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Harley Bassman: The Middle Class is Going to be Crushed by Inflation

Tom welcomes Harley Bassman to the show. Harvey is Managing Partner at Simplify Asset Management and Creator of the Move Indicator.

He explains the concept of convexity, which is simply a non-linear return. You have a bet where up or down moves are equally weighted for returns. Markets are a lot about character but hubris and ego are what get you on the front page of the New York Times. It’s important to understand your own biases and trade accordingly.

The Move indicator tracks the volatility of bonds, and he argues the Fed can’t raise rates too quickly. The Fed tends to respond around the 150 level. When the yield curve inverts, you’re going to get a recession in 12 to 18 months. We are currently deep into a yield curve inversion unlike any seen in the last 30 years. By Q2, we will likely be in recession.

He discusses why the Fed will continue to squeeze until something significant breaks. The middle class will be hit hard by inflation. What happens in the investment universe if inflation falls to four and stays at that level.

Demographics are important for determining where things will inevitably lead. Millennials will want to buy homes, but we’ve seen massive increases in housing prices. He feels housing prices have about 15 percent to come down, but doesn’t foresee a crash.

Likewise, he doesn’t find gold to be an investment, but more of an alternative currency. There isn’t a lot of it, and they aren’t making much more of it, so it fulfills an important function. It’s a disaster insurance policy.

Lastly, he discusses the correlation between stocks and bonds and how that is changing.

Time Stamp References:
0:00 – Introduction
0:40 – Convexity Concept
2:50 – Actionable Advice
5:10 – Move Index & Recession
14:27 – Powell’s Tough Job
16:32 – Inflation Outlook
22:02 – Declining Demographics
29:53 – Japan & Population
32:30 – Labor & Immigration
36:18 – Housing Markets
40:20 – Mortgage Backed Securities
43:39 – MBS Vs. REITs
48:36 – Fed & Soft Landing?
51:40 – Thoughts on Gold
53:45 – Concluding Thoughts

Talking Points From This Episode

  • The concept of convexity and how the Move index (indicator) measures bond volatility.
  • Demographic problems and why the middle class will be hardest hit by inflation.
  • Why MBS may be a good investment in this environment.

Guest Links:

Harley Bassman created, marketed and traded a wide variety of derivative and structured products during his twenty-six year career at Merrill Lynch. In 1985, he created the OPOSSMS mortgage options product that facilitated risk transmission between MBS originators and financial institutions. In 1988, he assumed responsibility for trading and marketing IO/PO and other levered prepayment securities. Soon after this, he started purchasing RTC auctioned MBS Servicing rights and repackaged them for the securities market as BIGS – Beneficial Interests in GNMA Servicing. Later, he started a GNMA servicing conduit, becoming one of the Top 20 originators in 1992. As managing and hedging prepayment risk became a priority focus for the financial markets, Mr. Bassman created PRESERV, Merrill’s trademarked Prepayment Cap product. Merrill was a leader in this product category, writing protection that covered the risk on tens of billions of notional mortgage servicing rights. Later, Mr. Bassman managed Merrill’s initial venture into off-balance sheet mortgage trading.

In 1994, Mr. Bassman assumed responsibility for OTC bond options. Within a year, Merrill was the leader in this product sector. A wide variety of products were offered, including vanilla and complex options on MBS spreads and the Treasury yield curve.

To help clients more fully appreciate Volatility as a primary risk vector, he created the MOVE Index. Similar in form to the VIX Index, it is now the recognized standard measure of Interest Rate Volatility.

From 1995 to 2000 he focused on creating hedge strategies for MBS servicers and portfolio optimization techniques for Total Return and Index investors.

Mr. Bassman became the manager of North American MBS and Structured Finance trading in 2001. During his tenure, he created SURF, (Specialty Underwriting and Residential Finance), a self-contained Sub-Prime mortgage conduit. He supervised the issuance of Merrill’s first Sub-Prime securities. He also transitioned the structuring business to a new technology platform.

In 2006, he built the RateLab, a full spectrum US Rates Trading Desk Strategy Group. Here he worked with investors to advise and optimize their risk exposure. As a key member of the client trading business, he facilitated activity by providing liquidity to both the firm’s clients and market makers.

After a (too) brief sabbatical, in 2011 Mr. Bassman joined Credit Suisse’s Global Rates business where he identified and integrated investment and hedging opportunities for sophisticated investors.

From 2014 to 2017 Mr. Bassman was an Executive Vice President and Portfolio Manager at PIMCO – a leading global investment management firm. Here he managed investments for the Liquid Alternative products group as well as advised on portfolio strategy across asset classes for the firm’s franchise businesses.

Presently, Mr. Bassman is a Managing Partner at Simplify Asset Management, a designer and manager of ETFs that offer better portfolio solutions for Financial Advisors and Independent Investors. He will continue to pen an episodic macroeconomic Commentary, as well as manage a “hedge fund of one”.

Mr. Bassman splits his time between Laguna Beach, California and New York City. He has a B.A. in management science from the University of California, San Diego and an MBA in finance and marketing from the University of Chicago.

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