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Speaker 1: This is Bloomberg Surveillance. China has again and again reacted

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Speaker 1: to hawkish talk from the FETE by allowing more currency depreciation.

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Speaker 1: Cashes a legitimate asset class. It insulates you from the

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Speaker 1: clients m capital markets, both bonds and stock. China is

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Speaker 1: not just a commodity power hies driving commodity prices. It's

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Speaker 1: a manufacturing power hives and has been putting in manufacturers

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Speaker 1: all through its supply chains in a Southeast Age or

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Speaker 1: in East Asia. Bloomberg Surveillance your link to the world

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Speaker 1: of economics, finance, and investment on Bloomberg Radio. Good morning everyone,

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Speaker 1: Michael McKee and Tom keene Berry Rid Holts in this

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Speaker 1: week coming up, I'm really thrilled to bring you uh

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Speaker 1: someone who with Paul Wilmot change quantitative finance. Emmanuel Derman

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Speaker 1: will join us in this hour. There's gonna be a

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Speaker 1: geeky physics. Our two hands on the steering wheel for

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Speaker 1: those of you driving. If you're at your desk, children

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Speaker 1: must leave the office as we speak to Derman of Columbia.

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Speaker 1: We will do that here in a big David Wilson's

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Speaker 1: shaking his head, going Tom calm down the four X

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Speaker 1: break this morning, but you by Interactive Brokers, winner of

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Speaker 1: f X Weeks two thousand fifteen award for the best

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Speaker 1: Retail for X trading platform visit ib at I b

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Speaker 1: k R dot Com slash four x. The last number

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Speaker 1: of days, I was going, nothing's happening, nothing sleepy, it's quiet,

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Speaker 1: cherry yell and changed that yesterday week or dollar d

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Speaker 1: X Y that blended index ninet six down to a

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Speaker 1: ninety four hand nine point nine nine yen stronger one

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Speaker 1: nine uh, the euro one thirteen o nine all sorts

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Speaker 1: of movement. I mentioned dollar when men be the Chinese,

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Speaker 1: Uh you want uh strengthening? Uh here substantially off that

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Speaker 1: move six point four seven seven seven. On currency, we

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Speaker 1: can talk for an hour in currency. But always interesting

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Speaker 1: stuff in the equity markets. David Wilson's what do you

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Speaker 1: have morning, Tom? I mean we have energy prices U

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Speaker 1: up and lots of dollar dynamics right, and ergy stocks

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Speaker 1: going along with them. Exxon Mobiles up half a percent

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Speaker 1: in early trading, Chevron and Conical Phillips with one percent

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Speaker 1: gained so far, Valiant Pharmaceuticals up four percent. The drug

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Speaker 1: maker asked lenders for an extension to file last year's

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Speaker 1: results until May thirty one. Now Valiant went into technical

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Speaker 1: default on some loans last month after failing to file

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Speaker 1: by March fifteen, and more defaults may follow if the

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Speaker 1: company doesn't deliver by April twenty nine, so that they're

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Speaker 1: looking to get out from under uh that pressure. Lulu

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Speaker 1: m Athletic of six percent. The yoga ware maker and

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Speaker 1: retailer posted fiscal fourth quarter earnings to beat the average,

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Speaker 1: anlessestment in the Bloomberg survey. Lulu Lemon benefited from cost

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Speaker 1: cuts and new products. Op Co Health, though down nine percent.

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Speaker 1: The drug maker said another company that manufactured its proposed

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Speaker 1: kidney treatment, Royaldi, was cited for deficiencies. Op Co has

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Speaker 1: filed for US approval of Royalty and said the production

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Speaker 1: issues don't directly affect that drug. Now Variant System down

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Speaker 1: fourteen percent. The data analysis software maker report of fiscal

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Speaker 1: fourth quarter property and revenue that were far below estimates.

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Speaker 1: Various forecast for this year showed it expects little or

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Speaker 1: no growth in its top and bottom lines. Land Star

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Speaker 1: System down five percent. The truck and company cut forecast

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Speaker 1: for first quarter earnings and sales to reflect falling revenue

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Speaker 1: per load. The drop amounts to about ten percent from

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Speaker 1: a year earlier. At Katia Pharmaceuticals up A US advisory

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Speaker 1: committee voted to support at katie is proposed treatment for

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Speaker 1: psychosis associated with Parkinson's disease. All Scripts Healthcare up four percent.

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Speaker 1: The medical software maker was raised. Equivalent can buy from

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Speaker 1: Hold Morgan Stanley Sonic up six and a half percent.

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Speaker 1: The drive in restaurant chains earnings and sales for the

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Speaker 1: fiscal second quarter receated projections UH Terraform power well, this

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Speaker 1: is it. This is the power plant owner created by

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Speaker 1: son Edison was cut. The equivalent of news from by

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Speaker 1: JP Morrigans and Shares sank fifty five percent yesterday after

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Speaker 1: its Terraform glow bull units start up filing that as

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Speaker 1: Parents faces substantial risk of bankruptcy. And I'll point out

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Speaker 1: Terraform Global down six Doing a value is what we call.

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Speaker 1: David Wilson, thank you so much, okay, folks, this is

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Speaker 1: a real pleasure. UM I will be direct. Paul Wilmot

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Speaker 1: changed the accessibility of quantitative finance, along with a lot

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Speaker 1: of other people. Bruno Dapierre, who were honored to say

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Speaker 1: works at Bloomberg LP. A guy named Taleb i'd throw

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Speaker 1: in their kent Osben who had a classic book. And

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Speaker 1: our next guest, Professor Dermot, Immanuel Dermot, Columbia University. Here's

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Speaker 1: what you need to remember. I will remember that I

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Speaker 1: didn't make the world, and it doesn't and it doesn't

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Speaker 1: satisfy my equations. Though I will use models boldly to

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Speaker 1: estimate value, I will not be overly impressed by mathematics.

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Speaker 1: And with that we welcome Emmanuel Dermant, professor. Wonderful to

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Speaker 1: have you on good morning, Good morning. I'm very glad

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Speaker 1: to be a I I look at Modelers of all Markets.

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Speaker 1: It's a classic. He's on the linkage of physics in

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Speaker 1: the finance. With great respect, I say, what did you

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Speaker 1: learn out of the crisis? The amplitudes that were mis

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Speaker 1: guests that you that you use every day, Now, what's

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Speaker 1: the new new for you? Seven years on? That's so

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Speaker 1: little has been learned in a way. I mean there

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Speaker 1: was a mass of failure, both of them. I think

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Speaker 1: of government and the FED after the after the crisis. Um,

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Speaker 1: you know, the crisis for me was was characterized by

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Speaker 1: several things. First of all, that piece you were reading

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Speaker 1: that Paul Wilmont and I wrote was called the modelers

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Speaker 1: and the financial modelers manifest that we were trying to

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Speaker 1: explain to people that social sciences and financial markets are

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Speaker 1: involved with people and not like physics systems, even though

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Speaker 1: the mathematics is similar, and people have to remember that, um,

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Speaker 1: that other people don't satisfy equations, even though you may

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Speaker 1: try to use equations to model them. In the end,

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Speaker 1: that's not the way they work. So um, that was

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Speaker 1: a good lesson, one that I actually learned ten years

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Speaker 1: before that, and nothing Paul Wood learned before that too.

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Speaker 1: But for me, the crisis has been so disappointing because

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Speaker 1: I'm we're sort of back in the same situation within

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Speaker 1: this is debate, and I want to stay away folks

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Speaker 1: from the mathiness and cross moments and blinding physics debates.

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Speaker 1: Token geek No, well, no, that rid Holes, very rid

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Speaker 1: Holes is here so he can be the token geek.

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Speaker 1: Are we have? We moved on from the simplicity of

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Speaker 1: the Gaussian or Bell curve distribution. It has been the

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Speaker 1: convenient model, going back to Fisher Black, even back to

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Speaker 1: bas Uh to mental block. But we've been doing the

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Speaker 1: Bell curve for years and we moved beyond the certitude

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Speaker 1: of that distribution. Yes, I think we have um The

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Speaker 1: trouble is there's nothing that replaces it was. What was

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Speaker 1: nice about the belt of was that it's a very

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Speaker 1: beautiful description of near what people call neoclassical finance, and

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Speaker 1: it would be great if the world worked that way.

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Speaker 1: It would be a beautiful system. But the world doesn't

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Speaker 1: work that way, and we've I think everybody knows that

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Speaker 1: the world doesn't work that way, but never really knows

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Speaker 1: what to replace it with. Professor tell Him has some

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Speaker 1: arguments about using fat tail distributions, but I think the

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Speaker 1: truth is people don't satisfy such simple there's no simple

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Speaker 1: model to replace it. So people have a hard time

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Speaker 1: mathematically with that. So when we're looking at models that

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Speaker 1: either depict the economy or an investment portfolio or any

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Speaker 1: specific asset class, how important is it for us not

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Speaker 1: to start out with assumptions that ultimately end up being disproven. Yes,

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Speaker 1: it's incredibly important all of those assumptions. A lot of

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Speaker 1: the models that the models that people make work for

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Speaker 1: a short time in a short regime when the markets

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Speaker 1: in a certain state, but as soon as things change,

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Speaker 1: it's driven by people. Obviously, that's almost the toutology, and

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Speaker 1: then all bets are off and there isn't some I mean,

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Speaker 1: part of what we were saying that exerved you read

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Speaker 1: was that there isn't a mathematics that describes people accurately,

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Speaker 1: and so you can't take solace in that. You have

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Speaker 1: to keep thinking, you have to stay aware. It's a

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Speaker 1: sort of human wish to find a formula that will

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Speaker 1: explain the market or explain what it's going to do,

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Speaker 1: but there isn't one, is my belief. Well, we certainly

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Speaker 1: can do worse than thinking about just basic mean reversion

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Speaker 1: as a way to think about different asset classes and

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Speaker 1: whether stocks, for example, are expensive or or inexpensive. Yes,

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Speaker 1: that's that's um. I think I think the right way

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Speaker 1: I agree with you, and I think the right way

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Speaker 1: to behave is is to use a mix of qualitative

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Speaker 1: and quantitative, not to be sort of blindingly quantitative. But

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Speaker 1: I don't think there's any I don't think there are

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Speaker 1: any permanent rules you look at the risk parity people.

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Speaker 1: I don't know if you're if your readers or your

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Speaker 1: listeners are familiar with rosparity. But that worked for a

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Speaker 1: long time. But that's not a solution either. Things. The

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Speaker 1: rule has change all the time within this and kent

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Speaker 1: osbin Folks has a fabulous book called Iceberg Risk. It

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Speaker 1: opens with two statisticians out at the tip of the

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Speaker 1: Titanic doing the Leonardo DiCaprio Kate Winslet act and the

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Speaker 1: Iceberg gets to cut to the chase. But Emmanuel Derman

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Speaker 1: the whole idea of binomial or conventional mathematics versus not

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Speaker 1: a chaos. I don't want to go to cast theory,

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Speaker 1: but a more disjoint mathematics. Which is right or do

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Speaker 1: we have to learn to use both? I think you

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Speaker 1: have to be I think you have to be disjoint.

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Speaker 1: I used to like to say, you know, quoting mau

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Speaker 1: Little thousand models bloom you know, or perverting mau Um

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Speaker 1: you have to do. It's good to think about as

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Speaker 1: many different models as you can that are consistent with

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Speaker 1: what you know, but have different futures, and be skeptical

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Speaker 1: of them all, but try to see which one works

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Speaker 1: best for now. So you know, prices over earnings models

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Speaker 1: or more complicated, you know, neoclassical binomial models. They all

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Speaker 1: have their fifteen minutes of fame, but they don't last forever.

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Speaker 1: We have fifteen minutes with you, which is a good thing.

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Speaker 1: Emmanuel Derman, please stay with us. Will continue with Professor

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Speaker 1: Derman of Columbia University his book of course, My Life

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Speaker 1: is a quant reflections on physics and finance. Coming back,

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Speaker 1: we'll talk to new Tonian mechanics Barry. I will not

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Speaker 1: mention s equals VOT plus one f GT squared. We're

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Speaker 1: not going there. We're not doing acceleration. Just did we

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Speaker 1: just did right? Futures up eleven and now for the

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Speaker 1: news Quatch free in New York. Here's Michael barn Thank

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Speaker 1: you very much, Tom Barry. The US is trying to

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Speaker 1: ease the concerns of its allies in Eastern Europe over

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Speaker 1: any increasingly aggressive Russia. Depending On announced today that it

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Speaker 1: will deploy an armored brigade combat team to Eastern Europe

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Speaker 1: along with a full set of equipment. There are about

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Speaker 1: soldiers in an armored brigade, along with dozens of heavy vehicles, tanks,

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Speaker 1: and other equipment. Donald Trump is defending his campaign manager,

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Speaker 1: who has been charged with simple battery after an incident

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Speaker 1: involving a female reporter. Trump says that campaign manager Curry

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Speaker 1: Lewandowski was just protecting him. It is a major blow

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Speaker 1: to Brazilian President Dilma Roussef, the country's biggest political party,

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Speaker 1: the Brazilian Democratic Movement Party, has left the governing coalition.

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Speaker 1: Russef has lost her key ally, just weeks before she

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Speaker 1: faces an impeachment vote in Congress. Global News twenty four

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Speaker 1: hours a day, powered by our twenty four in journalists.

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Speaker 1: I'm Michael Barr, Tom and Michael Thinks. So what's coming up?

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Speaker 1: We're going to talk about an interesting word within our investment.

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Speaker 1: Whether you're a sophisticate or not, the pain trade is

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Speaker 1: sometimes painful. With a manual Derman of Columbia. This is

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Speaker 1: Bloomberg Surveillance worldwide, counting down to the opening built brought

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Speaker 1: bar with its luxurious interior, legendary four by four capability.

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Speaker 1: Trible it at your local jeep dealer Today, Global Business

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Speaker 1: c m E Group US dot Indix Future is higher

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Speaker 1: amid optimism, interest rates will rise at a slow pace.

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Speaker 1: Snp E mini futures are up eleven points, DOWI mini

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Speaker 1: futures up one hundred nine, and now's documented futures up

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Speaker 1: twenty eight. The acts in Germany's up one point eight

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Speaker 1: percent ten, Your treasury down six thirty seconds, the at

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Speaker 1: one two percent. Nine X screw oil up two point

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Speaker 1: two per cent, or eighty two cents to thirty nine

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Speaker 1: O nine. A barrel COMEX gold is down two tenths

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Speaker 1: per cent or two dollars fifty cents at twelve thirty

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Speaker 1: five an ounce. The euro and dollar thirteen O eight.

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Speaker 1: The end one twelve point six five. US Treasury Secretary

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Speaker 1: Jack lou is speaking in Washington this morning right now,

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Speaker 1: actually saying on justified sanctions may hurt business in the US,

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Speaker 1: and that's a bloomberg business flash. Tom and Barry Karen,

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Speaker 1: thank you so much, greatly appreciated. Bloomberg Surveillance, Berry, Ridholtz

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Speaker 1: and Tom Keane with the Sammanuel Derman of Columbia University

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Speaker 1: re having a spirited discussion on humility and quantitative finance, folks.

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Speaker 1: One of the great entry books on this for those

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Speaker 1: of you that don't know the Newtonian mechanics that gets

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Speaker 1: you to the conversation is Frequently Asked Questions in Quantitative

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Speaker 1: Finance by Paul Wilmot. It is short, sweet, beautifully clear,

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Speaker 1: page by page, frequently ask questions and quantitative funance. It

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Speaker 1: also happens to be a fun book as well. Emmanuel Dermott,

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Speaker 1: I want to talk about what we learned from failure

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Speaker 1: not seem to Leb wrote the brilliant Anti Fragile about

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Speaker 1: learning from our disorder, learning from when things break, how

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Speaker 1: to move on and do better. Explain to us from

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Speaker 1: the Emmanuel Derman world, how we get wiser from our

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Speaker 1: quantitative mistakes. You know how sort of take us off

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Speaker 1: to a point of view to it, and that is

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Speaker 1: that people are people are. Nutrition and finance are kind

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Speaker 1: of very simple and are very similar, and that people

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Speaker 1: are always looking for some little bit of data that

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Speaker 1: they can use to predict the future. So for yours,

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Speaker 1: if you look at nutrition, um, people thought you needed

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Speaker 1: a lower amount of vitamin D, and then I think

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Speaker 1: you need the U s D. A keeps changing the

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Speaker 1: bitimum recommended requirements or vitamins and for various kinds of food,

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Speaker 1: and ten years later they change everything. And that's because

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Speaker 1: people have the terrible need, which is understandable, to be

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Speaker 1: told what to do when there isn't always a clear answer.

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Speaker 1: And I think finance is very similar. People glom onto

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Speaker 1: some kind of quantitative model and they use it for

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Speaker 1: a while. You see this a lot in statistical arbitragety.

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Speaker 1: It may work for a while, but then it fails.

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Speaker 1: And I think the lesson is kind of a philosophical

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Speaker 1: one that you sort of shouldn't be an idolator. An

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Speaker 1: idolator in the sense that you think you can make

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Speaker 1: an image of society, of human the human mind with

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Speaker 1: a formula or a prescription, and that it's always going

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Speaker 1: to work. So given that constantly skeptical, constantly skeptical, constantly

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Speaker 1: trying out new models, but don't don't make the transision

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Speaker 1: into hubris where you think you found the permanent solution.

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Speaker 1: So so, given that, does that mean investors have to

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Speaker 1: constantly be rethinking their philosophy in light of how humans

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Speaker 1: behave and miss behave in the market or can we

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Speaker 1: come up with the belief system that recognizes both the

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Speaker 1: math half and the psychology half of what takes place

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Speaker 1: in capital markets? Yeah, I think that psychology is dominant

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Speaker 1: and the math is an attempt to describe the psychology

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Speaker 1: and to formalize it in mathematical terms. And there isn't

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Speaker 1: going to be a permanent answer because when when regimes

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Speaker 1: in the market change, things change. And um, I look

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Speaker 1: a lot of option pricing and the nature of options

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Speaker 1: on for example, on the S and P changed after

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Speaker 1: the seven crash, and it's never been the same sense.

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Speaker 1: I'm writing a book called the Volatility Smile excuse me,

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Speaker 1: which is all about that phenomenon. And then gold similar

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Speaker 1: the options on gold suddenly changed in the late nineties

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Speaker 1: when the Swiss Central Bank did something different. And so yeah,

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Speaker 1: you've got to constantly understand how people psychology is changing

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Speaker 1: and then use the relevant math for a while. The

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Speaker 1: relevant math has an anchor. It may be a philosophical

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Speaker 1: anchor which is too deep for our radio. We wouldn't

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Speaker 1: even do that on TV. I mean, that's something you do.

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Speaker 1: You know with that fancy bookstore by Columbia Universities around

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Speaker 1: having a cup of coffee. It is a great bookstore,

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Speaker 1: and I think it's a hundred and twelve street. Uh uh,

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Speaker 1: Professor Dermot. Everybody wants to know where Bill Sharp's risk

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Speaker 1: free rate is. Every sophisticated global Wall Street or listening worldwide.

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Speaker 1: Those less sophisticated, they foundationally know there's a thing called

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Speaker 1: the risk free rate? Do you know where it is

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Speaker 1: right now? Or have we so distorted the system We

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Speaker 1: don't have a clue where our anchor is a little

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Speaker 1: bit on the side of what you just said that

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Speaker 1: I'm as distorted the system totally. The risk free rate

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Speaker 1: is low because some people are very risk averse, but

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Speaker 1: it's being set by the Fed in some very artificial

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Speaker 1: way that we've all gotten used to. And um um,

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Speaker 1: I think nobody really knows is it negative? Is it

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Speaker 1: going to get more negative? It's become It's it's very

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Speaker 1: strange for me. I mean, interest rates on the price

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Speaker 1: of money, and we're always against manipulating, manipulating the price

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Speaker 1: of things, and yet we all live with the fit

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Speaker 1: manipulating the price of money. That is the standard background.

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Speaker 1: There's always going to be some force out there impacting

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Speaker 1: what takes place in the market. It's our job to

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Speaker 1: figure out how to navigate those waters, isn't it. Yes?

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Speaker 1: And these days, for the last five years, it's all

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Speaker 1: a risk on risk off situation where people either punge

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Speaker 1: in and think everything is going to be good because

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Speaker 1: the fit is in is doing something good, or um

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Speaker 1: risk off and everything's in trouble. Did you have a

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Speaker 1: cue full and as or slide rule? Excuse me? Did

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Speaker 1: you have a slide role when you were in school? Oh? Yes,

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Speaker 1: once treated a picture of one a few years ago. Yeah,

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Speaker 1: I've got this old fabric castell slide rule from the

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Speaker 1: seventies of the sixties. Am I right? In that we

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Speaker 1: sort of lost something without the physical feeling of logarithms

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Speaker 1: off a slide rule versus everybody today. All your kids

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Speaker 1: at school today are all wis bang. You know, that's

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Speaker 1: a that's a I never thought of that, but that's

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Speaker 1: a that's a great, great insight in that calculation used

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Speaker 1: to be a physical thing with the slide rule. Yeah, well,

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Speaker 1: you used to look up logarithmic tables before that. Exactly

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Speaker 1: high school, Yeah, exactly. I mean this has been wonderful.

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Speaker 1: Emmanuel Dermot. I hope we can do this again. He

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Speaker 1: is a Columbia University, which barely describes his contribution to

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Speaker 1: the underpinnings of finance. Things branted every day, ran the

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Speaker 1: infamous quantitative Strategies group at Dolman SATs yes, and had

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Speaker 1: a number of other um efforts, of course, out of

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Speaker 1: the University of Cape Town originally, and of course his

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Speaker 1: truly his Columbia University. It's a very Columbia university. It is.

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Speaker 1: Let me do a shameless plug for the masters in

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Speaker 1: business we did with him. It was phenomenal. Quantz still

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Speaker 1: up on iTunes, Still up on iTunes. Emmanuel Derman was

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Speaker 1: very Ridles and Tom Key. This is Bloomberg's surveillance. Counting

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