In this wide ranging discussion, we discuss markets and market conditions, investor economics, (low) bond yields and (low and threatened) dividend yields. We go in-depth on the misunderstood opportunity of covered call writing as an overlay equity investing strategy, that is available via Covered Call ETFs, that produce a sustainable, tax efficient, high monthly income for every-day investors seeking yield, in addition to equity returns.
Pierre Daillie: (00:00:00) Hello, and welcome to the Insight is Capital podcast. My name is Pierre Daillie, managing editor of AdvisorAnalyst.com.
My special guests are Hans Albrecht and Nicholas Piquard of Horizons ETFs Management.
Hans Albrecht is Vice-President, Portfolio Manager and Option Strategist for Horizons ETFs Management.
He co-manages one of the largest options books in Canada, as well as $500 million in covered call ETFs and oversees day to day options activities. Previously, he was a floor options market maker and traded a large volatility book for National Bank Financial. He has lectured at Cornell and McGill Universities and has appeared on numerous expert derivative panels.
He's also a graduate of the University of Oxford and MIT FinTech and Artificial Intelligence programs and has been featured in Bloomberg, Investment Advisor, The Globe and Mail, The Financial Post and is a regular on BNN Bloomberg.
Nicholas Piquard is Vice-President, Portfolio Manager, and Option Strategist at Horizons ETFs Management, as well.
Working with Hans Albrecht, Nicholas manages approximately $200 million in assets of Horizons ETFs global lineup of covered call ETFs. Prior to joining Horizons, Nick spent nearly 15 years as an institutional derivatives trader with Canadian and international brokerage firms. He specializes in quantitative strategies trading options volatility, and relative value.
He graduated from the University of Waterloo with a Bachelor of Mathematics and holds the CFA designation.
Without further delay. My conversation with Hans Albrecht and Nicholas Piquard.
Hans, Nick. It's great to have you on the show , before we begin, have you guys both got your headsets on.
Hans Albrecht: (00:01:40) Everyone's got, well..., Nick and I have our beards.
Nick Piquard: (00:01:43) Yeah, exactly. Covid Beard.
Hans Albrecht: (00:01:45) It started to make me realize where I'm going gray.
Nick Piquard: (00:01:49) Actually, I actually just got a haircut this weekend for the first time. So it was starting to look pretty shaggy.
Pierre Daillie: (00:01:58) Work conventions have really softened up people's expectations, noises in the background. There's all kinds of, I mean, we've been having fun. We've been doing more podcasts and, and so it's been, it's been really nice to not have to haul recording equipment and headsets and microphones, all that stuff to do a, a live recording, although at this point, I think we'd like to start doing that again.
Nick Piquard: (00:02:27) Well, I got to say all this technology is pretty convenient, I mean, I think a lot of it might stick, for sure.
Pierre Daillie: (00:02:32) It's definitely what the, technology companies were trying to make us do. And here we are right now all that stuff we knew was there and thought, why use it when, if you don't need to. Now it was ready and available. I don't know what would have happened if this COVID came, 10 years ago.
Hans Albrecht: (00:02:51) We would have been in trouble. Oh yeah. We would've been in trouble. I think it would have been, it would have been much different experience for sure. Yeah, definitely.
Pierre Daillie: (00:02:58) I mean the, the bandwidth wasn't there, the applications weren't there. I mean, they weren't up, they weren't up to snuff. How are you guys doing?
Nick Piquard: (00:03:07) Not bad. I mean, given everything, it's, it's been a bit of a challenge, like both parents, like me and my wife working from home, and we get to share a working space and, and everything else.
And, I know Hans, he's got three kids at home, so that's always a, more of a challenge even for him. but, we're gainfully employed, so that's a leg up on a lot of people for sure.
Pierre Daillie: (00:03:29) Yeah, I think, definitely for those of us who are in the financial arena, and relative to the financial arena, we've definitely, I'd have to say we've been very fortunate in terms of how everything has played out and, and the financial business itself has been unscathed by that.
Nick Piquard: (00:03:48) Yeah.
Hans Albrecht: (00:03:49) Yeah. It's it's, I mean, technology is always, I think the financial industry has had a a bit of a leg up on technology and it, and it is very kind of computer, driven and, and we're also getting a tailwind from markets as well. I mean, we depend.
Just to, to a large extent on, market's doing well. And, and so stimulus for, for main street has definitely turned into stimulus for Wall Street. And we've, we've definitely seen that. So, and it's been confusing for a lot of people. So, but, but we are a beneficiary of that as well.
Pierre Daillie: (00:04:24) When you see that six companies in the S&P 500 are responsible for, the majority of the returns over the last decade. When you take take those six companies out of the S&P 500, the S&P 500 looks a lot like every other market.
Over the years we've heard all the arguments from, various folks in the, the passive side of the market, that dispersion of returns among stocks was at an all time low. What is the dispersion among the remaining 494 companies?
Nick Piquard: (00:04:59) Yeah. That's, that's a good question. I don't know that I have the perfect answer for that, but there, there's no doubt that, it's been driven by few select stocks. Not only are they the biggest companies in the world , but, but also they dominate so many economically.
I mean, Google, Apple, I mean, there's no competitors that they don't buy . They have the ability to basically acquire any competitors. They've come to the point where, they really. it's very hard to compete against them. and, and so, maybe it's maybe to that extent, their multiples, aren't ridiculous, given the profitability that they have and the runway for more profitability, but in terms of all the other names, there is a lot more dispersion. There's a lot more going on in the bottom 400 than there than there is in the top 10.
Hans Albrecht: (00:05:47) Yeah, that's, what's confusing to the outside observer and Nick and I get these questions all the time. . I was on the the Rob snow show again last week. And he said, this, this, this is pretty confusing to anyone watching these indices. It depends on what index you're looking at. Right? So if you take out a lot of those big names, and it, isn't just those, we've got some help care and we've got some consumer discretionary consumer staples that benefit as a result of technology.
Technology has allowed other old school businesses to also thrive. so, fulfillment and logistics and getting the products to customers is all part of the benefit of technology. Not just. Expanding data centers, right? So it all flows into many areas of the broader economy. But if you take a lot of those big names out of there, then you start, the index starts to look a little bit more realistic and relatable to something that's closer to the S&P without those names. The NASDAQ certainly is kind of in a different category. It starts to look maybe a little bit more like a Russell where you can kind of look at that and go, yeah. There's pain on main street. And so there should be some pain in the stock market. And so the Russell's down 15% on the year, which is drastically different from say the NASDAQ.
So. It depends on, on where you look, but, I think, I think the big thing is, you have to look at how these things are structured. And so when you've got, 60% of the NASDAQ, 100 is those names. And then you throw in with, with some biotech and some little things like that.
It really does make sense. Why shouldn't these stocks be making all time highs? They literally are benefiting from what's going on. So. It, isn't just not a negative, it's a positive, right? Any of these trends from Microsoft for cloud usage. and so it starts to make a little bit more sense.
Pierre Daillie: (00:07:36) Yeah. I think where it's confusing, of course, this is like, when you look at the fact that, that, 40 million Americans are out of work, or there abouts and, The government is subsidizing them for now.
These companies are going to do really well because they're really fitting in very nicely into the circumstances. they're, they're sort of unaffected by the circumstances because.
The circumstances are feeding them. What happens when, when something maybe like a third or half of those unemployed, those who are unemployed today, because of the type of, of jobs that they were in. And the businesses that they, that they work for that might never come back. Those jobs that are being treated as temporarily lost right now are permanently lost and those consumers are lost.
Hans Albrecht: (00:08:27) Exactly. And so that's, I think that's the, the stage, the realistic stage that's that's going to come. And so this morning, there was a retailer Mountain Equipment Coop. I think it was, they said 200 of these job losses are going to be permanent.
You're going to start to see more of that. Up to this point. It, I think the pain, the pain has largely been on paper. It's been a kind of. Income support in the U S has been so strong, in April income actually Rose in the U S so if you were, if you worked in retail, you you're the average wage take home wage per week was probably around $700 with the extended, wage support in the U.S. You're getting over $900.
If you worked in hospitality, you were making about $450 a week. You were getting $900 a week. You're getting $900 a week from the government. You're actually doing a better than you were before. So, so what's interesting is that the headlines, the people see that the tens of millions of jobs that have been lost are not supported from a spending standpoint, because a lot of people are being paid to sit at home and catch up on Homeland season eight and they, and they're, and they're continuing to buy, they're buying things and they're coming, they're getting five Amazon parcels a week.
And so. So there, and they're also pushing some of that money. You've heard about the Robinhood trader. So some of these, it's been documented that people are saying, well, look, I got this money and I can't, I can't watch sports. I can't bet on sports. So I'm going to bet on the stock market, that's necessarily a good thing.
But so far, a lot of the pain has been on paper. And I think to your point, yes, we're going to progress at some point to a stage where there are going to be some questions. Are they going to some of the support that we've seen? Otherwise, there's going to be this big income cliff. And I think that starts to filter it into those.
It starts in at the lower end, the lower at the lower end of where the job losses have been, which is the lower wages and those people don't own houses and stocks anyway. So it's not a big problem, but at some point that starts to filter up the ladder. And I think that's where you get problems. The dentist who made $300,000 last year, who's going to take a gigantic hit.
Does that start to play into the economy a little more? The restaurant owner, the. Myriad of jobs that you're alluding to that are going to become more permanent because not just because of the pandemic, but I think because of just the general sense of, corporate leaning out and austerity or I've, I can't remember what company it was, but I read about one company saying, look, we're starting to trim people.
We're not even in trouble, but we're starting to look for efficiencies. In the way that we do things in our business. So I think you're going to see, look to become more efficient, across the board. And I think that's going to impact jobs as well. So I think you're right. This next stage becomes maybe more meaningful for earnings and the stock market.
I don't know if you, if you, if you
Pierre Daillie: (00:11:23) From our observation point it's hard to reconcile , the amount of optimism that appears to be happening. It's hard to know if investors if they feel the same way about the way the market is behaving, because of the circumstances, , certain things have become distorted, for example, yields. , one of the things we're going to talk about today , at some length, is the, nontraditional types of income, with yields, well below 1%, what do investors do like short of speculating I don't think investors are going to stop investing in bonds nor should they.
But the problem is that you no longer investing in bonds, for the income you're investing in bonds, , in the outlook that rates or yields might go negative, in nominal terms, not just real. They're, they're negative now in real terms, but in nominal terms, they haven't yet gotten there.
But if they do, of course, you're still going to get the, the, the gain from the, the duration play.
Nick Piquard: (00:12:25) For sure. I mean, that's, that's been the game in bonds for, for the past, several years where even though yields were basically at record lows already, you could buy the Austrian a hundred year bond and double your money in, in six months, just, just on the, on the duration alone.
I think we're getting to the point where, first of all, I think governments are kind of realizing that negative rates really haven't helped that much. If you look at the situation, the banking sector in, in Europe, negative yields, they're trying to figure out how to have negative yields without impacting the financial sector, because it's caused such havoc in European banks.
So, I think a lot of people are starting to realize that, maybe negative rates isn't the, the panacea that everyone is hoping it to be. And on the other hand, what you're hearing a lot more about is yield curve control, which is basically, why don't we just fix, the 10 year we're at 1% and the two year at 50 basis points through whatever it is and, and make sure we keep those yields at that level.
And at which point, maybe there's going to be a lot less potential for gains. If we're already there. so I think that should be a real concern for, for bond investors in the sense that, they're likely going to be able to get their money back, but they're, they're not going to be able to get the, 4% to 5% returns that, they've been getting or, or hoping for, in the future.
Pierre Daillie: (00:13:53) Dividend yields are fairly low given stock valuations. The dilemma for investors and in particular, those investors to hold the large proportion of assets today, which is, those are nearing retirement or those who are, about to retire or those in retirement, baby boomers in particular.
If they're looking for yield, if they're looking for income from their investments, short of getting into credit, which is where a lot of money has been flowing, looking for yield. there are other ways to get income and, one of those ways is covered call writing or option overlay or covered call overlay, buy-write strategies. Looking at that, I can't help thinking that that's really an idea whose time has come. It's been a great idea for a long time. This is not a new strategy by any means.
It's been around for three decades. and in the days when it started, the technology wasn't there to support the activity, the liquidity wasn't there in the options market. In the very beginning, when, when the first Buy-Write strategies were, were sort of, developed.
It wasn't until 2002 that the CBOE launched a Buy-Write index. The fact that there's an index that exists to track buy-write, or covered call or option overlay. whether it's against the market or against the portfolio, the fact that there's a strategy there. I I'm bringing it up.
Cause I think, I think a lot of advisors and I think a lot of investors, definitely a lot of investors have difficulty wrapping their heads around the subject. This added strategy on top of an equity strategy to collect premium income from from the writing of options.
But, but, so I want to talk about that. I'm being very careful not to call them alternative. because it's not in the alternative space. The word alternative has a whole other meaning, but I like the term non traditional sources of income because there are strategies that are available to investors and to advisors looking for income for their clients, that are, inherently of a lower risk, and because of the way they're constructed provide some very interesting risk mitigation benefits. but I think there's also, there's also a number of other benefits, especially now with interest rates or yields. I mean, at the zero bound, there are some other interesting aspects, that we can get into such as, what looks like capital efficiency that, that a covered call strategy brings to a portfolio in terms of, sort of offsetting some of the risk that investors might take.
Yeah, yeah. Yeah. So now that's where you guys come in. You guys are really, both of you are involved actively in the, the strategy, at Horizons ETFs. You oversee the Covered Call ETF strategies.
Can we start off by, talking about how, the covered call strategy works, what is a covered call? How do you do it?
Nick Piquard: (00:17:07) Sounds good. I can start off with that. So, basically a covered call strategy is, it's a fairly basic option strategy that a lot of investors use to generate yield. So, what the strategy involves is purchasing a stock or having a stock in your portfolio that you already own, and then selling a call option against that stock position. And now what a call option is, if people don't know, it's the right to buy a stock at a certain price. Usually these, call options have different expirys and they have different strikes. But if I can give an example on a $10 stock, for example, you might have an $11 strike call, which gives you the right to buy the stock at $11.
Now, investors who. Are expecting an appreciation in the value of the stock are willing to pay a premium to buy that call option. It might be 30 cents, 40 cents, 50 cents. It depends on the stock. It depends on the volatility. And what a covered call option does is instead of buying the call option, you sell the call option.
You receive the premium, say 50 cents on a $10 stock. That gives you a 5% yield. Now in the case that the stock doesn't move, you just collect the call option premium, and you can start the strategy over again. Or in the case where the stock goes up above $11, then you will effectively sell the stock at that $11 price.
So you can capture your gain and you receive your premium as well, but you don't get to participate in more upside to stock may have. So it's a risk mitigating strategy in the sense that you're receiving money upfront for your portfolio. but in the case that it goes up, you're not going to fully participate in the upside, but you're gonna, you're getting paid for giving up some of that upside basically.
Pierre Daillie: (00:19:19) Right. And you're picking a strike price against the shares that's, out of the money just slightly out of the money? .
Nick Piquard: (00:19:25) Exactly. And that's going to depend on, I mean, when we use cover calls in our, portfolios, we have various models where we look at, what the, the, the best strike is given the, the price, the options and what not in the market, but traditionally, what investors will do is they'll sell an option that's out of the money.
One of the, one of the popular, ways to do it is to use kind of a one standard deviation move away from, from where the stock is. And, that, that gives you basically a little bit of upside on the stock. So what I mean by standard deviation is that that strike will be higher on a very volatile stock, such as Apple, right.
Or, but it will be a lot lower now, less volatile stocks such as utility company or, a bank or something like that. Yeah
Pierre Daillie: (00:20:24) The definition of, out of the money is relative to the amount of volatility that, that any given stock is experiencing. And then on a go forward basis, the term out of the money is relative because the standard deviation is relative.
Nick Piquard: (00:20:39) Exactly right. So if you look at the markets that we're in today with the, the spike in volatility that we've seen over the last three months, you want to give yourself more room when you're selling calls, because that we're going to get big bounces and, we're, that the markets are going to move around a lot more.
And so, if you were selling, a 5% out of the money call option a, six months ago, right now, we might be more like 10, 15% out of the money, just because you want to make sure that given how much stocks are moving today, that you're still going to be able to get the same amount of premium, if not more, because the volatility has really increased the price of these call options, but you also want to make sure that you're giving yourself of upside given, given where the markets are moving.
Pierre Daillie: (00:21:27) Yeah. you're writing options on a percentage of your shares.
Nick Piquard: (00:21:31) Correct.
Pierre Daillie: (00:21:32) And is there, is there a benchmark or limit that you guys work with in terms of how much you, you write options? Like if you have a position of a hundred thousand shares in a portfolio, how many shares would you write options against?
Nick Piquard: (00:21:50) Yeah, exactly. And that's, and that's going to depend on, I mean, what Honda and I do is that we will look at the market and we will, decide, based on, what we see in the market and the value that we're getting for the options, how much we want to write on that a hundred thousand shares.
So for example, we have a gold covered call ETF. Given the moves that we're getting in gold, we actually sell a slightly lower amount of call options in that portfolio, but, in the bank sector, we'll write a little bit more, given that we see less upside, risk in one of, in a lot of those securities . So that can vary, but it usually varies between kind of 25 and, 70% of the portfolio. So it can vary. Quite a bit of leeway there. in the past few months, we're generally on the lower side, more like, less than 50% , just because, we're already getting a lot of premium because the volatility is much higher.
And, there is a lot of risk, with, what we've seen a, security's going a lot higher, a lot lower. The energy sector is a perfect example of that, where, it was down 70%, from the high, at one point, this year, And then it rallied, 75% from the vote. So, you, you have to be very careful how much calls (call options) you're selling.
Pierre Daillie: (00:23:14) Yeah. Because you're going to, you're going to get your shares called away if you, if you didn't, if you didn't pick the strike price right. So I just want to clarify something because, you can pretty well take any, portfolio. You guys manage, for example, a portfolio of financials, you manage a portfolio of gold producers, you manage a broad based, the enhanced income ETF is a broad based portfolio.
itIs not sector specific. So you, you can take any existing portfolio. And the point I want to make is that. Underlying this strategy is the fact that you own these shares in the portfolio, whatever that portfolio is whether it's sector specific or broadly based, and then you're, you're applying this overlay with the covered call writing on top of it. So. You're not adding straight equity risk. you're doing this of course, to add alpha, to add income, from the strategy, but the risk is that you'll have to give up your shares if they get called away.
And then you're not, and then you'd have to buy them back if you mean to replace them. Right. How much friction is there in that strategy? If you have a really volatile, like for example, if you were, if you were buying options on Tesla or, any of the Fang stocks, there might be, a fair bit of friction, if you mean to continue to own those shares in the portfolio because you have a rising market. Your options might call away some of your positions. And if you haven't, if you haven't, Pick a strike price far out enough. Yeah. And, and ideally, you don't want any of your shares to get called away. Ideally you want, you want to capture all the upside all the time, as well as the option premium. Right. but if you go too far out, then the, the, the premiums are lower.
Nick Piquard: (00:25:04) And I mean, you bring a very good point.
And I, and I think in a lot of ways, an example, like, like a Tesla. you're never going to be able to, it's going to be very difficult, with a cover call, option strategy to capture all of the upside of Tesla and, receive premium on top of that. And so what what's going to end up happening is that you're gonna end up giving up some of that upside, but on the other hand, You're still going to get some upside.
And, and so, when you look at investors who are wondering whether they want to own bonds that are yielding 1%, or whether they want to own a Tesla covered call strategy, which is going to give you, 60% or 70% of the upside on Tesla, it's a small yield or a four or 5% yield. That's actually not a bad outcome for you.
Pierre Daillie: (00:25:53) The strategy works best ideally on stocks that are , traveling to the upside in a channel.
Nick Piquard: (00:26:02) Correct.
Pierre Daillie: (00:26:03) I mean, the fundamentals of the business growing very steadily and the stock prices traveling within , a, channel and, and you can actually almost predict, or, or it's a little bit more workable in terms of, a sustainable strategy for, for, for earning option income right?.
Nick Piquard: (00:26:23) absolutely. I mean, that is the ideal, stock to do a cover call is , one, which has changed in a, in a range relatively range-bound and, perhaps, in this way you don't get the same kind of, moves, like a Tesla might give you, but on the flip side, a Tesla option is going to be worth a lot more money. A call option on Tesla is going to be worth a lot more premium than a one that is sold on stocks, which are pretty range-bound and don't do much. The market relatively efficient in the sense that they will give you very much premium on a stock. that's kind of predictable and range-bound, but they'll give you a lot more premium on a stock, which is, less predictable, Yeah.
Hans Albrecht: (00:27:09) So if I can jump in Nick, Tesla, because of the fact that we, we tend to target a Delta. And what that means is that, we're looking at a strike level that is actually a moving target.
So in more volatile environments, that strike is going to be more distant from where the stock is trading and in a less volatile environment, that strike level is going to come down and it allows our strategy to kind of evolve with. The fluctuating volatility environment. And so in a name like Tesla, that's trading at say 120 volatility, implied volatility, your strike level is going to be significantly higher, away from where that stock is trading.
So to your earlier point, yes. And the ideal scenario for us is that the stock appreciates right to the level of the strike and stops right there. And we collect that premium and it's mission accomplished. We've collected the appreciation from where the stock is trading now to the strike price. Plus, we grabbed that premium.
So that is the ideal scenario. the underlying theory behind cover calls, and why some of the longer term studies have shown that it works very well. Is that. It month after month, you're selling away what you would consider, an abnormal move. So, when you look at a hundred dollars stock and you sell that $105 strike you deem that $105 level the next 30 days or 60 days, whatever, whatever tenor or you might be selling you deem that to be a reasonable amount of movement to the upside. And anything beyond that would be considered a little bit abnormal, perhaps not, this month, or next month, but over time, generally, option prices are fairly good, at, predicting at pricing in a stock movement because it's based on the broader environment, but it's based on the specific situation for that particular stock.
It's rare that option prices are completely out of whack and don't represent, potential movement for longer periods of time. So the idea is that, if you do this each month, 12 times a year, there will be the occasion where the, the equity moves, past your strike price, but generally speaking, you're selling away the potential above $105, let's say, and you're receiving, a premium for that. So in a sense where monetizing the sentiment that person could be, right. They, they might be willing to pay a dollar for that call, that only starts to pay them at five or 6% higher on the stock. That's great. They may or may not be right. But what we know now is that over time, they're probably not going to be right every single month.
What we can do is we can monetize that expression, that, that opinion and sentiment, and turn it into a yield for us right now.
Pierre Daillie: (00:29:57) The thing that, that always amazes me with the covered call overlays is that there isn't more excitement for them, like, especially in the environment that we've been in for so long, and people are willing to take credit risk to capture yields without really understanding, sometimes what they're getting into. Investors are willing to take what I think are even greater risks to capture, yield, reaching for yield, then something that's right in front of them. And has been working for decades, and, and is inherently less risky than straight equity risk. The fact , that you guys are selling away some of your upside, you're giving up some upside in order to capture this income from selling options, from writing options against your holdings.
The worst thing that can happen is that those shares that you optioned get called away and you have to replace them, if indeed you do want to replace them. That's the worst possible thing that could happen. On the downside you're getting protection as well, because. You're getting some downside protection visa returns, your overall returns because the yield or the income that you're making from the writing of the options, is, is actually, offsetting what might be some of your downside risk on the holdings itself. I think if you compare, like for investors who are looking for yield, if you just compare owning a straight equity fund versus owning an equity fund with a covered call overlay, the covered call overlay should typically have a smoother ride. It should...
Nick Piquard: (00:31:35) I agree a hundred percent, but I think you, you kind of nailed it in terms of, one of the differences in one of the reasons maybe perhaps, covered call overlay strategies have not been as popular. maybe the last couple of years is because we've been in such a big bull market where equities have gone up where people really are comparing the covered call strategy to equities.
And they're like, well, equities are up this much. And the covered call is up only, 70% of that or 75% of that. so maybe, maybe I'd rather rather own equities. They're not really looking at it as kind of a substitute for yield necessarily. They're always kind of looking at it as just substitute for equity.
Pierre Daillie: (00:32:17) That's a misperception, right?
Nick Piquard: (00:32:19) And I think the right way to look at it is like, well, look, this could be a way to earn yield, that's not bonds anymore. Cause as you say before, are being stretched into going into, fairly risky credit to earn, not very high yields anymore and looking at it in a slightly different way, looking, well, this is not equities, but this is. No bonds, but it can earn me an additional yield. The other challenging part, for covered calls, maybe not recently, of course, but, between, kind of 2016 and 2017, maybe 2018, volatilities were extremely low.
And so, the, the market was just kind of grinding higher and a very low volatility environment. And so we weren't getting a premium on the call options. but I think both of these things now are coming to a head in, in a really changing in the sense that how much more upside. Do bonds have in terms of capital gains potential, we know that the yields are low, but the one thing is how much more capital gains potential do they have by yields going lower?
And then you compare that to now a covered call strategy where the volatility is actually increased significantly. And so, the, the you're going to get more premiums on, on your, on your, on your covered on your comp premiums. And so I think the comparison now becomes. more interesting than ever than it has been in, in, in, in several years.
Pierre Daillie: (00:33:43) For sure. Yeah. So the first number one is, is the, the environment that we're in the, heightened volatility. volatility since, March has subsided from, let's say 60, 70, 80 on the VIX, to something more moderate, relatively speaking, but still like your strategy, the strategy of writing covered calls, benefits from the heightened volatility environment that we're in. The uncertainty, does lend itself to collecting higher premiums, across the board. So that's number one. That's a substantial benefit, I think for, for, equity investors who are looking for yield.
Nick Piquard: (00:34:30) And, even though the, the volatility levels, you mentioned the Vic score, it's still at the levels that it is today, and I think it's high twenties or low thirties . It's still much higher than the median or average over the last, kind of 10 years.
Pierre Daillie: (00:34:48) It was in the low teens.
Nick Piquard: (00:34:49) Yeah, exactly. In fact, I think it was a two year, a year and a half ago was in the single digits. Incredible.
Hans Albrecht: (00:34:59) It's a little bit of, a sort of a perfect storm for cover calls in a sense, because you've got this environment. They've driven rates down to zero. and, you have a situation where investors are compelled to keep investing in equities because of, you look at the asset models. And, at zero interest rates, Apple generating whatever cash it generates and Microsoft doing well, et cetera, makes these stocks, very compelling at a very low rate, low yield environment.
So, but at the same time, you're, you're looking at a lot of uncertainty, that is being reflected in option pricing. And so a VIX of 30, it, we've averaged over 30 this year and we did quite well last year as well, as compared to, to those low levels of 2017, we see this as a more normalized environment, a little on the high side.
Typically you would sort of see high teens to 20, over time. but when you combine this sort of, of, there is no alternative mentality to having to own equities, you can kind of alleviate some of the risk in. owning stocks by applying the covered call strategy. So we sort of think of it in terms of a spectrum of, fixed income all the way on one side and a speedometer that leads you all the way to the other, which is full bore, long equities. We're addressing the conundrum that investors are in right now, which is, you have to own equities, for a number of reasons, but, asking yourself, is there a better way to do that? And so being able to monetize the sentiment that's out there and it's the VIX and option prices in general, they're, they're stock specific to some extent, but they're also broader reality based as well. So there's, concerns on the credit side, there's concerns about reopening there's concerns about the viruses, health concerns. All of these things start to get absorbed into option pricing. And that's what leads us to a very high level of option pricing that we're seeing right now.
And we can benefit, even more so. by trying to monetize those, those prices and which by the way, become the capital gains yield for. But
Pierre Daillie: (00:37:07) That was another benefit which is that the option income is considered a capital gain. It's very tax efficient income. It's not. Yeah.
Nick Piquard: (00:37:18) And I think the investors kind of forget about that. A lot of times they'll look at a, at a dividend yield or, or, or they'll look at a bond yield or they look at a covered call yield, and they'll kind of look at it, look at the number and just compare the number and say, well, this is a little bit higher, this the lower, but on an after tax basis, for, the yield you get on the cover call is definitely a much more tax friendly, for the end investor in the sense that, 50% of that capital gain, it's not going to get taxed.
Hans Albrecht: (00:37:48) I was going to also say that, one of the misconceptions we get from advisors and investors at times is that, we'll say, "Hey, how about covered calls. This could make sense for you." And they say, "well, I don't, I don't expect stocks to do nothing for the next couple of years."
And we find that that's a bit of a misconception because we like markets to do well because we sell out of the money calls because the stock is trading at a hundred and we're selling the 105 strike or the 106 strike, et cetera. Each month, we are all for stock market indices that are going to move up over time.
So we find that there's a little bit of a messaging issue in there. We're perfectly happy with, with markets that appreciate because of the way that we're selling our strike, which incorporates the ability to make certain amount of appreciation before you get to that strike price.
So I just wanted to mention that.
Pierre Daillie: (00:38:37) Maybe some of that has to do with the language of options itself, where people hear the term, break even. We've all studied options as a requirement of licensing, but the, the knowledge of options is so basic for those who aren't trading options in the market. All there is, is just , , that word in the back of your head saying, options are for breaking even, or options are for downside risk management. There's part of the miscommunication is that the language of options is there in the back of our minds.
What we're missing out on is the fact that first of all, you're not selling options on the entire portfolio. You're just selling it on, on, on a percentage of your shares. So you're only selling away part of your upside, right? You're not selling all your upside. So that's, that's part of the, the misperception that that's happening.
Hans Albrecht: (00:39:28) And that's our job, right? Our job is to look at, look at each situation as it comes on a, on an individual stock level on an index level. As we talked about earlier, some of our mandates are, are more broad based, like a S&P 100. mandate or sometimes at times they're more specific, to, the oil sector or the banking sector or the, or the gold miner sector.
So, our coverage will vary depending on, people who buy the S&P 100. Product tend to look at covered calls as a sort of broad overlay. They liked the concept of covered calls and they want to apply it to basket of stocks, a diversified basket of stocks, whereas in the gold miners, for example, we want to make sure that they retain a good amount of that potential upside, because we know that they want it for a dual purpose, which is, they want to add these, these fairly easily generous premiums that they're getting , from miners or from our gold product itself specifically because gold doesn't yield anything. So we're able to generate a yield for a holding in gold, which is a nice benefit there.
But yeah. They want it for that dual purpose of, Hey, let's get a little bit of this premium. Let's generate some monthly income, but at the same time, let's, let's understand that we want that to be to benefit when we walk in one day and gold is up a hundred dollars. We don't want to give away all that upside.
So Nick and are constantly kind of looking at the overall mandate for each of these products and recognizing what unit holders are looking for. While at the same time, looking at the specific metrics, are these volatilities good enough for us? If they're not, we don't write as much. We're perfectly happy to not write as much.
If we don't feel we're getting the premiums that we should be getting for the potential underlying move for, or for what we're seeing out there. So, we're, we're kind of evaluating a lot of things in the various different portfolios.
Pierre Daillie: (00:41:19) I liked, I mean, you're just talking about gold miners and I was thinking, that's, that's a pretty nifty way to own gold miners while you're waiting for gold miners to recover or to, respond to the, fundamentals that are affecting gold in the longterm.
Right. I mean, you're getting, you're getting paid to own gold miners while you wait.
Nick Piquard: (00:41:43) And, and one of the, one of the things for advisors is, a lot of times they might hesitate, putting a gold miners in the portfolio because it has a very low dividend yield. So we'll just lower the dividend on the overall portfolio that the advisor might have for their client, so what's nice about this covered call strategy that you can still get some money that exposure to the gold miners while not reducing the overall yield on your overall portfolio. and I, I think that's one of the tricks for, for a lot of advisors right now is, they're looking at the yield on their overall portfolios and, they still need equity exposure and they still need bond exposure, but, they, they also have a certain percentage yield that their client expects. And so, I think that's where covered calls, can come in and, and help out.
Pierre Daillie: (00:42:32) Yeah. So this is where I was getting at earlier, when I mentioned capital efficiency. It's like capital efficiency. It might not be exactly, by definition capital efficiency.
What I like about the, what is interesting about the, Covered call overlay is that you're getting this increased yield, this enhanced yield from your equity holdings. And because you're getting this, this added yield to your portfolio, it means that you can change your allocations to things like duration, or you can reduce your dependence on, certain areas that are risky in terms of chasing yield.
You might be able to, to achieve the same yield by taking the position in in a covered call ETF. So there's a portfolio construction efficiency that's interesting about the covered call strategy, especially in this market. I mean, given that, or are near zero for, for bonds, I mean, not having to stretch as far, in terms of risk budget to get the return you're looking for, for an advisor to get their client, the return they're looking for in terms of cash flow. and if you're not using the cash flow, it's a nice re-invest, isn't it. It's a nice drip. You can roll your, covered call income into either more shares or somewhere else, whatever you want.
I'm curious to know, like in terms of the investment policy design of covered calls, if you're, allocating according to an investment policy statement in a portfolio, a client's portfolio or KYC, how does it get budgeted for risk from a compliance standpoint?
Nick Piquard: (00:44:08) I'm not a hundred percent sure. it might, depend on, on the firm, but for the most part, I think it just gets qualified , as equity because, for the most part , even with the call writing, there's still substantial, equity, volatility and equity risk, and, and so I think for the most part, it gets, it gets categorized in that sense. Hans do you agree with that?
Hans Albrecht: (00:44:31) Yeah, it's, it's considered a long equity and, and, certainly we shouldn't overstate the hedge effect that is in there. You're sort of clipping these rents month after month.
And they do add up sometimes ironically, it's the sectors that aren't doing as well, that kind of illustrate the benefit. So for example, in our energy fund, which, as we know energy has had some difficulty, in the last few years, we've seen our HEE portfolio really generate a good cushion in those down markets, in the upward markets that are strongly moving upward if we tend to give up a little bit of that upside you're, you're seeing the other side of it. So sometimes it's the bad scenario that kind of illustrates the, the good benefits strategy. One of the general rules is, look, if, if you own a covered call fund, you should be comfortable with the underlying basket that's in there. You really should believe in equities in a general sense first and foremost, adding that layer of additional income is the bonus. And where some of the secret sauce comes in, but, you really do want to believe in the basket. So, if you own Tesla and sell calls against it, well, you better be comfortable with the level of Tesla that, that you own, because it could certainly turn the other way and yeah, your premium will help you a little bit, but not, it won't help you a lot when Tesla dropped $700 and that's not a prediction.
I think it was up another GM this morning, by the way, literally another GM on the old
Pierre Daillie: (00:46:02) It's crazy. Elon Musk's net worth is now more than Ford and GM combined . Wow. And the, yeah, it's crazy. Well, they love him and he's a, he's so, I think they see him as a Steve jobs.
Yeah, they're making a big deal out of the benefits of some of the new batteries that might be coming in terms of how long they last, I think a lot of people held off on buying electric vehicles because they were concerned that, that, the battery would run out too soon.
The 200 miles wasn't enough, but now some of these batteries are lasting 500 miles. And, and they're talking about even longer now, like, nonstop driving across the U.S.
Hans Albrecht: (00:46:39) Yeah, and they can control that. They can control that from head from headquarters, which is quite kind of interesting last year during the major hurricane, they extended the distance for the battery, the batteries and Tesla is, and I think people were surprised about that, in some of the lower cost vehicles, they were being limited as to their range. and so they kind of extended that, but, I think, we're talking about standard deviation. I think Tesla just moved six standard deviations, in about a week and that's really kind of amazing.
Pierre Daillie: (00:47:14) Yeah, it certainly is. So, just to cap off covered call ETFs are essentially equity funds, but what they bring is the added benefit of the overlay, which is the writing of covered calls of positions held by the ETF itself.
From that an option premium is gained, is collected for selling the covered calls. It's like collecting rent.
That's the part I find really strange is that investors don't see it for what it is. The language of options complicates the idea itself. so that's the first thing. Secondly, the income from the covered call writing is tax efficient. You're not only collecting income, but you're collecting income that's tax preferred. You can offset some of your portfolio risk budget using the added yield from the covered call premium so that you're not extending or reaching for yield too far out there in order to get it, seeing as the market is starving for yield, and, an equity as an equity ETF holder, you're also enjoying some of the downside protection that the overlay provides to the portfolio.
So really the, the added risk, correct me if I'm wrong, but the added risk of the covered call overlay is not potential downside risks it's that your shares will get called away - it's opportunity risk right? It's not a capital risk. It's not money being lost. It's it's money not being gained potentially that's the risk of the overlay. So the overlay is a net enhancement to an equity fund to an equity ETF. It's a net enhancement.
It's not something that could result in a capital risk. It's something that's only resulting in an opportunity risk.
Nick Piquard: (00:49:10) Yeah, I think you really nailed it there. It's an opportunity risk with, with the strategy and, on top of the fact that, we don't write the whole portfolio, so it's really on an opportunity, the risk on a portion of the portfolio , and that's the reason you get paid that yield.
Pierre Daillie: (00:49:26) You guys have a financials ETF that you have a covered call overlay on those stocks do pay dividends. Correct. And so, so in addition to, being a dividend collecting financial sector, ETF, You're not only getting the dividends, you're not only own owning those, those banks and financials, you're owning, dividend paying financials.
And then on top of that, you're writing the overlay. And so in addition to the dividend income, you're getting the covered call income as well.
Nick Piquard: (00:49:54) Yeah. Which is a really nice part about it. On top of that, the banks, although they've been more volatile recently, they would classify as a, amongst some of the stocks that are maybe perhaps, more rangebound and a little less volatile than say the tech sector or, more volatile sectors, and so, that's been a, that's been a good strategy in, in that sector. earning both the dividend and, additional covered call income.
Hans Albrecht: (00:50:20) Yeah. In a, in a reach for yield environment. And, we have been in one of those for quite a long time. Right. we're looking at aging demographic folks who need to generate this extra yield.
That makes a lot of sense in your scenario where you're getting some financial dividends and you're able to add to that. Sometimes it's those slightly boring portfolios where the cover calls do make a lot of sense in something like that. Some folks tend to think that, Oh, I want to do cover calls and names like Tesla. The problem in those high flying names is that the underlying volatility. is, is so high that they're able to breach those strike prices. They're able to move drastically in one direction or another. You feel that those, those large option premiums are beneficial but oftentimes it's in those kinds of, plain, utilities, banks it's in those sectors where you start to really see that alpha, being generated. But in a general sense, I think the proof is sort of in the pudding with with these products. And I think, I like in this environment to maybe when cover calls we're doing quite well and were quite popular, which was sort of 2010, 2011, 2009, those were high implied volatility, high option premium environments. Stocks were moving around a little bit. but you were benefiting from those higher levels of premiums. And so I feel that we've sort of moved into a similar environment in the sense that, there is uncertainty about where things are going and that's manifesting itself in option prices.
And so, I think, there were a number of years in the last decade where. in those QE years, they were just sort of pushing equities up consistently week after week. It was a little bit more challenging with VIX at 12, but with VIX in the twenties around 30, these strategies start to make a lot more sense for folks.
Pierre Daillie: (00:52:09) Even with VIX at 12, you were still able to collect, the covered call income. It just, it's not as easy, but it's still there. It's still collectible, right?
Nick Piquard: (00:52:20) Maybe not as much.
Pierre Daillie: (00:52:21) I can't help thinking if I'm retired and I I'm continuing to be an equity investor and I need income from my portfolio, to sustain my lifestyle.
I just can't help thinking, why wouldn't I be excited about collecting the enhanced yield from the strategy, like, why wouldn't I want to do it? That's the part that always, it leaves me wondering is there any reason why I wouldn't want to do it?
Like, why wouldn't I do this? Like, why aren't people jumping all over this? When, it's right there.
Nick Piquard: (00:52:50) You bring a very good point. I was reading a report, by, one of the big banks in the U S about, what's the future of the 60/40 portfolio if you're retiring or and you're 40% bonds, 60% equities, but, the bonds aren't really yielding enough for you anymore to, to really, retire on, does that mean you have to go 70/30, but maybe that's too much risk. And so, so, I think, covered calls can come in here and maybe, supplement that portfolio with, a little bit more yield then the traditional 60/40 portfolio but without taking any more equity risk than you're already taking.
Pierre Daillie: (00:53:29) Yeah. I mean, it takes some of the pressure off, doesn't it? I mean, , it's not capital efficiency per se, but I meant that, that, you're relieving the pressure on the yield side of the portfolio, so yeah, you don't have to, you don't have to increase your equity risk budget in order to get the added income.
You can just substitute some of your equity position, your equity sleeve into covered call ETFs so that, so that you're getting the added yield and then you're relieving the portfolio of that, that pressure to seek or to chase yield.
Nick Piquard: (00:54:02) And I think up until now, investors have had the ability to maybe go down the credit curve in terms of getting a little bit more yield and, and maybe, realizing some, some gains on their bond portfolio, equity portfolios. but I think we're getting to the point where those options are running out a little bit.
Pierre Daillie: (00:54:20) The strategy of writing covered calls it's been around for a long time, but it's by no means an easy strategy to implement. You guys are doing a lot of work in order to make it happen. It's not, it's not something that you just set it and forget it.
It requires skill.
Well, it's funny that you mentioned that because I think that, amongst our, bigger investors in our funds, we have advisors who have done covered writing themselves in their own portfolios, realize how much work it is for them to do it.
They like the strategy, but it requires so much monitoring. We look at the portfolios every day - expiry, when the options expire, that you have to basically be looking at these positions all day and trading most of the day. So it's a lot of work for, for advisors to do themselves.
And, and so, our easiest pitches are to, advisors who are familiar with this strategy who might be doing it themselves and who realize how much work it is and are happy to get it professionally managed, by us. And I think, for advisors out there who aren't familiar covered call writing. I think that's the opportunity to maybe, read it, read about it and learn a little bit about it and realize the benefits. A lot of it in terms of realizing the benefits of the strategy is, is to be more educated about it, for sure.
Definitely. And I want to apologize for bringing up Tesla because I couldn't help myself, but it's, it's an exciting topic, it's been a great stock to own, but it doesn't really fit that well into your day to day strategy. Right? I mean, it's more of an 'explore' position as opposed to a core.
I'm assuming you build core portfolios, but something like Tesla while it's exciting and shiny and it's, and it's doing what it's been doing. It's not really something that plays a big part in your portfolio is it represents an opportunity.
Like you said, it's six, six standard deviations in a very short period of time would have basically been called away almost immediately if you, if you if you wrote options against something like that.
Nick Piquard: (00:56:28) Yeah, really at the end of the day, we're, we're just trying to give you, kind of benchmark performance with an additional yield. We're not, we're not trying to be stock pickers and we're not, we're not trying to, really, give you what, any, we're not really trying to establish much alpha in the stock picking side of things.
We're really trying to match the benchmark there. We're we're really trying to add value is with the covered call overlay and the additional yield
Hans Albrecht: (00:56:56) Technology, is a place that we, that we delve in a little bit. We tend to stay away from, the real high flyer names like Tesla. That's a little outside of our wheelhouse, but we do, we do have a product HEA that owns 50 of the top 100 S&P names, and so we do have some names in there, like, PayPal and some of those movers that we've seen of late that have benefited from the pandemic.
And, we have owned some of the larger tech names in there, and so I think, some of the benefit there, again, maybe somewhat similar to, to gold or gold miners is some of these names don't pay much in terms of yield. And so, options tend to be a little bit more pricey.
We can generate a little bit better yield, via selling them against those holdings. So sometimes in the technology space, it can make sense, to apply an overlay because you're generating a bit of extra yield in an area that might otherwise not generate. A whole lot to begin with. so, but a name like Tesla probably doesn't have a place in our portfolio at the moment.
It might, at some point if they become a real revenue producing company, but, it's, we shy away from any particular category, but some of the more speculative high flyers, you're generally not going to find in our portfolios.
Pierre Daillie: (00:58:08) Yeah. So you're not, you're not chasing those names. but as you said in the S&P 100, based HEA you own the top 50 and among those names are some of the high flyers like PayPal.
You also have the ability to hold off on on writing as well, too, right? I mean, you don't, if PayPal is, is, is shooting up one, two, three standard deviations over, over a short period of time, as some of the technology stocks have done, you can stand down on writing options on those and let them run as well.
So, you could already be in those positions and just participate in them you're not obliged to write options against everything you own.
Hans Albrecht: (00:58:51) Precisely. And so that's part of our job is to look at individual situations.
So, in some of the health names, in that portfolio, we keep the coverage a little bit low. We've got names like Pfizer that announced, promising, news on, on, potential vaccine. So there's certain areas where you, you want to stay away from that large upside gap risk. And so these are some of the things we're watching, just like earnings when earnings are coming, we try not to be too heavily written into certain names or we will, we'll look at some weeklies that expire before the earnings. So this is part of the active management is sort of, keeping track of individual situations as well as, broader themes, to make sure that we have coverage where we feel. it's beneficial and, keep coverage lower, and other areas where we, we feel like it's better to just wait, because as you mentioned earlier, one of the great risks is giving up that upside.
So we try to be cognizant of that, of that fact, all the time to deliver the best results we can for unitholders.
Pierre Daillie: (00:59:49) Speaking of earnings season what are some of the big surprises that you see coming?
Nick Piquard: (00:59:55) This a, second quarter is going to be, earning starting this week. it's going to be, it's going to be very interesting. I think for the most part. It's so unpredictable. Exactly what what's going to come down. I think investors kind of have a good idea that, Q2 is going to be obviously very impacted by, by what's happened, but I think what most investors are gonna look like is what the guidance is. what are they, what are they seeing for the rest of the year? how much are they going to, change their, their estimates for, for the balance of the year? I think that's what I think people are. They've kind of come to terms with, second quarter earnings are going to be, are going to be mostly difficult, but really what they, what they're going to be more interested in is what do you see for Q3? what do you see for Q4 for the rest of the year? and I think. I don't really have a, I personally don't have a view on that. And yet I think it's too hard to say.
And I think I'm in our covered call strategy-we're trying to be pretty agnostic. So, we're writing some, but we're leaving some powder dry in case we continue to see higher prices ahead.
Pierre Daillie: (01:00:58) Yeah, very interesting. Hans?
Hans Albrecht: (01:01:00) Yeah. I mean, I think, one of the advantages to the strategies that you can be somewhat agnostic and you can look at, the value that you're getting on the option side, as opposed to really making a call on where equities are going, when there's more uncertainty, you're getting a little bit more value and, and, and, and you can take advantage of that.
I think in the one sense markets are looking at this as a sort of a leap year. I almost see it as An ability to overlook what's happening this year and in the hope that we get some sort of V-ish recovery, and next year starts to look a little bit more like the earnings that we saw last year.
The fed is helping to do that. They're sort of building this bridge to next year. And I think, markets are kind of. building in a lot of that positive expectation. I think if we start to see poor guidance from companies that leads investors to believe that, the pain could continue into the end of this year and into next year.
I think markets might struggle a little bit in that sense. So I do think this is a, a big, month for earnings, a big quarter for earnings, not just for the absolute numbers. I think we're going to see numbers that aren't so great and some that are better in certain areas, but I think the guidance and the language, which is very, very important, in terms of what to look for.
Yeah, absolutely. there's too much uncertainty and, given that the market knows where we've been, expectations have already been lowered, so it's really, what comes next, right?
Yeah. Markets are, I mean, I think markets are trading at a 30% premium to when they were at this very low, early in the year in terms of forward earnings. And so, that's a bit of a leap in terms of what investors are expecting. And I think a lot of that is just this massive influx of liquidity, from the fed, that of course is making a big difference, lowering interest rates to almost zero.
That makes a big, big difference. But, there's no question that markets are looking at this as a glass very, very half-full. There's a lot hanging in the balance over the next, the, over the balance of the year, in terms of, how this uncertainty, starts to become more clear, from an earning standpoint, I think, at some point markets do have to run into some sort of wall of reality, and they may struggle a little more in that makes our strategy compelling because you're going to continue to get that uncertainty premium, just as stocks are perhaps in, in a buy the dip, atmosphere where people feel that there is nowhere else to go. All the planets are aligning for covered calls in that sense. E
Pierre Daillie: (01:03:36) Exciting. Very exciting. So now before I let you guys go, we're curious to know what you've been streaming or reading or watching, and, given that where we've been for the most part, at home.
Whether it's Netflix or Amazon prime, what have you guys been watching or reading or streaming ?
Nick Piquard: (01:03:57) I actually, just finished, reading this. I was listening to a podcast from one of the one of the central bank economists. and I can't remember his name now, but, but he, he alluded to a report that was written by a British economist called Lord Beverage on employment after World War II and a lot of the ideas that he talks about in that report about getting all these people who are coming back from World War 2, all these soldiers and in an economy, that's basically the British economy, which has basically been destroyed. And how do you get these people back to work.
And how do you get the economy back on a strong footing. And it's interesting reading because in a lot of ways, there's a lot of very interesting parallels with the situation today. With a lot of people are unemployed. You get in a lot of people you're going to have to find jobs for them that, they, an industry that, that are different from what they were used to before.
I think maybe a lot of the jobs that they have may not be, be coming back anytime soon. And so a lot of the ideas that he shares about, government's responsibility in terms of providing the right framework and the right stimulus and the right environment to 40 million Americans that are out of work that will need to find work, or the 8 million Canadians that are receiving CERB.
I think it was an interesting template to share the parallels with a situation in a lot of ways we've been through before and we've recovered from.
Pierre Daillie: (01:05:30) Yeah, that's a great analog, in terms of something comparative . It really is a great parallel.
Hans, how about you?
Hans Albrecht: (01:05:37) I do a lot of reading on technology because I sort of oversee our, our suite of technology industry 4.0. products and, reading a little Sam Harris and how should we treat AI? And I thought, some of the points he makes about, our viewpoint towards AI is quite different from, from other potential threats.
We think it's kind of a fun thing. We think one, the idea that robots and automation could take over and, and, and cause a whole lot of trouble. It's the stuff of just the stuff of movies and stuff of science fiction. and we kind of look at it as, as something, akin to entertainment and we don't take it quite seriously enough.
And so, I find some of those viewpoints just, The idea of general artificial intelligence and the possibility for computers to reach the sort of singularity level, where they can indeed start to make decisions, for us and, and the potential for that to, run away unencumbered, by controls, is a kind of interesting thing to me.
But at the same time, I've also. It was also reading the economist quarterly on, the, the AI hype versus, versus the reality of it all. So. not that we're in another AI, winter where things, are way over-hyped, I think we're, we're, right in the midst of a big sea change for the world.
But it's just interesting to see how, and we see it in markets. Do we see the ebb and flow of sentiment and expectation and reality and, it all plays out in markets. So I find, I find those areas very interesting to me read about, because they're not only interesting, but they're, I see them every day play out, in markets. So that kind of keeps me busy.
Pierre Daillie: (01:07:16) Yeah, it's life imitating art. Isn't it? it's happening. I was listening to a podcast with, Barry Ritholtz and, and, Ron Carson recently, maybe it was recorded within the last month, but Carson runs a $12 billion, RIA in the States. And, Carson was talking about AIs that are being developed now to do client onboarding for the financial industry. And he had his people communicating back and forth with the bot that was a part of the demo and the bot was so good they thought they were talking to humans. They thought they were communicating back and forth with humans. And the bot was able to take all of the onboarded information about the client and make a core suggesions so that, so that you could have a core recommendation, very specifically outlined for each and every onboarded client before you even talk to them.
You could then take that core recommendation and alter it to your liking, as opposed to spending two or three days analyzing a client's holdings to figure out what to do. You could, you could do it in minutes with this new. AI that was being developed.
Hans Albrecht: (01:08:31) Yeah. The natural language, language processing capabilities are quite incredible. And another way that, companies are being, technology really at the moment, doesn't give rise to anything completely world changing like a general artificial intelligence would, but it's all these incremental benefits that are, that start to add up, throughout the economy, the ability to not have people manning the phones for basic questions.
When, when you call in for customer service, it's only when the AI senses that somebody is getting aggravated or upset, then you get passed on to a human being who can then who can then deal with it. I mean, these little incremental improvements are really what it's all about, in, in that world and I find that just amazing. There was a quote recently. I can't remember who said it and they said, at first, technology is all about hype. and it can never sort of, rise to the occasion to the level of that hype, but then in the latter stages of it, or when, once things get going, people start to underestimate how exponential the progress can be, and I don't know if we're there yet, but we will be at some point,
Nick Piquard: (01:09:40) I think that actually plays. directly into what I was just talking about before, which is, what are you going to do with all these people whose jobs are going to be displaced by all that technology?
And I think that process started even before, the pandemic, but it's definitely going to be only accelerated by the pandemic and so, it will be a challenge, but I think that, the world is up for. Technology's not going away and it's only gonna get better and we're gonna, definitely going to be, but how do we ensure that it's good for all of society in that people can still, do something useful with, and, fruitful with their lives.
Hans Albrecht: (01:10:20) I think you're right, Nick. And I think the problem is, we talk about universal income and, are we going to see it at some point? I think we're starting to see it.
I think one of the things that COVID has accelerated is quite, quite probably, is this concept of universal income. and, the resting unemployment rate could very well be quite a bit higher than, 3.5% that we saw, in January. and so this idea that's going to be accelerated by automation and robotics and artificial intelligence and all these incremental improvements that we're seeing.
It's beneficial to big cap stocks, which I think is part of what markets are saying. When all this is said and done, these companies are going to be bigger and stronger and more lean than ever. What does that mean though for tens of millions of people? Not so good. And I think that kind of exacerbates the difference between main street and wall street in terms of what we're seeing.
But I think that universal income is here.
Pierre Daillie: (01:11:19) And, MMT, modern monetary theory is coming to life at the exact right moment, when it's possible to do that. And, I remember that at the beginning of the year before COVID broke on the scene, watching, some of the primaries, Andrew Yang and, and his idea of universal income was so far out there to most viewers listening, like universal Lincoln, everybody gets a check for a thousand dollars a month and yeah, because it's so crazy, but now, within a month and a half of both him and Bernie Sanders talking about they're both, both of their universal policies. COVID happened and all it did was it just accelerated the timeline on these social reforms economic reforms that are, that are, essential.
Nick Piquard: (01:12:11) It's interesting that you mentioned that because in the report that I was mentioning, it's actually called the full employment in a free society by, by Lord Beverage. And it mentions unemployment insurance and how it got started right before World War 1 and in after World War 1 ended, it became permanent. it was one of those things that was supposed to be a temporary relief for unemployed workers.
And then they realized, Oh, we're going to have to keep this. And so, maybe, maybe we're in a similar situation today.
Hans Albrecht: (01:12:45) I mean, back then though, we had the benefit of, of rebuilding. and a lot of, a lot of soldiers coming back ready to reenter the economy, and, quite a tailwind from that. I'm not sure what we have today. A lot of the jobs created in the last 10 or 12 years have been in hospitality and restaurants and sort of the good life, right.
That'd be, the U S has become a place where it's been less about. investing in CapEx and creation, innovation is maybe, maybe one of the areas, of course, the U S leads in, but in terms of creating things, they've fallen behind. And so. With the restaurant and hospitality industry and travel and all that under severe pressure.
It's, it's hard to see. I mean, we've seen over, over a century, people always find a way to get back to it and reinvent themselves. And it happened with agriculture and the great example of, we used to be mostly agriculture based, from an employment standpoint and people have come back to reinvent themselves.
And I think that's true. but this has happened so swiftly and technology happened so quickly. I found that quote, it's Roy Amara in the 1960s, he was a computer scientist at Stanford and he said, we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.
And so I think, technology is so disruptive and COVID has just added to the challenge of what was already under foot but it's, I think the transition is needs much more abruptly the shock to the, to the economy from COVID and the movement in technology and automation, is, has been so abrupt that I think it's, that we face a more difficult transition.
It's going to be hard to get, 50 year old, production line employee to go back to school and learn to code. It's just going to be a very difficult thing to do. So I think the challenges are a little heightened here.
Yeah, it's certainly has brought about a very dramatic change in values, in a very short period of time.
Pierre Daillie: (01:14:47) Hans, Nick, I know, probably continue talking . Thank you very much for being on the show. And, I really enjoyed this conversation. I hope, we can do this again. I hope we're going to have you back again in three or six months, to continue the conversation. I want to thank you very much for your time and, for your insight and your thought leadership. Thank you very much.
Nick Piquard: (01:15:11) Well, thanks for having us on the show. Appreciate having us on and look forward to being on.
Hans Albrecht: (01:15:16) Yes. Thank you. Our pleasure. Any time.
Pierre Daillie: (01:15:20) Let us know what you think about the topics we've discussed.
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