Our boilerplate introduction to Harley Bassman, The Convexity Maven:
Mr. Bassman knows some stuff.*
And his latest, December 15:
Come this time every year, I tend to publish a list of “Investments” that I think will do well over the intermediate horizon –two to five years. These are NOT meant to be nips to blips RV trades, but rather longer-term notions that capitalize upon either my strongly held themes or the trembling hands of Sharpe Ratio focused portfolio managers. Notwithstanding the misery of COVID, it did offer a delicious irony this year as self-quarantine from mid-February to Labor Day turned out to be the optimal investment strategy.
The too clever by half active Boomer traders had their pockets picked while the Millennial HODL (Hold On for Dear Life) strategy cleaned the table. Adding insult to injury, my four children now insist I refrain from providing them financial advice.As detailed in “The Wages of Fear”–December 2, 2020, the COVID pandemic prompted the shot-gun marriage of the Federal Reserve’s (FED) Monetary bazookas of a Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE) to the Federal Government’s ~$2Tn CAREs Fiscal relief program
Underpinning the roughly $2.5Tn of new US Treasury supply this year necessary to fund such spending is the FED’s near promise to hold their overnight rate at effectively zero until at least 2023. And this is the fulcrum upon which I balance most of the investment notions to follow .Financial Repression by the FED has pushed down interest rates across the risk and maturity spectrum. This policy has not reduced Credit risk, rather it has simply stripped away the incremental yield required to offset the inevitable losses from default. Thus, I prefer to take “leverage risk” over“credit risk”. In a nutshell: The FED wants us to borrow, so that is exactly what I will do.
As a reminder, I am not an investment advisor, nor is this a solicitation. You should not rely upon this Commentary for accuracy and you should seek advice from a professional. Finally, I personally own a variation of these investments.
Buy/Sell options SPY –January 2023 expiry
I would not call 3650 on the SPX cheap, nor is it even fair, but it is not rich relative to a ten-year Treasury rate of 0.90%, or a Junk bond rate of 4.90%. And the truth of the matter is that -rhodonite line-US stocks are reasonably priced, once one pulls out the six -apatite line- FAAANM stocks. (The -topaz line-ex-US stocks will be considered in a later section.) ....
....MUCH MORE
Do read to the end of the PDF, he includes a do-it-yourself swaption as the insurance policy for the whole package that is also pretty nice as a standalone investment.
*First off he defines convexity:
...Wall Street loves to make convexity sound complex (I suppose it’s so they can charge higher fees?). We speak Greek (calling it “gamma”), employ physics as a metaphor (analogizing to it “acceleration”), and use mathematical definitions (since it is the second derivative of the asset’s price change)."Pish. Posh." is a technical term only used by market professionals for those situations where one has decided to go full Alinsky rule #5:
Pish, posh. An investment is convex if the payoff is unbalanced for equally opposite outcomes. So if there’s the potential to earn a profit of two on a bet versus a maximum loss of one, the bet is positively convex. If you can lose three versus making two, it is negatively convex. That’s it. The rocket scientists are called upon to help (fairly) price the cost (value) of such possible outcomes. This is why the expansion of derivative trading in the 1990’s resulted in a hiring spree of physics PhD’s....
#5 Ridicule is man’s most potent weapon. It’s hard to counterattack ridicule, and it infuriates the opposition, which then reacts to your advantage...
The Convexity Maven is nothing if not a professional. Here is part of his mini-bio at MacroVoices:
Harley S. Bassman
Harley Bassman created, marketed and traded a wide variety of derivative and structured products during his twenty-six-year career at Merrill Lynch. In 1985 he created the OPOSSMS mortgage options product that facilitated risk transmission between MBS originators and financial institutions. In 1988, he assumed responsibility for trading and marketing IO/PO and other levered prepayment securities. Soon after this, he started purchasing RTC auctioned MBS Servicing rights and repackaged them for the securities market as BIGS - Beneficial Interests in GNMA Servicing. Later, he started a GNMA servicing conduit becoming one of the Top 20 originators in 1992. As managing and hedging prepayment risk became a priority focus for the financial markets, Mr. Bassman created PRESERV, Merrill's trademarked Prepayment Cap product. Merrill was a leader in this product category writing protection that covered the risk on tens of billions of notional mortgage servicing rights. Later, Mr. Bassman managed Merrill's initial venture into off-balance sheet mortgage trading.
In 1994, Mr. Bassman assumed responsibility for OTC bond options.
Within a year, Merrill was the leader in this product sector. A wide variety of products were offered including vanilla and complex options on MBS spreads and the Treasury yield curve.
To help clients more fully appreciate Volatility as a primary risk vector, he created the MOVE Index. Similar in form to the VIX Index, it is now the recognized standard measure of Interest Rate Volatility.And so much more, all those cutesy Merrill acronyms can be blamed on him and his team.
From 1995 to 2000 he focused on creating hedge strategies for MBS servicers and portfolio optimization techniques for Total Return and Index investors.
Mr. Bassman became the manager of North American MBS and Structured Finance trading in 2001. During his tenure, he created SURF, (Specialty Underwriting and Residential Finance), a self-contained Sub-Prime mortgage conduit. He supervised the issuance of Merrill’s first Sub-Prime securities. He also transitioned the structuring business to a new technology platform....
