Colin Lancaster On The Repo Markets Locking Up

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ValueWalk’s Raul Panganiban interviews Colin Lancaster, a 25-year Wall Street Professional. In this part, they discuss what global macro is, the introduction of the characters from his “Fed Up!”, why the book starts at November 2019, and the repo markets locking up.

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What Is Global Macro?

Well, it's a really important question. I'm glad you asked. Because, you know, I, the path that I've gone down from an investing perspective is focused on global macro. And I think one of the easiest ways to summarise this, if you think about, typically, what you see on CNBC or the news are people talking about individual stocks, or, you know, broad, you know, equity indices, the Dow Jones, the S&P, the NASDAQ. In people that focus on those things, they do a tremendous amount of work on companies and the prospects of those companies. global macro is really different. In that global macro, we do the same amount of really deep fundamental work. But at the end of the day, we're underwriting countries, not companies. So we're looking at, at the prospects of the Canadian economy or the US economy or the Chinese economy and, and thinking about data and looking at employment, inflation consumption, monetary policy, you know, the central bank's reaction function, and then expressing our views more in terms of you in the interest rate markets won the foreign exchange markets. It's interesting because people that come to us to to, to allow us to invest for them, are really looking for a diversifier against their their equity portfolio, see what they're looking for an uncorrelated return stream. And one of the things that I've always really found fascinating about global macro is that global macro historically has its best outperformance years, when equities are having the worst period. So So, you know, investors are always expecting you to put in your best best performance, when things are the most difficult when you know the shit is hitting the fan is as they say. And that That to me is this is this incredible mandate, but also an incredible challenge.

Can You Introduce The Characters From Your Book?

Yeah, look, it's fascinating because two of those characters, the Rabbi and Life Coach are two of my closest personal friends, people that I've had the privilege of working with over the course of my career. And the others, Elias and Jerry are more composites of people. And, you know, the fun thing about writing this and turning this into a novel is all of the market data or everything that you see in terms of market performance in investment decisions, and, you know, the process that a global macro trader would follow is all real deal that is all nonfiction material. From from a character perspective, I was able to take certain liberties in terms of timelines and these things to to again, your turn it into this more readable novel, but those two characters in in particular are, are very closely related to to my two closest friends and in real life, it made it really fun because I was able to imagine these conversations that I'd be having with them in real time and I think it it really helped the book come alive.

Your life coach in real life is one of you know, it, as I say in the book has a background very similar to Christine Lagarde, current head of the ECB And that she's probably one of the most accomplished derivative lawyers in the world that she represents hedge funds that do this and is responsible for negotiating the types of financing that they receive. The Rabbi is someone who is, you know, just an amazing pm and you'll get he is a person as I described in the book that you want is your lifeline in sort of real life, because he can always tell you, you know, why your investment thesis might be flawed, you know, where you might be wrong, and he just has this incredible knack for that. So it was really fun to to include them. And for those two people, in particular, the book took on a bit of a larger component for me, because, you know, to be able to create this little piece of art this book into memorialise this period of time, and for us to hopefully be able to look back in 30 or 40 years and say, Wow, what, what an amazing period of time, but I also wanted to be able to memorialise this to show my respect for for those two individuals.

Why Does The Book Starts At November 2019?

Yeah, what was really important is I wanted to capture some time leading up to the spread of the pandemic, I wanted to capture your what I consider to be some of the excesses that that we were already seen in the world. And in that period of time, what was really unique from a markets perspective is that, you know, yield curves were inverted, some yield curves, were already predicting a recession. Now, how they ever kind of predicted a global pandemic, you know, look, we'll never know exactly what they were responding to. But But, but your items like that did were a very predictive measure that period, and I wanted to make sure that I was capturing the excesses, some of what the markets were already doing some of the very significant issues that we were seeing in the repo markets, which is kind of the real building blocks, you know, the mechanics of the markets that were already going wrong is, you know, three months in advance of, you know, the, even the naming convention for COVID-19. And so I did want to make sure that I was capturing that run up into what ended up being this amazing spectacle, from from, from a markets and everyday life perspective.

Repo Markets Pointing To A Recession

Yeah, in the book, there's a scene that the boss, who is the main character in the book is with the rabbi in New Orleans at it conference. And he gets a call from life coach, saying that the repo markets are essentially locking up so that there was a huge spike in the interest rates, to, you know, this is the largest really acid base lending market in the world. And it was not functioning. And in fact, Jerome Powell, the head of the Fed, ended up having to provide an enormous amount of liquidity to get that market moving again. Now, what's interesting is just over the last few weeks, we've seen this huge take up in what are known as the reverse repo markets, which are responding to a different phenomena, which is today, there's too much liquidity in the room. But back then pre COVID, there was not enough and and the markets were locking up that they were essentially breaking down as a result. And I think it was such an interesting time, because whenever the plumbing in the market is is is not functioning properly, it always means we're usually means that there are bigger problems ahead. So it was another really good predictor of the worst problems yet to come.