WEBVTT - Marko Kolanovic Is Back With a Warning for Stocks 0:00:02.480 --> 0:00:07.040 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.239 --> 0:00:21.520 Hello and welcome to another episode of the All Thoughts podcast. 0:00:21.640 --> 0:00:23.079 I'm Tracy Alloway and. 0:00:23.000 --> 0:00:24.120 I'm Joe Wisenthal. 0:00:24.680 --> 0:00:28.400 Joe, in your in your history of being a financial journalist, 0:00:28.920 --> 0:00:31.600 what are you like most proud of in terms of 0:00:31.720 --> 0:00:35.720 coining phrases? Oh, it gave you a hint just then, 0:00:35.760 --> 0:00:37.240 because I assume it's Mint the coin. 0:00:37.440 --> 0:00:40.760 Yeah, Oh, good one, Yes, sure, Mint the coin. That's right, Okay, 0:00:40.840 --> 0:00:41.159 thank you. 0:00:41.360 --> 0:00:44.760 Yes, So I have a few. I have China's Great 0:00:44.840 --> 0:00:45.560 Ball of Money. 0:00:46.280 --> 0:00:48.479 I like how you're like, what are you most proud of? 0:00:48.680 --> 0:00:50.479 And this is going to be my saying, so what 0:00:50.520 --> 0:00:52.560 I'm I keep going? 0:00:52.560 --> 0:00:53.040 Thank you? 0:00:53.040 --> 0:00:56.600 You called me out Europe's sovereign bank loop, although no 0:00:56.640 --> 0:01:00.600 one believes that I invented that one, and flows before pros, 0:01:00.760 --> 0:01:03.320 which has come up quite a bit on this podcast. 0:01:03.360 --> 0:01:06.039 So the idea that you know, when valuations are extremely 0:01:06.120 --> 0:01:09.360 high and everyone's buying everything no matter what the price, 0:01:09.400 --> 0:01:13.480 that it's kind of momentum that matters more than fundamentals. Today, 0:01:13.520 --> 0:01:16.200 I'm very happy to say we are going to be 0:01:16.319 --> 0:01:23.000 speaking to a pro who knows flows. 0:01:19.760 --> 0:01:25.120 As so extremely well done, Tracy, Thank you excellent setup. 0:01:25.200 --> 0:01:29.120 Of course I appreciate all of the tracy neologisms. Man, 0:01:29.160 --> 0:01:32.000 what a time in the market to we talk about flows? 0:01:32.040 --> 0:01:35.800 Do we talk about momentum, etc. I feel like I 0:01:35.920 --> 0:01:39.440 you know, it's always chaotic, it's always uncertain, you'll never 0:01:39.520 --> 0:01:43.000 get an answer. But man, things feel really noisy right now. 0:01:42.959 --> 0:01:45.440 They feel super noisy. So we are recording this on 0:01:45.520 --> 0:01:49.120 January thirtieth. It is a week that has seen a 0:01:49.240 --> 0:01:54.000 very sharp sell off in tech stocks thanks to anxiety 0:01:54.240 --> 0:01:57.160 over deep seak coming out of China. We're going to 0:01:57.200 --> 0:01:59.400 talk about that and more generally, we're just going to 0:01:59.440 --> 0:02:01.400 talk about what's going on in the market right now, 0:02:01.520 --> 0:02:04.480 how investors might be handling it, and how the market 0:02:04.560 --> 0:02:08.440 structure might have changed over the years. And as I said, 0:02:08.480 --> 0:02:11.160 I'm very excited because we do have the perfect guests, 0:02:11.360 --> 0:02:13.720 the pro who knows his flows. He has a lot 0:02:13.720 --> 0:02:17.560 of nicknames, actually Gandalf being one of them as well. 0:02:17.560 --> 0:02:20.400 Actually I didn't realize one of our colleagues at Bloomberg 0:02:20.800 --> 0:02:23.480 kind of coined that name for him. But of course 0:02:23.600 --> 0:02:27.600 we are speaking with Marko Kolonovich. He is JP Morgan's 0:02:27.919 --> 0:02:32.760 former chief Global market strategist and co head of Global Research, 0:02:32.880 --> 0:02:35.600 and now he's with us to talk about the market. 0:02:35.639 --> 0:02:38.680 And Marco, thank you so much for coming on. 0:02:38.680 --> 0:02:40.600 O thoughts, thank you so much for having me. 0:02:40.840 --> 0:02:43.600 I'm very excited. I know I've said that three times now, 0:02:44.000 --> 0:02:47.799 but I guess we should start with the recent selloff, 0:02:48.080 --> 0:02:52.440 like the deep Seek, deep stock selloff. They are all 0:02:52.480 --> 0:02:55.640 these superlatives that you can use to describe Monday's action, 0:02:55.880 --> 0:02:58.840 like the biggest single stock plunge in history in the 0:02:58.840 --> 0:03:01.680 form of Nvidia, and eight of the top ten biggest 0:03:01.680 --> 0:03:03.520 one day drops in the S and P five hundred, 0:03:03.760 --> 0:03:07.280 et cetera, et cetera. And actually, as we're recording this 0:03:07.360 --> 0:03:10.960 on January thirtieth, Microsoft is down six percent after earning, 0:03:11.040 --> 0:03:14.920 so maybe the tech selloff isn't over yet. But one 0:03:15.000 --> 0:03:17.320 of the interesting things about this week is there hasn't 0:03:17.400 --> 0:03:20.960 really been broad contagion. So most stocks in the S 0:03:20.960 --> 0:03:23.480 and P five hundred were kind of like, meh, we 0:03:23.560 --> 0:03:28.760 don't care. When would you expect some of the anxiety 0:03:28.800 --> 0:03:32.400 over Deep Seek to maybe start having a bigger impact 0:03:32.639 --> 0:03:33.639 on the broader market. 0:03:33.760 --> 0:03:36.640 So, you know, as you said, there was not much contagion, 0:03:36.720 --> 0:03:38.680 you know, and if you look at the different stocks 0:03:38.680 --> 0:03:41.000 in SMP. Many of them were actually up, you know, 0:03:41.040 --> 0:03:43.920 and many even in the tech sectors sector were up. 0:03:43.960 --> 0:03:46.360 You know, if you look for instance, you know, Facebook 0:03:46.400 --> 0:03:49.360 yesterday or today, or a bunch of other names that 0:03:49.480 --> 0:03:51.840 sort of were perceived that they might be sort of 0:03:51.960 --> 0:03:55.600 benefiting from, you know, the sort of open architecture, you know, 0:03:55.960 --> 0:03:57.880 type of things that can come at the cheaper price, 0:03:57.920 --> 0:04:00.640 you know, and can be still you know, implemented in 0:04:00.680 --> 0:04:02.680 their business model when it comes to AI models. 0:04:02.920 --> 0:04:04.320 So it was early contained. 0:04:04.320 --> 0:04:04.480 You know. 0:04:04.560 --> 0:04:06.320 I'm a little bit surprised just because there were like 0:04:06.360 --> 0:04:08.280 three or four names that really got hammered, you know, 0:04:08.280 --> 0:04:10.960 and that can only be explained with not just with 0:04:11.000 --> 0:04:13.320 a panic, but some of the sort of forced selling, 0:04:13.400 --> 0:04:15.880 you know, maybe coming from options. You know, if you 0:04:15.920 --> 0:04:18.080 are you know, if you're selling in a video puts 0:04:18.080 --> 0:04:19.600 for the past few years, you could make a good 0:04:19.600 --> 0:04:21.080 living out of it. But then you know, you'll have 0:04:21.120 --> 0:04:24.560 a day like we saw this weekend, and basically you 0:04:24.680 --> 0:04:26.760 might get you know, forced out of these positions and 0:04:26.800 --> 0:04:28.320 maybe have a catastrophic loss. 0:04:28.480 --> 0:04:30.000 So it was fairly limited. 0:04:30.520 --> 0:04:32.559 I'm a little bit surprised, you know, just just because 0:04:32.600 --> 0:04:36.000 we didn't really have a meaningful sales since last summer, 0:04:36.240 --> 0:04:38.200 you know, sort of when at the back of the 0:04:38.240 --> 0:04:40.280 Bank of Japan, you know, so, so I do think 0:04:40.320 --> 0:04:42.240 we will we will see one. Perhaps it's a little 0:04:42.240 --> 0:04:44.880 bit too early in the year. There's still quite a 0:04:44.880 --> 0:04:47.480 bit of an optimism post election. There's a little bit 0:04:47.480 --> 0:04:50.640 of seasonality in January. People put money to work, they 0:04:50.640 --> 0:04:54.560 get paid, you know, they allocated capital. So maybe it's 0:04:54.560 --> 0:04:56.919 a little bit too early. I was somewhat inclined to 0:04:56.920 --> 0:05:00.200 see that we will see a bit more, you know. 0:05:00.279 --> 0:05:02.440 At the back of it, it's perhaps not over. We 0:05:02.480 --> 0:05:06.080 still have a few important earnings to come, so remains 0:05:06.120 --> 0:05:07.719 to be seen sort of what happens, you know, maybe 0:05:07.720 --> 0:05:10.720 another week of earnings, you know, whether there is any 0:05:10.800 --> 0:05:12.640 any sort of follow through, you know, but I do 0:05:12.720 --> 0:05:16.440 think that it's gonna be some investors will burn clearly, 0:05:16.480 --> 0:05:18.400 and a little bit of a tarnish on the sort 0:05:18.400 --> 0:05:21.800 of this thesis that some of these stocks like my video, 0:05:21.880 --> 0:05:23.520 just go up, you know every day you can't lose, 0:05:23.560 --> 0:05:24.920 you know, Like so I think people will think twice 0:05:24.960 --> 0:05:26.800 if something can drop like twenty percent in a day, 0:05:26.880 --> 0:05:29.200 you got to also think of it what it does 0:05:29.240 --> 0:05:30.640 to you to your risk and. 0:05:31.040 --> 0:05:35.040 Well so Tracy asked about contagion and the anxiety spreading 0:05:35.120 --> 0:05:38.479 across the market. But I guess I would flip the question, 0:05:39.120 --> 0:05:41.760 which is, as I've said before on the podcast, I'm 0:05:41.760 --> 0:05:44.279 a boring index investor. So like I look at a 0:05:44.360 --> 0:05:48.680 random American company that is like General Electric, it's doing fine. 0:05:49.200 --> 0:05:51.880 I'm not very exposed to General Electric because they're a 0:05:51.960 --> 0:05:54.839 small part of the index. I am very exposed to 0:05:55.320 --> 0:05:59.240 in Video and Microsoft and so forth. We did a 0:05:59.279 --> 0:06:02.919 recent episode about market concentration, but I'm sort of like 0:06:03.279 --> 0:06:07.479 curious your take on this fact that, like so many 0:06:07.520 --> 0:06:10.720 of these flows, they go into broad market indexes, but 0:06:10.800 --> 0:06:14.320 we're really all very exposed to a few concentrated market pads. 0:06:14.520 --> 0:06:17.160 Yeah, so the concentration is the highest, you know, sort 0:06:17.279 --> 0:06:20.279 sixties or seventies, so we're looking in fifty years half 0:06:20.279 --> 0:06:24.120 of the century history and concentration is sort of at 0:06:24.160 --> 0:06:26.440 the highest point. It's been a while for staying there 0:06:26.440 --> 0:06:29.400 at this level, like maybe past past year. So it's 0:06:29.400 --> 0:06:32.400 a weird market. You know, this concentration came for two reasons. 0:06:32.400 --> 0:06:36.720 You know, one is clearly thematic investing in technology. Then 0:06:36.720 --> 0:06:39.440 you also have investing in a large company. You have 0:06:39.480 --> 0:06:42.479 a theme of momentum sort of that is basically self fulfilling. 0:06:42.839 --> 0:06:45.400 You know, more something goes up, more money to tracts, 0:06:45.560 --> 0:06:48.159 becomes bigger an index, you know, all the passive flows 0:06:48.240 --> 0:06:50.640 into it. So there's a technical aspect, there's thematic aspect. 0:06:50.880 --> 0:06:54.520 There's even geopolitical aspect. A lot of money went outside 0:06:54.680 --> 0:06:56.760 of the other parts of the world. Europe is doing 0:06:56.960 --> 0:07:00.120 worse when it comes to sort of economy. China has 0:07:00.160 --> 0:07:01.760 been We've been a sort of with the brink of 0:07:01.800 --> 0:07:04.680 this Cold War with China, so money has has left there. 0:07:05.000 --> 0:07:08.240 You know, Latime has its own share of sort of issues, 0:07:08.520 --> 0:07:11.200 so money has been also geopolitically moving area. So it's 0:07:11.240 --> 0:07:13.600 a moving in the US, it's a moving in the indices, 0:07:13.640 --> 0:07:15.120 it's a moving in the tech you know, and then 0:07:15.160 --> 0:07:17.600 you end up with these give or take ten stocks 0:07:17.600 --> 0:07:19.960 that that really sucked up all the all the capital 0:07:20.000 --> 0:07:23.600 and evaluations got got very very high. Now, you know, 0:07:23.680 --> 0:07:26.640 tech investors, they do have a sort of their rationalization, 0:07:26.880 --> 0:07:28.600 So what's going to happen in the future. These things 0:07:28.720 --> 0:07:30.840 just grow and grow and grow. And that's when we 0:07:30.920 --> 0:07:32.400 when we saw with the deep Seek, we saw a 0:07:32.440 --> 0:07:34.440 little bit of a dent in that in that thesis. 0:07:34.440 --> 0:07:36.640 But these stocks didn't go up for the sake of 0:07:36.760 --> 0:07:38.800 for the thesis. They wound up some of these these 0:07:38.840 --> 0:07:42.680 these other flows, you know, so unprecedented concentration is not 0:07:42.760 --> 0:07:43.520 going to stay there. 0:07:43.600 --> 0:07:43.840 You know. 0:07:44.160 --> 0:07:47.720 The big question is when will we see that rebalance. 0:07:47.760 --> 0:07:50.400 Do we need to see you know, some cyclical downturn 0:07:50.520 --> 0:07:53.640 first to purge and to normalize some of these valuations, 0:07:53.640 --> 0:07:57.440 you know, because historically these pees were never this high. 0:07:57.440 --> 0:07:59.120 I mean, in two thousand they were this high, and 0:07:59.200 --> 0:08:01.040 we know how it then, you know, but a lot 0:08:01.080 --> 0:08:02.920 of people got burn myself include that with some of 0:08:02.960 --> 0:08:06.200 the we were more negative last year, you know. And basically, 0:08:06.280 --> 0:08:09.000 you know, market has this tremendous momentum, so the timing 0:08:09.200 --> 0:08:10.800 is is going to be challenge. 0:08:11.200 --> 0:08:14.880 What does it take to I guess turn momentum at 0:08:14.880 --> 0:08:17.960 this point, Like what what are the catalysts that actually 0:08:18.000 --> 0:08:21.040 work here? Because it does feel looking at the market 0:08:21.160 --> 0:08:24.720 so much of it is now technical or systematic in 0:08:24.800 --> 0:08:28.080 some way. There's a lot of options selling, as you mentioned, 0:08:28.120 --> 0:08:31.240 lots of multi strat funds that basically you know, just 0:08:31.360 --> 0:08:35.960 have to sell or buy to rebalance their exposure. What 0:08:36.080 --> 0:08:39.600 actually changes directions, like how do you get enough to 0:08:39.800 --> 0:08:40.760 change a trend. 0:08:41.160 --> 0:08:43.480 So, you know, so there's a technical aspect, sort of 0:08:43.679 --> 0:08:45.880 the mechanical aspect of it, and there's a sort of 0:08:45.920 --> 0:08:49.040 catalyst or more funda mental angle of things, you know. 0:08:49.320 --> 0:08:52.760 So to get things to start moving or to stall, 0:08:52.880 --> 0:08:55.520 you usually do need to have some funda mental driver 0:08:55.600 --> 0:08:59.200 of it. So perhaps there is concern about economy slowing down, 0:08:59.480 --> 0:09:02.439 you know, perhaps there is a concern about something geopolitically, 0:09:02.480 --> 0:09:05.120 maybe trade war with China or some sort of blockade 0:09:05.120 --> 0:09:07.560 of Taiwan's trads or something like that. Right, so first 0:09:07.559 --> 0:09:09.080 you need to have a little bit of a catalyst, 0:09:09.080 --> 0:09:11.920 you know. But if the market is technically very strong, 0:09:12.320 --> 0:09:14.440 the catalyst is not going to change the momentum. So 0:09:14.920 --> 0:09:17.120 what that means is, you know, more specifically. You know, 0:09:17.200 --> 0:09:19.520 so when you look at the trend investors, you know, 0:09:19.559 --> 0:09:21.440 they have a range of signals, you know, like so 0:09:21.480 --> 0:09:23.960 they can look at a one month price momentum, three 0:09:24.000 --> 0:09:26.800 month price momentum, six month pricements, or twelve month price momentum, 0:09:26.800 --> 0:09:28.440 maybe eighteen months, but that's about it, you know, And 0:09:28.440 --> 0:09:31.080 there's some very short term momentum players that look intra 0:09:31.160 --> 0:09:33.920 day or on a daily basis but most of these 0:09:33.920 --> 0:09:37.760 signals are concentrated around twelve months and two hundred day 0:09:37.800 --> 0:09:40.000 moving averages, right. So that's why when people look at 0:09:40.040 --> 0:09:42.720 the two hundred mo average, they first when I, you know, 0:09:42.760 --> 0:09:44.320 twenty years ago, when someone told me, I said, like, 0:09:44.320 --> 0:09:44.959 what is this magic? 0:09:45.120 --> 0:09:46.280 Why would this work? Right? 0:09:46.559 --> 0:09:50.440 But it's reality is that many models, you know, systematic models, 0:09:50.440 --> 0:09:54.040 primarily you know computer DRIM, but also psychological investors look 0:09:54.080 --> 0:09:55.840 at these things and become self fulfilling. So you need 0:09:55.880 --> 0:09:58.280 to actually come close enough to these levels to break them. 0:09:58.360 --> 0:09:58.520 Right. 0:09:58.960 --> 0:10:02.760 So for instance, earlier this week SMP got below around 0:10:02.800 --> 0:10:06.040 six thousand or a bit below. We were close to 0:10:06.120 --> 0:10:09.199 breaking twenty day moving average and fifty day moving average, 0:10:09.240 --> 0:10:10.920 so you can think of it as about one month 0:10:11.200 --> 0:10:14.040 and three month price momentum. So that's about the third 0:10:14.080 --> 0:10:16.280 of a signal. The big signal is really twelve month 0:10:16.280 --> 0:10:18.440 you know, or two hundred day moving average, right. But 0:10:19.200 --> 0:10:21.960 when you start moving things you can actually unravel. It's 0:10:22.000 --> 0:10:24.040 like a little bit like a snowball. So I thought like, 0:10:24.080 --> 0:10:25.880 if the market is going to stay below twenty and 0:10:25.920 --> 0:10:28.160 fifty days at the end of the day, you may 0:10:28.200 --> 0:10:31.120 get enough selling from CTAs or de risking from cts 0:10:31.120 --> 0:10:33.440 that they may get you to another leg lower right, 0:10:34.040 --> 0:10:36.560 So it's basically you need to have set up that 0:10:36.600 --> 0:10:39.600 you're close enough to these triggers on the downside to 0:10:39.720 --> 0:10:41.920 move it. And again I think this week we got 0:10:42.080 --> 0:10:45.600 very close. But there was also other flows like rotation. 0:10:45.960 --> 0:10:47.760 You saw like selling on a video, but Apple and 0:10:47.800 --> 0:10:49.480 Metal went up, you know, like so at the end 0:10:49.559 --> 0:11:08.520 now it was like drop but did not drop a lot, Joe. 0:11:08.600 --> 0:11:11.480 It kind of reminds me of like structured credit notes, 0:11:11.520 --> 0:11:15.679 where there's that knockoup knockout level and then you get 0:11:15.679 --> 0:11:18.160 this massive cliff risk and the whole thing kind of unwindes. 0:11:18.440 --> 0:11:21.280 Right, you have all these rules based investors and something 0:11:21.320 --> 0:11:23.800 happens like the model a system sell It is worth 0:11:23.880 --> 0:11:28.680 noting that as we are talking ten nineteen am January thirtieth, 0:11:29.040 --> 0:11:31.880 and Video is basically right at its two hundred day 0:11:32.320 --> 0:11:34.800 moving average. I know this isn't the broader market, but 0:11:34.920 --> 0:11:37.360 it's a big part of the broader market, so yeah, 0:11:37.440 --> 0:11:39.240 it might as it might as well. 0:11:39.280 --> 0:11:39.360 Be. 0:11:40.000 --> 0:11:43.000 One thing that struck me on Monday, which I was 0:11:43.200 --> 0:11:47.000 a bit surprised about in the selloff is that even 0:11:47.080 --> 0:11:51.079 on Monday you mentioned that Meta actually closed Green and 0:11:51.160 --> 0:11:53.640 they are a maker of a competitor to deep seek. 0:11:53.679 --> 0:11:56.480 They have their open source Lama, but they're seen by 0:11:56.600 --> 0:12:00.440 the market as a consumer of AI services because they 0:12:00.440 --> 0:12:03.199 don't sell their product. They use it to do things 0:12:03.240 --> 0:12:07.240 like better ad targeting, et cetera. Were you surprised that 0:12:07.440 --> 0:12:09.400 even on this day in which there is this sort 0:12:09.440 --> 0:12:12.240 of exogenous shock to the market, everyone wakes up to 0:12:12.760 --> 0:12:16.200 some new thing that actually investors showed a fair amount 0:12:16.280 --> 0:12:19.040 of discrimination in terms of what they don't. 0:12:19.720 --> 0:12:22.120 Yeah, so I mean that was that was against you know, 0:12:22.320 --> 0:12:25.600 January sentiment is still pretty positive. Economic data are strong, 0:12:25.640 --> 0:12:27.800 so people are saying, okay, this is not the beginning 0:12:27.800 --> 0:12:32.359 of economic downturn. This is isolated sort of event whereby 0:12:32.600 --> 0:12:34.960 some companies will get hit, you know, their sort of 0:12:34.960 --> 0:12:37.600 revenues will get hit yea, and some will be able 0:12:37.640 --> 0:12:39.000 to do things for cheaper you know, like so we 0:12:39.040 --> 0:12:41.800 had the salesforce I believe as well. And so it 0:12:41.960 --> 0:12:44.120 ended up not a macro day but more of a 0:12:44.200 --> 0:12:44.960 rotational day. 0:12:45.080 --> 0:12:45.280 You know. 0:12:45.360 --> 0:12:48.440 There is also a so called quant factors where you know, 0:12:48.520 --> 0:12:52.160 even within technology, some stocks are higher multiples, some stocks 0:12:52.200 --> 0:12:54.440 are lower multiple. So you know, some stocks are more 0:12:55.040 --> 0:12:57.160 momentum less momentum, you know. Like, so there was a 0:12:57.160 --> 0:12:59.040 bit of rotation. So Apple, which was a lagger, it 0:12:59.080 --> 0:13:01.319 also kind of quite a bit, although I don't think 0:13:01.320 --> 0:13:04.560 there was much fundamental stop going on for Apple. It 0:13:04.600 --> 0:13:08.000 was probably just rotation. So so market kind of held up, 0:13:08.040 --> 0:13:10.360 you know, and I was sort of at defense whether 0:13:10.440 --> 0:13:13.200 whether these like technical levels twenty fifty will will get 0:13:13.200 --> 0:13:15.760 broken and will go lower or not. We didn't, you know, 0:13:15.800 --> 0:13:19.760 but I do think that sort of you know, evaluation positioning, 0:13:19.880 --> 0:13:22.240 and some of these technicals are a bit stretched, you know, 0:13:22.320 --> 0:13:25.080 like so I don't have I don't see like a 0:13:25.160 --> 0:13:27.040 huge huge ob site from the market. So maybe I'm 0:13:27.040 --> 0:13:28.160 switching the topic a little bit. 0:13:28.160 --> 0:13:29.319 But no, No, that makes sense. 0:13:29.760 --> 0:13:34.160 Can I ask you a sort of procedural question, which is, 0:13:34.280 --> 0:13:36.720 you know, you were at JP Morgan for twenty years, 0:13:36.760 --> 0:13:39.800 and you were in the industry even before that. How 0:13:39.840 --> 0:13:44.400 did your sort of research and forecasting process change throughout 0:13:44.440 --> 0:13:45.240 those years? 0:13:45.640 --> 0:13:47.920 No, thank you, And it did change, and it's and 0:13:47.920 --> 0:13:50.280 it's an interesting good question, you know. So, so I 0:13:50.679 --> 0:13:53.880 got my PGE in physics, in theoretical physics, so there 0:13:53.920 --> 0:13:55.920 was a lot of coding, There was a lot of modeling. 0:13:56.679 --> 0:13:58.640 There was a lot of sort of trying to understand 0:13:58.760 --> 0:14:01.760 why one thing leads to another. You know, what is 0:14:01.800 --> 0:14:03.920 the cause, what is a concept? What's causality? You know, 0:14:04.000 --> 0:14:07.920 and what's the noise? What's statistically important, what's statistically not important? 0:14:07.960 --> 0:14:08.080 You know. 0:14:08.160 --> 0:14:10.280 Like so, so in physics you build these type of models. 0:14:10.280 --> 0:14:12.640 You try to understand what's significant, what's not, what you 0:14:12.640 --> 0:14:15.480 can neglect, which factors you can you have to take 0:14:15.520 --> 0:14:18.480 into account, and most important, how to simplify the complex. 0:14:18.520 --> 0:14:20.960 You know, market is an extremely complex system, you know, 0:14:21.040 --> 0:14:22.880 in many physical systems, so you need to sort of 0:14:23.440 --> 0:14:25.440 move the noise on one side and drivers on the 0:14:25.480 --> 0:14:28.440 other side, and try to recognize those patterns, right like So, 0:14:28.680 --> 0:14:31.520 although I really never used any formula from the physics 0:14:31.520 --> 0:14:33.920 in my almost never really in the finance, but the 0:14:33.920 --> 0:14:37.600 way of thinking is similar. So I started Merrilynch in derivatives, 0:14:37.600 --> 0:14:40.760 in derivatives research where I started looking, you know, interesting 0:14:40.800 --> 0:14:42.320 that we are now in earning seasons. So my first 0:14:42.320 --> 0:14:45.200 models were impact sort of earnings on a stock price 0:14:45.240 --> 0:14:47.120 and what can you read from options market? 0:14:47.240 --> 0:14:47.400 You know. 0:14:47.480 --> 0:14:49.880 Like so I published some papers, you know, come up 0:14:49.880 --> 0:14:52.080 with some formal as, and we were kind of backing out, okay, 0:14:52.120 --> 0:14:53.720 what the option market is saying, and then we go 0:14:53.720 --> 0:14:55.400 to analysts and say, hey, do you think it makes 0:14:55.400 --> 0:14:56.520 sense or doesn't make sense? 0:14:56.600 --> 0:14:56.760 Right? 0:14:57.320 --> 0:14:59.080 And then if you if you think that options are 0:14:59.080 --> 0:15:01.040 saying too much of a or too little of a movie, 0:15:01.040 --> 0:15:03.240 you could trade these options and stuff like that. So 0:15:03.280 --> 0:15:05.840 that was one example of okay, how do you sort 0:15:05.840 --> 0:15:08.000 of you know, you have a catalyst, You look at 0:15:08.000 --> 0:15:10.800 different markets, you see are these markets aligned? You put 0:15:10.840 --> 0:15:13.560 some model together, and then you find the discrepancy with 0:15:13.640 --> 0:15:15.480 the model. It's not always going to work, but if 0:15:15.480 --> 0:15:17.280 you do it for one hundred stocks, maybe an average 0:15:17.280 --> 0:15:19.640 and a portfolio level, you'll you'll be fine, you know. 0:15:19.680 --> 0:15:23.120 Like so so so that the relative research and quant research. 0:15:23.160 --> 0:15:25.360 I did a lot of quantity research. So you try 0:15:25.360 --> 0:15:28.000 to process the data, you try to look at the measures. 0:15:28.040 --> 0:15:30.000 And at that time, like you know, twenty twenty five 0:15:30.080 --> 0:15:33.760 years ago, it was beginning really of trading of vicks 0:15:33.960 --> 0:15:37.120 of volatility, swaps of correlation or dispersion. You know, like 0:15:37.160 --> 0:15:39.840 so you kind of try to see, okay, you know, 0:15:40.000 --> 0:15:42.200 you look at the vix you look at the market volatility. 0:15:42.240 --> 0:15:45.360 What's driving market volatility? While people say, well, it's a 0:15:45.400 --> 0:15:47.720 panic or it's not. But let's be more quantitative. You know, 0:15:47.760 --> 0:15:52.320 you can how correlated stocks are, what individual volatility of 0:15:52.360 --> 0:15:54.600 each stock is, you know, which part is due to 0:15:54.640 --> 0:15:58.120 the macro factor the market, what's idiosyncratic, So you can 0:15:58.200 --> 0:15:59.600 kind of break these down. Then you can look at 0:15:59.600 --> 0:16:03.080 the sector correlation between sector, what's crushed within sector, So 0:16:03.120 --> 0:16:05.920 you can kind of quantify these things and analyze and 0:16:06.040 --> 0:16:07.960 get some insight, you know, like two thousand and eight, 0:16:08.000 --> 0:16:09.520 for instance, we look at the tw thousand and seven 0:16:09.520 --> 0:16:11.880 thousand and eight, I look at how the hedging of 0:16:11.960 --> 0:16:14.640 options impacts the market, you know, like so you basically 0:16:14.640 --> 0:16:17.360 need to look at how many options are out there 0:16:17.400 --> 0:16:20.880 in index. Let's say you try to assess what's the 0:16:20.920 --> 0:16:24.120 positioning from from the flows from the sort of no 0:16:24.320 --> 0:16:27.840 knowing of industry hedging flows, and then you see, okay, 0:16:27.840 --> 0:16:29.720 what are the hedging requirements at the end of the 0:16:29.800 --> 0:16:32.200 day and two thousand and eight and then twenty eleven, 0:16:32.240 --> 0:16:34.960 and like a low hanging fruit, you could see sometimes 0:16:34.960 --> 0:16:37.880 these flows would be bigger than market can absorb, you know, 0:16:37.960 --> 0:16:40.440 and they would all go stay away from level ETFs 0:16:40.760 --> 0:16:43.120 from options, you know, so you see like, okay, there's 0:16:43.160 --> 0:16:46.400 like twenty billion dollars to sell and market can't absorb it. 0:16:46.480 --> 0:16:49.080 So you know, market towards last ten minutes will drop. 0:16:49.120 --> 0:16:52.520 And that's you mentioned sort of Ganda. That's where where 0:16:52.560 --> 0:16:54.320 some of these things because people, you know, if you 0:16:54.360 --> 0:16:56.720 look from the outside, you say, oh, how can he 0:16:56.760 --> 0:16:57.040 get that? 0:16:57.160 --> 0:16:57.280 Right? 0:16:57.600 --> 0:17:00.200 You know, and and but it is really understanding a 0:17:00.200 --> 0:17:04.280 bit of technicalities, which is flows, option, convexities, liquidity and 0:17:04.320 --> 0:17:06.800 how they how they sort of interfere. But you know, 0:17:06.880 --> 0:17:10.560 after twenty fifteen sixteen, people figure it out, you know, 0:17:10.640 --> 0:17:12.680 and then people put it in their models. 0:17:12.720 --> 0:17:14.520 They create like. 0:17:14.520 --> 0:17:16.280 A structured product of twenty eighteen. 0:17:16.359 --> 0:17:19.600 Everyone sort of woke up to the vis especially right 0:17:19.600 --> 0:17:20.399 Oh yeah, so that's. 0:17:20.240 --> 0:17:23.320 A February em again and yeah, and you know stuff 0:17:23.359 --> 0:17:26.440 like that. So you kind of analyze causes and consequences 0:17:26.520 --> 0:17:29.640 in the market, something that is new that's not been 0:17:29.760 --> 0:17:32.760 yet a look at, you know, and I have focused 0:17:32.840 --> 0:17:38.160 on things that we're new in the market, like products, options, futures, CTAs, 0:17:38.320 --> 0:17:39.320 those type of things. 0:17:39.600 --> 0:17:43.399 You know, this it's not particularly like technical. But another 0:17:43.520 --> 0:17:46.360 thing that seems to be true about the market right 0:17:46.400 --> 0:17:48.800 now is, at least maybe up until week ago, and 0:17:48.800 --> 0:17:52.440 there's just an incredible amount of optimism in any sort 0:17:52.440 --> 0:17:55.600 of measure. So if you ask, you know, there's consumer measures, 0:17:55.640 --> 0:17:57.040 do you think stocks are going to be higher in 0:17:57.040 --> 0:17:57.680 a year from now? 0:17:58.520 --> 0:17:59.639 Very high levels? 0:18:00.040 --> 0:18:02.359 If you look at things like the Bank of America, 0:18:02.480 --> 0:18:06.040 cell side analyst sentiment very close to euphoric levels. If 0:18:06.040 --> 0:18:10.600 you look at fund cash levels extremely low right now, 0:18:10.760 --> 0:18:14.320 very over everyone is overweight long tech. How do you 0:18:14.560 --> 0:18:17.320 ingest this information because on the one hand, you say, oh, 0:18:17.359 --> 0:18:19.520 everyone's all in, this is negative. On the other hand, 0:18:19.600 --> 0:18:22.280 people have been very optimistic for a while. How should 0:18:22.280 --> 0:18:25.840 we as consumers of this information think about what it 0:18:25.880 --> 0:18:28.159 says about the fragility of the ball market. 0:18:28.920 --> 0:18:32.840 So you know, clearly in the markets things are mean reverting, 0:18:33.000 --> 0:18:35.359 you know, Like so when think reached some very high levels, 0:18:35.400 --> 0:18:36.560 you know eventually they will. 0:18:36.480 --> 0:18:37.840 Gone a long time, Yeah, exactly. 0:18:37.880 --> 0:18:40.680 So, so so there is this mean reversion, But there's 0:18:40.680 --> 0:18:43.480