Speaker 1: Hello and welcome to what goes up a weekly markets podcast.
Speaker 1: My name is Mike Reagan, I'm a senior editor at
Speaker 1: Bloomberg and I'm Aldana hike across acid reporter with Bloomberg
Speaker 1: and this week on the show. Well, the Federal Reserve
Speaker 1: surprised investors this week by simultaneously raising their projections for
Speaker 1: interest rates and lowering their projections for economic growth. The
Speaker 1: consensus seems to be that the nightmare for investors in
Speaker 1: both stocks and bonds this year is far from over,
Speaker 1: unfortunately so. With traditional strategies like the sixty forty portfolio
Speaker 1: allocation under continued pressure, what are the options to investors
Speaker 1: really have? We'll talk to a quant at a major
Speaker 1: asset management firm who has some ideas about that. But first,
Speaker 1: vil Donna, it's been a while, UH, two weeks without you.
Speaker 1: We missed you terribly. You had quite an adventure, I did.
Speaker 1: I went to Spain, as you know you did, and
Speaker 1: when you came back I was delighted to see you
Speaker 1: actually did bring me some of that famous Spanish Ham
Speaker 1: don't tell Bryan Duncan from the Illinois Farm Bureau, but
Speaker 1: I snuck some Hammond for you. You suck some of
Speaker 1: that that delicious Iberico Ham. And but when you brought
Speaker 1: it to me, I was thinking, Vildonna does not look herself.
Speaker 1: I thought either she's jet lagged or she's just so
Speaker 1: disgusted by having to bring this ham to me from
Speaker 1: it was the last all the way across, but it
Speaker 1: was actually the third thing. You had covid and luckily
Speaker 1: covid you cannot catch covid from Ham. I've I've determined,
Speaker 1: thank God, thank God you're okay, even though your covid
Speaker 1: germs were all over. The Ham is delicious. That's what
Speaker 1: I get for around Europe. I was very worried about you,
Speaker 1: but now now that I know you're okay, I uh,
Speaker 1: I feel like you can take a little ribbing. But
Speaker 1: how was the COVID adventure? You were pretty sick. Yeah,
Speaker 1: I was kind of sick. I've never had it before
Speaker 1: and I finally caught up with me. I guess it's
Speaker 1: literally what I get for going to Europe and having fun.
Speaker 1: So well, we're glad, so glad you're back feeling good.
Speaker 1: The Ham was absolutely delicious. I know you're disgusted to
Speaker 1: carry around some some swine for me, and it's very surprised.
Speaker 1: I did not actually expect you to actually bring that.
Speaker 1: I got you the top quality version it was. There
Speaker 1: was like a two dollar version and there was like
Speaker 1: a seven dollar version. I got you the seven dollar one.
Speaker 1: In fact, I think you're probably not the only one
Speaker 1: sick over that hand, because I was so hungry going home,
Speaker 1: I actually opened the package and started eating it on
Speaker 1: the subway and I hate. Everyone hates so many eats
Speaker 1: on them, especially a big pile of ham, but I
Speaker 1: appreciate it. It It was delicious good. Well, I do want
Speaker 1: to bring in our guests. Who who? I don't want
Speaker 1: to keep him waiting too long. It's George Patterson. He's
Speaker 1: a chief investment officer at pgim quantitative solutions. So, George,
Speaker 1: thanks so much for joining us this week. Great to
Speaker 1: be here. Thank you for having me and maybe, uh,
Speaker 1: I can start out with just a quick story, which
Speaker 1: is that I met you over the summer at a
Speaker 1: pigym event and we talked a little bit about you
Speaker 1: and about your background, and you have a very interesting background.
Speaker 1: You actually used to work for NASA right. So I'm
Speaker 1: hoping you can just start out talking about your your
Speaker 1: yourself a bit and how you ended up with Pigym
Speaker 1: considering that background. Sure, yeah, well, I'm one of the
Speaker 1: few quantitative investors that can actually say they were a
Speaker 1: real rocket scientist. I studied physics both undergraduate and Graduate
Speaker 1: School and, uh, after graduating, my first opportunity was as
Speaker 1: a post doc at the Jet Propulsion Laboratory in Pasadena, California.
Speaker 1: So I was there for two years. UH, great, very
Speaker 1: great experience. Learned quite a bit. There are no more
Speaker 1: rockets at the Jet Propulsion Laboratory. It was you know
Speaker 1: at this point, but there was a lot of space
Speaker 1: related uh, you know, science and and physics going on.
Speaker 1: My project was maybe a little bit more tangentially related
Speaker 1: to space, but it was a great experience. However, you know,
Speaker 1: after some soul searching, I became interested in quantitative investments
Speaker 1: and Um found, you know, found an organization up in
Speaker 1: San Francisco. What was then wells Fargo Nico Investment Advisors.
Speaker 1: Became Barclay's global investors and was there for quite a
Speaker 1: large portion of my career. I've been doing the same
Speaker 1: thing quantitative investments, you know, typically, you know, focused on
Speaker 1: serving large institutions, and they've been doing that since the
Speaker 1: mid nineties and a number of different organizations at church.
Speaker 1: It's fascinating to me how many people with physics backgrounds,
Speaker 1: m I t types like yourself, end up in quant investing.
Speaker 1: What what is? Is it just the math background or
Speaker 1: there or there's certain sort of principles of physics that
Speaker 1: are just easily applied to markets? Why is it, uh,
Speaker 1: that connection that we see so often? Yeah, I think
Speaker 1: it's I think part of it is the math and
Speaker 1: Statistics and, Um, you know, not being I think the
Speaker 1: great thing about the physics background is is that they
Speaker 1: really teach you not to be afraid of of digging,
Speaker 1: going into a new field where you you know, you
Speaker 1: don't have anything, and really like taking it apart and
Speaker 1: understanding what drives it. So I've had several people who,
Speaker 1: you know, are economists that have, you know, said to
Speaker 1: me like, you know, I remember them saying to me
Speaker 1: at one point like we're, you know, we're so surprised,
Speaker 1: you know, that you've done so well. And I said, well,
Speaker 1: that's because I don't listen to economists who tell me
Speaker 1: something is impossible, because, you know, I need to prove
Speaker 1: to myself that something can't be done. And, Um, you know,
Speaker 1: a lot of times you you know, like you do,
Speaker 1: you don't want to get in the way of someone
Speaker 1: who's trying to solve something that's not that that everyone
Speaker 1: else says is impossible. So I think it's just that
Speaker 1: mentality you get that you need to you know, you
Speaker 1: need to challenge assumptions. You know, you're always looking to
Speaker 1: disprove something and, Um the thing I like, and I've
Speaker 1: got a number of other physicists who worked for me,
Speaker 1: the thing I really like about hiring, you know, people
Speaker 1: with that background is many times in this in this industry,
Speaker 1: you know there's a particular project that's I need someone
Speaker 1: to work on, and I may say go off and,
Speaker 1: you know, look at look at this problem or or
Speaker 1: look at that problem and and a lot of times
Speaker 1: what you find is that, you know, research is not easy,
Speaker 1: it's it's very challenging. You'll find that maybe whatever you
Speaker 1: set out to do is impossible. But when you hire
Speaker 1: someone with a bit of a science background, they'll always
Speaker 1: find something interesting. So they may they'll always come back
Speaker 1: to me and say, Hey, I didn't, we couldn't solve
Speaker 1: the problem, or we we solve the problem, but there's
Speaker 1: no there's no Alpha in it. But we found several
Speaker 1: other interesting things that might be relevant, and sometimes that's
Speaker 1: an important part of the job. You just have to
Speaker 1: kind of follow your nose to see where you know,
Speaker 1: where the opportunities are. Research is not a linear process.
Speaker 1: You don't say, you know, I'm going to go out and,
Speaker 1: you know find uh, you know, a sharp ratio three
Speaker 1: investment idea. You know, you have to you know it
Speaker 1: may be out there, it may not. Part of it
Speaker 1: is discovering it, Um, and it's you know, you have
Speaker 1: to be you have to be open to sometimes not
Speaker 1: necessarily going, you know, where the specific agenda is leading you. Yeah,
Speaker 1: and of course now anytime, uh, someone wants to make
Speaker 1: a stock go up on social media, they use that
Speaker 1: rocket ship Emoji. So some some more synergy there for
Speaker 1: for the rocket scientists, and a lot of overlape. Yeah,
Speaker 1: but George, Um, I know one area you're interested in
Speaker 1: and I'm sort of fascinated with is, um, natural language processing,
Speaker 1: you know, in other words using computers to sort of
Speaker 1: read text uh and interpret it. Uh. And when we
Speaker 1: got a lot of words from Jerome Pal this week,
Speaker 1: a fed statement and a press conference, Um, I feel
Speaker 1: like the you know, his message was was pretty easy
Speaker 1: to understand. You know, we're we're gonna hike rates, WE'RE
Speaker 1: gonna keep hiking rates aggressively until inflation is tamed. But
Speaker 1: I'm wondering, from UH quant perspective, from a natural language
Speaker 1: processing perspective, is there something more that a computer, uh
Speaker 1: program can, can glean from a press conference like that, uh,
Speaker 1: and the statement, or is it just a matter of
Speaker 1: of being able to react quickly to it, uh, with
Speaker 1: trading algorithms? You know, how does how does UH natural
Speaker 1: language processing fit into an event like that this week?
Speaker 1: So so there's several things, Um, that that I would
Speaker 1: say are relevant. Uh. You know, I'm sure there's a
Speaker 1: lot of people out there that are running, you know,
Speaker 1: very short horizon strategies, looking at what words he chooses
Speaker 1: to use and and like specifically, like the questions and
Speaker 1: answers that come out of that, and are looking to
Speaker 1: kind of uh Um, you know, talk, you know, get
Speaker 1: in or out of the market very quickly to take
Speaker 1: advantage of kind of a short term movement. I think
Speaker 1: the real advantage, however, of language processing is just that
Speaker 1: you can go into depth, you know, you can read
Speaker 1: a ten K and and analyze a lot of aspects
Speaker 1: of it and you could do that for two or
Speaker 1: three of them, but it might take you, you know,
Speaker 1: it could easily take you half a day or a
Speaker 1: day each. The advantage of language processing is that you
Speaker 1: get the breath, so you can do three thousand of these,
Speaker 1: you know, in a matter of, you know, minutes or
Speaker 1: maybe half an hour, depending on what what type of
Speaker 1: models you're running. But it's a combination of the breath
Speaker 1: and the timeliness, I would say, that makes it relevant.
Speaker 1: And if you think about humans, like so much of
Speaker 1: our intelligence, so much of our knowledge, is really encoded
Speaker 1: in writing. You know, we've been collecting numerical data for
Speaker 1: some time, but people have been generating written texts, you know,
Speaker 1: since the beginning of of you know, the beginning of
Speaker 1: kind of putting text down on paper. Um. So there's
Speaker 1: just a huge amount of information that comes out and
Speaker 1: there's a lot of value in there. Is What we
Speaker 1: have found. So it's been one of the most uh
Speaker 1: relevant areas for us, you know, over the past few
Speaker 1: years to extract information. Well, one of the words that
Speaker 1: kept coming up quite a bit during the power press
Speaker 1: conference was the word pain, and I read a bunch
Speaker 1: of notes after after his press conference, pointing this out
Speaker 1: specifically because of the market reaction that we saw on
Speaker 1: Wednesday afternoon. So maybe can you just lay out what,
Speaker 1: in your view, actually transpired with the power press conference
Speaker 1: and what we got from from the F O M
Speaker 1: C and what you make of how the market reacted?
Speaker 1: So my view is is that, you know, it over
Speaker 1: the summer with some earlier with some earlier statements from Powell,
Speaker 1: he he tried to portray a very, you know, serious
Speaker 1: view about taming inflation and he came away saying that
Speaker 1: you know, we're gonna WE'RE gonna do it. But he
Speaker 1: was maybe just a little bit too dubbish and you know,
Speaker 1: we saw a very large rally and markets over the
Speaker 1: summer as the result of that, even though a number
Speaker 1: of other fed speakers came out and and really were Um,
Speaker 1: you know, kind of we're much more pessimistic about things.
Speaker 1: So I think really since then what we've seen is
Speaker 1: he has just had to be extremely clear that they
Speaker 1: are gonna get their job done and you know it's
Speaker 1: gonna it is going to cause some disruption. I think.
Speaker 1: I think some of his earlier statements he was trying
Speaker 1: to be a bit more balanced. But I think now,
Speaker 1: given the market's reaction, he has just he has just
Speaker 1: realized that he has to be extremely clear about where
Speaker 1: things going, where he things are, things are going. I
Speaker 1: don't forget it is a challenging economic outlook, but it
Speaker 1: follows several years of huge gains in the market. So
Speaker 1: you know, if you look over a longer period of time,
Speaker 1: you know we've we've had a lot of gains in
Speaker 1: a short period of time. So it's not unrealistic to
Speaker 1: expect a little bit of give back in the next
Speaker 1: you know, the next year or two. Judge, as I
Speaker 1: said in the Intro, uh, you know, brutal year for
Speaker 1: both stocks and bonds. That sort of traditional sixty forty
Speaker 1: portfolio is uh, has hit hard times. Uh, to say
Speaker 1: the least. I imagine for a guy in your position
Speaker 1: there's uh, you know, a lot of clients out there
Speaker 1: saying get me a rocket, scientists on the phone. We
Speaker 1: gotta figure out something else that works. So so from
Speaker 1: a quand perspective. Um, I know there's some stuff that's
Speaker 1: working spectacularly. This year I did a story on trend
Speaker 1: following and mauntaged futures. Commodity trading advisors who are are
Speaker 1: really doing really well this year just by uh, sort of,
Speaker 1: you know, following the chart down when when, uh, you know,
Speaker 1: stocks are going down, when yields are going up, just
Speaker 1: just following the trends. But what else is is um
Speaker 1: sort of a solution from a quant perspective for a
Speaker 1: challenging environment like this? What are you telling those clients
Speaker 1: looking for something to either, you know, get some kind
Speaker 1: of return this year or at least protect the wealth
Speaker 1: they have? Yeah, so, you know, there are several different things.
Speaker 1: I mean, first of all, we do have several offerings
Speaker 1: that that focus on trend following or kind of global
Speaker 1: macro strategies or tail hedging, and you're right, those have
Speaker 1: very successful. This is kind of the perfect economic environment
Speaker 1: where you do have big movements as well as some
Speaker 1: big inconsistencies across the globe. For example, looking at Japan
Speaker 1: and how you know they're, you know, everyone else's raising
Speaker 1: rates in Japan is really not and you know we're
Speaker 1: we hear a little bit now about trying to have
Speaker 1: to defend the end. However, Um, you know, there's a
Speaker 1: couple of other things. One is commodities and and other
Speaker 1: and the other would be real assets in general. Maybe
Speaker 1: the last one I would talk about would be some
Speaker 1: downside protection. So commodities and real assets are, you know,
Speaker 1: we've seen kind of a big run up in commodities
Speaker 1: and a bit of a retracement, but over the long run,
Speaker 1: you know, there's a lot of research that shows that
Speaker 1: commodities do very well in this type of environment. Um,
Speaker 1: you know, we you know, our view is that the
Speaker 1: fit is going to be successful and taming inflation, but
Speaker 1: it's also going to take a little bit of time.
Speaker 1: It's not going to come down very rapidly and you know,
Speaker 1: we think there's a lot of opportunities for commodities in
Speaker 1: someone in in a portfolio. So that's that's one area. Um,
Speaker 1: commod these, I think, also of real assets, you know, Um,
Speaker 1: you know, whether it's real estate or or other, you know,
Speaker 1: direct real investments that are also typically do very well
Speaker 1: in inflationary times. I think the other thing that we
Speaker 1: see a lot of conversations about his downside protection. How
Speaker 1: do you build a strategy that can either hedge a
Speaker 1: hedge tail risk or just, you know, deliver most of
Speaker 1: the upside while limiting the downside? And there again there's
Speaker 1: a number of different solutions we offer in that area.
Speaker 1: So those that say are the main the main subjects
Speaker 1: that we've been talking about. Two clients we've seen the
Speaker 1: most interest in George. Can you talk a little bit
Speaker 1: more about that, because I know you sent us some
Speaker 1: notes before the podcast. You said, Um, it's important for
Speaker 1: investors to consider defensive strategy. So what specifically? Maybe you
Speaker 1: can just go a little bit more into detail. Yeah. So, so,
Speaker 1: you know, a lot of times if you look at
Speaker 1: a long term investor, a long term success and what
Speaker 1: you'll find is that it's it's it's important to participate
Speaker 1: in the upside, but it's probably more important to avoid
Speaker 1: a large draw down. So you know the draw downs
Speaker 1: are very difficult because if you have like a tem
Speaker 1: per cent draw down, you need more than ten percent
Speaker 1: to recoup the return. Just mathematically, a temper cent draw
Speaker 1: down allowed by temper cent gain doesn't get you back
Speaker 1: to where you're started. So if you have some ability
Speaker 1: to either avoid or limit those draw downs over long
Speaker 1: periods of time, that can be very beneficial to uh,
Speaker 1: to to an investor. And if you think about it,
Speaker 1: there you know it's valuable to an institution, but for
Speaker 1: a person. It's even more important, you know, particularly if
Speaker 1: you get into the you know, kind of like five
Speaker 1: to ten years before and after retirement. Um, you have
Speaker 1: to be very careful because that's kind of the period
Speaker 1: of time when, if you have a draw down, uh,
Speaker 1: it could be very detrimental to like retirement savings. So
Speaker 1: so there's a number of different, you know, number of
Speaker 1: different Um ways that you can get into. You developed
Speaker 1: drawing out your strategies that do well. I mean in
Speaker 1: some occasions people look at low ball strategies. We have
Speaker 1: a different approach that kind of combines Um, you know,
Speaker 1: both market and fixed income exposure with with Um with
Speaker 1: some optionality to basically give you downside protection but at
Speaker 1: the same time participate in most of the upside. So
Speaker 1: it's something that, from our perspective, should have a should
Speaker 1: have a place in in many portfolios. You mentioned, uh,
Speaker 1: real assets. I would mind unpacking that a little bit.
Speaker 1: I mean I think there's this this huge uh, curiosity
Speaker 1: and demand for sort of alternatives, liquid alternatives, you know,
Speaker 1: stuff outside of the traditional stocks and bond markets and
Speaker 1: wherever that takes you. But obviously liquidity can be an
Speaker 1: issue with alternative assets. What looks good to you from
Speaker 1: from that perspective, you know, Um, and is it? Is
Speaker 1: it tough for a quant to sort of apply your
Speaker 1: methods to non traditional markets like that? I don't think
Speaker 1: it's tough to you know, they're different structures, but no,
Speaker 1: I think in many ways, you know, being being, having
Speaker 1: a quantitative approach allows us to put some sort of
Speaker 1: consistency across the you know, the different types of asset classes.
Speaker 1: And when we think about things, we think not about
Speaker 1: just risk and return, but we also think about draw down,
Speaker 1: we think about, you know, kind of skewness, we think
Speaker 1: about liquidity. So I mean, from my perspective, from the
Speaker 1: you know, a quantitative approach, you know, definitely compliments Um,
Speaker 1: you know, more more traditional approaches. So I liquid assets.
Speaker 1: You know, private assets has been extremely hot. You know,
Speaker 1: I'd say the last few decades Um, we've seen a
Speaker 1: huge amount of money go into them and you know
Speaker 1: that those assets have done quite well. Your private assets
Speaker 1: definitely have a place in in an institutional investor's portfolio.
Speaker 1: The challenge really, as you mentioned, is liquid it, because
Speaker 1: some of these investments, you know, not only require you
Speaker 1: to make an investional initial investment, but there's also ongoing
Speaker 1: capital calls. So you know, what we have seen some
Speaker 1: clients experience is that you know, if you have a
Speaker 1: combination of liquid and a liquid investments and the liquids
Speaker 1: are requiring capital, you know if you have that, you
Speaker 1: know if you have that money invested in like equities,
Speaker 1: you might have you might be forced to sell equities
Speaker 1: at the worst possible time because you need to make
Speaker 1: a capital call. So so they're the question is not
Speaker 1: so much about looking at what's the maximum return I
Speaker 1: can get, but how does this fit into my portfolio
Speaker 1: and what is this going to cause me to do
Speaker 1: in a in a period of extreme stress? I mean,
Speaker 1: that's really the case. I mean, liquids are great, it's
Speaker 1: just you need to make you need to kind of
Speaker 1: go in the as I say, Eyes Wide Open in
Speaker 1: terms of looking at the opportunity and understanding how it's
Speaker 1: going to fit into your into your objectives. So we
Speaker 1: all know, Tina, there is no alternative and we've all
Speaker 1: been talking about it for such a long time. But
Speaker 1: the thing that I'm hearing out is Tia, which is
Speaker 1: there is an alternative. Two stocks. I don't know if
Speaker 1: you've also been thinking about this or hearing about this,
Speaker 1: but I'm one of you. What you make of this
Speaker 1: idea that there are alternatives now? And you know, somebody
Speaker 1: I spoke with earlier this week said you can hold
Speaker 1: your nose, for instance, and go into high yields. So
Speaker 1: what do you make of some of these alternatives? Now?
Speaker 1: I think it's unfortunate that people are always comparing everything
Speaker 1: to the SMP, right so that the goal is to
Speaker 1: build a portfolio that gives you alternatives and outperforms the SMP,
Speaker 1: and I think that that's that's a little bit of
Speaker 1: a high bar. I think the goal of alternatives is
Speaker 1: more to provide diversification and stability and is and is
Speaker 1: less about can I specifically outperform the SMP or can
Speaker 1: I specifically outperform a specific target? I mean, obviously you
Speaker 1: want your alternatives not to be, you know, to provide
Speaker 1: the diversification, you want them to be reasonably priced and
Speaker 1: obviously want you want solid performance. But sometimes people, I think,
Speaker 1: are a little myopic just saying okay, I want to alternative,
Speaker 1: but us to do better than then this investment or
Speaker 1: that investment. So you know, I think of alternatives much
Speaker 1: more in terms of risk, risk control and um and
Speaker 1: really it's about figuring out what your investment bowl is
Speaker 1: and designing a program that that's going to get you there,
Speaker 1: as opposed to, you know, what's the what's the highest
Speaker 1: possible return I'm going to get over the next month
Speaker 1: or six months? I mean, the world today is amazing
Speaker 1: in terms of what you can get. I mean you
Speaker 1: you know, when I was growing up it was, you know,
Speaker 1: stocks and bonds. Now you know, there's all kinds of uh,
Speaker 1: you know real estate, you know, publicly traded, privately traded. Um,
Speaker 1: you know fractional assets. You know where you can buy
Speaker 1: fractions of real estate or fractions of a painting. And
Speaker 1: I mean we, we've just like the access to these
Speaker 1: things has become, you know, a little scary in all honesty,
Speaker 1: and that like you can really get into many different
Speaker 1: things that, uh, look, some of this I think is
Speaker 1: probably good, but some of it is is maybe stretching
Speaker 1: a little too far. Bildna got me a fract of
Speaker 1: a Spanish hug. That was that's the best asset I've had.
Speaker 1: That was that was a good, yeah, alternative asset. But,
Speaker 1: George Um, you mentioned something earlier on that. I want
Speaker 1: to sort of rewinding. Get back to and that is
Speaker 1: that you said you do think the Fed is going
Speaker 1: to be successful in taming inflation, but it's gonna take
Speaker 1: a while and I don't want to put you on
Speaker 1: the spot, I know, I know no one wants to
Speaker 1: predict that inflation is gonna peak at at this percent
Speaker 1: on this date, but I wonder how you're thinking about
Speaker 1: how that taming of inflation is going to play out. Um,
Speaker 1: you know, are we bound to sort of retest the
Speaker 1: market lows from June and maybe even set new lows?
Speaker 1: And equities, uh, you know, our our bond is going
Speaker 1: to continue to suffer. You know what what's what's sort
Speaker 1: of the near future look like? Uh, to you? As
Speaker 1: far as, uh, what the Fed is doing to fight inflation?
Speaker 1: These are unique times and and I don't have h
Speaker 1: you know, I try to not make specific or term
Speaker 1: predictions because, you know, my view is the way to
Speaker 1: be successful is to have a long term perspective and
Speaker 1: to be focusing on the fundamentals that are driving the market.
Speaker 1: I would say, you know, when we look at inflation,
Speaker 1: we look at the components of inflation. You know, there
Speaker 1: are some components, like housing, that have been driving housing.
Speaker 1: That driving the recent numbers up, and we know that's
Speaker 1: a slow moving component, right. So even if they even
Speaker 1: if they jacked up rates focus style, you know, overnight,
Speaker 1: it's gonna take time for that to flow through. The
Speaker 1: other thing is that, uh, you know, a lot of
Speaker 1: research shows that these increases really take time to impact
Speaker 1: the market. So, you know, we're still, you know, we're
Speaker 1: still raising right now while the first increase is really
Speaker 1: filtering its way through. Something might happen very quickly in
Speaker 1: the in the financial markets, but in terms of like
Speaker 1: how these impact of consumer it takes a long time. So,
Speaker 1: you know, that's part of the reason I think it's
Speaker 1: gonna I mean, I personally think inflation may have peaked. So, however,
Speaker 1: I don't think it's gonna we're not. WE'RE NOT gonna
Speaker 1: Kinda go back down to two percent overnight. I think
Speaker 1: it's gonna be. I think it's gonna Mut be a
Speaker 1: multi year UM multi year trend. I think, you know,
Speaker 1: it is gonna be. As long as you are raising rates,
Speaker 1: you know, and tightening financial conditions, it is going to
Speaker 1: be challenging for Equity Markets and likely mixing about markets. Right. Uh,
Speaker 1: you know, George, you you said something there too that
Speaker 1: I find fascinating. You say it's such a unique environment,
Speaker 1: and I wonder as a as a quant, you know,
Speaker 1: you're so used to dealing with historical data sets, Um Um,
Speaker 1: and when you think of this environment we're on like
Speaker 1: the closest comparison, obviously, like you said, is the eighties.
Speaker 1: That that really high inflation and the Paul vocal fed
Speaker 1: really trying to fight it with with both fists Um.
Speaker 1: But when you go back, you know, when you're running
Speaker 1: regressions and stuff and looking at at your available data,
Speaker 1: when you get to the nineties even and the eighties,
Speaker 1: you know you're so limited in the amount of data
Speaker 1: you're able to sift through. Does that does that make
Speaker 1: it harder for a quant or is it, you know,
Speaker 1: just a matter of like you know, for example, with
Speaker 1: trend following? Well, you don't really care what the fundamental,
Speaker 1: fundamental data was so much back then. If if the
Speaker 1: trends doing this, we're gonna follow it. But you know
Speaker 1: what's what's it like for a quant dealing with unprecedented times,
Speaker 1: or at least times that are unprecedented? Is as far
Speaker 1: as the robust sets of data go. So one of
Speaker 1: the most rewarding parts of my job is getting to
Speaker 1: mentor young people in the field that you know, young
Speaker 1: portfolio managers and researchers on the quant side, and the
Speaker 1: thing I always tell them is, you know, remember you
Speaker 1: are an investor first and a quant second. So you
Speaker 1: know you cannot blindly follow the data. You cannot Um.
Speaker 1: I mean it cannot just because of the historical relationship.
Speaker 1: You can't say we're going to use that. You have
Speaker 1: to think and understand what drove that and is there relevance?
Speaker 1: You know, one of the interesting thing things is when
Speaker 1: you're in the world of academia you want to build
Speaker 1: a model to predict something new. You know, you design
Speaker 1: find a model and say, well, it can I make
Speaker 1: a prediction about some part of the world that no
Speaker 1: one's ever seen and and test whether the models right
Speaker 1: or not. From an investment perspective, I don't want my
Speaker 1: model to have to be encountering new scenarios that have
Speaker 1: never been tested. I want to make sure I've got
Speaker 1: some relevant data. And you're right, it is very challenging
Speaker 1: the further back we go to be able to to
Speaker 1: be able to Um, to use data and say hey,
Speaker 1: I've got I've covered every possible scenario and that's really
Speaker 1: where you have to rely on traditional fundamental investment insights
Speaker 1: and you have to pair those two. Now that's a
Speaker 1: lot less relevant if you're running a high frequency strategy
Speaker 1: that holds stocks like you know, or a fraction of
Speaker 1: a day or a nanosecond. You know, you can you there.
Speaker 1: You could be purely model driven, but if you're thinking
Speaker 1: longer term, you do. You really need to make sure
Speaker 1: that your your model is calibrated but also has been
Speaker 1: exposed to different types of regimes that that you might
Speaker 1: be in. And I don't know if you and your
Speaker 1: team put together projections in terms of what to expect
Speaker 1: from the Fed, for instance, for the remainder of this year.
Speaker 1: Does it look like we're going to get another seventy
Speaker 1: five basis point hike in November and a fifty basis
Speaker 1: point hike in December? What are what are you expecting?
Speaker 1: So so we do? We do monitor kind of how
Speaker 1: futures are pricing the scenario, the different UH projected rate hikes.
Speaker 1: You know, personally, I think you know, there's there's an
Speaker 1: element of this which is mathematical, which is what is
Speaker 1: the rate that they need to obtain. I think there's
Speaker 1: also a psychological aspect to let people know that they're
Speaker 1: very serious. Um. So, you know, we were. We do
Speaker 1: think that they're going to continue the pace of hikes
Speaker 1: really until they see inflation start to materially roll over.
Speaker 1: It looks like some areas have begun to slow but
Speaker 1: it's still it's just it's to the risk for them
Speaker 1: is that they become viewed it as less credible and
Speaker 1: I think that they're going to do what need to do.
Speaker 1: So yeah, I mean, you know, while this isn't particularly
Speaker 1: a how it spew are you know, my personal view
Speaker 1: is I wouldn't be surprised to see another material rate
Speaker 1: just to kind of cement in the fact that they're
Speaker 1: so serious about gaming inflation, which, look, I think is
Speaker 1: good for everyone in the long term. At George, what
Speaker 1: they're gonna and I'm wondering if you've thought about this
Speaker 1: or studied it at all, but one of the big
Speaker 1: themes this year, uh and really recent years, has been
Speaker 1: the options market. Inequities seems to be sort of the
Speaker 1: tail that's wagging the dog sometimes. You know, you have
Speaker 1: options expirations in the middle of the month and all
Speaker 1: of a sudden there's volatility either to the upside or
Speaker 1: the downside. That seems to be uh, completely related to,
Speaker 1: you know, the options gammaging and that sort of thing.
Speaker 1: Have you looked into that at all? And and and is,
Speaker 1: you know, not selling Jerry Seinfeld, but what's the deal
Speaker 1: with that? You know, it's it's amazing and it really
Speaker 1: seemed to kind of pick up after, you know, after
Speaker 1: the lockdown, Um, that all of a sudden there's just
Speaker 1: a huge amount of interest in options and meme stocks.
Speaker 1: And Yeah, we have seen that. There are situations where,
Speaker 1: you know, the tailor is wagging the dog and some
Speaker 1: and some names and that option activity has just exploded. Um,
Speaker 1: you know, personally, I use the best indicator I use
Speaker 1: is what my, you know, teenage kids friends are asking me.
Speaker 1: and Um, you know, a few years ago it was
Speaker 1: crypto and then now they're all interested in options. You know,
Speaker 1: they don't want trade stocks, they want to trade bonds.
Speaker 1: They're going right to options right Um, and it's like, okay,
Speaker 1: there's limited downside. I lose the premium, but there's no
Speaker 1: question that like all of a sudden, you know, the
Speaker 1: retail interest has just, you know, sky rocketing. Options I
Speaker 1: think it's. I think it's coming down a little bit now,
Speaker 1: but it's just, you know, there's this you know, it's
Speaker 1: the it's the greater fuel theory. Right, I'm I'm I'm
Speaker 1: buying something because I just expect to sell it in
Speaker 1: a few days at a higher price. But there's no
Speaker 1: particular you know, it's I'm just doing that because markets
Speaker 1: are going up and you know, you know that's great
Speaker 1: as long as it works, but as soon as it
Speaker 1: stops working, all the people that have been drawn into
Speaker 1: that change their view. Yeah, is it's sort of a
Speaker 1: dead end street to try to try to uh, find
Speaker 1: patterns there and trade off of them. You know, to
Speaker 1: the fundamental sort of went out in the long run.
Speaker 1: Um Metal. Look, fundamentals went out in the long run,
Speaker 1: but there's no question that there's hurting right. There's no
Speaker 1: question that when you know, some of these trends become
Speaker 1: established in certain names, they're going to start. They're they're
Speaker 1: gonna get there. It's not gonna play out overnight. They
Speaker 1: can it can go on from like weeks to months. Um.
Speaker 1: Our view is that we tend to focus on longer
Speaker 1: term trends and we try to stay away we don't
Speaker 1: want to be, you know, we don't want to be
Speaker 1: the you know, the snail in front of the steam roller.
Speaker 1: So like if we see, you know, a huge wave
Speaker 1: of retail interest coming a lot of time, we just
Speaker 1: want to we want to be patient and avoid that
Speaker 1: and let that lay out a little bit, because then
Speaker 1: we think there's a better opportunity for the types of
Speaker 1: information that we process, which tends to be a little
Speaker 1: bit more longer horizon in terms of our holdings. And George,
Speaker 1: we talked about Tina and Tia, but I'm wondering what
Speaker 1: you would recommend to somebody who would like to be
Speaker 1: sitting in cash right now. Uh, you know, in all honesty,
Speaker 1: cash is not a bad place right now. Um, you know, obviously, uh,
Speaker 1: it's costing you something in terms of inflation. Um, you know,
Speaker 1: there are some us uh I bonds that that give
Speaker 1: you some reasonable inflation protection, but there's a lot of
Speaker 1: there's limits on how much you can buy of those. Um,
Speaker 1: cash is not a bad place to be in the
Speaker 1: short term, I mean inflation. It hurts you over long
Speaker 1: periods of time. It's less relevant over short periods of time.
Speaker 1: But Um, okay, I've got a decent allocation to cash because, Um,
Speaker 1: you know, it's it's part of the providing downside protection. Well,
Speaker 1: George's fascinating stuff there. It's great to get your perspective. Um,
Speaker 1: we won't let you leave, though, until we get to
Speaker 1: our little gimmick tradition here on the show, which is
Speaker 1: the craziest things we've seen in markets this week. UH,
Speaker 1: Bill Donna, you know you started off on this podcast
Speaker 1: before you were a co host. Remember, your title was
Speaker 1: chief crazy things correspondent. Yeah, it was really good stuff.
Speaker 1: I think we're gonna have to replace you with this guy,
Speaker 1: twiggy Sunday, from twitter. I assume that's assumed. That's his
Speaker 1: real name, real name? Definitely? Yeah, that definitely his real name.
Speaker 1: He's hit me with a bunch of crazy things this week,
Speaker 1: so I'm gonna I'm relying solely on him for mine.
Speaker 1: But let's start with you. And what's The craziest thing
Speaker 1: you've seen in markets? This one probably a lot of
Speaker 1: people already know about. So if you spend any time
Speaker 1: on twitter, you probably saw this story. But the beyond meat,
Speaker 1: the CEO, sorry, their chief operating office beyond, Do you
Speaker 1: know this story? Wait, that wasn't like beyond meat, him, Iberico,
Speaker 1: him that you brought me. Was it you got? You
Speaker 1: got real hamp but beyond meat suspended its chief operating
Speaker 1: officer after he bit a man's nose. Why you didn't
Speaker 1: hear of this? I did, but I thought I dreamed it.
Speaker 1: That really happened. No, this really happened. It's just so ironic.
Speaker 1: It's a it's a non Meat Company. He bit somebody's nose,
Speaker 1: someone in the nose. Yep, he's been suspended and it's
Speaker 1: just I mean, I love thinking about like these meat alternatives,
Speaker 1: as you know, but shares of beyond meat, I checked before,
Speaker 1: the podcasts are down seventies this year and I think
Speaker 1: partly it's because those alternatives are much more expensive, like
Speaker 1: buying for fake meat patties is much more expensive than
Speaker 1: buying buying for hamburger patties. So and having a guy
Speaker 1: go to I'm biting people in the nose, one would
Speaker 1: assume I'm no quad George, but I would assume that's
Speaker 1: not good for a stock person in general. That's pretty good. Well,
Speaker 1: how's the nose? How's The continently? So this was in
Speaker 1: the stories. Apparently he literally actually bit off a piece
Speaker 1: of the nose. Come on, there was some at least
Speaker 1: some damage. Oh my gosh, that is that is truly
Speaker 1: a crazy thing. How about you, George? You see anything
Speaker 1: crazy in markets recently? You know they's been all of
Speaker 1: these Um, you know, depreciating assets, with cars and boats
Speaker 1: in particular, there's a period of time that you know
Speaker 1: there was such a short demand, short supply, that you
Speaker 1: know you could take an old bunker that you know
Speaker 1: it was probably worth nothing and sell it more than
Speaker 1: you paid for it, even adjusting for inflation. So you
Speaker 1: know there were we had a few old cars around and, Um,
Speaker 1: you know, during this time I sold one or two
Speaker 1: of them in a matter of days. That amazing. Um. Yeah,
Speaker 1: so maybe it's probably not the situation now, but I've
Speaker 1: heard it's the same ingod boats. You know that there's
Speaker 1: such short supply of boats and demand has held up
Speaker 1: very well that people have been able to sell boats,
Speaker 1: which the ultimates appreciating asset, for for a profit. I know,
Speaker 1: I was gonna say what's what's the old joke that
Speaker 1: the happiest days of a voter's life is the day
Speaker 1: they buy the boat, that the day they sell it?
Speaker 1: I guess. Well, here's twiggies tweets to me, which offer
Speaker 1: us a great opportunity to play our little game. Show
Speaker 1: the prices precise here. Okay, Vildana, the most followed influencer
Speaker 1: on Tiktok is a guy named Kabi Lane him me,
Speaker 1: neither I. Uh. My kids make fun of me because
Speaker 1: I watched the reels on instagram and they say those
Speaker 1: are all just Tiktok's that are like three, three weeks old.
Speaker 1: So that's where I'm at on the TIKTOK. Yeah, yeah,
Speaker 1: so I'll probably get to this guy in a few,
Speaker 1: few weeks. He'll be a hundred and forty nine, almost
Speaker 1: a hundred and fifty million tiktok followers for this guy.
Speaker 1: So he gets some sponsored posts to put something on Tiktok.
Speaker 1: So try to think what the highest payment he's gotten
Speaker 1: for a single post. Okay, so that's on one side.
Speaker 1: On the other side, twiggy sent me the golf bag
Speaker 1: and that's sorry. By the way, it was courtesy of
Speaker 1: Fortune magazine. They have an interesting profile on this guy
Speaker 1: from tiktok. The other ones from Golf Digest. It was
Speaker 1: the bag that tiger used, his golf bag in the
Speaker 1: two thousand and five season, which was a good season
Speaker 1: for him. I think he won the British open and
Speaker 1: he won the masters. He was aged nine. So the
Speaker 1: question is, and George, I hate to inform you, but
Speaker 1: you're now contestant on the prices precise as well. And
Speaker 1: I ask you both. which do you think it was
Speaker 1: more valuable? One Post from this guy on Tiktok were
Speaker 1: tiger woods, two thousand and five golf bag, and give
Speaker 1: me a number that you associate with the higher one. Well,
Speaker 1: I think the Kardashians something like two hundred or two
Speaker 1: hundred fifty thousand pro post sometimes, I think. So I'M
Speaker 1: gonna go with one fifty for for the guy and
Speaker 1: that the bag is worth more. Now remember this is
Speaker 1: this is the most he's ever been paid for a post.
Speaker 1: So that the top tick of this guy's influence your career.
Speaker 1: You'RE gonna go with not. Not, not like his average. Yeah,
Speaker 1: we don't know his mean. Okay, I think that you're
Speaker 1: telling me that it's more than that. I'll go. I'll
Speaker 1: go with you think the bag is worth so then
Speaker 1: the then that makes a bag worth less, I think.
Speaker 1: Do you think the bags worth less, George? What do
Speaker 1: you think what's what's more valuable? One Post from this
Speaker 1: guy or Tiger's two thousand and five golf bag? You
Speaker 1: know there there's a lot, there's a lot of people
Speaker 1: that are obsessed with golf. When you get you get
Speaker 1: that there's only one bag from tiger right from that year.
Speaker 1: So I'm going with that. Is more expensive, more expensive items.
Speaker 1: I would have gone with the golf bag as well,
Speaker 1: especially you never know, maybe there's some some free teas
Speaker 1: and balls in there somewhere, little tiny pencils. But this guy.
Speaker 1: Top payment for this guy's Tiktok was seven D and
Speaker 1: fifty thousand dollars for one post, for one single post,
Speaker 1: so more than the Kardashians. Yeah, I don't get it.
Speaker 1: That's like a mansion. Um. Tiger's bag thousand, which seems
Speaker 1: s low to me. George, I don't know. I would
Speaker 1: have thought real assets right. I would have thought the
Speaker 1: real asset would have won. But, George, such a treat
Speaker 1: to catch up with you and hear your insights. We
Speaker 1: we really appreciate it, uh and we hope somebody will
Speaker 1: come back and do it again. Look for George on
Speaker 1: Tiktok and we're on Youtube now, by the way, the
Speaker 1: podcast is now on Youtube, so look for us there
Speaker 1: if you uh can't find us on all the other places.
Speaker 1: I've also the track of everywhere. There's a lot of places. Yeah, yeah,
Speaker 1: but if you tube's your thing, maybe some people prefer Youtube.
Speaker 1: I don't know already. Thanks George. Thank George. What goes up.
Speaker 1: We'll be back next week, and so then you can
Speaker 1: find us on the Bloomberg terminal website and APP or
Speaker 1: wherever you get your podcasts. We love it if you
Speaker 1: took the time to rate and review the show on
Speaker 1: apple podcasts so more listeners can find us. And you
Speaker 1: can find us on twitter. Follow me at Reag anonymous bill.
Speaker 1: Donna Hirich is at Bildonna Hirich. You can also follow
Speaker 1: Bloomberg podcasts at podcasts. What goes up is produced by
Speaker 1: Stacy Wang. Thanks for listening. See you next time.