Betting on a Major Inflection Point

Published on
July 19th, 2019
Duration
68 minutes

Betting on a Major Inflection Point

The Interview ·
Featuring John Burbank and Alex Gurevich

Published on: July 19th, 2019 • Duration: 68 minutes

John Burbank, CEO and founder of Passport Capital, discusses his highest conviction trade as we encounter what may be the final phase of the business cycle. In this candid conversation with Alex Gurevich, CIO and founder of HonTe Investments, Burbank reveals the thesis behind his Eurodollar bet and speaks about the history of globalization that has led to this potential breaking point. Filmed on July 2, 2019 in San Francisco.

Comments

Transcript

  • RN
    Raymond N.
    19 August 2019 @ 23:42
    Hi All, I wanted to ride this bet as well, but as a new entrant to this entire world, would anyone be able to explain the steps needed to understand the mechanics of HOW to take on this trade? Examples, is the specific trade to “buy call options” on GE1! where I can follow its progress on trading view? GE1! = Eurodollar futures? , currently at 97.985 The bet would be hoping that this tanks by 100 to 200 basis points, meaning down to 96.986? I understand that the above could be completely wrong and that betting not the FED cutting interest rates is followed by a completely different mechanism. Unfortunately, for me to take this bet, I’m going to have to learn how to buy call options, what ticker to buy, at what entry and exit price, what to monitor on a daily or weekly basis, and even the platform to do it... ie. Would Robinhood App suffice? How about leverage? Thank you kindly! Sorry for the ignorance as I’m new and learning hear. If anyone has any questions on crypto, bitcoin tech and leverage I am more than happy to pay it forward there :) Best!
    • RN
      Raymond N.
      19 August 2019 @ 23:45
      Wow, I just saw Jeff D’s post. I’m still curious what folks responses to the above would be, and comments on Jeff’s methodology of taking in this trade! Also what are all your thoughts/odds of this bet paying off today moving forward (Aug 19, 2019 after the first fed cut has already been made)... high, med, low probability?
  • RM
    Ryan M.
    2 August 2019 @ 12:08
    So many nuggets of wisdom here. I liked it when Alex said people have a hard time trading a pattern that's not happening right now.
  • DD
    Dominik D.
    2 August 2019 @ 03:29
    If this works out, surely it will go down as the greatest RV video of all time. Being presented a 10x trade on a silver platter. My God is this subscription ever paying off. <3
  • BB
    Barbara B.
    1 August 2019 @ 20:18
    Absolutely terrific content. Don't mind the awkwardness, this is gold dust. Bring them on again pls RV!
  • jd
    john d.
    30 July 2019 @ 17:03
    Go to for quick education on Eurodollars https://www.cmegroup.com/education/courses/introduction-to-eurodollars/the-importance-of-basis-point-value.html
    • JC
      John C.
      11 August 2019 @ 20:44
      Thanks for this!
    • KL
      Kerrie L.
      19 August 2019 @ 23:42
      Thank you!
  • jd
    john d.
    30 July 2019 @ 17:01
    EDZ20
  • JD
    Jeff D.
    30 July 2019 @ 01:23
    THIS IS EXACTLY HOW TO DO THE TRADE: You want to buy CALLs on /GEZ19 Safe trade: Strike price 98.5 with around 400 days till expiration (costs about $500 per contract) Risk-on trade: Strike price 98.75 with around 320 days till expiration (costs around $350 per contract) You could buy less time, if you know how to trade in and out on the way up...extra risky, but more profitable. Get in ASAP, and close the trade when the FED funds rate = 0 These option prices move fast, and you want a good entry point. Today is a good day to get in. Remember these options cut-both-ways. Big gains on up days. Savage losses on down days. Don't freak out, and don't get greedy. This is a great trade. I expect to make 10X this year. I recommend Tastyworks for trading options, they make it super easy, but any brokerage can do this trade. (Maybe not Robinhood) You need futures trading permission to do this trade. It is separate from margin and options trading permission. You can't even buy CALLs on futures without getting permission. Call your broker and they will help you find the online "enable futures" button / process. Go to younghustler.com for more information on how options work, and videos on how to set up an account with Tastyworks. Godspeed.
    • KK
      Ketan K.
      30 July 2019 @ 17:51
      Thankyou Jeff, very helpful of you...Just a follow up -- how best can you track this trade if you dont/cant play it with Futures? Is there an equivalent via a more conventional instrument?
    • JD
      Jeff D.
      30 July 2019 @ 23:14
      Ketan. This is the trade he is talking about in the video. I don't know anything else that has a similar risk / reward. Stop farting around, and get in this trade.
    • JB
      Johan B.
      1 August 2019 @ 08:31
      Jeff: Do you still recommend the same trades after the FED information yesterday?
    • Hv
      Hannah v.
      2 August 2019 @ 21:15
      Did you not see Raoul’s grin today on Hedgeye with Keith McCullough? I’m guessing he just made a shit-ton with this first Fed IR drop of 0.25%. The bet is that IR’s go to zero.
    • EL
      Eric L.
      6 August 2019 @ 02:08
      A simple way for new traders to get exposure to long Eurodollars would be to buy $DLBR.
  • TS
    Tyler S.
    29 July 2019 @ 20:56
    I agree with everything said, what exactly is this "trade" buy eurodollar fed futures?
  • as
    andrew s.
    28 July 2019 @ 11:28
    My lagging interest in RV has been revived
  • TB
    Theron B.
    26 July 2019 @ 00:58
    Terrific. Really enjoyed this commentary.
  • RP
    Ryan P.
    26 July 2019 @ 00:45
    EDV and TLT
  • VH
    Victor H.
    25 July 2019 @ 11:07
    Can someone explained what exactly is the bet John Burbank talked about? I watched the whole video twice and still very confused. Thanks TONS!!!!
    • CM
      C M.
      25 July 2019 @ 16:59
      Normally at the end, there is a graphic detailing the trade. Believe he made mention of buying calls on Eurodollars. May not be practical for retail traders like me.
    • ek
      eric k.
      25 July 2019 @ 19:14
      supports gold
    • RP
      Ryan P.
      26 July 2019 @ 11:20
      If you want to learn about Eurodollars YouTube “Jeff Snider Macrovoices” and look for the Eurodollar system video. It’s an hour well worth your time.
  • JS
    Jason S.
    24 July 2019 @ 07:51
    Am I correct in saying that buying long calls on eurodollar futures is betting the US dollar will rise, when interest rates head to zero?
    • RL
      Robert L.
      29 July 2019 @ 04:15
      Not necessarily, generally when rates head to zero it means the dollar can fall due to loss of interest rate differential between high US rates and zero/negative foreign rates. However, US interest rates falling to zero might mean coinciding european rates going more negative due to further economic deterioration which would mean stable/rising US dollar. In short, dollar could conceivable get stronger or weaker after when rates head to zero. Burbank is saying that with this trade, he doesn't need to bet that dollar gets stronger or weaker, only that short term rates are going to zero; he can be agnostic about the dollar direction, which makes the trade cleaner and more precise.
  • JS
    John S.
    23 July 2019 @ 15:54
    Good interview....couple questions 1) wasn’t this same secular tech argument made in 1999? Yes, I get that he’s saying it’s more software driven today, but multiples matter. 2) if the majority of the voting population is B or worse students, I’d think the A students and their tech companies are at risk - aka antitrust and more taxation. We are already hearing politicians teeing those up. Big picture, yes technology is taking a bigger slice of the consumption pie but people are also able to borrow and spend for discretionary and nondiscretionary items today. Recession will bite everyone. Beware of political backlash on tech. Up and to the right for tech only works if the world population feels flush. Trumps election is evidence of discontent and he’s only made the disparity worse.
  • VS
    Vasil S.
    23 July 2019 @ 11:23
    Absolutely loved Burbank's candidness and humility. Fantastic to see!
  • AH
    Ahmed H.
    23 July 2019 @ 04:33
    this was awesome! burbs.. the legend - conducted by alex.. brilliant
  • F
    Floyd .
    22 July 2019 @ 22:07
    A bit disjointed but good information. Given the emphasis on the issue by RealVision ,periodic updates on this topic would be appreciated.
  • M
    Matthew .
    22 July 2019 @ 13:24
    Extremely interesting video, thank you RV. Question for John / other viewers who are familiar with ED futures. I noticed the TED spread has blown out during most recessions (spread between 3 mo Treasury Bill and 3 mo LIBOR): https://fred.stlouisfed.org/series/TEDRATE Does this present a risk for owning ED futures vs. a treasury-linked instrument? I wonder if you might end up in a situation where you "win" on anticipating fed cuts but lose on the spread widening? (disclaimer: I have no familiarity with rates trading)
  • JC
    JP C.
    22 July 2019 @ 01:03
    Had to watch this again it was so good! Long innovation and illiquidity premium and short leveraged rates might be "the next perfect trade". Risk parity on steroids...move over Spoo's and Two's. The mark to market arbitrage might be equally brilliant.
  • WK
    William K.
    21 July 2019 @ 23:25
    Kudos to Alex, John,and Real Vision for this interview. We may look back in 5 years and see today's growing education, knowledge and understanding of the Eurodollar system by individual investors as a milestone along the ancient storyline of investing. I know w/ certainty most Fed staffers and FOMC voters do not understand how the Eurodollar market works or mitigates monetary policy. Liquidity risks > fundamental risks and liquidity risks are a function of Eurodollar capital flows. Individual investors with limited experience, beware of this trade...there are plenty of other ways to potentially lose your capital. If interested to learn more I encourage you to read https://www.alhambrapartners.com/tag/eurodollar-system/. Jeff Snider (w/ Michael Green) would be a great long-form interview.
  • CH
    Corey H.
    21 July 2019 @ 03:35
    great video. Did some research into this trade. Can anyone recommend a web link for a novice to learn step by step how to put a trade like this on?
    • GK
      Giannis K.
      21 July 2019 @ 13:01
      if you mean ED futures, my advice would be to pull up the futures chain and start plotting term spreads (3m6m spread etc). and then just spend a few months observing and learning about the interbank market/unsecured short-term lending. Also, this market is particularly driven by flows in the respective options, which often carry massive notionals. Wouldn't suggest to anyone without having already traded or at least observed the market for at least a few months to go into Eurodollars. Moreover, this being someone else's idea you don'y know where the exit point is or where/how should you reverse if you are wrong so adding to that a handicap for experience in the particular market instrument means you have all these factors working against you. Its not as simple, especially in ED to just buy calls and wait; buying any optionality means you are fighting the time decay which in turn means your job becomes minimizing the impact of theta decay.
    • MT
      Mike T.
      21 July 2019 @ 19:01
      if your starting from scratch as Giannis suggests you need to do some work first to raise your understanding of what you're getting in to. Have a quick look at the videos at the next two links and if that wets your appetite from the 3rd link do a search on 'eurodollars' to find many hours of free material on wide variety of strategies to trade ED's. I'm not suggesting you'll find exactly what you need to structure a high probability trade but this material should get the thought process going. https://www.tastytrade.com/tt/shows/options-jive/episodes/trading-short-term-yields-with-eurodollars-07-17-2018 https://www.tastytrade.com/tt/shows/options-jive/episodes/opportunity-in-todays-rate-decision-05-01-2019 if still interested after watching the above first two vids you can find more by searching at .... https://www.tastytrade.com/tt/search
    • AM
      A M.
      21 July 2019 @ 19:25
      https://www.themacrotourist.com/posts/2018/09/11/edoptions/ might help you.
    • JC
      John C.
      12 August 2019 @ 07:30
      Thanks A M. The Macrotourist (Kevin Muir) seemed to be saying back then that he was liking the opposite of this trade i.e. the Fed would keep hiking as they had plotted out which would cause a world of pain and rates to keep going higher. Did not play out like that of course, and the 'whale' he observed must have made a killing selling puts on the shorter end. At this point I guess I just can't see them raising rates again anytime soon particularly with the global rates situation and continues USD strength. Will be interesting!
  • NR
    Nelson R.
    20 July 2019 @ 22:58
    I'dd like to see more of John Burbank, lot's of nuggets here. Having said that, high probability this interview marks the Top in the ED trade for the rest of the year.
  • RP
    Ryan P.
    20 July 2019 @ 20:40
    Dear RV, make a video or Trade Idea on how to put this trade on lol!
    • RP
      Raoul P. | Founder
      20 July 2019 @ 21:12
      Big calls on Eurodollar futures. That’s all there is to it. They are ultra liquid.
    • RP
      Raoul P. | Founder
      21 July 2019 @ 13:08
      *buy calls.
    • SM
      Sebastian M.
      31 July 2019 @ 13:07
      But how? I think there are quite a few interested retail traders here who, despite having bought stocks and funds, do not know how to buy those. For starters: is there a ticker?
  • SA
    Stephen A.
    20 July 2019 @ 19:35
    For me this was one of the more underwhelming interviews on Real Vision. I think both speakers were very articulate and explained their concepts well, it is just that the concepts are rather mainstream. Betting on "A" companies is pretty mainstream, may be not in the Real Vision crowd but certainly among the CNBC and Fox Business crowd. Betting on the FED cutting rates to zero in the event of a recession is also a pretty mainstream call. What is not mainstream is the FED being forced to raise rates because of inflation during a recession like Paul Volcker did. Also I need to mention that Gurevich's theory that tech stocks may not correct even if we have a recession because of crowding was disproved only 6 months ago when we had a near -20% correction in SPX while most other indexes went beyond -20% including tech stocks (XLK) which corrected -24%. Crowded trades always correct if for no other reason than institutional portfolio managers incur tax liability when their inventory rises significantly (unlike individual investors) and they have to sell some their inventory to pay taxes. Funny thing is we had a -20% tech stock correction WITHOUT a recession. While I understand the argument that stratospheric multiples can get even more stratospheric because of crowding, this is not a process that can continue without significant corrections. Essentially, Gurevich/Burbank say that tech stocks will become like bitcoin - completely disconnected from fundamental valuations. While that is true, what is also true that as there is no basis for valuation the swings in prices become entirely momentum/sentiment driven and sentiment happens to be a very fickle beast (as we observe in bitcoin). -80% corrections in bitcoin happen every 2-3 years happen like clockwork. Same thing will happen to tech stocks if valuations become too disconnected from reality.
    • PC
      Peter C.
      20 July 2019 @ 22:14
      Look at the valuations of MSFT, FB, TWTR,... there margins, growth, ROIC Earlier stage like AMZN, SQ, Slack,... are more uncertain Appreciative of your alternative view to Burbank
    • DS
      David S.
      21 July 2019 @ 00:34
      422 likes. I have never seen anything like this anywhere else. Both men have made great calls and leveraged up. Both are well worth listening to. I always appreciate different viewpoints, but I enjoyed this interview also. DLS
    • DP
      David P.
      21 July 2019 @ 22:24
      Yeah those highly convex bets that have 50% chance of you making 10x are common and ordinary.
    • JH
      Jesse H.
      23 July 2019 @ 17:20
      Well said - could not agree more; would have liked Mike Green to chime in to this conversation because his insight and deep understanding of complexity dynamics would have exposed it as perhaps an oversimplification of market dynamics. When you add in the action of algos, sentiment- and short-term driven markets, what appears to be drying up liquidity, share buybacks and a whole slew of other factors, I expect many investors in the equity market are going to need one hell of a "stomach" in the coming years. There are simply too many risks on the horizon, interacting in complex and frankly unforeseeable ways, and no matter how robust government and central bank intervention, the relief valve is always people's everyday lives. As Gundlach says, who would be another excellent one to get back, we may well be headed for a time not dissimilar to the French revolution in terms of its dynamics and the social / economic inequality that is driving them. If we get the kind of world that Burbank and Gurevich are betting on, expect to see much more social dislocation, populism and justifiably pissed off voters. And then...quite possibly...MMT, which could ultimately result in much higher rates than the zero bound, and a nasty fall in markets.
    • JH
      Jesse H.
      23 July 2019 @ 17:25
      I suppose my core point is...I'd really love it if we could have capitalism again (we definitely don't have it now)...and such a return to capitalism would mean higher interest rates, and probably markedly higher right now (in the 5-10% range). Only problem, of course: the colossal and unproductive debt overhang. The real question is how does one "end the party" in the gentlest possible manner - this is the only responsible course of action to take; and the wisest course of action to enable a return to capitalism. Debtors at some point are going to have to take a massive haircut. Let's get rid of the zombies, please.
  • KA
    Kevin A.
    20 July 2019 @ 18:52
    What a great interview. This week has been excellent. I'd love to see a private equity executive interviewed on the recession topic. Leveraged companies are going to get smoked if we go into recession. I'd also love to see a long-only, large high-yield investor interviewed (since they are the ones financing these companies with no covenants). Finally, as an individual investor (ex-sellside credit trader for 22 years), I get very nervous dabbling in futures and options. I've been buying 3/4/5-year certificates of deposits from internet banks to try to lock in yield. I won't make money on mark-to-market but I need the carry. I love his idea of making multiples of capital from the idea, but I am not sure of a clean way to do it either on my own or with a manager.
    • KA
      Kevin A.
      20 July 2019 @ 18:54
      I forgot to say above, I totally agree that rates are going to zero hence my seeming insanity for buying 5-year CDs.
  • DR
    David R.
    20 July 2019 @ 18:46
    Very good. Also, thank you very much for the transcript to read.
  • CT
    CHRISTIAN T.
    20 July 2019 @ 18:08
    Great video, hats off!
  • YB
    Yuriy B.
    20 July 2019 @ 18:04
    I'm a complete newcomer to futures, but I don't see a favorable risk/reward when I do the math: Current Fed Funds Rate = 2.41% Current implied Fed Funds Rate for Sept 2019 based on Eurodollar Futures = 2.105% So here's how the math plays out assuming you buy a single Sept 2019 futures contract (~$300-$350, after fees): - Realistic worst case scenario: Sept 2019 Fed Funds rate = 2.5% ---> net loss of ~$1,000 / contract - Base case: Sept 2019 Fed Funds rate = 2.25% ---> net loss of ~$360 / contract - Best case scenario: Sept 2019 Fed Funds rate = 2.0% -> net gain ~$250 / contract I use the numbers above for Fed Funds futures (2.0 vs 2.25 vs 2.50%) because even when the Fed "cuts rates", the "effective Fed Funds rate" tends to stay on the high side of their 25 basis point range (see Luke Gromen's recent work on this new phenomenon: i.e., Fed Funds rate > IOER as of 3/2019; https://youtu.be/li0mKKwD2MU). Bottom line: the risk-reward of the Burbank trade seems unfavorable right now. I'll stick with Treasuries across the curve to make a similar bet. With Treasuries, at least I don't have to worry about timing the purchase nearly as much. My upside may be limited, but so is my downside. Call me old-fashioned, but I gotta stick with Warren Buffet's two rules of investing!
    • RP
      Raoul P. | Founder
      20 July 2019 @ 21:16
      This isn’t quite right. John is betting that ED’s go from let’s say 98.4 (1.6%) to 100 (0%) and the futures and options offer massive leverage on this bet
    • GT
      Gene T.
      21 July 2019 @ 00:08
      To pile on to Raoul's comment, the potential return in Eurodollar futures and options is massive. The math: - Each Dec 2020 Eurodollar futures contract that moves from 98.36 to 100 would realize a gross profit of $4,100 (1.64 * 2500), on initial margin of ~$450 (over 9x). - A Dec 2020 99.5 Call can be purchased for .04, or $100; if the Dec 2020 futures contract trades at 100, the 99.5 call should realize a profit of .46 (.50 - .04), or $1,150 (11.5x)
    • MT
      Mike T.
      21 July 2019 @ 10:31
      nothing wrong with Gene T's maths in the example, but suggest keep probabilities in mind. At the time of writing for /GEZ0 (Dec 2020) to make it to 100 would require a greater than 2 Standard Deviation move according to the Option Market for this particular futures contract. Statistically how often do we see moves greater than 2SD? Less than 5% of the time! Currently the Options Market is pricing in an expected move of +/- 0.54 for Dec 2020 contract, In round numbers calculated from Friday's closing price of 98.3650 gives us an upside expected at expiry of 98.905 end of 2020. I'm only put this out, not to doubt the long ED call (I'm in btw) but to provide context to anyone considering what position size to use. To use a silly example to make a serious point, dont put all your money shooting for ED to get to 100 end of next year when there's a less than 5% chance it will work out. My $0.02 I'm going to layer in over time, every day I will watch what Options Market is calculating (constantly changing) as the expected move to help me decide just how much capital to deploy.
    • GT
      Gene T.
      21 July 2019 @ 13:32
      Excellent points by Mike T. on the market’s current pricing of EDZ20 reaching 100 (less than 5% probability), but wasn’t this Burbank’s exact point - he believes the probability of rates going to zero is much higher than the market is pricing, hence the opportunity. BTW, Mike T’s points also highlight why I prefer the underlying futures contracts over call options - if EDZ20 did expire at 98.905, all the call strikes above that would be worthless, yet the underlying futures contract would still see a profit of $1,350 from Friday’s 98.365 close.
    • DP
      David P.
      21 July 2019 @ 22:28
      I bought Sep and Dec 2020 Eurodollar 99 calls for ~0.02 in Dec last year. If Fed goes to zero these will make 40x+. If you don't like this trade I don't know what to tell you.
    • MT
      Mike T.
      22 July 2019 @ 09:10
      David P. if you were switched on to the idea of long ED's (interest rates going down ) trade in Dec 2018, really well done that's most impressive. This might be the big one, certainly the thesis put forward is persuasive and if it works out happy days you'll win big. However if you were to consistently/repeatedly, use such debit trades as a go to strategy, over time you will get burnt because the odds of being consistently successful buying far OTM calls is overwhelmingly negative. Put another way if I were to suggest two trade recommendations and ask people to choose between Trade 1: has the possibility of huge profits with very small risk (e.g. $0.02 far OTM Calls sounds very tempting) or Trade 2: has far less profit potential but with much greater risk, most folks would instinctively go for Trade 1, which of course is completely the wrong answer because the mathematical probabilities, over multiple repeated occurrences (lots of trades) play out over time in favour of the positions that take on more risk, it's the way Option Markets are designed to work. It all comes down to Math. If low probability trades keep folks engaged with Markets, and people enjoy the possibility striking it big with very little money at risk then great I fully understand, but it is not the basis for long term success.
    • JS
      Jason S.
      24 July 2019 @ 09:27
      This thread is another reason why RV is worth multiples of its value. Exceptional comments!
    • PH
      Pedro H.
      27 July 2019 @ 05:53
      @Mike T, you’re definitely a tastytrader with that kind of lingo. I know because I’m also one. :) Haven’t yet made the /GE debit call spread. But I’m very tempted to do it. It’s just a bit against my nature of premium seller. But I also like the ideia of making a macro trade Raoul style, looking for a +8X return... And like Burbank said, he missed this Eurodollar trade in 01 and 08, and he’s not going to miss this time. Real Vision has brought to the attention of a lot a investors about the potential of this trade in a crisis situation. And this is one of the best qualities of RV.
  • FW
    Francis W.
    20 July 2019 @ 17:16
    So the dollar is the key to everything and we are not going to discuss the dollar
    • DD
      Dominik D.
      24 July 2019 @ 03:03
      this is the funniest comment I've seen on RV so far -- ahaha
  • TM
    Tom M.
    20 July 2019 @ 16:21
    Localization will not be inefficient. New technology will be utilized more.
  • MG
    Miguel G.
    20 July 2019 @ 13:36
    Great video thoroughly enjoyed it. With that being said there isn’t a phrase I hate more than don’t fight the fed. These fed officials aren’t God like and I’m a firm believer in booms and busts and the business cycle still being relevant. I for one think if the fed was ever vulnerable to losing control it may be here and now. The argument that negative rates in the US could push equities higher as people chase higher yield I totally disagree with. If that was a legitimate argument then why haven’t we seen that in Europe, or Japan for that matter. The time will come and I think it’s soon that valuations will matter again imho. Why can’t negative rates in the US also mean hoarding US dollars instead of chasing risky assets at these high valuations. IMHO I say now is the time to fight the fed while everyone continues to buy in to this fallacy that the fed has their back. I believe assuming the fed will navigate this in to calm waters is being naive to history and I personally believe it won’t be different this time. The business cycle lives and will always live under capitalism law.
  • MT
    Mike T.
    20 July 2019 @ 12:05
    one of the very best vids I've seen on RV since this platform started. I do however have one thought. At 40mins 40secs JB said " it took me a while to work how to structure the trade through buying calls' . I agree with the directional bias of Long Eurodollars, but not by simply buying just calls. I would be most interested to learn if Mr Burbank might see merit in structuring things differently. If you simply buy OTM calls only then by definition such a position/s has negative Theta trade ie time decay will work against you. I believe a modified approach - requires more capital - is mathmatically better. As /GE has low IV Rank at 10.1 then to be directionally long sell a long call debit spread structured as follows sell ITM Call and buy an OTM call. One needs to 'play about' with the strikes to end up with the long option having greater instrinsic value than the debit paid for the spread. This ensures positive time decay and a breakeven below the current stock (futures) price. Whilst I'm a keen advocate of when ever possible if there are liquid option then using options is the way to go, but in the case of Eurodollar futures as they have very small margin requirements, the simpliest method for those that want to 'put a first time foot in the water' with Eurodollars, buy/sell GE futures direct. at the risk of receiving an accusation of being in-precise to make serious money with Eurodollars it will be necessary to have many multiple contracts as Trading eurodollars is the 180 opposite of trading something like Beyond Meat stock.
    • MT
      Mike T.
      21 July 2019 @ 11:14
      typo above *buy* a long call debit spread
  • JV
    Jens V.
    20 July 2019 @ 10:44
    Rates and FX is where the investment banks make billions in trading year after year. Part of it is client driven but much of it is pure trading/speculation like the subject of this interview. Most people think that trading profits mostly come from equities, but that’s not the case. It’s just the market that most people know about and are active in.
  • JS
    J S.
    20 July 2019 @ 08:51
    Excellent interview as always RV! I use LCG to trade futures, but they don’t have the Eurodollars market. Can anyone advise either an alternative on LCG i can trade or a good alternative broker, as there are so many to choose from?
    • MT
      Mike T.
      20 July 2019 @ 10:01
      for trading derivatives in my view, there's only one place to go https://tastyworks.com/ . The only down side to Tastyworks is it's 100% US centric, which for me is not a problem because when it comes to liquidity, US Markets are the only game in town. The folks behind Tastyworks are the same people that developed ThinkorSwim. One particular benefit of Tastyworks is they've totally cracked adjusting and management of established options and future positions e.g. roll up, roll down, roll out etc one click all very easy. Another very useful feature, they permit Short Calls in IRA accounts. For those that want the to access prety much every possible market around the world outside the US then often referred to as the 'poor mans prime brokerage' https://www.interactivebrokers.com/en/home.php
    • GT
      Gene T.
      21 July 2019 @ 00:20
      I've been using Schwab to trade Eurodollar futures (and 2-yr notes futures, and Aussie dollar futures, and gold/silver futures - you get the point) and am happy with them.
    • JS
      J S.
      22 July 2019 @ 06:13
      Thank you, Gents.
    • JC
      John C.
      12 August 2019 @ 07:04
      Interactive Brokers is very good for Futures IMO and have among the lowest cost per trade in the industry in general.
  • PC
    Peter C.
    20 July 2019 @ 06:37
    John's view is that the Fed Funds rate is going to zero similar to David Rosenberg,... I have the same view & as a retail investor, express this by: - long IVOL - Nancy Davis' actively managed ETF that through the OTC market is long optionality on a steeping of the yield curve (eg short end rates dropping), long vega, & long inflation protected treasuries - long TLT - long yield based equities like utilities, REITS, US Pref shares...
    • MT
      Mike T.
      20 July 2019 @ 09:20
      whilst the idea of IVOL is certainly interesting, the fact is there are two problems. 1./ Other than yesterday, and that was only 827K when perhaps some RVTV viewers must have bought in, the average daily volume is neglible. The liquidity is very poor. 2./ second problem there's no Options, the availability of which allows one to deploy their capital in an efficient manner. It's never a good use of capital to buy any underlying outright. leaving aside how best to structure/play it with Eurodollars so to speak, mechanically trading /GE eurodollar futures is available to almost everyone irrespective of account size e.g. even though the contract size is big at $250,000 the overnight margin per contract is 'only' $343 small enough to trade very small. Open a full margin account with approval to use all the 'toys' i.e. Stocks, Options, Futures is the way to go, stay away from illiquid ETF. On scanning the comments section herewith, my heart nearly missed a beat seeing questions about using DLBR which to all intents and purposes has NO volume.
    • PC
      Peter C.
      20 July 2019 @ 17:29
      Mike T, thanks for your advice. I agree I need to understand and add the futures market to my tool kit. However, I think you have these flaws in your thinking. 1. IVOL - liquidity is adequate. The bid ask spread is 0.01. And yes I bought some yesterday however the volume was driven by Nancy Davis being on CNBC or Bloomberg for 20 minutes talking about options and IVOL. 2. TLT has one most liquid options market. For example, the Aug16 132 strike traded 363 & 1,090 contracts on the call & put side respectively. Scanning the option chain the volume is on the put side & consistent with this interview. Options have their role for us. For example, for added income I sold 135 calls that just expired yesterday against my TLT holding. But options certainly are not the best solution to owning an underlying out right in all cases.
    • MT
      Mike T.
      21 July 2019 @ 09:43
      Peter C. on the point of using IVOL I think we will have to agree to disagree. I sincerly wish you well with your IVOL position. On another point regarding your TLT covered call. Of course covered calls are one of the most simple and widely used option strategies and have their place in many portfolios in a bull market, but I'd like to pick up on your comments regarding 135 Calls which expired on Friday. With covered calls do you routinely allow the option to expire worthless? If yes, and you have detailed records of your historical CC trades suggest go back and check how the following two alternative approaches to 'managing' the short call would have worked out. As a general rule I'm not a fan of allowing short options to run out to expiry, if a covered call position is working out ie stock going up, when the value of the call falls to 50% of initial credit is a good time to reassess the position and time to consider rolling out to next cycle. If however you decide to let it run further out in time, as soon as the value of the call gets below $0.50 I would suggest close out that strike and roll out to next cycle using your preferred Delta choice. Over the long term always allowing short calls to to run out to expiry is suboptimal. As said if you have detailed trade archives your should be able to validate this yourself. The two approaches to management is a balance between taking more risk for higher profit potential but lower win rate (of the short call) or lower risk for lower profit potential but a higher win rate. Which path to take is the dilema we all face every day.
  • bs
    bernard s.
    20 July 2019 @ 06:19
    What are the actual contracts that John likes to buy?? Was it EDZ0???
  • ML
    Michael L.
    20 July 2019 @ 03:40
    i'm not sure where Burbank got this thing where everyone's betting on rate hikes. All i've heard all year in the news (and i'm talking about mainstream stuff like WSJ, CNBC) is market pricing rate cuts. with ED futures you also have to worry about timing and pace of rate cuts
    • DD
      Dominik D.
      25 July 2019 @ 19:32
      I think he was talking about his perspective from when he first discovered the trade idea (during the hiking cycle)
  • FC
    Fractal C.
    20 July 2019 @ 03:28
    Great interview. How about now John interviewing Alex?
  • DS
    David S.
    20 July 2019 @ 00:04
    RVTV Team - Although Japan is a different society, I would like to see an interview comparing Japan’s deep dive into low interest rates and monetizing their debt. Mr. Koo has a great understanding of the balance sheet recession, low interest rates, monetized debt and the Japanese and American cultures. He worked in the Fed and with the BOJ. I hope that you will extend an invitation for him to return to RVTV and help us on these topics. DLS
    • JC
      JP C.
      20 July 2019 @ 02:38
      I agree. Would be great to get Mr. Koo back to talk about his views of the US today based on his experiences in Japan. Would be very interesting to pair him up with someone like Lacy Hunt, Rosenberg or Zervos, i.e. economist's who now have skin in the game as PM's and/or market strategists. Alternatively, continue the dialogue with Burbank and Gurevich. I'm looking for high-minded learning but equally the translation of these dynamics into salient ideas for current positioning/investing as in this episode. Still amazed that Koo's first appearance on Real Vision seemed to slip through the cracks...low viewing by RVisioner's !!??
    • CH
      Corey H.
      21 July 2019 @ 04:00
      Agree 100% Richard Koo's book - The Holy Grail of Macro Economics is amazing and he would be a real gem to have on RV.
  • DS
    David S.
    20 July 2019 @ 00:03
    Mr. Burbank and Mr. Gurevich - Great interview. In the short term I am betting on US bond rates dropping. It will take time for any MMT, infrastructure, etc. to be enacted. If they are, I will find a bolt hole quickly. DLS
  • GF
    Gianluca F.
    19 July 2019 @ 23:35
    Incredible video. Just a thought - without using futures, what's the best way to trade on this thesis?
  • MS
    Mark S.
    19 July 2019 @ 23:11
    On question. My perception is that the ED trade will be far larger than 10x. Do you Raoul agree? If Vega explodes which I think is what you are looking for I'm thinking closer to 75-200x.
    • TB
      Thibault B.
      20 July 2019 @ 12:36
      It depends on the exact strike, but the vega on longer dated ED calls can be misleading in a normal pricing model. If you consider that 0 is the lower bound for rates, then ED futures max out around 99.75. Assume you have a 99.50 call, does it make sense for the vega to be, say, 0.10 per vol point? It doesn't matter how much the implied vol rises, the payout is capped around 0.25. Of course, (infinitely) negative rates and thus all values of ED are allowed, then the vega makes sense again.
    • JC
      John C.
      12 August 2019 @ 07:25
      Thibault nailed it, but negative rates on the short end like in Europe and Japan could be the reason. I'd think they would be able to get to say -50 or even 75 bps on the short end if Europe is any comparable. That's why I am thinking of going long a lot of June or Dec 2020 calls to get in the full rate easing cycle in. The Eurodollar futures call options I have already bought just a few weeks ago are already well in the money. If things got really bad in 3Q-4Q 2019 there is also an argument to buy a lot of 2012 Dec call optinos which are still cheap and would make returns huge is they ended up cutting say 75-100 bps by year end. We shall see.
  • mh
    miles h.
    19 July 2019 @ 23:04
    Dates, strikes?
    • MS
      Mark S.
      21 July 2019 @ 03:50
      Who said we’re stopping at zero or that the market will believe we will stop there? These things always go much farther than anyone can imagine. ECB and Japan are negative, who would have guessed that a few years ago? The Vega is what I’m watching.
    • JC
      John C.
      12 August 2019 @ 07:28
      Agree with you Mark S. but has LIBOR ever gone negative? I do realize these contracts mirror short end fed funds rates, but since it's an interbank rate at some point is there some sort of a floor whereby the banks just go to the Fed to borrow dollars? Or will that window largely be shut off in a crisis and they have to borrow amongst themselves?
  • GR
    George R.
    19 July 2019 @ 22:48
    Nice of Alex to let John talk.
  • RL
    Rui L.
    19 July 2019 @ 20:01
    "Price is just a bouncing of liquidity."
    • DH
      Daniel H.
      19 July 2019 @ 22:43
      I heard him say balancing, but I could be wrong.
    • DS
      David S.
      20 July 2019 @ 00:13
      Quote from transcript: "Price is really just the balancing of liquidity." I love the line as it shows the clearing of multiple bets with skin in the game. Bouncing is also cute as it brings to mind all the trades trying to clear at once. DLS
    • JC
      John C.
      12 August 2019 @ 07:32
      Interesting to see both Michael Oliver at MSA and Burbank both believe liquidity and momentum are the drivers of price (and that price is a secondary factor). Am starting to think they are right.
  • MK
    Matthew K.
    19 July 2019 @ 19:22
    Fantastic convo...did we determine which dates/strikes he was targeting?
    • JC
      John C.
      12 August 2019 @ 07:33
      John had his sheet out ready to tell us but unfortunately they got sidetracked on another topic and never got around to telling us what options he owed.
  • TJ
    Terry J.
    19 July 2019 @ 19:02
    Loved it! I feel privileged to be able to eavesdrop on this discussion. When Raoul explained at outset about why he loves Real Vision so much, it reminded me of why I decided to join Grant and Raoul's revolution in financial information, namely to be able to listen to successful market participants give me their views and insights (and not soundbites) of markets and the macro picture, and what trades they are currently making. I still have to pinch myself that I have been able to access this daily for so many years so cheaply. Thank you Alex and John for an absorbing seventy minutes of your valuable time, and thank you Real Vision. Please keep bowling me over, and making me a better informed and, hopefully, a better investor.
    • PW
      Phil W.
      20 July 2019 @ 01:30
      Well said terry! Om part "Absolutely Brilliant"
    • BM
      Bryan M.
      20 July 2019 @ 05:41
      Well said Terry and me too!!
  • AJ
    Angus J.
    19 July 2019 @ 18:03
    It is a great expression of an aggressive Fed thesis but you need to hedge your delta with equivalent OIS/Libor basis. The last time the Fed cut like that the basis move eliminated much or most of the upside,
    • PC
      Philip C.
      20 July 2019 @ 03:57
      Thank god somebody raised this
    • KV
      Konstantin V.
      20 July 2019 @ 08:50
      @angus, @philip, could you please elaborate on this idea? Why would you say a call on eurodollar is just not enough?
    • sm
      sam m.
      20 July 2019 @ 09:09
      @Konstantin V. - they are talking about the euro dollar futures being priced on the libor rate rather than the fed rate ... so you might have a view on lower fed rates but the libor rate doesn't fall as far as the fed rate and the spread (called the "basis") widens. So you might be right about fed cutting rates but you won't profit (as much) from your view.
    • TB
      Thibault B.
      20 July 2019 @ 12:28
      I used to worry about this. But later I realised that post GFC another Lehman will not be allowed to happen (at least among the big western banks, those quoting libor) - it is the one overriding concern of all CBs. Although banks may effectively become insolvent (as in Europe), there will be no disorderly bankruptcies. So the 'credit' part of libor rates is much less important than it used to be. Just as well, since eurodollar markets are far longer dated and more liquid than fed fund futures.
    • PC
      Philip C.
      20 July 2019 @ 15:11
      @ Konstantin. EDM0 (J
    • PC
      Philip C.
      20 July 2019 @ 15:25
      @ Konstantin. EDM0 (Jun 2020) trades @ 98.305. Therefore, 100 - price (98.305) - 3m Libor OIS (30bps) assuming it wont trade wide because counterparty risk is 'gone' = 1.395 which is ~4/5x 25bp cuts from here. Ftr, there's more $ taking other side of this trade. Everybody and their Uncle is receiving rates. 25d puts are trading at like 20 IVB vs 40 calls. ED MM have maxed out inventories and are mega long spot convexity. Jump risk galore why not pick up some gamma? Or maybe I'm just talking my book....
    • AJ
      Angus J.
      22 July 2019 @ 16:17
      @Konstantin V. @Philip C is correct. If you buy ED Calls your bet is on Libor not the Fed Funds Rate. As yields drop the credit spread between the US Government (Treasuries and Fed Funds) and the banks (LIBOR) widens. You could be right on the Feb but lose it all in the widening of the TED spread. This was exactly what happened in 2007 and 2008. Ted Spread widened from 15 bp to 200-300 bp. The widening may not be as bad as 2007-2008 but if you are buying OTM ED calls you do not have much room for error. Current ED vs FF bundles are 25-30bp after sitting at 15-20 for months so the market is starting to price this potential move in. You can also hedge via Two year notes (TU) vs Eurodollars. Hope that helps
    • JC
      John C.
      12 August 2019 @ 07:43
      Angus - thanks for the detailed description. But when I hear Raoul and Burbank both saying this is potentially a once in a lifetime bet I'm just wondering what I'm missing here by buying say Dec 2020 ED calls (EDs are like at 98.625 now). Credit risk aside, as I understand I'm taking a bet on where 3-month LIBOR will be in Dec. 2020 if I buy straight up calls. When I look at the charts I see 3-month LIBOR largely follows Treasury rates on the short end whenever the Fed ends up cutting with a small lag period - but they still end up near one another. Lowest LIBOR ever got was 25 bps or so I think which clearly is above zero. Is that the OIS Spread differential you're talking about? Thanks!
  • NS
    Nishant S.
    19 July 2019 @ 17:53
    Amazing video. Any other equivalent ways to bet on the trace to zero which are more approachable for the individual investor. ? Treasury ETFs,? leveraged treasury etfs, short Libor etn ? Or should one scramble to learn how to by calls on the Eurodollar rate directly?
    • TM
      Timothy M.
      19 July 2019 @ 21:18
      Agreed. I loved the interview and the thesis. I opened a Futures account on Etrade after listening to the interview and spent a few hours trying to understand the lingo. That said, I don't want to make a substantial bet with an instrument I do not fully comprehend.
    • JH
      Jonathon H.
      20 July 2019 @ 13:00
      You need the derivative markets, either options or futures to get the leverage required to generate outsize returns in these interest rate trades that John describes. The short end ETFs will only offer limited upside. You must also recognise the significant risk that these leveraged strategies have as well, tough to learn on the fly.
  • JH
    Jesse H.
    19 July 2019 @ 16:39
    Thanks, guys - I am not exaggerating when I say that this may be the best RV interview so far this year, at least in my opinion. Fantastic quality in terms of content and clarity of the discussion. And, as Raoul said, two of the smartest investors one can find. Brilliant stuff - I might just have to watch this a second time.
    • JH
      Jesse H.
      19 July 2019 @ 16:45
      The humility is also striking here...and refreshing.
  • JB
    J B.
    19 July 2019 @ 14:17
    James Goldsmith 1994 Charlie Rose interview: https://www.youtube.com/watch?v=4PQrz8F0dBI
    • dm
      david m.
      19 July 2019 @ 15:17
      Completely nailed it.
  • RR
    Robert R.
    19 July 2019 @ 14:08
    Thank you for getting these two together. Great to be able to see two of the best go through their thought process, and be so humble about their success, and put emphasis on their continued efforts to evolve and grow their skill set.
  • CH
    Chris H.
    19 July 2019 @ 13:50
    Top Blokes. Really interesting. Thanks.
  • BA
    Bruce A.
    19 July 2019 @ 13:45
    John Burbank sounds like the kind of guy who isn't first on to the scene of any particular market move, but he's the guy who understands when it is a really important move.
  • LK
    Lyle K.
    19 July 2019 @ 13:23
    Great job RV for putting this together!
  • Nv
    Nick v.
    19 July 2019 @ 12:14
    Burbank's view is 100% consensus in US technology - See BAML FLow Show and Global Fund Manager Survey. Long Dollar, long US equities. Your Twitter stream may sound different but the DOLLARS are invested in his view
    • JC
      John C.
      12 August 2019 @ 07:45
      He might be in line with consensus but as he said in the interview he's no longer tech as things the market is long in the tooth and valuations wildly out of line (but he does realize they could stay that way for quite awhile if it's indeed a structural shift)
  • SA
    Stefano A.
    19 July 2019 @ 11:48
    Is a transcript going to be available as usual? Thank you
  • DS
    Dusko S.
    19 July 2019 @ 11:03
    Excellent! Any thoughts from the RV viewing financial industry pros on replicating the suggested trade by going long a retail product ULBR?
    • DS
      Dusko S.
      19 July 2019 @ 14:06
      DLBR not ULBR.
    • NS
      Nishant S.
      19 July 2019 @ 18:00
      Hi Dusko- that sounds like a great idea. Would love to know what the pros think
    • NS
      Nishant S.
      19 July 2019 @ 18:09
      Seems like DLBR is not the way to go. Here is a link from the prospectus: "Any decision to hold the ETNs for more than one day should be made with great care and only as the result of a series of daily (or more frequent) investment decisions to remain invested in the ETNs for the next one-day period. Accordingly, the ETNs should be purchased only by sophisticated investors who understand and can bear the potentialrisks and consequences associated with a short-term investment based on the composite forward LIBOR rate and that may be subject to the effects of carry and decay, may be highly volatile and may experience significant losses, up to the entire amount invested, in a short period of time. Investors should actively and frequently monitor their investments in the ETNs, even intra-day. It is possible that you will suffer significant losses in the ETNs even if the performance of the composite forward LIBOR rate over the time you hold the ETNs is positive, in the case of the Long LIBOR ETNs, or negative, in the case of the Short LIBOR ETNs."
    • DS
      Dusko S.
      19 July 2019 @ 18:36
      Nishant, caution is certainly advised, even more so because it's a thinly traded instrument with a wide bid to ask spread. However, if you're not in a position to trade futures in your PA (like myself), it might be a way to hedge the portfolio. What I really like about the ETF is that is actually a derivative play on EDZ (eurodollars) and not on LIBOR itself. The reason being that in case of a serious liquidity crunch the inverse correlation between LIBOR and EDZ may turn positive (as was the case in 2008). See https://www.alhambrapartners.com/2016/08/30/eurodollar-futures-libor-and-the-oft-obscured-consistency-of-present-vs-future-risks/
    • IS
      Igor S.
      19 July 2019 @ 18:38
      DLBR has next to no volume. Does anyone know of any alternatives?
    • DS
      Dusko S.
      19 July 2019 @ 19:12
      @ Igor S. If you're used to trading options, you get used to a low liquidity and high decay rate.
    • NS
      Nishant S.
      19 July 2019 @ 20:07
      Thanks for the link Dusko. Will try to wrap my head around the article.
  • TA
    Tommaso A.
    19 July 2019 @ 10:37
    i loved this, thank you RV and guests.... i think they are looking at Dec 2020 eurodollar call options, strike 98.625 costs 0.24, roughly 5x return if rates go to 0-0.25 by then
    • KV
      Konstantin V.
      19 July 2019 @ 10:52
      Isn't it too far away in the future? I've just watched the video and my impression is rather June 2020... Or did I get wrong?
    • TA
      Tommaso A.
      19 July 2019 @ 10:59
      @konstantin i think they speak about 5x return in 1 year, so you might be right .. June seems a bit too close thought , you may miss the full move
    • TA
      Tommaso A.
      19 July 2019 @ 11:01
      june is priced @0.15 , september 0.20..but much more aggressive IMO
    • PC
      Philip C.
      19 July 2019 @ 17:35
      Receiving rates at this level is preposterous. Can we be real for a second....
    • JH
      Jesse H.
      19 July 2019 @ 17:57
      Thanks, Tommaso - good to know. How does one buy these exactly, and though I'm sophisticated, I am a retail investor...so perhaps better to just buy 2-year treasuries (though you don't get the nice returns due to lack of leverage)? Thanks.
    • JH
      Jesse H.
      19 July 2019 @ 17:58
      Lol - sorry, didn't mean to say "I'm sophisticated" -- just meant to say, I am a reasonably educated investor...that's what I meant to say. Cheers.
    • GS
      Gordon S.
      19 July 2019 @ 22:38
      @Jesse H.: For Fed Funds Futures look up the ticker "ZQ" and for Eurodollars the ticker "GE". If nothing shows up try for example "GEM0", this is the Eurodollar June 2020 contract. Interactive Brokers has these tradable, not sure about other brokers. C.f. here for more info on tickers and how they are formed: https://www.mrci.com/web/online-explanation-pages/symbols-a-codes.html P.S.: To get the expected interest rate do 100/(price of contract), i.e. for ZQZ9 (Fed Funds December 2019 contract) which is currently trading at 98.265, do 100/98.265 = 1.01765 thus implying Fed Funds at 1.765% in Dec. 2019.
    • KV
      Konstantin V.
      20 July 2019 @ 08:45
      @Gordon, thank you! It seems @tommaso gave the prices for GE calls. Why would you suggest ZQ instead of GE as a way to go option? Is there any benefit of ZQ or are they essentially equivalent?
  • AP
    A P.
    19 July 2019 @ 10:32
    John openly displaying beginner's mindset on how he learned about ED was incredible to see. Cherry on the cake of this week. And thanks Alex for the great questions. But mostly thank you RV for this Recession Watch week and all the insights. Finally, I see an interesting pattern developing: after Bitcoin breaking higher on Crypto Week, Gold/Silver breaking higher on Recession Week = RV as the coincident indicator (even leading in the case of rare earths)? Cheers guys.
  • PC
    Philip C.
    19 July 2019 @ 09:25
    EDZ9 25d calls trade at 2x IVB v 25d put tho?
  • PB
    Pieter B.
    19 July 2019 @ 07:50
    Thanks a lot for the fantastic conversation!
    • tr
      tom r.
      19 July 2019 @ 20:39
      The reason I gave this interview a thumbs down is that it could have been much better if you would have shown the actual trades and timelines he is betting on including actual option trades and leverage. I can see a whole lot of people jumping in and making bad bets because this wasn't laid out clearly. I am very interested in this trade but still have many questions as to what it actually entails. If you are going to use this kind of leverage, you best get it right.
    • DS
      David S.
      19 July 2019 @ 22:46
      tom r. - I understand your reasoning, but this is not Trade Ideas. Thanks for letting us know your thinking. For me it was apparent that Mr. Burbank does not want to lay out the trade, sizing and leverage on an inflection point trade. Each new piece of information can change the trade, sizing and leverage. Mr. Burbank would have to be in constant contact to update the trade. This is too much to ask. In addition, it is something new to him and he really does not want to mislead us. DLS