passive over the last 40 years, but pretty aggressively in the last 10. The passive guys are just always on. There's no decision. You're just fully invested. You're off and running. Active guys have discretion and they're going to be the first place where you're going to see stresses, to be frank, because they have the ability to pull levers that, you know, a passive investor can't, the spy can't do anything. It just owns, you know, the whatever, 486, I think it is now. Companies in the S&P 500. So Active is the first place where you'll see action driven by, you know, mark movements or stresses that you need, but they've already been light risk. They've been light risk all year. So they don't need a buyer protection. They're already light risk. Like if anything, their risk is if we scream 20%.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“So if people are selling risk all over the place, how come we're not having a capitulations type where everyone, I'm selling Apple, I'm selling Microsoft, I'm selling Facebook, I'm selling my oil stocks, I'm selling my gold stocks, I'm selling everything. Zad, get me out of everything, get me out of everything. People were doing that, you'd have crashes and the VIX would be at 50, but it's not. It's at 24.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“The problem is with those folks for what's happened in 2022 is most active managers have been light on risk the entire year. They started the year like we'll call it neutral in terms of normal stance, but they've been selling risk all year long. Like most of the prime brokerage statements effectively for like hedge fund managers and CTAs and all this kind of stuff essentially say that they're at the lowest net exposure to your longs minus your shorts net It's basically the lowest exposure like ever”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“The move. It's not like there's a ton of folks that can naturally then sell them and do something else because the basis risks that they're going to have to endure is too much, especially in that type of environment. So again, it's just think flows. It's like what's driving the price of that type of volatility is a ton of buyers when there's very, very few natural sellers. Where do those buyers kind of like come from? You're like, well, if you're, you know, a active manager, a hedge fund, or maybe even like, you know, some mutual funds that have like a lot of distraction, something along those lines, maybe you're way, way, way overrisked. And your risk manager says, hey guys, like in the shocks, if you go down, you know, 20%, Mark goes on 20%, we're down 30. Like, that seems a little extreme. Like, how are you going to best accomplish that? You're like, oh, maybe, maybe I'll buy something that has a lot of convexity. Maybe you'll buy those options.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Like flows driven, where like the other end of that would be, I don't know, a meme stock. Is that fundamentals? You're like, no, it's like, you know, one day of tons of buyers and another day of tons of sellers, and that's what whipping the thing all over the place that is very, very flows, not very fundamentally driven. So these extremely longer dated, way, way, way out of the money options, they're very much flows driven. They're not really fundamentals driven. Like how the heck are you going to like proclaim like, you know, a fundamental case for the fair price of those to an extreme specific value? It's when people need those options. That's when they explode in price. It's flows. It's when there's forest buyers sure, but just like a huge, huge demand for those types of options, that's what causes them to move. And they, and again, like they're not very fundamentally driven.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Right. So the waterfall of that, right? It's like, okay, we kind of know in general what they're doing. They're buying these longer dated, way, way, way, way, way out of the money puts. So those puts, again, they don't really have much reactivity to like the market. It's just when does VAL explode? That's when they make a ton of money. And I like to think about it as like, you know, most assets are either flows driven or fundamentals driven. And so what does it actually kind of like mean? You're like, all right, if I'm an event fund, you know, M&A is happening. We know a specific date at three months in the future that this deal gets done. That's like the extreme case of fundamentals. I got a price today. I know what I'm going to get in three months' time. I got a 97% expectation of it happening, like specific event that is 100% fundamentally driven, not necessarily.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Right. But when volatility, the circumstances under which volatility would spike from 40 to 80 typically R1s where you have the S&P 500 crashes 14% in a week, right? So it is kind of reliant on realized volatility going up as well.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Make a ton of money because it turns your dollar into 20, 30, 50, 100 bucks. So those options are specifically trying to get positive convexity, i.e. turn a little bit of money into a lot of money based on changes of implied volatility, not really changes in market.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Interesting from your question than saying Vicks don't waste too much time on it is you said Taylorus and so what the heck does Tayloris mean? That means if you're investing on behalf of those folks in terms of allocating, is you basically only have one choice of what to buy. There's different flavors of it, but it's essentially one choice. You have to buy extremely far out of the money options. I'm talking, you know, like one year out, so like we'll call it December 2023, like 2000 strike puts, maybe even 1,500 strike puts. And what values those options is not really market movement, it's like, you know, market up, down, you know, 300 points. The price of those options isn't really changing much based on the movement of the market, of spot market. Those options change if volatility explodes. So if the imply volatility of those options goes from 40 to 80, that's when you...”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Yes. So it's quite rare where the SP 500 will go a lot higher, like more than 1% higher, and the VIX will go up as well. In fact, when that happens, you have people writing articles about like, why is this happening? The fear gauge is not working. And some people say that's sort of a bear market indicator. I remember in September 2020, people were talking about the Nasdaq whale. And it was a bear-term market indicator that turned out to be correct. But for a month or two. And then it was, you did not want to be long risk and short volatility.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Anything about the implied volatility of the SP 500 options? No, but it might save us up five points. All you did is you moved down. Like the pricing of the actual options has not changed. The VIX metric might have gone up five points, but all you did is you wandered down whatever, about 10% of the S&P 500 to just get to the implied volatility that was already there. So without wasting too much of your time, it's just like it's really telling you on any given day which direction the market's going and very, very little to do with the implied volatility of the actual tradable S&P 500 options.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Than at the market option and or an out of the money call, right? So you're like your call has a lower valley number than whatever the index is today, which has put even has a higher number. So simplistically, what that means is if the market moves down, well, you're just referencing an option that already had a higher number associated with it. So like that's playing well. So like really simple. You're like a 28, 38, excuse me, 100 strike SRP 100 is approximately right now has an implied volatility 25 and the whatever 3,500 strike has an implied volatility of 30. If you go from 3,800 to 3500, automatically you're going to move from 2,500 to 30.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Talk about Not tradable, yeah, the really, really, really fast version is, as you said, the VIX is referencing approximately 30 days out in the future, all the S&P 500 options in the chain for that date, and it's waiting them in terms of like getting the single measure based on how close they are effectively the money, like for lack of better. So the formula is like, you know, and at the money option has more weight than a 10% out of the money call or 10% of money put, but this 10% of the money put and call are factored in to the calculation of that number. So because there's a ton of inputs into that number, what matters is not only the change of implied volatility of a specific option, supply volatility, a lot of options, and it's a floating measure, meaning I think most people grab the concept that in general, an out of the money put has a higher implied volatility.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“No, my point is there's a litany of choices. Hundreds of thousands of choices that I could use as a quote to say volatility is up, down sideways. And guess what? Like, of course, like some of the down, some are going to say it's up. Some of them were going to say it sideways. If you have that many choices, you can tell whatever story you want. The interesting bit, and by the way, like not to sidetrack, just for your viewers, please just ignore the VIX. It's not a useful tool. It doesn't tell you what you think it's telling you. It mainly tells you the direction of the market on any given day rather than anything to do with it volatility. Why should we do the debt?”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so I mean, first off, when people say, you know, volatility moved or something like that, like, what the heck are you talking about? Because you're like, there's a litany of tenors, you know, like obviously the SIBO wants to make money that they literally have them like every single day for like two weeks all the way out to, you know, two and a half years at this point in time. So you're like, there's tons of different maturities. And obviously, in the S&P 500, you can buy a 500 strike put or a 6,000 strike call. So you're like, there's a litany of choices. Sorry”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“That strategy has not worked as well as some people might have thought, but I know there are very legitimate reasons. So the very sort of somewhat basic assumption is, hey, Zed Volatility is supposed to be a hedge. I allocate a certain percentage of my portfolio to these hedges, and those hedges are supposed to do well when the stocks do poorly. Stocks have done poorly as well, but the hedges, you know, you're not getting these huge sort of 2008 style returns in tail risk and the VIX. So what's going on, Zed?”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Let's move a little bit to the world of equity. You said, okay, bonds don't move that much, so the interest rate products, interest derivatives that were being bought and sold, they didn't give as much juice, nearly as much juice as equities because equities have evolved of, I don't know, 20, 30, in some cases 80, but bonds is much, much less. So stocks have sold off as everyone knows. U.S. stocks, all stocks around the world, but US stocks have sold off roughly about 20%. And when stocks sell off, the thinking goes, volatility rises. When SPY down VIX up or UVXY and ETF that holds VIX futures up, which is like a 30-day implied volatility for the S&P 500.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Yield, and you're like, I'm a long term investor. I can put it in the drawer. This is no big deal. You're like, well, you better make sure you can actually keep it in the drawer. Like, you can't ever have that situation where you need to access it. And their models are like, we didn't have a 300 basis point in the long end of the Gilt curve, you know, in a year in the model. And so we thought we had enough liquidity and could keep things in the drawer, but we didn't. And so we had to sell our liquids and selling a liquids. You can't do instantaneously. It takes a little bit of time. Wow.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Buy it. And so they were like, okay, what do you need? And they're like, two weeks should be enough. And they're like, okay, you better sell that stuff because we're doing it for two weeks. And sure enough, they liquidated what they needed to in those two weeks and the, you know, systemic effects of risk assets across the globe stopped once that bridge was achieved and they liquidated those illiquids that they needed to.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Done, it was there. But they needed the bridge that the Bank of England effectively gave them. They're like, we have good assets. We have a buyer of these assets.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“I now have an issue. And so that's why we saw those last kind of like 10 days of September UK pensions causing stress globally because at first they sold UK IG credit, then they sold US IG credit, obviously putting pressure on here. And then they had a call up, you know, the black stones of the world and said, all right, we're auctioning off these parking lots in Germany. You want them and Blackstone says, yes, I would love to have them. We have a lot of, you know, uncommitted capital that we can call at any point in time. We need about a week. We need about a week to go ahead and make sure their parking lot exists. They send some 22-year-old over there. They'd put it in their model of comps and they're like, all right, we think the fair value of that is, you know, 97 cents in the dollar. We'll bid you 92 cents in the dollar. And they're like, perfect.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, as interest rate swaps, but again, it's just guilts. It's like they just own guilts, whether it was in cash or synthetic or both. But, you know, all of them are both, to be honest. And if they were only in guilts and linkers, again, treasuries and tips, and then had, you know, additional swaps on guilts to get the duration to match, there'd be no problems. Like everything's moving in sync. You have tons of collateral, no problems. As soon as you started selling some of your cash guilts and buying some other things to reach for that like little bit of additional yield, that's where the problem started, eventually ending up all the way in a really illiquid holding. And then when both the assets and liabilities fell 40%, you're like, oh, shoot, like I had, you know, 50% of my assets in a liquids. Now I only have 10% in liquids, 10% in liquids isn't enough collateral to support the position that I have on.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Because the discount rate went up big, right? So it's like you're Your assets and your liabilities have the exact same discount rate, right? And so when your assets went down 20%, your liabilities also went down 20%. But what ends up happening is you actually need to continue to support the position that you have in the asset side, which means you need collateral to support that position, but you funneled a handful of your collateral into something illiquid that you cannot post at the exchange to maintain your positioning. And the position you're talking about”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Both assets and liabilities were down a ton. Rates sold off a ton, so their assets are down 20%. Liability is also down 20%.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“That's what creates the problems. That was the issue the reach that they did eventually drifted itself down an illiquid path. And when they needed essentially access to that capital, again, their assets and liabilities were doing what they're doing. They're just both down 40%. We need access to those assets to go ahead and keep collateralizing what we're doing. They got rid of the access. They put the capital in something illiquid.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“If you're still fully funded, your assets and liabilities match, that's all good and fine. You're doing your little reach, but when you need access to those assets to go ahead and collateralize everything that you did to go ahead and make those assets and liabilities match, you have dramatic movements in both the assets and liabilities. They're moving exactly the same, but your assets aren't totally accessible. You know, you took 50% of them and put it in a place you can't access immediately. That is the problem. And so that little reach for that, you know, it's every problem, right? You're like, hey, there's no risk in this. Let's wait for just like a little bit more.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“They never made it to that. They never made it to that. But what they did bake it to was high grade privates. And they started investing quite significantly in essentially investment grade level private investments. Your parking lot down the road, infrastructure stuff, or gone down that path. Highly illiquid stuff.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Credit, and I'm willing to like hedge the currency risk. And like, I get that little 30 basis points, 0.3% more. And that's all I need to, like. Make the machine work and not have to fund it for new people.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“What you do is you want to reach just a little bit with your assets. Like, I could just totally lock this out. I could buy guilts and linkers again, basically tips and treasuries and call it a day. But every time I hire somebody, then I would have to contribute more money to the plan because they're a new liability. They're a new person in the pension. I'd rather just have the pension pay for that itself. So rather than just owning, you know, again, guilts and linkers, essentially treasuries and tips, they reached a little bit. And they, you know, these guys don't reach like, oh, I'm going to buy equities. It's not like crazy risky stuff. It's like at first it's like, I'm going to buy a little bit of credit. Like, not a ton, but like rather than just buying guilts, I'm going to buy some credit. And first, they just bought credit like in the UK, no currency risk, all that kind of stuff. They're like, UK credit market's kind of small. It's, you know, not really earning as much as the US. Let's go. Let's buy US credit. It's still going to be A plus, you know, stuff. Like, we're not buying high yield. It's ig.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“And so when you want to call it a day, you actually can call it a day. There's no new people coming in. We can take our liabilities and assets, call it a day. In fact, most U.S. plans, these, you know, not most, but like they're starting to do PRT, which is pension risk transfer, which is basically you just sell the whole thing to an insurance company, you're done with it. When your plan is open, you can't do that. There's new people. There's new people every day. Every time you hire somebody up, that's another, you know, 50-year pension plan person because you hired a 22-year-old, right? So when you're open, you can still lock down vast majority of the risk, but it can teach some bad behaviors. And what I mean by that is, all right, again, we'll just use simple dollar. If you have a hundred dollars of liabilities discounted today and you have 100 pounds of assets, you're like everything's all good. But you know you're going to hire more people.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Those lines. And so our pension plans as a whole are legacy. Like it's you're paying off the people that work 40, 30, 20 years ago, current employees are on a DC plan, which means our duration is shorter because you don't have new people, young people getting involved in the plan, and they're smaller and shrinking. But they're closed.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“But essentially, if the UK jacked up those insurance premiums to basically convince corporations to be like, don't swing for the fence, just lock this down and make sure you can pay it. Where the problem came from, because everything I'm describing is like, this is all fine. Everything's great. Why did we have a problem? The reason we had a problem in the UK, which makes it very, very different to be honest, from the US, the main reason, is UK pension plans are still open. US pension plans for the most part are closed. What does that mean? New employees in the UK get a pension. In the US, that is a rarity. We've shifted over to DC defined contribution.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, okay. Right. And so LEI took off in the UK about 20 years ago. And it's really regulatorily driven. Basically, the amount of insurance premiums, for lack of a better word that a pension would have to pay for being underfunded and or taking market risk, they increased them a bunch. So basically it's like we don't want you using your pension to swing for the fences, which a lot of people did in the 80s and 90s because essentially if you became way overfunded, then the corporate could pull money out of the pension and put it into earnings. And they're like, we're done with this. We want the pension to just be there. And so the best way to do this is basically say if you're underfunded, you're going to have to pay into the insurance premium pool. U.S. is called PPG, which is essentially the Fed takes over defaulted corporates and absorbs the pension and your pay insurance premiums essentially into that to make sure there's enough money as a collective.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“No, their duration was probably perfectly matched, to be honest. Like, their liabilities and their assets are the exact same amount of duration.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“So duration you can have it on the liability side. So if you have a lot of sort of aging retirees who need money when they retire, you can forecast that. And that's basically a future cash flows in reverse, but there's cash outflows. So you need cash inflows to match that at the specific time horizon. So was the UK pension system did they not have enough duration or do they have too much and they needed to hedge it back, just to be clear?”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Liabilities. And the other piece is UK pensions are pretty much fully funded. So if you had a $10 billion of liability or pounds of liabilities, most of them had $10 billion of assets. So it's like you don't have that weird situation of we're chasing for something because we have way too little money.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Off capital base over time. And again, it's actually really, really easy bond math. You basically know what the distributions you need to make are. Like there's little variability, like longevity. Oh, shoot, people are living longer and extends the duration of things. But ultimately, your actuaries telling you these are the cash flows you need to pay. And that's pretty much what everybody expects and how they're modeling their portfolio against it. In the UK, the discount rate, meaning like you got all those cash flows and what are you using to discount it back to today is a combination of guilts, i.e. treasuries and linkers, i.e. tips. So it's a portion of it is just, you know, whatever essentially the UK version of a treasury is, plus a little bit of inflation piece. So it's very vanilla and very vanilla to go ahead and hedge that, you know, super liquid, available products that should be pretty easy to buy an asset portfolio that matches.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Pretty significant structured product market which was selling volatility and equities and embedding them notes than Korea then a little bit in Europe and then you know here so low rates cause people to reach for certain things and they create products to service those those needs the UK pension crisis is a completely different story like quick synopsis, I guess and then the UK pension prices without spending too much labor time because I feel like a lot of people have talked about it but essentially LDI liability driven investment you're just trying to match your assets to your liabilities and what that means is your liabilities are cash flows are going to go out every single year to retirees and you want your assets to be able to withstand all those payments whether it's from distributions or just you know sell”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“12% because that's an easier marketing decision and you need to have riskier assets that are underliers to the options that are embedded in those notes to get those big headline yields. So that definitely has a significant effect on equity option markets. It's mostly in the long end, you know, meaning you're plus type stuff. It definitely has effect mostly in index rather than signal length, but it definitely has an effect because, you know, that's not exactly the most liquid part of the curve. And if there's a lot of notes that are doing things not based on fair implied volatility, they're doing things based on, I want to create a note, hedge it, and then sell another note. It definitely distorts fair value to some extent. It's not like we haven't seen this before, though. It's like, you know, Japan had low rates forever, so they created.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT
“Options in riskier assets because those options are more valuable. If you're selling options in treasury space, it'd be difficult to like, hey, here's a structured note that generates three and a half percent over Treasuries. It's hard to market, especially if you're trying to get a 2% fee or something like that in there. So in general, they're selling options in the equity space because equity is in general have higher volatility and thus the options associated with them are higher. And you can get some like, you know, funkier options. You're not just selling a putter, a call, it's a knock-on, a knockout, and so on and so forth. Maybe there's some hybrids, the if-thens, like, you know, the equity market has to be lower and rates have to be here. Anytime you add complexity, then obviously the value of that option likely goes up. And thus you generate more effective yield in that structured product. The point there is most of that space is definitely equity oriented just because people want to sell a structure delt that have a headline yield of seven, eight, nine.”
2022-11-14 · Forward Guidance · Forced Retirement Selling May Disrupt Santa Rally | Zed Francis · IDENTIFIED FROM THE TRANSCRIPT