Generation Gap

Jared Dillian | The 10th Man
March 1, 2018

There is a generation gap in finance. You might immediately think of Neil Howe’s work on generational studies, with Generation X and Millennials, but that’s not what we’re talking about.

You can split traders into two groups:

• Pre-crisis

• Post-crisis

I am a pre-crisis trader. I remember a time when interest rates were high and currencies were strong. I remember when the Fed used to do things like drop 50bp intermeeting rate hike bombs on the market, when central banks used the element of surprise.

I remember paper tickets and fractions. I remember open outcry trading floors. I remember when the NYSE specialists were the bad guys and the algorithms were the good guys.

I remember when the compliance guys were losers, not running the show. I remember when you could drop an f-bomb in an email and not get fired. When people would scream at each other all day and then go have a beer and some laughs.

I have seen three bubbles, and they all work out the same. I came of age in the markets in a time of free trade and light regulation.

All I needed to get a job was an MBA.

Am I nostalgic for those days? That is not the point.

The point is that anyone who started their career after 2008 has a different view of things. Interest rates have mostly been zero and currencies are garbage. Central banks are afraid to upset the market.

A paper ticket is as rare as an arctic fox. Open outcry trading floors are now gyms and retail stores and museums. The NYSE specialists have wrapped themselves in the American flag and Michael Lewis wrote a whole book about evil computers.

Best job on Wall Street is compliance, hands down. Yell on a trading floor now and you’ll get shushed.

There’s been one big bull market, and we’re not even sure it was a bubble. Regulation is ridiculous, and here come the tariffs.

And all you need to get a job is a computer science degree and fluency in six different programming languages.

There is a huge generation gap between pre-2008 traders and post-2008 traders. They don’t even like each other very much.

Why You Care

The pre-crisis traders are still hanging around, but eventually they will age out. This means that the next cohort will have never seen an environment where interest rates are not zero, or very low.

They will have never seen an environment where volatility is high. Because of regulation and balance sheet constraints, they will be unaccustomed to handling risk.

This is a recipe for disaster. Suffice it to say that many of these younger folks were caught off guard recently.

If you’ve never seen something before, you have difficulty imagining it. A few people predicted the “vol-splosion” of a few weeks ago—notably, none of them started their career after 2008. Actually, I was one of them, warning about it both in The Daily Dirtnap and The 10th Man.

Experience counts for a lot in the financial markets. The oldest guy on my desk at Lehman taped a chart of homebuilder stocks adjacent to other asset bubbles in history.

In 2006, he abruptly retired. He still owned a bunch of restricted stock, so he collared it, but the rumor was that he bought two puts for every one call he sold. He made money all the way up… and all the way down.

Then again, there is something to be said for technical proficiency. I literally cannot use a spreadsheet. Sure, I could poke around with one when I was on the desk at LEH and get it to do what I wanted to do, but it did not come easy to me.

And I have forgotten everything I learned. I am not too different from the Baby Boomer who doesn’t even know how to stick a USB drive into his computer.

Post-2008 traders have a massive technological advantage over everyone else, and it will probably come in handy in the future. The idea that you would hire someone who is Excel-illiterate onto the desk in 2018 is inconceivable.

School of Thought

In the old days, you would hire a trader for his gut instincts and his aggression and his tolerance for risk. Today, you hire someone for his technical knowledge and proficiency with an asset class. Two totally different schools of thought.

The old system was bad because you couldn’t predict who was going to be a good trader. Banks tended to hire exceedingly voluble people, but only a small percentage had any aptitude for it.

The new system is bad because you need some gut instinct and aggression now and then, both of which are sorely lacking. It’s hard to imagine pajama boy lifting S&P futures when they’re limit down.

I left the business the day of Lehman’s bankruptcy, which makes me a pre-crisis trader to the day. Street Freak is such an interesting read because it’s a time capsule of that time period. Wall Street is almost unrecognizable.

In some ways, that’s good. In other ways, it’s not. I still will wager on the outcome of a decision made by the seat of my pants, instead of one made by the computer.

SIC Virtual Pass

I’ll be writing next week’s 10th Man from San Diego, at the 2018 Strategic Investment Conference. Hope to see some of you guys there, but if you can’t go this year, the SIC Virtual Pass is a pretty great alternative.

You can find out more about it by clicking here, but here are some important points:

• You get video recordings of every session from the SIC 2018, for the first time ever. As they’ll be uploaded for you within 24 hours of the conference, you can watch these when you want but…

• You can also watch the 20+ hours of presentations and panels live (again, first time ever), and…

• You can ask speakers questions while they’re onstage—you guessed it—for the first time ever).

If you order now, you get a $400 discount and you’ll be all set up for the livestream from March 6… no downside here.

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