Nancy Davis: When a Little Luck and a Lot of Hard Work Pay Off

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1:24And now to the top analysis of today's markets.

1:32Hi, everyone. Welcome to another edition of My Life in Four Trades. Joining me today is Nancy Davis, founder of Quadratic Capital Management. Hi, Nancy. Welcome to My Life in Four Trades. Thanks for having me on, Maggie. It's great to see you. I feel like we represent spring is in the air, right, today? Yeah, that's right. Yellow and pink. I love it. Well, before we jump into your trade, so on My Life in Four Trades, we do two of your best trades, two of your worst trades, But before we jump in, it's our tradition to learn a little bit about your background. So where did you grow up and what were you like as a kid?

2:07I would describe myself as dirty and outside all the time. I never wore shoes. I was always in a, you know, spent probably a third of my life in a magnolia tree in the yard and I was always outside and running around, so. A free spirit. Were you into sports or were you always sort of into academics? What were your interests? What were you, how'd you spend your time? I definitely like sports. My father is a musician, so I also played a lot of musical instruments growing up. And I was the stand-up bassist for my high school's orchestra, which was pretty cool, given I'm, you know, petite, you know, I'm about five, three on a good day.

2:53So you picked the biggest instrument. Yeah, exactly. um did you so that's such an that's an interesting way to start given where your career took you did you have an awareness of money from a young age or markets was that something that was discussed in your house oh no not at all my my parents were like don't know anything about markets um didn't have any ties to wall street i had never even been to new york until you know I started interviewing for Wall Street jobs. So it was totally, you know, out of what I grew up with. So how did it get on your radar? When did you first become aware of it?

3:36Well, I had a, an academic scholarship to college. I was, you know, I had an academic ride and then my, a lot of my friends would, you know, go out and go out to dinner and I wanted to go out with other kids. And so I had a job all through college. And through my job, like once I realized I could work off campus and get paid a lot more and do something more interesting, I started to, because of my job, wanted to learn about derivatives because we were using a lot of swaps. And I worked for a management consulting firm. It was, you know, I was an intern there, But I was paid and I was working, you know, probably 40 hours my last two years.

4:20And I had to learn about derivatives for my job. And that's kind of how I fell into it was, you know, and then I started trading myself. And I think I probably looked a little different when I, you know, I didn't know anybody. I came to Goldman Sachs right out of college. I didn't know anyone at the firm. I had never even been to New York. I just sent my resume in on the internet. Yeah, back then, you remember that before LinkedIn. I know, right? So were you in math classes in college that you were sort of working? So you're in D.C., I think, at this time, right? Yeah, I was in D.C. And I took a bunch of, because I had like a day job, I was taking a lot of night classes.

5:08And because I was an academic scholarship kid, I was in what they call the honor program. So I could take classes in any of the different universities. And I ended up taking five grad classes, which is kind of how I got into the derivatives markets. And I just thought it was so fascinating. And I was really fortunate that one of my professors was an ex-LBO banker and kind of helped me a little bit about, you know, I remember when I was applying to these different firms, he was so funny. He, you know, I got an offer from Goldman. He's like, you should take that. And I said, well, I had these other offers and I was going through the other firms.

5:49He's like, no, Goldman's the best. You should go there. So yeah. You need some guidance if you're, if you're flying blind, because this is, you know, this is before, I remember when we were going, cause I have a daughter who's kind of going in the beginning of the college process now. I tell her all the time, we didn't know anything, you know, like we never visited schools. We ended up there. And even the job process. You just did not have sort of the amount of information and social media and all these other things to fill you in. So it was kind of like flying blind. Yeah. Yeah. No, it's, but I think in a way it's good because then you can really listen to what people tell you who are more experienced.

6:28And I think maybe now it's a little harder because you have so much information. It's tough to know who to listen to because you're like information overload. So. Yeah. So that Goldman interview process must have been a doozy. We've had a couple of Golden alumni on. Sergio Silver was one of them who told us about his like 400 interviews that he had to go through to get. I think that was when he was an intern. Exaggerating. But it's a pretty brutal process. What did you make of your first sort of impression of Wall Street? um you know it was definitely uh I had read about the stress interviews and I kind of was like I'm great at math like bring it on you know I was sort of like a you know in it to win it kind of mentality and um I don't know I just kind of took it in stride and I think I was always pretty self-confident um even even when I was a college student so I sort of was like I know my stuff you know, but I think once I got into the firm, it definitely felt a little like I wasn't from an Ivy League school.

7:34I think a lot of the other analysts, and even when I went through the associate program, there were, you know, I was kind of an outlier in terms of, you know, my path getting there. Yeah. This isn't one of your trades. It's a bonus trade, but I understand that there's a lucky green dress that you feel like played a role in your Gullman, journey. Tell me about that. Well, so I took the train up to New York for my first Goldman interview. I wore this dress that I bought literally at TJ Maxx. It's green and stretchy, and it was great for the train. And I guess I'm, you know, knock on wood, very fortunate that I can still wear that dress because in the middle of the pandemic, so March 2020, I was invited by the New York Stock Exchange to ring the closing bell.

8:28And it happened to be the worst down day in the US equity market since the 87 crash. The market was just falling. And I knew it was falling when I left to go to the Stock Exchange for the close. And so I'm looking at my closet and I'm like, oh my gosh, I'm going to wear my lucky green dress. So I'm very fortunate. It's It's stretchy. It can still fit me. And yeah, if you Google, it's kind of cool. It's on the internet. If you Google my name, you know, and then Hada CTF, you'll see a picture of the green dress from, and then the next day it was, I believe it was the middle of March, 2020. The next day, the New York Stock Exchange completely shut down and went all electronics.

9:15So I was actually the last person to ring the bell before they shut down. Which is absolutely crazy. And crazy that something plays a role in both of those really pivotal times in your life. We were joking about calling it a lucky dress, but I wonder, the subject of luck comes up a lot in these interviews. How much do you think that luck plays a role and skill plays a role? I think both play a role, but I do consider myself a very lucky person. I had a tremendous opportunity. I was with the right people. I've had a lot of support over my career, over my life. So I do feel very lucky. And I know Goldman, especially on the prop desk, I joined the prop desk very early on.

10:08I spent about seven years with Goldman Props, about 10 years with the whole firm. And in the Prop Desk, we were always very superstitious. There was no red. Red is the color of losing money. Green is the color of making money. Hence my green dress on the worst down day in the U.S. equity market. I was like, stop the nonsense. This is overdone. But yeah, We, you know, no red nail polish, no red ties, no red pens. You know, I guess I've always been a little superstitious and somebody who believes that inherently I'm a pretty lucky person. That's amazing. I didn't realize there was that. I'm not surprised, though, but I didn't realize there was that level of superstition.

10:49Yeah. Eric Mindich started it. It's like Goldman who pride themselves on their skill, you know. So, but I guess everyone, I guess everyone falls victim to that. Yeah. That was Eric Mindich. back in the day. He was the one who kind of started the like no red thing. I love it. I wonder if they're still doing it. Goldman people call us up, let us know if that's still a rule. As you climb the, as you were making your way through Goldman, I mean, that's a pretty cutthroat firm. We've all heard stories. How did you, how did you navigate that? How did you find that whole experience? Well, I had a wonderful time at Goldman.

11:29That's no small thing. Thanks. You know, and again, I do feel like I was very, very lucky to be in the prop desk because at the end of the day, you had a number next to your name and there was a very flat organization. There weren't a lot of politics. I always tell other women, like, it's a great place to be as a trader or portfolio manager because you can really cut through the bullshit and the politics. And so I was, I think it was 2003 when I was promoted to be the head of credit derivatives and OTC trading for the Goldman Prop Desk. And I ran the group for about five years before I went to JP Morgan's hedge fund.

12:13And it was just, it was a wonderful place to be. I had both my children at Goldman when I was, you know, came back for both of them after maternity leave. And I just had a wonderful experience. And, you know, I was very honored because recently Goldman had a women's conference in London and they actually had me in as a speaker. I was one of the few people outside the firm as an alum. But, yeah, I had a wonderful time there. I love the firm. It was the best culture and such a great training ground. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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14:00Yeah, it's amazing to hear because it's hard, especially when you're trying to juggle family. A lot of people step out. It's the broken wrong. A lot of people step out. It's really hard to kind of find your way back in. So it's amazing that you did it, but also that you you found that you were supported in that. So, so let's jump into your first trade. Yeah. And it was a good one. And I believe this is when you're at Goldman, but you'll tell us, and that was in 2011. So maybe you weren't, I'm not sure being on the other side of the London whale trade. So set the scene for us. Like, are you at Goldman?

14:33Where are you? What's happening at work and at this time of your life? Yeah. So I was not at Goldman for this. I was at a 1940 Act Mutual Fund. And I didn't know that it was the other side of the London Whale trade. I had no idea that was coming or what it was, but we were, you know, long only credit. And as, you know, all the credit funds had a tremendous amount of exposure to credit spreads widening and correlation increasing, I was looking at the tranche market and saw, you know, IG9 super senior tranches were like super cheap. So you could buy protection to benefit when credit spreads widening and when correlations increased, which is exactly, you know, as a long only mutual fund when the funds actually lost money.

15:22So I was running around trying to put IG9 super senior protection in all of these portfolios across the firm. And it was pretty exciting. I had to actually go and go to the board meetings, change the prospectuses of the mutual fund because derivatives were not allowed. And so it was definitely a huge learning experience for me to be able to try to communicate to the board what we were trying to do and why it was a good fiduciary thing to do and why it was good for the fund investors and having that communication. I actually still keep in touch with some of the board members. I actually emailed one of the guy who used to be the chair of the board last week.

16:06And so that was 10 plus 12 years ago. And so it's really cool to make those relationships and then continue them. So what was the reaction when you were going around to these boards? Because it sounds like you were seeing something that other people were not, and you had to sort of convince them to see what you were seeing. What was the reaction when you first started going to them? Because people don't like change, especially when you have to change the bureaucracy of something like a prospectus. Yeah. I mean, I think what I was saying was like, look, we're long, we're a long only fund, and this is a way of protecting in case of recession or that was when Greece was happening and the whole European crisis.

16:52And so there was a lot of turbulence in the world and interest rates were still basically at zero. And so I just, I didn't know it ended up being the other side of the London whale trade, but I remember going to my boss and saying, you know, I've heard these things about J.P. Morgan. I don't think they know about it. Can I go tell, you know, Jess Staley? Because I used to work with him when I was at J.P. Morgan at their hedge fund. And so I knew people at J.P. Morgan from when I was a portfolio manager at their hedge fund strategy. So it wasn't part of the sell side. It was just a private fund.

17:31But yeah, it turned out, I remember my boss sent me a really funny email the day that the JP Morgan news, you know, the one whale trade, I didn't know it was called the one in whale trade, but he said, you know, something I'm paraphrasing, but I have egg on my face. You were right. I can't believe it. Oh my gosh. Yeah. I didn't know one. That was, that was for those who, who may not have been around when that was happening, it was shocking. And also everyone thought that nothing like that could happen after all of the things that took place in the great financial crisis. And in 2000, you know, there were so many regulate, there was so much that happened in banking that for something like that to go down was sort of, I mean, it sent shockwaves through everything.

18:11So did you have anybody who like who doubted you or resisted you or thought like, oh, this is this isn't necessary? Did you kind of come around to this idea that needed to be hedged? Because there's a lot of talk right now about people who are not sufficiently hedged. But back then, was it an easy sell or, you know, did you really have to sort of convince some people? I mean, it kind of depends. Like, everybody's different. You know, I definitely remember periods in my career where things were so obvious. Like, when I worked at J.P. Morgan's hedge fund, I had Volkswagen options. I was long optionality in Volkswagen because Volkswagen vol was cheaper than dollar yen.

18:58It was like the cheapest. It was a single stock vol that you could buy for single digits. And I remember going around the firm, I already had it in my portfolio, but going around the firm specifically to the convert desk who, you know, by nature, convert desks are always short stocks. And I was look, convert this thing into puts because the ball is so cheap. And so I remember doing that. And like, definitely that was frustrating because a lot of people did not listen to me. And they were like, well, it's realizing four and it's priced at six. So that's a really extreme premium. I was like, are you crazy?

19:34Like$1 involves 10 and this is six. So I've definitely had points in my life where I've saw things and implemented it myself, but trying to convince others is really a skill that I would say I'm not particularly good at. I have a lot of conviction with my things, but convincing other people to do things is not, I'd say, my skill set. But in terms of the buying super senior protection, I was able to convince several portfolio managers to add it, but then several others who did not. So, you know, I think all you can do is control your own portfolio and then tell people about what they're doing and let them make their own decision.

20:17Yeah. It's funny that you think you're describing it as something that's not your skill set, because I think there are an awful lot of people who are early who would tell you that it has to do with a lot of other things as opposed to the person telling them. You know, sometimes people just don't want to hear things for a variety of reasons. So what do you think the takeaway was from this? I mean, first of all, what was your reaction when you found out that you're on the other side of these trades? Because you didn't know for most of the time, right? No, no, I didn't know at all. It's really hard in the moment to know who's on the other side, especially when you're not in a customer.

20:56You know, I hadn't really been on a customer desk since like, you know, my early days at Goldman, I was on the sell side, sell side. But afterwards, I was always on the buy side. And you don't really know who the flows are, you don't have that information. And so I think it's more of just looking for opportunities, looking for attractive convexities, looking for things that are might potentially be mispriced. And I've always been somebody who just loves buying cheap options and being kind of anti-consensus, I guess you could say. When everybody is worried about something, I like to take the other side or vice versa.

21:39And so that's kind of been, I guess, as somebody who focuses on the asymmetric part of the derivatives market. So I don't use any linear derivatives like futures, forward swaps, all of those go up a dollar, but they go down a dollar. I'm not a big fan of linear derivatives. I only like the asymmetric derivatives, so options specifically. And I like to buy options, which is weird in itself, Maggie. 99 % of the world, all they do is sell options. And so I've always felt like I've had this different way of constructing portfolios. But to me, it's like such a no-brainer. I'm like, everybody is trying to lose money with their options, right?

22:22If you think about it, like everybody has their portfolio and then they sprinkle the options, either sell them and hope they expire or they buy them for hedges, but nobody's actually trying to make money off the options. So to me, it seems like a, you know, very obvious, like that's a great place to add alpha, but you know, I've always thought about things a little differently. Yeah, clearly, clearly. That's amazing. So it's interesting in context of your next trade, which is one of your worst, and it's being short Japan. And so we'll just say in both of your worst trades, they're trades that have frustrated you over long periods of time.

23:01But let's start with Japan. Why does this make the list? I mean, there's so many reasons that, you know, Japan is sometimes called the widow maker. So I've, over the course of my career, tried to short Japan in all sorts of ways, whether it was payer swaptions in the rates market or, you know, JPY FX options or Nikkei or dispersion. You know, Japan is just always frustrating because there's fundamentals and then there's Japan. And Japan, you know, has just been, you know, something that's been very hard. I think, you know, obviously the central bank has been manipulating their markets for a long time.

23:45They've been in significant deflation for a very long period. Even now, it blows my mind. I look at Japan's doing still yield curve control, and their yield curve is about positive 50. When you look at the 2s, 10s, JGBs, or 2s, 10s, JPY swaps, positive 50, where the U.S. is like massively inverted still. So to me, I'm just like, what in the world? That makes no sense that the U.S. is so negative and Japan is positive. But Japan's definitely been like over time just incredibly frustrating because I always want to short it. And I'm never, never, you know, sometimes you can get good carry because depending on what currency you pair it against, if you're long a higher yielding currency, I guess my most success with Japan is having the carry currencies versus Japan, but rates, forget about it.

24:42It's like so hard to make money there. And then the equity market just really is distorted because of the central bank's activities. Yeah. Why do you think you kept going back? Because it's been multiple times. You've tried all different kinds of things. Why not just throw in the towel and say, Japan, forget it? it's cheap ball. Like it goes back to, you know, I like, I like cheap ball and, um, you know, it's very, it gets really cheap sometimes because, uh, you know, so owning cheap optionality is always something that is a little, you know, it's a little, uh, thing that keeps me coming back.

25:23Would you, are you ever tempted to try again? Um, you know, I think at some point definitely, But right now I'm doing 40-act funds that have very clear prospectuses, and Japan has not eaten any of our funds. So not at the moment. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

25:52Maybe in Nancy's private life one of these days, it sounds like the one that got away, you know? You can't crack the code. It's frustrating. I know, right? So one of your other trades in a similar fashion that ranks as your worst is gold. And this is another one that you've just been frustrated with time and time again. Are there similarities to the Japan trade? What is it about gold that puts it in the worst? Yeah, I think, you know, I, especially after the financial crisis, really was one of those people that the Fed doing QE and printing all this money is going to be very inflationary. And so I've had gold in my portfolio and my personal account for really since, you know, I'd say 2009.

26:41And with the exception of like certain periods, it really doesn't do anything. And so I've had all different ways of constructing long gold. I think probably the most clever was against Swiss francs. So you can actually own gold in FX form. It's called XAU. So I had long XAU versus the Swiss franc, which was a negative yielding currency. So it actually made gold a positive carry position. um but then the Swiss francs uh you know the the the the central bank kind of messed that up so fortunately it was just options but you know it's um it's definitely just been one of those very frustrating trades and I actually did a lot of um academic research on what is gold because some people say oh gold is an inflation hedge and I think I really did believe that um probably initially, and now I'm solidly in the camp of gold is definitely a fiat currency trade.

27:44It's definitely FX. It's definitely psychology, but I don't think it is an inflation hedge. And I know we'll probably get lots of comments from all the gold bug and bring it on. I love all the hate that I get. I have done the work and would be happy to send out our papers on gold being a lot of things, Definitely a fiat currency, definitely psychology, but it's not an inflation hedge. That's so interesting. And you're absolutely right. We get questions about it constantly in the shows we do because of the situation we're in and because people are looking for that sort of safe haven harbor. And they think that's the way to protect itself.

28:22I'm laughing when you're like, hey, bring it on. I just know the comments. People are crazy with gold. So it's, uh, you could maybe just talk with people are crazy because if it doesn't fit into their, um, right now, people are very tribal about whatever it is they believe in. They're very, they're very fixed on that, but it sounds like you're really comfortable being a contrarian. Like you're okay with that. Yeah. I mean, I, um, I guess I, I sort of think doing what everybody else is doing is a little boring. So I, uh, you know, I guess I like naturally enjoy, you know, when everybody's worried about one thing.