Speaker 1: Hello, and welcome to What Goes Up a Bloomberg Weekening
Speaker 1: Markets podcast. I'm Sara Plante, reporter on the Cross Asset team,
Speaker 1: and I'm Mike Reagan, a senior editor on the Markets team.
Speaker 1: This week on the show, there's no denying it. We're
Speaker 1: in a healthcare crisis, as disheartening as it may be,
Speaker 1: and you could also say that we're in an economic
Speaker 1: and a market crisis. Well, our guests actually coined the
Speaker 1: term crisis alpha, and the strategy she runs is up
Speaker 1: seven percent this year. She'll explain what crisis alpha actually
Speaker 1: is and how to capture it in times like these,
Speaker 1: and as always, we will close out the episode with
Speaker 1: our tradition the craziest thing I saw in markets this week? Uh,
Speaker 1: And please do if you see something crazy and markets,
Speaker 1: give us a call on the podcast hotline at six
Speaker 1: four six four three four nine oh or tweet to
Speaker 1: us at Podcasts and let us know the craziest thing
Speaker 1: you saw and maybe we'll play your voicemail or mention
Speaker 1: your tweet on the air. Well, let's introduce a new
Speaker 1: voice here, first time on the show. Very excited to
Speaker 1: have her. As sorry, as you pointed out, she is
Speaker 1: an expert in trend following UH using managed futures, in fact,
Speaker 1: wrote the book on it, or at least co wrote
Speaker 1: the book Trend Following with Managed Futures, The Search for
Speaker 1: Crisis Alpha. She is the chief research strategist at Alpha
Speaker 1: Simplex Group. UH, teaches at m I T in her
Speaker 1: spare time, and very excited to get her take on
Speaker 1: these markets. Her name is Katie Kaminsky. Katie, Welcome to
Speaker 1: the show. Hi, nice to be here today. I wanted
Speaker 1: to ask about sort of how the trend following, especially UH.
Speaker 1: I believe it's the Alpha Simplex Managed Future strategy that
Speaker 1: Sarah was referring to. It's up like about seven or
Speaker 1: eight percent this year. UM. I was reading a note
Speaker 1: you wrote about sort of the process of trend following
Speaker 1: during this bear market in stocks that we've seen this year,
Speaker 1: and I guess you wrote a little bit about how
Speaker 1: the signals, the cross assets signals from say the bond
Speaker 1: market and the and the commodities market copper and oil especially, UM,
Speaker 1: we're sort of signaling a risk off environment a lot
Speaker 1: earlier than stocks, at least before stocks peaked towards the
Speaker 1: end of February there. But I'm just curious how it
Speaker 1: all sort of fits together, if you could kind of
Speaker 1: dissect for us the returns and that fund how it's
Speaker 1: able to do so well in this type of environment.
Speaker 1: So the concept of crisis alpha opportunities are opportunities game
Speaker 1: during periods of market stress or crisis. Um Strategies like
Speaker 1: trend following are specifically designed to constantly measure where markets
Speaker 1: are going and how things are changing across a wide
Speaker 1: range of methodologies. And what we find is that we
Speaker 1: move as the markets move, So as markets move in
Speaker 1: different directions, we're constantly adjusting and following where markets go.
Speaker 1: And so in the moments when there's a lot of
Speaker 1: uncertainty or there's a lot of stress in the markets,
Speaker 1: it turns out that people tend to be much more
Speaker 1: polarized in their actions, for both either behavioral reasons or
Speaker 1: for the fact that they may be driven into action
Speaker 1: based on risk management and other typical institutional protocols. So
Speaker 1: the key thing that we are following, and what's different
Speaker 1: about us is that we're much more technical in nature,
Speaker 1: and that we're actually looking at where the market's going
Speaker 1: as opposed to why it's going somewhere, And that means
Speaker 1: that we're listening to the markets and seeing where they
Speaker 1: are pointing. So if I think about what happened earlier
Speaker 1: this year, especially January, what was very ominous to me
Speaker 1: and was giving a little pause was just how are
Speaker 1: trend fling signals and how trend fling in general started
Speaker 1: to see a growing apprehension, not in the equity markets,
Speaker 1: but more so in the other periphery markets, which were
Speaker 1: starting to price in some of the uncertainty and some
Speaker 1: of the potential UH impacts of a potential pandemic. So,
Speaker 1: speaking of this apprehension, Katie, the last time I saw
Speaker 1: you was early March. It seems like a lifetime ago
Speaker 1: because we were actually face to face in person. Doesn't
Speaker 1: happen anymore. I believe it was on on March six. Then.
Speaker 1: At the time, the SMP had fallen twelve percent, and
Speaker 1: little did anyone know that from that point we still
Speaker 1: had roughly or more to go. We would also all
Speaker 1: be entering stay at home orders. Businesses would be shutting.
Speaker 1: And at the time you expressed that apprehension, and around
Speaker 1: the same period you also authored a report and within
Speaker 1: it you said the market smells as skunk, precisely for
Speaker 1: those reasons that other asset classes were signaling caution and
Speaker 1: and it makes me think, I mean, if the market
Speaker 1: quote unquote smelled the skunk, then well then what does
Speaker 1: it smell now, because I mean, you look at oil
Speaker 1: prices this past week, which dropped below twenty a barrel
Speaker 1: for w t I again, and at the same time,
Speaker 1: we haven't really seen bond prices react all that much.
Speaker 1: But meanwhile, we've just seen equity markets turn around to
Speaker 1: the upside pretty forcefully, exactly. And what's interesting for us
Speaker 1: is that we saw tremendous trends in the cross asset space.
Speaker 1: So there were tremendous opportunities in fixed income UM, short energies,
Speaker 1: short industrial metals, long precious metals. UH. The currency market
Speaker 1: has been a little bit more of it back and
Speaker 1: forth in all of this situation, but in general, the
Speaker 1: trends that we were seeing were relatively strong, much stronger
Speaker 1: than the typical amount of trend that you would see
Speaker 1: UM in a time where people are not concerned. And
Speaker 1: this is why these strategies actually do very well in
Speaker 1: these environments is that during periods of fear or distress,
Speaker 1: people are much more coordinated and how they behave and
Speaker 1: prices as a result, can also move in a much
Speaker 1: more coordinated way, which means that a particular strategy that's
Speaker 1: actually measuring and monitoring these trends can actually capture them.
Speaker 1: So I often think about our positioning as an aggregate
Speaker 1: estimate or view of what the market thinks, where the
Speaker 1: market's going. So if I take a look back in
Speaker 1: January at the beginning of this what was concerning to
Speaker 1: me is I saw a lot of strength in terms
Speaker 1: of a lot of bullish signals for fixed income, you know,
Speaker 1: kind of in some sense hesitation about the equity markets.
Speaker 1: I also saw a lot of strength in terms of
Speaker 1: short positions in things like energies, and as you know,
Speaker 1: oftentimes energies fall with equities but don't recover as much
Speaker 1: um And so we saw all of these type of
Speaker 1: signs and strengthening, especially in flight to safety trades in
Speaker 1: terms of the cross assets that we monitor, which was
Speaker 1: indicative that half of the things we were looking at
Speaker 1: we're looking a little ominous. And the equity markets were
Speaker 1: yet to fall Asian markets were a little bit weaker.
Speaker 1: But as we saw markets fall out in February into March,
Speaker 1: then the theme became coordinated and it was very much
Speaker 1: a a theme of crisis. And since that point we
Speaker 1: saw that continue throughout March. Um our signals have gone
Speaker 1: from being very cautiously optimistic about equities to cautiously pessimistic.
Speaker 1: Um not in size, but definitely right now the way
Speaker 1: we're thinking about things, because you asked about positioning, UM,
Speaker 1: if I take a look at how trends signals are
Speaker 1: looking right now, there's definitely a very cautious view on equities,
Speaker 1: cautious and slightly negative. Yeah. I'm sure everyone right now
Speaker 1: is having to make very difficult decisions. And when you
Speaker 1: say that the stands currently, at least regarding equities is
Speaker 1: cautiously pessimistic, can you maybe walk us through the evolution
Speaker 1: of the strategy maybe from the end of January to
Speaker 1: the point at which we get to this point now
Speaker 1: where we've had a nice rebound off of the lows
Speaker 1: and the strategy is pessimistic. I know it changes quite often,
Speaker 1: but can you maybe give us a sense of how
Speaker 1: the strategy did change throughout time as markets were moving
Speaker 1: up until this point. Yeah, I will run through how
Speaker 1: the strategy had moved, But then at the end I'll
Speaker 1: maybe give some um overall view in terms of what
Speaker 1: could be driving this UM. So we'll start with at
Speaker 1: the beginning of the year. UM. It was quite interesting
Speaker 1: because after a year that was so phenomenally good for
Speaker 1: the equity markets last year, things were looking good. Bond
Speaker 1: markets had been more range bound and reverted somewhat in December,
Speaker 1: so it was really looking like a very pro equity
Speaker 1: market environment. UM. I know, growth estimates were a little
Speaker 1: bit more muted than the priory prior year, but in general,
Speaker 1: the risk on theme had grown a lot, and we've
Speaker 1: seen that in em currencies, we've seen that in equities.
Speaker 1: But then later in the month and around mid month
Speaker 1: in January, as people started to notice some of the
Speaker 1: things that we're going on in Asia, we noticed that
Speaker 1: our potential signals in fixed income started actually to tick up,
Speaker 1: our short view on energy started to grow. And then
Speaker 1: as we had sort of an initial hiccup at the
Speaker 1: end of January, we started to pick up some potential
Speaker 1: concern um, not in US equity markets, but in some
Speaker 1: of the cross asset markets. And what was interesting is
Speaker 1: that you start to get to a position which looked
Speaker 1: very hedged, so it was long equities, long fixed income,
Speaker 1: short energy. Now, if you think about that, that's really
Speaker 1: a hedged position. It's almost like a no position in
Speaker 1: the sense that you're kind of if equities go down,
Speaker 1: you have things that might go up UM in terms
Speaker 1: of your positioning. So that continued in through the month
Speaker 1: of February. So February nineteen was the peak before the
Speaker 1: great fall. And what's been interesting about that is that
Speaker 1: all of the other signals that we were seeing and
Speaker 1: other asset classes just extended during these periods of time.
Speaker 1: So the short energy trade grew strength. We also saw
Speaker 1: a fixed income positively responding to that. So for us,
Speaker 1: it was really about UM, a somewhat hedged position. So
Speaker 1: Trent following an average was roughly flat for the month
Speaker 1: of February, which I think is relatively spectacular given the
Speaker 1: type of moves that we saw. Then in March, as
Speaker 1: we were seeing this move continue, we we're getting out
Speaker 1: of equity markets and trend failing signals were reducing exposure
Speaker 1: to equities down to an almost neutral to very low position,
Speaker 1: and we saw continued gains in fixed income and as
Speaker 1: well as commodity markets. Okayny I love if you could
Speaker 1: sort of explain for us some of the signals that
Speaker 1: define a trend uh in your strategies. Um, you know,
Speaker 1: is it as simple as something like a moving average? Uh?
Speaker 1: You know, I imagine there's a lot of complex math involved.
Speaker 1: But what are some of the sort of cornerstones of
Speaker 1: identifying a trend that the strategy uses. So the key
Speaker 1: approach to trend falling is about taking many different technical
Speaker 1: methodologies and using those to create some sort of score
Speaker 1: or vote in terms of the direction of an individual market.
Speaker 1: So this requires you to parameterize how much data you're
Speaker 1: going to use and what methodology you're going to use
Speaker 1: in terms of measuring the strength of that particular trend.
Speaker 1: What we tend to do, and what many in the
Speaker 1: space tend to do, is we use a wide range
Speaker 1: of different methodologies, some using more technical simple terms like
Speaker 1: moving averages and breakout signals, and others too as complicated
Speaker 1: as drawing from the machine learning literature and trying to
Speaker 1: do things a little bit more nonlinearly. So overall, I
Speaker 1: tend to explain a trend filling system is really similar
Speaker 1: to a voting system. You have many different models with
Speaker 1: different time horizons in terms of how much data they're using,
Speaker 1: and they all come together an aggregate to vote on
Speaker 1: where the market is going. So if you think about
Speaker 1: what we're really trying to do, we're taking in all
Speaker 1: this data from the markets would as you know, if
Speaker 1: you look at a week, and you look at a month,
Speaker 1: and you look at a year, they can look very different.
Speaker 1: Try to use mathematical techniques to measure those and then
Speaker 1: aggregate them together. Let those approaches vote to create an
Speaker 1: overall signal. What this means is that in aggregate we
Speaker 1: are trying to measure all the information and bring it
Speaker 1: together to give ourselves an overall view of where the
Speaker 1: market's going. Because trend falling is really just momentum trading
Speaker 1: across different assets. You're following where things are moving, and
Speaker 1: you're adjusting as the world changes. Whenever there is a
Speaker 1: heightened state of volatility in the market, UM, there's this
Speaker 1: tendency for analysts or or market pundits who can't really
Speaker 1: explain what's going on, to sort of point the finger
Speaker 1: at the machines running quant strategies. Uh. You know, if
Speaker 1: if not trend following, then uh, volatility targeting and UM
Speaker 1: even risk parity that sort of thing, And you know
Speaker 1: that it's kind of an easy scapegoat. I guess for
Speaker 1: for some people to say, you know, this market doesn't
Speaker 1: make any sense to anyone but a machine running the
Speaker 1: strategy and the application. A lot of times is that
Speaker 1: UM uh quant strategies tend to do the same type
Speaker 1: of thing you're talking about, UH, all sort of reacting
Speaker 1: maybe racking to different signals, but the end result being
Speaker 1: to sell or buy all at the same time and
Speaker 1: possibly exaggerate the moves in the market. UM. Does do
Speaker 1: you think that really happens in general? Uh? And specifically?
Speaker 1: And and say the volatility we've seen the last couple
Speaker 1: of months, UM or is it just impossible to know
Speaker 1: and sort of impossible to dice sacked what is causing
Speaker 1: massive swings like that? I always see and and I
Speaker 1: think it's an easy narrative to say that, because it's
Speaker 1: easier to blame a machine than a person. UM. But
Speaker 1: one other thing is is that I always go back
Speaker 1: to the basic tenants of volatility. Volatility represents uncertainty. When
Speaker 1: things go up and down a lot, it's because people,
Speaker 1: whether or not it's algorithm or a person, I don't
Speaker 1: know what's going on, and they're unsure about where the
Speaker 1: markets are going, and I would say that across the
Speaker 1: quant space it's actually been very mixed. Trend Falling strategies
Speaker 1: are one of the only strategies that have really tend
Speaker 1: to do very well in this environment. It actually turns
Speaker 1: out that a lot of the other quant strategies have
Speaker 1: struggled UM. The reason being is that they may have
Speaker 1: very specific hedges or offsets and in strategies that when
Speaker 1: things get volatile, things get complicated for them. UM. And
Speaker 1: so I would say that I tend to think about
Speaker 1: volatility is really our perception or it's a measurement of
Speaker 1: our view of uncertainty. So the environment that we just
Speaker 1: went into, and you can probably you probably agree with
Speaker 1: me yourself, is that the idea of a pandemic, the
Speaker 1: idea of staying at home, the idea of a lockdown
Speaker 1: UM is something so uncertain that it is not at
Speaker 1: all surprising to me that markets would be up and
Speaker 1: down every other day. Because volatility is a measure of
Speaker 1: uncertainty things going around UM A lot is much more
Speaker 1: about how we feel about what things, what things are worth. UM.
Speaker 1: Now could UH systematic managers or quad managers when people
Speaker 1: do the same thing move these things more, it's possible.
Speaker 1: I'd have to do a much more extensive research and
Speaker 1: really get into the data. I know that even when
Speaker 1: we looked at the flash crash, I know the CFTC
Speaker 1: did some extensive analysis of that and found actually that
Speaker 1: it was a fundamental trade that was just too large
Speaker 1: that created a dislocation. So I think I think that's
Speaker 1: a great question. It's definitely a good narrative. People like
Speaker 1: it blame the machine, um, But for me, it's really
Speaker 1: this volatility isn't someone's fault. It's more that we don't know.
Speaker 1: It's really representative of how unsure the markets are about
Speaker 1: what's going on. No, there's no doubt that headlines news
Speaker 1: flow has been on hyper drive. It scenes and Mike,
Speaker 1: you know that that has given us plenty of opportunities
Speaker 1: at least to uh think of crazy things for our
Speaker 1: crazy things and markets for sure, So what did what's
Speaker 1: your best? What has been shocking to me has been
Speaker 1: the contango in oil that we have seen the fact
Speaker 1: that may oil pray says we're nineteen and September thirty something,
Speaker 1: and I saw a report from Bloomberg today that people, um,
Speaker 1: so going back to what we saw bonds in the
Speaker 1: summer where people are willing to pay to own German debt.
Speaker 1: Now we have a situation where you get paid to
Speaker 1: sell gasoline, So maybe that's the next thing. We all
Speaker 1: go around and find gasoline and sell it, because, um,
Speaker 1: that's a weird world that you could get paid to
Speaker 1: actually sell gasoline. There must be just oil tigers crowded
Speaker 1: off the shores right now full of oil. It's it's
Speaker 1: an amazing Uh, that is an amazing situation. Apparently they
Speaker 1: said it was twelve cents a gallon in in North
Speaker 1: Dakota for oil. Well that's a good one, Katie, and
Speaker 1: you get you get props for sticking close to the markets, Sara,
Speaker 1: can you top Katie's oil can tango? So I brought
Speaker 1: to one that's markets related and one that's less so so,
Speaker 1: but I'll start with the market related one and that's that.
Speaker 1: Now the five largest companies make up which is a
Speaker 1: new record. And I think it's just been pretty amazing
Speaker 1: that we continue to see a lot of these mega
Speaker 1: cap technology and internet companies just continue to perform so
Speaker 1: well in this type of environment. I think like a
Speaker 1: couple of years ago, people would have said that when
Speaker 1: the bull market came to an end. The companies that
Speaker 1: let on the way up, we're going to lead on
Speaker 1: the way down and that and that certainly hasn't happened. Um.
Speaker 1: So I think the fact that we have a new
Speaker 1: record related to top heaviness in the market is pretty crazy.
Speaker 1: For one, Yeah, absolutely absolutely, and then uh, the less
Speaker 1: markets related one really not related to the markets at all.
Speaker 1: There was just a great story in the New York Times.
Speaker 1: It was a bit uh, someone would say humorous. Um,
Speaker 1: but the headline reads Trump wanted a radio show, but
Speaker 1: he didn't want to compete with them, and it's it's
Speaker 1: a great read if you have some downtime. Essentially, it's
Speaker 1: just details President Trump going to one of the Coronavirus
Speaker 1: Task Force meetings and laying out this plan that he
Speaker 1: wanted to have a two hour radio show each day. Um.
Speaker 1: And the only reason he didn't want to do it
Speaker 1: is because he didn't want to knock Rush Limbaugh's ratings. Um.
Speaker 1: It's it's an interesting rate. Uh, it's just a bit
Speaker 1: humorous in these In these times, he has a two
Speaker 1: hour TV show every night at the at the press
Speaker 1: count right now, he has a TV show instead with
Speaker 1: with great ratings so crazy times. I'm not sure how
Speaker 1: two hours on the radio helps him fight the virus,
Speaker 1: but he does like to talk, so UM, I have
Speaker 1: no no doubt he could fill two hours or radio
Speaker 1: time a day. All right, these are all pretty good.
Speaker 1: I will I'll give you mine, um mine. As you know,
Speaker 1: I like to push the boundaries of what is considered
Speaker 1: a market story. Uh, but this is certainly crazy now.
Speaker 1: One of the most depressing things about this virus, uh
Speaker 1: for the average person who hasn't really had to deal
Speaker 1: with with a sick or dying relative, but the lack
Speaker 1: of sports on TV uh throughout this has been traumatic
Speaker 1: for a lot of people, um, especially gamblers. And here's
Speaker 1: where we get into the markets. Now that online gambling
Speaker 1: is legal in some states, I I think it's okay
Speaker 1: to consider that an official market, at least for the
Speaker 1: purposes of this crea before. Yeah, at least for the
Speaker 1: purposes of this this crazy observation. So the first major
Speaker 1: league sport to get back in business, do you know
Speaker 1: what it is? Well, not counting world wide wrestling. Uh,
Speaker 1: that's what I was gonna say. W w Okay, I
Speaker 1: guess that might be there might be a tie between that,
Speaker 1: but you can't. You can't gamble on that. I mean,
Speaker 1: I guess you could. But if you're gonna gamble on
Speaker 1: professional professional wrestling, then you've got goods of major problems.
Speaker 1: But I believe if you have inside information, right, yeah,
Speaker 1: but those are all plans anyways, right, they're all chograph's
Speaker 1: bet on the good guy. I guess um. They're is
Speaker 1: a league called the Major League Eating League, and it's
Speaker 1: these guys you know, like at the hot dog eating
Speaker 1: contests on Conan Island. It's all those guys. Uh. It's
Speaker 1: been officially turned into a league called Major League Eating
Speaker 1: and they believe they are the first professional sport to
Speaker 1: get back in business. They're having eating tournament. Everyone's gonna
Speaker 1: be at their home zooming in or or skyping in.
Speaker 1: I guess uh. And you'll be able to gamble on it.
Speaker 1: They've already set some of the over unders and stuff
Speaker 1: like that on it. Let me just tell you what
Speaker 1: you have to do to to participate in this tournament.
Speaker 1: So the qualifying round will consist of two pounds of
Speaker 1: slice bologney. So you have the two pounds of slice bologney,
Speaker 1: and it's a race. So who can eat that two
Speaker 1: pounds of blowney. The fastest I've read somewhere the overunder
Speaker 1: was like sixty nine seconds three to eat two pounds
Speaker 1: of blaney. So um, So, Mike, you're not you're not
Speaker 1: going to try to take part of Maybe if it
Speaker 1: was I don't know about bolony the quarter finals hot dogs,
Speaker 1: I could I don't know, I could kind of see that.
Speaker 1: If it was chicken wings, maybe I I could get
Speaker 1: into that. I'm from Philly, where the the big competition
Speaker 1: is the chicken chicken wing eating competitions. But so then
Speaker 1: from the quarterfinals, uh, you'll have to eat a family
Speaker 1: sized pack of oreos and a half a gallon of milk.
Speaker 1: That doesn't seem that tough actually, but here's where, yeah,
Speaker 1: here's where they really will separate the pros from the amateurs. Though. Uh.
Speaker 1: To make it to the finals, you'll have to eat
Speaker 1: over a gallon of baked beans. Oh and if you
Speaker 1: win that, the the finals consists of ten individual cups
Speaker 1: of ramen noodles. Um. But I think that gun. I
Speaker 1: wonder who comes up with this stuff beans and ramen?
Speaker 1: What are they assuming more people have these things at
Speaker 1: their home. I wonder if that's it. Yeah. Yeah, Oreos
Speaker 1: the gaunt of baked beans, I think is the deal
Speaker 1: breaker there. I don't, I don't know, I I I
Speaker 1: pity the person who gets that far. It's a hard one.
Speaker 1: I must say. I haven't been dragged into eating a
Speaker 1: food watching it. But I've been watching um the horse
Speaker 1: tournaments for the NBA and the w n b A
Speaker 1: and also i've been watching some NBA players playing two
Speaker 1: K on Xbox, which has been a pretty entertaining and
Speaker 1: this time. Yeah, yeah, that's that's not bad. Let's say, Hey,
Speaker 1: it beats beats watching a rerun of a game. Anyway, Katie,
Speaker 1: maybe you could get your pals and m I t
Speaker 1: you could have like a New England clam chowder eating competition.
Speaker 1: Why not? I think I think it's probably hard to
Speaker 1: get ahold of some fresh clam chowder around here. I
Speaker 1: don't know. Maybe there's a delivery service to check if legal, right, Uh,
Speaker 1: all right, well do what you gotta do in these times.
Speaker 1: But on that note, anyways, Katie Kaminski, thank you so
Speaker 1: much for joining the show this week. Thank you so
Speaker 1: much for having me. What goes up? We'll be back
Speaker 1: next week. Until then, you can find us on the
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Speaker 1: Up is produced by Toper Foreheads. The head of Bloomberg
Speaker 1: Podcast is Francesca Levie. Thanks for listening, See you next time.
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