WEBVTT - Michael Purves Talks Cross Asset Volatility

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Michael Purvas. He's a

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<v Speaker 1>founder and CEO of Talbacan Capital Advisors.

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<v Speaker 2>Michael, what are the conversations you're having with your clients

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<v Speaker 2>these days?

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<v Speaker 3>Is we all were going into week three of this

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<v Speaker 3>Iran issue here, and it's been such a volatile time

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<v Speaker 3>for financial markets, starting with the commodities markets.

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<v Speaker 2>What are the conversations you're having with your clients these days.

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<v Speaker 1>Well, one thing I think is that's I've certainly been

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<v Speaker 1>doing is standing back and looking at sort of some

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<v Speaker 1>of the cross asset correlations and how those are moving,

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<v Speaker 1>because I think there was good clues as to what

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<v Speaker 1>type of risk environment we're we're we're we're edging into there.

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<v Speaker 1>And so one of the interesting things here, you know

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<v Speaker 1>Thomas referencing the VIX at twenty one, which is really

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<v Speaker 1>not that high a level there, that's right line with

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<v Speaker 1>its long term average there. But at the same time,

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<v Speaker 1>you know, you're seeing very high cross process of correlations

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<v Speaker 1>the for example, like Crude's correlation with the VIX right now,

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<v Speaker 1>over the last several days really since this attack, these

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<v Speaker 1>attacks began, it's in the top two percent of all

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<v Speaker 1>readings going back a decade. If you look at crude

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<v Speaker 1>correlations with high yield spreads, those are also in the

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<v Speaker 1>top two percent. And what's interesting about that is that

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<v Speaker 1>high yield is now correlating with the VIX, which it

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<v Speaker 1>had kind of decorrelated. It's supposed to be positively correlated, right,

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<v Speaker 1>you know, spreads back up that kept you know, when

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<v Speaker 1>risk off happens. That correlation kind of broke down over

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<v Speaker 1>the last eighteen months for all sorts of interesting reasons.

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<v Speaker 1>But now that correlation's coming back now as it relates

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<v Speaker 1>to the VIX. What's interesting also is that, you know

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<v Speaker 1>the fix of twenty one, Yes it's been correlating with

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<v Speaker 1>the crude prices, but the across stock correlations are still

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<v Speaker 1>really kind of muted. They've gone up a lot over

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<v Speaker 1>the last couple of weeks, but they're not really high here, right,

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<v Speaker 1>and you're still staying on any given day, one stock

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<v Speaker 1>can be in the green and a bunch of other

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<v Speaker 1>stocks and be in the red there, So we're not

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<v Speaker 1>really in the sort of you know, sort of risk

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<v Speaker 1>off environment, but we're you know, crude is clearly driving.

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<v Speaker 2>The possum mark.

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<v Speaker 1>So I think that gets to you know, sort of

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<v Speaker 1>begs the questions about how are you really trying to

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<v Speaker 1>contextualize what's been happening here? I think again you have

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<v Speaker 1>to step back a little bit and just think. Look,

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<v Speaker 1>you know, we had a great year last year in

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<v Speaker 1>the equity market. A late winter malaise is kind of

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<v Speaker 1>normal without iran, right, that's something that could be expected. Here.

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<v Speaker 1>We had a bad jobs rapport with some really important

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<v Speaker 1>questions that were begged by the complex the complexion of

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<v Speaker 1>what jobs were being dropped, particularly in the you know,

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<v Speaker 1>sort of those pillars of job growth the today.

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<v Speaker 3>What do you do?

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<v Speaker 1>I mean, Yeahully artfully dodged as many questions as you

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<v Speaker 1>get to get off the stage. But seriously, I think

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<v Speaker 1>it's it's interesting. I mean, Thomas referencing your your rea prices,

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<v Speaker 1>solfare prices, helium prices, all these things will impact producer

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<v Speaker 1>prices that will sort of weave its way.

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<v Speaker 2>WHOA did you have.

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<v Speaker 4>In organic chemist three freshman year in college?

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<v Speaker 2>Did you go down in flames?

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<v Speaker 3>Like I continue on, UEA, we need more methy continuous?

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<v Speaker 1>Oh god, well so so. But all those things do

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<v Speaker 1>you know, raise questions about I think what the FED

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<v Speaker 1>has to deal with today is what I call inflation complexity.

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<v Speaker 1>So you're gonna see you're gonna see producer producer prices

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<v Speaker 1>right are once again, you know, in some way similar

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<v Speaker 1>to post Ukraine, some some different, but those are going

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<v Speaker 1>to linger and creep into into the inflation metrics we

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<v Speaker 1>see a few months from now, right, and and maybe

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<v Speaker 1>longer than that, we don't know, uh there. But at

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<v Speaker 1>the same time, you've got companies laying off a whole

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<v Speaker 1>bunch of workers with AI right, right, So that's that's

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<v Speaker 1>part of the inflation complexity that the FED has to

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<v Speaker 1>deal with. And then of course the other dimension of

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<v Speaker 1>the FED has to contend with. There is this sort

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<v Speaker 1>of K shaped economy and in a way, the auron

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<v Speaker 1>attacks almost worse than you know, you have to rather

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<v Speaker 1>than think about you know this, this this situation is

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<v Speaker 1>like straight's on, Straight's off. It's really not that binary.

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<v Speaker 1>Nor is the fact that is a procession on procession off.

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<v Speaker 1>You if you understand that in terms of the K,

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<v Speaker 1>you know there there will be many things that magnify

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<v Speaker 1>the economic divergence.

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<v Speaker 4>Michael Purvis with his charm besides a twelve vvacation in

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<v Speaker 4>the summer, is he really truly mixes in analysis of equities, bonds,

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<v Speaker 4>currencies and commodities. So I've plotted Aussie yen is a

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<v Speaker 4>specific rim proxy.

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<v Speaker 3>Back thirty years observation one, two, three, four, five, Six

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<v Speaker 3>times in thirty years we've had two standard deviation plus

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<v Speaker 3>strong Australia week yen.

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<v Speaker 2>And the word I use is stochastic.

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<v Speaker 4>They're point, they go up their stress and they turn

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<v Speaker 4>around and come down.

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<v Speaker 2>Why is this time any different?

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<v Speaker 4>Where this is the mother of all opportunities at two

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<v Speaker 4>point two standard devia and a long trend and you

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<v Speaker 4>go against this.

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<v Speaker 2>Gloom, this zite guide that's out there.

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<v Speaker 1>Now, well, I'm going to pivot that back to the

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<v Speaker 1>to maybe dollar yen and and dollar euro. I think

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<v Speaker 1>one thing that's really apparent here is that when you

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<v Speaker 1>look at relative hydrocarbon vulnerability that isn't obviously today the

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<v Speaker 1>United States very different than it was in the nineteen

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<v Speaker 1>seventies here, right, So we're not a petro currency the

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<v Speaker 1>US dollar, but relative to the end and relative to

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<v Speaker 1>the Euro, we are. And I think what you're referencing

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<v Speaker 1>in Australia some version of that theme here, right, And

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<v Speaker 1>so what have you seen you've seen? You know, I

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<v Speaker 1>was before Iran, I was waiting for the Euro to

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<v Speaker 1>break one twenty maybe go to one twenty five, worked

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<v Speaker 1>out big til Iran right there. And now you're seeing

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<v Speaker 1>that now if you measure say the US dollar relative

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<v Speaker 1>to the Canadian dollar, that's really been very stable right there.

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<v Speaker 1>So there are sort of petro currency and I don't

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<v Speaker 1>like the term, but there are petrocurrency dynamics that are

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<v Speaker 1>that are that are in that and it's also being

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<v Speaker 1>reflected in the in the equity markets.

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<v Speaker 2>I gotta wrap this up, but you're a young guy.

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<v Speaker 2>Can you just state that usually these tensions are stochastic

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<v Speaker 2>and they repeat and reverse always almost.

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<v Speaker 1>The question is is yeah, classic golf oil spikes, you

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<v Speaker 1>know their temporary. You know, gold shoots up, shoots back

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<v Speaker 1>right right, the Australian dollar shoots up relative to the

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<v Speaker 1>end and and falls back. But the the the the

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<v Speaker 1>question we don't know is is and he saw this

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<v Speaker 1>by the way in SPX options where the three months

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<v Speaker 1>football ski finally caught up with a one month SKW

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<v Speaker 1>just the other day there that this may be not

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<v Speaker 1>a two week thing. Maybe they're this tension will persist

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<v Speaker 1>for you know, a few months here and so following Ukraine.

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<v Speaker 1>You know that was not a sort of straights on,

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<v Speaker 1>straights off type of dynamic that just come to kept going,

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<v Speaker 1>and yet it drove a lot of problems, for example

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<v Speaker 1>within the Eurozone. Right relative to the S.

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<v Speaker 2>Right, did you survive St Patrick's thing?

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<v Speaker 1>Uh? Mostly putting together charts and I did have a

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<v Speaker 1>green bagel though.

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<v Speaker 4>So Michael Purvis, tall back and thank you so much,

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<v Speaker 4>greatly appreciate it.