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Speaker 1: This is a Bloomberg Business Flash and I'm Karin Moscow.
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Speaker 1: the worst of the PC slump. And that's a Bloomberg
Speaker 1: business flash. Tom and Mike Karen, thank you very much. Well,
Speaker 1: it is a truism in investing that the smart guys
Speaker 1: buy companies before the rest of the world knows why
Speaker 1: you would want to do so. The smarter guys identify
Speaker 1: those companies for the smart guys. One of the smarter
Speaker 1: guys is Quality. He's head of equity derivatives flow equity derivatives.
Speaker 1: They officially call it for credit sweets, and he's here
Speaker 1: with us now. Um, you look, let me ask it
Speaker 1: this way. We have a sort of risk on field
Speaker 1: to the markets. The last three or four days what
Speaker 1: are people doing in the options market and does that
Speaker 1: tell us whether this is sustainable or not? Sure? Thanks, Um.
Speaker 1: One of the things that we're more concerned with is that,
Speaker 1: like you said, even though there is more of a
Speaker 1: risk to risk on tone to the market, Um, the
Speaker 1: bigger concern is is this just a short squeeze or
Speaker 1: is this more of a function of you know, basically
Speaker 1: the world is okay? Again taught me you're looking confused.
Speaker 1: I'm I'm going back and forth with Okay, the rich
Speaker 1: Truman is our is our crack producer here trying to
Speaker 1: float Tom's balloon here? Um, So risk on for the moment,
Speaker 1: but are people willing to bet on that? And so
Speaker 1: that's the again, like you know, that's the million or
Speaker 1: billion dollar questions? So speaking is you know, is this over?
Speaker 1: Is this period of fear over? Um? And one of
Speaker 1: the things that stands out to us is, look, we're
Speaker 1: in a period now where we've just gone through earnings
Speaker 1: and you don't have really that much volume going through
Speaker 1: at the moment um. That's something that should throw up
Speaker 1: some alarm bells, so to speak. Right, and even though
Speaker 1: you don't have much volume, what you do have in
Speaker 1: the market right now. A lot of buy backs active again,
Speaker 1: buy backs start after the earning experience ends because companies
Speaker 1: will start getting involved. We've heard it's incredibly slow. You
Speaker 1: do a lot of quantum and the derivatives. You do
Speaker 1: that out of your chemistry degree at Harvard. We talked
Speaker 1: about EC ten at Harvard and did you take ten? Everyone?
Speaker 1: Everybody takes a ten. What they don't know is keem forty,
Speaker 1: which is inorganic chemistry, which is a rite of passage.
Speaker 1: Their models within science, within chemistry, are the models in
Speaker 1: your world world right now upside down or askew? Do
Speaker 1: you have any confidence in derivative construction given how slow
Speaker 1: it is and given the correlations that we see out
Speaker 1: there on the bloomberg? That's a great question. So the
Speaker 1: great thing about chemistry is that when you put X
Speaker 1: plus Y together, if it's supposed to blow up, blows
Speaker 1: up in the market putting xplus y together, everyone's wait
Speaker 1: for it to blow up. It doesn't blow up. And
Speaker 1: the reason why is because it's not just excell and
Speaker 1: Y that actually matters. There's a B, C, D, E,
Speaker 1: F G out there that all influence it. And it's
Speaker 1: you know, again, one of those things in science that
Speaker 1: you call a multidimensional problem, which is a complicated way
Speaker 1: of saying, you know what, no one knows the answer
Speaker 1: for sure. But what you can do is you can
Speaker 1: create a model that says, hey, you know what, most
Speaker 1: of the time, when most things happen, this should happen.
Speaker 1: And like you said, when correlations start breaking down, people
Speaker 1: start asking why, what's the acceptable failure level? Though, then
Speaker 1: for a quant strategy, when you say most of the time,
Speaker 1: how most do you have to be in order to
Speaker 1: make it work? Again, that's you know, another great question
Speaker 1: if this was based questions. You know, if this were
Speaker 1: baseball a third of the time would be great. But
Speaker 1: it's not baseball. It's investing. And the interesting thing about
Speaker 1: investing is that even something that say only works fifty
Speaker 1: one percent of time, right, great traders can make money
Speaker 1: on that if their money management is such that the
Speaker 1: fifty one percent of time that they get it right,
Speaker 1: they make ten to one right. And so that's that's
Speaker 1: why I like, this is myth about QUANTZ and that hey,
Speaker 1: these guys are right ninety percent of time. They're not. Really,
Speaker 1: It's about just getting something that's right most of the time,
Speaker 1: or enough of the time, so that when you put
Speaker 1: it all, can you do that with an inequity desk,
Speaker 1: with the distortion off of fixed income, of negative interest rates,
Speaker 1: the zero bound reality of every central bank out there
Speaker 1: in the first and second order derivatives of commodities right now?
Speaker 1: Can you can you in two thousand and sixteen create
Speaker 1: a model? And that's the thing you can't if you're
Speaker 1: looking backwards, because you don't have history to basically give you, Hey,
Speaker 1: here's we don't even have a risk free rate exactly exactly.
Speaker 1: I mean, so what do you do on the desk
Speaker 1: at credit situies? What do you do if you don't
Speaker 1: have a risk free rate and you can't look backwards?
Speaker 1: What you do is you just sort of make a
Speaker 1: best guess. But what you can do is you can
Speaker 1: basically take say, hey, you know what, um. And the
Speaker 1: analogy I'll give is, you know, sometimes when you're playing golf,
Speaker 1: right and you hit a driver, um, you know right
Speaker 1: away whether they're that's gonna slice right, UM. But you know,
Speaker 1: predicting like how far you go or whatever? Again, this
Speaker 1: thing go two or fits yards, three yards, It doesn't matter.
Speaker 1: What you really are trying to get at is when
Speaker 1: you hit it is this thing going to slice and
Speaker 1: sometimes again, predicting what happens way out in the future
Speaker 1: is tough. But what you try to do, and especially
Speaker 1: an advantage we have on a train desk is I
Speaker 1: don't have to get what's right three months out, but
Speaker 1: what I'm trying to just get what's right one day.
Speaker 1: That one to Mike's question, though, if we hear from
Speaker 1: interview after interviews that things are quiet, is what we
Speaker 1: hear in a lack of volume, can you construct forward
Speaker 1: thinking models? And that's a really tough question. It is
Speaker 1: a tough question and unfortunately for a lot of people. Right,
Speaker 1: And it's not just something that comes on the investing side.
Speaker 1: It comes even at the level of a bank CEO. Right.
Speaker 1: You're trying to a strategy that's supposed to give you
Speaker 1: a profitable bank, or strategy that's supposed to give you
Speaker 1: a profitable trading investment. Right. Um, but you're really just
Speaker 1: going on best guests. You're going on maybe some pass
Speaker 1: case studies, maybe some um, you know, real like numbers
Speaker 1: that again, like you said, there's no history for it,
Speaker 1: we'll just will just working for I say, I'm the
Speaker 1: St Regions Hotel, in Beijing and I read my first
Speaker 1: article on CDO squares and I had the basic response
Speaker 1: of everybody, including the big short what's that? It's my
Speaker 1: basic idea, what's the new CDEO squared away from flow
Speaker 1: equity at credit? Sueez? What's the derivative item or guests
Speaker 1: or manipulation that you see now that causes you professional concern? Well,
Speaker 1: things that will cause me the most professional concern are
Speaker 1: where do people have their wealth? Because wealth destruction is
Speaker 1: ultimately what we're looking for. Right. It's a great Michael
Speaker 1: Lewis quote. You know, to airs equities, but to really
Speaker 1: screw things up takes fixed income. And what you really
Speaker 1: need to do is find out, all, right, what is
Speaker 1: that you know, area where people have concentrated What what
Speaker 1: you would say about foreign exchange? You can't air, you
Speaker 1: can't say that I'm radio exactly. So again, where is
Speaker 1: a lot of wealth in the world held And a
Speaker 1: lot of it is held in you know, basically government bonds, right, um,
Speaker 1: And as you move towards the negative interstrate world, what
Speaker 1: are you gonna do when the person who has their
Speaker 1: bank account in you know, some country all of a
Speaker 1: sudden is losing money because you have negative rates. Like
Speaker 1: you said at the beginning, this is something that we
Speaker 1: have a model before. And while you can look in
Speaker 1: the equity markets and equity strategies, use your quand models
Speaker 1: to say, hey, you know what, this stock should go
Speaker 1: up and this stock should go down. The question that
Speaker 1: you're asking me about what causes me concern is that
Speaker 1: it's not the day to day movements of the equity
Speaker 1: market that's gonna, you know, cause the concern it is
Speaker 1: when you get actual wealth destruction. When someone who has
Speaker 1: a million, you know, Frank's, all of a sudden wakes
Speaker 1: up and has nine thousand francs right then they start
Speaker 1: making decisions. I would point out that the twenty year
Speaker 1: Swiss franc is breaking down, not through record low, but
Speaker 1: at zero point one zero percent. I've never said this
Speaker 1: on air. The twenty year the two decade yield is
Speaker 1: a tenth of a percent. Well, you don't want to
Speaker 1: be investing in Swiss funds at the moment unless unless
Speaker 1: you have to, I guess, or if you think they're
Speaker 1: going to continue to decline. Now, that's part of the
Speaker 1: prediction effort for somebody who's going to be investing in
Speaker 1: these things. Uh, what is what's the impact of this
Speaker 1: idea that the neutral real rate is much lower than
Speaker 1: we've ever seen it before. Uh and and made stay there. Yeah,
Speaker 1: this is something that is you know, and a phenomenon
Speaker 1: that's going to propagate itself. And we're just gonna have
Speaker 1: to see um again. If the neutral rate has to
Speaker 1: be lower, that means that risk assets need to be
Speaker 1: higher because you know, like I said before, people don't
Speaker 1: want to earn zero. They want to earn something um.
Speaker 1: But there's a big pull between you know, again the
Speaker 1: greed and fear um aspects of it, and that people
Speaker 1: want to return. But when they're nervous, when they're in
Speaker 1: a risk reduction mode, they won't go get that return.
Speaker 1: And so again you take everything down to zero. We
Speaker 1: don't know yet if actually that money is going to
Speaker 1: go into buying stocks or buying bonds. We'll find out though,
Speaker 1: Thank you for stopping by. And a Gaussian word quality
Speaker 1: is with credit SUITEZ and equity flow uhrwids, we have
Speaker 1: much to talk to what people'll have them back on?
Speaker 1: Continue this? Uh? Was that was that? Okay? Mike? I
Speaker 1: don't think I don't think we avoided a fair amount
Speaker 1: of jargon. Right, Well, you kept me from getting lost,
Speaker 1: which is good. Yeah, next week crotosis. Look at that
Speaker 1: features up six down, futures up fifty four. I'm watching oil, Mike,
Speaker 1: help me watch oil because I got to relaunch my
Speaker 1: launchpad screen right now. It's for West Texas up two
Speaker 1: point eight percent, Brent crude thirty five two. It's up
Speaker 1: two point one on the day, and we get of
Speaker 1: course the holiday delayed inventory numbers out at ten thirty.
Speaker 1: This more we like those holiday even right now was
Speaker 1: actually inventory is quite important. We'll give you, I hope,
Speaker 1: good perspective on that as well. E en one three
Speaker 1: stronger Japanese gen stay with us a bonus another hour
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