0:13

Hello and welcome to what goes up a

0:15

weekly markets podcast. My name

0:17

is Mike Reagan, I'm a senior editor at

0:19

Bloomberg and I'm Aldana hike across

0:21

acid reporter with Bloomberg and this week

0:24

on the show. Well, the Federal Reserve

0:26

surprised investors this week

0:28

by simultaneously raising their projections

0:31

for interest rates and lowering

0:34

their projections for economic growth. The

0:36

consensus seems to be that the nightmare

0:38

for investors in both stocks and

0:41

bonds this year is far from

0:43

over, unfortunately so.

0:45

With traditional strategies like the sixty

0:48

forty portfolio allocation under

0:50

continued pressure, what are the options

0:52

to investors really have? We'll

0:54

talk to a quant at a major asset management

0:57

firm who has some ideas about that.

0:59

But first, vil Donna, it's

1:01

been a while, UH, two

1:03

weeks without you. We missed you terribly.

1:06

You had quite an adventure, I

1:08

did. I went to Spain, as you know you did,

1:10

and when you came back I was

1:12

delighted to see you actually did bring

1:15

me some of that famous Spanish Ham don't

1:17

tell Bryan Duncan from

1:19

the Illinois Farm Bureau, but I snuck

1:21

some Hammond for you. You suck some of that

1:23

that delicious Iberico Ham.

1:25

And but when you brought it to me, I

1:28

was thinking, Vildonna does not look herself.

1:30

I thought either she's jet lagged or

1:33

she's just so disgusted by

1:35

having to bring this ham to me from

1:38

it was the last all the way across, but

1:40

it was actually the third

1:42

thing. You had covid and luckily

1:44

covid you cannot catch covid from

1:46

Ham. I've I've determined, thank God, thank

1:49

God you're okay, even though your covid germs

1:51

were all over. The Ham is delicious. That's what

1:53

I get for around

1:56

Europe. I was very worried about you, but now now

1:58

that I know you're okay, I uh,

2:00

I feel like you can take a little

2:02

ribbing. But how was the COVID adventure? You

2:04

were pretty sick. Yeah, I was kind of sick. I've

2:07

never had it before and I finally caught up with

2:09

me. I guess it's literally what I get

2:11

for going to Europe and having

2:13

fun. So

2:17

well, we're glad, so glad you're back

2:20

feeling good. The Ham was absolutely

2:22

delicious. I know you're

2:24

disgusted to carry around some

2:27

some swine for me, and it's very surprised.

2:29

I did not actually expect you to actually bring that. I

2:31

got you the top quality version it was.

2:33

There was like a two dollar version and there was like a seven

2:35

dollar version. I got you the seven dollar one. In

2:37

fact, I think you're probably not the only one sick

2:40

over that hand, because I was so hungry going home, I

2:42

actually opened the package and started eating

2:44

it on the subway and I hate.

2:46

Everyone hates so many eats on them,

2:49

especially a big pile of ham,

2:52

but I appreciate it. It It was delicious

2:54

good. Well, I do want to bring in our guests. Who

2:56

who? I don't want to keep him waiting too long. It's

2:58

George Patterson. He's a chief investment

3:01

officer at pgim quantitative solutions.

3:03

So, George, thanks so much for joining us

3:05

this week. Great to be here. Thank

3:07

you for having me and maybe,

3:09

uh, I can start out with just a

3:12

quick story, which is that I met you over the summer

3:14

at a pigym event and we talked a little

3:16

bit about you and about your background, and

3:18

you have a very interesting background. You actually

3:21

used to work for NASA right.

3:23

So I'm hoping you can just start out talking

3:26

about your your yourself a bit and how you ended

3:28

up with Pigym considering that background.

3:31

Sure, yeah, well, I'm one of the few

3:34

quantitative investors that can actually say they were

3:36

a real rocket scientist. I studied

3:39

physics both undergraduate

3:41

and Graduate School and, uh, after

3:43

graduating, my first opportunity

3:46

was as a post doc at the Jet Propulsion Laboratory

3:49

in Pasadena, California. So

3:51

I was there for two years. UH, great,

3:54

very great experience. Learned quite

3:56

a bit. There are no more rockets

3:58

at the Jet Propulsion Laboratory. It was

4:01

you know at this point, but there was a lot of space related

4:04

uh, you know, science and and physics

4:06

going on. My project was maybe a little

4:09

bit more tangentially related to space, but it was

4:11

a great experience. However, you know,

4:13

after some soul searching, I

4:15

became interested in quantitative investments

4:18

and Um found, you know, found an organization

4:20

up in San Francisco. What was then wells

4:23

Fargo Nico Investment Advisors. Became

4:26

Barclay's global investors and was

4:28

there for quite a large portion

4:30

of my career. I've been doing the same thing

4:32

quantitative investments, you know, typically,

4:35

you know, focused on serving large

4:37

institutions, and they've been doing that

4:40

since the mid nineties and a number of different

4:42

organizations at church. It's fascinating

4:44

to me how many people

4:47

with physics backgrounds, m I t types

4:49

like yourself, end up in quant investing.

4:51

What what is? Is it just the math background

4:53

or there or there's certain sort of

4:56

principles of physics that are just easily applied

4:58

to markets? Why is it, uh, that connection

5:01

that we see so often? Yeah,

5:03

I think it's I think part of it is the

5:05

math and Statistics and, Um,

5:07

you know, not being I

5:10

think the great thing about the physics background

5:12

is is that they really teach you not to be

5:14

afraid of of digging, going

5:16

into a new field where you you know, you

5:18

don't have anything, and really like taking it apart

5:21

and understanding what drives it. So I've

5:23

had several people who, you know,

5:25

are economists that have, you know, said

5:27

to me like, you know, I remember them

5:29

saying to me at one point like we're, you know, we're so

5:32

surprised, you know, that you've done so well. And

5:34

I said, well, that's because I don't listen to economists

5:36

who tell me something is impossible, because, you

5:38

know, I need to prove to myself that something can't

5:41

be done. And, Um, you know, a lot

5:43

of times you you know, like

5:45

you do, you don't want to get in the way of someone who's trying to solve

5:47

something that's not that that everyone else says is

5:49

impossible. So I think it's just that mentality

5:52

you get that you need to you

5:54

know, you need to challenge assumptions. You know,

5:57

you're always looking to disprove something

5:59

and, Um the thing I like, and I've

6:01

got a number of other physicists who worked for me, the

6:04

thing I really like about hiring, you know, people

6:06

with that background is many times

6:08

in this in this industry, you

6:10

know there's a particular project that's I

6:12

need someone to work on, and I may say go off and,

6:15

you know, look at look at this problem or

6:17

or look at that problem and and a lot

6:19

of times what you find is that, you know, research

6:21

is not easy, it's it's very challenging.

6:24

You'll find that maybe whatever

6:26

you set out to do is impossible. But

6:29

when you hire someone with a bit of a

6:31

science background, they'll always

6:33

find something interesting. So they may they'll always

6:35

come back to me and say, Hey, I didn't, we couldn't solve the

6:37

problem, or we we solve the problem, but there's

6:39

no there's no Alpha in it. But we found

6:42

several other interesting things that might be relevant,

6:44

and sometimes that's an important

6:46

part of the job. You just have to kind of follow your nose

6:49

to see where you know, where the opportunities

6:51

are. Research is not a linear process.

6:54

You don't say, you know, I'm going to go out and, you

6:56

know find uh, you know, a sharp

6:58

ratio three investment idea.

7:00

You know, you have to you know it may be out

7:03

there, it may not. Part of it is discovering it, Um,

7:05

and it's you know, you have to be you

7:08

have to be open to sometimes not necessarily

7:10

going, you know, where

7:12

the specific agenda is leading you. Yeah,

7:14

and of course now anytime, uh, someone

7:17

wants to make a stock go up on social media,

7:19

they use that rocket ship Emoji. So some

7:21

some more synergy there for for the rocket scientists,

7:24

and a lot of overlape. Yeah,

7:26

but George, Um, I know one area

7:29

you're interested in and I'm sort

7:31

of fascinated with is, um,

7:33

natural language processing, you

7:35

know, in other words using computers to

7:38

sort of read text uh

7:40

and interpret it. Uh. And when

7:42

we got a lot of words from Jerome Pal

7:45

this week, a fed statement

7:47

and a press conference, Um,

7:49

I feel like the you know, his

7:52

message was was pretty easy to understand.

7:54

You know, we're we're gonna hike rates, WE'RE

7:56

gonna keep hiking rates aggressively until

7:59

inflation is tamed. But I'm

8:01

wondering, from UH quant perspective,

8:03

from a natural language

8:06

processing perspective, is there

8:08

something more that a computer, uh

8:10

program can, can glean from a

8:13

press conference like that, uh,

8:15

and the statement, or is it just a matter of of

8:17

being able to react quickly to it, uh,

8:20

with trading algorithms? You know, how does how

8:22

does UH natural language

8:24

processing fit into an event like that

8:26

this week? So

8:28

so there's several things, Um, that

8:30

that I would say are relevant. Uh. You

8:32

know, I'm sure there's a lot of people

8:35

out there that are running, you know, very

8:38

short horizon strategies, looking

8:40

at what words he chooses to use and

8:43

and like specifically, like the questions and

8:45

answers that come out of that, and are looking to

8:47

kind of uh Um,

8:49

you know, talk, you know, get in or out

8:51

of the market very quickly to take advantage of

8:53

kind of a short term movement. I think

8:55

the real advantage, however, of language

8:58

processing is just that you can

9:00

go into depth, you know, you can read a

9:03

ten K and and analyze a

9:05

lot of aspects of it and you could

9:07

do that for two or three of them, but it might take

9:09

you, you know, it could easily take you half a day or a

9:11

day each. The advantage of language processing

9:14

is that you get the breath, so you can do

9:16

three thousand of these, you know, in

9:18

a matter of, you know, minutes or maybe half

9:20

an hour, depending on what what type

9:22

of models you're running. But it's a combination

9:24

of the breath and the timeliness, I would say,

9:26

that makes it relevant. And if you think about

9:29

humans, like so much of our intelligence,

9:31

so much of our knowledge, is really encoded

9:34

in writing. You know, we've been

9:36

collecting numerical data for some time, but

9:38

people have been generating written texts,

9:40

you know, since the beginning of of you know, the

9:43

beginning of kind of putting text down on

9:45

paper. Um. So there's

9:47

just a huge amount of information that comes out

9:49

and there's a lot of value in there. Is What we

9:51

have found. So it's been one of the most

9:54

uh relevant areas for us,

9:56

you know, over the past few years to extract information.

10:00

Well, one of the words that kept

10:02

coming up quite a bit during the power

10:05

press conference was the word pain, and

10:07

I read a bunch of notes after after

10:09

his press conference, pointing this

10:11

out specifically because of the market

10:14

reaction that we saw on

10:16

Wednesday afternoon. So maybe can you just lay out

10:19

what, in your view, actually transpired

10:21

with the power press conference and what we got from

10:24

from the F O M C and what

10:26

you make of how the market reacted?

10:29

So my view is is that, you know, it

10:32

over the summer with some earlier

10:34

with some earlier statements from Powell,

10:36

he he tried to

10:39

portray a very, you

10:41

know, serious view about taming inflation

10:43

and he came away saying that you know,

10:45

we're gonna WE'RE gonna do it. But he was maybe

10:48

just a little bit too dubbish

10:50

and you know, we saw a very

10:52

large rally and markets over the summer

10:54

as the result of that, even though a number of other

10:57

fed speakers came out and

10:59

and really were Um,

11:01

you know, kind of we're much more pessimistic about

11:03

things. So I think really since then what we've

11:05

seen is he has just had to be extremely

11:07

clear that they are gonna get their

11:10

job done and you know it's

11:12

gonna it is going to cause some disruption.

11:14

I think. I think some of his earlier statements

11:16

he was trying to be a bit more balanced. But

11:19

I think now, given the market's reaction, he has

11:21

just he has just realized that he has to be extremely

11:23

clear about where things going, where

11:25

he things are, things are going. I don't forget

11:28

it is a challenging economic outlook,

11:30

but it follows several years

11:32

of huge gains in the market. So you

11:35

know, if you look over a longer period of time,

11:37

you know we've we've had a lot of gains in a short period

11:39

of time. So it's not unrealistic to expect

11:41

a little bit of give back in the next you know,

11:44

the next year or two. Judge,

11:46

as I said in the Intro, uh, you know, brutal

11:48

year for both stocks and bonds. That sort

11:51

of traditional sixty forty portfolio

11:53

is uh, has hit hard

11:56

times. Uh, to say the

11:58

least. I imagine for a guy in

12:00

your position there's uh, you know, a

12:02

lot of clients out there saying get me a rocket,

12:04

scientists on the phone. We gotta figure out something

12:06

else that works. So

12:09

so from a quand perspective. Um,

12:11

I know there's some stuff that's working spectacularly.

12:14

This year I did a story on trend

12:16

following and mauntaged futures.

12:18

Commodity trading advisors who are are really

12:20

doing really well this year just by

12:23

uh, sort of, you know, following

12:25

the chart down when when, uh,

12:27

you know, stocks are going down, when yields

12:29

are going up, just just following the trends. But what else

12:32

is is um sort

12:34

of a solution from a quant perspective

12:37

for a challenging environment like this? What are

12:39

you telling those clients looking for

12:41

something to either, you know, get

12:43

some kind of return this year or at least protect

12:45

the wealth they have? Yeah,

12:48

so, you know, there are several different

12:50

things. I mean, first of all, we do have several

12:52

offerings that that focus on trend

12:54

following or kind of global macro strategies

12:57

or tail hedging, and you're right, those have

13:00

very successful. This is kind of the perfect

13:02

economic environment where you do have big

13:05

movements as well as some big inconsistencies

13:07

across the globe. For example, looking at Japan

13:10

and how you know they're, you know, everyone

13:12

else's raising rates in Japan is really not and

13:14

you know we're we hear a little bit now about trying to have

13:16

to defend the end. However, Um,

13:19

you know, there's a couple of other things. One is commodities

13:22

and and other and the other would be real

13:24

assets in general. Maybe the last one I would talk

13:26

about would be some downside protection. So

13:29

commodities and real assets are, you

13:31

know, we've seen kind of a big run up in commodities

13:33

and a bit of a retracement, but over the long

13:35

run, you know, there's a lot of research that

13:37

shows that commodities do very well in

13:39

this type of environment. Um,

13:42

you know, we you know, our view is that

13:44

the fit is going to be successful and taming inflation,

13:47

but it's also going to take a little bit of time. It's not

13:49

going to come down very rapidly

13:51

and you know, we think there's a lot of opportunities

13:54

for commodities in someone in in

13:56

a portfolio. So that's that's

13:58

one area. Um, commod these, I think,

14:00

also of real assets, you know, Um,

14:03

you know, whether it's real estate or or

14:05

other, you know, direct

14:07

real investments that are also typically

14:10

do very well in inflationary times.

14:13

I think the other thing that we see a lot of conversations

14:16

about his downside protection. How do you

14:18

build a strategy that can either hedge a hedge

14:20

tail risk or just, you know, deliver

14:23

most of the upside while limiting the downside?

14:26

And there again there's a number of different solutions

14:28

we offer in that area. So those that say are the main the

14:31

main subjects that we've been talking about. Two

14:33

clients we've seen the most interest

14:36

in George. Can you talk a little bit

14:38

more about that, because I know you sent us some notes before

14:40

the podcast. You said, Um, it's important for investors

14:42

to consider defensive strategy.

14:44

So what specifically? Maybe you can just go a

14:47

little bit more into detail. Yeah.

14:49

So, so, you know, a lot of times

14:52

if you look at a long term investor,

14:54

a long term success and

14:57

what you'll find is that it's

15:00

it's it's important to participate in the

15:02

upside, but it's probably more important

15:04

to avoid a large draw down.

15:07

So you know the draw downs are very difficult

15:10

because if you have like a tem per cent draw down, you

15:12

need more than ten percent to recoup

15:15

the return. Just mathematically,

15:17

a temper cent draw down allowed by temper

15:20

cent gain doesn't get you back to where you're started.

15:22

So if you have some ability

15:24

to either avoid or limit

15:26

those draw downs over long periods

15:28

of time, that can be very beneficial

15:31

to uh, to to an investor.

15:33

And if you think about it, there you know it's valuable

15:35

to an institution, but for a person. It's

15:38

even more important, you know, particularly if

15:40

you get into the you know, kind of like

15:42

five to ten years before and after retirement.

15:45

Um, you have to be very careful because that's kind

15:47

of the period of time when, if you have a draw

15:49

down, uh, it could be very

15:52

detrimental to like retirement savings.

15:54

So so there's a number of different, you

15:56

know, number of different Um ways that

15:58

you can get into. You

16:00

developed drawing out your strategies that do well.

16:02

I mean in some occasions people look at

16:04

low ball strategies. We have a

16:06

different approach that kind of combines

16:10

Um, you know, both market and fixed income exposure

16:13

with with Um with

16:15

some optionality to basically give you

16:17

downside protection but at

16:19

the same time participate in most

16:21

of the upside. So it's something

16:24

that, from our perspective, should have

16:26

a should have a place in in many portfolios.

16:35

You mentioned, uh, real assets.

16:38

I would mind unpacking that a little

16:40

bit. I mean I think there's this this huge uh,

16:43

curiosity and demand for sort

16:45

of alternatives, liquid alternatives,

16:48

you know, stuff outside

16:50

of the traditional stocks and bond

16:52

markets and wherever that

16:55

takes you. But obviously liquidity can

16:57

be an issue with alternative

16:59

assets. What looks good

17:01

to you from from that perspective, you

17:03

know, Um, and is it? Is it tough

17:05

for a quant to sort of apply your methods

17:08

to non traditional markets like that? I

17:11

don't think it's tough to you know, they're different

17:13

structures, but no, I think in many ways,

17:15

you know, being being, having a quantitative

17:17

approach allows us to put some sort of

17:19

consistency across the

17:22

you know, the different types of asset classes. And

17:24

when we think about things, we think not about just

17:27

risk and return, but we also think about draw

17:29

down, we think about, you know, kind of skewness,

17:31

we think about liquidity. So I mean, from

17:33

my perspective, from the you know, a quantitative

17:35

approach, you know, definitely compliments

17:38

Um, you know, more more traditional

17:40

approaches. So I liquid assets.

17:43

You know, private assets has been extremely

17:45

hot. You know, I'd say the last few decades

17:48

Um, we've seen a huge amount of money go into them

17:50

and you know that those assets have done quite

17:52

well. Your private assets definitely have a

17:54

place in in an institutional investor's

17:56

portfolio. The challenge really, as

17:58

you mentioned, is liquid it, because some of these

18:00

investments, you know, not only require

18:03

you to make an investional initial investment, but there's

18:05

also ongoing capital calls.

18:07

So you know, what we have seen some

18:10

clients experience is that you know, if

18:12

you have a combination of liquid and a liquid investments

18:15

and the liquids are requiring capital,

18:18

you know if you have that, you know if

18:20

you have that money invested in like equities,

18:22

you might have you might be forced to sell equities

18:25

at the worst possible time because you need to make

18:27

a capital call. So so

18:29

they're the question is not so much about

18:31

looking at what's the maximum return

18:33

I can get, but how does this fit into my portfolio

18:36

and what is this going to cause me to do in a in

18:38

a period of extreme stress? I mean,

18:40

that's really the case. I mean, liquids are great,

18:42

it's just you need to make you need to kind of go in

18:44

the as I say, Eyes Wide Open in

18:47

terms of looking at the opportunity

18:49

and understanding how it's going to fit into your into

18:51

your objectives. So

18:53

we all know, Tina, there is no

18:56

alternative and we've all been talking about it for such

18:58

a long time. But the thing that I'm hearing out is

19:00

Tia, which is there is

19:02

an alternative. Two stocks. I don't know if

19:04

you've also been thinking about this or hearing about

19:07

this, but I'm one of you. What you

19:09

make of this idea that there are alternatives

19:11

now? And you know, somebody I spoke

19:13

with earlier this week said you can hold your nose, for

19:16

instance, and go into high yields. So what

19:18

do you make of some of these alternatives? Now? I

19:20

think it's unfortunate that people are always

19:22

comparing everything to the SMP, right

19:24

so that the goal is to build a

19:27

portfolio that gives you alternatives

19:29

and outperforms the SMP, and I think that

19:31

that's that's a little bit of a

19:33

high bar. I think the goal of alternatives

19:36

is more to provide diversification and

19:38

stability and is and is less

19:40

about can I specifically outperform

19:42

the SMP or can I specifically outperform

19:45

a specific target? I mean, obviously

19:47

you want your alternatives not to be, you

19:49

know, to provide the diversification, you want

19:51

them to be reasonably priced and obviously

19:54

want you want solid performance. But sometimes

19:56

people, I think, are a little myopic just saying okay,

19:58

I want to alternative, but us to do better than then

20:01

this investment or that investment. So you

20:03

know, I think of alternatives much more in terms of risk,

20:06

risk control and um

20:09

and really it's about figuring out what your investment

20:11

bowl is and designing a program that

20:13

that's going to get you there, as opposed to,

20:16

you know, what's the what's the highest possible

20:18

return I'm going to get over the next month or six

20:20

months? I mean, the world today

20:22

is amazing in terms of what you can get. I

20:25

mean you you know, when I was growing up it

20:27

was, you know, stocks and bonds. Now

20:29

you know, there's all kinds of uh,

20:32

you know real estate, you know, publicly

20:34

traded, privately traded. Um,

20:36

you know fractional assets. You

20:39

know where you can buy fractions of real

20:41

estate or fractions of a painting. And

20:43

I mean we, we've just like the access

20:46

to these things has become, you

20:48

know, a little scary in all honesty, and that like

20:50

you can really get into many different things that,

20:53

uh, look, some of this I think is probably good,

20:55

but some of it is is maybe stretching a little too

20:57

far. Bildna got

20:59

me a fract of a Spanish hug. That

21:01

was that's the best asset I've had. That was

21:04

that was a good, yeah, alternative asset. But,

21:07

George Um, you mentioned something earlier

21:09

on that. I want to sort of rewinding. Get

21:11

back to and that is that you said

21:13

you do think the Fed is going to be successful

21:16

in taming inflation, but it's gonna take

21:18

a while and I don't want to put you on the

21:20

spot, I know, I know no one wants to predict

21:22

that inflation is gonna peak at at this percent

21:25

on this date, but I wonder

21:28

how you're thinking about how that taming

21:31

of inflation is going to play out. Um,

21:34

you know, are we bound to sort of retest

21:36

the market lows from June and maybe even set

21:38

new lows? And equities, uh,

21:41

you know, our our bond is going to continue to suffer.

21:44

You know what what's what's sort of the near

21:46

future look like? Uh, to you?

21:48

As far as, uh, what

21:50

the Fed is doing to fight inflation? These

21:52

are unique times and and I don't

21:55

have h you know, I try

21:57

to not make specific

22:00

or term predictions because, you know,

22:02

my view is the way to be successful is to have a

22:04

long term perspective and to be focusing

22:06

on the fundamentals that are driving the market. I

22:09

would say, you know, when

22:11

we look at inflation, we look at the components of inflation.

22:14

You know, there are some components, like housing, that

22:16

have been driving housing. That driving

22:19

the recent numbers up, and we

22:21

know that's a slow moving component, right.

22:23

So even if they even if they jacked

22:25

up rates focus style, you

22:27

know, overnight, it's gonna take time

22:29

for that to flow through. The other

22:31

thing is that, uh, you know,

22:34

a lot of research shows that these

22:36

increases really take time to impact

22:38

the market. So, you know, we're still,

22:41

you know, we're still raising right now while

22:43

the first increase is really filtering its way

22:45

through. Something might happen very quickly in

22:48

the in the financial markets, but in terms

22:50

of like how these impact of consumer it

22:52

takes a long time. So, you

22:54

know, that's part of the reason I think it's gonna I mean,

22:56

I personally think inflation may have

22:58

peaked. So, however, I

23:00

don't think it's gonna we're not. WE'RE NOT gonna Kinda

23:03

go back down to two percent overnight.

23:05

I think it's gonna be. I think it's gonna Mut be a

23:07

multi year UM

23:09

multi year trend. I

23:11

think, you know, it is gonna be. As long

23:13

as you are raising rates, you know, and tightening

23:16

financial conditions, it is going to be challenging

23:18

for Equity Markets and likely mixing about

23:20

markets. Right. Uh, you know,

23:22

George, you you said something there too that I

23:25

find fascinating. You say it's such a unique environment,

23:27

and I wonder as a as a quant, you know, you're

23:30

so used to dealing with historical

23:32

data sets, Um Um, and

23:35

when you think of this environment we're on like

23:37

the closest comparison, obviously, like

23:39

you said, is the eighties. That that really

23:41

high inflation and the Paul

23:44

vocal fed really trying to

23:46

fight it with with both fists Um.

23:49

But when you go back, you know, when you're running

23:52

regressions and stuff and looking at at

23:54

your available data, when you get to the nineties

23:56

even and the eighties, you know you're so limited

24:00

in the amount of data you're able to

24:02

sift through. Does that does

24:04

that make it harder for a quant or

24:06

is it, you know, just a matter of like you

24:09

know, for example, with trend following? Well, you

24:11

don't really care what the fundamental,

24:13

fundamental data was so much back then. If if

24:15

the trends doing this, we're gonna follow

24:18

it. But you know what's what's it like for a quant

24:20

dealing with unprecedented

24:22

times, or at least times that are unprecedented?

24:25

Is as far as the robust

24:27

sets of data go. So

24:29

one of the most rewarding parts of my job is getting

24:31

to mentor young people in the field

24:34

that you know, young portfolio managers and researchers

24:36

on the quant side, and the thing I always

24:38

tell them is, you know, remember

24:41

you are an investor first and a

24:43

quant second. So you know

24:45

you cannot blindly follow the data.

24:47

You cannot Um. I mean it cannot

24:50

just because of the historical relationship. You can't say

24:52

we're going to use that. You have to think and understand

24:55

what drove that and is there

24:57

relevance? You know, one of the interesting

24:59

thing things is when you're in the world of academia you

25:02

want to build a model to predict

25:04

something new. You know, you design

25:07

find a model and say, well, it can I make a prediction about

25:09

some part of the world that no one's ever seen and

25:11

and test whether the models right or not. From

25:14

an investment perspective, I don't want my model

25:17

to have to be encountering

25:19

new scenarios that have never been tested.

25:21

I want to make sure I've got some relevant data.

25:23

And you're right, it is very challenging the

25:25

further back we go to be able to

25:28

to be able to Um, to use

25:30

data and say hey, I've got I've covered every possible

25:33

scenario and that's really where you

25:35

have to rely on traditional

25:37

fundamental investment insights and you

25:39

have to pair those two. Now that's

25:41

a lot less relevant if you're running a high

25:43

frequency strategy that holds stocks like

25:45

you know, or a fraction of a day or a nanosecond.

25:48

You know, you can you there. You could be purely

25:51

model driven, but if you're thinking longer term,

25:53

you do. You really need to make sure that your

25:56

your model is calibrated but

25:58

also has been exposed to different

26:00

types of regimes that that you might be in.

26:04

And I don't know if you and your team put together

26:06

projections in terms of what to expect from the Fed,

26:08

for instance, for the remainder of

26:11

this year. Does it look like we're going to get another

26:13

seventy five basis point hike in

26:15

November and a fifty basis point hike

26:17

in December? What are what are you expecting?

26:20

So so we do? We do monitor

26:23

kind of how futures are pricing the scenario,

26:25

the different UH projected

26:27

rate hikes. You know, personally, I

26:29

think you know, there's there's an element

26:32

of this which is mathematical, which is what

26:34

is the rate that they need to obtain. I think there's

26:36

also a psychological aspect to let people

26:38

know that they're very serious. Um. So,

26:40

you know, we were. We do think that they're

26:43

going to continue the pace of

26:45

hikes really until they see inflation

26:47

start to materially roll over. It looks

26:49

like some areas have begun to slow but it's

26:52

still it's just it's to the

26:54

risk for them is that they become viewed

26:57

it as less credible and I think that they're going

26:59

to do what need to do. So yeah, I mean, you

27:01

know, while this isn't particularly a how it spew

27:04

are you know, my personal view is I wouldn't

27:06

be surprised to see another material rate

27:08

just to kind of cement in the fact that they're

27:10

so serious about gaming inflation,

27:13

which, look, I think is good for everyone in the long

27:15

term.

27:30

At George, what they're gonna and I'm wondering

27:32

if you've thought about this or studied it at

27:34

all, but one of the big themes this year, uh

27:37

and really recent years,

27:40

has been the options

27:42

market. Inequities seems to be sort of

27:44

the tail that's wagging the dog sometimes. You know,

27:46

you have options expirations

27:49

in the middle of the month and all of a sudden

27:51

there's volatility either to the upside

27:53

or the downside. That seems to be uh,

27:56

completely related to, you know, the

27:58

options gammaging and that sort of thing.

28:01

Have you looked into that at all? And and and is,

28:03

you know, not

28:05

selling Jerry Seinfeld, but what's the deal with

28:07

that? You

28:09

know, it's it's amazing and it

28:12

really seemed to kind of pick up after, you

28:15

know, after the lockdown, Um,

28:17

that all of a sudden there's just a huge

28:19

amount of interest in options

28:22

and meme stocks. And Yeah, we have seen

28:24

that. There are situations where, you

28:26

know, the tailor is wagging the dog and some and some

28:28

names and that option activity has just

28:30

exploded. Um, you

28:32

know, personally, I use the best indicator

28:35

I use is what my, you know, teenage

28:37

kids friends are asking me. and Um,

28:40

you know, a few years ago it was crypto and

28:42

then now they're all interested in options. You know,

28:44

they don't want trade stocks, they want to trade bonds. They're

28:46

going right to options right Um,

28:48

and it's like, okay, there's limited downside.

28:51

I lose the premium, but there's

28:53

no question that like all of a sudden, you know,

28:56

the retail interest

28:58

has just, you know, sky rocketing.

29:00

Options I think it's. I think it's coming down a

29:02

little bit now, but it's just, you

29:04

know, there's this you know, it's the it's

29:06

the greater fuel theory. Right, I'm I'm

29:09

I'm buying something because I just expect

29:11

to sell it in a few days at a higher price.

29:13

But there's no particular you know, it's

29:15

I'm just doing that because markets are going up

29:17

and you know, you

29:19

know that's great as long as it works, but

29:21

as soon as it stops working, all the

29:24

people that have been drawn into that change

29:26

their view. Yeah, is it's sort of a dead

29:28

end street to try to try to uh,

29:31

find patterns there and trade off of

29:33

them. You know, to the fundamental sort of went out in

29:35

the long run. Um Metal.

29:38

Look, fundamentals went out in the long run, but

29:40

there's no question that there's hurting right. There's

29:42

no question that when you know, some of

29:44

these trends become established in certain names,

29:46

they're going to start. They're they're gonna get there.

29:48

It's not gonna play out overnight. They can

29:50

it can go on from like weeks to months.

29:53

Um. Our view is that we tend to

29:55

focus on longer term trends and

29:57

we try to stay away we don't want to

29:59

be, you know, we don't want to be the you

30:01

know, the snail in front of the steam roller. So

30:04

like if we see, you know, a huge wave

30:06

of retail interest coming a lot of time,

30:08

we just want to we want to be patient and avoid

30:11

that and let that lay out a little bit,

30:13

because then we think there's a better opportunity

30:15

for the types of information that we

30:17

process, which tends to be a little bit more longer

30:19

horizon in terms of our holdings. And

30:22

George, we talked about Tina and Tia,

30:24

but I'm wondering what you would recommend

30:26

to somebody who would like to be sitting in cash right

30:28

now. Uh,

30:31

you know, in all honesty, cash is not

30:33

a bad place right now. Um, you know,

30:35

obviously, uh, it's costing you something

30:38

in terms of inflation. Um,

30:40

you know, there are some us uh

30:43

I bonds that that give you some

30:45

reasonable inflation protection, but there's a lot of

30:48

there's limits on how much you can buy of those.

30:50

Um, cash is not a bad place to be in

30:52

the short term, I mean inflation. It hurts

30:54

you over long periods of time. It's

30:57

less relevant over short periods of time. But

30:59

Um, okay, I've got a decent

31:02

allocation to cash because, Um,

31:04

you know, it's it's part of the providing

31:06

downside protection. Well, George's

31:08

fascinating stuff there. It's great to get

31:11

your perspective. Um,

31:13

we won't let you leave, though, until we get

31:15

to our little gimmick

31:17

tradition here on the show, which is the craziest things

31:20

we've seen in markets this week.

31:23

UH, Bill Donna, you know you

31:25

started off on this podcast before you were

31:27

a co host. Remember, your title was chief

31:29

crazy things correspondent. Yeah, it was

31:31

really good stuff.

31:34

I think we're gonna have to replace you with this guy, twiggy

31:37

Sunday, from twitter.

31:39

I assume that's assumed. That's his real

31:41

name, real name? Definitely? Yeah, that definitely his

31:43

real name. He's hit me with a bunch of crazy

31:46

things this week, so I'm gonna I'm relying

31:48

solely on him for mine. But let's start with you. And

31:50

what's The craziest thing you've seen in markets?

31:53

This one probably a lot of people already

31:55

know about. So if you spend any time on twitter, you probably

31:57

saw this story. But the beyond

32:00

meat, the CEO, sorry,

32:02

their chief operating office beyond, Do

32:06

you know this story? Wait, that wasn't like beyond meat,

32:08

him, Iberico, him that you brought me. Was

32:10

it you got?

32:12

You got real hamp but beyond meat

32:14

suspended its chief operating officer

32:17

after he bit a man's nose.

32:20

Why you didn't hear of this? I

32:22

did, but I thought I dreamed

32:24

it. That really happened. No, this really happened. It's

32:27

just so ironic. It's a it's a non

32:29

Meat Company. He bit somebody's

32:32

nose, someone in the nose.

32:34

Yep, he's been suspended and it's

32:37

just I mean, I love thinking

32:39

about like these meat alternatives, as

32:41

you know, but shares of beyond meat, I checked

32:43

before, the podcasts are down seventies this

32:46

year and I think partly it's

32:48

because those alternatives are

32:50

much more expensive, like buying for fake

32:54

meat patties is much more expensive than buying

32:56

buying for hamburger patties. So

32:59

and having a guy go to I'm biting people in the nose,

33:01

one would assume I'm no quad George, but I would assume

33:03

that's not good for a stock person in general.

33:06

That's pretty good. Well, how's

33:08

the nose? How's The continently?

33:11

So this was in the stories. Apparently he literally

33:14

actually bit off a piece of the nose.

33:16

Come on, there

33:18

was some at least some damage. Oh

33:21

my gosh, that is that is truly

33:23

a crazy thing. How about you, George? You see anything

33:25

crazy in markets recently? You

33:28

know they's been all of these Um, you know, depreciating

33:31

assets, with cars and boats in particular,

33:33

there's a period of time that you know there

33:36

was such a short demand, short supply, that you

33:38

know you could take an old bunker that you

33:40

know it was probably worth nothing and sell

33:43

it more than you paid for it, even adjusting

33:45

for inflation. So you know there were we had

33:47

a few old cars around and, Um,

33:49

you know, during this time I sold

33:51

one or two of them in a matter of days. That amazing.

33:54

Um. Yeah, so maybe

33:56

it's probably not the situation now, but

33:59

I've heard it's the same ingod boats. You know that there's

34:01

such short supply of boats and

34:03

demand has held up very well that people have been

34:05

able to sell boats, which the

34:08

ultimates appreciating asset, for

34:10

for a profit. I know, I was gonna say what's

34:12

what's the old joke that the happiest days of a voter's

34:14

life is the day they buy the boat, that the day they

34:16

sell it? I guess. Well, here's

34:19

twiggies tweets to me, which

34:21

offer us a great opportunity to play

34:24

our little game. Show the prices

34:26

precise here. Okay,

34:28

Vildana, the most followed

34:31

influencer on Tiktok

34:33

is a guy named Kabi Lane

34:37

him me, neither I.

34:39

Uh. My kids make fun of me because I watched

34:41

the reels on instagram and they say those are all

34:43

just Tiktok's that are like three, three weeks

34:46

old. So that's where I'm at on the TIKTOK.

34:48

Yeah, yeah, so

34:50

I'll probably get to this guy in a few, few weeks.

34:53

He'll be a hundred and forty nine,

34:55

almost a hundred and fifty million tiktok

34:58

followers for this guy. So

35:01

he gets some sponsored posts to

35:03

put something on Tiktok. So try

35:06

to think what the highest payment

35:09

he's gotten for a single post. Okay,

35:12

so that's on one side. On the other side, twiggy

35:15

sent me the golf

35:17

bag and that's sorry. By the way, it was courtesy

35:19

of Fortune magazine. They have an interesting profile

35:22

on this guy from tiktok. The other ones from

35:24

Golf Digest. It was the bag that

35:26

tiger used, his golf bag in

35:28

the two thousand and five season, which

35:31

was a good season for him. I think he won

35:34

the British open and he won

35:36

the masters. He was aged nine. So

35:38

the question is, and George, I hate to

35:40

inform you, but you're now contestant on the prices

35:43

precise as well. And

35:46

I ask you both. which do you think it was more

35:48

valuable? One Post from this guy on

35:50

Tiktok were tiger woods,

35:52

two thousand and five golf bag, and

35:55

give me a number that you associate

35:58

with the higher one. Well, I think the Kardashians

36:00

something like two hundred or two hundred fifty

36:02

thousand pro post sometimes,

36:04

I think. So I'M gonna go with one

36:07

fifty for for the guy and

36:09

that the bag is worth more. Now

36:12

remember this is this is the most he's ever

36:14

been paid for a post. So that the top tick

36:17

of this guy's influence your career.

36:19

You'RE gonna go with not. Not, not

36:21

like his average. Yeah, we don't know his mean.

36:24

Okay, I

36:27

think that you're telling me that it's more than that. I'll

36:30

go. I'll go with you

36:33

think the bag is worth so then

36:35

the then that makes a bag worth less,

36:38

I think. Do you think the bags worth less, George?

36:40

What do you think what's what's more valuable? One Post

36:42

from this guy or Tiger's two thousand

36:44

and five golf bag? You know there there's a

36:46

lot, there's a lot of people that are obsessed with golf.

36:49

When you get you get that there's only one

36:51

bag from tiger right from

36:54

that year. So I'm going

36:56

with that. Is more expensive, more

36:58

expensive items. I would have gone

37:00

with the golf bag as well, especially

37:02

you never know, maybe there's some some free

37:05

teas and balls in there somewhere, little

37:07

tiny pencils. But this

37:09

guy. Top payment for

37:12

this guy's Tiktok was seven D and fifty

37:14

thousand dollars for one post, for

37:16

one single post, so more than the Kardashians.

37:20

Yeah, I don't get it. That's like

37:22

a mansion. Um.

37:25

Tiger's bag thousand,

37:28

which seems s low to me. George, I don't know. I would have

37:30

thought real assets right. I would have thought the real

37:32

asset would have won. But, George,

37:34

such a treat to catch up with you and hear

37:37

your insights. We we really appreciate it, uh

37:39

and we hope somebody will come back and

37:41

do it again. Look for George on Tiktok

37:44

and we're on Youtube now, by the way, the podcast

37:46

is now on Youtube, so look for us

37:48

there if you uh can't find us on

37:50

all the other places. I've also the track of everywhere.

37:53

There's a lot of places. Yeah, yeah, but

37:55

if you tube's your thing, maybe some people prefer

37:57

Youtube. I don't know already. Thanks George.

37:59

Thank George.

38:08

What goes up. We'll be back next week, and so

38:10

then you can find us on the Bloomberg terminal website

38:12

and APP or wherever you get your podcasts.

38:15

We love it if you took the time to rate and review

38:18

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38:22

us on twitter. Follow me at Reag anonymous

38:25

bill. Donna Hirich is at Bildonna Hirich.

38:28

You can also follow Bloomberg podcasts at

38:30

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38:32

up is produced by Stacy Wang. Thanks

38:35

for listening. See you next time.