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Speaker 1: Hello, and welcome to What Goes Up a Bloomberg Weekening

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Speaker 1: Markets podcast. I'm Sara Plante, reporter on the Cross Asset team,

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Speaker 1: and I'm Mike Reagan, a senior editor on the Markets team.

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Speaker 1: This week on the show, there's no denying it. We're

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Speaker 1: in a healthcare crisis, as disheartening as it may be,

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Speaker 1: and you could also say that we're in an economic

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Speaker 1: and a market crisis. Well, our guests actually coined the

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Speaker 1: term crisis alpha, and the strategy she runs is up

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Speaker 1: seven percent this year. She'll explain what crisis alpha actually

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Speaker 1: is and how to capture it in times like these,

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Speaker 1: and as always, we will close out the episode with

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Speaker 1: our tradition the craziest thing I saw in markets this week? Uh,

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Speaker 1: And please do if you see something crazy and markets,

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Speaker 1: give us a call on the podcast hotline at six

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Speaker 1: four six four three four nine oh or tweet to

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Speaker 1: us at Podcasts and let us know the craziest thing

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Speaker 1: you saw and maybe we'll play your voicemail or mention

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Speaker 1: your tweet on the air. Well, let's introduce a new

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Speaker 1: voice here, first time on the show. Very excited to

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Speaker 1: have her. As sorry, as you pointed out, she is

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Speaker 1: an expert in trend following UH using managed futures, in fact,

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Speaker 1: wrote the book on it, or at least co wrote

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Speaker 1: the book Trend Following with Managed Futures, The Search for

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Speaker 1: Crisis Alpha. She is the chief research strategist at Alpha

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Speaker 1: Simplex Group. UH, teaches at m I T in her

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Speaker 1: spare time, and very excited to get her take on

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Speaker 1: these markets. Her name is Katie Kaminsky. Katie, Welcome to

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Speaker 1: the show. Hi, nice to be here today. I wanted

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Speaker 1: to ask about sort of how the trend following, especially UH.

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Speaker 1: I believe it's the Alpha Simplex Managed Future strategy that

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Speaker 1: Sarah was referring to. It's up like about seven or

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Speaker 1: eight percent this year. UM. I was reading a note

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Speaker 1: you wrote about sort of the process of trend following

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Speaker 1: during this bear market in stocks that we've seen this year,

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Speaker 1: and I guess you wrote a little bit about how

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Speaker 1: the signals, the cross assets signals from say the bond

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Speaker 1: market and the and the commodities market copper and oil especially, UM,

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Speaker 1: we're sort of signaling a risk off environment a lot

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Speaker 1: earlier than stocks, at least before stocks peaked towards the

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Speaker 1: end of February there. But I'm just curious how it

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Speaker 1: all sort of fits together, if you could kind of

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Speaker 1: dissect for us the returns and that fund how it's

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Speaker 1: able to do so well in this type of environment.

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Speaker 1: So the concept of crisis alpha opportunities are opportunities game

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Speaker 1: during periods of market stress or crisis. Um Strategies like

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Speaker 1: trend following are specifically designed to constantly measure where markets

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Speaker 1: are going and how things are changing across a wide

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Speaker 1: range of methodologies. And what we find is that we

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Speaker 1: move as the markets move, So as markets move in

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Speaker 1: different directions, we're constantly adjusting and following where markets go.

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Speaker 1: And so in the moments when there's a lot of

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Speaker 1: uncertainty or there's a lot of stress in the markets,

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Speaker 1: it turns out that people tend to be much more

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Speaker 1: polarized in their actions, for both either behavioral reasons or

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Speaker 1: for the fact that they may be driven into action

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Speaker 1: based on risk management and other typical institutional protocols. So

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Speaker 1: the key thing that we are following, and what's different

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Speaker 1: about us is that we're much more technical in nature,

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Speaker 1: and that we're actually looking at where the market's going

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Speaker 1: as opposed to why it's going somewhere, And that means

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Speaker 1: that we're listening to the markets and seeing where they

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Speaker 1: are pointing. So if I think about what happened earlier

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Speaker 1: this year, especially January, what was very ominous to me

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Speaker 1: and was giving a little pause was just how are

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Speaker 1: trend fling signals and how trend fling in general started

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Speaker 1: to see a growing apprehension, not in the equity markets,

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Speaker 1: but more so in the other periphery markets, which were

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Speaker 1: starting to price in some of the uncertainty and some

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Speaker 1: of the potential UH impacts of a potential pandemic. So,

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Speaker 1: speaking of this apprehension, Katie, the last time I saw

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Speaker 1: you was early March. It seems like a lifetime ago

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Speaker 1: because we were actually face to face in person. Doesn't

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Speaker 1: happen anymore. I believe it was on on March six. Then.

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Speaker 1: At the time, the SMP had fallen twelve percent, and

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Speaker 1: little did anyone know that from that point we still

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Speaker 1: had roughly or more to go. We would also all

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Speaker 1: be entering stay at home orders. Businesses would be shutting.

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Speaker 1: And at the time you expressed that apprehension, and around

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Speaker 1: the same period you also authored a report and within

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Speaker 1: it you said the market smells as skunk, precisely for

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Speaker 1: those reasons that other asset classes were signaling caution and

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Speaker 1: and it makes me think, I mean, if the market

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Speaker 1: quote unquote smelled the skunk, then well then what does

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Speaker 1: it smell now, because I mean, you look at oil

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Speaker 1: prices this past week, which dropped below twenty a barrel

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Speaker 1: for w t I again, and at the same time,

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Speaker 1: we haven't really seen bond prices react all that much.

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Speaker 1: But meanwhile, we've just seen equity markets turn around to

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Speaker 1: the upside pretty forcefully, exactly. And what's interesting for us

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Speaker 1: is that we saw tremendous trends in the cross asset space.

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Speaker 1: So there were tremendous opportunities in fixed income UM, short energies,

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Speaker 1: short industrial metals, long precious metals. UH. The currency market

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Speaker 1: has been a little bit more of it back and

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Speaker 1: forth in all of this situation, but in general, the

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Speaker 1: trends that we were seeing were relatively strong, much stronger

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Speaker 1: than the typical amount of trend that you would see

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Speaker 1: UM in a time where people are not concerned. And

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Speaker 1: this is why these strategies actually do very well in

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Speaker 1: these environments is that during periods of fear or distress,

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Speaker 1: people are much more coordinated and how they behave and

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Speaker 1: prices as a result, can also move in a much

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Speaker 1: more coordinated way, which means that a particular strategy that's

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Speaker 1: actually measuring and monitoring these trends can actually capture them.

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Speaker 1: So I often think about our positioning as an aggregate

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Speaker 1: estimate or view of what the market thinks, where the

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Speaker 1: market's going. So if I take a look back in

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Speaker 1: January at the beginning of this what was concerning to

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Speaker 1: me is I saw a lot of strength in terms

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Speaker 1: of a lot of bullish signals for fixed income, you know,

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Speaker 1: kind of in some sense hesitation about the equity markets.

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Speaker 1: I also saw a lot of strength in terms of

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Speaker 1: short positions in things like energies, and as you know,

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Speaker 1: oftentimes energies fall with equities but don't recover as much

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Speaker 1: um And so we saw all of these type of

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Speaker 1: signs and strengthening, especially in flight to safety trades in

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Speaker 1: terms of the cross assets that we monitor, which was

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Speaker 1: indicative that half of the things we were looking at

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Speaker 1: we're looking a little ominous. And the equity markets were

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Speaker 1: yet to fall Asian markets were a little bit weaker.

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Speaker 1: But as we saw markets fall out in February into March,

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Speaker 1: then the theme became coordinated and it was very much

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Speaker 1: a a theme of crisis. And since that point we

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Speaker 1: saw that continue throughout March. Um our signals have gone

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Speaker 1: from being very cautiously optimistic about equities to cautiously pessimistic.

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Speaker 1: Um not in size, but definitely right now the way

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Speaker 1: we're thinking about things, because you asked about positioning, UM,

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Speaker 1: if I take a look at how trends signals are

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Speaker 1: looking right now, there's definitely a very cautious view on equities,

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Speaker 1: cautious and slightly negative. Yeah. I'm sure everyone right now

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Speaker 1: is having to make very difficult decisions. And when you

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Speaker 1: say that the stands currently, at least regarding equities is

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Speaker 1: cautiously pessimistic, can you maybe walk us through the evolution

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Speaker 1: of the strategy maybe from the end of January to

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Speaker 1: the point at which we get to this point now

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Speaker 1: where we've had a nice rebound off of the lows

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Speaker 1: and the strategy is pessimistic. I know it changes quite often,

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Speaker 1: but can you maybe give us a sense of how

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Speaker 1: the strategy did change throughout time as markets were moving

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Speaker 1: up until this point. Yeah, I will run through how

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Speaker 1: the strategy had moved, But then at the end I'll

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Speaker 1: maybe give some um overall view in terms of what

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Speaker 1: could be driving this UM. So we'll start with at

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Speaker 1: the beginning of the year. UM. It was quite interesting

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Speaker 1: because after a year that was so phenomenally good for

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Speaker 1: the equity markets last year, things were looking good. Bond

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Speaker 1: markets had been more range bound and reverted somewhat in December,

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Speaker 1: so it was really looking like a very pro equity

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Speaker 1: market environment. UM. I know, growth estimates were a little

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Speaker 1: bit more muted than the priory prior year, but in general,

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Speaker 1: the risk on theme had grown a lot, and we've

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Speaker 1: seen that in em currencies, we've seen that in equities.

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Speaker 1: But then later in the month and around mid month

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Speaker 1: in January, as people started to notice some of the

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Speaker 1: things that we're going on in Asia, we noticed that

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Speaker 1: our potential signals in fixed income started actually to tick up,

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Speaker 1: our short view on energy started to grow. And then

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Speaker 1: as we had sort of an initial hiccup at the

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Speaker 1: end of January, we started to pick up some potential

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Speaker 1: concern um, not in US equity markets, but in some

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Speaker 1: of the cross asset markets. And what was interesting is

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Speaker 1: that you start to get to a position which looked

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Speaker 1: very hedged, so it was long equities, long fixed income,

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Speaker 1: short energy. Now, if you think about that, that's really

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Speaker 1: a hedged position. It's almost like a no position in

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Speaker 1: the sense that you're kind of if equities go down,

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Speaker 1: you have things that might go up UM in terms

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Speaker 1: of your positioning. So that continued in through the month

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Speaker 1: of February. So February nineteen was the peak before the

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Speaker 1: great fall. And what's been interesting about that is that

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Speaker 1: all of the other signals that we were seeing and

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Speaker 1: other asset classes just extended during these periods of time.

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Speaker 1: So the short energy trade grew strength. We also saw

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Speaker 1: a fixed income positively responding to that. So for us,

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Speaker 1: it was really about UM, a somewhat hedged position. So

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Speaker 1: Trent following an average was roughly flat for the month

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Speaker 1: of February, which I think is relatively spectacular given the

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Speaker 1: type of moves that we saw. Then in March, as

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Speaker 1: we were seeing this move continue, we we're getting out

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Speaker 1: of equity markets and trend failing signals were reducing exposure

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Speaker 1: to equities down to an almost neutral to very low position,

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Speaker 1: and we saw continued gains in fixed income and as

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Speaker 1: well as commodity markets. Okayny I love if you could

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Speaker 1: sort of explain for us some of the signals that

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Speaker 1: define a trend uh in your strategies. Um, you know,

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Speaker 1: is it as simple as something like a moving average? Uh?

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Speaker 1: You know, I imagine there's a lot of complex math involved.

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Speaker 1: But what are some of the sort of cornerstones of

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Speaker 1: identifying a trend that the strategy uses. So the key

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Speaker 1: approach to trend falling is about taking many different technical

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Speaker 1: methodologies and using those to create some sort of score

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Speaker 1: or vote in terms of the direction of an individual market.

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Speaker 1: So this requires you to parameterize how much data you're

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Speaker 1: going to use and what methodology you're going to use

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Speaker 1: in terms of measuring the strength of that particular trend.

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Speaker 1: What we tend to do, and what many in the

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Speaker 1: space tend to do, is we use a wide range

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Speaker 1: of different methodologies, some using more technical simple terms like

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Speaker 1: moving averages and breakout signals, and others too as complicated

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Speaker 1: as drawing from the machine learning literature and trying to

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Speaker 1: do things a little bit more nonlinearly. So overall, I

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Speaker 1: tend to explain a trend filling system is really similar

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Speaker 1: to a voting system. You have many different models with

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Speaker 1: different time horizons in terms of how much data they're using,

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Speaker 1: and they all come together an aggregate to vote on

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Speaker 1: where the market is going. So if you think about

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Speaker 1: what we're really trying to do, we're taking in all

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Speaker 1: this data from the markets would as you know, if

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Speaker 1: you look at a week, and you look at a month,

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Speaker 1: and you look at a year, they can look very different.

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Speaker 1: Try to use mathematical techniques to measure those and then

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Speaker 1: aggregate them together. Let those approaches vote to create an

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Speaker 1: overall signal. What this means is that in aggregate we

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Speaker 1: are trying to measure all the information and bring it

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Speaker 1: together to give ourselves an overall view of where the

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Speaker 1: market's going. Because trend falling is really just momentum trading

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Speaker 1: across different assets. You're following where things are moving, and

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Speaker 1: you're adjusting as the world changes. Whenever there is a

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Speaker 1: heightened state of volatility in the market, UM, there's this

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Speaker 1: tendency for analysts or or market pundits who can't really

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Speaker 1: explain what's going on, to sort of point the finger

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Speaker 1: at the machines running quant strategies. Uh. You know, if

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Speaker 1: if not trend following, then uh, volatility targeting and UM

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Speaker 1: even risk parity that sort of thing, And you know

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Speaker 1: that it's kind of an easy scapegoat. I guess for

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Speaker 1: for some people to say, you know, this market doesn't

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Speaker 1: make any sense to anyone but a machine running the

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Speaker 1: strategy and the application. A lot of times is that

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Speaker 1: UM uh quant strategies tend to do the same type

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Speaker 1: of thing you're talking about, UH, all sort of reacting

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Speaker 1: maybe racking to different signals, but the end result being

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Speaker 1: to sell or buy all at the same time and

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Speaker 1: possibly exaggerate the moves in the market. UM. Does do

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Speaker 1: you think that really happens in general? Uh? And specifically?

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Speaker 1: And and say the volatility we've seen the last couple

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Speaker 1: of months, UM or is it just impossible to know

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Speaker 1: and sort of impossible to dice sacked what is causing

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Speaker 1: massive swings like that? I always see and and I

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Speaker 1: think it's an easy narrative to say that, because it's

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Speaker 1: easier to blame a machine than a person. UM. But

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Speaker 1: one other thing is is that I always go back

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Speaker 1: to the basic tenants of volatility. Volatility represents uncertainty. When

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Speaker 1: things go up and down a lot, it's because people,

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Speaker 1: whether or not it's algorithm or a person, I don't

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Speaker 1: know what's going on, and they're unsure about where the

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Speaker 1: markets are going, and I would say that across the

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Speaker 1: quant space it's actually been very mixed. Trend Falling strategies

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Speaker 1: are one of the only strategies that have really tend

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Speaker 1: to do very well in this environment. It actually turns

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Speaker 1: out that a lot of the other quant strategies have

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Speaker 1: struggled UM. The reason being is that they may have

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Speaker 1: very specific hedges or offsets and in strategies that when

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Speaker 1: things get volatile, things get complicated for them. UM. And

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Speaker 1: so I would say that I tend to think about

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Speaker 1: volatility is really our perception or it's a measurement of

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Speaker 1: our view of uncertainty. So the environment that we just

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Speaker 1: went into, and you can probably you probably agree with

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Speaker 1: me yourself, is that the idea of a pandemic, the

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Speaker 1: idea of staying at home, the idea of a lockdown

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Speaker 1: UM is something so uncertain that it is not at

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Speaker 1: all surprising to me that markets would be up and

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Speaker 1: down every other day. Because volatility is a measure of

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Speaker 1: uncertainty things going around UM A lot is much more

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Speaker 1: about how we feel about what things, what things are worth. UM.

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Speaker 1: Now could UH systematic managers or quad managers when people

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Speaker 1: do the same thing move these things more, it's possible.

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Speaker 1: I'd have to do a much more extensive research and

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Speaker 1: really get into the data. I know that even when

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Speaker 1: we looked at the flash crash, I know the CFTC

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Speaker 1: did some extensive analysis of that and found actually that

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Speaker 1: it was a fundamental trade that was just too large

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Speaker 1: that created a dislocation. So I think I think that's

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Speaker 1: a great question. It's definitely a good narrative. People like

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Speaker 1: it blame the machine, um, But for me, it's really

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Speaker 1: this volatility isn't someone's fault. It's more that we don't know.

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Speaker 1: It's really representative of how unsure the markets are about

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Speaker 1: what's going on. No, there's no doubt that headlines news

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Speaker 1: flow has been on hyper drive. It scenes and Mike,

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Speaker 1: you know that that has given us plenty of opportunities

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Speaker 1: at least to uh think of crazy things for our

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Speaker 1: crazy things and markets for sure, So what did what's

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Speaker 1: your best? What has been shocking to me has been

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Speaker 1: the contango in oil that we have seen the fact

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Speaker 1: that may oil pray says we're nineteen and September thirty something,

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Speaker 1: and I saw a report from Bloomberg today that people, um,

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Speaker 1: so going back to what we saw bonds in the

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Speaker 1: summer where people are willing to pay to own German debt.

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Speaker 1: Now we have a situation where you get paid to

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Speaker 1: sell gasoline, So maybe that's the next thing. We all

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Speaker 1: go around and find gasoline and sell it, because, um,

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Speaker 1: that's a weird world that you could get paid to

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Speaker 1: actually sell gasoline. There must be just oil tigers crowded

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Speaker 1: off the shores right now full of oil. It's it's

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Speaker 1: an amazing Uh, that is an amazing situation. Apparently they

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Speaker 1: said it was twelve cents a gallon in in North

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Speaker 1: Dakota for oil. Well that's a good one, Katie, and

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Speaker 1: you get you get props for sticking close to the markets, Sara,

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Speaker 1: can you top Katie's oil can tango? So I brought

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Speaker 1: to one that's markets related and one that's less so so,

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Speaker 1: but I'll start with the market related one and that's that.

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Speaker 1: Now the five largest companies make up which is a

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Speaker 1: new record. And I think it's just been pretty amazing

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Speaker 1: that we continue to see a lot of these mega

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Speaker 1: cap technology and internet companies just continue to perform so

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Speaker 1: well in this type of environment. I think like a

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Speaker 1: couple of years ago, people would have said that when

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Speaker 1: the bull market came to an end. The companies that

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Speaker 1: let on the way up, we're going to lead on

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Speaker 1: the way down and that and that certainly hasn't happened. Um.

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Speaker 1: So I think the fact that we have a new

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Speaker 1: record related to top heaviness in the market is pretty crazy.

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Speaker 1: For one, Yeah, absolutely absolutely, and then uh, the less

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Speaker 1: markets related one really not related to the markets at all.

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Speaker 1: There was just a great story in the New York Times.

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Speaker 1: It was a bit uh, someone would say humorous. Um,

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Speaker 1: but the headline reads Trump wanted a radio show, but

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Speaker 1: he didn't want to compete with them, and it's it's

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Speaker 1: a great read if you have some downtime. Essentially, it's

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Speaker 1: just details President Trump going to one of the Coronavirus

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Speaker 1: Task Force meetings and laying out this plan that he

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Speaker 1: wanted to have a two hour radio show each day. Um.

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Speaker 1: And the only reason he didn't want to do it

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Speaker 1: is because he didn't want to knock Rush Limbaugh's ratings. Um.

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Speaker 1: It's it's an interesting rate. Uh, it's just a bit

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Speaker 1: humorous in these In these times, he has a two

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Speaker 1: hour TV show every night at the at the press

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Speaker 1: count right now, he has a TV show instead with

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Speaker 1: with great ratings so crazy times. I'm not sure how

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Speaker 1: two hours on the radio helps him fight the virus,

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Speaker 1: but he does like to talk, so UM, I have

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Speaker 1: no no doubt he could fill two hours or radio

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Speaker 1: time a day. All right, these are all pretty good.

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Speaker 1: I will I'll give you mine, um mine. As you know,

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Speaker 1: I like to push the boundaries of what is considered

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Speaker 1: a market story. Uh, but this is certainly crazy now.

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Speaker 1: One of the most depressing things about this virus, uh

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Speaker 1: for the average person who hasn't really had to deal

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Speaker 1: with with a sick or dying relative, but the lack

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Speaker 1: of sports on TV uh throughout this has been traumatic

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Speaker 1: for a lot of people, um, especially gamblers. And here's

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Speaker 1: where we get into the markets. Now that online gambling

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Speaker 1: is legal in some states, I I think it's okay

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Speaker 1: to consider that an official market, at least for the

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Speaker 1: purposes of this crea before. Yeah, at least for the

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Speaker 1: purposes of this this crazy observation. So the first major

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Speaker 1: league sport to get back in business, do you know

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Speaker 1: what it is? Well, not counting world wide wrestling. Uh,

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Speaker 1: that's what I was gonna say. W w Okay, I

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Speaker 1: guess that might be there might be a tie between that,

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Speaker 1: but you can't. You can't gamble on that. I mean,

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Speaker 1: I guess you could. But if you're gonna gamble on

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Speaker 1: professional professional wrestling, then you've got goods of major problems.

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Speaker 1: But I believe if you have inside information, right, yeah,

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Speaker 1: but those are all plans anyways, right, they're all chograph's

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Speaker 1: bet on the good guy. I guess um. They're is

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Speaker 1: a league called the Major League Eating League, and it's

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Speaker 1: these guys you know, like at the hot dog eating

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Speaker 1: contests on Conan Island. It's all those guys. Uh. It's

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Speaker 1: been officially turned into a league called Major League Eating

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Speaker 1: and they believe they are the first professional sport to

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Speaker 1: get back in business. They're having eating tournament. Everyone's gonna

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Speaker 1: be at their home zooming in or or skyping in.

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Speaker 1: I guess uh. And you'll be able to gamble on it.

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Speaker 1: They've already set some of the over unders and stuff

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Speaker 1: like that on it. Let me just tell you what

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Speaker 1: you have to do to to participate in this tournament.

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Speaker 1: So the qualifying round will consist of two pounds of

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Speaker 1: slice bologney. So you have the two pounds of slice bologney,

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Speaker 1: and it's a race. So who can eat that two

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Speaker 1: pounds of blowney. The fastest I've read somewhere the overunder

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Speaker 1: was like sixty nine seconds three to eat two pounds

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Speaker 1: of blaney. So um, So, Mike, you're not you're not

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Speaker 1: going to try to take part of Maybe if it

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Speaker 1: was I don't know about bolony the quarter finals hot dogs,

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Speaker 1: I could I don't know, I could kind of see that.

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Speaker 1: If it was chicken wings, maybe I I could get

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Speaker 1: into that. I'm from Philly, where the the big competition

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Speaker 1: is the chicken chicken wing eating competitions. But so then

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Speaker 1: from the quarterfinals, uh, you'll have to eat a family

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Speaker 1: sized pack of oreos and a half a gallon of milk.

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Speaker 1: That doesn't seem that tough actually, but here's where, yeah,

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Speaker 1: here's where they really will separate the pros from the amateurs. Though. Uh.

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Speaker 1: To make it to the finals, you'll have to eat

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Speaker 1: over a gallon of baked beans. Oh and if you

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Speaker 1: win that, the the finals consists of ten individual cups

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Speaker 1: of ramen noodles. Um. But I think that gun. I

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Speaker 1: wonder who comes up with this stuff beans and ramen?

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Speaker 1: What are they assuming more people have these things at

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Speaker 1: their home. I wonder if that's it. Yeah. Yeah, Oreos

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Speaker 1: the gaunt of baked beans, I think is the deal

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Speaker 1: breaker there. I don't, I don't know, I I I

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Speaker 1: pity the person who gets that far. It's a hard one.

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Speaker 1: I must say. I haven't been dragged into eating a

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Speaker 1: food watching it. But I've been watching um the horse

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Speaker 1: tournaments for the NBA and the w n b A

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Speaker 1: and also i've been watching some NBA players playing two

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Speaker 1: K on Xbox, which has been a pretty entertaining and

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Speaker 1: this time. Yeah, yeah, that's that's not bad. Let's say, Hey,

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Speaker 1: it beats beats watching a rerun of a game. Anyway, Katie,

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Speaker 1: maybe you could get your pals and m I t

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Speaker 1: you could have like a New England clam chowder eating competition.

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Speaker 1: Why not? I think I think it's probably hard to

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Speaker 1: get ahold of some fresh clam chowder around here. I

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Speaker 1: don't know. Maybe there's a delivery service to check if legal, right, Uh,

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Speaker 1: all right, well do what you gotta do in these times.

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Speaker 1: But on that note, anyways, Katie Kaminski, thank you so

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Speaker 1: much for joining the show this week. Thank you so

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Speaker 1: much for having me. What goes up? We'll be back

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Speaker 1: next week. Until then, you can find us on the

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Speaker 1: Bloomberg Terminal, website and app, or wherever you get your podcasts.

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Speaker 1: We'd love it if you took the time to rate

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Speaker 1: interview the show on Apple podcast so more listeners can

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Speaker 1: find us, and you can find us on Twitter, follow

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Speaker 1: me at at Sarah Panzac, Mike is that Reaganonymous, and

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Speaker 1: you can also follow Bloomberg Podcasts at podcasts. What Goes

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Speaker 1: Up is produced by Toper Foreheads. The head of Bloomberg

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Speaker 1: Podcast is Francesca Levie. Thanks for listening, See you next time.

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Speaker 1: Before