Speaker 1: And joining us now for an exclusive conversation about these markets.
Speaker 1: Cliff Assness AQR Capital Management, Founder, managing principal and chief
Speaker 1: investment officer. We've been talking so much about these record
Speaker 1: highs we've been experiencing, but within those record highs, there's
Speaker 1: a tremendous amount of stock market concentration.
Speaker 2: Here.
Speaker 1: There's a few stocks that have benefited so disproportionately.
Speaker 3: How do you invest through that?
Speaker 2: Well, first, it's a lot easier to be a quant
Speaker 2: at these times.
Speaker 3: We do run some traditional portfolios, but a lot of
Speaker 3: what we do are.
Speaker 2: Long and short, and it's very common for us to
Speaker 2: be long about seven hundred and fifty stocks around the
Speaker 2: world and short about seven hundred and fifty balanced by industry.
Speaker 3: So we do the courageous thing and run away from
Speaker 3: this problem we've had.
Speaker 2: We've had very good years with the mag seven soaring,
Speaker 2: even though value strategies are part of what we're doing.
Speaker 2: The opposite could hadn't happened in a while, the opposite
Speaker 2: could happen. So concentration is a problem for typical active
Speaker 2: manager and for us in some places, when you're only
Speaker 2: allowed to go long against the benchmark because a lot
Speaker 2: of your information, if you're a good active manager, is
Speaker 2: about what not tone, and when some things are so
Speaker 2: concentrated and big, it shrinks the size of everything else
Speaker 2: and makes that information less relevant. When you're long short
Speaker 2: or even a traditional portfolio that allows you to do
Speaker 2: a little bit of shorting, that really goes away and
Speaker 2: you don't have to think a lot about the mag seven.
Speaker 2: You just have to think about what you like and
Speaker 2: don't like. So I mainly run away from this problem.
Speaker 3: You know.
Speaker 1: Speaking of running away from the problem, you have one
Speaker 1: fund in particular, we're taking a look out. My colleague
Speaker 1: Justina lead pointed this out. You have an equity market
Speaker 1: neutral fund that is up about twenty three percent this year.
Speaker 3: You're beating the market. I'll take your word for.
Speaker 1: It, and that fund, I'm interested in it because traditional
Speaker 1: value factor is generic. Ones out there in the market
Speaker 1: have not performed that well. What do you do differently
Speaker 1: with value?
Speaker 2: I have literally a piece on our website saying we
Speaker 2: are not all about value, except occasionally when we are
Speaker 2: when the world goes into absolute bubble mode. Anyone who
Speaker 2: cares about price is affected by it. But value is
Speaker 2: only a component of what we do. Some particularly strong
Speaker 2: things over the last few years have been and this
Speaker 2: year have been our quality strategies, profitable companies that are.
Speaker 3: Stable, low volatility, low beta.
Speaker 2: Some of the more proprietary things that people at my
Speaker 2: firm will kill me if I try to talk to
Speaker 2: you about, but more mL and alternative data kind of
Speaker 2: things we have had you quoted it, they get mad
Speaker 2: at me if I quoted. But we've had a very
Speaker 2: strong year our versions of value.
Speaker 3: When you go global and you don't.
Speaker 2: Take big industry bets, probably about flat on the year,
Speaker 2: It's not been a terrible year.
Speaker 3: You get very distorted.
Speaker 2: The value indices are cap weighted, and we all focus
Speaker 2: on the US, so they really are mag seven against
Speaker 2: everything else real world, particularly quants, but even non quants
Speaker 2: are often much more subtle in in what they're in
Speaker 2: what they're doing. So not a terrible year for value
Speaker 2: as we define it. But that's not been the driver.
Speaker 2: It's been the other stuff that's made it kind of
Speaker 2: fun this year. So I don't want to still yeah,
Speaker 2: a bunch of time.
Speaker 3: No, No, I just mean the year is not over.
Speaker 2: I hate year to date until December thirty, first four o'clock.
Speaker 3: You really want the family do this thing. How you do.
Speaker 3: I'm a superstitious quant. Okay, there you go.
Speaker 4: I will say you can say anything on TV one,
Speaker 4: so feel free to talk about your returns single stocks.
Speaker 4: And I do want to get your thoughts on size,
Speaker 4: because the phenomenon that we've been discussing is the fact
Speaker 4: that you don't have a lot of small cap IPOs anymore.
Speaker 4: That companies are waiting in the private markets until they're
Speaker 4: a little bit bigger, so maybe they bypass the small
Speaker 4: and the mid cap index. And that's spurred the idea
Speaker 4: that maybe the small cap premium has disappeared as a factor.
Speaker 4: I would love to hear your thoughts.
Speaker 2: Yeah, well this one again. I'm going to turn the
Speaker 2: question around on you, like a quant. Okay, we don't
Speaker 2: think there's ever been a small cap premium.
Speaker 3: What does that mean?
Speaker 2: Well, certainly sometimes small caps win, but a premium means
Speaker 2: they win on average, that on average, you make extra money.
Speaker 2: The early tests of this were in the early nineteen eighties,
Speaker 2: when the so called small firm.
Speaker 3: Effect was discovered.
Speaker 2: I arrived at the University of Chicago about five years
Speaker 2: after this, but it was there, it was being done,
Speaker 2: and it showed that after adjusting for their beta. Another
Speaker 2: thing quants do and non quants. If you're making extra
Speaker 2: money just because you're a one point five beta and
Speaker 2: markets go up, you will make more money than a
Speaker 2: one beta, and small cap does tend to be more
Speaker 2: sensitive to the market. The early tests had to estimate
Speaker 2: the listing returns the databases just say dlisted, so you
Speaker 2: have to guess at how much you would have recovered
Speaker 2: from that, and they overestimated how much you recover, and
Speaker 2: they didn't adjust enough for the fact that the traditional
Speaker 2: statistical methods. You know, I love statistics, but they grossly
Speaker 2: underestimate the market sensitivities.
Speaker 3: The beta is the volatilities of things.
Speaker 2: That don't trade every day, and a lot of small
Speaker 2: caps don't trade enough. When you adjust for both those things,
Speaker 2: there's not been a historical small premium now today it's interesting.
Speaker 2: I do think this effect of companies waiting longer, it's
Speaker 2: probably more we don't trade on this. It's just an opinion,
Speaker 2: but the small world is probably a more distressed value
Speaker 2: world even than it normally interest is. So I don't
Speaker 2: think that necessarily means if you believe in the premium,
Speaker 2: I don't think it necessarily means it's gone. It could
Speaker 2: just be suffering, and along with value strategies in general,
Speaker 2: I know a fair amount of people who look at
Speaker 2: this thing that's spread between cheap and expensive in small
Speaker 2: is even wider than it is in large cap where
Speaker 2: it is wide versus history. So it could be a
Speaker 2: sea change, or it could just be bad things that
Speaker 2: have happened that lead to good things.
Speaker 3: I have a sea change question, please.
Speaker 5: So I pay like half of my income to the
Speaker 5: US government taxes here in the capitalists, you know, free
Speaker 5: market Cliff wants.
Speaker 3: To help you, Taxy of New York. No.
Speaker 5: No, but I lived for like ten years in Germany,
Speaker 5: right socialist Germany, where I paid less in taxes than
Speaker 5: I do here, and I got free health.
Speaker 3: Care and childcare there.
Speaker 5: So when I see a story about reducing my tax liability,
Speaker 5: I'm reading it. Justina Lee wrote a great story about you, guys.
Speaker 5: Quand Giant AQR cuts income tax bills for wealthy clients.
Speaker 3: Yeah.
Speaker 2: I hated the title, but okay, well, how can I
Speaker 2: get in on this?
Speaker 5: Like what am I missing that I'm you know, losing
Speaker 5: half of the money I earn and not getting anything
Speaker 5: back for it.
Speaker 2: I'm well getting even bigger picture, the difference in Germany
Speaker 2: and the US.
Speaker 3: You raise a fair general point.
Speaker 2: People don't realize that, at least when it comes to
Speaker 2: income tax, the US tax code is more far more
Speaker 2: progressive than a lot of other countries that are thought
Speaker 2: of as more progressive. So you're not imagining it. You
Speaker 2: are paying very high rate for us. It probably started
Speaker 2: about ten years ago.
Speaker 3: We always co invested with our with our with.
Speaker 2: Our clients, who are almost all tax non taxable institutions,
Speaker 2: pension funds and Dowmonds foundations, sovereign wealth funds, and we
Speaker 2: knew this was kind of stupid.
Speaker 3: In some ways.
Speaker 2: We believe in our strategies, but you shouldn't invest the
Speaker 2: same for a taxable investor as a non taxable investor.
Speaker 3: It always shocks me when people are like you do
Speaker 3: that for them.
Speaker 2: I'm like, yeah, you remember, we're fiduciaries. We have to
Speaker 2: do what's best for the client. And classic example is
Speaker 2: if this is stock you loved a year ago, you
Speaker 2: made a lot of money on it's eleven and a
Speaker 2: half months later, and your model or your process, or
Speaker 2: even your active managers.
Speaker 3: If you're not a quant, wants to sell it.
Speaker 2: If you're a tax free institution, you just sell it.
Speaker 2: If you're an individual, you're crazy not to wait two weeks. Right,
Speaker 2: I don't know anything about the next two weeks. I
Speaker 2: wish I did. I'd be Janet. You just talked about
Speaker 2: them if I knew about the.
Speaker 3: Next two weeks. So you wait two weeks and they're
Speaker 3: gonna do.
Speaker 2: They design some silly things in the tax code, like
Speaker 2: the difference between selling something after three hundred and sixty
Speaker 2: four days at again and three und sixty six days
Speaker 2: is dramatically difference in your tax bill. So we don't
Speaker 2: do a darn thing different in terms of gross alpha.
Speaker 2: We are basically you have to do, except for making
Speaker 2: holding in another.
Speaker 3: Two weeks or something.
Speaker 2: We are still running mostly about making money before taxes.
Speaker 2: We're running our standard process. But the major things which
Speaker 2: turn out to matter a lot if you do them
Speaker 2: systematically are if we're running your money after tax, you're
Speaker 2: and you're an institution, and we're running your money pre tax,
Speaker 2: and we decide we hate a stock we used to love,
Speaker 2: we'll sell it for you, and we'll wait fifteen days
Speaker 2: to sell it for you. That doesn't sound so powerful,
Speaker 2: but when you're long short and you have seven hundred
Speaker 2: and fifty longs and seven hundred and fifty shorts. And
Speaker 2: when you're us, which we got kind of lucky on this,
Speaker 2: our average holding period is just.
Speaker 3: Under a year anyway.
Speaker 2: So we are making a ton of decisions naturally part
Speaker 2: of the pre tax alpha process around that key decision point.
Speaker 2: If you're a high frequency trader, you can't do very much.
Speaker 2: You're realizing it all every day. If you're Warren Buffett,
Speaker 2: you already have a good tax plan. It's eventually to
Speaker 2: hopefully not for a long time, but to die and
Speaker 2: to pass it on to your airs or charity tax free.
Speaker 2: One year is a beautiful time because the tax code
Speaker 2: is kind of silly about it. The tax code I
Speaker 2: would write is not necessarily the tax code that I will,
Speaker 2: as a fiduciary manage my clients too well.
Speaker 4: I want to talk about the after tax return a
Speaker 4: little bit more, because of course there's always been a
Speaker 4: focus on after tax returns, but it feels like there's
Speaker 4: more and more products that are coming to market that
Speaker 4: are focused on the after tax return.
Speaker 3: I think about what's going on in.
Speaker 4: The ETF space where I live, and there's an a
Speaker 4: tier to make exchange funds in the ETF wrapper and
Speaker 4: to get a little dystopian. I wonder if that's like
Speaker 4: the future of asset management after tax return products and
Speaker 4: leverage single sock ETFs.
Speaker 2: I mean, I have strong opinions on what's the best
Speaker 2: way to do this. Exchange funds. I watched some of
Speaker 2: them at Goldman Sachs thirty years ago. They always struck me.
Speaker 2: You know, we like to do really natural things, like
Speaker 2: we're doing our process anyway, but we're gonna wait two
Speaker 2: and a half.
Speaker 3: Weeks to do this. They you know, those always struck
Speaker 3: me as a little like in alchemy.
Speaker 2: Yeah, I'm not super comfortable with that kind of solution.
Speaker 2: But what you said in general, a larger focus on
Speaker 2: after tax I have been waiting for this for my
Speaker 2: entire career as a as a little kid in this business.
Speaker 3: This is not genius.
Speaker 2: I think a lot of people did it. I was like,
Speaker 2: why does everyone? Why do tax will people focus on
Speaker 2: pre tax returns. I mean, they've been studies that look
Speaker 2: at mutual funds and say the money flows to the
Speaker 2: largest pre tax return, which is often for the obvious
Speaker 2: canonical invest there not the best post tax return.
Speaker 3: Rob are not.
Speaker 2: Who has been a friend of me of mine for
Speaker 2: a long time. We've written articles back and forth. He
Speaker 2: wrote a brilliant piece on this, and I think in
Speaker 2: the eighties it might be saying, but nobody cared for
Speaker 2: a long long time. So I think it's a positive development.
Speaker 2: I think you have to have pre tax alpha. You
Speaker 2: can't do things that are just about taxes. But once
Speaker 2: you're doing it, you should money different for your tax
Speaker 2: will investors.
Speaker 3: And that is shockingly new. It should have been a
Speaker 3: long time ago.
Speaker 1: Let's switch back to something you were talking about a
Speaker 1: little earlier. We were talking about places. Let's talk about
Speaker 1: it in terms of places to find alpha, because you
Speaker 1: had went there. Where outside of the stock market are.
Speaker 3: You finding it?
Speaker 1: You've made a lot of money in recent years on commodities.
Speaker 1: A lot of people have been talking about bonds. You
Speaker 1: were weeks away from putting around new capital markets assumptions.
Speaker 1: How do you think about diversification? What's the new sixty forty?
Speaker 2: The new sixty forty still sixty forty. I don't know
Speaker 2: who on earth has ever invested in sixty forty. Somehow
Speaker 2: that became you have to do sixty forty if you
Speaker 2: like write a piece like we do on the perspective
Speaker 2: returns of fifty to fifty. The world goes I can't,
Speaker 2: I can't deal with this. This is fifty to fifty.
Speaker 2: We do think both stocks and bonds, and this will
Speaker 2: be reflected in our piece that's coming out soon. We
Speaker 2: do these capital market assumption pieces. They're really are client service.
Speaker 2: We're interested. We don't trade on them. They're like ten
Speaker 2: year signals. I've had a couple bad years in a
Speaker 2: row that I can survive. Things that only work over
Speaker 2: ten year horizons are not very practical.
Speaker 3: And they often give you kind of weird indicators. They'll
Speaker 3: say things like, we expect to this right now.
Speaker 2: We expect to make less on the next ten years
Speaker 2: on sixty forty, particularly on stocks, than the long term
Speaker 2: average because they're expensive. You know how hard it is
Speaker 2: to make money With the phrase make less? What if
Speaker 2: you underweight or short them, if they go up but
Speaker 2: less than normal. At the end of ten years, you
Speaker 2: tell your client, we lost you money, but we lost
Speaker 2: you less than we would have in the twentieth century.
Speaker 2: We talk about this a lot, and people don't get
Speaker 2: very excited about that. Having said that, everyone's got to
Speaker 2: plan their life, from individuals to pension funds.
Speaker 3: How much am I going to make on my assets
Speaker 3: to cover what I have to cover? So these numbers
Speaker 3: are very important.
Speaker 2: If you're going to make less, it's important, But I
Speaker 2: want to be clear, it's not a trading signal, but cost.
Speaker 2: We think less of the markets. We think diversification away
Speaker 2: from sixty forty, which, to be honest, we always believe in.
Speaker 2: So I'm singing a song I would sing all the time,
Speaker 2: but we do think it is somewhat more important when
Speaker 2: markets are probably offering you less trend following strategies long
Speaker 2: short equity strategies that are truly short, not long short,
Speaker 2: because that's just window dressing.
Speaker 3: Well, what's the.
Speaker 1: Best advice you would give to somebody who is primarily
Speaker 1: an equity investor. It's kind of like what David Cosson
Speaker 1: was saying a couple of weeks ago, like Golden Sachs.
Speaker 1: If you're standing at these valuations and you're worried about
Speaker 1: long term returns and you're investing today, how do you
Speaker 1: play just equities?
Speaker 3: If you're playing just equities, it's in your question.
Speaker 2: You are stuck with just equities, then it's about can
Speaker 2: you add alpha to it? And we think some of
Speaker 2: the more publicly known things buying high quality companies at
Speaker 2: reasonable price, what Warren Buffett does, we think is still
Speaker 2: going to work going forward. It doesn't fix the equity
Speaker 2: risk premium. To fix that you have to go outside
Speaker 2: of equities or be willing to short some equities. So
Speaker 2: with in equities, we still think there's alpha for active
Speaker 2: managers who have a discipline, rational process.
Speaker 3: But to cheat the question, I think to.
Speaker 2: Really move the dial on an all equity exposure, you know,
Speaker 2: why are you all equities? You've lived through one of
Speaker 2: several but a golden age for equities, and people tend
Speaker 2: to look at ten years and extrapolate that forever, when
Speaker 2: in real life at that horizon there's at least some
Speaker 2: degree again and it's not a daily tradable strategy, but
Speaker 2: there at least some degree of mean reversion. So the
Speaker 2: world on average gets this little backwards. They get all
Speaker 2: excited and are comfortable with one hundred percent whatever it is,
Speaker 2: one hundred percent one thing, when that one thing has
Speaker 2: won same thing for us versus non us.
Speaker 3: US has crushed the world.
Speaker 2: Most of that has been the US getting more expensive
Speaker 2: than the world. The fundamentals have come in somewhat better
Speaker 2: on the US, but as we measure, that's about ten
Speaker 2: to fifteen percent of the US's victory. Eighty five percent
Speaker 2: is people being willing to pay more for those multiples.
Speaker 2: That's not something you want to extrapolate fundamental performance. You
Speaker 2: can argue maybe there's something better in the US, maybe
Speaker 2: this is not, but just price multiple moves. So I
Speaker 2: think the number one thing is to cheat your question
Speaker 2: and go You've lived through a tremendous period of richening,
Speaker 2: particularly for a US investor. I'm not saying dump them,
Speaker 2: but I'm saying to assume that's going to happen again
Speaker 2: is a little crazy. And doing some other things, be
Speaker 2: they the things we like or whatever you think can
Speaker 2: add value. That's not just a great bed on equities.
Speaker 2: Rising is always important. You always want to build the
Speaker 2: best portfolio you can. Is more important now than it
Speaker 2: normally is.
Speaker 5: Yeah, this is what Oswa thamzar And was talking about
Speaker 5: with has Linda, and the fact that we're in a
Speaker 5: pricing market right now. It's about momentum and vibes more
Speaker 5: than fundamentals. I want to ask about we have a
Speaker 5: really cool function on the Bloomberg E can go Eca
Speaker 5: and go and you can. We have AI now powering
Speaker 5: a search through companies earnings reports, and I ran a
Speaker 5: search here to see how often people mentioned machine learning
Speaker 5: and AI itself, and obviously you know it's blown up
Speaker 5: in twenty twenty three. And whenever I started thinking about this,
Speaker 5: at first, I thought a lot about you and AQR.
Speaker 3: Because how often do you think about me?
Speaker 5: Well with shanology to me, No, I mean I love
Speaker 5: to think about quants and how they can put this
Speaker 5: kind of thing to use. And I remember a couple
Speaker 5: of years ago reading a story about how you were
Speaker 5: hiring all of these you know, computer science guys from
Speaker 5: University of Chicago, and how much can you put a
Speaker 5: use and gain an edge over other people who are
Speaker 5: I hope, doing the same thing.
Speaker 2: Sure, well that's a separate question, and I do think
Speaker 2: i'll skip to the end on that. I do think
Speaker 2: the AI world will be far more dynamic than what
Speaker 2: you might call the quant factor investing world. You do
Speaker 2: a very good version of Warren Buffett's doing. You'll have
Speaker 2: bad times, but if you stick with it, I think
Speaker 2: the whole world can know about it, and you can
Speaker 2: still make money from.
Speaker 3: It, but we don't have to throw away the Benjamin
Speaker 3: Graham book.
Speaker 2: Now AI big data, alternative data sets will be I
Speaker 2: think a more constant arms race where you have to
Speaker 2: keep reinventing what you do. I'm actually optimistic we can
Speaker 2: do that, but it will have more of that element.
Speaker 2: AI is a really complex topic to even discuss about
Speaker 2: how a firm like ours is using it. If you
Speaker 2: guys want to give me a three hour segment and
Speaker 2: kill your ratings forever. I know it's hard to do
Speaker 2: AI in three minutes, but at our firm we're using
Speaker 2: at least three different ways. One is signal generation, literally,
Speaker 2: you know quant signals.
Speaker 3: We've always done that could be done better.
Speaker 2: The classic example is using natural language processing to look
Speaker 2: at written and verbal information and turn that into is
Speaker 2: this good news or bad news?
Speaker 3: Quants have done this forever. They've done it.
Speaker 2: Word counts, you see the word increasing, You do a
Speaker 2: plus one.
Speaker 3: That was very course.
Speaker 2: If the actual sentence was massive embezzlement is increasing, then
Speaker 2: plus one was probably not your best call. Quants only
Speaker 2: have to be right about fifty three percent of the time,
Speaker 2: so that's okay. Turns out NLP machine learning is better
Speaker 2: than our old methods at doing that. A second way
Speaker 2: we're using AI is how to combine our factors, how
Speaker 2: to weight them. This is a little annoying because you
Speaker 2: know the old joke or recession is when your neighbor
Speaker 2: loses your job, or depression.
Speaker 3: Is when you lose your job.
Speaker 2: AI is coming for me now because I've always been
Speaker 2: one of the AQO and makes kind of the final
Speaker 2: call on weights on how much you know, I don't
Speaker 2: do this every day. We're not traders, but what should
Speaker 2: be The final weights are not all model driven because
Speaker 2: you can overfit that way.
Speaker 3: AI is taking over some of that role.
Speaker 2: It turns out it's annoyingly better than me, So that's
Speaker 2: another way. Finally, just as a productivity tool, which is
Speaker 2: the most mundane, but just to code, AI is making
Speaker 2: everything faster and probably moving where you talked about that
Speaker 2: innovation cycle itself AI for a to use AI is
Speaker 2: there the other really kind of cool way to think
Speaker 2: about AI. And I probably slowed our firm down by
Speaker 2: a year or two on this. I think sometimes the
Speaker 2: old man's job at the firm is to slow things
Speaker 2: down when there's new stuff. But forever we've talked about
Speaker 2: not overfitting that. A danger of quantitative processes is you
Speaker 2: see things in the data that were random. You think
Speaker 2: you can trade them, but they weren't real AI. And
Speaker 2: the way you combat that, by the way, is to
Speaker 2: combine data with theory and common sense.
Speaker 3: AI, to be honest.
Speaker 2: Pushes us a little on the spectrum away from some
Speaker 2: of the traditional things we've talked about, and I was
Speaker 2: uncomfortable from me. You are surrending yourself a little bit
Speaker 2: more to the machine. If there's limited data, you still
Speaker 2: need some economic priors. If there's a lot of data,
Speaker 2: you sometimes don't. One of my partners, Brian Kelly, has
Speaker 2: written a paper with a title I love called the
Speaker 2: Virtue of Complexity, because everyone always talks about the virtue
Speaker 2: of simplicity, even I've had to adjust to a world
Speaker 2: where maybe simplicity isn't always the goal. Complexity can be
Speaker 2: the goal.
Speaker 3: You know, over and over and over, we.
Speaker 1: Have one Wall Street executive after another saying AI is
Speaker 1: not going to take your job. But you've come here
Speaker 1: and said AI's even coming for me in some respects.
Speaker 1: What does that mean about a job on Wall Street
Speaker 1: over the next five, ten, twenty years that's.
Speaker 2: The operative question is over what time horizon, Not to
Speaker 2: get philosophical, but on significantly long enough time horizon.
Speaker 3: It's coming after all our.
Speaker 2: Jobs, right, which is not necessarily a bad thing depending
Speaker 2: on the transition, you know, we get to a world
Speaker 2: of Star Trek with where we have a replicator that
Speaker 2: can make whatever we want. That's not necessarily terrible news,
Speaker 2: but it could be a lot of upheaval on the
Speaker 2: way to that. I think clearly so far at AQR
Speaker 2: it is certainly we've not shrunk because of AI. It
Speaker 2: has made our existing people more productive. Forecasting five or
Speaker 2: ten years down the road is of course a lot harder,
Speaker 2: and I'm not sure a quonkeeek who lives for diversification
Speaker 2: is the guy you want doing this.
Speaker 3: But increasingly.
Speaker 2: You have a job like doing an RFP a client
Speaker 2: wants questions answered. That's going to get much more AI
Speaker 2: over time. I doubt even on a ten year horizon,
Speaker 2: we'll get to a point where no human has to
Speaker 2: look at it. Right now, we are not at that point.
Speaker 2: I would not release something that was pure chat GPT
Speaker 2: to a client, But it's all about time horizing all
Speaker 2: this is coming, and I'm not the guy to do it,
Speaker 2: but how society adjusts to it, that's the question. You
Speaker 2: cannot stop technology. And I always laugh when I hear
Speaker 2: about people like we're going to stop automation.
Speaker 3: I'm like, good luck with that.
Speaker 2: You can slow it down at little bit and maybe
Speaker 2: let some other country beat us at it.
Speaker 3: But it's common for all our jobs.
Speaker 2: My wife went on a quest for our four children,
Speaker 2: we're all in the early twenties right at one point
Speaker 2: saying what jobs should they pursue that are most safe
Speaker 2: from a from AI and she concluded at the end,
Speaker 2: you just do what you're interested in.
Speaker 3: I can't figure it out, since she's pretty smart. Yeah, yeah, So.
Speaker 4: Cliff, we have less than two minutes left with you.
Speaker 4: I want to talk about market mechanics here, and I
Speaker 4: want to talk about leverage single stock ETFs. I was
Speaker 4: speaking with your new friend Mike Green from Simplify on
Speaker 4: Friday and we were talking about these leverage micro strategy ETFs.
Speaker 4: His belief is that that's helping to fuel this record premium.
Speaker 4: That micro strategy has to bitcoin itself, not specifically about
Speaker 4: that product, but you think about the proliferation of these
Speaker 4: types of products, what do you think that means for
Speaker 4: the market structure and the motion of markets.
Speaker 2: All right, I'm drifting from quant now. Whenever I give
Speaker 2: like broad opinions about market psychology, ye, you should weigh
Speaker 2: my opinion somewhat less than when I'm talking about AI
Speaker 2: or diversification because I'm a little out of my wheelhouse.
Speaker 2: But I do think if you look at valuation differences,
Speaker 2: we're still at a time of extremes. And that's not
Speaker 2: just the mag seven. You could do it within any
Speaker 2: industry you want and add them up. I wouldn't call
Speaker 2: it a bubble four years ago. I would have called
Speaker 2: it a bubble. But we still are a time of extremes.
Speaker 2: I think animal spirits are high. Keep hearing that it's
Speaker 2: you know, that's I don't know how to judge this exactly,
Speaker 2: but it's partly quantitative, looking at just the spread between
Speaker 2: what we think are reasonable and unreasonable price stocks, and
Speaker 2: part of it is qualitative, the part you shouldn't trust
Speaker 2: me on. But the part you shouldn't trust me on
Speaker 2: looks at the rise of say, aggressively levered ETFs and says, yeah,
Speaker 2: nobody needs those, And then you combine it with twenty
Speaker 2: four to seven trading. You know, if you're waking up
Speaker 2: at two am and you need a levered bed on,
Speaker 2: then you might want to reconsider not just your financial plans,
Speaker 2: but many things in your life. Extremely lebretytfs if you
Speaker 2: hold them long enough, are almost and I only say
Speaker 2: almost for legal reasons, are almost certainly going to lose
Speaker 2: their money. The volatility drag is very large if you
Speaker 2: rebalance them religiously. It depends on the costs that are
Speaker 2: embedded in them. If you use them for very short
Speaker 2: term tactical views, they can make some sense.
Speaker 3: And then I ask, why do.
Speaker 2: You have very short term tactical views, because very few
Speaker 2: of us, certainly including me, certainly in concentrated non quan
Speaker 2: not Jane Street, but you know two stocks. I don't think.
Speaker 2: I don't think these people have any information on it.
Speaker 2: So I do think it is a speculative tool, a
Speaker 2: symptom of some things that are still pretty extreme in markets.
Speaker 2: And well, this is clearly not investment advice, but I
Speaker 2: wouldn't use them. And I speaking of by the way,
Speaker 2: that was investment of ice.
Speaker 5: Speaking speaking of speculation outside of your wheelhouse.
Speaker 3: My boss does want me to ask this question. I'm
Speaker 3: like he's a quat.
Speaker 5: But how are you investing in Asia with the backdrop
Speaker 5: of Trump tariffs?
Speaker 2: Your bosses are asking me a stupid question. I would
Speaker 2: never insult you guys, but I'm very comfortable now.
Speaker 3: I'm kidding.
Speaker 2: We're investing like quant We are relatively actually really close
Speaker 2: to balanced by country and industry around the world.
Speaker 3: We don't. That doesn't make us ristless.
Speaker 2: We have bad periods when the styles we like, reasonable
Speaker 2: companies at good prices that are starting to turn around
Speaker 2: are not being favored.
Speaker 3: Not gonna be a fun time for us. But we
Speaker 3: have been very.
Speaker 2: Good over time at avoiding the big Thematic themes like
Speaker 2: tariffs are a lot about specific countries and specific industries.
Speaker 2: That's where they can play havoc. They can make real
Speaker 2: winners and losers.
Speaker 5: Can you use Trump one point zero as a blueprint
Speaker 5: for Trump two point zero?
Speaker 2: Oh? There are a lot of jokes that write themselves here.
Speaker 2: I think we're at a time it could work out
Speaker 2: very well. I'm not necessarily a pessimist, but I think
Speaker 2: we are at a time of elevated uncertainty. We can
Speaker 2: measure that. That's not just an opinion. You can look
Speaker 2: at dispersion and forecasts of earnings. Of economic forecasts, you
Speaker 2: can look at how bad they're missing when the numbers
Speaker 2: come out up or down. Dispersion is just about the
Speaker 2: size of the miss. It's elevated and as a soft sense,
Speaker 2: whether you love it or hate it, the Trump world's
Speaker 2: going to be very different than the prior world. So
Speaker 2: I do think economic uncertainty is larger. I'll give a
Speaker 2: blatant commercial I think things like trend following strategy strategies.
Speaker 3: That what are called positively convex.
Speaker 2: It's the geek term for they tend to do well
Speaker 2: in tumult are probably a better time. But mostly when
Speaker 2: it comes to picking individual stocks, we run away from
Speaker 2: your question.
Speaker 3: It wasn't a stupid question, it was just not the
Speaker 3: right question for a while.
Speaker 1: Another Trump question for you. We do have less than
Speaker 1: a minute left here, but do you think that the
Speaker 1: tax cuts, if achieved, will be fuel for the market
Speaker 1: as certain investors believe.
Speaker 2: They usually are in the short term? We do have
Speaker 2: You don't need me here to tell you we have
Speaker 2: a bit of a deficit problem that it doesn't appear
Speaker 2: that either party wants to take. We could talk about
Speaker 2: government getting more efficient.
Speaker 3: We could talk about the DOGE. Do they still pronounce
Speaker 3: it doze when it's a department?
Speaker 2: Still those even when it's the Department of Government Efficiency?
Speaker 3: I think, so let's doggy. I'm copying this from Twitter.
Speaker 2: Someone else said it, but it cracks me up that
Speaker 2: we have two guys heading the Department of Government Efficiency. Yes,
Speaker 2: it's like first thing, fire one guy. That's what either
Speaker 2: of them would do, and I'm not saying which one.
Speaker 2: I'm not going there. I do think we are in
Speaker 2: a world of more uncertainty. I think when it comes
Speaker 2: to stimulative things, the budget deficits are going to matter
Speaker 2: at some point. Many of us would have thought they'd
Speaker 2: matter twenty years ago.
Speaker 3: And have been dead wrong.
Speaker 2: So I'm not going to do the suckers game of
Speaker 2: trying to time when that matters. But at what point
Speaker 2: we consider something stimulative versus oh my god, we've gone
Speaker 2: too far is something I would be terrified to trade on.
Speaker 3: So I'm not trading on that.
Speaker 2: But that point does exist, so I won't make any
Speaker 2: firm forecasts. I just think we're in for an interesting
Speaker 2: ride in one direction or another coming up.
Speaker 1: Cliff, we thank you so much for joining us.