Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: I'm really pleased to say that I'm here with AQR's
Speaker 2: Cliff Asmas.
Speaker 1: Cliff, thank you so much for joining this morning. Thanks
Speaker 1: for having me.
Speaker 2: We have to start with your paper that caused quite
Speaker 2: a bit of a stir. Let me just read the
Speaker 2: title for our audience, the less efficient market hypothesis. Quite
Speaker 2: the claim for someone who studied under arguably the godfather
Speaker 2: Eugene Fama of the EMH. So what did you see
Speaker 2: that led you to believe this market is less efficient?
Speaker 3: Sure, well, efficient markets in general, this idea that prices
Speaker 3: in some rational sense reflect all information.
Speaker 1: That's the extreme version of that toothesis.
Speaker 3: Gene tells the class, like third week of class, markets
Speaker 3: are assuredly not perfectly efficient, and you get a gasp.
Speaker 3: Because it's the University of Chicago. Everywhere else in the
Speaker 3: world they just go, yeah, we know that. But in
Speaker 3: Gene's class, that's a gas. So it begs the question,
Speaker 3: once you accept they're not perfect, how imperfect and does
Speaker 3: that change through times?
Speaker 1: And I'm very clear about this in the paper. A
Speaker 1: lot of this is op ed.
Speaker 3: It's my life experience in this business, but over my career.
Speaker 3: At the very beginning of my career, when we started AQR,
Speaker 3: eighteen of our first nineteen months were the blowoff top
Speaker 3: of the dot com bubbles, and we did a lot
Speaker 3: of things back then.
Speaker 1: We were losing a lot of money. That was a
Speaker 1: bad part.
Speaker 3: It wasn't statistically like beyond shocking, but it's not pleasant
Speaker 3: to happen in your first year and a half. And
Speaker 3: it turned out that the prices between cheap and expensive
Speaker 3: stocks in general, using a bunch of valuation measures, maybe
Speaker 3: they vary between six times more expensive to three times
Speaker 3: more expensive.
Speaker 1: The expensive stocks.
Speaker 3: They had shot up to like thirteen and they'd never
Speaker 3: been closed. It was fifty years of this and then this.
Speaker 3: So then you spend a lot of time saying, is
Speaker 3: there some way we're wrong?
Speaker 1: Is there reason this is rational? And if you include
Speaker 1: know you stick with it.
Speaker 3: Then if someone had said to me at that point,
Speaker 3: is this going to happen again in your career, I hopefully.
Speaker 1: Would never say never.
Speaker 3: No one in our field, your field, my field should
Speaker 3: ever say never about anything financial. But I think I
Speaker 3: would have said, oh yeah, probably not, almost definitely not,
Speaker 3: because it hadn't happened in fifty years my career is
Speaker 3: not going to be another fifty years.
Speaker 1: I wish it were, but it's not going to be.
Speaker 3: And if the question in your career presupposes you're still.
Speaker 1: Here and you're not the only one, and.
Speaker 3: You guys are probably in charge, So how's this going
Speaker 3: to happen again? And then even before COVID it was
Speaker 3: getting there, but COVID took that same differential and blew
Speaker 3: it out of the water the cliff.
Speaker 2: I kind of argue, it'll play out the same as
Speaker 2: last time, that spreads will come back down, value will
Speaker 2: work again, and it's just we're in another one of
Speaker 2: these period.
Speaker 3: That's exactly what we do, argue, So you are totally
Speaker 3: permitted to argue that. But the bigger question I'm trying
Speaker 3: to answer is I see this as a sign of
Speaker 3: the market getting less efficient about pricing. And in principle,
Speaker 3: we all think things should get more efficient over time.
Speaker 3: Technology marches on, data is more available, things that were
Speaker 3: available at a leg or available instantly now, but I
Speaker 3: think most of those things go to speed, not to
Speaker 3: accurate price. It. Yeah, things get in prices faster, but
Speaker 3: I think there's strong evidence so.
Speaker 1: Not just these two things, but these are the two
Speaker 1: major ones.
Speaker 3: I experience that the crazy periods are getting crazier and
Speaker 3: lasting longer. So the next question to ask in the paper,
Speaker 3: and this is very speculative, I admit, is why why?
Speaker 3: And there are probably other great ones, but I focus
Speaker 3: on three, and I'll say I'm really fast sure. The
Speaker 3: first is the rise of passive. That's everyone's favorite. Passive
Speaker 3: is broken the market. I think that is probably part
Speaker 3: of it. No one knows how many people can actually
Speaker 3: be passive without breaking the market, but we know it's
Speaker 3: not one hundred percent. That's a weird world where nobody
Speaker 3: is thinking about whether Nvidio is worth more than a
Speaker 3: candy story. So the idea that there would be less
Speaker 3: could weaken the tether to reality.
Speaker 2: And I'll let you get to the other two because
Speaker 2: I find them really but justin in terms of that
Speaker 2: Quesially we're talking about Nvidia and this being a crazy period.
Speaker 1: No quants know nothing about Indorce, so.
Speaker 2: You know nothing about a single stock. I'm very aware
Speaker 2: of that. How crazy is this period?
Speaker 3: We're still and I again I won't talk about Nvidia
Speaker 3: in particular, but when it comes to the spread between
Speaker 3: cheap and expensive stocks, we were at a new hundredth
Speaker 3: percentile in COVID. I jokingly called it one hundred and
Speaker 3: twentieth percentile, which from my math friends listening to you,
Speaker 3: there is no such thing. It's just a new hundredth,
Speaker 3: but it's about twenty percent above the prior hundredth.
Speaker 1: We're back down to about the eightieth percentile spread versus history.
Speaker 3: We still have a little bit of a tilt on,
Speaker 3: but far smaller than when it was one hundred and twenty.
Speaker 3: So I would say things are still out of whack,
Speaker 3: but it's not an arbitragy you can drive a truck
Speaker 3: through right now. But so I think passive as part
Speaker 3: of it. But it's very hard to know how much.
Speaker 3: The second one I'll do beyond quick post GFC ten
Speaker 3: fifteen years of super low interest rates, I don't think
Speaker 3: justifies these spreads, and we've written a lot about that.
Speaker 3: But in a very non technical sense, may that drive
Speaker 3: investors mad and to do some crazy things?
Speaker 1: Yes, that's all I'll say about that.
Speaker 3: My third and favorite hypopnsis because it's so counterintuitive. Is
Speaker 3: I started out saying technology might make things faster, but
Speaker 3: not more accurate.
Speaker 1: It might. In fact, I would.
Speaker 3: Argue probably does contribute to the less accurate pricing, and
Speaker 3: in particular I'm talking about the melu of instant information
Speaker 3: free trading.
Speaker 1: Certainly social media.
Speaker 3: The dot com bubble was the first go round of
Speaker 3: kinna proto social media where you're.
Speaker 1: A little too young for this one, but message boards
Speaker 1: were very hot.
Speaker 3: People are all discussing their favorite e toys and doctorcoop.
Speaker 1: Dot coms and.
Speaker 3: If markets are efficient to some degree not perfect. The
Speaker 3: wisdom of crowds, the famous idea that a crowd can
Speaker 3: be more wise than the average component of the crowd,
Speaker 3: is a huge.
Speaker 1: Part of it.
Speaker 2: How much of your Twitter interactions color this because you're
Speaker 2: fair to talk to? I just you know, when you're
Speaker 2: talking to people who you don't agree with online, do
Speaker 2: some of that color? It's saying maybe this crowd isn't
Speaker 2: so wise.
Speaker 1: I hope not. But but may it may it some
Speaker 1: may it sneak in.
Speaker 3: I would have to admit it. Might it might it
Speaker 3: might sneak in. But if a wise crowd is the
Speaker 3: goal in a market, have we ever had a vehicle
Speaker 3: better than social media for turning a wise crowd into
Speaker 3: a dangerous mob?
Speaker 1: And I'm not going to get political except I'm not.
Speaker 3: Going to choose a political side. But if our politics
Speaker 3: are not a great example of this, I mean there
Speaker 3: was a point twenty years ago where we had utopian
Speaker 3: views with social media, that social media would make us
Speaker 3: all like each other more. I don't think I need
Speaker 3: to convince any of your viewers that that has not happened,
Speaker 3: and I think a lot of the same has creeped
Speaker 3: into markets.
Speaker 1: It's unfair to choose the most crazy example.
Speaker 3: But a poster child, not not not not a proof
Speaker 3: are the US meme stocks.
Speaker 1: They have the most extreme example of.
Speaker 3: What I'm talking about, crazy evaluations driven by social media.
Speaker 3: But life is not just them and everyone else. It's
Speaker 3: a point on a spectrum. So I do think markets
Speaker 3: have gotten someone less efficient. I think the final interesting
Speaker 3: question is what does that mean for a rational style
Speaker 3: of investing?
Speaker 2: Can I ask you point out in your paper that
Speaker 2: it's a problem for society?
Speaker 1: Why is it a problem for society?
Speaker 3: Well, if you're actually going to read the paper, it's
Speaker 3: going to make this all take longer, you know that, right.
Speaker 3: It's a it's a problem for society, and I think
Speaker 3: I'll be a cheerleader for our industry. Quick seconds I
Speaker 3: don't know of enough people who think about it this way,
Speaker 3: but rational prices are very important to a free enterprise
Speaker 3: society when price is a whilely irrational prices are how we.
Speaker 1: Allocate resources, and we do it in a very unproductive way.
Speaker 3: If companies that are not very productive and are speculative
Speaker 3: and pie in the sky are are getting all the money, yeah,
Speaker 3: so it matters.
Speaker 1: And let me finish with one thought, what does it mean?
Speaker 3: Well, if markets are somewhat I don't say they're terrible
Speaker 3: less efficient.
Speaker 1: Deviations from fair value We got ended there.
Speaker 2: I'm so sorry.
Speaker 3: Deviations from fair value will be bigger, last longer, but you'll.
Speaker 1: Make more money from them.
Speaker 2: You nailed it.
Speaker 1: Thanks so much.
Speaker 2: That was cliff astness of AQR over here at the
Speaker 2: Capitlar conference.