1 00:00:10,880 --> 00:00:15,040 Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast. 2 00:00:15,120 --> 00:00:19,479 Speaker 1: I'm Joe Wasntal and I'm Tracy Halloway. It feels like 3 00:00:19,480 --> 00:00:23,959 Speaker 1: we're a little bit of a moment of volatility. I mean, obviously, 4 00:00:24,040 --> 00:00:26,880 Speaker 1: the last eighteen or twenty months now have been this 5 00:00:26,960 --> 00:00:32,440 Speaker 1: sort of extraordinary bull run, full on grab for risk, etcetera. 6 00:00:33,000 --> 00:00:34,800 Speaker 1: I have no idea whether that's coming to an end 7 00:00:34,880 --> 00:00:36,920 Speaker 1: or not, but it feels like with the FED and 8 00:00:37,120 --> 00:00:40,800 Speaker 1: inflation of stuff, we're a little bit of a wobble here. Yeah. 9 00:00:40,840 --> 00:00:43,279 Speaker 1: So we're recording this on the first of December. And 10 00:00:43,560 --> 00:00:46,280 Speaker 1: one of the more interesting things about the past week 11 00:00:46,400 --> 00:00:50,760 Speaker 1: or so is that the wobble started even before we 12 00:00:50,840 --> 00:00:55,280 Speaker 1: had the sort of discovery or the big kerfuffle around 13 00:00:55,320 --> 00:00:59,560 Speaker 1: the new COVID variant Oh my Crown. And it also 14 00:00:59,600 --> 00:01:02,920 Speaker 1: started before we had the FED really start to signal 15 00:01:03,440 --> 00:01:07,200 Speaker 1: that it was looking to potentially taper and raise interest 16 00:01:07,280 --> 00:01:11,440 Speaker 1: rates at a faster pace than the market had been anticipating. 17 00:01:12,000 --> 00:01:14,960 Speaker 1: And this is really interesting to me because, like I 18 00:01:15,000 --> 00:01:17,880 Speaker 1: was kind of thinking back to two thousand seven and 19 00:01:17,959 --> 00:01:21,240 Speaker 1: the quant crisis that we saw that was sort of 20 00:01:21,280 --> 00:01:24,319 Speaker 1: the forerunner to the big financial crisis, and I wouldn't 21 00:01:24,319 --> 00:01:27,360 Speaker 1: want to say that we're about to see something as extreme, 22 00:01:27,800 --> 00:01:30,200 Speaker 1: but it was pretty striking that, you know, in the 23 00:01:30,319 --> 00:01:35,160 Speaker 1: last week of November, when stocks were still basically at 24 00:01:35,160 --> 00:01:38,720 Speaker 1: their all time highs, we did have all this stuff 25 00:01:38,720 --> 00:01:41,640 Speaker 1: that was sort of happening just under the surface. So 26 00:01:41,680 --> 00:01:44,480 Speaker 1: a lot of factor strategies getting hit. A lot of 27 00:01:44,520 --> 00:01:48,440 Speaker 1: the stocks, you know, the growth stocks that were beloved 28 00:01:48,480 --> 00:01:53,200 Speaker 1: by hedge funds UM seemed to be getting hit quite violently. UM. 29 00:01:53,240 --> 00:01:56,240 Speaker 1: So that was kind of striking, like something is definitely happening. 30 00:01:56,400 --> 00:02:00,080 Speaker 1: I'm just not entirely sure what now. You flagged it 31 00:02:00,760 --> 00:02:05,400 Speaker 1: early in a piece in your newsletter, pointing out exactly 32 00:02:05,400 --> 00:02:07,040 Speaker 1: that that is some of There are all these things 33 00:02:07,080 --> 00:02:10,480 Speaker 1: going on, particularly this concentration and this idea that they 34 00:02:10,480 --> 00:02:14,040 Speaker 1: are these very popular investments, and maybe the public gets 35 00:02:14,040 --> 00:02:16,360 Speaker 1: into them and hedge funds get into them, and they 36 00:02:16,400 --> 00:02:18,680 Speaker 1: start to get sold for what might some might be 37 00:02:18,720 --> 00:02:21,880 Speaker 1: called like non economic reasons. And nothing we've seen lately 38 00:02:22,000 --> 00:02:25,040 Speaker 1: like comes close to say this the so called quant 39 00:02:25,120 --> 00:02:28,560 Speaker 1: meltdown the year before the financial crisis hit. But it 40 00:02:28,720 --> 00:02:30,840 Speaker 1: is true that, you know, you have these periods where 41 00:02:30,840 --> 00:02:32,720 Speaker 1: like these winners emerge and the way to win the 42 00:02:32,760 --> 00:02:35,240 Speaker 1: game is to just double a triple down on a 43 00:02:35,280 --> 00:02:38,040 Speaker 1: handful of names, and then as soon as there's any 44 00:02:38,120 --> 00:02:41,840 Speaker 1: elevativation of volatility and you have to pull down your risk. 45 00:02:42,120 --> 00:02:44,240 Speaker 1: You can see some really ugly charts, and there are 46 00:02:44,280 --> 00:02:47,080 Speaker 1: some really ugly charts of a lot of tech but 47 00:02:47,120 --> 00:02:49,720 Speaker 1: not just tech, sort of tech momentum names that have 48 00:02:49,800 --> 00:02:54,440 Speaker 1: been super popular for a while after over the pandemic period. Yeah, 49 00:02:54,600 --> 00:02:57,919 Speaker 1: definitely the air getting kicked out of some of those 50 00:02:58,240 --> 00:03:01,399 Speaker 1: tech tires, I guess. But all of it, I mean, look, 51 00:03:01,400 --> 00:03:03,800 Speaker 1: all of it comes back to a question that people 52 00:03:03,840 --> 00:03:06,919 Speaker 1: have been asking for a while now, I mean basically 53 00:03:06,960 --> 00:03:10,080 Speaker 1: ever since two thousand nine, which was, you know, after 54 00:03:10,120 --> 00:03:13,560 Speaker 1: the last financial crisis, and that is are we in 55 00:03:13,639 --> 00:03:18,920 Speaker 1: a bubble? Are these types of asset valuations unsustainable in 56 00:03:19,160 --> 00:03:22,919 Speaker 1: one way or another? And secondly, if they are unsustainable, 57 00:03:23,040 --> 00:03:25,920 Speaker 1: what is going to be the catalyst that actually ends 58 00:03:26,000 --> 00:03:29,440 Speaker 1: up popping the bubble? Because so far we haven't really 59 00:03:29,480 --> 00:03:32,000 Speaker 1: seen it. I mean, we've seen corrections, but we haven't 60 00:03:32,040 --> 00:03:35,200 Speaker 1: seen anything on the magnitude of what people have been 61 00:03:35,200 --> 00:03:39,960 Speaker 1: sort of worried about. March, of course, um was the 62 00:03:39,960 --> 00:03:45,200 Speaker 1: big moment for markets, but that reversed amazingly quickly. Yeah, 63 00:03:45,200 --> 00:03:47,320 Speaker 1: And I would have said one more thing, which is 64 00:03:47,440 --> 00:03:51,080 Speaker 1: a like, are there bubbles? Is there a lot of speculation, etcetera. 65 00:03:51,120 --> 00:03:54,520 Speaker 1: But be is any of the bubblish activity, or if 66 00:03:54,560 --> 00:03:56,960 Speaker 1: there is bubblish activity, does any of it pose a 67 00:03:57,000 --> 00:03:59,480 Speaker 1: threat to financial stability? So it's like we could look 68 00:03:59,480 --> 00:04:03,120 Speaker 1: at like cryptocurrency and say, look, this is unsustainable, and 69 00:04:03,160 --> 00:04:06,280 Speaker 1: probably for many of them they are. But on the 70 00:04:06,320 --> 00:04:09,840 Speaker 1: other hand, much of that activity, perhaps someone could argue, 71 00:04:10,360 --> 00:04:13,560 Speaker 1: is not a threat to financial stability. So these are 72 00:04:13,600 --> 00:04:16,480 Speaker 1: all like big questions that people are always wrestling with. 73 00:04:16,520 --> 00:04:18,920 Speaker 1: But I think, you know, again these days, I don't 74 00:04:18,960 --> 00:04:21,600 Speaker 1: want to over dramaticize the moves we've seen as of now, 75 00:04:21,960 --> 00:04:23,880 Speaker 1: but you know, once again, some of these questions have 76 00:04:24,120 --> 00:04:26,560 Speaker 1: come to the come to the form. It's a good 77 00:04:26,600 --> 00:04:29,320 Speaker 1: time to ask these questions again. I feel like we 78 00:04:29,400 --> 00:04:32,040 Speaker 1: have a strong news peg in the form of recent 79 00:04:32,040 --> 00:04:34,000 Speaker 1: market development. So we're gonna seize on it, and we're 80 00:04:34,040 --> 00:04:37,240 Speaker 1: going to be discussing all these big questions with really 81 00:04:37,279 --> 00:04:40,880 Speaker 1: the perfect person, right, Yeah, we have the perfect person. 82 00:04:41,040 --> 00:04:44,280 Speaker 1: I'm very excited. We're gonna be speaking to Rick Bookstaber, 83 00:04:44,360 --> 00:04:47,000 Speaker 1: Richard Bookstaber. He is the co founder of a new 84 00:04:47,040 --> 00:04:51,720 Speaker 1: firm called Fabric that provides risk management solutions to financial firms. 85 00:04:52,000 --> 00:04:55,680 Speaker 1: He's well known for his writing and theory in the 86 00:04:55,720 --> 00:04:58,600 Speaker 1: world of like risk management. He has a well known 87 00:04:58,640 --> 00:05:01,520 Speaker 1: book that came out prior to the Great Financial Crisis, 88 00:05:01,560 --> 00:05:05,000 Speaker 1: Learning about Complexity and Derivatives is the title A Demon 89 00:05:05,120 --> 00:05:08,120 Speaker 1: of Our Own Design. Many people view that book as 90 00:05:08,160 --> 00:05:11,200 Speaker 1: having been prophetic about some of the uh some of 91 00:05:11,240 --> 00:05:13,680 Speaker 1: the issues that helped blow up the financial system and 92 00:05:13,720 --> 00:05:18,240 Speaker 1: the economy. He's done risk management at various firms, including Bridgewater, 93 00:05:18,560 --> 00:05:21,640 Speaker 1: So we're going to be speaking to him about financial 94 00:05:21,640 --> 00:05:24,359 Speaker 1: stability and markets right now and how he thinks about 95 00:05:24,480 --> 00:05:28,159 Speaker 1: risks and risks to the system. Rick Bookstaber, thank you 96 00:05:28,240 --> 00:05:31,839 Speaker 1: very much for coming on odd lots, Thanks thanks for 97 00:05:31,920 --> 00:05:34,840 Speaker 1: having me. Why do you start off by telling us 98 00:05:34,839 --> 00:05:37,440 Speaker 1: like sort of what you're up to these days? Like 99 00:05:37,720 --> 00:05:40,120 Speaker 1: you know a lot of people almost certainly know you 100 00:05:40,320 --> 00:05:44,240 Speaker 1: from that book A Demon of Our Own Design, Tracy 101 00:05:44,400 --> 00:05:46,400 Speaker 1: is we're talking about a little bit before. Tracy kept 102 00:05:46,400 --> 00:05:47,920 Speaker 1: it out our desk for a long time, wanted sort 103 00:05:47,920 --> 00:05:51,560 Speaker 1: of a legendary book. What have you been working on 104 00:05:51,760 --> 00:05:57,640 Speaker 1: in some in recent years. So I recently left the 105 00:05:57,720 --> 00:06:01,080 Speaker 1: University of California where I was the chief risk officer 106 00:06:01,240 --> 00:06:06,080 Speaker 1: for their pension and endowment. Um interesting, the University of 107 00:06:06,080 --> 00:06:09,479 Speaker 1: California has bet a hundred and seventy billion dollars to 108 00:06:09,560 --> 00:06:12,920 Speaker 1: manage between the pension and endowment, and I left there 109 00:06:12,960 --> 00:06:17,120 Speaker 1: to start this firm Fabric, which is really focused on 110 00:06:17,160 --> 00:06:25,120 Speaker 1: providing risk management to wealth advisors and the investment advisory community, 111 00:06:25,960 --> 00:06:30,359 Speaker 1: essentially taking the sort of risk capabilities that I developed 112 00:06:30,839 --> 00:06:34,960 Speaker 1: as I've been in various institutional positions as chief risk 113 00:06:35,000 --> 00:06:40,320 Speaker 1: officer in order to deliver higher quality risk management capabilities 114 00:06:40,400 --> 00:06:44,320 Speaker 1: to the financial advisors. So I'm just going to go 115 00:06:44,360 --> 00:06:49,240 Speaker 1: ahead and jump to the big question to Jore, which 116 00:06:49,279 --> 00:06:51,680 Speaker 1: has to be you know, are we in a bubble? 117 00:06:51,800 --> 00:06:57,440 Speaker 1: Do you see signs or evidence here of bubble like conditions? Well, 118 00:06:57,520 --> 00:07:00,400 Speaker 1: I hate to say bubble because when you say bubble, 119 00:07:00,520 --> 00:07:04,359 Speaker 1: that's always got a sense of prediction to it. But 120 00:07:04,440 --> 00:07:07,680 Speaker 1: I would say that we're in a very vulnerable situation, 121 00:07:08,200 --> 00:07:12,080 Speaker 1: a period of high risk. So the level of risk 122 00:07:12,080 --> 00:07:15,280 Speaker 1: in the market is really greater than what you might 123 00:07:15,320 --> 00:07:20,880 Speaker 1: observe looking at day to day price action, looking at volatility. 124 00:07:20,920 --> 00:07:23,600 Speaker 1: So how do you establish that quantitatively or I mean 125 00:07:23,640 --> 00:07:25,520 Speaker 1: we all feel it, right, we all look at crypto 126 00:07:25,560 --> 00:07:27,320 Speaker 1: and to go, this is crazy, or we go might 127 00:07:27,440 --> 00:07:29,960 Speaker 1: look at meme stocks, I think it's kind of nuts. 128 00:07:30,080 --> 00:07:32,320 Speaker 1: Or the degree to which people are just talking about 129 00:07:32,360 --> 00:07:36,080 Speaker 1: trading is very intense, like nothing we've seen since the 130 00:07:36,160 --> 00:07:38,720 Speaker 1: late nine days, for sure, But these are just like 131 00:07:38,760 --> 00:07:42,320 Speaker 1: sort of like gut feelings, emotions, stuff like that. How 132 00:07:42,320 --> 00:07:45,240 Speaker 1: do you go about, actually from a risk management perspective, 133 00:07:45,480 --> 00:07:49,400 Speaker 1: attempting to quantify the level of risk in the market 134 00:07:49,440 --> 00:07:52,920 Speaker 1: so that it's not just feel Crypto and n f 135 00:07:53,000 --> 00:07:57,560 Speaker 1: T s certainly are canaries in the coal mine. It's 136 00:07:57,560 --> 00:08:01,040 Speaker 1: not quite like credit default swaps pre two thousand eight 137 00:08:01,120 --> 00:08:04,640 Speaker 1: because they're not integral to the market. So that is 138 00:08:05,400 --> 00:08:09,240 Speaker 1: a telling sign. But the key things that I look 139 00:08:09,280 --> 00:08:12,360 Speaker 1: at in terms of vulnerability are the extent that the 140 00:08:12,400 --> 00:08:19,280 Speaker 1: markets levered, the degree of concentration, and how much liquidity 141 00:08:19,520 --> 00:08:22,080 Speaker 1: we have in the market right now. It's like we're 142 00:08:22,120 --> 00:08:25,480 Speaker 1: all partying in a nightclub and having a great time, 143 00:08:25,760 --> 00:08:28,320 Speaker 1: but there's a lot of us jammed into that space. 144 00:08:29,200 --> 00:08:33,400 Speaker 1: So if a fire gets started, we're going to have 145 00:08:33,480 --> 00:08:36,520 Speaker 1: a hard time getting out of the exits. So we're 146 00:08:36,600 --> 00:08:40,480 Speaker 1: very concentrated, and if we're in a nightclub, those exits 147 00:08:40,480 --> 00:08:43,240 Speaker 1: are like the liquidity of the market, how quickly can 148 00:08:43,240 --> 00:08:48,000 Speaker 1: we get out? And uh leverage, which is also high 149 00:08:48,080 --> 00:08:50,599 Speaker 1: by a lot of measures right now, is sort of 150 00:08:50,640 --> 00:08:53,640 Speaker 1: the flammability of the space. How quickly can we get out? 151 00:08:54,400 --> 00:08:56,800 Speaker 1: So we're in a situation now where there's a lot 152 00:08:56,840 --> 00:09:01,840 Speaker 1: of crowding, a lot of concentration. We're although we can't 153 00:09:01,880 --> 00:09:06,360 Speaker 1: observe it day today, the liquidity that will be available 154 00:09:06,720 --> 00:09:10,360 Speaker 1: if people start to head to the excess is low. 155 00:09:11,360 --> 00:09:12,640 Speaker 1: And there are a lot of people who are going 156 00:09:12,679 --> 00:09:16,160 Speaker 1: to have to head to the exits because they're either 157 00:09:16,320 --> 00:09:19,760 Speaker 1: leveraged or they're out ahead of their skis in terms 158 00:09:19,760 --> 00:09:24,160 Speaker 1: of their exposure to the equity markets. So this idea 159 00:09:24,360 --> 00:09:28,600 Speaker 1: of rushing for the exits and everything getting rather crowded, 160 00:09:28,679 --> 00:09:33,880 Speaker 1: that's something that we did observe in March with the 161 00:09:33,880 --> 00:09:36,960 Speaker 1: big market crash, and in particular in the treasury market. 162 00:09:37,280 --> 00:09:40,480 Speaker 1: Um given these sort of relative value trades that a 163 00:09:40,480 --> 00:09:42,520 Speaker 1: lot of hedge funds had taken on, and given you know, 164 00:09:42,559 --> 00:09:47,040 Speaker 1: observations around liquidity problems in that market for quite some time, 165 00:09:47,440 --> 00:09:52,360 Speaker 1: I guess my question is does any of that matter nowadays, 166 00:09:52,440 --> 00:09:57,640 Speaker 1: like the experience of is that if things get bad enough, 167 00:09:58,800 --> 00:10:01,840 Speaker 1: the authorities will step in and prop up the market, 168 00:10:02,000 --> 00:10:04,920 Speaker 1: even with credit, which was one area of concern for 169 00:10:05,120 --> 00:10:08,839 Speaker 1: many many years after the financial crisis, the Federal Reserve 170 00:10:08,880 --> 00:10:13,679 Speaker 1: announced a new corporate bond buying facilities to help that market. 171 00:10:14,080 --> 00:10:17,679 Speaker 1: And even though we saw very dramatic price gaps on 172 00:10:17,720 --> 00:10:21,800 Speaker 1: the way down, arguably because of liquidity issues once again 173 00:10:21,840 --> 00:10:25,600 Speaker 1: and because of you know, crowded one way positioning, it 174 00:10:25,640 --> 00:10:28,360 Speaker 1: was very short lived. And here we are, you know, 175 00:10:28,679 --> 00:10:31,040 Speaker 1: almost two years later now or a year and a 176 00:10:31,080 --> 00:10:34,760 Speaker 1: half later, and it doesn't seem to matter that much. 177 00:10:35,559 --> 00:10:42,200 Speaker 1: What the FIT did in is really breathtaking. They're very aggressive, 178 00:10:42,520 --> 00:10:45,400 Speaker 1: very quick on the trigger, and they really saved the 179 00:10:45,480 --> 00:10:48,839 Speaker 1: markets from a disaster. The a lot of the e 180 00:10:49,000 --> 00:10:52,080 Speaker 1: t f s were failing, nobody could do the arbitrage 181 00:10:52,160 --> 00:10:56,680 Speaker 1: to keep them in line with the underlying stocks. Treasuries. 182 00:10:56,679 --> 00:11:00,439 Speaker 1: There's one day that the treasury market traded to hundred 183 00:11:00,440 --> 00:11:03,160 Speaker 1: and fifty million dollars. I mean, that's this is the 184 00:11:03,200 --> 00:11:05,719 Speaker 1: most liquid market in the world, and it basically was 185 00:11:05,760 --> 00:11:10,720 Speaker 1: shut down. So what the Fed did then was I 186 00:11:10,760 --> 00:11:13,959 Speaker 1: think one of the kind because the situation was one 187 00:11:14,000 --> 00:11:16,760 Speaker 1: of a kind, and they did a lot to pull 188 00:11:16,840 --> 00:11:20,520 Speaker 1: the market from the ABYSS. But there's two questions. Would 189 00:11:20,520 --> 00:11:23,760 Speaker 1: they have the will to do it if what we 190 00:11:23,840 --> 00:11:27,800 Speaker 1: have is simply replay of say two thousands I used 191 00:11:27,800 --> 00:11:31,680 Speaker 1: two thousands as a better example in two thousand eight. 192 00:11:32,080 --> 00:11:34,640 Speaker 1: And do they have the bullets available to do it? 193 00:11:34,880 --> 00:11:37,240 Speaker 1: I mean, typically the FED does not have in its 194 00:11:37,280 --> 00:11:41,200 Speaker 1: mandate tempering the markets when you're talking about credit markets, 195 00:11:41,559 --> 00:11:43,800 Speaker 1: you know, high yield markets, we're talking about e t 196 00:11:43,960 --> 00:11:46,719 Speaker 1: f s when you're talking about equities. So I think 197 00:11:46,720 --> 00:11:50,760 Speaker 1: would be foolish from a risk standpoint to bet on 198 00:11:50,840 --> 00:11:54,160 Speaker 1: that and to make decisions thinking that the FED is 199 00:11:54,200 --> 00:11:58,720 Speaker 1: going to back things up. So just on the liquidity point, 200 00:11:59,080 --> 00:12:02,560 Speaker 1: I mean, you were involved in the vocal rule, and 201 00:12:02,600 --> 00:12:05,640 Speaker 1: this is something that you know, the banks in particular 202 00:12:05,840 --> 00:12:10,520 Speaker 1: like to blame for liquidity issues in almost any market. 203 00:12:10,880 --> 00:12:13,840 Speaker 1: At the moment, they can't come in and take bets anymore, 204 00:12:14,120 --> 00:12:17,480 Speaker 1: and so you know, it means there's less market makers 205 00:12:17,520 --> 00:12:20,480 Speaker 1: and things get kind of weird because Wall Street doesn't 206 00:12:20,520 --> 00:12:23,480 Speaker 1: have the same amount of risk appetite that it once did. 207 00:12:23,840 --> 00:12:26,960 Speaker 1: Is that an argument that you buy into or would 208 00:12:26,960 --> 00:12:30,280 Speaker 1: you say that something like Vulcan has, at a minimum 209 00:12:30,320 --> 00:12:36,640 Speaker 1: at the margins affected liquidity. When I was at Treasury 210 00:12:36,720 --> 00:12:39,920 Speaker 1: and the sec U, you know, as you pointed out, 211 00:12:39,960 --> 00:12:44,679 Speaker 1: I was involved with developing the Vocal rule, and the 212 00:12:44,760 --> 00:12:48,400 Speaker 1: big argument that the broker dealers and banks had was 213 00:12:48,880 --> 00:12:53,040 Speaker 1: this is going to cramp liquidity. And the general sense 214 00:12:53,400 --> 00:12:55,960 Speaker 1: among the regulators was, oh, come on, you guys, yeah, 215 00:12:56,000 --> 00:12:58,720 Speaker 1: you'll figure out some reason to not have this put 216 00:12:58,720 --> 00:13:02,080 Speaker 1: in place because it does reduce their ability to make 217 00:13:02,120 --> 00:13:06,800 Speaker 1: money on the customer facing side. But actually they're right, 218 00:13:07,720 --> 00:13:11,640 Speaker 1: And you know, I pointed this out that the incentive 219 00:13:11,760 --> 00:13:14,800 Speaker 1: will no longer be there with the vocal rule to 220 00:13:14,920 --> 00:13:20,640 Speaker 1: be as aggressive in making markets because the profit capabilities 221 00:13:20,640 --> 00:13:24,880 Speaker 1: are not there. When I was at Solomon in THEES 222 00:13:25,240 --> 00:13:29,360 Speaker 1: and we had the emerging market crisis actually crisis because 223 00:13:29,360 --> 00:13:32,760 Speaker 1: you had Mexico and then Asia, we were losing money 224 00:13:32,800 --> 00:13:35,840 Speaker 1: with every trade, but we did it anyway because we 225 00:13:35,920 --> 00:13:40,560 Speaker 1: wanted to defend that franchise because pre vocal rule, you 226 00:13:40,600 --> 00:13:45,880 Speaker 1: could make money trading proprietarily on the customer desks. Well 227 00:13:45,920 --> 00:13:49,199 Speaker 1: that's not there anymore, and so there's no incentive or 228 00:13:49,240 --> 00:13:53,000 Speaker 1: certainly a much smaller incentive for a broker deal or 229 00:13:53,040 --> 00:13:55,800 Speaker 1: to step up to make markets if things are not 230 00:13:55,880 --> 00:14:00,760 Speaker 1: going well. So yes, I think the vocal rule has 231 00:14:00,880 --> 00:14:06,079 Speaker 1: restricted liquidity that market makers would make available in times 232 00:14:06,120 --> 00:14:11,160 Speaker 1: of distress or crisis. Now you know you have to say, well, 233 00:14:11,640 --> 00:14:14,320 Speaker 1: there's a devil's bargain there, because on the other hand, 234 00:14:15,240 --> 00:14:21,320 Speaker 1: you don't have broker dealers essentially front running clients. So 235 00:14:21,840 --> 00:14:25,200 Speaker 1: the balancing act was there the vocal rules put in place. 236 00:14:25,600 --> 00:14:29,560 Speaker 1: But it is a case that's reduced liquidity and and 237 00:14:29,600 --> 00:14:32,480 Speaker 1: I have to say reduced it in ways that are 238 00:14:32,520 --> 00:14:36,160 Speaker 1: not really evident day to day because everybody is more 239 00:14:36,160 --> 00:14:39,240 Speaker 1: than happy to make markets when there's no stress. So 240 00:14:39,280 --> 00:14:41,640 Speaker 1: this is what I want to get back to. And 241 00:14:41,680 --> 00:14:45,160 Speaker 1: I'm still like sort of searching for When you talk 242 00:14:45,240 --> 00:14:47,960 Speaker 1: about if if people run to the exits, and you 243 00:14:47,960 --> 00:14:50,600 Speaker 1: know that's gonna happen again at various times, there's going 244 00:14:50,680 --> 00:14:52,720 Speaker 1: to be the exit is going to be smaller than 245 00:14:52,760 --> 00:14:55,400 Speaker 1: people think, or that there is a high degree of 246 00:14:55,920 --> 00:15:00,040 Speaker 1: concentration of assets, and that is going to exact a 247 00:15:00,040 --> 00:15:03,560 Speaker 1: survey problems if or when when in fact they do come. 248 00:15:03,840 --> 00:15:06,520 Speaker 1: What are I mean other than the sort of theoretical 249 00:15:06,600 --> 00:15:10,720 Speaker 1: things and also, you know, on vulcaral aside, what are 250 00:15:10,720 --> 00:15:13,480 Speaker 1: the things specifically that you see sort of from a 251 00:15:13,560 --> 00:15:17,440 Speaker 1: numbers perspective or from a sort of qualitative perspective about 252 00:15:17,520 --> 00:15:21,000 Speaker 1: the trading, about position sizing that show you that this 253 00:15:21,120 --> 00:15:23,360 Speaker 1: is a vulnerable market, or that you say, we're in 254 00:15:23,400 --> 00:15:26,160 Speaker 1: an we're in an overcrowded nightclub and the fire warden 255 00:15:26,200 --> 00:15:29,640 Speaker 1: would not be happy with how many people are in it. Yeah, yea. 256 00:15:29,840 --> 00:15:32,440 Speaker 1: So so let me go through one by when the 257 00:15:32,520 --> 00:15:37,280 Speaker 1: issues in terms of leverage, liquid eating, concentration, right, in 258 00:15:37,360 --> 00:15:43,800 Speaker 1: terms of leverage, margin, debt less free cash balances is 259 00:15:43,840 --> 00:15:46,920 Speaker 1: that i'll say an all time high. The date only 260 00:15:46,920 --> 00:15:50,760 Speaker 1: goes back so far, but it's higher than even in 261 00:15:50,800 --> 00:15:55,880 Speaker 1: two thousands. And you have households that are more exposed 262 00:15:55,880 --> 00:15:59,800 Speaker 1: in their liquid assets, have more exposure to equities than 263 00:16:00,280 --> 00:16:04,920 Speaker 1: any time in recent history. And that's not strictly speaking leverage, 264 00:16:05,280 --> 00:16:07,760 Speaker 1: but that's what you might think of his hot money. 265 00:16:08,560 --> 00:16:12,680 Speaker 1: Things turn south. Households are going to realize that they 266 00:16:12,720 --> 00:16:17,000 Speaker 1: have more risk than they might have thought about and 267 00:16:17,080 --> 00:16:22,160 Speaker 1: start to liquidate. In terms of concentration, you've already made 268 00:16:22,160 --> 00:16:26,360 Speaker 1: the point. The top five stocks in the SMP makeup 269 00:16:26,720 --> 00:16:31,240 Speaker 1: around of the SMPS market camp. Of course, if everything 270 00:16:31,320 --> 00:16:35,120 Speaker 1: we're equal weighted, they'd be one The top ten stocks 271 00:16:35,640 --> 00:16:39,400 Speaker 1: are somewhere north of of the total SMP market camp, 272 00:16:39,880 --> 00:16:45,120 Speaker 1: and of course technology is dominant in that area. If 273 00:16:45,160 --> 00:16:49,480 Speaker 1: you go and look at the exposure to technology and 274 00:16:49,520 --> 00:16:54,480 Speaker 1: the SMP using a standard measure like the GICKS sectors, 275 00:16:54,760 --> 00:16:59,720 Speaker 1: it's around That's a level that we've seen at other 276 00:16:59,760 --> 00:17:03,560 Speaker 1: periods where we've ended up with market crisis. For banks, 277 00:17:03,920 --> 00:17:09,000 Speaker 1: it was over in two thousand seven for the Internet 278 00:17:09,400 --> 00:17:14,720 Speaker 1: and TMT stocks technology telecommic media, and two thousand was 279 00:17:14,800 --> 00:17:20,640 Speaker 1: over And by the way, is a low estimate because 280 00:17:21,640 --> 00:17:25,840 Speaker 1: we measure how much how many stocks are in the 281 00:17:25,840 --> 00:17:30,320 Speaker 1: technology sector based on their main business. Of course, many 282 00:17:30,480 --> 00:17:34,320 Speaker 1: companies have technology, and Amazon as a case in point, 283 00:17:34,359 --> 00:17:37,520 Speaker 1: they have cloud computing. And if you do things that way, 284 00:17:37,800 --> 00:17:40,800 Speaker 1: you get a number where it's close to of the 285 00:17:40,920 --> 00:17:45,840 Speaker 1: s and P is exposed to technology. By a lot 286 00:17:45,880 --> 00:17:51,119 Speaker 1: of measures. We've got concentration stocks, and we have concentration 287 00:17:51,880 --> 00:17:58,120 Speaker 1: uh in one particular sector that's leverage. And I already 288 00:17:58,160 --> 00:18:02,000 Speaker 1: spoke about the issue with liquidity. The market making is 289 00:18:02,040 --> 00:18:03,720 Speaker 1: not going to be there the way that it has 290 00:18:03,760 --> 00:18:07,320 Speaker 1: been in the past, and the amount of cash that's 291 00:18:07,320 --> 00:18:10,960 Speaker 1: available to supply in the event that people need to 292 00:18:11,040 --> 00:18:15,600 Speaker 1: head out the exit is low. Uh. The percent of 293 00:18:15,680 --> 00:18:19,720 Speaker 1: liquid assets and money market funds is lower than it's 294 00:18:19,760 --> 00:18:37,880 Speaker 1: been in recent history as well. So what would be 295 00:18:38,560 --> 00:18:42,520 Speaker 1: the catalyst in your view for you know, that big 296 00:18:42,640 --> 00:18:45,320 Speaker 1: rush to the exits. And the reason I asked is 297 00:18:45,359 --> 00:18:49,080 Speaker 1: because the experience of the two thousands was that the 298 00:18:49,200 --> 00:18:54,080 Speaker 1: thing that people thought was safe, um, you know, subpride 299 00:18:54,119 --> 00:18:57,760 Speaker 1: bonds that were being used as collateral. Uh in the 300 00:18:57,800 --> 00:19:02,280 Speaker 1: rebo market. Suddenly we're not very safe at all. And 301 00:19:02,680 --> 00:19:05,040 Speaker 1: I'm aware that, of course some people have been warning 302 00:19:05,040 --> 00:19:07,800 Speaker 1: about this problem for a while, but you know, the 303 00:19:07,840 --> 00:19:12,359 Speaker 1: majority of people were at least acting like everything was fine, um, 304 00:19:12,400 --> 00:19:17,280 Speaker 1: and the collateral was absolutely perfect to use. But nowadays 305 00:19:18,040 --> 00:19:23,000 Speaker 1: we've had so many warnings about specific risks. So people 306 00:19:23,040 --> 00:19:26,000 Speaker 1: have been warning about over value tech for a long time, 307 00:19:26,040 --> 00:19:29,240 Speaker 1: about concentration of big tech in the indusicries for a 308 00:19:29,240 --> 00:19:33,199 Speaker 1: long time. We've been worrying about the possibility of a 309 00:19:33,240 --> 00:19:37,199 Speaker 1: COVID resurgence, you know, ever since the Winter of and 310 00:19:37,240 --> 00:19:40,760 Speaker 1: the impact on economic growth. Now we're worried about inflation 311 00:19:40,920 --> 00:19:45,000 Speaker 1: and the possibility of the FED hiking rates, and maybe 312 00:19:45,040 --> 00:19:48,080 Speaker 1: that's going to impact risk assets. And you know, maybe 313 00:19:48,119 --> 00:19:50,879 Speaker 1: a few years ago we weren't necessarily talking so much 314 00:19:50,920 --> 00:19:53,720 Speaker 1: about inflation, but we were certainly talking about what happens 315 00:19:54,160 --> 00:19:56,800 Speaker 1: to the market when the FED raises rates. So all 316 00:19:56,840 --> 00:20:01,320 Speaker 1: of these kind of feel like known risks in the market, 317 00:20:01,520 --> 00:20:04,240 Speaker 1: And I'm curious if if there's one thing that you 318 00:20:04,359 --> 00:20:08,640 Speaker 1: think is sort of less appreciated that could have a 319 00:20:08,720 --> 00:20:15,240 Speaker 1: destabilizing effect. One of the nice things about systemic risks, 320 00:20:15,440 --> 00:20:17,960 Speaker 1: risks that really can be material to the overall market, 321 00:20:18,119 --> 00:20:22,639 Speaker 1: is they're sort of plane and open to view. I 322 00:20:22,640 --> 00:20:26,960 Speaker 1: don't think there's any secret thing working, you know, that 323 00:20:27,119 --> 00:20:30,199 Speaker 1: we aren't thinking about. It's just that we aren't thinking, 324 00:20:31,240 --> 00:20:35,359 Speaker 1: we aren't looking at what's out there in terms of 325 00:20:35,480 --> 00:20:39,760 Speaker 1: risk and and taking it seriously. We have a pe ratio, 326 00:20:40,240 --> 00:20:45,680 Speaker 1: we have price to sales that's in outer space. Talking 327 00:20:45,680 --> 00:20:49,560 Speaker 1: about another thing that's either at or above recent history. 328 00:20:50,040 --> 00:20:53,880 Speaker 1: Various measures of price earnings and price two sales are 329 00:20:54,000 --> 00:20:58,359 Speaker 1: up there, and people justify it in various ways. You know, 330 00:20:58,800 --> 00:21:04,960 Speaker 1: during the Internet period two thousand, the period that Greenspan 331 00:21:05,040 --> 00:21:12,159 Speaker 1: called irrational exuberance, people justified the crazy pe ratios by saying, oh, 332 00:21:12,520 --> 00:21:17,320 Speaker 1: old accounting methods don't make sense anymore. Today they say, oh, 333 00:21:17,480 --> 00:21:21,639 Speaker 1: rates are very low, so the discounting of future earnings 334 00:21:22,200 --> 00:21:24,520 Speaker 1: should mean that price earnings go up. I don't think 335 00:21:24,560 --> 00:21:28,040 Speaker 1: that's a good argument, but in any case, what's out 336 00:21:28,080 --> 00:21:30,120 Speaker 1: there is plane to be seen. The things that I'm 337 00:21:30,119 --> 00:21:33,439 Speaker 1: talking about should not be a mystery to to anybody, 338 00:21:33,480 --> 00:21:36,080 Speaker 1: but people aren't reacting to it in terms of adjusting 339 00:21:36,760 --> 00:21:41,840 Speaker 1: their exposure accordingly. So it could be that people wake 340 00:21:41,960 --> 00:21:45,520 Speaker 1: up and think, wait a minute, evaluations are crazy. Here, 341 00:21:45,840 --> 00:21:49,040 Speaker 1: a few people start to sell that drops the market. 342 00:21:49,680 --> 00:21:52,600 Speaker 1: It could be that fed tapering or something even worse 343 00:21:52,680 --> 00:21:57,240 Speaker 1: than along the spectrum from tapering to recession causes a 344 00:21:57,280 --> 00:22:00,719 Speaker 1: dislocation to the markets. It could be then Asian causes 345 00:22:00,760 --> 00:22:06,520 Speaker 1: a problem, perhaps because treasuries, which people regard as safe assets, 346 00:22:06,520 --> 00:22:11,640 Speaker 1: start to drop as reeds go up, and that begins liquidation. 347 00:22:12,119 --> 00:22:17,119 Speaker 1: All these are stresses that could be the start of 348 00:22:17,119 --> 00:22:21,880 Speaker 1: the avalanche. So how do you actually adjust your exposure 349 00:22:22,040 --> 00:22:26,040 Speaker 1: in a scenario like this? And for the past um 350 00:22:26,560 --> 00:22:30,720 Speaker 1: decade or so, it feels like valuations were basically driven 351 00:22:30,760 --> 00:22:34,080 Speaker 1: by inflows. So if you wanted you know, to be 352 00:22:34,119 --> 00:22:37,560 Speaker 1: a successful investment manager, you basically jumped on the stuff 353 00:22:37,600 --> 00:22:41,240 Speaker 1: that other people we're buying. And I'd be curious to 354 00:22:41,240 --> 00:22:44,920 Speaker 1: get your perspective as well from you know, your previous 355 00:22:44,960 --> 00:22:48,960 Speaker 1: position as the Chief Risk Officer UM at the University 356 00:22:48,960 --> 00:22:52,040 Speaker 1: of California's Office of the c i O. Because as 357 00:22:52,040 --> 00:22:55,159 Speaker 1: you mentioned, this was a huge portfolio, more than a 358 00:22:55,240 --> 00:22:58,199 Speaker 1: hundred billion, and I'm assuming you have some sort of 359 00:22:58,280 --> 00:23:02,919 Speaker 1: yield target that you need to be reaching, but it 360 00:23:03,000 --> 00:23:07,640 Speaker 1: seems very very difficult to get there without taking on 361 00:23:08,200 --> 00:23:12,800 Speaker 1: some form of risk. Yeah, there's no free lunch, right, 362 00:23:12,880 --> 00:23:17,159 Speaker 1: So if you say I'm concerned, I think volatility or 363 00:23:17,280 --> 00:23:21,159 Speaker 1: potential volatility potential risking market is very high. If you 364 00:23:21,160 --> 00:23:23,879 Speaker 1: have a volatility target, you know, you only want to 365 00:23:23,920 --> 00:23:26,959 Speaker 1: have a certain value at risk. That means you're going 366 00:23:27,000 --> 00:23:30,400 Speaker 1: to take your positions down and that is not pleasant 367 00:23:30,480 --> 00:23:34,160 Speaker 1: if the markets continue to do what they're doing. UM. 368 00:23:34,359 --> 00:23:39,560 Speaker 1: But there are some easier methods. One is diversification, which 369 00:23:39,600 --> 00:23:43,879 Speaker 1: reduces risk. People think they're diversified if they're holding a 370 00:23:43,920 --> 00:23:47,160 Speaker 1: broad based portfolio like the SMP five, but as I mentioned, 371 00:23:47,440 --> 00:23:50,960 Speaker 1: they're not really diversified. They actually have a big bet 372 00:23:51,000 --> 00:23:54,880 Speaker 1: on technology. So one thing that you can do is 373 00:23:55,680 --> 00:24:01,400 Speaker 1: take action to increase diversification, which means moving away from 374 00:24:02,160 --> 00:24:06,280 Speaker 1: a cap weighted index like the SMP. Another thing to 375 00:24:06,400 --> 00:24:10,560 Speaker 1: realize is that what you think is safe may not 376 00:24:10,640 --> 00:24:16,440 Speaker 1: be so safe. Treasuries, longer treasuries, say tenure plus, you know, 377 00:24:16,520 --> 00:24:20,520 Speaker 1: high durration treasuries are not really safe in some of 378 00:24:20,520 --> 00:24:24,879 Speaker 1: these scenarios, especially the inflation scenario, and that would suggest 379 00:24:24,960 --> 00:24:27,960 Speaker 1: that if you are going to take action to reduce exposure, 380 00:24:28,400 --> 00:24:32,280 Speaker 1: you're better off moving it towards cash than simply moving 381 00:24:32,280 --> 00:24:36,840 Speaker 1: it towards bonds, certainly better than moving towards high yield bonds, 382 00:24:36,880 --> 00:24:41,080 Speaker 1: which also have a spread that scenario historic low. So 383 00:24:41,200 --> 00:24:44,760 Speaker 1: step one would be diversifying a true sense, which means 384 00:24:44,800 --> 00:24:50,520 Speaker 1: reducing the overweight that's implicit that you have in technology. 385 00:24:50,640 --> 00:24:54,879 Speaker 1: The second is, if you are willing to recognize that 386 00:24:55,040 --> 00:24:57,439 Speaker 1: risk is high and you want to maintain some notion 387 00:24:57,520 --> 00:25:02,120 Speaker 1: of a forward looking volatility target, move away from high 388 00:25:02,200 --> 00:25:06,160 Speaker 1: risk assets to lower risk assets, and the low risk 389 00:25:06,160 --> 00:25:09,440 Speaker 1: gasset that makes most sense is something like cash, where 390 00:25:09,480 --> 00:25:13,320 Speaker 1: I would define for investment purposes, I would define cash 391 00:25:13,640 --> 00:25:17,240 Speaker 1: is say, being anything that has a duration of less 392 00:25:17,280 --> 00:25:21,159 Speaker 1: than two or three years, because something with low duration 393 00:25:21,320 --> 00:25:24,120 Speaker 1: is not going to be affected in a meaningful way 394 00:25:24,359 --> 00:25:27,720 Speaker 1: should rates go up. I want to talk more about 395 00:25:27,840 --> 00:25:31,680 Speaker 1: the the the lack of safety in the safe assets 396 00:25:31,720 --> 00:25:33,440 Speaker 1: or how that could be a problem. And I think 397 00:25:33,520 --> 00:25:37,320 Speaker 1: one difference between the Great Financial Crisis and the dot 398 00:25:37,320 --> 00:25:40,080 Speaker 1: com bubble is, Okay, there was a big crash and 399 00:25:40,200 --> 00:25:42,880 Speaker 1: assets in the dot com era, but no one really 400 00:25:42,920 --> 00:25:45,200 Speaker 1: like thought those were like safe assets, Like no one 401 00:25:45,240 --> 00:25:47,719 Speaker 1: thought at the time, like Amazon was like some like 402 00:25:48,000 --> 00:25:51,439 Speaker 1: core retrospect, you should have bought it. But this course 403 00:25:51,400 --> 00:25:53,800 Speaker 1: save asset or pets dot com or the Globe dot 404 00:25:53,880 --> 00:25:56,600 Speaker 1: com or some like. Of course safety in twenty in 405 00:25:56,680 --> 00:26:00,359 Speaker 1: two thousand seven tight what we discovered of worse was 406 00:26:00,440 --> 00:26:03,639 Speaker 1: that a lot of assets that were thought to be 407 00:26:03,760 --> 00:26:06,880 Speaker 1: triple A literally we're not safe, and that is sort 408 00:26:06,920 --> 00:26:09,720 Speaker 1: of what caused the crisis and why those two crashes 409 00:26:09,760 --> 00:26:12,960 Speaker 1: were different. Do you believe that, I mean, you mentioned, Okay, 410 00:26:13,040 --> 00:26:16,000 Speaker 1: if we get inflation, we get rate hikes, there's gonna 411 00:26:16,040 --> 00:26:19,240 Speaker 1: be this hit to some of these so called safe assets. 412 00:26:19,480 --> 00:26:23,200 Speaker 1: But do you believe there's anything that's equivalent where people 413 00:26:23,240 --> 00:26:26,600 Speaker 1: are truly thinking like there's like a bomb that we've 414 00:26:26,680 --> 00:26:30,040 Speaker 1: somehow a bomb in here that we've somehow labeled triple 415 00:26:30,080 --> 00:26:33,399 Speaker 1: A that could post systemic risk or is it more 416 00:26:33,520 --> 00:26:37,360 Speaker 1: just about you won't get very good volatility adjusted returns 417 00:26:37,680 --> 00:26:40,240 Speaker 1: because these assets won't behave the way you expected them to. 418 00:26:40,840 --> 00:26:43,040 Speaker 1: You will not only get very good returns to get 419 00:26:43,160 --> 00:26:47,760 Speaker 1: nagod returns unless you are holding bonds that match your 420 00:26:48,320 --> 00:26:51,679 Speaker 1: target that you know where you have duration matching between 421 00:26:51,720 --> 00:26:59,400 Speaker 1: assets and liabilities. Even treasuries can drop substantially as rates increase. 422 00:27:00,320 --> 00:27:03,359 Speaker 1: You get your principle back. But if you are if 423 00:27:03,400 --> 00:27:06,840 Speaker 1: you're needing to liquidate, you're going to find marked market losses. 424 00:27:07,600 --> 00:27:09,920 Speaker 1: And of course if you're in high old bonds, it's 425 00:27:10,000 --> 00:27:13,959 Speaker 1: that times ten. We we see periods where the spread 426 00:27:14,080 --> 00:27:18,440 Speaker 1: with high yield can be temper sent end up. You know, 427 00:27:18,520 --> 00:27:22,399 Speaker 1: it's not just that it won't make the return you 428 00:27:22,480 --> 00:27:26,480 Speaker 1: might have hoped. It's actually a risky asset in the 429 00:27:26,600 --> 00:27:31,040 Speaker 1: face of higher rates and inflation means higher nominal rates 430 00:27:31,640 --> 00:27:35,200 Speaker 1: in terms of Triple A's two eight is not a 431 00:27:35,240 --> 00:27:39,040 Speaker 1: good example for just about anything other than things can 432 00:27:39,119 --> 00:27:42,760 Speaker 1: go down. We had a crisis that hit at the 433 00:27:42,920 --> 00:27:48,200 Speaker 1: heart of the financial system. Banks, short term lending, and 434 00:27:48,720 --> 00:27:51,600 Speaker 1: you know, as you point out, bonds that were supposed 435 00:27:51,640 --> 00:27:55,359 Speaker 1: to be high quality actually weren't because of some of 436 00:27:55,440 --> 00:28:01,240 Speaker 1: the magic between the packaging of core reponds and the 437 00:28:01,359 --> 00:28:04,600 Speaker 1: reading agencies and the way that they read it. Then 438 00:28:04,640 --> 00:28:07,400 Speaker 1: that's not going to happen again. I would not really 439 00:28:07,480 --> 00:28:12,399 Speaker 1: go back to two thousand eight as the the type 440 00:28:13,000 --> 00:28:16,840 Speaker 1: for what sort of issue we would have if I 441 00:28:16,880 --> 00:28:20,680 Speaker 1: were going to pick an analog, and no analog really 442 00:28:20,760 --> 00:28:24,159 Speaker 1: exists for the markets, because we change, we innovate, we 443 00:28:24,359 --> 00:28:29,720 Speaker 1: grow with experience. I more picked two thousands as an example. 444 00:28:31,119 --> 00:28:33,040 Speaker 1: How does UM you sort of touched on it, But 445 00:28:33,200 --> 00:28:38,080 Speaker 1: how does banking regulation actually play into this? Because, of course, 446 00:28:38,160 --> 00:28:40,760 Speaker 1: one of the big changes between now and the two 447 00:28:40,840 --> 00:28:44,280 Speaker 1: thousands is that we had all these new rules around 448 00:28:44,560 --> 00:28:48,560 Speaker 1: UM leverage and liquidity coverage ratios and things like that 449 00:28:48,720 --> 00:28:53,680 Speaker 1: come into effect that actually forced banks to buy what 450 00:28:54,200 --> 00:28:59,400 Speaker 1: ostensibly should be safe assets like US treasuries or agency 451 00:29:00,000 --> 00:29:03,680 Speaker 1: mortgage bonds, things like that, and so on the one hand, 452 00:29:03,880 --> 00:29:07,120 Speaker 1: I could see I could see the potential to argue 453 00:29:07,160 --> 00:29:09,720 Speaker 1: this both ways. So you could say that because you 454 00:29:09,920 --> 00:29:15,520 Speaker 1: have a buyer base that is basically UM forced to 455 00:29:15,720 --> 00:29:18,280 Speaker 1: snap up a lot of these assets, the idea that 456 00:29:18,360 --> 00:29:22,239 Speaker 1: they're suddenly going to sell them off if inflation picks up, 457 00:29:23,160 --> 00:29:26,560 Speaker 1: maybe that's less likely. But on the other hand, as 458 00:29:26,640 --> 00:29:29,600 Speaker 1: you mentioned, if we get an inflationary scenario and bonds 459 00:29:29,640 --> 00:29:32,560 Speaker 1: suddenly don't look as safe and maybe they start, you know, 460 00:29:32,640 --> 00:29:35,880 Speaker 1: the movements and bonds start feeding into banks internal risk 461 00:29:36,000 --> 00:29:39,160 Speaker 1: models and things like value at risk, then maybe you 462 00:29:39,200 --> 00:29:42,440 Speaker 1: would have a moment where they decide, well, actually we 463 00:29:42,520 --> 00:29:46,160 Speaker 1: need to do something about this. I think banks are 464 00:29:46,320 --> 00:29:49,640 Speaker 1: out of the game right now as we look forward 465 00:29:49,680 --> 00:29:55,000 Speaker 1: towards risk. They've been I wouldn't say nude, but their 466 00:29:55,360 --> 00:29:59,400 Speaker 1: their ability to take risk or to be a source 467 00:29:59,520 --> 00:30:03,320 Speaker 1: of reasonvolving risk is much lower now than before. You know, 468 00:30:03,400 --> 00:30:08,239 Speaker 1: we talked about the restrictions in terms of market making. Uh, 469 00:30:08,320 --> 00:30:13,120 Speaker 1: they also and and that's proprietary treating on the client side. 470 00:30:13,440 --> 00:30:17,360 Speaker 1: They also don't have internal proprietary treating for their own book. 471 00:30:18,360 --> 00:30:22,560 Speaker 1: They have very tight leverage constrains and monitoring in terms 472 00:30:22,600 --> 00:30:25,760 Speaker 1: of what they can do there. So I don't think 473 00:30:25,800 --> 00:30:27,960 Speaker 1: banks can be part of the solution. I also don't 474 00:30:27,960 --> 00:30:30,400 Speaker 1: think banks will be part of the problem. If if 475 00:30:30,480 --> 00:30:33,960 Speaker 1: we're looking at where the problem will come, I think 476 00:30:34,040 --> 00:30:37,080 Speaker 1: it's you know, we see the enemy and it is us. 477 00:30:37,640 --> 00:30:42,320 Speaker 1: I think it's the institution's retail and individuals who are 478 00:30:42,920 --> 00:30:47,840 Speaker 1: caught up and exposed in the market. It's really irrational 479 00:30:47,920 --> 00:30:53,200 Speaker 1: exuberance type of a risk as opposed to fundamental structural 480 00:30:53,680 --> 00:30:56,760 Speaker 1: risk within the banking and guts of the financial system. 481 00:30:57,320 --> 00:31:00,920 Speaker 1: Cryptocurrency is a great example of that. It's on the edge. 482 00:31:01,360 --> 00:31:05,920 Speaker 1: It itself is not in my mind, systemic or sufficient 483 00:31:06,360 --> 00:31:10,440 Speaker 1: to really trigger something for the market's broadly based. But 484 00:31:10,600 --> 00:31:16,200 Speaker 1: what you see with crypto is just a dramatization of 485 00:31:16,320 --> 00:31:20,080 Speaker 1: what is happening in the market's overall. We have a 486 00:31:20,200 --> 00:31:24,480 Speaker 1: lot of speculative activity, and we don't have we don't 487 00:31:24,560 --> 00:31:27,440 Speaker 1: have a lot of people who are in a position 488 00:31:27,520 --> 00:31:33,760 Speaker 1: of supplying liquidity in the face of people suddenly either 489 00:31:33,920 --> 00:31:37,000 Speaker 1: needing to exit the market or wanting to exit it. 490 00:31:52,480 --> 00:31:54,960 Speaker 1: So I think this is super interesting. I mean, you know, 491 00:31:55,040 --> 00:31:58,320 Speaker 1: when banks get in trouble, that's a big problem, obviously 492 00:31:58,480 --> 00:32:01,280 Speaker 1: in part because normal more people have money with those 493 00:32:01,360 --> 00:32:04,640 Speaker 1: banks and their their deposits are kind of loans to 494 00:32:04,680 --> 00:32:06,400 Speaker 1: the banks, and they expect to get them back one 495 00:32:06,480 --> 00:32:09,600 Speaker 1: to one, and if that ever blows up, that's a 496 00:32:09,640 --> 00:32:12,880 Speaker 1: real problem. It sounds like the main issue is, in 497 00:32:13,000 --> 00:32:16,960 Speaker 1: your view, just that we're so exposed to risky assets 498 00:32:17,000 --> 00:32:20,640 Speaker 1: all of us, either through retirement funds, are day to 499 00:32:20,760 --> 00:32:24,480 Speaker 1: day hot money, are pension funds, and so forth, that 500 00:32:24,720 --> 00:32:27,200 Speaker 1: it would be a really big problem if they went down. 501 00:32:27,560 --> 00:32:29,080 Speaker 1: You know, one of the things that Tracy and I 502 00:32:29,160 --> 00:32:31,400 Speaker 1: have talked a lot about on this show is like 503 00:32:31,840 --> 00:32:33,920 Speaker 1: this sort of forty year I mean, we talked about 504 00:32:33,960 --> 00:32:35,680 Speaker 1: the last year and a half, for the last ten 505 00:32:35,760 --> 00:32:37,720 Speaker 1: years or whatever, but you know, the sort of forty 506 00:32:37,800 --> 00:32:43,840 Speaker 1: years simultaneous bull market in stocks and treasuries. And I'm 507 00:32:43,880 --> 00:32:47,040 Speaker 1: curious if, in your experience, having looked at the worked 508 00:32:47,080 --> 00:32:50,960 Speaker 1: at the pensions side, whether this sort of is just 509 00:32:51,080 --> 00:32:54,120 Speaker 1: taken taken for granted that on a short term basis 510 00:32:54,720 --> 00:32:58,160 Speaker 1: that treasuries sir at a short and medium term treasuries 511 00:32:58,160 --> 00:33:00,760 Speaker 1: act as a volatility buffer for risk has it. But 512 00:33:00,880 --> 00:33:03,080 Speaker 1: at the long term you start to get paid out 513 00:33:03,120 --> 00:33:05,760 Speaker 1: on both, which has been a very sweet deal for 514 00:33:06,280 --> 00:33:10,640 Speaker 1: the diversified investor, But perhaps it's just not always going 515 00:33:10,720 --> 00:33:14,000 Speaker 1: to be the case, to our detriment. This is one 516 00:33:14,000 --> 00:33:16,680 Speaker 1: of the things I think is an issue in the 517 00:33:16,760 --> 00:33:20,280 Speaker 1: markets that people tend to be shortsighted. They don't look 518 00:33:20,320 --> 00:33:24,000 Speaker 1: at history with the broader scope. If you're a hedge 519 00:33:24,040 --> 00:33:28,440 Speaker 1: fund or a broker dealer, that's fine because you're going 520 00:33:28,560 --> 00:33:32,520 Speaker 1: in and out in your time frame. Your perspective is 521 00:33:32,960 --> 00:33:36,360 Speaker 1: daily or monthly. But if you're an individual or pension funds, 522 00:33:36,400 --> 00:33:39,400 Speaker 1: if you're an ascid owner, you have to be concerned 523 00:33:39,400 --> 00:33:43,320 Speaker 1: about the nature of the market over decades. If you 524 00:33:43,400 --> 00:33:46,360 Speaker 1: have that few it's worthwhile to go back even to 525 00:33:47,480 --> 00:33:52,280 Speaker 1: the seventies to see what can happen. If you look 526 00:33:52,920 --> 00:33:58,560 Speaker 1: from nineteen sixty eight two, if you were standing in two, 527 00:33:58,880 --> 00:34:01,600 Speaker 1: you were in the same place ace in terms of 528 00:34:01,640 --> 00:34:05,440 Speaker 1: your portfolio as you were. You know, we talked about 529 00:34:05,520 --> 00:34:09,320 Speaker 1: Japan having lost decade. That was more than a lost 530 00:34:09,400 --> 00:34:13,680 Speaker 1: decade for investors. If you look from two thousand to 531 00:34:13,840 --> 00:34:18,600 Speaker 1: two thousand thirteen, same story. You had a period where 532 00:34:18,800 --> 00:34:21,719 Speaker 1: in you were in the same place that you were 533 00:34:22,239 --> 00:34:25,480 Speaker 1: in two thousand. There can be periods of a decade 534 00:34:25,560 --> 00:34:30,080 Speaker 1: or more where things are flat. And if you're a 535 00:34:30,239 --> 00:34:32,360 Speaker 1: longer term investor, if you have a time from a 536 00:34:32,480 --> 00:34:35,279 Speaker 1: ten or twenty or twenty five years, that's a big 537 00:34:35,360 --> 00:34:40,359 Speaker 1: problem because if you're saving for retirement. If you've got 538 00:34:40,400 --> 00:34:45,440 Speaker 1: a portfolio with the idea of liquidating retirement, your reasonable 539 00:34:45,520 --> 00:34:50,880 Speaker 1: expectation is an average return inequities of around seven percent. 540 00:34:51,040 --> 00:34:55,399 Speaker 1: That's the actuarial rate that's assumed by pension funds seven 541 00:34:55,440 --> 00:34:59,759 Speaker 1: percent average annual return. So if you're flat for ten, 542 00:35:00,120 --> 00:35:04,040 Speaker 1: twelve or thirteen years, you're not really flat. You're down 543 00:35:04,320 --> 00:35:08,759 Speaker 1: about fifty from where your expectations reasonably should have been. 544 00:35:09,800 --> 00:35:14,120 Speaker 1: So when we look at what can occur, we need 545 00:35:14,239 --> 00:35:19,440 Speaker 1: to sort of look at situations beyond two nine on where, 546 00:35:19,480 --> 00:35:23,000 Speaker 1: of course we've had this stupendous run up and and 547 00:35:23,160 --> 00:35:26,640 Speaker 1: with rates, it's the same story we've had. You know, 548 00:35:26,680 --> 00:35:30,960 Speaker 1: as you're pointing out this incredible secular bull market in rates, 549 00:35:31,840 --> 00:35:35,160 Speaker 1: people think now that rates of two and three percent 550 00:35:35,360 --> 00:35:38,200 Speaker 1: or the norm, this is where life is supposed to be. 551 00:35:39,000 --> 00:35:44,640 Speaker 1: In the nineteen early nineteen eighties, I was building a 552 00:35:44,719 --> 00:35:47,640 Speaker 1: house and I got a mortgage. I got a construction 553 00:35:47,719 --> 00:35:51,320 Speaker 1: loan of I got a mortgage of thirteen and a 554 00:35:51,360 --> 00:35:54,920 Speaker 1: half percent. In the mid nineteen eighties, I was at 555 00:35:55,000 --> 00:35:58,360 Speaker 1: Morgan Stanley and one of the traders did a print 556 00:35:58,920 --> 00:36:02,880 Speaker 1: when Treasury's got to eight percent. Because the view is 557 00:36:03,040 --> 00:36:06,200 Speaker 1: off we're finally back to normal, and he wanted that 558 00:36:06,600 --> 00:36:10,759 Speaker 1: to court sort of memorialize that event. So rates can 559 00:36:11,239 --> 00:36:14,480 Speaker 1: go up. Rates can be five percent, they can be 560 00:36:14,920 --> 00:36:18,120 Speaker 1: seven or eight percent. That is sort of too many 561 00:36:18,200 --> 00:36:21,279 Speaker 1: of our mind's distant history. We sort of think that 562 00:36:22,000 --> 00:36:26,239 Speaker 1: where we stand now in this bullmarket is it, but 563 00:36:26,360 --> 00:36:28,279 Speaker 1: it may not be it, and we don't need rates 564 00:36:28,320 --> 00:36:31,080 Speaker 1: go up to eight percent for things to really be 565 00:36:31,280 --> 00:36:34,440 Speaker 1: difficult for people who think they're in safe assets. I 566 00:36:34,480 --> 00:36:37,240 Speaker 1: want to go back to what you were saying earlier 567 00:36:37,360 --> 00:36:41,719 Speaker 1: and the distinction between risk on the cell side with 568 00:36:41,920 --> 00:36:46,480 Speaker 1: the banks versus risk on the bye side with investors, 569 00:36:46,560 --> 00:36:51,200 Speaker 1: whether they're big institutional investors or retail investors. And you 570 00:36:51,360 --> 00:36:57,040 Speaker 1: know this because you were involved in post financial crisis regulation. UM. 571 00:36:57,080 --> 00:37:00,960 Speaker 1: I remember you gave some speeches or guidance to Congress 572 00:37:01,040 --> 00:37:05,440 Speaker 1: on these issues. And this was really a conscious choice 573 00:37:05,640 --> 00:37:10,040 Speaker 1: by the regulators to d risk the banks after the 574 00:37:10,160 --> 00:37:14,000 Speaker 1: two thous crisis and move a lot of risk taking 575 00:37:14,640 --> 00:37:20,080 Speaker 1: into either the by side or shadow banking institutions. UM, 576 00:37:20,320 --> 00:37:23,160 Speaker 1: when it comes to things like lending. And I guess 577 00:37:23,239 --> 00:37:26,120 Speaker 1: my question is, you know now we're talking about the 578 00:37:26,360 --> 00:37:30,680 Speaker 1: risks that are facing primarily the by side the investors 579 00:37:30,719 --> 00:37:35,520 Speaker 1: who have been buying all these overinflated assets. And is 580 00:37:35,600 --> 00:37:39,399 Speaker 1: it I mean, this was the intended results of all 581 00:37:39,520 --> 00:37:43,040 Speaker 1: this reform. So how much of a problem would it 582 00:37:43,160 --> 00:37:50,200 Speaker 1: actually be if we suddenly saw risk assets tank tomorrow. Yeah, 583 00:37:50,280 --> 00:37:54,839 Speaker 1: the guess the horses are out of the barn. And uh, 584 00:37:55,239 --> 00:37:58,920 Speaker 1: it's much further to control what goes on in the 585 00:37:59,040 --> 00:38:02,200 Speaker 1: market then, of course what goes on in the banks 586 00:38:02,960 --> 00:38:05,520 Speaker 1: the So this is the point I'm making that the 587 00:38:05,640 --> 00:38:12,960 Speaker 1: risk now resides in the markets with institutions and much 588 00:38:13,040 --> 00:38:17,920 Speaker 1: more than in the past with retail investors, and that's 589 00:38:17,920 --> 00:38:22,120 Speaker 1: a little harder to control than when it's within the 590 00:38:22,200 --> 00:38:27,200 Speaker 1: regulatory system. So I think we sort of have little 591 00:38:27,640 --> 00:38:30,239 Speaker 1: to do from a regulation standpoint, the sort of watch 592 00:38:30,400 --> 00:38:33,360 Speaker 1: things play out. You know, we do have controls obviously 593 00:38:33,440 --> 00:38:36,840 Speaker 1: on how much leverage people can hold, but that's the 594 00:38:36,960 --> 00:38:41,360 Speaker 1: main tool that's available. When you get to retail. The 595 00:38:41,520 --> 00:38:46,239 Speaker 1: risks also are quite different and require different sort of 596 00:38:47,360 --> 00:38:51,600 Speaker 1: management then when you're talking about hedge funds or banks 597 00:38:51,800 --> 00:38:54,560 Speaker 1: or broker dealers. And actually that's the center of what 598 00:38:54,640 --> 00:38:58,120 Speaker 1: I've been doing at Fabric. If you're an individual, you 599 00:38:58,239 --> 00:39:00,919 Speaker 1: have risks coming from two sides. You have the risk 600 00:39:00,960 --> 00:39:04,719 Speaker 1: of your portfolio, and the risk of your portfolio, by 601 00:39:04,719 --> 00:39:07,120 Speaker 1: the way, has to be looked at over the course 602 00:39:07,160 --> 00:39:09,600 Speaker 1: of years, not over the course of the next month, 603 00:39:09,719 --> 00:39:12,640 Speaker 1: so you have a much longer time frame. But you 604 00:39:12,719 --> 00:39:16,839 Speaker 1: also have risk coming from your own decisions and your 605 00:39:16,880 --> 00:39:21,400 Speaker 1: own need for assets. So you have to manage not 606 00:39:21,640 --> 00:39:24,680 Speaker 1: just the risk in the market and not just look 607 00:39:24,719 --> 00:39:28,640 Speaker 1: at that risk as a progress is longer term. You 608 00:39:28,760 --> 00:39:30,759 Speaker 1: have to do that in the context of how you 609 00:39:30,800 --> 00:39:35,200 Speaker 1: would react based on that. Would you suddenly I'll reduce 610 00:39:35,280 --> 00:39:37,640 Speaker 1: your risk tolerance if the market goes down, and on 611 00:39:37,719 --> 00:39:41,640 Speaker 1: that basis sell even more well, you suddenly have expenses 612 00:39:42,080 --> 00:39:44,840 Speaker 1: where you have to uh sell and de risk on 613 00:39:44,920 --> 00:39:49,360 Speaker 1: that basis. The complication as you get to the individuals, 614 00:39:50,400 --> 00:39:53,920 Speaker 1: the level of complication in terms of risk is greater. 615 00:39:54,840 --> 00:39:57,960 Speaker 1: The models that you need to use are different from 616 00:39:58,040 --> 00:40:01,319 Speaker 1: what you have for institutions. So the move that we're 617 00:40:01,320 --> 00:40:03,600 Speaker 1: seeing from the banks and broker dealers in the larger 618 00:40:03,640 --> 00:40:08,880 Speaker 1: institutions into retail not only is more difficult to control, 619 00:40:09,560 --> 00:40:13,200 Speaker 1: it also creates a different type of a risk dynamic. 620 00:40:14,280 --> 00:40:16,600 Speaker 1: So I want to ask a question, and it's kind 621 00:40:16,640 --> 00:40:20,320 Speaker 1: of verging away maybe from finance more towards the realm 622 00:40:20,560 --> 00:40:24,400 Speaker 1: of economics. But this issue of like, we're all highly 623 00:40:24,520 --> 00:40:29,319 Speaker 1: exposed to risky assets and this could feed through to uh, 624 00:40:29,400 --> 00:40:31,480 Speaker 1: you know, pose problems would be a different set of 625 00:40:31,520 --> 00:40:33,880 Speaker 1: problems that we saw in two thousand and two, thin, 626 00:40:33,920 --> 00:40:37,160 Speaker 1: but it would be problems. Nonetheless. Would there be a 627 00:40:37,239 --> 00:40:41,440 Speaker 1: case therefore to sort of think about macro policies that 628 00:40:41,800 --> 00:40:45,839 Speaker 1: make the economy or make households, or make retirees less 629 00:40:45,880 --> 00:40:50,239 Speaker 1: reliant on gambles? I mean, I think about crypto again. 630 00:40:50,520 --> 00:40:52,120 Speaker 1: So it's just say, a sort of canary in the 631 00:40:52,200 --> 00:40:55,360 Speaker 1: coal mine. But how many people are trading crypto because 632 00:40:55,400 --> 00:40:57,600 Speaker 1: they feel that they need to hit some level or 633 00:40:57,640 --> 00:41:00,880 Speaker 1: they feel the level of financial pridcare procarity in their 634 00:41:00,920 --> 00:41:03,400 Speaker 1: own life and they see an opportunity to rectify that 635 00:41:03,520 --> 00:41:07,040 Speaker 1: by winning big on some coin. And so could some 636 00:41:07,160 --> 00:41:10,480 Speaker 1: of these things that we identify as financial problems be 637 00:41:10,600 --> 00:41:13,160 Speaker 1: addressed were we to have an economy and we don't, 638 00:41:13,160 --> 00:41:15,000 Speaker 1: you know, there'll be different ways of getting about that. 639 00:41:15,239 --> 00:41:18,160 Speaker 1: Were we to have an economy in which households and 640 00:41:18,239 --> 00:41:23,960 Speaker 1: individuals weren't so reliant on a stock market that just 641 00:41:24,120 --> 00:41:26,640 Speaker 1: kept going up all the time, in order to basically 642 00:41:27,320 --> 00:41:30,719 Speaker 1: make their monthly payments. Well, if you think that you're 643 00:41:31,520 --> 00:41:36,640 Speaker 1: behind and have to take risk, if you're inequities already 644 00:41:36,680 --> 00:41:41,399 Speaker 1: in this market, you've got a problem. You know, we've 645 00:41:41,440 --> 00:41:45,120 Speaker 1: seen it's hard to envision a time where we've seen 646 00:41:45,200 --> 00:41:48,440 Speaker 1: this sort of appreciation, uh that we've had over the 647 00:41:48,560 --> 00:41:52,759 Speaker 1: last number of years. You know, so people who want 648 00:41:52,840 --> 00:41:56,400 Speaker 1: to win even bigger, they may as well buy lottery tickets. 649 00:41:56,960 --> 00:42:01,440 Speaker 1: We really are, you know, in an unusual time in 650 00:42:01,680 --> 00:42:05,040 Speaker 1: terms of the opportunities that have been laid before us. 651 00:42:05,120 --> 00:42:08,200 Speaker 1: And I think right now, you know, people get this 652 00:42:08,320 --> 00:42:12,160 Speaker 1: exuberance and I feel like, hey, you know, I've made 653 00:42:12,239 --> 00:42:15,960 Speaker 1: this much money. Let's keep really, let's keep the party going. 654 00:42:17,000 --> 00:42:19,680 Speaker 1: I don't think, but you know that being said, we've 655 00:42:19,880 --> 00:42:27,200 Speaker 1: really moved towards the whole ethos away from divine defined 656 00:42:27,360 --> 00:42:33,080 Speaker 1: benefit to defined contribution. That's true with pensions, and that's 657 00:42:33,239 --> 00:42:35,440 Speaker 1: led people to be much more aware of the markets. 658 00:42:35,960 --> 00:42:38,920 Speaker 1: The technology is now there so that they can monitor 659 00:42:39,000 --> 00:42:43,040 Speaker 1: the markets, transact in the markets very very easily. For 660 00:42:43,200 --> 00:42:46,280 Speaker 1: some people, I think the markets have become a source 661 00:42:46,360 --> 00:42:52,200 Speaker 1: of entertainment and UH an extension of their social media presence. 662 00:42:53,000 --> 00:42:55,680 Speaker 1: So this is sort of the world that we're in now. 663 00:42:55,920 --> 00:43:00,279 Speaker 1: And and I actually think that crypto is not only 664 00:43:00,360 --> 00:43:03,960 Speaker 1: an indication of exuberance and i'd say in a sensor 665 00:43:04,000 --> 00:43:09,279 Speaker 1: of foolhardiness in terms of an investment perspective, but it's 666 00:43:09,640 --> 00:43:12,840 Speaker 1: kind of an indication of how the markets are evolving. 667 00:43:13,560 --> 00:43:16,120 Speaker 1: A lot of information, some of it not good information. 668 00:43:16,640 --> 00:43:20,800 Speaker 1: The ability to trade for apparently no cost on your phone, 669 00:43:21,560 --> 00:43:24,320 Speaker 1: the ability to make trades, and bite size sort of 670 00:43:24,760 --> 00:43:29,560 Speaker 1: dinner and dinner and a movie size where it's it's 671 00:43:29,600 --> 00:43:35,239 Speaker 1: really inconsequential. All these things are moving the market in 672 00:43:35,360 --> 00:43:38,719 Speaker 1: a direction where it starts to look a little more 673 00:43:39,040 --> 00:43:42,320 Speaker 1: like what we've seen in social media. And if you 674 00:43:42,400 --> 00:43:45,320 Speaker 1: don't like what social media has done to common discourse, 675 00:43:45,760 --> 00:43:48,920 Speaker 1: you're probably not gonna like what that might lead to 676 00:43:49,520 --> 00:43:53,560 Speaker 1: in terms of the markets. But that's so it's not 677 00:43:53,920 --> 00:43:58,480 Speaker 1: just the move that we've had from banks and institutions 678 00:43:58,880 --> 00:44:03,680 Speaker 1: towards retail, And it's not just the increased embrace of 679 00:44:03,760 --> 00:44:09,960 Speaker 1: retail into the markets. It's very recently some of the 680 00:44:10,120 --> 00:44:14,320 Speaker 1: changes in the way people interact with the markets, and 681 00:44:14,400 --> 00:44:17,319 Speaker 1: we haven't even seen the start of that playing out yet. 682 00:44:18,239 --> 00:44:21,120 Speaker 1: I think that can be the next level of concern 683 00:44:21,640 --> 00:44:25,759 Speaker 1: that will have because that would be a structural systemic 684 00:44:26,400 --> 00:44:31,520 Speaker 1: change in the market structure. Rick. I think that was 685 00:44:31,560 --> 00:44:33,480 Speaker 1: a great place to leave it. Thank you so much 686 00:44:33,560 --> 00:44:36,080 Speaker 1: for coming on odd lots great to get your perspective, 687 00:44:36,200 --> 00:44:38,719 Speaker 1: lots to think about, and uh, hope to be back 688 00:44:38,719 --> 00:44:44,600 Speaker 1: at someone. Okay, great, Well, thanks you guys after the crash. Yeah, 689 00:44:45,239 --> 00:45:05,160 Speaker 1: take care of Rick. Thanks for I appreciate it. Tracy. 690 00:45:05,200 --> 00:45:08,920 Speaker 1: I thought that was really interesting, and I really think that, 691 00:45:09,080 --> 00:45:12,080 Speaker 1: you know, we go through this frame of thinking about 692 00:45:12,120 --> 00:45:15,040 Speaker 1: the last crisis and I don't mean March because it 693 00:45:15,080 --> 00:45:17,640 Speaker 1: was so weird, but you know, and it's like, oh, 694 00:45:17,680 --> 00:45:19,960 Speaker 1: what is going to blow up the system? And the 695 00:45:20,080 --> 00:45:22,320 Speaker 1: idea that like maybe the next big problem is not 696 00:45:22,440 --> 00:45:25,439 Speaker 1: like a blow up, but stocks go down and stay down, 697 00:45:25,840 --> 00:45:28,280 Speaker 1: and a lot of people have lifestyles premised on stocks 698 00:45:28,360 --> 00:45:30,960 Speaker 1: going up is sort of like a risk that we 699 00:45:31,040 --> 00:45:34,879 Speaker 1: don't really talk about. Yeah. I also I thought your 700 00:45:35,080 --> 00:45:38,600 Speaker 1: question about whether or not there's an economic reason for 701 00:45:38,680 --> 00:45:41,239 Speaker 1: this was really good because I mean, I do think 702 00:45:41,320 --> 00:45:44,960 Speaker 1: that plays into it. Where we have seen lower levels 703 00:45:45,000 --> 00:45:48,640 Speaker 1: of economic growth since the two financial crisis, people have 704 00:45:48,760 --> 00:45:52,600 Speaker 1: been a lot more upset about things like wages or 705 00:45:52,719 --> 00:45:58,239 Speaker 1: just general unfairness of the socio economic system. And so 706 00:45:58,360 --> 00:46:00,640 Speaker 1: I do feel like people are by suing a lot 707 00:46:00,680 --> 00:46:04,160 Speaker 1: of risk assets, not as long term investments, but basically 708 00:46:04,239 --> 00:46:06,399 Speaker 1: like a lottery ticket. I know, Rick said like, well, 709 00:46:06,480 --> 00:46:08,400 Speaker 1: you might as well buy a lottery ticket, but that 710 00:46:08,640 --> 00:46:10,920 Speaker 1: is essentially what people are doing with some of the 711 00:46:11,000 --> 00:46:14,560 Speaker 1: meme stocks or some of the you know, coins and 712 00:46:14,640 --> 00:46:17,399 Speaker 1: things like that. Yeah, you know what, And there's something 713 00:46:17,520 --> 00:46:19,000 Speaker 1: that I've meant to bring up with you, and maybe 714 00:46:19,040 --> 00:46:21,400 Speaker 1: we should do another episode on it. But something that 715 00:46:21,480 --> 00:46:23,680 Speaker 1: I think about a lot is what you've written about 716 00:46:23,800 --> 00:46:27,440 Speaker 1: with this sort of degree of speculation that exists in China, 717 00:46:27,600 --> 00:46:30,960 Speaker 1: and China obviously a poorer country and not a particularly 718 00:46:31,040 --> 00:46:33,880 Speaker 1: robust safety net in China, and and then you have 719 00:46:34,120 --> 00:46:37,000 Speaker 1: all these people who do things like trade iron or 720 00:46:37,120 --> 00:46:40,560 Speaker 1: futures at home. Would you would us speculators retails speculators 721 00:46:40,680 --> 00:46:43,640 Speaker 1: rarely trade commodities at home, and yet that's like a 722 00:46:43,719 --> 00:46:46,080 Speaker 1: big thing in China. And so I often wonder if 723 00:46:46,640 --> 00:46:51,520 Speaker 1: there is this connection between countries that are like unequal, 724 00:46:52,040 --> 00:46:55,280 Speaker 1: have procaredy sort of mediocre safety nets, and the impulse 725 00:46:55,400 --> 00:46:58,640 Speaker 1: that people feel that they need to like speculate in 726 00:46:58,840 --> 00:47:01,560 Speaker 1: order to like it's some level of income or some 727 00:47:01,800 --> 00:47:04,080 Speaker 1: level of wealth because they can't get there through like 728 00:47:04,200 --> 00:47:08,760 Speaker 1: sort of like the normal job for ways. Totally, although 729 00:47:08,800 --> 00:47:11,360 Speaker 1: I would say a, I mean, I'm kind of worried 730 00:47:11,360 --> 00:47:14,880 Speaker 1: about the day that Wall Street bets wakes up, discovers 731 00:47:15,040 --> 00:47:18,600 Speaker 1: commodity futures and decides to like drive up I don't 732 00:47:18,600 --> 00:47:21,040 Speaker 1: know the price of oil or copper or something like that. Um, 733 00:47:21,520 --> 00:47:26,640 Speaker 1: but be it is kind of ironic that in one 734 00:47:26,920 --> 00:47:29,320 Speaker 1: when we have had all this craziness in the market 735 00:47:29,600 --> 00:47:32,920 Speaker 1: and stocks up until recently we're at all time highs, 736 00:47:33,000 --> 00:47:35,680 Speaker 1: that China is actually going in the other direction and 737 00:47:35,800 --> 00:47:39,640 Speaker 1: really cracking down on a lot of speculative activity. Um. 738 00:47:39,719 --> 00:47:42,200 Speaker 1: So it's just interesting to see the West and the 739 00:47:42,239 --> 00:47:46,279 Speaker 1: East sort of going in two different directions on this. Yeah. No, 740 00:47:46,400 --> 00:47:49,480 Speaker 1: it is interesting hearing Rick's perspective, like from the port 741 00:47:49,600 --> 00:47:52,640 Speaker 1: of pension fund manager, and it really does seem like 742 00:47:53,120 --> 00:47:54,840 Speaker 1: it's just been the gravy years. If you're like a 743 00:47:54,920 --> 00:47:57,080 Speaker 1: long term investor and you have a big slug of 744 00:47:57,160 --> 00:47:59,840 Speaker 1: stocks and you have a big slug of bonds, and 745 00:48:00,000 --> 00:48:01,920 Speaker 1: you don't have to react to like every dip of 746 00:48:02,000 --> 00:48:04,960 Speaker 1: the market like this has been like a dream several 747 00:48:05,080 --> 00:48:09,040 Speaker 1: decades because you get this short term is short term counterbalancing, 748 00:48:09,120 --> 00:48:11,560 Speaker 1: but long term bowl market and both. And so if 749 00:48:11,600 --> 00:48:13,799 Speaker 1: something were to change, and the thing that could change 750 00:48:13,840 --> 00:48:17,320 Speaker 1: would be inflation and a sustained rate hiking regime and 751 00:48:17,440 --> 00:48:20,239 Speaker 1: response to that inflation, like, how many of these like 752 00:48:20,320 --> 00:48:22,800 Speaker 1: pension funds are like positioned to deal with that. I 753 00:48:22,840 --> 00:48:26,800 Speaker 1: think it's an extremely interesting question. Yeah, I mean this 754 00:48:26,920 --> 00:48:29,400 Speaker 1: gets into the whole sort of question of whether or 755 00:48:29,440 --> 00:48:31,840 Speaker 1: not we're going to see a big regime change. And 756 00:48:32,040 --> 00:48:34,920 Speaker 1: I think, you know, again, I'll just say it's December one. 757 00:48:35,400 --> 00:48:37,239 Speaker 1: There's a lot to talk about, but I have a 758 00:48:37,320 --> 00:48:40,120 Speaker 1: feeling we're gonna be keeping up this discussion in the 759 00:48:40,239 --> 00:48:43,120 Speaker 1: coming months. Should we leave with there? Yeah, let's leave 760 00:48:43,120 --> 00:48:46,320 Speaker 1: it there alright. This has been another episode of the 761 00:48:46,400 --> 00:48:49,040 Speaker 1: All Thoughts podcast. I'm Tracy Alloway. You can follow me 762 00:48:49,239 --> 00:48:52,759 Speaker 1: on Twitter at Tracy Alloway. And I'm Joe Wisenthal. You 763 00:48:52,800 --> 00:48:55,799 Speaker 1: can follow me on Twitter at The Stalwart. Follow our 764 00:48:55,840 --> 00:48:59,920 Speaker 1: producer Laura Carlson. She's at Laura M. Carlson. Follow the 765 00:49:00,000 --> 00:49:03,640 Speaker 1: Boomberg head of podcast, francesco Leavi at Francisco Today, and 766 00:49:03,880 --> 00:49:06,719 Speaker 1: check out all of our podcasts on Twitter under the 767 00:49:06,760 --> 00:49:09,160 Speaker 1: handle at podcasts. Thanks for listening.