The MOST Important Thing
Why even our best Models Fail Us: The Illusion of Control Over Randomness
20 May 2026
Chapter 1: What is the main topic discussed in this episode?
And yield curve control, unlike quantitative easing, quantitative easing is about, hello, Mr. Powell, here's 120 billion a month. Go and spend it. And he bought whatever he wanted, bonds and affected prices of things. Yield curve control is different. It's like, hello, Alan, the 10-year treasury is not going to go worse than 5%. Why? Because I said so. What are you going to do about it?
Print infinite amount of dollars to hold it. It's more about knowing what not to do. So if someone is now, okay, who do you want to marry? It's like, I have no idea, but I can tell you who I do not want. So that's what I learned. That's what I learned from some relationships. You're like, I don't really know what I want, but I can tell you exactly what I don't want.
And so I think you can improve the average and you can make your day better by simply knowing what to avoid.
Welcome to the Most Important Thing podcast, where we speak with the best and brightest in finance, economics, investment and geopolitics to bring you the truth about what's driving the global economy and financial markets.
Every week, our chief market sceptic, Dr Alan O'Sullivan, and former government minister Ivan Yates sit down with a global expert to provide invaluable lessons from a lifetime of markets experience. Economic expansion or recession, market highs or underlying vulnerabilities, AI dystopia or just the next bubble? Escalating geopolitical tensions or simply the new global order?
These are deep conversations searching for truth and practical investing strategies to improve your chances in this uncertain market environment. To optimize your learning experience, visit our learning hub at themitpodcast.com, where you will find the latest guides, investment e-books, and a community that focuses solely on expert insights. Enjoy the show.
Now today's episode of The Most Important Thing, we are off to Madrid and we're going to speak to Mr. Diego Perea and he is the CIO, the fund manager for a fund called Quadriga and he is going to talk to Alan about what?
Diego, again, is another very interesting character, okay? Has an interesting background. He's actually an engineer, started off as a mining engineer, has a number of mining qualifications, okay? But Diego is a practitioner. He's got skill in the game. He's managing money. Again, takes a contrarian view, is very aware of the monetary policy mistakes that have been made.
And what I mean by that is during the interview, we talk about the excesses of central banks. Whenever there's a problem, the playbook is very simple. The central bank's right to the rescue, print money. And that's okay in a crisis, but it has been abused. Back to Dr. Lacey Hunt, when you abuse one of the factors of production, you get problems like negative interest rates was lunacy.
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Chapter 2: How does yield curve control differ from quantitative easing?
And the fair value of NVIDIA is now X. Okay. And you continue to adjust. But that misconception and that bubble and that anti-bubble and that relationship is alive. And I think Soros, again, talks about this idea of the period, the dawn, where the conceptions and misconceptions coexist. Um, and, and, and it's normal.
It's not like, uh, deep seek came up with something and everybody, boom, a light bulb went on and the entire universe said, uh, now I understand exactly what happened. And this is the fair value. It's like, everyone's trying to figure out. So in that process, you know, things, things move, but I love the concept of black swan.
I think fat tails is, uh, but then ultimately, and you think of a misconceptions, the other big point that links them is risk primia, is a concept I teach to the students, is the relationship between, let's call it real-world probabilities. If we had a crystal ball and we knew exactly what the outcome of the real probability is, which is the ludic fallacy.
As humans, we try to think that there is such thing, which it's not. It's random. There's an element of stochastic randomness. But what you can do is you can go to the markets and say, OK, what is your probability distribution? And you look at the options markets, you look at the correlation markets, and you can actually construct an extraordinarily accurate distribution.
view of what the world is predicting today and that's what i do within in you know what we do on the quant side and we're able to uh it's not that we have a crystal ball but we have a exactly access to to the crystal ball of the market to say what are you predicting and i think that's where perhaps things get disconnected so the fact that there might be uh black swans
doesn't mean they're a good investment on themselves or a bad investment. It depends on what the market is pricing, how the market is, the supply and demand for these things. And so there's a lot of art and science on identifying these opportunities and basically, you know, generating contractual and indirect ways in which we achieve our objective.
You know, I think we need to fall in love with the problem, not the solution. This is one of my motives in life. You know, I think the biggest problems in corporate world history, the biggest blow-ups have always been people who fell in love with their product, you know, with their solution, not with the problem. Think of linking the story back to oil and OPEC, right?
In my book, I said, look, OPEC and oil have been extraordinarily successful. And the misconception at the time was that, you know, the book was called Opportunities from the End of Peacoil. Back in the day, you know, when we published that book, people were like, are you crazy? Of course, oil is going to go to 500 because there's only enough barrels and we're going to run out.
And I was like, look... The reason OPEC has been so successful and one of the big misconceptions in the system was the belief that OPEC was successful because it was an oligopoly, i.e. I control the supply, I control the price.
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Chapter 3: What is Diego's framework for understanding asset bubbles?
I'm looking to the next major misconception, which has a huge impact on Irish investors, European investors, you know, global pension funds. Fixed income works in a disinflationary environment, but what about in a stagflationary environment? You know, what are the implications?
I suppose for you, it's good because, I mean, there is a massive market for what you do, but the 60-40 just doesn't work anymore. I agree.
And I think this is one of the natural conclusions from exactly what we're discussing. And let me put it in a... in different ways. So if we had some teenagers listening to this, I'll say, let's assume that this is a video game, right? Level one of the video game is, can you make money in nominal terms? And what I mean by that is, hey, Alan, here's 100 euros, make me money.
And you come back with 103 euros and you say, hey, Diego, I made you three euros nominal. And that works in a world where inflation is negligible, which is pretty much the game we've played for the last few decades.
I mean, I think it would be a fun exercise to look for, you know, in the developed market world, you know, just do a word count of inflation from 2000 to, you know, for a big part of history, other than the obvious cyclical aspects of oil is overheating and whatever. The 2% inflation target, that frog in boiling water, it's, again, made inflation be somewhat negligible.
No one would come back to you and say, yeah, Alan, you made me three, but inflation is 2.7. In reality, you just made me 0.3 because benchmarks are nominal. We think nominal. Inflation, by the way, your inflation is different from mine, different from anyone listening to us.
Um, so in that sense, level one, making money in nominal terms has worked for a while and fixed income works because, you know, even if I'm paying you in Japan, 0.1%, uh, it's better than, than deflation, of course. And so people were kind of fooled there. Now, level two is, can you make me money in real terms?
And I'm not saying real after CPI or some sort of official BS inflation is, can you actually preserve my capital? And once us frogs realize that that game, that effectively to make money in real terms is much harder, and in fact, cash and fixed income in many cases in many parts of the world is deeply into that negative territory, we start jumping off the ball.
And this is driven, you know, why did the frog jump? There are two Inflation has two big dimensions. Number one is inflation itself. Two plus two equals four. You print 10% of your monetary base and let's assume that everything gets impacted linearly. That would be a very naive way of thinking. how money printing impacts the world.
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Chapter 4: What misconceptions should investors be aware of?
And this is why I think from a game theory perspective, these three levels are there. And we are somewhere between two and three. And, but, you know, I think Mark Twain said death and taxes, right? I'd say death, taxes, and inflation, right? So I think in that story, we have this dynamic. And to your point, the 60-40 fallacy, are we really solving problems? This is kind of what I keep asking.
Are we really solving the problem or are we delaying, transferring, transforming or enlarging the problem? And what yield curve control does, back to that level two and what we might be witnessing in certain parts of the world, is we're not solving the problems.
We're transforming a credit problem, which is a fiscally imbalanced bankrupt economy, into an inflation problem and currency devaluation. And this is yet again the same thing we've always done, except that problems become bigger and more exponential And so we're now at that point where the frogs, you know, and this brings me to, you know, in the chess game, okay, move six or seven.
Because the first thing people are thinking today is, if I have a problem with US treasuries, and at 5%, they're going to have to print a lot of dollars to hold it, and the dollar is going to go to zero. And I'm like, yeah, but... Do you want to buy bonds at two and a half? Do you want to buy JGBs at one and a half?
They have exactly the same problem, except that the Fed and the Treasuries have already taken the hit of their bonds going from one and a half to five. So from a duration perspective and considering the central bank put, which is really a fixed income put, it's not an S&P put. A free put by put-call parity is a free call.
So if I'm loaned treasuries at 10%, at 5% yield, and that yield is controlled, I have a free call, except that it's denominated in dollars. But good luck in the ride of the bond or the bono or the BTP, and good luck with JGBs. And good luck with interest rate differentials and the widening. What does that mean for the euro or the yen?
And so what at a first order looks like a one-way street towards weaker dollar could potentially
give bring us into a fork that is much less obvious and what it means on a relative basis which brings me back to gold so i've already played this chess game in my head and brings me back to i don't really know where these guys are going to go but i think i know where gold is going and and and that and that will bring us to taxation etc but it's as you can see it's a fun chess game in in our heads that we need to to understand and play through and
We'll see how it ends.
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Chapter 5: How do black swan events influence market strategies?
What happens when correlations break? And what happens, you know, as this crisis mechanically take us to that level? And these are things like the VIX kicking in and inflation or whatever. The challenge with high inflation, and the reason I agree with you, is that high inflation is the path for lower fixed income and lower equities potentially.
And that exposes that correlation risk, increases volatility, et cetera, et cetera. And in some ways, this nightmare of the tariffs has been, again, we keep it evergreen, but the idea is that it's a path where you're effectively increasing inflation, volatility, uncertainty, destroying value. And that's why I think at first instance was so negative.
And you have, in the case of the US, this trifecta of lower US fixed income, lower US equity and lower dollar, which is just an emerging market behavior. You don't see that. Even during Brexit, you had sterling collapsing, but UK assets going up because of a total return gain. So I think in that sense, it's very important to understand that You want your defenders to be volatile.
You need them to be volatile. So do not confuse volatility and risk. But the problem, it's the unreliability of correlation. If you knew that your defender is going to be reliable during the crisis, then you want it to be as volatile as possible. The problem is that reliability, and that reliability is largely a function sometimes of positioning.
I'm laughing because I love your analogies with goalkeepers, defenders, but I was thinking, what if your goalkeeper is Rene Higuita, the Colombian goalkeeper? The scorpion.
Yeah, the scorpion. I would have a heart attack. If I've been Colombian and he did that, I would have a... I was probably 10 years old at the time, but I would have still had a heart attack.
That was, for listeners and viewers, that's 30 years old, by the way. That was England versus Colombia. You can check it on YouTube. And the ball comes in and Higuita just does this scorpion kick. And it's hilarious. Like, yeah, brilliant. But closer to home, Bruce Gravelaar is another one. What if your goalkeepers are a bit more volatile, you know?
Look, and I think that's why I make the difference between defenders and goalkeepers. I don't think fixed income is a goalkeeper. I've always viewed fixed income as a defender.
And the problem is, you know, back in the day when I think it's in the book, I talked about de Bund being, I called it Franz de Bund Beckenbauer with, again, it shows my age, but it was this legendary defender from Germany, right? Who passed away now, but incredible defender. So de Bund may have been an incredible defender once upon a time,
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