WEBVTT - AQR Capital Management CIO Cliff Asness Talks Market Volatility

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>I'm really pleased to say that I'm here with AQR's

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<v Speaker 2>Cliff Asmas.

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<v Speaker 1>Cliff, thank you so much for joining this morning. Thanks

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<v Speaker 1>for having me.

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<v Speaker 2>We have to start with your paper that caused quite

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<v Speaker 2>a bit of a stir. Let me just read the

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<v Speaker 2>title for our audience, the less efficient market hypothesis. Quite

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<v Speaker 2>the claim for someone who studied under arguably the godfather

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<v Speaker 2>Eugene Fama of the EMH. So what did you see

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<v Speaker 2>that led you to believe this market is less efficient?

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<v Speaker 3>Sure, well, efficient markets in general, this idea that prices

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<v Speaker 3>in some rational sense reflect all information.

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<v Speaker 1>That's the extreme version of that toothesis.

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<v Speaker 3>Gene tells the class, like third week of class, markets

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<v Speaker 3>are assuredly not perfectly efficient, and you get a gasp.

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<v Speaker 3>Because it's the University of Chicago. Everywhere else in the

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<v Speaker 3>world they just go, yeah, we know that. But in

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<v Speaker 3>Gene's class, that's a gas. So it begs the question,

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<v Speaker 3>once you accept they're not perfect, how imperfect and does

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<v Speaker 3>that change through times?

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<v Speaker 1>And I'm very clear about this in the paper. A

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<v Speaker 1>lot of this is op ed.

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<v Speaker 3>It's my life experience in this business, but over my career.

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<v Speaker 3>At the very beginning of my career, when we started AQR,

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<v Speaker 3>eighteen of our first nineteen months were the blowoff top

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<v Speaker 3>of the dot com bubbles, and we did a lot

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<v Speaker 3>of things back then.

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<v Speaker 1>We were losing a lot of money. That was a

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<v Speaker 1>bad part.

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<v Speaker 3>It wasn't statistically like beyond shocking, but it's not pleasant

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<v Speaker 3>to happen in your first year and a half. And

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<v Speaker 3>it turned out that the prices between cheap and expensive

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<v Speaker 3>stocks in general, using a bunch of valuation measures, maybe

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<v Speaker 3>they vary between six times more expensive to three times

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<v Speaker 3>more expensive.

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<v Speaker 1>The expensive stocks.

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<v Speaker 3>They had shot up to like thirteen and they'd never

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<v Speaker 3>been closed. It was fifty years of this and then this.

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<v Speaker 3>So then you spend a lot of time saying, is

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<v Speaker 3>there some way we're wrong?

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<v Speaker 1>Is there reason this is rational? And if you include

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<v Speaker 1>know you stick with it.

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<v Speaker 3>Then if someone had said to me at that point,

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<v Speaker 3>is this going to happen again in your career, I hopefully.

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<v Speaker 1>Would never say never.

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<v Speaker 3>No one in our field, your field, my field should

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<v Speaker 3>ever say never about anything financial. But I think I

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<v Speaker 3>would have said, oh yeah, probably not, almost definitely not,

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<v Speaker 3>because it hadn't happened in fifty years my career is

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<v Speaker 3>not going to be another fifty years.

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<v Speaker 1>I wish it were, but it's not going to be.

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<v Speaker 3>And if the question in your career presupposes you're still.

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<v Speaker 1>Here and you're not the only one, and.

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<v Speaker 3>You guys are probably in charge, So how's this going

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<v Speaker 3>to happen again? And then even before COVID it was

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<v Speaker 3>getting there, but COVID took that same differential and blew

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<v Speaker 3>it out of the water the cliff.

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<v Speaker 2>I kind of argue, it'll play out the same as

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<v Speaker 2>last time, that spreads will come back down, value will

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<v Speaker 2>work again, and it's just we're in another one of

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<v Speaker 2>these period.

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<v Speaker 3>That's exactly what we do, argue, So you are totally

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<v Speaker 3>permitted to argue that. But the bigger question I'm trying

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<v Speaker 3>to answer is I see this as a sign of

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<v Speaker 3>the market getting less efficient about pricing. And in principle,

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<v Speaker 3>we all think things should get more efficient over time.

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<v Speaker 3>Technology marches on, data is more available, things that were

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<v Speaker 3>available at a leg or available instantly now, but I

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<v Speaker 3>think most of those things go to speed, not to

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<v Speaker 3>accurate price. It. Yeah, things get in prices faster, but

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<v Speaker 3>I think there's strong evidence so.

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<v Speaker 1>Not just these two things, but these are the two

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<v Speaker 1>major ones.

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<v Speaker 3>I experience that the crazy periods are getting crazier and

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<v Speaker 3>lasting longer. So the next question to ask in the paper,

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<v Speaker 3>and this is very speculative, I admit, is why why?

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<v Speaker 3>And there are probably other great ones, but I focus

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<v Speaker 3>on three, and I'll say I'm really fast sure. The

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<v Speaker 3>first is the rise of passive. That's everyone's favorite. Passive

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<v Speaker 3>is broken the market. I think that is probably part

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<v Speaker 3>of it. No one knows how many people can actually

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<v Speaker 3>be passive without breaking the market, but we know it's

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<v Speaker 3>not one hundred percent. That's a weird world where nobody

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<v Speaker 3>is thinking about whether Nvidio is worth more than a

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<v Speaker 3>candy story. So the idea that there would be less

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<v Speaker 3>could weaken the tether to reality.

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<v Speaker 2>And I'll let you get to the other two because

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<v Speaker 2>I find them really but justin in terms of that

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<v Speaker 2>Quesially we're talking about Nvidia and this being a crazy period.

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<v Speaker 1>No quants know nothing about Indorce, so.

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<v Speaker 2>You know nothing about a single stock. I'm very aware

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<v Speaker 2>of that. How crazy is this period?

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<v Speaker 3>We're still and I again I won't talk about Nvidia

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<v Speaker 3>in particular, but when it comes to the spread between

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<v Speaker 3>cheap and expensive stocks, we were at a new hundredth

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<v Speaker 3>percentile in COVID. I jokingly called it one hundred and

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<v Speaker 3>twentieth percentile, which from my math friends listening to you,

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<v Speaker 3>there is no such thing. It's just a new hundredth,

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<v Speaker 3>but it's about twenty percent above the prior hundredth.

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<v Speaker 1>We're back down to about the eightieth percentile spread versus history.

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<v Speaker 3>We still have a little bit of a tilt on,

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<v Speaker 3>but far smaller than when it was one hundred and twenty.

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<v Speaker 3>So I would say things are still out of whack,

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<v Speaker 3>but it's not an arbitragy you can drive a truck

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<v Speaker 3>through right now. But so I think passive as part

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<v Speaker 3>of it. But it's very hard to know how much.

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<v Speaker 3>The second one I'll do beyond quick post GFC ten

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<v Speaker 3>fifteen years of super low interest rates, I don't think

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<v Speaker 3>justifies these spreads, and we've written a lot about that.

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<v Speaker 3>But in a very non technical sense, may that drive

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<v Speaker 3>investors mad and to do some crazy things?

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<v Speaker 1>Yes, that's all I'll say about that.

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<v Speaker 3>My third and favorite hypopnsis because it's so counterintuitive. Is

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<v Speaker 3>I started out saying technology might make things faster, but

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<v Speaker 3>not more accurate.

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<v Speaker 1>It might. In fact, I would.

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<v Speaker 3>Argue probably does contribute to the less accurate pricing, and

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<v Speaker 3>in particular I'm talking about the melu of instant information

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<v Speaker 3>free trading.

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<v Speaker 1>Certainly social media.

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<v Speaker 3>The dot com bubble was the first go round of

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<v Speaker 3>kinna proto social media where you're.

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<v Speaker 1>A little too young for this one, but message boards

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<v Speaker 1>were very hot.

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<v Speaker 3>People are all discussing their favorite e toys and doctorcoop.

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<v Speaker 1>Dot coms and.

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<v Speaker 3>If markets are efficient to some degree not perfect. The

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<v Speaker 3>wisdom of crowds, the famous idea that a crowd can

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<v Speaker 3>be more wise than the average component of the crowd,

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<v Speaker 3>is a huge.

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<v Speaker 1>Part of it.

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<v Speaker 2>How much of your Twitter interactions color this because you're

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<v Speaker 2>fair to talk to? I just you know, when you're

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<v Speaker 2>talking to people who you don't agree with online, do

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<v Speaker 2>some of that color? It's saying maybe this crowd isn't

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<v Speaker 2>so wise.

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<v Speaker 1>I hope not. But but may it may it some

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<v Speaker 1>may it sneak in.

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<v Speaker 3>I would have to admit it. Might it might it

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<v Speaker 3>might sneak in. But if a wise crowd is the

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<v Speaker 3>goal in a market, have we ever had a vehicle

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<v Speaker 3>better than social media for turning a wise crowd into

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<v Speaker 3>a dangerous mob?

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<v Speaker 1>And I'm not going to get political except I'm not.

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<v Speaker 3>Going to choose a political side. But if our politics

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<v Speaker 3>are not a great example of this, I mean there

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<v Speaker 3>was a point twenty years ago where we had utopian

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<v Speaker 3>views with social media, that social media would make us

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<v Speaker 3>all like each other more. I don't think I need

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<v Speaker 3>to convince any of your viewers that that has not happened,

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<v Speaker 3>and I think a lot of the same has creeped

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<v Speaker 3>into markets.

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<v Speaker 1>It's unfair to choose the most crazy example.

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<v Speaker 3>But a poster child, not not not not a proof

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<v Speaker 3>are the US meme stocks.

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<v Speaker 1>They have the most extreme example of.

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<v Speaker 3>What I'm talking about, crazy evaluations driven by social media.

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<v Speaker 3>But life is not just them and everyone else. It's

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<v Speaker 3>a point on a spectrum. So I do think markets

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<v Speaker 3>have gotten someone less efficient. I think the final interesting

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<v Speaker 3>question is what does that mean for a rational style

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<v Speaker 3>of investing?

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<v Speaker 2>Can I ask you point out in your paper that

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<v Speaker 2>it's a problem for society?

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<v Speaker 1>Why is it a problem for society?

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<v Speaker 3>Well, if you're actually going to read the paper, it's

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<v Speaker 3>going to make this all take longer, you know that, right.

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<v Speaker 3>It's a it's a problem for society, and I think

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<v Speaker 3>I'll be a cheerleader for our industry. Quick seconds I

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<v Speaker 3>don't know of enough people who think about it this way,

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<v Speaker 3>but rational prices are very important to a free enterprise

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<v Speaker 3>society when price is a whilely irrational prices are how we.

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<v Speaker 1>Allocate resources, and we do it in a very unproductive way.

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<v Speaker 3>If companies that are not very productive and are speculative

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<v Speaker 3>and pie in the sky are are getting all the money, yeah,

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<v Speaker 3>so it matters.

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<v Speaker 1>And let me finish with one thought, what does it mean?

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<v Speaker 3>Well, if markets are somewhat I don't say they're terrible

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<v Speaker 3>less efficient.

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<v Speaker 1>Deviations from fair value We got ended there.

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<v Speaker 2>I'm so sorry.

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<v Speaker 3>Deviations from fair value will be bigger, last longer, but you'll.

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<v Speaker 1>Make more money from them.

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<v Speaker 2>You nailed it.

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<v Speaker 1>Thanks so much.

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<v Speaker 2>That was cliff astness of AQR over here at the

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<v Speaker 2>Capitlar conference.