WEBVTT - Le: correlations are breaking down

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<v Speaker 1>Global business news twenty four hours a day, f Bloomberg

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<v Speaker 1>dot com, the Radio plus mobile app and on your radio.

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<v Speaker 1>This is a Bloomberg Business Flash and I'm Karin Moscow.

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<v Speaker 1>This updates brought to you bi Sector spider e t

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<v Speaker 1>F shy buy a single stock when you can invest

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<v Speaker 1>in the entire sector. Visits sector s p d r

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<v Speaker 1>S dot com are called on a six six sector

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<v Speaker 1>et F and this morning, Walmart Stores down four point

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<v Speaker 1>four percent shares of them, the world's largest retailer, lowering

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<v Speaker 1>its annual sales forecast after the strong dollar pulled down

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<v Speaker 1>the value of overseas revenue. Futures meanwhile, are moving higher,

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<v Speaker 1>and we checked the markets every fifteen minutes throughout the

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<v Speaker 1>trading day. On Bloomberg, SNP EVENI futures have four points,

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<v Speaker 1>DOWI mini futures of forty four and ASTAC EVENI futures

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<v Speaker 1>of seventeen decks. In Germany's up one point six percent,

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<v Speaker 1>and your treasury of one thirty second the yield one

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<v Speaker 1>point eight one percent yield on the two year point

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<v Speaker 1>seven three percent. Nimex screwed oil of two point four

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<v Speaker 1>percent or seventy three cents to thirty nine of barrel

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<v Speaker 1>comes Gold is down half per cent or six dollars

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<v Speaker 1>thirty cents to twelve oh five. Ten announced the euro

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<v Speaker 1>at all six then one thirteen point eight three. Dish

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<v Speaker 1>Network posted profit that missed analysts estimates is more TV

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<v Speaker 1>customers canceled service and in video is up eight percent.

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<v Speaker 1>This morning, the biggest maker of graphics chips used in

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<v Speaker 1>high end gaming computers predicted sales that may exceed analysts estimates,

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<v Speaker 1>demonstrating again how its enthusiast customers are protecting it from

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<v Speaker 1>the worst of the PC slump. And that's a Bloomberg

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<v Speaker 1>business flash. Tom and Mike Karen, thank you very much. Well,

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<v Speaker 1>it is a truism in investing that the smart guys

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<v Speaker 1>buy companies before the rest of the world knows why

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<v Speaker 1>you would want to do so. The smarter guys identify

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<v Speaker 1>those companies for the smart guys. One of the smarter

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<v Speaker 1>guys is Quality. He's head of equity derivatives flow equity derivatives.

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<v Speaker 1>They officially call it for credit sweets, and he's here

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<v Speaker 1>with us now. Um, you look, let me ask it

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<v Speaker 1>this way. We have a sort of risk on field

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<v Speaker 1>to the markets. The last three or four days what

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<v Speaker 1>are people doing in the options market and does that

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<v Speaker 1>tell us whether this is sustainable or not? Sure? Thanks, Um.

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<v Speaker 1>One of the things that we're more concerned with is that,

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<v Speaker 1>like you said, even though there is more of a

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<v Speaker 1>risk to risk on tone to the market, Um, the

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<v Speaker 1>bigger concern is is this just a short squeeze or

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<v Speaker 1>is this more of a function of you know, basically

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<v Speaker 1>the world is okay? Again taught me you're looking confused.

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<v Speaker 1>I'm I'm going back and forth with Okay, the rich

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<v Speaker 1>Truman is our is our crack producer here trying to

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<v Speaker 1>float Tom's balloon here? Um, So risk on for the moment,

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<v Speaker 1>but are people willing to bet on that? And so

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<v Speaker 1>that's the again, like you know, that's the million or

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<v Speaker 1>billion dollar questions? So speaking is you know, is this over?

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<v Speaker 1>Is this period of fear over? Um? And one of

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<v Speaker 1>the things that stands out to us is, look, we're

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<v Speaker 1>in a period now where we've just gone through earnings

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<v Speaker 1>and you don't have really that much volume going through

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<v Speaker 1>at the moment um. That's something that should throw up

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<v Speaker 1>some alarm bells, so to speak. Right, and even though

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<v Speaker 1>you don't have much volume, what you do have in

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<v Speaker 1>the market right now. A lot of buy backs active again,

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<v Speaker 1>buy backs start after the earning experience ends because companies

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<v Speaker 1>will start getting involved. We've heard it's incredibly slow. You

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<v Speaker 1>do a lot of quantum and the derivatives. You do

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<v Speaker 1>that out of your chemistry degree at Harvard. We talked

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<v Speaker 1>about EC ten at Harvard and did you take ten? Everyone?

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<v Speaker 1>Everybody takes a ten. What they don't know is keem forty,

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<v Speaker 1>which is inorganic chemistry, which is a rite of passage.

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<v Speaker 1>Their models within science, within chemistry, are the models in

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<v Speaker 1>your world world right now upside down or askew? Do

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<v Speaker 1>you have any confidence in derivative construction given how slow

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<v Speaker 1>it is and given the correlations that we see out

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<v Speaker 1>there on the bloomberg? That's a great question. So the

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<v Speaker 1>great thing about chemistry is that when you put X

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<v Speaker 1>plus Y together, if it's supposed to blow up, blows

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<v Speaker 1>up in the market putting xplus y together, everyone's wait

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<v Speaker 1>for it to blow up. It doesn't blow up. And

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<v Speaker 1>the reason why is because it's not just excell and

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<v Speaker 1>Y that actually matters. There's a B, C, D, E,

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<v Speaker 1>F G out there that all influence it. And it's

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<v Speaker 1>you know, again, one of those things in science that

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<v Speaker 1>you call a multidimensional problem, which is a complicated way

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<v Speaker 1>of saying, you know what, no one knows the answer

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<v Speaker 1>for sure. But what you can do is you can

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<v Speaker 1>create a model that says, hey, you know what, most

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<v Speaker 1>of the time, when most things happen, this should happen.

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<v Speaker 1>And like you said, when correlations start breaking down, people

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<v Speaker 1>start asking why, what's the acceptable failure level? Though, then

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<v Speaker 1>for a quant strategy, when you say most of the time,

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<v Speaker 1>how most do you have to be in order to

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<v Speaker 1>make it work? Again, that's you know, another great question

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<v Speaker 1>if this was based questions. You know, if this were

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<v Speaker 1>baseball a third of the time would be great. But

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<v Speaker 1>it's not baseball. It's investing. And the interesting thing about

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<v Speaker 1>investing is that even something that say only works fifty

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<v Speaker 1>one percent of time, right, great traders can make money

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<v Speaker 1>on that if their money management is such that the

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<v Speaker 1>fifty one percent of time that they get it right,

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<v Speaker 1>they make ten to one right. And so that's that's

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<v Speaker 1>why I like, this is myth about QUANTZ and that hey,

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<v Speaker 1>these guys are right ninety percent of time. They're not. Really,

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<v Speaker 1>It's about just getting something that's right most of the time,

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<v Speaker 1>or enough of the time, so that when you put

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<v Speaker 1>it all, can you do that with an inequity desk,

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<v Speaker 1>with the distortion off of fixed income, of negative interest rates,

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<v Speaker 1>the zero bound reality of every central bank out there

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<v Speaker 1>in the first and second order derivatives of commodities right now?

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<v Speaker 1>Can you can you in two thousand and sixteen create

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<v Speaker 1>a model? And that's the thing you can't if you're

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<v Speaker 1>looking backwards, because you don't have history to basically give you, Hey,

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<v Speaker 1>here's we don't even have a risk free rate exactly exactly.

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<v Speaker 1>I mean, so what do you do on the desk

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<v Speaker 1>at credit situies? What do you do if you don't

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<v Speaker 1>have a risk free rate and you can't look backwards?

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<v Speaker 1>What you do is you just sort of make a

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<v Speaker 1>best guess. But what you can do is you can

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<v Speaker 1>basically take say, hey, you know what, um. And the

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<v Speaker 1>analogy I'll give is, you know, sometimes when you're playing golf,

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<v Speaker 1>right and you hit a driver, um, you know right

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<v Speaker 1>away whether they're that's gonna slice right, UM. But you know,

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<v Speaker 1>predicting like how far you go or whatever? Again, this

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<v Speaker 1>thing go two or fits yards, three yards, It doesn't matter.

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<v Speaker 1>What you really are trying to get at is when

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<v Speaker 1>you hit it is this thing going to slice and

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<v Speaker 1>sometimes again, predicting what happens way out in the future

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<v Speaker 1>is tough. But what you try to do, and especially

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<v Speaker 1>an advantage we have on a train desk is I

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<v Speaker 1>don't have to get what's right three months out, but

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<v Speaker 1>what I'm trying to just get what's right one day.

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<v Speaker 1>That one to Mike's question, though, if we hear from

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<v Speaker 1>interview after interviews that things are quiet, is what we

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<v Speaker 1>hear in a lack of volume, can you construct forward

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<v Speaker 1>thinking models? And that's a really tough question. It is

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<v Speaker 1>a tough question and unfortunately for a lot of people. Right,

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<v Speaker 1>And it's not just something that comes on the investing side.

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<v Speaker 1>It comes even at the level of a bank CEO. Right.

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<v Speaker 1>You're trying to a strategy that's supposed to give you

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<v Speaker 1>a profitable bank, or strategy that's supposed to give you

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<v Speaker 1>a profitable trading investment. Right. Um, but you're really just

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<v Speaker 1>going on best guests. You're going on maybe some pass

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<v Speaker 1>case studies, maybe some um, you know, real like numbers

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<v Speaker 1>that again, like you said, there's no history for it,

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<v Speaker 1>we'll just will just working for I say, I'm the

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<v Speaker 1>St Regions Hotel, in Beijing and I read my first

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<v Speaker 1>article on CDO squares and I had the basic response

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<v Speaker 1>of everybody, including the big short what's that? It's my

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<v Speaker 1>basic idea, what's the new CDEO squared away from flow

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<v Speaker 1>equity at credit? Sueez? What's the derivative item or guests

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<v Speaker 1>or manipulation that you see now that causes you professional concern? Well,

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<v Speaker 1>things that will cause me the most professional concern are

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<v Speaker 1>where do people have their wealth? Because wealth destruction is

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<v Speaker 1>ultimately what we're looking for. Right. It's a great Michael

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<v Speaker 1>Lewis quote. You know, to airs equities, but to really

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<v Speaker 1>screw things up takes fixed income. And what you really

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<v Speaker 1>need to do is find out, all, right, what is

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<v Speaker 1>that you know, area where people have concentrated What what

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<v Speaker 1>you would say about foreign exchange? You can't air, you

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<v Speaker 1>can't say that I'm radio exactly. So again, where is

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<v Speaker 1>a lot of wealth in the world held And a

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<v Speaker 1>lot of it is held in you know, basically government bonds, right, um,

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<v Speaker 1>And as you move towards the negative interstrate world, what

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<v Speaker 1>are you gonna do when the person who has their

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<v Speaker 1>bank account in you know, some country all of a

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<v Speaker 1>sudden is losing money because you have negative rates. Like

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<v Speaker 1>you said at the beginning, this is something that we

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<v Speaker 1>have a model before. And while you can look in

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<v Speaker 1>the equity markets and equity strategies, use your quand models

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<v Speaker 1>to say, hey, you know what, this stock should go

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<v Speaker 1>up and this stock should go down. The question that

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<v Speaker 1>you're asking me about what causes me concern is that

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<v Speaker 1>it's not the day to day movements of the equity

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<v Speaker 1>market that's gonna, you know, cause the concern it is

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<v Speaker 1>when you get actual wealth destruction. When someone who has

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<v Speaker 1>a million, you know, Frank's, all of a sudden wakes

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<v Speaker 1>up and has nine thousand francs right then they start

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<v Speaker 1>making decisions. I would point out that the twenty year

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<v Speaker 1>Swiss franc is breaking down, not through record low, but

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<v Speaker 1>at zero point one zero percent. I've never said this

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<v Speaker 1>on air. The twenty year the two decade yield is

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<v Speaker 1>a tenth of a percent. Well, you don't want to

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<v Speaker 1>be investing in Swiss funds at the moment unless unless

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<v Speaker 1>you have to, I guess, or if you think they're

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<v Speaker 1>going to continue to decline. Now, that's part of the

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<v Speaker 1>prediction effort for somebody who's going to be investing in

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<v Speaker 1>these things. Uh, what is what's the impact of this

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<v Speaker 1>idea that the neutral real rate is much lower than

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<v Speaker 1>we've ever seen it before. Uh and and made stay there. Yeah,

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<v Speaker 1>this is something that is you know, and a phenomenon

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<v Speaker 1>that's going to propagate itself. And we're just gonna have

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<v Speaker 1>to see um again. If the neutral rate has to

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<v Speaker 1>be lower, that means that risk assets need to be

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<v Speaker 1>higher because you know, like I said before, people don't

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<v Speaker 1>want to earn zero. They want to earn something um.

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<v Speaker 1>But there's a big pull between you know, again the

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<v Speaker 1>greed and fear um aspects of it, and that people

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<v Speaker 1>want to return. But when they're nervous, when they're in

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<v Speaker 1>a risk reduction mode, they won't go get that return.

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<v Speaker 1>And so again you take everything down to zero. We

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<v Speaker 1>don't know yet if actually that money is going to

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<v Speaker 1>go into buying stocks or buying bonds. We'll find out though,

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<v Speaker 1>Thank you for stopping by. And a Gaussian word quality

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<v Speaker 1>is with credit SUITEZ and equity flow uhrwids, we have

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<v Speaker 1>much to talk to what people'll have them back on?

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<v Speaker 1>Continue this? Uh? Was that was that? Okay? Mike? I

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<v Speaker 1>don't think I don't think we avoided a fair amount

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<v Speaker 1>of jargon. Right, Well, you kept me from getting lost,

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<v Speaker 1>which is good. Yeah, next week crotosis. Look at that

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<v Speaker 1>features up six down, futures up fifty four. I'm watching oil, Mike,

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<v Speaker 1>help me watch oil because I got to relaunch my

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<v Speaker 1>launchpad screen right now. It's for West Texas up two

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<v Speaker 1>point eight percent, Brent crude thirty five two. It's up

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<v Speaker 1>two point one on the day, and we get of

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<v Speaker 1>course the holiday delayed inventory numbers out at ten thirty.

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<v Speaker 1>This more we like those holiday even right now was

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<v Speaker 1>actually inventory is quite important. We'll give you, I hope,

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<v Speaker 1>good perspective on that as well. E en one three

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<v Speaker 1>stronger Japanese gen stay with us a bonus another hour

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<v Speaker 1>of Bloomberg's surveillance