Diego Parrilla, CIO of Quadriga Asset Managers and author of The Anti-Bubbles, joins Maggie Lake to expose the structural flaws in today’s global economy, flaws rooted in decades of reckless money printing, debt addiction, and political short-termism.
Parrilla warns that we’re heading straight into stagflation, where inflation, slower growth, volatility, and geopolitical risk converge into what he calls a “perfect storm” for traditional portfolios.
In this must-watch conversation, you’ll learn:
- Why gold could soar to $10,000
- How yield curve control may be the Fed’s next move
- Why the 60/40 portfolio is broken
- How inflation expectations are driving markets
- Why volatility is the new safe haven
- What true diversification looks like in a fragile financial regime
Parrilla also critiques the illusion of safety in Treasuries and the dollar, expresses skepticism about Bitcoin, and explains how to position portfolios for resilience in what he calls a “hostile market environment.”
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Diego Parrilla 0:00
That path to stagflation, which is the combination of, you know, inflation and low growth, is becoming more so a reality than than ever.
Maggie Lake 0:16
Hello and welcome to wealthion. I’m Maggie Lake, and today I’m joined by Diego Parilla, the CIO of quadriga asset managers, author of the energy world is flat and anti bubbles, and visiting lecturer at Imperial College in London. Hi Diego. It’s great to have you on Thank you, Maggie, thanks for having me. So as we can tell from that intro, you have been thinking and writing about market and debt bubbles and sort of these big macro dynamics for a long time. So I’m really curious, how would you describe what’s unfolding in global markets right now?
Diego Parrilla 0:53
I mean, we’re clearly, I think I would break it down in two parts. First one is, you know, from a structural perspective, the damage have already been done in some ways. You know, we’ve seen decades of monitoring fiscal abuse that have led to imbalances in the system. The monitoring fiscal policies without limits do not solve problems. They just delay transfer, transform and enlarge them. And so the starting point, you know, is complex, and we’ve had a lot of other dynamics in play, including geopolitical issues as well as AI and so a very complex dynamic. But what we’re witnessing now with this new era of trumponomics, you know, it’s in the tariffs. I described it a bit like a perfect storm for hostile markets, because you’re really hitting in some of the weakest areas. You’re creating a lot of uncertainty around, you know, investments and around outlook. This is just bad news. You’re creating clear inflationary pressures, which is the Achilles heels of global financial markets, as they can impact, you know, through high inflation, you could have, effectively, scenario of lower equities and lower fixed income. And I think that’s that’s a big problem you have, obviously higher volatility, which we’re experiencing, and that’s also damaging for risk and and lower economic growth as a result of of these measures. So I think in some ways, what we’re experiencing is can be a game changer. Certainly, Mr. Trump is positioning this as a historic moment Liberation Day was to be talked about in decades to come, and certainly a belief in something that he generally thinks is the right thing to do, and the price that will pay is worth it. Having said that, I think, like great philosopher Mike Tyson, would say, you know, everyone has a plan until, you know, they punch you in the face. And I think the markets are starting to test a little bit of of that view, not just on the equity markets, which I think some of the valuations were perhaps stretched and but I think also on the fixed income markets, which I think poses a bigger challenge, and that’s already creating some strengths, as of speaking right now, we just had all this rhetoric with with Powell, and he can’t wait to get him out. And so I think the pressure, the tension, is growing across multiple fronts, and volatility is going to remain high. Uncertainty, I think will remain high. And I think he’s got himself into such a mess that you can’t just pretend you can. You can just walk back from this. So I think we’re in a fragile situation that is exposing a lot of the pre existing fragility of the system. And yeah, it’s going to be a rocky ride. It’s
Maggie Lake 4:15
interesting that you talk about the pre existing fragilities, because you know, if you if you follow the headlines. This is trade. This is an attempt to rebalance global trade, which a lot of people acknowledge maybe needed to happen. But when you’re talking about those existing fragilities, what exactly is the root of the problem? Because it sounds like we were heading there anyway, maybe this has just created more volatility around this, but the rubber was going to hit the road. What is the root? What? What? What is the root of that fragility that we need to understand? Because that seems really important.
Diego Parrilla 4:49
Yeah, I think, look, when I, when I wrote the anti bubbles in in 2017 that was in the midst of negative nob bin AL. No interest rates. You know which, which was kind of taking monetary policies without without limits, to an extreme we’ve never seen before, right? I mean, it’s an absurdity to have nominal interest rates, and that abuse of monetary policies has always gone hand in hand with with fiscal abuse. In some ways, the ability for governments to overextend their debt was rewarded and encouraged and facilitated by a world of artificial low interest rates where central banks were literally printing money and lending it out so the levels of debt that we’ve taken at a global scale are just simply artificial. You can’t possibly think that you can sustain some of those levels of debt without the support from from, I guess, money printing in one way or another. And so I think the this dynamics that we we lived through for the last few decades, you know, acknowledging that or pretending that deflation was the enemy, that we just couldn’t print enough, and that we had to effectively overextend ourselves. And I think this has created a situation that is effectively limiting the ability of the economies and the world to continue to play the same game. And so the dynamics that we’ve seen with AI, and which is clearly a game changer, have in some ways, created this phenomenal valuations. We’ve seen a lot of things come into play the last few years, with the pandemic and again, a technological game changer and other things that have created this perception of invincibility. In some ways, I think the monitoring fiscal abuse that we’ve seen is it was simply sustainable. It was a matter of time that things would have to go in check. And in some ways, you know, if you were to write a movie, I don’t think you could come up with a with a better script that coming up with, with this, this sort of dynamic of of tariffs. But as I said earlier, it’s a deadly, you know, combination of what hurts most, which is, you know, inflation, volatility, uncertainty in economic lower economic growth. So as we go into this, there’s big questions being been asked. You know, that are multi decade, you know, people starting to challenge the role of treasuries or the dollar. Are they really safe havens? Or are we in a new paradigm? And things like gold, which you know, are performing incredibly, you know, as which is, in my view, long overdue. I mean, my The subtitle of my book was called gold’s perfect storm. It was very obvious that all these monetary and fiscal abuse would result in some of these things. And yeah, as we head into this, the from a game theory perspective, I’ve always believed that the system is designed to finish in stagflation, you know, faced with these challenges, or, you know, governments and central banks are always going to do the same thing, you know, they’re going to print and borrow. And so I think that that addiction to monitoring fiscal policies without limits eventually has limits and things, you know, this is not a zero sum game. It creates, you know, second third order effects and but ultimately, I think that that path to stagflation, which is the combination of, you know, inflation and low growth is becoming more so a reality than than ever. So, yeah, I think this is really important
Maggie Lake 8:53
to lay that out. I’m just going to jump in here because I feel like and we’ll unpack all of what you just said. I think it’s really important to point that out, because I because I think, as you just explained it, a lot of people can wrap their head around that, because it’s, it’s sort of, you know, raging around with a credit card and no one ever charging you interest, and feeling like there was this amazing power with that, and then the sort of bill coming home to roost, and all of The difficulties of getting out under that, if anyone’s ever experienced that, I think people can relate to that, and can kind of make sense of that, even though it’s on this massive level. So, so I think it’s really important to sort of set that as the root of the problem. So from, if I’m hearing you correctly, that there is a sense, and I’m presuming people certainly within the Trump administration know this because, you know Scott Besson was a macro hedge fund manager. I mean, he, you know, I’m sure he read your book, I mean, and I’m sure you’ve all had conversations with each other over the years, because this isn’t a new concept, and many you have been worrying, warning about this for a long time. Can this be fixed by research? Setting global trade. I know right now, the moment we’re in, there’s uncertainty, there’s volatility, you know, there’s concerns about inflation, but ultimately, if they are successful in Reno renegotiating this global free trade with more nations involved, and somehow this whole tariff war ends with less tariffs. Is that a step in the right direction? Can Can resetting global trade, if they were successful, start to address some of that debt level, or is that the wrong remedy?
Diego Parrilla 10:35
No big questions. I think clearly the trend of globalization versus, arguably, the bipolarization of the world or or, you know, the the protectionism of America first. I think these are beliefs. These are major issues that are, you know, you can find scapegoats for to blame whoever you want for the issues, but I sincerely believe that you know, what Trump is trying to do is it’s not just about the country. So I think that the message is addressed to to the corporates themselves. Ultimately, if you’re apple and you’re building in China, nobody arguably put a gun in your head to do that. They may have given you, you know, benefits and incentives and and a lot of carrots, but, but ultimately, the decision is, is yours. He generally feels that this is something that you know needs to be restored and, and I think a lot of challenges in this process, because the damage is clearly there. I think it’s totally unrealistic that you can just switch on and off and pretend that corporates can just overnight be able to continue their operations. There’s going to be a lot of disruptions. It’s clearly going to be disruptive with inflation and growth, and that’s impacting valuations. And you know, we’re in a world where there’s this big battle, you know, between deflationary forces and inflationary forces. And we heard Powell speaking, and so I think whilst the direction might be correct in the sense that maybe, it’s the right thing, and there’s been some imbalances and some, arguably, abuses in the system that have led to things that might need to be corrected. The way in which has been handled, and the aggressiveness and speediness of the moves is certainly very damaging. And I think as we look through we’re talking about inflation, but what really matters even more than inflation itself is inflation expectations and and that’s something that you know, in a world of low inflation, central banks are in control. You know, we are. I always said that, you we’re frogs in a monetary broth, you know, where the temperature is increasing at an official rate of 2% per annum, which is complete BS, to be honest, but, but the game is really about us frog staying in that, in that broth, and what’s the reason why us frogs would would jump out of that? Let’s call it fixed income broth, that world where you you think you’re okay, and it’s obviously high jumps in inflation, but it’s, it’s mostly inflation expectations and and that is the reason why, you know, back in in 20, you know, 22 we had this phenomenal move in, in in hikes and rates. It wasn’t really inflation itself. We have had inflation for, for a long time. It was inflation expectations getting out of control. And I think that demon is coming out of the bottle again, and it’s coming in the middle of other hostilities and wars. And I think that pressure that is going to put on government’s finances and all the other points we’ve made, means that the timing and the sequence of these, these problems to solve is, you know, bringing the usual short term, long term dynamics. And so arguably, even if some of these measures might be the right thing in the long term, I think the path is going to be extraordinarily painful. And I wonder if it’s going to be even something they can, they can handle if it, if it goes. So that kind of forces, you know, some sort of negotiations, as you say. But I think about it in a way that, look, would you go if, if Trump, you know, needs to save face, he’s put us all into this big mess. He has clearly decided that he he can’t just back off, so he’s picked on China has been being the bad guy, and both sides are, you know, might try to negotiate. I think it would be hard, I think, given the beliefs and the lack of trust, particularly in the on the US side on, because some agreements. Reached before. And according to the administration, they feel that they weren’t honored, and it’s been just, you know, there are deeper things that you can read and directly between the lines, but also explicitly. And so I think the US China thing is going to be very difficult to resolve. And if you think about it, and you suddenly, you come up with an agreement with, let’s say Vietnam or or anybody else at the end of the day, Trump wants all those things brought back to the US, right? He wants the money, the jobs, the technology, the production capacity. He wants that back. So how is he going to come up with agreements with third parties like Vietnam, if, if that’s just transferring the program from China to Vietnam or whatever else. So I think he’s really trapped. I think it’s going to be very difficult to do something meaningful enough. But ultimately, whatever compromise they do, and if this is done in a very small scale, it’s going to take time. They’re multilateral negotiations. Time’s really going against him, in the sense that you know, even the delays you know, which
Unknown Speaker 16:15
sir. So basically, in that sense, the all these, all these dynamics that are taking place in terms of the,
Diego Parrilla 16:27
you know, these pressures I think are really hurting him and and uncertainty. I think it’s a major factor. You’ve seen the ECB cutting today and arguably going for another three cuts and uncertainties everywhere. And that’s, that’s a real, real thing. So these negotiations are really, again, might be the right idea, but the cost is high. The mismatches in timing are going to put a lot of stress into a lot of areas. And this has already happened in a world of you know, we have limited room to maneuver in terms of fiscal expansions, and so I think it’s a bit of a mess. I mean, you can see how all this, all these pieces are coming together to reinforce this idea of volatility and uncertainty and lower growth. Can we completely unwind it? I don’t think so. I think it would be, you know, would require something pretty major. So I think Trump’s going to have to save face and and just, I think ultimately, it’s a matter of belief. So I think he will continue that on this line, and even if he throws lines and bones and compromises, I think deep inside and the deep rooted problem is, you know, he wants to bring that back to the US, not not to Vietnam or Japan or whatever. So it’s going to be very interesting. And in the meantime, I think we should be ready to for more wild headlines and pressure building in the system. So from markets perspective, is arguably a big worrying but I think volatility will continue to to rule, and inflation is, you know, it’s like the entropy of the universe. It just, it just only goes up. So I think in that sense, the markets already telling you that there are worries about that, and you can see how governments are reacting to that, and how the forces are pulling in both directions. So it’s, I think it’s a recipe for a lot of volatility and uncertainty. And this is never good news for markets, no.
Maggie Lake 18:33
And we can feel that. I think all of us can feel that. What? So this is inflationary. In your mind, we’re in an inflationary period, because, as you know, there are plenty of people who are seeing deflations everywhere. This is why central banks have to move. We’re seeing prices fall, I guess, on the back of this idea that people are because of the uncertainty, pulling back, and that we’re headed for a global recession, or at the very least, a US recession, and that’ll kill demand. Why do you think this is an inflationary period? What are you seeing that the deflationary camp doesn’t
Diego Parrilla 19:06
I think there’s two forces. Of course, there’s a lot of deflationary pressures, and there’s also inflationary pressures. And depends which side you’re on. I think the real issue with inflation is monetary inflation, is structural inflation that comes through money printing and debt. The cyclical inflation is what it is. You have strong cycles and weak cycles and and super cycles in commodity markets, you know, with super high prices and there’s a lag for investment all those let’s call it cyclical and super cyclical. Inflationary pressures are rules are within the game. The reason, I think this is ultimately inflationary is because of the wrong type of inflation, which is the monetary inflation, and that’s just pure money printing and debt that is the system is taken and that’s. Very much one way. And the bigger the problem, you know, the more you need it. There’s no doubt in my mind that you know, if you look at I don’t think it’s a coincidence that that Trump sort of gave this relief to markets last week, as the you know, 10 year bond was at four and a half, and the third year bond was was at five. And this these levels make extraordinarily difficult to finance yourself and refinance yourself. And I think if these things get be out of control, then they bring what is inevitable, in my view, which is yield curve control. You curve. Control is a mechanism by which, you know, it’s basically the next level of QE, right? Qe at the end of the day was, we’re going to print 500 billion a month. And, you know, we’re going to buy stuff, right? This is, I’m just going to buy infinite amount to make sure the yields don’t go right. And we’ve seen this in action. We’ve seen it in Japan, and we know what it means for the currency and inflation. So I think in a world where the level of debt is too high, and, you know, you basically been tested on that through higher yields, I think there’s no question that we’re going to see basically more more printing. So that’s a reason why, you know, inflation is, in my view, structural, and why, in a way, the more deflation you have in the system, and the in terms of slow, lower economic activity, the more inflation you’re going to get through the other channel. And you know, we have plenty of examples in Latin America and many other places of how these monitoring fiscal policies end up in effectively diluting the value of the currency, creating structural inflation and creating the stake inflationary problems that I’m talking about. I think you can easily get fooled by the deflationary pressures of the economic activity and things that which are real, but the problem is so large that you’re just not going to go through the real pain you should endure. You’re just going to go and do it all again and just print more and sustain the system and find ways and great acronyms, we seem to be pretty good at that, that that will effectively create mechanisms by which these things get stabilized. But let’s not fool ourselves. This is just, you know, they’re not solving the problem. They’re delaying, transferring, transforming and enlarging the problems, which is again reinforcing the thesis of the anti bubbles that I put forth in the book.
Maggie Lake 22:45
I think this is that such an important explanation, and you’re the second person to sort of hint at that this week with me, and I think it’s really, really helps us understand why things seem so confusing and at odds when you’re talking about that sort of those high street, main street price increases being very different, or price decreases being very different from that structural inflation. And the inflation expectation that you’re concerned about, that stagflationary kind of spiral is because of that monetary inflation, not because of the prices we pay at the food store or something else. So what do investors need to understand when it comes to investing in this kind of environment?
Diego Parrilla 23:31
Well, in my view, the if you think about portfolio construction and you know, building your objectives, I think the we’re in a new, new game, right? I think inflation is you can’t ignore it. I mean, for the longest time we’ve been, you know, working on, you could pretty much ignore inflation from your investment decisions, and it’s only a relatively recent event. And even today, I don’t think people are that cautious, or you know, in terms of what it means, but I think the big dynamic that it’s is challenging. In many ways, the setup is, what does inflation mean for fixed income and credit markets? In some ways, you know, you’re earning your high nominal returns. And I would argue that if you look at the US fixed income market, you know, with 10 year yields at roughly 4.3% as we speak, we’ve sort of earned a lot of defensive power. You know, the duration, if you with very simple back of the envelope maps. You know, if there was a crisis and interest rates were sent all the way back to zero, you could gain potentially. You know this, this 43% arguably in, in in capital gains. You. Just through the PV of the coupon. So in some ways, these high yields give you the potential for defense, which is something, again, we earned through the hikes. At the same time, it’s questionable whether, in a world where inflation is sticky and structural, whether you can actually do that, or to what extent you know is zero realistic, or are we looking at 2% or 4% or what happens if you know you you can’t really come to the rescue with with fixed income? And I think that reality where the 6040 balance portfolio faces those inflation and pressures and challenges, I think it creates, you know, risks, the risk of false diversification. We saw it in 2022 and we’ve seen a little bit of that in the past few weeks. And I think this is something that the inflation expectations, the realization that this is not just about nominal returns, but real returns, and the purchase of power in the long term, I think it’s something that, again, has deep implications. What it means is that when you think about diversification, you probably need more reliable sources of, you know, anchor relation, or things that will protect your portfolio and and that’s kind of what I’ve been doing, you know, for forever. I mean, if we portfolio was a football team. We play goalkeeper, and I think that role of goalkeeper becomes ever more relevant when the defenders, such as fixed income, start to fail or they’re not able to do their job. So yeah, I think in terms of investments, we are perhaps conditioned to believe that the spikes in volatility are very short lived, that everything will go back to a very low, let’s say VIX, below 15 of environment. You buy the dip, you sell the spikes on the on the VIX, you sit on these things that always go up. And I just don’t think those free puts are there. It’s going to be a much more volatile environment with with this additional risks of inflation, in geopolitics and uncertainty, and so in some ways, I think it’s, it’s the game is a lot more open than it’s been in a very, very long time. And you could get people in the show that will call for the next move being down 40% and some people will call it for up 40% and that, I don’t think either one of us is right. I think what it’s telling you is going to be very volatile and and that’s that’s clear, but the longer this continues, or if the situation doesn’t improve, I think the pressure builds up for lower and that’s kind of my base case. I think it’s things remain volatile. Things start to wait on the system, there’s a lot of uncertainty, and that impacts consumption investments. And before you know it, you know you need to get this, this additional support. But in some ways, it’s going to be challenged by arguably, a lot of these inflationary pressures that are coming also from from, you know, the types themselves and other issues. So I think volatility rules and and that creates, again, without this idea of, by the dip and being, you know, correlations and dispersion increasing. And let’s, let’s not, let’s not forget, you know, we were probably seeing the burst of the AI bubble, at least in its first wave, I think clearly, as a game changer, as a technology. We’ve seen this movie before. My book, the energy world is flat, was inspired by Friedman’s book The World is Flat, which was a post mortem of the.com and I think there’s a lot of lessons to be learned from the.com you know, with a game changer technology, the big investments done, the over capacity, the write offs and how, ultimately, the big winners were the consumers. You know, where the different people, not, not necessarily those huge corporates that were expected to make those, those those huge gains. So I think it’s there’s a lot of factors coming in, but certainly the market dynamics, whether we’re talking about individual investments or Outlook or volatility or interest rates or or growth expectation. Or investments, or anything else, or, you know, or portfolio construction is is way more uncertain and way more volatile than than it’s been, and that, I think it’s going to impact also risk taking and other things which kind of everything pushes back to the point we’re making. You know that it’s is is a it’s a bit of a fragile environment, and that doesn’t have a pretty obvious solution.
Maggie Lake 30:26
Yeah, so I’m curious, Diego, you, you wrote these books. I mean, 2017 you’ve been thinking about this for a long time. How does it feel now that it’s actually playing out? I mean, this is kind of what you predicted. Now,
Diego Parrilla 30:42
look both, both books. I think you know, if you read them at the time, they’re like, What the hell you know? What is this guy talking about today’s Of course, I think you know when you have this the first thing I would say is that, you know, writing these books is, is very humbling exercise, you know, it’s, it’s an exercise of, you know, as Cicero would say, if you want to learn, teach or if you want to learn, write, I found those books, you know, as an exercise for me to try to make sense of incredible things. The anti bubbles was really about, what are we doing with this thing of negative nominal yields? Is this? Is it really as simple as that? Can we? Can we? Are we really solving problems? What? What exactly is it? And so I think when you have this very long term models in your head that are, you know, 10,000 feet or higher, then, yeah, it’s, basically you get away from all the short term noise and a lot of things. And I’m sort of blessed or lucky that you know, the themes that I presented, both in both books and in general, I haven’t just survived the passage of time, they’ve actually been reinforced. And to be honest, this it’s also, if you’re a student of history, then you realize that this, what we’re doing, is nothing new under the sun, in some ways. So a lot of the things we’re doing and have been trying, I think it’s we might think this time is different, but ultimately, from a macro perspective, again, there are a lot of bright minds that that share my concerns, and when I dedicate my book, I generally, I’ve always said, I hope you like it. I hope I’m wrong,
Maggie Lake 32:33
right? Well, that’s why, that’s why I’m asking, because I know, I mean, no one was accusing you of being Chicken Little The sky is falling, but there was an element of that, for those of you who have been looking at this and kind of warning of this, and when that happens, there is a point where you’re like, Well, okay, the sky is falling, but shit, the sky is falling. Like, this is not good, you know. So that’s what I was curious about. How it feels. It’s almost kind of the worst case scenario. What you all try to warn people against is now unfolding. So you must have thought about how to navigate through that. In the worst case scenario that you turned out, you turned out to be what I feel
Diego Parrilla 33:13
like, like a doctor diagnosing a bad disease to a friend. You know, I as a as a doctor, you want to be correct. As a friend. You want to be wrong. I think some of the things we’re seeing, you know, are, again, from a game theory perspective, the game is designed in a way that it will end up in stagflation. It’s just from my perspective, it’s, it’s how it works. If you are a government and you, you know you want to win the next election, and you can actually borrow a lot, and that you can do because you control the central bank, who’s basically printing money to lend you and allow you to do things that would wouldn’t be possible, and that leads you to levels of debt that are unsustainable, and means that you’re creating systemic risk, which means that mommy and daddy need to come back to the rescue again, and that sort of saves the day and creates the next wave and a new paradigm. This thing’s just the snowball keeps going. And yeah, I think ultimately, the sun, the sky may fall, but the sun will come out. There’ll be transfers we’ve seen, you know, countries in like Latin America and others that I think we should study and pay close attention to, what it means for those economies when you go that, that route. And, yeah, you know, I think people like Ray Dalio or myself are worried about geopolitical implications and what it means, and that’s what truly, truly worries me, and that direction of autocracy and geopolitics and inflation and scapegoats is is happening, and it’s. Yeah, I think for the average people, it’s very hard to to pinpoint exactly who to blame, right? And it’s very easy to manipulate that. But ultimately, some of arguably well intended solutions to problems, such as, you know, you could go back to, you know, 2008 right? And how we decided to address certain issues. I think it’s, I think in Spanish, we have, this is an expression. It’s just, cuando se Jodi el Peru, they say, When did Peru screw it up? And it’s a very well known sentence, and people discuss, you know, go back in history, like, Okay, where did it all start? Where did we go wrong? And I think you can go back and see that some of these things, arguably, were again short term, long term trade offs, but it’s always one way. You know, faced with systemic risk, or faced with a pandemic, or faced with a war, or faced with a crisis of a the financial system or regional banks or an energy crisis, every single time we do the same, every single time we solve it through a combination of money printing and debt. And the point I’m making is we’re not really solving the problem. We are delaying, transferring, transforming and enlarging the problem. And so you may have averted a regional banking crisis or a European energy crisis, but you ended up transforming the problem into inflation and inequality and social unrest. And that’s why you know this. This is this is how things work at the macro space, and why, some of my, you know, big picture macro frameworks are working and they’re playing out. And, you know, it’s not a it’s not a crystal ball, it’s just understanding some of those dynamics and how they compound. And I think ultimately, we’ve passed the point of no return, unfortunately, a long time ago in some of these economies, and you see this thing accelerating. I think that new phase ahead of us is yield curve control. That’s going to be the new acronym. They may call it yield curve control. They may call it something else. In Japan, it’s called yield curve control. You know, they used it and they shied away from it, and it’s put aside, but certainly will come back 100% 99.9% certainty that I think it will be needed again in Europe, the day we did the first jumbo hike from minus 0.75 to zero. I mean, it’s kind of science fiction to that we were ever at those levels. But the day they did that, they introduced the anti fragmentation tool, which was, okay, guys, we’re going to hike rates, but please don’t mess around with Spain and Italy, because we’re not going to let it happen. And if you think about it, you know it’s pretty remarkable that on the way up of yields, actually the periphery was very well behaved. It was very well behaved because the ECB was ready to step in and introduce look of control. And I think the Fed, if things get bad, will have to do something similar. And this is, you know, de facto everywhere in the world, everyone has the same disease. And, yeah, I think that’s what’s coming on the on the macro which accelerates currency devaluations inflation, and it brings us to the reality of a world where you can no longer ignore inflation, and the frogs start to jump, and central banks lose control. And fixed income, again, requires this printing, which is a self reinforcing mechanism, why gold might be on its way to 10k and real assets and and so how do you stop that? It takes posterity. It takes pain. It takes things that politically are very difficult to handle. And so whilst we were well intended, and we tried to to impose those, I think realistically, they’re always, always tricky, but look Argentina perhaps shows a bit of a glimpse of hope in terms of how, you know, I so what was, you know, a country already deep into the abyss is is taking some very dramatic measures. But I think the beauty of Argentina, in some ways, is how the populist community has finally understood that all those measures were really counterproductive, you know, and how I think if they really want to get, you know, want to avoid these issues, that some, some pain is to come, but, but yeah, so hopefully, I think we’ll find that that path, but certainly the car. Current road and the new dynamics are, in my view, not necessarily going in that direction. They’re going in the opposite direction because we’re gonna this artificial measures and things that we’re introducing the system. I don’t think they’re helping for that path. But who knows? Maybe that’s a catalyst that we need to get things on the right track. But it’s not easy. I mean, we’ve seen it with the dragging report, and you know, in general, people know what we need to do. It’s really hard to get it done, and in the circumstances, with this polarization of the world is becoming even harder. So yeah, from a macro perspective, we with forces, yeah in every dimension and direction.
Maggie Lake 40:52
I mean, yeah, that we need problem solvers. It seems more than ever in this environment. What? What? So? What? What does the anti bubble strategy suggest in terms of investment? Are there any safe havens? You mentioned gold? Is that the only safe haven?
Diego Parrilla 41:09
Well, the idea of the bubble, anti bubble, for those who are not familiar with it, is, you know, bubbles are, if I borrow George Soros definition of bubble is assets that are artificially expensive based on a belief that happens to be false, what he calls a misconception. So for example, if you look at Nvidia and the day that the deep seat announcement came out, there were a bunch of misconceptions, a lot of pillars that were sustaining those valuations that were hit, you know, like you need these super computers. No, turns out you can do it with your child’s children’s, you know, gaming computer. Oh, every I’m the only game in town. Marches are infinite. Demand is infinite. As you get these misconceptions hit, effectively, some of these bubbles implode. So what I did with the concept of anti bubble is I generalized the framework, and I said, Okay, misconceptions can distort reality, but not only through artificially high valuations, also through artificially low valuations. And if you think about the typical bubble, anti bubble relationship, like, you know, in equity versus VIX, there’s no good guy and bad guy in the bubble anti bubble movie. Sometimes equities are artificially expensive and volatility is artificially cheap, and sometimes during crisis, is the other way around. Volatility is artificially high and equities are artificially low. So my view is this is a game where you need to embrace volatility. You shouldn’t fight you need to be in a position where you have both equities and reliable reactive protection. And I don’t think fixed income is that reliable reactive protection. We run strategies that run basically volatility and tail risk, and so your direct, reliable, reactive protection for an SMP, long would be an SMP put Okay, so that’s going to give you, but those type of protections can be expensive, can have a lot of negative risk, premia, so there are other ways in which You could try to protect you know, whether it’s vix call options or gold or arguably the dollar or duration or others, I think in this environment, as we discussed earlier, some of those called safe havens are being challenged. You know that we are now in a situation where one of the biggest questions out there is, is the dollar safe haven currencies? Is our treasury safe haven? Or are they? Are they the problem? Or are they potentially going to come and save me? And I think this is really a big question. I still think that what we’re witnessing today as a narrative. Narratives are very powerful and tend to move markets and so very often you get overextended. Look for the time being, when seeing I’m a contrarian guy, and in that sense, I think whilst the dollar and Treasuries are on the spot like today, I still think the euro or the yen or the yuan are no way better. You have interest rate differentials that are widening, you have a positioning that is becoming pretty much one way, and ultimately a lot of other dynamics that could lead to if you have these big shocks. So I think our approach is really about creating strategies that combine, like a long only equity with the protection. And what we do is we just embrace that volatility. You know, we. Try to accumulate and monetize the protection and just embrace, embrace that, that volatility of the market. If you are, you know, levered long only you’re fighting volatility. You’re short volatility. When volatility spikes, people tend to lose. And if you’re over levered, you might be wiped out. I think this is an environment where you have to find portfolios that are truly diversified. And I’m not talking about average correlations, which is a very common mistake. I’m talking about correlations on the extremes. How do you behave under this two three sigma events? And so that’s that’s really what we do. We run a couple of strategies that try to do this? One as a pure goalkeeper, the other one as a combination. People who follow me may see some updates on LinkedIn, or or, or ex Twitter, but I think this is an environment where you know you can’t ignore inflation. You have to embrace volatility, and you need to look for portfolios that will effectively benefit from from that, in a in a without leverage and in ways you can actually take advantage of these dynamics. And as I said, there’s no good guy and bad guy in the movie. I think, you know, the strikers and equities have a role to play the defenders, you know, volatility and tail risk and gold, and arguably, we’ll see that where the dollar and treasuries land. But I think they’re going to be also quite volatile themselves. But I I lean for the view that they’re still defenders, and this narrative can actually get you really good entry point to accumulate some of that. But having said that, you know the reality is very fluid, and we need to keep very adaptable to what’s happening and and and things are happening very fast. So, so, yeah, I think from a portfolio investment perspective, that would be my advice. I mean, beware of inflation, I think is way stickier that has deep implications, and embrace volatility. And to do that, make sure that the diversification of the portfolio is real. And to do that, you need stuff that will be designed to perform in a given way, which is sort of what we do on a day to day basis, and what I’ve specialized on.
Maggie Lake 47:30
Yeah, I love, I always love your football for American soccer analogy, because I think it really helps put that into perspective. And I love the idea that there’s no good guy bad guy, because a lot of people get married to narrative here and sort of demonize certain asset classes or geographies, or, let’s face it, in this hyper political environment, administrations as well, and sort of feed that into their investment narrative, which can get, I think, sort of muddy the water. You mentioned, you mentioned, I think gold at 10k is this kind of the even though there’s no good guy, bad guy, and you have to have a variety and true diversification is this kind of a golden era for hard assets, given all the uncertainty,
Diego Parrilla 48:13
yeah, I think, look, gold is unique. I’m not just making it up. It’s been doing a job for over 2500 years. And it has these pretty unique features, physical and chemical and monetary look in the in the book, with gold, you know, roughly around 1000 1200 or whatever it was, I always said, you know, gold has a few $100 of downside. It has a few $1,000 of upside. What I’m going to say now sounds pretty simple, but basically, when you go from 1000 to $3,000 an ounce, you earned 200% return, if the next $2,000 from 3000 to 5000 is only a 66% return. Okay? In order to do that 200% move, you’re gonna go from three to 9k so I think in some ways, the exponential nature of some of these assets in a world of exponential monetary growth. And as you get into yield curve control is we’re in a new territory. It’s totally unchartered. It’s not just a number, because obviously you have many dynamics. I mean, gold is also used for industrial uses, and there’s mining and there’s scrap, and there’s hundreds of things, but, uh, but in some ways, the merit of gold and real assets in general is not their own. Is the demerit of the the units is the currency. So we talk about gold. In in dollars or euros. But, you know, for example, in Swiss franc, I mean, I think this month to date, everyone’s looking at gold as the star, not the star of the month is the Swiss franc is up eight and a half percent this month versus the dollar, with gold seven as we speak. Now, that move is incredible, okay? And I think it makes me think a little bit that it’s not a coincidence that these huge moves that we’re seeing are happening pretty much for the low yielding currencies, which is the currencies that are generally used for carry trades. So this pickup in volatility, and this big uncertainty is resulting in a mega unwind of carry trades, because at the end of the day long, you know, dollar Swiss, or dollar yen or dollar euro, it’s a very positive carry trade. I mean, as we speak, you know you’re earning, you know, 234, percent per year being long, arguably what is is a safe haven asset, right? So I think in that sense, the accumulation of some of these positions in the system through trend following and macro and others is is huge, because it made so much sense right now, the pain that we’ve seen through the Unwind of those positions, I think that the jury’s out whether how much of that is really just the Unwind of some of these carry trades, which, by the way, we see every single crisis. So the first thing you see, or you saw, in March 2020 as volatility picked up, was the Unwind of carry trades. It’s not like, you know the Yen was the best thing in the world. And, you know, the yen rallied and the Aussie dollar collapsed because people were unwinding aussie yen trades, right? So I think in some ways, the weakness of the dollar might look a bit strange, because you don’t associate $1 with a carry trade. You normally associate, you know, em currencies, like the Turkish Lira, or, to some extent, the higher yielders. But I think it’s a very interesting dynamic. The magnitude of the moves is pretty brutal. But you look at dollars in age, like the Chinese yuan or others, and that’s been arguably very muted. And I think the fundamentals, and you know, are obviously divergent for many of these. But yeah, I think the gold story is real. Gold, you know, has potentially, again, a long way to go. The narrative is becoming very strong, warning it’s a crowded trade, and it’s going to be, I think there’s safe hands behind the the moving gold. I think you could probably argue that there’s been central banks accumulating and to some extent, maybe even dumping treasuries in favor of gold. That’s, again, a big, a big flow. But if you think about the positioning, and if people were thinking, oh my god, I lost the the gold train, by the silver train this month, you saw drawdown of almost 15% in the first leg. So I think the market was really exposed in a lot of the positioning. And I think fundamentals, you know, for things like silver could be very bright and but you can see that a lot of these price moves are not just fundamentals. There’s really a lot of positioning. And I think gold, it’s still, you know, under owned, but it’s also becoming crowded. And so I think whilst the long term picture is, I think, very constructive, beware of highly leveraged positions, because they can, they can really take you out. So I think in some ways, you know, as always, leverage is, is, is your enemy. And I think gold is very well positioned for these big moves. It just, you know, it’s in this volatility and shocks and moves, anything can happen. So I’m a big believer is a meaningful part of our portfolio, and our strategies is core, but, but, yeah, we do it in ways that we think makes, makes sense. We can hold and we can we can benefit for the long term. This is not a two week trade is, you know, multi year trade, and I think that that trade is very, very likely going to perform again, partially because of the merits of gold, partially because of the demerits of everybody else.
Maggie Lake 54:35
Yeah, the demerits I love that does, does Bitcoin have a role in your anti bubble strategy. I think Bitcoin
Diego Parrilla 54:43
is fascinating. It’s remarkable how stable it’s been in the last few weeks. I I’ve written a lot about this. I’m asked a lot about it. I I think, you know, there’s a lot of merits from from the. Technology. We need solutions to the problem of money, etc. Personally, I don’t own any personally. Don’t take it personal. I don’t really believe in I think that in the civil war between different cryptos. I think I’m the kind of guy who tries to fall in love with the problem, not not the solution and and I think, you know, for example, all the stuff that came out with with Trump and the Trump coin and the Melania coin, this is really so blatant, that is so obvious that these things are worth zero. It’s not. It’s not. You don’t even need a P. I mean, you don’t need too much. I think common sense to know that you’re using alchemy to just create value. Are out of out of nothing. It creates this wealth effect where people feel very rich based on some spurious, completely, you know, things that are completely out of thin air. So and you can actually create these things at infinitum. And arguably, as humans, we love alchemy. You know, many of the previous crisis, like 2008 you know, securitization crisis was, you know, we thought we could take 100 pieces of garbage and come up with a bunch of gold. In that case, where we’re mortgages. I think there’s a lot of alchemy in the system. And ultimately, I think there’s some merit, but the I think there’s a lot of risk as well, and and so, you know, we’ll see. I, as I say, I’m not a I don’t own it. I Whoever does it, I think they should do without leverage. And again, I think bitcoins biggest enemy, it’s, it’s its own nature that you can actually create. There’s only 21 million Bitcoins you could create, 21 million cryptos, you know, out of thin air, but, but look, there’s people that are way smarter than me, that that that blindly believe in it, and they’ve been doing very well and and I’m glad, I’m glad for for that, but I I just feel that, you know, I think there’s, there’s a lot of considerations as well, and I just call for caution. So, like everything, it probably has a role to play that it’s like gold, it has to be in the right size, right amount. And, yeah, I think so that’s real estate and many other things. So yeah, I think that that movie. We’ll see how it plays out in history. But ultimately, technology, I’m a huge fan of technology and and, and there’s a big problem to solve, and this is an effort in that direction. I am skeptical around many of the things around it, and the alchemy of creating money out of thin air, and that wealth effect is very virtuous on the way up, but it’s extraordinarily vicious on the way down. And, and, yeah, I’m just when I when I see, as I said, the Melania coin and things like that. I think it’s, you know, the rationale for those things, and who’s making, who’s getting rich, and is there any real value creation? I can’t help but being extraordinarily skeptical and I just don’t think that movie is going to end up well. But anyway, just play with caution.
Maggie Lake 58:47
Yeah, yeah, exactly. And I sort of love the concept of there, you know, being some real, real innovation there, but it’s early innings, right? This is very new, and so with that comes a lot of wild west behavior that you have to really be careful about, but it’s an education for all of us. I think we’re all on that learning journey. Diego, it was so wonderful to catch up with you. I think that we’re just at the beginning of this sort of new era, and so such an important conversation to have about what real diversification looks like. I think we’re all taking a hard look at our portfolios and trying to figure out a way forward. So really appreciate you coming on and engineering your views that you’ve been thinking about this for such a long time. So thank you.
Diego Parrilla 59:30
It’s my absolute pleasure. Thank you so much. And you know, look forward to continuing the discussion anytime. Thank you, Maggie and team.
