1
00:00:14,040 --> 00:00:17,240
Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.

2
00:00:17,320 --> 00:00:20,400
Speaker 1: My name is Mike Reagan. I'm a senior editor at Bloomberg,

3
00:00:20,560 --> 00:00:23,959
Speaker 1: and I'm aldowna higher across acid reporter with Bloomberg. This

4
00:00:24,000 --> 00:00:27,040
Speaker 1: week on the show. While the headlines coming from the

5
00:00:27,080 --> 00:00:30,640
Speaker 1: banking sector have been nothing short of terrifying this month,

6
00:00:31,160 --> 00:00:34,720
Speaker 1: yet the stock market just keeps chugging along, especially the

7
00:00:34,760 --> 00:00:38,000
Speaker 1: tech sector. In fact, the NASDAC one hundred index is

8
00:00:38,200 --> 00:00:41,440
Speaker 1: about to snap a streak of four straight quarterly declines.

9
00:00:41,960 --> 00:00:44,840
Speaker 1: That's its longest losing streak in more than twenty years.

10
00:00:45,360 --> 00:00:47,479
Speaker 1: So what's going on? Is it just a return to

11
00:00:47,520 --> 00:00:51,440
Speaker 1: the days when growth stocks would reliably outperform after value

12
00:00:51,479 --> 00:00:54,320
Speaker 1: had its brief time in the sun, or is it

13
00:00:54,400 --> 00:00:57,000
Speaker 1: something else going on. We're gonna get into it with

14
00:00:57,080 --> 00:01:00,120
Speaker 1: a quant who also has some very interesting thoughts on

15
00:01:00,120 --> 00:01:03,920
Speaker 1: a topic we hardly ever talk about around here, microcaps,

16
00:01:04,560 --> 00:01:07,280
Speaker 1: which val Donna leads me to put you on the

17
00:01:07,319 --> 00:01:10,720
Speaker 1: spot and ask what's your favorite microcap stock? My favorite

18
00:01:10,760 --> 00:01:12,240
Speaker 1: micro Well, I was going to say, you missed an

19
00:01:12,240 --> 00:01:14,600
Speaker 1: opportunity to make a great pun. You could have said,

20
00:01:14,640 --> 00:01:18,400
Speaker 1: like a small topic, you know, good, Oh my gosh,

21
00:01:18,840 --> 00:01:23,640
Speaker 1: what's my favorite microcap? Oh my gosh, you really are

22
00:01:23,680 --> 00:01:26,520
Speaker 1: giving me on a spot I don't even know any

23
00:01:26,560 --> 00:01:28,160
Speaker 1: I gotta admit I didn't know any I looked, I

24
00:01:28,200 --> 00:01:30,640
Speaker 1: looked them up, and now I know what's your favorite?

25
00:01:30,680 --> 00:01:34,200
Speaker 1: What's your favorite one? Well, I'm gonna not reveal that,

26
00:01:34,280 --> 00:01:36,920
Speaker 1: but I will say it's it's a fascinating field and

27
00:01:36,959 --> 00:01:39,480
Speaker 1: there's a bunch year to day that are up like

28
00:01:39,560 --> 00:01:42,800
Speaker 1: two hundred percent if you look at the Russell microcap

29
00:01:42,880 --> 00:01:44,800
Speaker 1: in next. So I'm glad we've got the perfect guest

30
00:01:44,840 --> 00:01:46,880
Speaker 1: to break it down for us. Oh my gosh, is

31
00:01:46,880 --> 00:01:49,920
Speaker 1: it a lot of like biotech? A lot of biotech? Yeah,

32
00:01:50,280 --> 00:01:52,720
Speaker 1: a lot of biotech. Oh my gosh. Okay, well, then

33
00:01:52,800 --> 00:01:55,640
Speaker 1: let's bring our guests in. It's Patrick McDonough Managing director

34
00:01:55,720 --> 00:01:59,320
Speaker 1: at Pegum Quantitative Solutions. Thank you so much for joining us,

35
00:02:00,000 --> 00:02:01,680
Speaker 1: Thanks for having me, glad to be here to talk.

36
00:02:02,160 --> 00:02:04,600
Speaker 1: Before we got started with today's interview, you and I

37
00:02:04,640 --> 00:02:06,760
Speaker 1: were chatting and you said you would keep equations to

38
00:02:06,840 --> 00:02:11,120
Speaker 1: a minimum during our during our podcast recording, So I

39
00:02:11,160 --> 00:02:13,560
Speaker 1: wanted to ask you to just lay out your role

40
00:02:13,639 --> 00:02:16,679
Speaker 1: for us. Sure. Sure, I'm a portfolio manager on the

41
00:02:16,760 --> 00:02:21,600
Speaker 1: Quantitative Equity Team, Impegium Quantitative Solutions. I know everybody loves

42
00:02:21,600 --> 00:02:25,519
Speaker 1: to talk to to quant portfolio managers, those mats, all

43
00:02:25,520 --> 00:02:30,160
Speaker 1: the all the regressions and interactions across factors, So I'll

44
00:02:30,160 --> 00:02:35,320
Speaker 1: make sure to lay that awfully thick today. Absolutely well, Patrick,

45
00:02:35,440 --> 00:02:38,720
Speaker 1: let's get started just with a sort of overview of

46
00:02:38,760 --> 00:02:41,040
Speaker 1: what we've seen in the market so far this year.

47
00:02:41,120 --> 00:02:43,600
Speaker 1: I mean, you know, I mentioned in the intro that

48
00:02:44,400 --> 00:02:46,920
Speaker 1: strong rally and tech. I think the NAZAC one hundreds

49
00:02:46,960 --> 00:02:51,080
Speaker 1: up like fourteen fifteen percent this year. What do you

50
00:02:51,120 --> 00:02:53,800
Speaker 1: think's going on? Is it a growth value thing or

51
00:02:53,880 --> 00:02:57,520
Speaker 1: is it you know, texts the best place to hide

52
00:02:57,520 --> 00:02:59,920
Speaker 1: out from the troubles in the banking sector. How are

53
00:03:00,160 --> 00:03:03,120
Speaker 1: you sort of explaining this action we've seen in the

54
00:03:03,120 --> 00:03:06,320
Speaker 1: market this year. I think it looks like a value

55
00:03:06,400 --> 00:03:09,960
Speaker 1: versus growth On the surface, you're seeing tech go do

56
00:03:10,080 --> 00:03:14,120
Speaker 1: really well. You're seeing well, actually it almost happens inter

57
00:03:14,320 --> 00:03:17,520
Speaker 1: day in some cases, but by and large, for the

58
00:03:17,919 --> 00:03:19,959
Speaker 1: year to day period, we've seen tech do really well.

59
00:03:20,200 --> 00:03:22,880
Speaker 1: We've seen a reversal of the cyclicals that drove value

60
00:03:23,000 --> 00:03:25,720
Speaker 1: last year. So at first clients it's said nice simple

61
00:03:25,919 --> 00:03:29,320
Speaker 1: value versus growth story with growth coming back. But I

62
00:03:29,320 --> 00:03:31,000
Speaker 1: think if you peel that back a couple of layers,

63
00:03:31,000 --> 00:03:34,560
Speaker 1: what you're actually seeing is fear or at least on certainty,

64
00:03:34,639 --> 00:03:37,920
Speaker 1: driving the equity market, and that's being played out with

65
00:03:38,040 --> 00:03:43,240
Speaker 1: these larger tech names that have done well in the past.

66
00:03:43,640 --> 00:03:45,160
Speaker 1: But I don't necessarily think you're going to do all

67
00:03:45,200 --> 00:03:47,760
Speaker 1: that well going forward in the space. So I actually

68
00:03:47,800 --> 00:03:50,280
Speaker 1: think it's a little bit more of a size effect

69
00:03:50,480 --> 00:03:54,240
Speaker 1: that we're seeing at this point rather than actual growth.

70
00:03:54,320 --> 00:03:56,240
Speaker 1: And you believe the names that are doing it. You know,

71
00:03:56,280 --> 00:04:02,400
Speaker 1: it's Apple, it's Microsoft, Salesforce, and these are really big companies.

72
00:04:02,880 --> 00:04:06,280
Speaker 1: These are also really really expensive companies and videos more

73
00:04:06,320 --> 00:04:09,800
Speaker 1: than fifty times forward earnings at this point. So it's

74
00:04:09,800 --> 00:04:11,680
Speaker 1: hard to see how these are really growth companies. They've

75
00:04:11,680 --> 00:04:14,160
Speaker 1: already come, they've already grown, they've been growing for you know.

76
00:04:14,280 --> 00:04:17,080
Speaker 1: They you could argue that haven't really grown for half

77
00:04:17,080 --> 00:04:19,719
Speaker 1: a decade at this point. They're just so big. If anything,

78
00:04:19,720 --> 00:04:23,240
Speaker 1: they're very profitable companies at this point, but it's kind

79
00:04:23,240 --> 00:04:25,200
Speaker 1: of hard to see them as actual growth companies. And

80
00:04:25,480 --> 00:04:28,279
Speaker 1: from a factor, I can't help it. I'm a quanta.

81
00:04:28,279 --> 00:04:31,800
Speaker 1: I have to From a factor perspective. These aren't really

82
00:04:31,839 --> 00:04:34,520
Speaker 1: growth companies. If anything, they show up a size of

83
00:04:34,520 --> 00:04:37,640
Speaker 1: course larger cap names even within say the SMP or

84
00:04:37,720 --> 00:04:40,200
Speaker 1: the NASDAC or they show up as quality names. These

85
00:04:40,200 --> 00:04:43,680
Speaker 1: are companies that are very, very consistent and persistent when

86
00:04:43,680 --> 00:04:46,600
Speaker 1: it comes during an earnings perspective. Really not growth at

87
00:04:46,600 --> 00:04:48,840
Speaker 1: this point. I think this is a place to hide

88
00:04:49,160 --> 00:04:52,880
Speaker 1: for equity investors at this point. Yeah, just what we've

89
00:04:53,240 --> 00:04:56,359
Speaker 1: forever considered growth have grown into becoming I guess the

90
00:04:56,360 --> 00:04:59,720
Speaker 1: blue chip defensive stocks almost that you know, if you

91
00:04:59,760 --> 00:05:01,680
Speaker 1: have to belong something, these are the names you go

92
00:05:01,720 --> 00:05:05,000
Speaker 1: with exactly. In a lot of ways, this reminds me

93
00:05:05,040 --> 00:05:07,479
Speaker 1: of sort of the two thousand and eight beginning of

94
00:05:07,480 --> 00:05:10,400
Speaker 1: twenty nineteen period. So it's not two thousand and eight

95
00:05:10,440 --> 00:05:11,839
Speaker 1: at least, which is a good thing. It's not a

96
00:05:11,839 --> 00:05:14,359
Speaker 1: banking crisis. Governments around the world have really stepped up

97
00:05:14,400 --> 00:05:17,760
Speaker 1: and put a floor under financials. But it is a

98
00:05:17,760 --> 00:05:19,800
Speaker 1: little bit I think of the market hoping that the

99
00:05:19,839 --> 00:05:23,080
Speaker 1: FED rising rates isn't going to last, and we're going

100
00:05:23,160 --> 00:05:25,280
Speaker 1: to see a reversal of that in the short term.

101
00:05:25,720 --> 00:05:27,920
Speaker 1: If you remember, going back to twenty eighteen, the FED

102
00:05:27,960 --> 00:05:30,360
Speaker 1: started to raise rates, The market kind of freaked out

103
00:05:30,360 --> 00:05:32,920
Speaker 1: a little bit. You saw sort of the re emergence

104
00:05:32,920 --> 00:05:35,080
Speaker 1: of the fangs fangs two point zero at this point

105
00:05:35,839 --> 00:05:40,080
Speaker 1: coming back, and everything else in the market maybe discovered

106
00:05:40,080 --> 00:05:42,920
Speaker 1: there or rolled over a little bit. COVID put an

107
00:05:43,000 --> 00:05:45,400
Speaker 1: end to that particular trade at this point, but it

108
00:05:45,440 --> 00:05:47,839
Speaker 1: was a last gasp of what had been almost a

109
00:05:47,839 --> 00:05:50,520
Speaker 1: ten year bull rally at that point. People looking for

110
00:05:50,640 --> 00:05:54,320
Speaker 1: those those companies that would be economically insensitive or at

111
00:05:54,360 --> 00:05:58,160
Speaker 1: least agnostic to any downturn in the markets. You compare

112
00:05:58,160 --> 00:06:00,320
Speaker 1: that to the fixed income market, and wow, it's it's

113
00:06:00,360 --> 00:06:03,320
Speaker 1: two very very different messages that we're seeing right now.

114
00:06:03,960 --> 00:06:06,040
Speaker 1: The fix income market right now kind of looks like

115
00:06:06,600 --> 00:06:09,000
Speaker 1: the six space mount in Disney World. Right You kind

116
00:06:09,000 --> 00:06:11,440
Speaker 1: of ride up the curve a little bit going up

117
00:06:11,480 --> 00:06:13,599
Speaker 1: to the to the sixth month, and then it rolls

118
00:06:13,640 --> 00:06:16,720
Speaker 1: on down until the ten year, twenty year, get a

119
00:06:16,760 --> 00:06:20,200
Speaker 1: little bit of a bump going into the thirty year.

120
00:06:21,080 --> 00:06:24,040
Speaker 1: But that's not posed for sort of a growth market.

121
00:06:24,400 --> 00:06:28,039
Speaker 1: That's not i think signaling happy landings or at least

122
00:06:28,400 --> 00:06:31,120
Speaker 1: anything other than volatility going forward. Where the equity market

123
00:06:31,200 --> 00:06:33,000
Speaker 1: right now, it's like it's fine we're whistling past this

124
00:06:33,080 --> 00:06:37,520
Speaker 1: particular graveyard and hoping that continues forever. I guess at

125
00:06:37,520 --> 00:06:39,680
Speaker 1: this point hard to see that with rates, you know,

126
00:06:40,080 --> 00:06:43,440
Speaker 1: in the short term rifle of five percent. But maybe

127
00:06:43,600 --> 00:06:48,080
Speaker 1: we'll have, you know, forever, forever, perpetual growth, but that

128
00:06:48,160 --> 00:06:51,200
Speaker 1: seems unlikely. Mike. I don't know about you, but I

129
00:06:51,240 --> 00:06:58,039
Speaker 1: love roller coaster rides, especially in the market. My kids

130
00:06:58,120 --> 00:07:03,599
Speaker 1: get this season passes to six Flags. I can't even

131
00:07:03,640 --> 00:07:08,280
Speaker 1: watch them go on is really fun. Yeah, so that's

132
00:07:08,320 --> 00:07:11,680
Speaker 1: a new Jersey staple. Patrick. I have a follow up

133
00:07:11,720 --> 00:07:14,640
Speaker 1: question about the what you were just saying about the

134
00:07:14,760 --> 00:07:17,320
Speaker 1: fixed income market, because a couple of weeks ago, what

135
00:07:17,400 --> 00:07:18,880
Speaker 1: a lot of people were saying was that there was

136
00:07:18,920 --> 00:07:21,200
Speaker 1: a short squeeze in the fixed income market and that's

137
00:07:21,200 --> 00:07:24,240
Speaker 1: why we were seeing all those moves. So I'm wondering if, like,

138
00:07:24,400 --> 00:07:27,400
Speaker 1: can we even trust the signals that the treasury market

139
00:07:27,440 --> 00:07:31,360
Speaker 1: is sending us if we did see some of those

140
00:07:31,400 --> 00:07:34,280
Speaker 1: moves happening because of the short squeeze. That's a that's

141
00:07:34,280 --> 00:07:36,600
Speaker 1: a tough question, right, It's it's it kind of depends

142
00:07:36,600 --> 00:07:39,440
Speaker 1: on what As an acid owner, your your time horizon is.

143
00:07:40,000 --> 00:07:42,080
Speaker 1: It's been a really nice trading signal if you've been

144
00:07:42,360 --> 00:07:44,320
Speaker 1: sort of a high frequency quant and you've been moving

145
00:07:44,320 --> 00:07:47,560
Speaker 1: in and out sort of middlesecond trading and uh and

146
00:07:47,560 --> 00:07:50,040
Speaker 1: and taking advantage of the volatilities we saw up until

147
00:07:50,080 --> 00:07:52,760
Speaker 1: the last week or so. I think at the very least,

148
00:07:52,760 --> 00:07:55,600
Speaker 1: what it does give investors though, as an opportunity that

149
00:07:55,680 --> 00:07:57,920
Speaker 1: we haven't had in a long time. People aren't really

150
00:07:57,960 --> 00:08:01,000
Speaker 1: necessarily pulling out of this large cap tech trades that

151
00:08:01,040 --> 00:08:03,680
Speaker 1: we were talking about. There hasn't been a rebalance and

152
00:08:03,720 --> 00:08:06,640
Speaker 1: to say staples or something like that, which is more negative,

153
00:08:06,880 --> 00:08:08,760
Speaker 1: but people are sitting on cash and you can actually

154
00:08:08,800 --> 00:08:10,840
Speaker 1: get a yield for the first time, you know, in

155
00:08:11,200 --> 00:08:14,640
Speaker 1: a decade decade plus, and that's really I think going

156
00:08:14,720 --> 00:08:18,800
Speaker 1: to have an opportunity. Well, you have a rising opportunity

157
00:08:18,840 --> 00:08:20,440
Speaker 1: set now, so that's going to have a big impact

158
00:08:20,720 --> 00:08:23,760
Speaker 1: I think on more markets go that marginal dollar, that

159
00:08:23,920 --> 00:08:27,480
Speaker 1: next investment dollar. You don't have to chase the current trends.

160
00:08:27,720 --> 00:08:30,360
Speaker 1: You can actually sit there in a money market fund

161
00:08:30,360 --> 00:08:32,920
Speaker 1: at close to five percent and kind of not panic

162
00:08:33,240 --> 00:08:34,920
Speaker 1: and kind of maybe just kind of cool your jets

163
00:08:34,920 --> 00:08:37,800
Speaker 1: and rest for a little bit. And that's a nice option.

164
00:08:37,840 --> 00:08:39,679
Speaker 1: I think for people to have. So whether it's a

165
00:08:40,400 --> 00:08:44,000
Speaker 1: pure signal of an impending recession or not, I will see.

166
00:08:44,040 --> 00:08:46,199
Speaker 1: It's kind of hard, in my view, my personal view,

167
00:08:46,240 --> 00:08:49,520
Speaker 1: to see where this goes. Have this not end and

168
00:08:49,559 --> 00:08:52,240
Speaker 1: at least some sort of pull back. The consumer keeps

169
00:08:52,240 --> 00:08:54,600
Speaker 1: proving me wrong. There seems to be this interesting fight

170
00:08:54,679 --> 00:08:57,559
Speaker 1: going on now between the Fed and the American consumer.

171
00:08:58,559 --> 00:09:00,880
Speaker 1: But it's it's rare, I think, to have to go

172
00:09:00,960 --> 00:09:04,520
Speaker 1: from basically zero to what's called five percent interest rates

173
00:09:04,559 --> 00:09:08,400
Speaker 1: and not just break a few relatively small, obscure banks.

174
00:09:09,080 --> 00:09:12,559
Speaker 1: I would expect to see people start pulling back, And anecdotally,

175
00:09:12,800 --> 00:09:14,960
Speaker 1: you know, I'm starting to see it, just just amongst

176
00:09:15,200 --> 00:09:18,680
Speaker 1: my friends, my family. Things are getting awfully expensive out there,

177
00:09:19,080 --> 00:09:21,079
Speaker 1: and it's hard to see how that doesn't have some

178
00:09:21,120 --> 00:09:24,520
Speaker 1: sort of consequences for the economy going forward. You know, Patrick,

179
00:09:24,559 --> 00:09:27,280
Speaker 1: the one thing you hear so often is, well, yes,

180
00:09:27,320 --> 00:09:32,480
Speaker 1: the Fed is raising rates. Jerome Powell pretty much signaled

181
00:09:32,480 --> 00:09:35,880
Speaker 1: that he does not see any environment in which they'd

182
00:09:35,920 --> 00:09:38,480
Speaker 1: actually cut rates this year, regardless of what the short

183
00:09:38,559 --> 00:09:41,600
Speaker 1: term interest rate market is saying. But on the other hand,

184
00:09:41,679 --> 00:09:44,280
Speaker 1: that Fed balance sheet that everyone keeps a close eye

185
00:09:44,320 --> 00:09:49,840
Speaker 1: on has really ramped up aggressively, and obviously, to me,

186
00:09:49,920 --> 00:09:54,120
Speaker 1: there's a big difference between quantitative easing, where they are,

187
00:09:54,280 --> 00:09:58,520
Speaker 1: you know, expanding the balance sheet by buying assets from banks,

188
00:09:58,520 --> 00:10:03,520
Speaker 1: buying treasuries and mortgage back securities, and this version of

189
00:10:03,520 --> 00:10:06,800
Speaker 1: it where they're just extending loans through the discount window

190
00:10:06,840 --> 00:10:09,920
Speaker 1: and through this new term loan facility for for banks

191
00:10:09,920 --> 00:10:13,120
Speaker 1: that are struggling. But yet there's this almost this knee

192
00:10:13,160 --> 00:10:17,280
Speaker 1: jerk reaction that hey, the Fed's outing liquid liquidity, the

193
00:10:17,280 --> 00:10:22,320
Speaker 1: bounce sheet is expanding, This is unabashedly uh good for

194
00:10:22,440 --> 00:10:24,880
Speaker 1: risk assets. How do you think about that? I mean

195
00:10:24,880 --> 00:10:27,560
Speaker 1: that that to me seems like kind of a risky

196
00:10:27,600 --> 00:10:31,520
Speaker 1: interpretation of what the Fed's doing. Um, and I'm just

197
00:10:31,559 --> 00:10:34,760
Speaker 1: curious how you how you view it. I think that's

198
00:10:35,200 --> 00:10:37,160
Speaker 1: I would agree with your with your view that that's

199
00:10:37,200 --> 00:10:39,760
Speaker 1: that's that's a bit of a risky way to view

200
00:10:39,760 --> 00:10:42,200
Speaker 1: what's going on with the FED. And maybe we can

201
00:10:42,240 --> 00:10:44,480
Speaker 1: kind of flip that and see what people have what

202
00:10:44,600 --> 00:10:48,080
Speaker 1: the impact has been across the quote un risk free

203
00:10:48,200 --> 00:10:52,160
Speaker 1: quote unquote risk free asset class over the last even

204
00:10:52,160 --> 00:10:54,599
Speaker 1: just year to date, right, I mean, suddenly duration is

205
00:10:54,640 --> 00:10:57,040
Speaker 1: really mattered and suddenly if you just looked at the

206
00:10:57,040 --> 00:10:59,720
Speaker 1: whip sawing of the two year much less, you know,

207
00:10:59,760 --> 00:11:03,600
Speaker 1: any thing longer dated duration matters. Again, so even risk

208
00:11:03,679 --> 00:11:07,920
Speaker 1: free holding maturity government securities aren't exactly risk free if

209
00:11:07,920 --> 00:11:11,280
Speaker 1: it doesn't if it doesn't line up properly with the

210
00:11:11,320 --> 00:11:14,240
Speaker 1: liabilities on your balance sheet. So trying to kind of

211
00:11:14,320 --> 00:11:18,280
Speaker 1: time this from from a risk asset perspective is I

212
00:11:18,280 --> 00:11:20,000
Speaker 1: think a bit of a fools game at this point.

213
00:11:20,280 --> 00:11:22,480
Speaker 1: Probably better to take advantage of that yield bring you

214
00:11:22,480 --> 00:11:25,120
Speaker 1: can get it played the defenses at least a little bit.

215
00:11:25,320 --> 00:11:27,360
Speaker 1: And again, even if you look at the tech names

216
00:11:27,360 --> 00:11:29,800
Speaker 1: that are doing well in the equity market, they're not

217
00:11:29,920 --> 00:11:32,760
Speaker 1: really the risky end of the spectrum. This isn't the

218
00:11:32,760 --> 00:11:37,640
Speaker 1: startup end, This isn't sort of the aggressive well perhaps

219
00:11:37,720 --> 00:11:41,120
Speaker 1: maybe fifty times and age we mentioned is a bit

220
00:11:41,120 --> 00:11:44,680
Speaker 1: on the extreme end, but very big, very stable, very

221
00:11:44,720 --> 00:11:47,920
Speaker 1: safe companies. I don't really think we're going to see

222
00:11:48,320 --> 00:11:51,440
Speaker 1: much of a risk on market in the foreseeable future.

223
00:11:51,960 --> 00:11:54,439
Speaker 1: And we started see some of those wobbles across more

224
00:11:54,520 --> 00:11:57,679
Speaker 1: risky ends of that's called CPAs or hedge funds, people

225
00:11:57,720 --> 00:11:59,920
Speaker 1: getting kind of wiped out a little bit in that

226
00:12:00,080 --> 00:12:03,280
Speaker 1: space and even across private equity. Now, maybe I'm a

227
00:12:03,280 --> 00:12:06,160
Speaker 1: little bitter as a public's guy and having a daily

228
00:12:06,320 --> 00:12:08,360
Speaker 1: marked to mark rather than being able to kind of

229
00:12:08,640 --> 00:12:12,240
Speaker 1: hide on my multi year contracts there. So maybe we

230
00:12:12,280 --> 00:12:13,960
Speaker 1: should all take this with a grant of salt. But

231
00:12:14,040 --> 00:12:16,600
Speaker 1: it is interesting to see some of the news breaking

232
00:12:16,640 --> 00:12:20,280
Speaker 1: on some really big PE players having to finally again

233
00:12:20,360 --> 00:12:22,880
Speaker 1: finally you can tell my bias there. But that's that

234
00:12:23,000 --> 00:12:25,520
Speaker 1: marked to mark across some of these other asset class

235
00:12:25,520 --> 00:12:29,280
Speaker 1: So I'm not really sure the market is digested all

236
00:12:29,320 --> 00:12:31,520
Speaker 1: this free capital that we've had it from that's called

237
00:12:31,600 --> 00:12:34,520
Speaker 1: the thread round one. If this is round two, I

238
00:12:34,520 --> 00:12:36,080
Speaker 1: don't know where that goes in a safe in a

239
00:12:36,120 --> 00:12:38,520
Speaker 1: safe manner, I'm wondering patch of what you think the

240
00:12:38,559 --> 00:12:41,480
Speaker 1: market should be pricing in, or the stock market should

241
00:12:41,520 --> 00:12:44,199
Speaker 1: be pricing in at this point. I've read this interesting

242
00:12:44,760 --> 00:12:48,280
Speaker 1: note from City this week that said something like stock

243
00:12:48,480 --> 00:12:52,360
Speaker 1: neither stucks nor bonds have priced in a recession, and

244
00:12:52,559 --> 00:12:55,360
Speaker 1: as Mike just mentioned, you know the market is expecting

245
00:12:55,360 --> 00:12:57,480
Speaker 1: some cuts later this year. What should the market be

246
00:12:57,520 --> 00:13:00,520
Speaker 1: pricing in? I think what the market should be focusing

247
00:13:00,520 --> 00:13:03,440
Speaker 1: on is actually earnings at this point, and I think

248
00:13:03,440 --> 00:13:05,080
Speaker 1: that would be kind of the way to it to

249
00:13:05,120 --> 00:13:08,160
Speaker 1: adjust the pricing going forward. We kind of had a

250
00:13:08,200 --> 00:13:10,880
Speaker 1: little bit of a reset of of the pe ratio

251
00:13:10,960 --> 00:13:14,080
Speaker 1: the last year or so as markets came down last year,

252
00:13:14,400 --> 00:13:17,840
Speaker 1: but earnings haven't moved much and there hasn't been that

253
00:13:17,840 --> 00:13:21,480
Speaker 1: that resetting of future expectations of what companies can be

254
00:13:21,520 --> 00:13:24,920
Speaker 1: doing and what companies can be doing. I think, really realistically,

255
00:13:26,040 --> 00:13:28,240
Speaker 1: I'll keep picking on the big tech names because they've

256
00:13:28,240 --> 00:13:31,720
Speaker 1: been the winner's space. If you've got billions of hundreds

257
00:13:31,720 --> 00:13:34,079
Speaker 1: of billions of earnings coming in a year, how can

258
00:13:34,120 --> 00:13:37,160
Speaker 1: you really be priced at twenty or thirty or whatever

259
00:13:37,160 --> 00:13:40,480
Speaker 1: the multiple is going forward. You're so big that seems

260
00:13:40,520 --> 00:13:44,520
Speaker 1: really unrealistic unless there's some sort of new product or

261
00:13:44,600 --> 00:13:48,640
Speaker 1: new area for growth. That's hard to see right. We're

262
00:13:48,640 --> 00:13:50,720
Speaker 1: seeing it now. I guess if we want to pick

263
00:13:50,760 --> 00:13:56,600
Speaker 1: on sort of the AI approach, where you're more consumer focused,

264
00:13:58,280 --> 00:14:00,840
Speaker 1: big tech companies have been going hasn't exactly. I mean,

265
00:14:00,880 --> 00:14:03,040
Speaker 1: it's been fun. We've been hearing all sorts of crazy

266
00:14:03,080 --> 00:14:05,800
Speaker 1: news stories about people falling in love with chatbots or

267
00:14:06,040 --> 00:14:09,360
Speaker 1: chat box suddenly becoming aware and threatening to destroy the world.

268
00:14:09,600 --> 00:14:11,360
Speaker 1: I think that was an eighties movie I grew up on,

269
00:14:11,480 --> 00:14:15,240
Speaker 1: but the actual impact of that from a revenue perspective

270
00:14:15,280 --> 00:14:18,560
Speaker 1: seems premature at this point, I would say, so, I

271
00:14:18,600 --> 00:14:22,000
Speaker 1: think we need to as as a market collectively start

272
00:14:22,040 --> 00:14:26,520
Speaker 1: reevaluating what more reasonable growth expectations are and I think

273
00:14:26,560 --> 00:14:29,840
Speaker 1: that will help reset the p that's going to be

274
00:14:29,880 --> 00:14:33,600
Speaker 1: the prices down that's going to I think reawaken what

275
00:14:33,800 --> 00:14:37,560
Speaker 1: more realistic upside or quite honestly downside would be in

276
00:14:37,600 --> 00:14:39,960
Speaker 1: the market. And that's not to say that markets are

277
00:14:40,640 --> 00:14:44,960
Speaker 1: miss identifying quote unquote good companies. I think what they're

278
00:14:44,960 --> 00:14:48,240
Speaker 1: missing though, is where companies go from here. So where's

279
00:14:48,240 --> 00:14:52,880
Speaker 1: the upside? If you think back to Microsoft, right, you know,

280
00:14:53,080 --> 00:14:57,080
Speaker 1: good company has been a good company for decades, really

281
00:14:57,120 --> 00:15:01,960
Speaker 1: got hammered at the end of the tech bubble, but

282
00:15:02,600 --> 00:15:04,640
Speaker 1: wasn't going out of business. There was no there's no

283
00:15:05,160 --> 00:15:08,640
Speaker 1: fear of Microsoft going out of season to exist. It

284
00:15:08,680 --> 00:15:11,480
Speaker 1: was still a good company. The price just didn't move

285
00:15:11,600 --> 00:15:14,160
Speaker 1: for well over a decade, so it wasn't necessarily a

286
00:15:14,160 --> 00:15:16,320
Speaker 1: good investment at that point, and I think that's where

287
00:15:16,360 --> 00:15:19,920
Speaker 1: we maybe need to start thinking about redistributing capital for

288
00:15:20,000 --> 00:15:23,320
Speaker 1: that actual upside. Potential rather than just kind of seeing

289
00:15:23,320 --> 00:15:32,400
Speaker 1: the companies to stay paved. Patrick, let's get into that

290
00:15:32,600 --> 00:15:36,480
Speaker 1: notion about microcaps, because I know you've done. I've been

291
00:15:36,520 --> 00:15:39,680
Speaker 1: looking into them a bit lately. Talk to us about,

292
00:15:39,840 --> 00:15:43,160
Speaker 1: you know what you've researched, what you found, how we

293
00:15:43,160 --> 00:15:46,360
Speaker 1: should think about microcaps. Part of this started out with

294
00:15:47,480 --> 00:15:52,280
Speaker 1: trying to identify companies for that actual upside potential, right

295
00:15:52,280 --> 00:15:55,000
Speaker 1: if you think about it, from pure economic growth, almost

296
00:15:55,000 --> 00:15:57,600
Speaker 1: an academic study of getting back in to say like, hey,

297
00:15:57,720 --> 00:16:00,200
Speaker 1: where where are these companies with new ideas that have

298
00:16:00,200 --> 00:16:02,680
Speaker 1: been overlooked or can come in and disrupt markets and

299
00:16:02,880 --> 00:16:05,520
Speaker 1: actually disrupt So we're not going to pay for the

300
00:16:05,520 --> 00:16:09,040
Speaker 1: the Ugers and again the Microsoft, So for the apples

301
00:16:09,040 --> 00:16:11,520
Speaker 1: who have already come and disrupted and are now the

302
00:16:11,960 --> 00:16:14,920
Speaker 1: established players. Where can you find some of those new places?

303
00:16:15,600 --> 00:16:18,040
Speaker 1: And it started with tech, It started with tech and biotech.

304
00:16:18,080 --> 00:16:20,480
Speaker 1: It was kind of looking into, you know, what are

305
00:16:20,480 --> 00:16:23,480
Speaker 1: the structures of those names and is there an opportunity

306
00:16:23,560 --> 00:16:27,160
Speaker 1: outside of the VC or private equity space and really

307
00:16:27,200 --> 00:16:30,240
Speaker 1: realizing that the microcaps have been very overlooked. Now there's

308
00:16:30,240 --> 00:16:31,920
Speaker 1: a lot of choppiness down there, there's a lot of

309
00:16:31,960 --> 00:16:34,320
Speaker 1: noise down there. You have to be very very careful.

310
00:16:34,360 --> 00:16:37,200
Speaker 1: You have to be very systematic or structured. I of

311
00:16:37,200 --> 00:16:39,640
Speaker 1: course think wants to invest in every it wants or

312
00:16:39,680 --> 00:16:41,480
Speaker 1: the answer to every question. But but you really do

313
00:16:41,520 --> 00:16:44,360
Speaker 1: have to be diversified and clean and structured in the

314
00:16:44,400 --> 00:16:47,320
Speaker 1: way that you do it in a microcraft space. But

315
00:16:47,400 --> 00:16:49,960
Speaker 1: you also have the opportunity for other segments of the

316
00:16:50,000 --> 00:16:55,440
Speaker 1: economy that aren't really necessarily in vogue, so things like banks, right,

317
00:16:55,480 --> 00:16:58,840
Speaker 1: you could actually diversify in financials. You can look at

318
00:16:59,800 --> 00:17:03,240
Speaker 1: industrials that are actually down sort of the real end

319
00:17:03,240 --> 00:17:06,200
Speaker 1: of the economic spectrum, if you will, and get into

320
00:17:06,240 --> 00:17:09,159
Speaker 1: that space in a more diversified way through microcap And

321
00:17:09,200 --> 00:17:12,359
Speaker 1: it's also something that is not really played in from

322
00:17:12,560 --> 00:17:17,480
Speaker 1: a traditional institutional investor space. It's something that people have

323
00:17:17,600 --> 00:17:20,880
Speaker 1: historically avoided. Whether that's governance you need to give another

324
00:17:20,920 --> 00:17:22,760
Speaker 1: manager who gets into space or look at it. Or

325
00:17:22,800 --> 00:17:24,600
Speaker 1: you could get your growth from other or at least

326
00:17:24,600 --> 00:17:26,520
Speaker 1: you assume do you get your growth from other segments

327
00:17:26,520 --> 00:17:28,840
Speaker 1: of the market, which means it's not crowded. So it's

328
00:17:28,880 --> 00:17:30,479
Speaker 1: an area where you can go in and get a

329
00:17:30,520 --> 00:17:33,679
Speaker 1: lot of upside even above just the pure beta in

330
00:17:33,720 --> 00:17:36,439
Speaker 1: the microcap space, so so very exciting, I think from

331
00:17:36,480 --> 00:17:38,879
Speaker 1: an opportunity to set, at least in the long term.

332
00:17:39,040 --> 00:17:43,760
Speaker 1: I feel like individuals stock selection would be tough in

333
00:17:43,800 --> 00:17:47,120
Speaker 1: that space though, I mean, is there a systematic way

334
00:17:47,160 --> 00:17:48,560
Speaker 1: to do it? Is you know, would you buy an

335
00:17:48,560 --> 00:17:52,200
Speaker 1: ETF just buy everything? You know, I'm thinking of PGM

336
00:17:52,240 --> 00:17:56,400
Speaker 1: with what a trillion and a half dollars to work with,

337
00:17:56,600 --> 00:17:59,560
Speaker 1: you know, and quants in general tend to have billions

338
00:17:59,600 --> 00:18:01,439
Speaker 1: and billion dollars to put to work. Like, how do

339
00:18:01,480 --> 00:18:08,320
Speaker 1: you how do you approach microcaps systematically? I think you

340
00:18:08,400 --> 00:18:09,800
Speaker 1: hit one of the nails on the head right there

341
00:18:09,800 --> 00:18:13,080
Speaker 1: with knowing your limitations. This isn't a space where you're

342
00:18:13,080 --> 00:18:14,879
Speaker 1: going to have billions and billions of dollars to be

343
00:18:14,920 --> 00:18:16,919
Speaker 1: able to play in. If you do so, you're just

344
00:18:16,960 --> 00:18:19,959
Speaker 1: going to completely overwhelm the space. So to be very

345
00:18:20,040 --> 00:18:23,200
Speaker 1: very tailored in what you're doing. So in the US

346
00:18:23,280 --> 00:18:26,159
Speaker 1: microcap space, you know, we probably want to put in

347
00:18:26,760 --> 00:18:30,600
Speaker 1: a billion or show at a maximum level at this point,

348
00:18:30,760 --> 00:18:32,959
Speaker 1: So you're limiting the upside that you can from an

349
00:18:33,000 --> 00:18:35,880
Speaker 1: AUM growth. But you're doing that so you can preserve

350
00:18:35,960 --> 00:18:38,080
Speaker 1: the actual ability to do stock selection. The ability to

351
00:18:38,119 --> 00:18:41,440
Speaker 1: actually add value in the space you have to come

352
00:18:41,480 --> 00:18:44,920
Speaker 1: out of to a certain extent from a philosophical perspective

353
00:18:45,160 --> 00:18:48,400
Speaker 1: of hey, we still want to harvest the same underlying

354
00:18:48,440 --> 00:18:51,760
Speaker 1: economic principles that we do as quants in the larger

355
00:18:51,760 --> 00:18:54,200
Speaker 1: cap space. But you can't just take the same old

356
00:18:54,240 --> 00:18:56,760
Speaker 1: model and slap it down there and call it a solution.

357
00:18:57,160 --> 00:18:59,080
Speaker 1: You have to look and see what actual works. So

358
00:18:59,119 --> 00:19:01,360
Speaker 1: you have to understand that there's going to be more

359
00:19:01,400 --> 00:19:04,080
Speaker 1: sentiment driven trades that go on there, a little bit

360
00:19:04,080 --> 00:19:06,440
Speaker 1: more volatility, or in some cases a lot more volatility.

361
00:19:06,720 --> 00:19:08,520
Speaker 1: You have to be really clean, you have to be

362
00:19:08,720 --> 00:19:11,760
Speaker 1: very efficient, and you have to be really really experienced

363
00:19:11,760 --> 00:19:13,639
Speaker 1: to trade in that space, particularly if you're doing it

364
00:19:13,680 --> 00:19:17,240
Speaker 1: across multiple names. But the benefits of that or diversification

365
00:19:18,160 --> 00:19:20,560
Speaker 1: a lot of upside potential, as I said, both in

366
00:19:20,600 --> 00:19:23,000
Speaker 1: the space so you think the data, but also in

367
00:19:23,000 --> 00:19:25,000
Speaker 1: the name selection that you're doing. But you have to

368
00:19:25,040 --> 00:19:27,560
Speaker 1: be really really disciplined from a risk perspective as well.

369
00:19:27,720 --> 00:19:31,000
Speaker 1: So this is where you have to have multiple, multiple holdings,

370
00:19:31,040 --> 00:19:32,760
Speaker 1: so you're just not putting all of your eggs in

371
00:19:32,840 --> 00:19:36,520
Speaker 1: one basket. So you go so far as to go

372
00:19:36,600 --> 00:19:40,000
Speaker 1: to the OTC pink sheet type of markets, or they

373
00:19:40,080 --> 00:19:43,080
Speaker 1: too risky to get involved with. It's a little risky.

374
00:19:43,119 --> 00:19:44,600
Speaker 1: I think in that point, if you're going to start

375
00:19:44,600 --> 00:19:47,560
Speaker 1: doing OTC, you would need some sort of information advantage

376
00:19:47,600 --> 00:19:49,680
Speaker 1: to really want to play in that space. I don't

377
00:19:49,680 --> 00:19:51,639
Speaker 1: think you need to. That's the fun part, though. You

378
00:19:51,640 --> 00:19:54,639
Speaker 1: don't actually have to get in that space to add value.

379
00:19:55,160 --> 00:19:57,840
Speaker 1: You can do it with the liquid names, and that's

380
00:19:57,880 --> 00:20:02,639
Speaker 1: really where I think being systematic mic bias notwithstanding, but

381
00:20:02,840 --> 00:20:04,959
Speaker 1: being systematic in the way that you're trading, right, So

382
00:20:05,000 --> 00:20:07,000
Speaker 1: you have to be able to go out and make

383
00:20:07,040 --> 00:20:10,200
Speaker 1: sure as you're picking the names you can actually harvest.

384
00:20:10,600 --> 00:20:12,800
Speaker 1: We use the ADP measures for example, right we're looking

385
00:20:12,800 --> 00:20:15,960
Speaker 1: at the average daily volume of certain names and making

386
00:20:15,960 --> 00:20:18,960
Speaker 1: sure we don't get anywhere near max adv across any

387
00:20:19,000 --> 00:20:21,000
Speaker 1: of these names, so that you actually have the space

388
00:20:21,080 --> 00:20:24,360
Speaker 1: to come in and harvest the upside of that name

389
00:20:24,560 --> 00:20:26,879
Speaker 1: without driving that name up on your own. If you

390
00:20:26,920 --> 00:20:28,639
Speaker 1: come in, you drive the price up as you're buying it,

391
00:20:28,680 --> 00:20:30,439
Speaker 1: there's no room for it to grow, so it's just

392
00:20:30,560 --> 00:20:32,760
Speaker 1: bad business to do that. The other is you have

393
00:20:32,800 --> 00:20:35,399
Speaker 1: to make sure you really have good relationships with your counterparts.

394
00:20:35,720 --> 00:20:38,719
Speaker 1: It's not as liquid, although the adv and liquidity as

395
00:20:38,760 --> 00:20:41,840
Speaker 1: a rule has been going up significantly microcaps, So this

396
00:20:41,920 --> 00:20:45,200
Speaker 1: isn't twenty years ago, ten years ago. Even this is

397
00:20:45,320 --> 00:20:47,600
Speaker 1: very very liquid markets. But you have to make sure

398
00:20:47,600 --> 00:20:50,520
Speaker 1: you have good relationships with your counterparts. You might want

399
00:20:50,520 --> 00:20:53,199
Speaker 1: to cancel trade halfway through if someone else is jumping

400
00:20:53,240 --> 00:20:55,480
Speaker 1: up on that name. Be a little bit more comfortable

401
00:20:55,480 --> 00:20:58,080
Speaker 1: having a little bit more cash, not canceling your not

402
00:20:58,440 --> 00:21:00,720
Speaker 1: fulling out filling a full order for example, if it

403
00:21:00,760 --> 00:21:04,320
Speaker 1: starts to move away from you, and then rebalance it

404
00:21:04,400 --> 00:21:07,240
Speaker 1: across other names in the portfolio. So there's a lot

405
00:21:07,280 --> 00:21:09,800
Speaker 1: of science that goes into it, but you still have

406
00:21:09,840 --> 00:21:12,719
Speaker 1: to have that art as an experience PM to make

407
00:21:12,760 --> 00:21:16,199
Speaker 1: sure that you can leverage the information flow that you're getting. Okay, Patrick,

408
00:21:16,240 --> 00:21:19,280
Speaker 1: I have a two part question, which is typically something

409
00:21:19,320 --> 00:21:23,000
Speaker 1: that Mike would give guests, like a multipart question. So

410
00:21:23,680 --> 00:21:28,080
Speaker 1: I'm stealing from him. Two parts Is amateur our amateur? Yeah,

411
00:21:28,119 --> 00:21:31,760
Speaker 1: but I'm trying not to scare the guests away anyway.

412
00:21:32,200 --> 00:21:36,000
Speaker 1: You So, Mike and I might not have our favorite microcaps,

413
00:21:36,000 --> 00:21:37,840
Speaker 1: but maybe you can lay out some names that you

414
00:21:37,840 --> 00:21:40,119
Speaker 1: guys are looking at and then The second part is

415
00:21:40,320 --> 00:21:42,520
Speaker 1: you said you have to be very experienced to be

416
00:21:42,560 --> 00:21:45,760
Speaker 1: trading these names, So I'm wondering who your advice is for, Like,

417
00:21:45,960 --> 00:21:48,919
Speaker 1: is it for the professional or is it something that

418
00:21:49,480 --> 00:21:53,359
Speaker 1: you know a retail investor and at home investor should

419
00:21:53,440 --> 00:21:57,080
Speaker 1: also be looking at. I'll take the second part of

420
00:21:57,119 --> 00:22:01,520
Speaker 1: that first. I think it's probably not a space where

421
00:22:01,520 --> 00:22:03,000
Speaker 1: you want to be doing a lot of day trading

422
00:22:03,280 --> 00:22:06,560
Speaker 1: per se, simply because you names can move against you

423
00:22:06,640 --> 00:22:09,880
Speaker 1: really really quickly. There's a lot of information flow that's

424
00:22:09,920 --> 00:22:12,240
Speaker 1: going on there. And also I think you want to

425
00:22:12,240 --> 00:22:14,080
Speaker 1: be diversified, so I don't think you want to be

426
00:22:14,160 --> 00:22:18,280
Speaker 1: necessarily researching five, ten, even fifteen names in the space

427
00:22:18,320 --> 00:22:21,080
Speaker 1: and putting all your capital across those names. You really

428
00:22:21,119 --> 00:22:24,880
Speaker 1: want to be diversifying away from any single name. There's

429
00:22:24,880 --> 00:22:28,720
Speaker 1: a lot more what I would call sentiment or the

430
00:22:28,880 --> 00:22:33,000
Speaker 1: underlying upside potential for individual names, less of the more

431
00:22:33,000 --> 00:22:36,280
Speaker 1: traditionalist valuation and quality signals where those do exist in

432
00:22:36,320 --> 00:22:38,560
Speaker 1: the space, and you want to make sure that you

433
00:22:38,560 --> 00:22:41,960
Speaker 1: can harvest that systematically because you're going to diversify those

434
00:22:41,960 --> 00:22:45,240
Speaker 1: single name risks away by having say one hundred and

435
00:22:45,240 --> 00:22:48,960
Speaker 1: fifty two hundred names in your portfolio. That's harder to

436
00:22:49,000 --> 00:22:51,880
Speaker 1: do as a retail investor individual investor, you can still

437
00:22:51,880 --> 00:22:53,840
Speaker 1: do it, but it's a lot harder to do. The

438
00:22:53,880 --> 00:22:56,000
Speaker 1: other is t costs. It's a lot more expensive to

439
00:22:56,080 --> 00:22:59,639
Speaker 1: trade if you don't already have those big existing pre

440
00:22:59,760 --> 00:23:03,000
Speaker 1: exist trading relationships where you can keep those costs down.

441
00:23:03,320 --> 00:23:06,160
Speaker 1: So it's a lot harder for I think your average

442
00:23:06,320 --> 00:23:08,359
Speaker 1: person to do it in this space. I don't know

443
00:23:08,359 --> 00:23:10,000
Speaker 1: if I have this done for it as an individual

444
00:23:10,000 --> 00:23:12,280
Speaker 1: investors will be quite honest with you, but it's a

445
00:23:12,280 --> 00:23:15,040
Speaker 1: lot easier to do to leverage it across a partner,

446
00:23:15,080 --> 00:23:17,440
Speaker 1: like as a pigeon quand so I think it makes

447
00:23:17,440 --> 00:23:20,040
Speaker 1: a little bit more sense to leverage some sort of

448
00:23:20,320 --> 00:23:23,919
Speaker 1: institutional help as you're doing that. So a little bit

449
00:23:23,920 --> 00:23:27,199
Speaker 1: more limited as far as individual names. One area that

450
00:23:27,200 --> 00:23:29,880
Speaker 1: I'm interested in, and it'll be interesting to see what

451
00:23:30,040 --> 00:23:35,199
Speaker 1: happens given some of these regional banks that we're providing

452
00:23:35,240 --> 00:23:40,560
Speaker 1: liquidity in the space is biotech. Biotech. As you know,

453
00:23:40,600 --> 00:23:42,880
Speaker 1: a lot of these companies are just not profitable. They're

454
00:23:42,920 --> 00:23:46,520
Speaker 1: just generating costs as they're out chasing usually one or

455
00:23:46,520 --> 00:23:49,200
Speaker 1: two ideas, usually one idea as they're doing and it's

456
00:23:49,200 --> 00:23:51,240
Speaker 1: really really exciting because it ends up being a lot

457
00:23:51,240 --> 00:23:54,120
Speaker 1: of individual R and D types of companies that could

458
00:23:54,160 --> 00:23:57,520
Speaker 1: come up with the next greatest breakthrough on an individual

459
00:23:57,600 --> 00:23:59,879
Speaker 1: drug or of something along those lines. And I think

460
00:23:59,880 --> 00:24:03,199
Speaker 1: it's really really cool and really exciting and just from

461
00:24:02,600 --> 00:24:05,600
Speaker 1: a personal perspective, kind of a nice thing to employ

462
00:24:05,680 --> 00:24:09,800
Speaker 1: some capital too. But with interest rates going up, which

463
00:24:09,840 --> 00:24:11,600
Speaker 1: is a big part of it, and some of these

464
00:24:12,400 --> 00:24:14,800
Speaker 1: you know, you can think of Silicon Volley Bank for

465
00:24:14,800 --> 00:24:17,199
Speaker 1: a good example, or some of the more VC like

466
00:24:17,680 --> 00:24:19,880
Speaker 1: banks that we're providing the capital for these companies, it's

467
00:24:19,920 --> 00:24:22,320
Speaker 1: been a lot harder for them to make payroll, to

468
00:24:22,359 --> 00:24:25,280
Speaker 1: make costs to do this. Going forward, I think there's

469
00:24:25,280 --> 00:24:29,040
Speaker 1: a big opportunity for some of the biggest names in

470
00:24:28,800 --> 00:24:30,679
Speaker 1: the in the pharma space to go in there and

471
00:24:30,760 --> 00:24:33,359
Speaker 1: kind of bottom fish and pick up some really nice

472
00:24:33,720 --> 00:24:36,399
Speaker 1: external R and D as it were in the space.

473
00:24:36,400 --> 00:24:38,840
Speaker 1: So I think there's some opportunity for some takeouts there

474
00:24:39,520 --> 00:24:45,359
Speaker 1: across biotech in particular in the space. Potentially in a

475
00:24:45,400 --> 00:24:48,439
Speaker 1: little bit less likely but but maybe more interesting, is

476
00:24:48,800 --> 00:24:51,399
Speaker 1: with Signature Bank being bought out and some of the

477
00:24:52,880 --> 00:24:55,679
Speaker 1: potential for M and A across financials a little bit

478
00:24:55,720 --> 00:24:57,200
Speaker 1: more of a risky bet, but it could be interesting

479
00:24:57,320 --> 00:25:00,159
Speaker 1: some of these smaller regional banks get swept up by

480
00:25:00,160 --> 00:25:02,320
Speaker 1: some of the bigger bets. Now, since we've seemed to

481
00:25:02,320 --> 00:25:04,840
Speaker 1: have forgotten too big to fail and ander mar now

482
00:25:04,880 --> 00:25:06,760
Speaker 1: almost more encouraging it, it'll be interesting to see if

483
00:25:06,760 --> 00:25:08,480
Speaker 1: there's any M and A. They're not necessarily sure i'd

484
00:25:08,480 --> 00:25:10,640
Speaker 1: put on my eye in a particular basket, but there's

485
00:25:10,680 --> 00:25:14,240
Speaker 1: some opportunity in that space. Now. If there's a little

486
00:25:14,280 --> 00:25:17,040
Speaker 1: bit more of a recession environment, we could see microcap

487
00:25:17,200 --> 00:25:19,199
Speaker 1: slow down, So it's a little bit more of a

488
00:25:19,240 --> 00:25:21,280
Speaker 1: longer bet, or at least a risk on bet in

489
00:25:21,320 --> 00:25:24,520
Speaker 1: the space. But we've already seen valuations come down from

490
00:25:24,520 --> 00:25:27,680
Speaker 1: the end of last year until including up three year

491
00:25:27,720 --> 00:25:32,240
Speaker 1: to date. The valuations across sort of the public smaller

492
00:25:32,280 --> 00:25:35,760
Speaker 1: startup come down. So I think if it's the potential

493
00:25:35,800 --> 00:25:37,560
Speaker 1: for an entry point, or if we're not there yet,

494
00:25:37,600 --> 00:25:39,840
Speaker 1: we're getting there soon in much the same way we're

495
00:25:39,840 --> 00:25:42,720
Speaker 1: seeing across you know, even the privates in the p space.

496
00:25:43,560 --> 00:25:45,640
Speaker 1: You know, I wonder you know you mentioned the higher

497
00:25:45,640 --> 00:25:49,240
Speaker 1: interest rates, and I wonder you know, from sort of

498
00:25:49,240 --> 00:25:53,320
Speaker 1: a macro level, what effects a microcap trade. You know,

499
00:25:53,840 --> 00:25:56,080
Speaker 1: my guess is there's a lot of data involved. You know,

500
00:25:56,119 --> 00:25:59,919
Speaker 1: if the smps going up x percent, the microcap index

501
00:26:00,040 --> 00:26:02,880
Speaker 1: will go up at a percentage greater than x. If

502
00:26:02,880 --> 00:26:05,840
Speaker 1: it goes down, why percent, it's going down at a

503
00:26:05,920 --> 00:26:08,080
Speaker 1: rate greater than why. I mean, do you need a

504
00:26:08,160 --> 00:26:13,080
Speaker 1: boat market to really fully embrace microcaps or is there

505
00:26:13,080 --> 00:26:17,800
Speaker 1: a potential for some non someone correlated returns. You know,

506
00:26:19,440 --> 00:26:21,320
Speaker 1: large caps are weak, but you can still get some

507
00:26:21,320 --> 00:26:24,560
Speaker 1: some good returns and microcaps the beta of the acid

508
00:26:24,560 --> 00:26:26,679
Speaker 1: class is very, very similar, so one hundred percent right.

509
00:26:26,760 --> 00:26:28,800
Speaker 1: You know, when there's sort of that risk on environment

510
00:26:28,920 --> 00:26:31,159
Speaker 1: for equities, you tend to get a little bit more

511
00:26:31,200 --> 00:26:33,280
Speaker 1: juice in microcap and then when it's a risk off,

512
00:26:33,280 --> 00:26:34,880
Speaker 1: you get a little bit less than what you're seeing

513
00:26:34,920 --> 00:26:37,280
Speaker 1: the market. But the alpha or the upside potential, the

514
00:26:37,320 --> 00:26:41,840
Speaker 1: security selection opportunities that is much higher in the in

515
00:26:41,880 --> 00:26:43,600
Speaker 1: the microcap space, and you get a little bit more

516
00:26:43,640 --> 00:26:47,399
Speaker 1: of that alpha buffer, which gives you that opportunity to do.

517
00:26:47,480 --> 00:26:49,960
Speaker 1: So what actually it might be more interesting is sort

518
00:26:50,000 --> 00:26:54,520
Speaker 1: of a a typical portable alpha. To use a marketing

519
00:26:54,600 --> 00:26:56,320
Speaker 1: term from from a long time ago. I don't know

520
00:26:56,359 --> 00:26:58,280
Speaker 1: where I dreads that one up, but you can kind

521
00:26:58,280 --> 00:27:01,679
Speaker 1: of hedge out the beta or short the market in

522
00:27:01,720 --> 00:27:04,480
Speaker 1: the space and just use the upside potential. Stock selection

523
00:27:04,520 --> 00:27:07,439
Speaker 1: is a pure offer, and that's an interesting overlay perspective

524
00:27:07,880 --> 00:27:10,720
Speaker 1: even in a downward market, even for a reasonable de

525
00:27:10,800 --> 00:27:13,679
Speaker 1: sizable institution that doesn't onmally plan the space. You get

526
00:27:13,720 --> 00:27:16,040
Speaker 1: a little bit of that flexibility, and that shows the

527
00:27:16,119 --> 00:27:18,480
Speaker 1: creativity that you can do in the space doesn't have

528
00:27:18,520 --> 00:27:21,760
Speaker 1: to just be that that pure long only. Well, that's

529
00:27:21,760 --> 00:27:24,960
Speaker 1: something that you can conceivably lever in the space with

530
00:27:25,080 --> 00:27:42,439
Speaker 1: the right risk of And what's the time horizon you

531
00:27:42,480 --> 00:27:45,840
Speaker 1: guys are dealing with, because Mike mentioned there's a couple

532
00:27:46,040 --> 00:27:48,200
Speaker 1: that are up like two or three hundred percent so

533
00:27:48,200 --> 00:27:50,720
Speaker 1: far this year. Is that something you're looking at and

534
00:27:52,359 --> 00:27:55,479
Speaker 1: expecting actually we can expect even more from some of

535
00:27:55,480 --> 00:27:58,720
Speaker 1: these names. Or what does the time horizon typically look like?

536
00:27:59,480 --> 00:28:02,400
Speaker 1: A lot or it's a lot shorter in microcap than

537
00:28:02,440 --> 00:28:04,760
Speaker 1: it is even in small cap and it's signifulantly less

538
00:28:04,760 --> 00:28:06,679
Speaker 1: so thanks you get up the cap space in a

539
00:28:06,800 --> 00:28:08,960
Speaker 1: larger cap, so you have to be willing to take

540
00:28:09,280 --> 00:28:11,960
Speaker 1: profits a lot sooner in the space, So you have

541
00:28:12,040 --> 00:28:14,399
Speaker 1: to be much more of an active trader in the

542
00:28:14,480 --> 00:28:16,640
Speaker 1: space for exactly as you said, if you're up two

543
00:28:16,720 --> 00:28:19,000
Speaker 1: or three hundred percent today, you know it could be

544
00:28:19,040 --> 00:28:21,080
Speaker 1: on a news flow. Let's say it's one of those

545
00:28:21,080 --> 00:28:24,639
Speaker 1: biotechniques you're mentioning, they're up for a stage two trial,

546
00:28:24,720 --> 00:28:28,240
Speaker 1: for example, on a particular drug. That's a nice profit

547
00:28:28,280 --> 00:28:29,679
Speaker 1: and you should be willing to take it at that

548
00:28:29,720 --> 00:28:32,040
Speaker 1: point and then you can reevaluate it and decide if

549
00:28:32,040 --> 00:28:33,960
Speaker 1: you want to replay capital. But you have to be

550
00:28:34,000 --> 00:28:35,760
Speaker 1: a lot more active in the space than you would

551
00:28:35,800 --> 00:28:38,520
Speaker 1: be in here, particularly in your a larger cap Well.

552
00:28:38,560 --> 00:28:42,080
Speaker 1: Patrick McDonald, Managing Director a p GEM Quantitative Solutions, thank

553
00:28:42,120 --> 00:28:45,360
Speaker 1: you so much for joining us, and I'd like to

554
00:28:45,360 --> 00:28:48,120
Speaker 1: segue us into our favorite part of the show, which

555
00:28:48,160 --> 00:28:50,680
Speaker 1: is the craziest thing we all saw in markets this week,

556
00:28:50,720 --> 00:28:53,800
Speaker 1: and I'd like to kick us off. So, okay, I

557
00:28:53,840 --> 00:28:56,360
Speaker 1: know last week I had a weirdest thing that had

558
00:28:56,400 --> 00:28:59,280
Speaker 1: absolutely nothing to do with markets, So this time around,

559
00:28:59,320 --> 00:29:04,120
Speaker 1: I'm sticking something tangentially related to markets. There's a Champagne

560
00:29:04,160 --> 00:29:08,080
Speaker 1: fifty index, the live x Champagne fifty index, and I

561
00:29:08,120 --> 00:29:11,480
Speaker 1: saw this as part of a Bloomberk story about how

562
00:29:11,560 --> 00:29:16,720
Speaker 1: champagne prices for certain champagnees are. They've just skyrocketed, and

563
00:29:17,160 --> 00:29:21,080
Speaker 1: this index is doing or has beaten the foot Sea

564
00:29:21,160 --> 00:29:24,120
Speaker 1: goal the SMP five hundred over the last couple of years.

565
00:29:25,040 --> 00:29:26,840
Speaker 1: That's a pretty good one, Patrick, How about you? You

566
00:29:26,840 --> 00:29:31,160
Speaker 1: see anything crazy this week that's hard to top. I

567
00:29:31,280 --> 00:29:34,240
Speaker 1: guess what I'm confused about. Where I think is crazy

568
00:29:34,360 --> 00:29:37,400
Speaker 1: is is why is bitcoin aging like a fine line?

569
00:29:37,640 --> 00:29:43,240
Speaker 1: I'm not really sure why. I'm sorry, that's good. I

570
00:29:43,240 --> 00:29:45,520
Speaker 1: don't understand why bigcoin bitcoin ons from what was the

571
00:29:45,600 --> 00:29:51,360
Speaker 1: twenty thousand to twenty seven thousand. I'm not I'm a quant.

572
00:29:51,400 --> 00:29:53,560
Speaker 1: I love tech. I think anything that has to do

573
00:29:53,560 --> 00:29:56,360
Speaker 1: with computers is inherently cool. But I just don't understand

574
00:29:56,400 --> 00:30:00,000
Speaker 1: why we're kind of refighting a battle that I thought

575
00:30:00,080 --> 00:30:03,040
Speaker 1: we'd already won at this point with bitcoin, so seeing

576
00:30:03,080 --> 00:30:05,840
Speaker 1: sort of and Bitcoin alone, it wasn't the other cryptos.

577
00:30:05,880 --> 00:30:08,080
Speaker 1: It was particularly Bitcoin, which I know, I guess is

578
00:30:08,120 --> 00:30:10,840
Speaker 1: the biggest and the most established, But I thought we

579
00:30:10,960 --> 00:30:13,920
Speaker 1: already proven that it wasn't inflation. I'm just not really

580
00:30:13,960 --> 00:30:16,560
Speaker 1: sure what the base case. So I'll have to drink

581
00:30:16,560 --> 00:30:19,200
Speaker 1: some of that champagne and it will come. It's a

582
00:30:19,240 --> 00:30:23,160
Speaker 1: moving target. The base case, you know, the irrational for

583
00:30:23,240 --> 00:30:27,920
Speaker 1: buying bitcoin is I think, read the headlines, put your

584
00:30:27,920 --> 00:30:30,040
Speaker 1: finger in the air and see which way the winds blowing,

585
00:30:30,320 --> 00:30:33,640
Speaker 1: and pick a narrative and go with it. But but

586
00:30:33,840 --> 00:30:37,240
Speaker 1: it is a really interesting topic because it Bitcoin is

587
00:30:37,280 --> 00:30:42,000
Speaker 1: having a fantastic quarter, it's up something like sixty five

588
00:30:42,160 --> 00:30:45,760
Speaker 1: seventy percent. But at the same time, we're not seeing

589
00:30:45,960 --> 00:30:49,640
Speaker 1: the typical stuff, the typical like animal spirits that come

590
00:30:50,160 --> 00:30:54,120
Speaker 1: with huge price surges for cryptocurrencies. Like you don't have

591
00:30:54,160 --> 00:30:58,680
Speaker 1: people coming out and giving like huge price predictions as

592
00:30:58,680 --> 00:31:01,360
Speaker 1: you might have seen in like twenty twenty or twenty

593
00:31:01,400 --> 00:31:04,960
Speaker 1: twenty one, or you know, people going crazy on Twitter

594
00:31:06,040 --> 00:31:10,720
Speaker 1: with yeah, you know, shilling some weird crypto coin you've

595
00:31:10,760 --> 00:31:12,960
Speaker 1: never heard of, and you know, and to be fair,

596
00:31:13,000 --> 00:31:16,120
Speaker 1: if you go back to the origin story of bitcoin

597
00:31:16,200 --> 00:31:19,760
Speaker 1: after the financial crisis two thousand and eight, two thousand

598
00:31:19,760 --> 00:31:22,560
Speaker 1: and nine, the whole thinking was you can't trust your

599
00:31:22,560 --> 00:31:25,760
Speaker 1: money in a bank, you can trust it on the blockchain.

600
00:31:25,840 --> 00:31:29,160
Speaker 1: So I don't know if that's really it. Other people

601
00:31:29,200 --> 00:31:31,360
Speaker 1: have said all the liquidity being added to the market

602
00:31:31,400 --> 00:31:34,280
Speaker 1: by the Fed you know a little from Columba, A

603
00:31:34,400 --> 00:31:37,800
Speaker 1: little from Columba, all the above, But it's fascinating to watch.

604
00:31:37,840 --> 00:31:41,480
Speaker 1: I agree. I agree, you would felt like it was

605
00:31:41,560 --> 00:31:45,400
Speaker 1: left for dead there. But always those laser eye traders

606
00:31:45,440 --> 00:31:49,320
Speaker 1: always give us something to talk about. I like it anyway,

607
00:31:49,360 --> 00:31:54,240
Speaker 1: I'll give you mine mine. Some a Bloomberg story sounds

608
00:31:54,280 --> 00:31:57,960
Speaker 1: like the beginning of a joke, But an investment advisor,

609
00:31:57,960 --> 00:32:02,960
Speaker 1: a financial planner, and NBA agent and a former stockbroker

610
00:32:04,080 --> 00:32:10,680
Speaker 1: all walk into SEC complaint basically, so stories about how

611
00:32:11,480 --> 00:32:16,840
Speaker 1: there was these schemes to um cheat a handful of

612
00:32:16,960 --> 00:32:21,960
Speaker 1: NBA players out of something like thirteen million, and that

613
00:32:22,720 --> 00:32:26,000
Speaker 1: in the face of it is not that crazy. Unfortunately,

614
00:32:26,040 --> 00:32:28,480
Speaker 1: the you know, these guys are kind of sitting ducks

615
00:32:28,520 --> 00:32:32,880
Speaker 1: for scam artists out there, NBA players in fact. That

616
00:32:32,880 --> 00:32:34,600
Speaker 1: that's that's what gets me to what I thought was

617
00:32:34,640 --> 00:32:37,920
Speaker 1: the most interesting thing in this story. And I'll just

618
00:32:38,040 --> 00:32:42,160
Speaker 1: read out this one paragraph to you. The case comes

619
00:32:42,160 --> 00:32:46,760
Speaker 1: amid a rising trend of frauds on the pros, marked

620
00:32:46,760 --> 00:32:52,280
Speaker 1: by their fame, financial inexperience, and high net worth. According

621
00:32:52,320 --> 00:32:55,320
Speaker 1: to a twenty twenty one report by Ernst and Young,

622
00:32:55,520 --> 00:32:59,280
Speaker 1: professional athletes have reported, and I'm not going to give

623
00:32:59,280 --> 00:33:02,480
Speaker 1: you the number. And here's where we play the prices precise.

624
00:33:03,640 --> 00:33:07,880
Speaker 1: Between two thousand and four and two thousand and nineteen,

625
00:33:08,960 --> 00:33:12,400
Speaker 1: Ernst and Young went and tallied up all of the

626
00:33:12,480 --> 00:33:18,040
Speaker 1: money that was scammed off of pro athletes based on

627
00:33:18,640 --> 00:33:23,520
Speaker 1: publicly available criminal, civil and bankruptcy pleading. So two thousand

628
00:33:23,520 --> 00:33:27,480
Speaker 1: and four, twenty nineteen, Da Ernston Young accountants did the

629
00:33:27,520 --> 00:33:31,640
Speaker 1: math how much money were pro athletes scammed out of?

630
00:33:32,240 --> 00:33:37,200
Speaker 1: I'm gonna go with five point four billion. Five point

631
00:33:37,200 --> 00:33:41,320
Speaker 1: four billion, Yeah, all right, Patrick, prices right, roles are

632
00:33:41,320 --> 00:33:43,360
Speaker 1: in effect. Remember, so you can go a dollar over

633
00:33:43,440 --> 00:33:46,440
Speaker 1: a dollar under. You have a good poker face right now,

634
00:33:46,960 --> 00:33:49,640
Speaker 1: How did I do with five point four billion? I

635
00:33:49,720 --> 00:33:53,400
Speaker 1: was gonna go one point two? Oh no, I've got

636
00:33:53,440 --> 00:33:55,280
Speaker 1: that just popped in my head. On much or why

637
00:33:55,400 --> 00:33:57,920
Speaker 1: so's it's enough of an under? So I'm hoping that

638
00:33:58,120 --> 00:34:00,680
Speaker 1: I played the odds there one point to well, you're

639
00:34:00,760 --> 00:34:02,640
Speaker 1: under it was six hundred million. I thought that was

640
00:34:02,680 --> 00:34:07,760
Speaker 1: a lot. That's way too low, bigger than most microcap stocks.

641
00:34:07,760 --> 00:34:12,560
Speaker 1: It's not worth the effort. If I'm going to scam

642
00:34:12,680 --> 00:34:15,120
Speaker 1: a bunch of basketball stars, I want like a couple

643
00:34:15,120 --> 00:34:20,359
Speaker 1: of billion dollars. You know, all right, all right, you've

644
00:34:20,360 --> 00:34:25,279
Speaker 1: got big ambitions, I guess, but six hundred million, Yeah,

645
00:34:25,360 --> 00:34:27,120
Speaker 1: it's not enough. I thought that was a lot. You

646
00:34:27,160 --> 00:34:29,239
Speaker 1: don't think that's a lot. Five point four billion, Well,

647
00:34:29,760 --> 00:34:34,479
Speaker 1: Josh Allen has a five hundred million dollar contract, you know. Well,

648
00:34:34,640 --> 00:34:36,560
Speaker 1: but you know, the other thing is, I bet there's

649
00:34:36,560 --> 00:34:39,400
Speaker 1: a lot that they don't even realize they got scammed

650
00:34:39,400 --> 00:34:43,520
Speaker 1: out of. You know, we're put into lousy investments or otherwise.

651
00:34:43,640 --> 00:34:46,359
Speaker 1: You know. But wow, I thought six hundred millions a lot.

652
00:34:46,360 --> 00:34:49,080
Speaker 1: You guys are tough, tough audience. Five point four billion.

653
00:34:49,800 --> 00:34:55,680
Speaker 1: We're cynical New Jersey and I think that anyway. Patrick

654
00:34:55,760 --> 00:34:59,640
Speaker 1: McDonough of p JIM so great to catch up with

655
00:34:59,719 --> 00:35:01,480
Speaker 1: you in hear your thoughts. You got me thinking about

656
00:35:01,520 --> 00:35:04,600
Speaker 1: microcaps more than I ever have now, a very overlooked

657
00:35:05,000 --> 00:35:09,440
Speaker 1: but fascinating asset class. So gave us plenty to think

658
00:35:09,480 --> 00:35:11,680
Speaker 1: about here. Hopefully we can get you back again in

659
00:35:11,719 --> 00:35:13,680
Speaker 1: the future. Oh, Bill, Donna, Mike, thank you. This was

660
00:35:13,719 --> 00:35:15,600
Speaker 1: so much fun. I really appreciate you guys taking the

661
00:35:15,680 --> 00:35:17,360
Speaker 1: time to chat with me. I'm gonna go back to

662
00:35:17,400 --> 00:35:22,280
Speaker 1: the server room with the other quants now, Thank you Patrick,

663
00:35:31,719 --> 00:35:33,759
Speaker 1: What Goes Up. We'll be back next week and so

664
00:35:33,880 --> 00:35:36,200
Speaker 1: then you can find us on the Bloomberg Terminal website

665
00:35:36,200 --> 00:35:39,600
Speaker 1: and app or wherever you get your podcasts. We love

666
00:35:39,640 --> 00:35:41,400
Speaker 1: it if you took the time to rate and review

667
00:35:41,440 --> 00:35:44,520
Speaker 1: the show on Apple Podcasts so more listeners can find us.

668
00:35:45,080 --> 00:35:47,279
Speaker 1: And you can find us on Twitter, follow me at

669
00:35:47,360 --> 00:35:51,880
Speaker 1: reag Anonymous. Bildna Hirich is at Bildonna Hirich. You can

670
00:35:51,920 --> 00:35:56,560
Speaker 1: also follow Bloomberg Podcasts at podcasts. What Goes Up is

671
00:35:56,560 --> 00:35:59,799
Speaker 1: produced by Stacy Wong. Thanks for listening, See you next time.

672
00:36:06,160 --> 00:36:07,200
Speaker 1: That men