Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of The Odd Lots Podcast.
Speaker 3: I'm Jill Wisenthal and I'm Tracy Alloway.
Speaker 2: Tracy, Market's getting interesting again.
Speaker 3: I love interesting markets.
Speaker 4: We do.
Speaker 2: We always say we're long volatility. That's right here at
Speaker 2: the Odd Lots Podcast. All financial journalists are long volatility.
Speaker 3: I guess yes. I mean you can actually see it
Speaker 3: in the listeners and readership numbers. Our traffic follows the.
Speaker 2: Vin there's some bad incentives. Yeah, perhaps perhaps, but if
Speaker 2: it bleeds at leads. I mean they've been saying this
Speaker 2: about the news forever.
Speaker 4: Yeah.
Speaker 3: So at the moment, we are recording this on Friday, November.
Speaker 2: Fourteenth, at ten oh seven am.
Speaker 3: Yeah, we have to say that we have to be
Speaker 3: very specific because things are changing so fast. At the moment,
Speaker 3: the S and P five hundred is down like zero
Speaker 3: point seven percent, but it was down more than one
Speaker 3: percent earlier, and then yesterday it fell, you know, one
Speaker 3: point eight percent. So this is a pretty substantial slide.
Speaker 3: And of course it comes at a time when people
Speaker 3: were already worried about things like tech valuations and the
Speaker 3: possibility of an AI bubble.
Speaker 2: Totally. The US DOC market has had a phenomenal year,
Speaker 2: and this is all kind of minor in the grand
Speaker 2: scheme of things, but some of the moves haven't been
Speaker 2: that minor for some big things. It is some of
Speaker 2: the most volatile period since April. Really, I mean, it's
Speaker 2: kind of been a smooth rite up since the end
Speaker 2: of April or the middle of April, whenever that bottom.
Speaker 2: There's just a lot going on questions about the FED.
Speaker 2: Gold interestingly had a massive year, and it also is
Speaker 2: selling off, so that sort of raises the question about
Speaker 2: what's been driving gold Bitcoin getting absolutely clobbered. Of course,
Speaker 2: you know, it's sort of a glorified tech stock and
Speaker 2: the way it trades, so many interesting things, so many
Speaker 2: market winners fading a little bit.
Speaker 3: You know, it was really interesting this morning. For a second,
Speaker 3: bonds weren't really doing anything. They weren't rallying, And so
Speaker 3: if you can't go into gold, if you can't go
Speaker 3: into bonds, if everything's selling off at the same time,
Speaker 3: that seems kind of worried.
Speaker 2: Well, this is really interesting and probably needs to be
Speaker 2: discussed more. But you're absolutely right. I think yields on
Speaker 2: the tenure were actually up yesterday, November thirteenth. In the
Speaker 2: last week I was looking at the work function on
Speaker 2: the Bloomberg terminal. Odds of a December rate cut have
Speaker 2: come in quite a bit. It's closer to a coin flip.
Speaker 2: A week ago is sixty six percent. There have been
Speaker 2: some speeches from some of the FMC members talking about
Speaker 2: you know, they're uncertain, and part of the reason were
Speaker 2: uncertain because we've had so little data. I guess we're
Speaker 2: going to start getting data again now that.
Speaker 3: The although it's still going to be messy.
Speaker 2: It's still going to be super messy. You know, Understanding
Speaker 2: the economy in real time is hard in the best
Speaker 2: of times. It's really hard when there's no data, and
Speaker 2: then it's really hard when the data that does come
Speaker 2: out is going to be driven by the lack of
Speaker 2: government employment, which then make the data even more ambiguos.
Speaker 2: So a million questions, very interesting moment in a very
Speaker 2: interesting year for markets. We sort of got to get
Speaker 2: a better understanding of what's going on.
Speaker 3: Can I say one more thing before we get to
Speaker 3: our guest, which is I think part of the discussion
Speaker 3: at the FED. We're kind of getting very circular here
Speaker 3: because I suspect what's happening is, yes, the FED is
Speaker 3: worried about inflation, so some FOMC members are getting a
Speaker 3: little bit more hawkish in their speech. I think they're
Speaker 3: worried about AI bubble possibilities and valuations as well. And
Speaker 3: the longer they heat right slow, the longer this goes on,
Speaker 3: and then maybe the mess is even bigger when they
Speaker 3: eventually have to clean it up totally.
Speaker 2: All kinds of crosswinds, yea to speak well. Anyway, I'm
Speaker 2: very excited to say that we do indeed have the
Speaker 2: perfect guest, someone we've never had on the show before,
Speaker 2: but very excited to talk to him. We're going to
Speaker 2: be speaking with Dirk Villa. He is the head of
Speaker 2: Global macro strategy at City. He brought us a book
Speaker 2: to that he co authored, Trading Fixed Income and FX
Speaker 2: and Emerging Markets.
Speaker 3: It's going to be useful in the US, I know.
Speaker 2: That's the thing. It's like suddenly all these em veterans like,
Speaker 2: let's tell you how some of these things really works. So, Derek,
Speaker 2: thank you so much for coming on the podcast.
Speaker 5: Great to be here. Thanks for the invite to ask.
Speaker 2: You a question. If you went back, say a month
Speaker 2: ago or a month and a half ago, you're talking
Speaker 2: to clients, et cetera. Did you ever encounter a single bear?
Speaker 4: I mean, I'm trafficking more among the macro people than
Speaker 4: the equity folks, sure, and the macro guys always half
Speaker 4: class empty, right, So that you did find some bears,
Speaker 4: and I would say, actually only a few weeks ago
Speaker 4: that disappeared because there was a really strong buying into
Speaker 4: the center, really right, So meaning November and December have
Speaker 4: exceptionally positive seasonality always, and they've even better seasonality risk
Speaker 4: and risk and exactly. So I think the bears that
Speaker 4: we found disappeared over the last few weeks. So maybe
Speaker 4: just at the wrong time you value, but that's how
Speaker 4: it goes.
Speaker 3: Right, Yeah, How do you officially measure sentiment in this market?
Speaker 3: I'm always curious because obviously everyone has different methodologies, but
Speaker 3: sentiment seems quite key. When you're talking about a ball
Speaker 3: run that's really driven by tech stocks and this AI narrative,
Speaker 3: the story becomes so important.
Speaker 4: It's actually really key to this because if you were
Speaker 4: to say, listen, this is the top of a bubble
Speaker 4: or something, you'd have to see really really into the
Speaker 4: ztic sentiment and we never quite saw that. My favorite
Speaker 4: indicator is because the polls indicated stands for positioning and
Speaker 4: various other things, and that is something that we put
Speaker 4: out and that worked really really well this year and
Speaker 4: actually the last five years for that matter, and that
Speaker 4: never went into territory that really told us to be cautious.
Speaker 4: We do a bunch of surveys, so we survey all
Speaker 4: the big asset allocators worth the futrillion in asset under management,
Speaker 4: and they never got as bullish on US equities because
Speaker 4: after April there was a big move outside of US equities,
Speaker 4: as you know, and they never really fully jumped into
Speaker 4: the US equity market as much as they went outside
Speaker 4: of the US. So we always thought, you know what,
Speaker 4: there are certain stories here that definitely remind us of
Speaker 4: two thousand of a bubble, and on our definition, actually
Speaker 4: it is a bubble, but it's not close to the
Speaker 4: end of it. And one missing component was really the
Speaker 4: sentiment that never got as extreme on our measures.
Speaker 3: We're definitely going to get more into the bubbles, especially
Speaker 3: the two thousands. But before that, I want to ask,
Speaker 3: how do you square I guess non frenzied sentiment with
Speaker 3: the amount of announcements that we're getting from companies. We're
Speaker 3: joking on the podcast that every day while we're recording
Speaker 3: this in studio, we get a new headline that, you know,
Speaker 3: Anthropic is going to spend fifty billion on data centers,
Speaker 3: or someone else is going to spend one hundred billion.
Speaker 3: It just goes on and on.
Speaker 5: Yes, that is, It's very true.
Speaker 4: I mean, I think the market is starting to question
Speaker 4: those numbers a little bit. Right when the Oracle deal
Speaker 4: came out, for example, the stock jumped. Guess what, We're
Speaker 4: back to where we were before the deal was announced.
Speaker 4: So I think there is a certain sense of skepticism
Speaker 4: a party because some people think they've seen all that before, right,
Speaker 4: and people bullish. I'm not telling you they're bearish.
Speaker 5: I'm just telling you they're not as excited as you
Speaker 5: might have expected.
Speaker 4: Just watching the price action, I think that is more
Speaker 4: than us here and the actually none of the indicators
Speaker 4: suggests that. I mean you, I'm sure everyone has their
Speaker 4: own favorite, but it's really very rare to find one
Speaker 4: that tells you, you know what, this is in line with
Speaker 4: what you've seen at other market tops.
Speaker 2: You know what, since we've never had you on the
Speaker 2: podcast before and you know, the author of a book
Speaker 2: on and you have a great job global head of
Speaker 2: macro Strategy City. What do you give us the sixty
Speaker 2: second background of what you do and how you got here,
Speaker 2: like what's your job? And yeah, okay, how'd you land here?
Speaker 5: Yeah?
Speaker 4: I came over to the US in ninety nine. Essentially
Speaker 4: it's joining a macro hedg fund. We traded back then
Speaker 4: and again right now. Actually, I think it's all about
Speaker 4: the bubble. That's the single biggest call. Everything else will
Speaker 4: fall into place. Whenever the bubble bursts, the dollar weekends,
Speaker 4: the FED rates will go to zero on maybe not
Speaker 4: quite to zero, but you could AGGRESSI effect. So everything
Speaker 4: that's what you have to focus on.
Speaker 5: And so even though I joined.
Speaker 4: The hedge fund back then as an em specialist, very
Speaker 4: quickly I looked into companies because we really had to
Speaker 4: figure out when is this dot com bubble over? And
Speaker 4: then we you know, we traded very successfully actually the
Speaker 4: run up and the run down, although I would say
Speaker 4: it's way very hard to trade a beer market because
Speaker 4: these bear market valies are really quite vicious, and so
Speaker 4: in the end, all the money was made being long
Speaker 4: fixed in come rather than being short equities, but broady speaking,
Speaker 4: that was me shifting from emerging markets to global macro,
Speaker 4: if you like.
Speaker 5: But then I went back.
Speaker 4: To the buyside party because you know, the particular hedge
Speaker 4: fund never became as poolish again on the bull market,
Speaker 4: having been successful bearish for a long time.
Speaker 2: So people are cursed by good luck getting bear markets
Speaker 2: right and then ver rare haunted by that for the
Speaker 2: rest of their career.
Speaker 5: Very rare, very rare.
Speaker 4: But yeah, So at Citybank, I covered emerging markets for
Speaker 4: a long long time and switched back to global macro
Speaker 4: a few years ago. And and as you can imagine,
Speaker 4: it's mostly speaking to hedge fund clients, to some money clients,
Speaker 4: some corporates. What we do a bit differently is that
Speaker 4: I have a big quant team, So essentially we back
Speaker 4: test everything under the sun, at least to get your
Speaker 4: price right. Things are always lightly different, but I think
Speaker 4: it's very important to have the right prize, and that's
Speaker 4: what the back tests give you. So we have a
Speaker 4: big quant effort, be a very trade sort of aggressive
Speaker 4: and putting a lot of trades out and Martin carefully
Speaker 4: and and I have a bigger major market angle than most,
Speaker 4: which I still think is extremely helpful in this environment.
Speaker 3: So since you've been around for a while, let's talk
Speaker 3: about the two thousands dot com bubble or nineteen ninety
Speaker 3: nine two thousand dot com bubble. Obviously people are using
Speaker 3: that as an analogy for this period of time. But
Speaker 3: we had someone in our discord actually shout out to
Speaker 3: Burflyer asking, yeah, asking whether or not people were talking
Speaker 3: about dot com stocks tech stocks being in a bubble
Speaker 3: the way people are talking about AI stocks tech stocks
Speaker 3: being in a bubble. Now, what's your experience? You know
Speaker 3: more than twenty years ago.
Speaker 4: Back then it was even clearer than now. I mean,
Speaker 4: if you remember NaSTA when the fifty percent.
Speaker 2: In Q four, Yeah, and.
Speaker 4: I remember some stories and we had some analyst pictures
Speaker 4: all the time. So there was an analyst for Nokia
Speaker 4: who said, don't worry that we need more than one
Speaker 4: hundred percent cell phone penetration in the world because Petsville
Speaker 4: were cell phone like.
Speaker 5: It wasn't wrong, but.
Speaker 4: So you get My favorite pitch was for Akamai, where
Speaker 4: when analyst said, you know what, the reason why the
Speaker 4: company will do well is the only three people who
Speaker 4: understand the formula. That's that's basically at the base of it,
Speaker 4: and all three works for akama So I don't worry and.
Speaker 3: No worry about it. We knew it.
Speaker 2: It's literally there's just no one who could ever replicate
Speaker 2: this technology because only three people who could build it,
Speaker 2: and they got it right.
Speaker 4: These type of things happened back then, and of course
Speaker 4: not to pick on Akamai, but it know it. It
Speaker 4: went up from I don't know thirty to three hundred
Speaker 4: after the IPO and back to one.
Speaker 5: You know this is yah. Yeah, these type of things happened, which.
Speaker 2: That was one of the more legit companies.
Speaker 5: Yeah you know that exists.
Speaker 4: Yeah I don't Yeah, I'm not covering them or anything,
Speaker 4: so I don't comment.
Speaker 5: But yeah, yeah, yeah.
Speaker 3: This reminds me of what you always say, Joe, things
Speaker 3: can always get crazier, right, Yeah.
Speaker 2: Yeah, it really does feel like you see some event,
Speaker 2: you know, like there was that you know what I
Speaker 2: was thinking about when Jensen wan I think it was
Speaker 2: about a year ago now, maybe nine months ago. Remember
Speaker 2: he signed a woman's brat, right, remember, and everyone's like, oh,
Speaker 2: this has got to be the top, right, because that's
Speaker 2: just one of those things. A semiconductor top signed, that's right.
Speaker 2: You know, it's like why a CEO of semiconductor company
Speaker 2: getting like legit rock star treatment and how much is
Speaker 2: in video up since then? Setting aside some of the
Speaker 2: recent wobbles, there is no point where you can definitively say, oh,
Speaker 2: this is the people, right, There's always it could always
Speaker 2: get weirder.
Speaker 4: Yeah. You know what gives me sleepless nights is actually
Speaker 4: that the two thousand episode is not the right benchmark, right,
Speaker 4: because if you use two thousand, you could say.
Speaker 2: Everything's fine, Yeah, everything fine, very bad.
Speaker 4: But of course not every bubble has to get as
Speaker 4: crazy as the two thousand one, you know. I mean
Speaker 4: it wasn't extreme even by bubble standards, so that is
Speaker 4: a bit of a risk if you focus too much
Speaker 4: on that one.
Speaker 3: Do you have a preferred historical analogy for our current period?
Speaker 4: And I do think two thousand is probably the closest,
Speaker 4: just because it was also very tech heavy and it
Speaker 4: had a big CAPEX built out attached to it, so
Speaker 4: that makes it good.
Speaker 5: I mean, the nineteen twenty nine mines.
Speaker 4: Of All the Mother of All Bubbles, if you like,
Speaker 4: and that was about you know, like cars and electrification
Speaker 4: and consumer gadgets and appliances rather, so you could use that,
Speaker 4: and that is actually the one that people used in
Speaker 4: two thousands. So you always go one bubble back if
Speaker 4: you like to make your case and to argue maybe
Speaker 4: why things can go very crazy. But I think here
Speaker 4: the many things at rhyme.
Speaker 2: So one thing that Tracy brought up in the intro,
Speaker 2: which is very important, is that rates in the recent
Speaker 2: days haven't come down that much. Today they're down a
Speaker 2: little bit, but by and large it's not like treasuries
Speaker 2: have been this great life preserver when the rest of
Speaker 2: your portfolio isn't working. In fact, actually right now and
Speaker 2: doing time stamps again, we're back at four point one one.
Speaker 2: We were down at four point h six earlier round nine.
Speaker 2: So even that once again we don't see this bid
Speaker 2: into treasuries. Rates are sort of down overall for the
Speaker 2: year a little bit, but there's not this desire to
Speaker 2: grab them talk to us about what's going on in
Speaker 2: that space.
Speaker 4: I think the reason is that a lot of the
Speaker 4: bullishness of the last three weeks was based on one
Speaker 4: simple statement is saying, listen, we're building a bubble and
Speaker 4: the FED is cutting into that. That never happened before it, right,
Speaker 4: And obviously in two thousand the hike behind the seventy
Speaker 4: five bass points, they hiked fifty basis points after the
Speaker 4: bubble had already beaked. So I mean, you know, they
Speaker 4: and they had inflation that it was not.
Speaker 5: Without any reason.
Speaker 4: But for sure, it's very unusual for the FED to
Speaker 4: cut into a bubble, and that was a great both thesis.
Speaker 4: And so now we're doubting that a little bit, right,
Speaker 4: I mean, so they are basically having a feed that
Speaker 4: might be more hawkish.
Speaker 5: December went to fifty to fifty essentially, and so if.
Speaker 4: You remove that plank of the argument, value should be
Speaker 4: all in inequity, it has consequences, right, And so we
Speaker 4: warbled a little bit for that reason. But I mean
Speaker 4: I would also remember, I mean, the hiked one hundred
Speaker 4: and seventy five basis points before the bubble peaked in
Speaker 4: two thousand, right, So will it be the end of
Speaker 4: the equitiable market if the FED doesn't go I mean,
Speaker 4: I doubt it.
Speaker 2: Talk to us a little bit about these doubts that
Speaker 2: are creeping in for December. I mean, we're truly in
Speaker 2: a fog for multiple reasons. Because even if we had
Speaker 2: government data. I'm sure the conditions plenty of different crosswinds.
Speaker 2: We don't have the government data, but like one thing
Speaker 2: we do seem to know is that hiring has been
Speaker 2: very weak and so fourth and several of the months
Speaker 2: almost certainly that would be the case for October and
Speaker 2: November if we had clear indications on it. What is
Speaker 2: the reluctance right now? Why is it a coin flip?
Speaker 5: Yeah?
Speaker 4: I mean well, I think the single biggest thing is,
Speaker 4: of course, all the comments were getting out of the
Speaker 4: FED right, and we had you know that, the tweet
Speaker 4: earlier this week, and so in the end, if you
Speaker 4: try to forecast the FAT, you better listen to what
Speaker 4: you're saying.
Speaker 2: They were exactly given the weakness, so that I think
Speaker 2: the question is of course all about the job right.
Speaker 5: The reason is a job market inflation.
Speaker 4: You can argue maybe tele inflation were not tr up
Speaker 4: so far it has been way benign. Some FAT members
Speaker 4: believe it's s throwing up, some others don't. But I
Speaker 4: think the main crux of the question is the job market.
Speaker 5: How week is it now?
Speaker 4: The Dalla's FAT put a paper out arguing that if
Speaker 4: you get slightly negative net migration. The break even NFP
Speaker 4: is thirty k. If you get slightly positive net migration
Speaker 4: sixty k, so that that is somewhere the range where
Speaker 4: these days and FP should come in without there being
Speaker 4: a problem. Right, So if you if, then if p
Speaker 4: press and of course September we know is somewhat artificially strong. October,
Speaker 4: if we get it, would be artificially weak due to
Speaker 4: the government buyouts. November is a really interesting one that
Speaker 4: might have a bit of an impact from the shutdown
Speaker 4: and so forth, so that may really clean one. Maybe
Speaker 4: we have to dad even longer. But let's say we
Speaker 4: take November is as good as it gets for now.
Speaker 4: So if that is below thirty, there'll be a cut, right,
Speaker 4: If it's below sixty, there'll be probably no cut. It's
Speaker 4: somewhere in between. They'll find it out. But without that data,
Speaker 4: it's just hard to you know, reassure the market yes.
Speaker 5: There'll be a cut, or no, there won't be.
Speaker 4: So the job market data will be very, very important.
Speaker 4: We've got a lot of alternative data sources. Of course,
Speaker 4: in the meantime, by be wading, they were a bit
Speaker 4: on the weakish side. So that's why the city call
Speaker 4: is actually for a cut, I mean the noises out
Speaker 4: of there from seever certainly a little bit all over
Speaker 4: the place, so it's not that obvious.
Speaker 3: Yeah, and a lot can still change between now and
Speaker 3: the meeting. Okay, so if everyone I mean I realized,
Speaker 3: not everyone agrees it's a bubble. But for the sake
Speaker 3: of this argument, let's say we all know it's a bubble.
Speaker 3: It seems like one of the things that happened, especially
Speaker 3: since the financial crisis, is people stopped running away from
Speaker 3: bubbles and started running into them, right, and so everyone
Speaker 3: wants to make money very very quickly. So if you
Speaker 3: see the line continuously going up, you just join the party,
Speaker 3: and everyone assumes that they are smart enough to time
Speaker 3: the top of the bubble and get out at the
Speaker 3: right point. What's your take on how long this is
Speaker 3: actually going to go on for and what are you
Speaker 3: looking at in terms of actually spotting that top other
Speaker 3: than sentiment, which we spoke a bit about.
Speaker 4: Yeah, it's a big question actually even inside city USC strategists.
Speaker 5: It's the cost believe me that it's a bubble.
Speaker 4: But we have a definition, so'll you know, we cannet
Speaker 4: do something. So the definition for us is it's a
Speaker 4: little bit like the GMO one, which is essentially saying
Speaker 4: something goes up more than two standard deviations against the
Speaker 4: long term trend. In real terms, we call it a bubble, right,
Speaker 4: and then whenever you have a big sell off, you
Speaker 4: restart the clock, because when you have a big sell of,
Speaker 4: you essentially the sentiment goes to zero, and so you
Speaker 4: have to rebuild it.
Speaker 5: And on that.
Speaker 4: Framework we end up bubble territory sort of, I guess
Speaker 4: in May June of this year. And when you do that,
Speaker 4: the interesting thing about it is, as you point out,
Speaker 4: it goes up. So once you end up oup the territory,
Speaker 4: you're supposed.
Speaker 5: To buy it.
Speaker 4: And the only time and that didn't happen was nineteen
Speaker 4: twenty nine.
Speaker 5: It went straight down.
Speaker 4: And I think the reason for that is a little
Speaker 4: bit that the way people define water bubble is the
Speaker 4: use nine is twenty nine, right, and so and we
Speaker 4: did that too, and so therefore that's the only on
Speaker 4: all the other episodes, you.
Speaker 5: Go straight up, so you buy it when you enter.
Speaker 4: But the interesting thing is, and clients ask me, well,
Speaker 4: if that is true, what's the difference beween the bullmark
Speaker 4: and the bubble you tell me it's going up. And
Speaker 4: the difference is that if you buy it when it
Speaker 4: enders a bubble, you will give it back eventually most
Speaker 4: of it. Most of the in bubble gains will be
Speaker 4: given back, so it will lar badly, right, And so
Speaker 4: that I mean, you don't necessarily give back everything all
Speaker 4: the time, but in most episodes give back most of it,
Speaker 4: And so that makes it an important definition. Now, Unfortunately,
Speaker 4: when you study that, it's not like clear how long
Speaker 4: they last. I mean, the on average, I can tell
Speaker 4: you the two years of above average returns followed by
Speaker 4: below average returns, and on a ten year time horizon
Speaker 4: your below average return. But it can vary a fair amount,
Speaker 4: and so that makes it hard. I would say, if
Speaker 4: you look at two thousand again as a template, if
Speaker 4: it'll certainly not help you to look at fundamentals, right,
Speaker 4: I mean, so what happened was Nastik broke in March
Speaker 4: and everything still figher two thousands, okay, So and when
Speaker 4: that happened, fundamentals road over in September, so that there
Speaker 4: was a six to seven month period where fundamentals still
Speaker 4: look just the way that you had looked before.
Speaker 3: I guess because everyone was spending so much money on capex,
Speaker 3: and like takes a while for that to roll on.
Speaker 5: Yes, exactly, And of course it's highly circular.
Speaker 4: But people spend on capex while the equity is going up,
Speaker 4: so actually stops going up. They start to reconsider what
Speaker 4: do we do next, So then everything wills over exactly.
Speaker 4: So so if you look at an immensive, probably not
Speaker 4: capture it, which means it will be a highly technical
Speaker 4: thing if you want to call the top.
Speaker 5: And it would be helpful if you get a blow
Speaker 5: off top.
Speaker 4: Like you know, if you get to the fifty percent
Speaker 4: in one quarter, you know you probably have a bigger
Speaker 4: chance to get it right. But I think it's really
Speaker 4: quite dangerous to be early in this thing because well
Speaker 4: you will not hit it precisely on the day your
Speaker 4: eyes earlier either or you're late, right, And I think
Speaker 4: if you're late, you can control a little bit more
Speaker 4: how much money you don't make in a sense.
Speaker 5: Right.
Speaker 4: And so one framework that we have we call it
Speaker 4: the general's framework, because what happens in this bubble generals
Speaker 4: the general because it becomes very narrow, and that's a
Speaker 4: feature of the bubble, it's not an exception, right, And
Speaker 4: so this, this narrowness means that if the leaders start
Speaker 4: to break down, it's a real warning sign. And so
Speaker 4: what we look at and we just at the top
Speaker 4: seven leaders because people are excited about max seven, but
Speaker 4: it could be ten or basically on our numbers, if
Speaker 4: three of the top seven breakdown, meaning they fall below
Speaker 4: the twenty moving average, that's a really dangerous sign.
Speaker 2: Twenty day moving day.
Speaker 4: Okay, it will not be early, right because by the
Speaker 4: time it triggers, the market is obviously down from the peak.
Speaker 4: But I think following that has saved us a lot
Speaker 4: of money on the downside when these things happen. So
Speaker 4: that is something you can use because it will be technical,
Speaker 4: it will not be fundamentally this happened and get.
Speaker 2: Out this is fantastic. So let's just sort of like
Speaker 2: just to sort of summarize this because that was actullent.
Speaker 2: So the bubble condition has emerged when the games are
Speaker 2: what is the timeframe we're talking about, So you say
Speaker 2: two standard deviations above the real long term?
Speaker 5: Yeah, exactly.
Speaker 4: So I mean they measure the long and performance. It's
Speaker 4: actually rolling windows. It shows every year and it's just
Speaker 4: the linear trend that you that you put through it,
Speaker 4: and then you can see how.
Speaker 2: How much you go to standard deviations and trend in
Speaker 2: real terms.
Speaker 4: So we deflate it because in the seventies a lot happened, right,
Speaker 4: you're in a bear market.
Speaker 2: But the two standard deviations in like a certain period
Speaker 2: of time or like.
Speaker 5: How do yeah, yes, it's the yearly returns.
Speaker 2: It, okay, and then the warning sign So in your view,
Speaker 2: you know, if you think about sort of profit maximization
Speaker 2: or risk minimization or whatever, the thing to look for
Speaker 2: is when three of the seven leaders break down or
Speaker 2: why is that?
Speaker 4: Like yeah, yeah, I mean just in a sense, we
Speaker 4: just back testa right, we just we realized, Okay, there's
Speaker 4: something special about these bubbles where the leaders carry the
Speaker 4: weight for a long time, right, And so you have
Speaker 4: to find out, well, when the leaders break, what is.
Speaker 5: A danger signal that actually works?
Speaker 4: And it's always a trade off between giving you too
Speaker 4: many signals you leave money on the table, and to
Speaker 4: a few signals where you you take part in the
Speaker 4: downside that you want to avoid. And so what we
Speaker 4: found is if you use that rule for two thousands
Speaker 4: or for others that we have in the sample, you know,
Speaker 4: once three of them break it's becoming the odds are
Speaker 4: not in your favor anymore.
Speaker 2: Can you apply this framework to gold? So this is
Speaker 2: the interesting thing, which is that we don't typically associate
Speaker 2: booming stock markets with booming gold, especially because gold is
Speaker 2: associated with fear and pessimism, et cetera. Talk a little
Speaker 2: bit about what's going on.
Speaker 4: Gold is just very very interesting. I mean, the first
Speaker 4: leg up was essentially this whole central bank story, right
Speaker 4: if if you think about it, all started really with
Speaker 4: the crimea issue and put in making innocent three bets.
Speaker 4: When he diversified away from the dollar, right, he bought
Speaker 4: euro he bought CNY, and he bought gold, and Europe
Speaker 4: was not a particular promising bed. In the end, CNY
Speaker 4: was a good bed for him. But obviously China cannot
Speaker 4: bet on the CNHY and that is gold for China.
Speaker 4: And so the I think in the very very big
Speaker 4: picture central banks that are very important for the gold market.
Speaker 5: That gold market boughtoned.
Speaker 4: In the nineties seven the Bank of England was done
Speaker 4: selling gold, and it will probably peak when the PBOC
Speaker 4: is done buying gold, and they still could buy a lot.
Speaker 4: So that I have no issue with as a structural story,
Speaker 4: long term story. What happened this year was not the
Speaker 4: central bank buying, at least not as far as we
Speaker 4: can help from the official data. It was much more
Speaker 4: this whole debasement fears that trapped into gold. And the
Speaker 4: first leg was very easy for micro guys to understand
Speaker 4: and participate in. That was just you know, the Fed
Speaker 4: is going to cut, and whenever the Fed cuts, you know,
Speaker 4: the dollars sold off into the first cut, rates fell
Speaker 4: into the first cut, and gold went up.
Speaker 5: So that is as it should be.
Speaker 4: Now, then what happened if you remember after the first cut,
Speaker 4: rates went up, the dollar went up and gold cut
Speaker 4: going up, right, And that was roughly the time and
Speaker 4: Stephen Marin talked about the third mandate for the Fed
Speaker 4: and things like that, and so the debasement fears became
Speaker 4: more acute and that propelled go higher. Now, the interesting
Speaker 4: issue is that it was really not that much the
Speaker 4: institution investors right, because all the other debasement trades didn't work.
Speaker 4: I mean, the curve did not steepen, break evens did
Speaker 4: not rise, the dollar did not fall. So it was
Speaker 4: a retail driven debasement fear, and you saw people lining
Speaker 4: around the RBA in Australia trying to get physically gold
Speaker 4: out of the vault. Right, so it was it became
Speaker 4: a memestog almost for a while. And so while it
Speaker 4: hasn't actually triggered our bubble levels, if we apply the
Speaker 4: same methodology, it certainly I think became too dangerous. And
Speaker 4: so we actually got out of gold a little while ago. Now,
Speaker 4: the debasement story is an interesting story. It could come back, right.
Speaker 4: You saw gold consolidated for a while and then when
Speaker 4: Trump discussed two thousand dollars for everyone, then gold started
Speaker 4: to take off again because people start to think, well,
Speaker 4: maybe that we have to trade the basement again.
Speaker 5: And that's a very big call.
Speaker 4: And personally I think the new AFMC will be more
Speaker 4: domash than the old one, right, I mean, we don't.
Speaker 5: Know quite yet who will be the head of the FMC.
Speaker 4: It's likely to happen, and so the debasement story could
Speaker 4: come back, but you have to time it fairly well
Speaker 4: because you have a lot of retail in it and
Speaker 4: it already moved a lot. Right, So in the debasement feres,
Speaker 4: I think it might be next year's story run this
Speaker 4: year's story. The central bank story will come back eventually,
Speaker 4: but it's I mean, China loves to buy pullbacks rather
Speaker 4: than the high, so I'm not quite sure how that
Speaker 4: then they will come back. But structure, I think gold
Speaker 4: is likely still okay. In the short term, we're a
Speaker 4: bit more cautious.
Speaker 3: Well, if gold is off the table for now, and bonds,
Speaker 3: no one really knows what they're going to do. How
Speaker 3: are people actually hedging and what are you recommending?
Speaker 5: Yeah, very good question.
Speaker 4: What people typically do, which is actually dangerous in a bubble,
Speaker 4: is that just buy some put spread in the SMP. Now,
Speaker 4: the issue is in a bubble, if you first go
Speaker 4: up another thirty percent, the strikes so far out of
Speaker 4: the money that it will just not help you.
Speaker 3: And we saw Michael Burry who was like the poster
Speaker 3: boy for calling the AI bubble closes fun this week.
Speaker 4: So yeah, so I think so the obvious thing actually
Speaker 4: became harder to do in a bubble. The other issue
Speaker 4: is can you use currencies? And that is also very interesting,
Speaker 4: right because the correlation between the dollar and there s
Speaker 4: MP changed somewhat, and it changed in April. It used
Speaker 4: to be the case when there's some pieces off, the
Speaker 4: dollar goes up that correlation flipped on us in April,
Speaker 4: and while there's a lot of debate whether the correlation
Speaker 4: will move back to positive or stay negative, I think
Speaker 4: if we are talking about a bursting bubble, that would
Speaker 4: be done a negative, right.
Speaker 5: So there are structures that allow you.
Speaker 4: Cheap adges if you're fitting to bed on SMP lower
Speaker 4: and at the same time dollar weeker, right, so that
Speaker 4: might work. What we have actually recommended is to do
Speaker 4: something in credit because the way I see it, I mean, either,
Speaker 4: you know, the AI bubble continues to move higher and
Speaker 4: then credit will not benefit very much from it, and
Speaker 4: there's no you know, there's not that much a I
Speaker 4: related credit in the indsease, and in any case, people
Speaker 4: start to worry about credit on the I front and
Speaker 4: spreads e extreme tight. Of course, on the other hand,
Speaker 4: if the US has a bigger problem than we're thinking
Speaker 4: and the labor market falls through trapdoor, and then you know,
Speaker 4: to credible to protect you really well, So so credit
Speaker 4: is something to look at.
Speaker 2: Let's talk about your em background. This is one of
Speaker 2: those things that I think, I don't know, maybe it
Speaker 2: started as a joke. It's like, you know, people are
Speaker 2: joking the US is becoming an em and then it
Speaker 2: sort of gets a little more oh haha, oh oh,
Speaker 2: and then suddenly it feels less and less not funny. Yeah,
Speaker 2: it's not really funny anymore. A do you like buy
Speaker 2: this premise that you know there is something about em governance,
Speaker 2: et cetera that is applicable to thinking about the US
Speaker 2: right now, I.
Speaker 4: Think people made the case in its first of all
Speaker 4: the questions, how you defined in them is actually a
Speaker 4: harder question, you think, because traditionally people do it just
Speaker 4: looking at GDP per ahead and then obviously right, it's.
Speaker 3: A MSCI gets paid a lot of money to do this,
Speaker 3: that's right.
Speaker 4: And so by putting that aside, I mean I think
Speaker 4: for trading the right definition is a little bit whether
Speaker 4: your bonds rally that's when the VICS goes up or
Speaker 4: they don't. Right, And on that definition, which is the
Speaker 4: trading centric definition of emergent markets, you actually find China
Speaker 4: is not emergent market because CGB is rally when there
Speaker 4: is a risk off, and and Korea is an emergent market.
Speaker 4: So it's a much more sensible definition for traders than
Speaker 4: the definition right.
Speaker 5: And so in the this.
Speaker 2: Is uncomfortable because we're about to get to what the
Speaker 2: US A bond have been doing during this volatility exactly so.
Speaker 4: And of course the initial headline was for the UK
Speaker 4: right when the list trust issue happened and the pound
Speaker 4: sort of and then Gill sold off, and so people said, oh, yeah,
Speaker 4: the UK is moving in that direction.
Speaker 5: And for the US again you can argue a little bit.
Speaker 4: I would say though, that what will likely happen is
Speaker 4: that if that should become a problem. So if you
Speaker 4: see US rates selling off during risk a version, maybe
Speaker 4: because of fiscal voice or something like that, I do
Speaker 4: think the FED will come in and hammer rates back down.
Speaker 4: And I think they can do that as instance, they're
Speaker 4: physically able to do it.
Speaker 5: I bet they could. The Treasure could phase out the
Speaker 5: twenty year.
Speaker 4: Bond if they wanted to, They could do more buybacks,
Speaker 4: and yes, it will beaken the dollar for you, But
Speaker 4: it's not that they run out of rope in the
Speaker 4: way merger market would when these things happen, right, because
Speaker 4: in the sense of it happens in Brazil, it's not
Speaker 4: that the government can control or that the Center Bank
Speaker 4: is able to keep the bond yield at a certain level.
Speaker 4: The US has many tools that they have at these
Speaker 4: post that they could use.
Speaker 3: I think, since you're in the trading space, or you
Speaker 3: pay very close attention to it, are you seeing anything
Speaker 3: in terms of positioning that could make a sell off
Speaker 3: either more extreme or unexpected or volatile in the current setting.
Speaker 3: And the reason I ask is, you know, we had
Speaker 3: a few episodes about the dispersion trade and people selling volatility,
Speaker 3: and I was having lunch with someone in the market
Speaker 3: yesterday and they were very clear that a lot of
Speaker 3: people are still doing the dispersion trade, which kind of
Speaker 3: surprised me.
Speaker 5: Yeah, no, it's true.
Speaker 4: I mean that many crowded trades. I would say again,
Speaker 4: broadly speaking, we never found us acquity position all that heavy,
Speaker 4: but it certainly and people own it.
Speaker 5: Right.
Speaker 4: Gold was on our survey of these as that okay,
Speaker 4: this gold was for a long time to stand out.
Speaker 5: It came back a little bit.
Speaker 4: One other trade that people really quite like is the
Speaker 4: emcry trade, and that is a bit link to the
Speaker 4: volatility trade because it works levant volatility is low, right,
Speaker 4: and so that is a very heavily owned trade. It's
Speaker 4: very hard to forecast volatility spikes. I told you I'd
Speaker 4: have a quantitum, and we back test a lot of
Speaker 4: potential strategies that we think are credible, and we did
Speaker 4: not find a good rule to say volatility is low
Speaker 4: enough by volatility or volatility has been low enough for
Speaker 4: extremely long time by volatility. On average, you're obviously meant
Speaker 4: to sell volatility because implies are higher than realized and yes,
Speaker 4: they're unpleasantly low right now, I would say, but on average,
Speaker 4: it's just not right to.
Speaker 5: Buy volatility in these circumstances. So what do you do
Speaker 5: about it?
Speaker 4: I think what you can do is you can find
Speaker 4: rules that essentially tell you, well, volatility has started to
Speaker 4: move up by x, and it's probably a good idea
Speaker 4: to get out because when it's it's positive recoridated, right,
Speaker 4: So if it starts to move, it can move a lot.
Speaker 4: So we have one particular volatility index that is actually
Speaker 4: the sort of maximum Z score, if you like, of
Speaker 4: all the various different volatilities publicare about the move index,
Speaker 4: VIX index, two, ten, implied wall INDEXAM implied wall index,
Speaker 4: and high it spreads.
Speaker 5: And but we take the maximum.
Speaker 4: Of that, not the average, which is a bit different
Speaker 4: than than other people do. And the reason is that
Speaker 4: no matter what goes wrong, EMFX will not like it. Right,
Speaker 4: So if the stress comes from US rates and the
Speaker 4: move index, it will not like it. If it comes
Speaker 4: from VIX, and there's some people also not like it.
Speaker 4: So and and that volatility indicator so far is still
Speaker 4: relatively well behaved. And again I'm glad you you keep
Speaker 4: mentioning when exactly recording this, because it could could.
Speaker 5: And if we have constructed I mean.
Speaker 2: We'll look for it in your in your report. All right.
Speaker 2: I just have one last question, So I actually I
Speaker 2: really like this definite This is very useful mission of EM.
Speaker 2: Do your government bonds rally and a volatility spike? I
Speaker 2: guess what that implies is are your bonds safe havens
Speaker 2: or are they credits?
Speaker 3: Right?
Speaker 2: So you have this experience in them, et cetera. Are
Speaker 2: there any other bitter lessons if all sort of US
Speaker 2: investors are to some extent increasingly a little bit more
Speaker 2: trading in an EM space, you have any lessons for
Speaker 2: them from the EM world that we should all know about.
Speaker 4: The strong lesson used to be that don't assume you
Speaker 4: get these sort of fairly well behaved politics that you
Speaker 4: get in the US and other countries.
Speaker 5: But that less of course noticed somewhat on my mind.
Speaker 5: But you know, the.
Speaker 4: Main issue is really politically risk and we have a
Speaker 4: lot of elections coming up, especially in that time right
Speaker 4: if we have Chile, we have Columbia with brazila and
Speaker 4: so these things can really make a I used to say,
Speaker 4: much much bigger difference than in the US, although that
Speaker 4: is more debatable at this stage.
Speaker 2: That's interesting, all right, Dirk Villa, thank you so much
Speaker 2: for coming on odd large, thank you for bringing us
Speaker 2: this book, and I'll have to have you back sometimes.
Speaker 2: It's fantastic.
Speaker 5: The new book is coming soon.
Speaker 3: Okay, so what's the new book on.
Speaker 4: It's the same idea about the global macrowat well, we'll
Speaker 4: read it.
Speaker 2: Thank you so much, Thank you, Tracy. I like getting
Speaker 2: a sort of mathematical, precise definition of what a bubble is.
Speaker 1: I find it.
Speaker 5: Look.
Speaker 2: I mean, obviously there are aspects of bubbles that are
Speaker 2: very sentiment driven, and I think pop culture driven. Just
Speaker 2: how much people talk about extra y and these are
Speaker 2: useful things to discuss, but it's also nice to think about. Okay,
Speaker 2: let's just come up with some rules that tell us
Speaker 2: when these things, what constitutes a bubble? And when it's over,
Speaker 2: precision is good.
Speaker 3: I hope Derk will tell.
Speaker 2: Us he's got to send us.
Speaker 3: In the email, at least tell his clients, and we'll
Speaker 3: see the note.
Speaker 2: Hopefully we'll see the note.
Speaker 3: I mean, I do think the message. It's a very
Speaker 3: realistic message in some respects because the problem with bubbles
Speaker 3: is you can't sit them out. If you're a money manager,
Speaker 3: or even if you want to make more money, right,
Speaker 3: your clients are going to be really really angry if
Speaker 3: the S and P five hundred is going up twenty
Speaker 3: percent and you've been bearished for two years. And again
Speaker 3: Michael Burry has turned into a really good example of this.
Speaker 3: But on the other hand, everyone wants to get out
Speaker 3: precisely at the top because we want to maximize our
Speaker 3: profits as much as possible. And I think when Dirk
Speaker 3: says like, well, you know, you kind of have to
Speaker 3: ride the bubble and then you kind of have to
Speaker 3: wait a little bit for it to start popping, and
Speaker 3: you just have to kind of figure out how much
Speaker 3: money or loss you are willing to take.
Speaker 2: Except that you're not going to time the top.
Speaker 3: Perfectly right exactly, and that reality, Yeah.
Speaker 2: I think that's sort of an interesting approach to the
Speaker 2: bubble problem, and so just don't worry about nailing the time,
Speaker 2: but come up with some rules. And it is interesting
Speaker 2: these consistent patterns of the leadership narrows, et cetera. You know,
Speaker 2: one thing I've been thinking about. Ask about this, but
Speaker 2: one thing I've been wondering about. You know, people look
Speaker 2: back at those two thousand analogies all the time, and
Speaker 2: one of the things that people say is that, well,
Speaker 2: this isn't a bubble like that, because you know, we
Speaker 2: don't have the pets dot com. We don't have like
Speaker 2: this proliferation of non profitable tech companies soaring. And I
Speaker 2: guess that's true. But I think one of the problems
Speaker 2: I have with these analogies is private markets are so
Speaker 2: much bigger now, and so you look at these megavaluations
Speaker 2: that private companies are raising at and you know, it
Speaker 2: feels like there's like momentum trading almost going on in
Speaker 2: private markets, et cetera. Yeah, and it would be nice.
Speaker 2: You know, you can't really get an apples to apples
Speaker 2: comparison because so much of the bubbly activity appears to
Speaker 2: be happening away from this S and P five hundred
Speaker 2: or away from the Nasdag. And so these charts about
Speaker 2: what percentage of companies are or aren't making money that
Speaker 2: only look at public markets, I think are a little
Speaker 2: bit unsatisfying.
Speaker 5: Right.
Speaker 3: Well, I would add on to that that, you know,
Speaker 3: the companies themselves might be profitable, but the business itself
Speaker 3: is as yet not generating positive cash flows and everyone
Speaker 3: just expects it to.
Speaker 2: Yeah at one point, right or the spending is simply
Speaker 2: not sustainable, and that's another fact. Anyway, super interesting conversation.
Speaker 2: We've had them on Karthvik Center. And also likes that
Speaker 2: definition of em which is are your government bonds credits
Speaker 2: or are they save havens? And they don't love how
Speaker 2: in this recent volatility we haven't seen more of a
Speaker 2: bid into treasures. I don't love that.
Speaker 3: Nope, not a good sign on that happy note. Shall
Speaker 3: we leave it there?
Speaker 2: Let's leave it there, all right.
Speaker 3: This has been another episode of the Odd Thoughts podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow our producers Carmen Rodriguez at Carman Arman, Dashel Bennett
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