Latest / Masters in Business / Kenneth Tropin on Quantitative Hedge Fund Strategies

Transcript

Kenneth Tropin on Quantitative Hedge Fund Strategies · Masters in Business

0:02
Speaker 1: This is mesters in Business with very Results on Bloomberg Radio.
0:08
Speaker 1: This week on the podcast, I have yet another extra
0:13
Speaker 1: special guest, and this is really a fascinating, extra special
0:17
Speaker 1: guest who you probably never heard of, but you should.
0:21
Speaker 1: His name is Ken Tropin. Uh. Where do I even
0:25
Speaker 1: begin with him? He's a member of the Futures Hall
0:28
Speaker 1: of Fame. Uh. He's the chairman and founder of Graham
0:32
Speaker 1: Capital Management, which runs eighteen billion dollars and has amassed
0:36
Speaker 1: a quite a track record. Uh. He used to work
0:40
Speaker 1: with John Henry, currently the owner of the Boston Red
0:43
Speaker 1: Sox and another successful hedge fund manager. He worked with
0:48
Speaker 1: Paul Tutor Jones. The list of people he knows and
0:52
Speaker 1: has um trained with and under is quite astonishing. Uh.
0:57
Speaker 1: The firm that he's built is one of those very quiet,
1:04
Speaker 1: very successful um entities that without a whole lot of
1:09
Speaker 1: media coverage, without a whole lot of fanfare, just amass
1:13
Speaker 1: an enormous amount of capital because they've done so well
1:17
Speaker 1: for their clients over time. UM. I found the conversation
1:21
Speaker 1: with Ken to be absolutely fascinating, and I think you
1:26
Speaker 1: will also if you're at all interested in macro investing
1:31
Speaker 1: trend following commodities, currencies, fixed income, various types of quantitative strategies. Uh,
1:40
Speaker 1: and most important of all, risk management. You're gonna find
1:45
Speaker 1: this conversation to be absolutely fascinating. With no further ado
1:48
Speaker 1: my interview of GCMs Ken Tropin, I want to start
1:53
Speaker 1: with your background. You began at Sheerson in the nineteen eighties.
1:58
Speaker 1: Tell us a little bit about those days. Well, you know, uh,
2:02
Speaker 1: here we are um at a very different place and time,
2:06
Speaker 1: So it's kind of cool to reflect back on what
2:08
Speaker 1: was happening in nineteen eighty like very different universe, right right, Well,
2:13
Speaker 1: for example, interest rates were four uh when I started
2:17
Speaker 1: at Jeerson, and those were those were treasuries. We're not
2:20
Speaker 1: talking jump on yeah, no, no, no no, And and in fact,
2:22
Speaker 1: I think we got as high as twenty earlier in
2:25
Speaker 1: my career, and so, uh, you know, it was a
2:29
Speaker 1: very interesting time to begin, which I did as an
2:32
Speaker 1: account executive at Sheerson, and then in night two, Dean
2:37
Speaker 1: Winter recruited me to join them and to really start
2:41
Speaker 1: managing what was their floodgling hedge fund practice, which was
2:45
Speaker 1: really with C T A S back in that year,
2:47
Speaker 1: and then it evolved into you know, more macro style funds.
2:50
Speaker 1: So you eventually become director of managed Futures at Deanwood Reynolds.
2:56
Speaker 1: That's pretty early in the managed futures history. Tell us
3:00
Speaker 1: a little bit about that here. Sure, it was a
3:03
Speaker 1: you know, uh, it was an era where you know,
3:07
Speaker 1: first of all, the markets were really inefficient, right, um,
3:10
Speaker 1: So it was it was very fertile, uh to do
3:14
Speaker 1: what we do because markets moved a lot. There was
3:17
Speaker 1: a lot of volatility. Uh. And I think it's almost
3:21
Speaker 1: the polar opposite of where the world has been the
3:24
Speaker 1: last few years, where volatility has been somewhat subdued, and
3:29
Speaker 1: you know, equities have been such a strong performer. But
3:31
Speaker 1: back in two um, you know, stocks were very quiet,
3:35
Speaker 1: they were in a trading range. Interestrates are super high, uh, commandity,
3:40
Speaker 1: markets were moving a lot, and there wasn't a lot
3:43
Speaker 1: of competition if you were a trader in that early
3:46
Speaker 1: part of the industry's history. So let's talk about that
3:49
Speaker 1: inefficiency for a moment. Today, you wanna hang a shingle
3:53
Speaker 1: or you want to open your own proprietary trading, it's
3:57
Speaker 1: very difficult to find an edge and consistently make money.
4:01
Speaker 1: Back in the eighties, that wasn't necessarily the case. Yeah,
4:05
Speaker 1: I mean relatively simple trading systems made money and uh
4:10
Speaker 1: and and you know, they had volatility and people were
4:13
Speaker 1: okay with volatility because everything was volatile back then. Um
4:17
Speaker 1: and so uh you know it was uh, you know,
4:22
Speaker 1: relatively I want to say straightforward, because I don't think
4:26
Speaker 1: generating consistent profits has ever been something that's so straightforward
4:29
Speaker 1: or so easy. But on a relative basis, it was easier.
4:33
Speaker 1: And of course, when you have a young industry, that's
4:36
Speaker 1: a great time to get involved. You had to say
4:38
Speaker 1: the very least. So after Deanwood Reynolds, you end up
4:42
Speaker 1: as CEO of John Henry and Company. Tell us a
4:44
Speaker 1: little bit about that experience. Yeah, John was one of
4:46
Speaker 1: our managers, uh that we had, you know, our clients
4:50
Speaker 1: invest in and in um. He and I explored me
4:57
Speaker 1: leaving Dean Winder to join his pharmacy CEO. His company
5:00
Speaker 1: was in California at the time. I wanted to be
5:03
Speaker 1: in the East coast. We moved the firm to Connecticut.
5:06
Speaker 1: Uh and uh I was there for about four and
5:08
Speaker 1: a half years, and then he and I saw things differently.
5:12
Speaker 1: In nine and a part of company and uh, you know,
5:17
Speaker 1: UH had a lot of time to think about what
5:20
Speaker 1: I wanted to do and ultimately decided I wanted to
5:24
Speaker 1: start up my own fund. And uh that's how Graham got,
5:28
Speaker 1: uh you know underway in the you know, spring of
5:31
Speaker 1: So we're gonna talk a lot more about Graham. But
5:34
Speaker 1: John Henry seemed to have done pretty okay for himself. Sure.
5:38
Speaker 1: I mean he now owns the Red Sox, and you know,
5:42
Speaker 1: he's done very, very very well. He's left the finance world,
5:46
Speaker 1: but he's certainly not left the business world. And he
5:48
Speaker 1: seemed to have brought the same set of analytical chops
5:52
Speaker 1: to owning the Red Sox as he did in his
5:55
Speaker 1: own Hedge five. Yeah. I think that's kind of who
5:57
Speaker 1: he is, quantitative database and logical decisions, which you know,
6:02
Speaker 1: seems to have broken, uh, the curse of the Babe. Well, yeah,
6:07
Speaker 1: you know, let's face it, right, I mean, what was it?
6:09
Speaker 1: What was a year that every down three and out
6:11
Speaker 1: of the Yankees or something, and then they ended up
6:13
Speaker 1: prevailing in that World Series. I'm a Yankee fan, so
6:16
Speaker 1: I can say I was rooting for that. But that's
6:18
Speaker 1: what happened. It's a hundred years was all it took
6:22
Speaker 1: to overcome that one mistake alright, so let's talk a
6:25
Speaker 1: little bit about founding Graham Capital. In you leave John Henry,
6:30
Speaker 1: you have a little time to think about what you
6:32
Speaker 1: want to do. What was the process like launching a
6:36
Speaker 1: new hedge funds in the early to mid nineties, you
6:40
Speaker 1: know it was, I mean, this is not an easy
6:42
Speaker 1: thing to do. Ever, I would say it probably somewhat, um,
6:46
Speaker 1: you know, easier to do in ninety four than it
6:48
Speaker 1: would be today where the world has become so institutional. Uh.
6:52
Speaker 1: And you know, I've been longtime close friends with Paul
6:57
Speaker 1: Jones and Mark Dalton, president and you know when pulled
7:00
Speaker 1: the founder and uh CEO of Tutor and uh, when
7:04
Speaker 1: I left Henry, we talked about should I you know,
7:08
Speaker 1: a couple of ideas I had about starting my own fund,
7:11
Speaker 1: and uh they were kind enough and uh and and
7:16
Speaker 1: eager to uh invest and helped me seed Graham, which
7:21
Speaker 1: made it a lot easier to get the fund off
7:23
Speaker 1: the ground. And I am asking my prop capital alongside
7:26
Speaker 1: of their prop capital, and we began trading and you know,
7:29
Speaker 1: I guess it was July or something like that. What
7:32
Speaker 1: sort of strategies were you using when you first launched
7:35
Speaker 1: the farm? Yeah, so it was trend following systems that
7:37
Speaker 1: I designed, uh and UH they had some features to
7:42
Speaker 1: them that, UH were intended to take advantage of what's
7:47
Speaker 1: very good about trend following, which is sort of capturing
7:50
Speaker 1: these big right tail moves, but we're also intended to
7:53
Speaker 1: not have some of the givebacks the people associate with
7:56
Speaker 1: trend falling when trends reverse. And UH. Those were techniques
8:01
Speaker 1: that I came up with that I thought would work.
8:03
Speaker 1: They ended up being pretty successful. And that's you know,
8:07
Speaker 1: in the early days of Graham, Uh, like any new
8:10
Speaker 1: hedge fund, I did everything from designing trading systems to
8:14
Speaker 1: executing those systems. So so let's talk a little bit
8:17
Speaker 1: about trend following because people who are professional traders, or
8:22
Speaker 1: especially futures and commodities traders, are fairly familiar with that strategy.
8:27
Speaker 1: I don't know if all our listeners are. The basic
8:30
Speaker 1: concept is when one of these asset classes starts a
8:35
Speaker 1: long move, they tend to go much further and much
8:38
Speaker 1: longer than people typically expect, and you want to capture
8:42
Speaker 1: as much as that move as possible. Is that too
8:44
Speaker 1: much of an order description? And think of it this way,
8:48
Speaker 1: that a good trend following system will identify based on
8:54
Speaker 1: momentum UH signals that a trend is underway. Let's take
8:58
Speaker 1: a recent example, uh, energy prices. Everybody knows energy prices
9:02
Speaker 1: gone up in the last six months quite a bit.
9:04
Speaker 1: And you know, a simple trend following system is going
9:09
Speaker 1: to identify that this is a strong trend, and it's
9:12
Speaker 1: going to get you on the right side of that trend. Now,
9:15
Speaker 1: at some point, that trend is going to end, and
9:18
Speaker 1: that same trend following system is never going to predict
9:21
Speaker 1: the exact top, but it's gonna get you out of
9:23
Speaker 1: that trend after it's made some amount of profit on
9:27
Speaker 1: the way up. And it's it's always gonna expect to
9:30
Speaker 1: lose some of those profits when the trend reverses, but
9:34
Speaker 1: still end up capturing the meat of the trend. So
9:37
Speaker 1: if you could say that the maximum size of a
9:40
Speaker 1: trend was say a hundred, maybe you might capture that trend.
9:46
Speaker 1: And UH if you're able to do that in a
9:49
Speaker 1: diverse uh number of markets and asset classes, UH while
9:54
Speaker 1: managing risk and the markets that aren't trending. You know,
9:57
Speaker 1: that's in general how trend following works. It's much better
10:01
Speaker 1: to be involved in trend following when markets are moving
10:03
Speaker 1: and when markets are quiet and sideways, not as easy
10:06
Speaker 1: to make money and right, how do you avoid I'm
10:10
Speaker 1: thinking about how you catch the reversal at the end.
10:13
Speaker 1: Obviously you have to be willing to give back some
10:15
Speaker 1: of the profits before it's clear that the trend was broken.
10:20
Speaker 1: How do you avoid the false positives, the whip saws.
10:23
Speaker 1: I can't count how many times when I was a
10:26
Speaker 1: young turk on a trading desk, you would get shaken
10:29
Speaker 1: out of a move, and then it would as soon
10:31
Speaker 1: as you're gone, immediately go back to the prior trends.
10:34
Speaker 1: So there are lots of It's a great question. There
10:36
Speaker 1: are a lot of technologies that people use that we use.
10:39
Speaker 1: Um you know. Some of those technologies can include having
10:44
Speaker 1: multiple signals and multiple time horizons. So maybe your quick
10:49
Speaker 1: systems get shaken out on a on a sort of
10:52
Speaker 1: minor medium reversal, but you're longer term systems, for example,
10:58
Speaker 1: take longer to get knocked out. And so most people
11:02
Speaker 1: I know who do this do not have one time horizon.
11:05
Speaker 1: They use multiple time rides. That's just an example of
11:07
Speaker 1: a technique that's easy to understand. You guys, do everything
11:12
Speaker 1: from quantitative analysis to macro. Tell us a little bit
11:15
Speaker 1: about your approach to trading the markets. Sure, well, there's
11:20
Speaker 1: as you sort of referenced, we do a lot of
11:22
Speaker 1: different trading styles of Graham. We do discretiony macro trading,
11:27
Speaker 1: which is typically a portfolio manager, and we have um
11:32
Speaker 1: some number of portfolio managers fifteen or eighteen different portfolio
11:35
Speaker 1: managers that independently manage a book of of you know,
11:42
Speaker 1: risk assets, and uh they uh will decide what they're
11:47
Speaker 1: going to buy and sell. Uh, and they're going to
11:51
Speaker 1: live with certain risk policies and they're going to hopefully
11:54
Speaker 1: not be all doing the same thing at the same time. Uh.
11:58
Speaker 1: And then we also run a bit large annotative business,
12:01
Speaker 1: which is a model driven uh you know, computer uh
12:05
Speaker 1: you know, trading system business that uh is also really
12:10
Speaker 1: diversified in the types of models that uses. Some are
12:13
Speaker 1: pure momentum based models, which people identify with trend following,
12:17
Speaker 1: but then there are some models that are value based,
12:19
Speaker 1: that are fundamentally based. Uh. Some that uh you know
12:23
Speaker 1: are smart systems that are learning systems. So there are
12:28
Speaker 1: a lot of different ways to hopefully make money in
12:30
Speaker 1: the macro markets that we are involved in. So let's
12:33
Speaker 1: talk a little bit about that diversification. If you have
12:37
Speaker 1: eighteen different portfolio managers, and I know you're only half
12:40
Speaker 1: joking when you say, we hope they're not all doing
12:43
Speaker 1: the same things by design, the assumption is each of
12:46
Speaker 1: them are bringing a different approach to the assets they're covering,
12:51
Speaker 1: or is it possible that some of them are overlapping
12:54
Speaker 1: with others. Yeah, well the answer is yes to both.
12:57
Speaker 1: So we currently have fifteen different teams, not eighteen, No,
13:00
Speaker 1: all other a couple of teams that are pretty close
13:03
Speaker 1: to joining us. And uh, many of them are going
13:08
Speaker 1: to be trading the most important macro markets, so that
13:11
Speaker 1: you know, that's fixed income markets. Uh, that's the equity markets,
13:14
Speaker 1: that's the foreign exchange markets, and to some extent, commodities,
13:18
Speaker 1: and uh, some of them are gonna have similar views
13:21
Speaker 1: when really interesting big moves are happening. Uh. An example
13:25
Speaker 1: of that is there was a big move up in
13:26
Speaker 1: rates that sort of peaked in May, and a lot
13:30
Speaker 1: of our traders got involved in that and benefited from
13:32
Speaker 1: rates going up in Germany and rates going up in
13:34
Speaker 1: the United States. UM. There are other times where they
13:39
Speaker 1: have very different time horizons and so one trader, uh
13:42
Speaker 1: might you know, be a long US fixed income and
13:47
Speaker 1: a trader right next to them is short, and they
13:50
Speaker 1: could both actually be right depending on the time arising.
13:53
Speaker 1: So somebody who has a very short term trading style
13:56
Speaker 1: could be short for a week and get out and
13:58
Speaker 1: make a profit doing that, while the other trader who's long,
14:02
Speaker 1: is waiting you know, for six to eight or twelve
14:04
Speaker 1: weeks for his position to accomplish what he thinks it
14:07
Speaker 1: should accomplish. So different different time horizons, different assets. We
14:11
Speaker 1: have traders that are involved in you know, a lot
14:15
Speaker 1: of interest rate derivatives, UH swaps, the yield curve, um,
14:19
Speaker 1: things that are trading systems don't always get involved in,
14:23
Speaker 1: but our traders will. So for example, as you know,
14:26
Speaker 1: there's been this giant flattening into the yield curve. That's
14:29
Speaker 1: been something that a number of our traders have been
14:31
Speaker 1: involved in, something that typically the uh you know, technical
14:35
Speaker 1: systems wouldn't be so involved in. And and you sit
14:40
Speaker 1: on the risk management committee when you have all these
14:44
Speaker 1: teams with a lot of authority and a lot of
14:45
Speaker 1: independence trading their own models, how do you manage that?
14:50
Speaker 1: That sounds like that's a lot of balls in the
14:52
Speaker 1: air at once. It is. But you know, we have
14:54
Speaker 1: a lot of technology to support all of that. We
14:57
Speaker 1: have UM risk system ms that are live pian L
15:01
Speaker 1: reporting models that tell us what every trader's performances every
15:05
Speaker 1: minute of the day that the markets are open. And
15:07
Speaker 1: then we meet every day at nine thirty and have
15:10
Speaker 1: since two thousand and eight to look at every trader's portfolio.
15:14
Speaker 1: How has it changed since the previous day. Who's added
15:16
Speaker 1: to risk, who's cut risk, what assets are they in?
15:19
Speaker 1: We run stress tests on all of their positions. UH.
15:22
Speaker 1: We see who's performing well, who's might be struggling. And
15:27
Speaker 1: you know, if we have to uh encourage a trader
15:30
Speaker 1: to reduce risk or do nothing. Uh, we as the
15:34
Speaker 1: senior management UH team of the firm are acutely aware
15:38
Speaker 1: of exactly what the firm's risk is at any minute
15:42
Speaker 1: of the day. And I think it's that discipline to
15:45
Speaker 1: meet and have. You know, total transparency into risk taking
15:50
Speaker 1: helps manage uh. You know the outcome quite a bit.
15:53
Speaker 1: And you guys have been doing this for almost thirty years,
15:56
Speaker 1: so you obviously know a thing or two about risk management.
16:01
Speaker 1: I look around this year, I see some quant focus
16:04
Speaker 1: head funds blowing up to say nothing of all the
16:08
Speaker 1: venture investments into crypto, and some of the crypto funds
16:11
Speaker 1: really just losing in some cases their assets. As someone
16:17
Speaker 1: who is a professional risk manager, when you look out,
16:21
Speaker 1: what do you see when when the world around you
16:24
Speaker 1: has these frequent flare ups, Well, you know, it always
16:29
Speaker 1: gives you religion about managing risk, right, I mean, at
16:32
Speaker 1: the end of the day, Uh, it's it's awfully important
16:36
Speaker 1: to make money for our clients and on our proprietect
16:39
Speaker 1: capital for ourselves. But the only way you're gonna do
16:42
Speaker 1: that is by managing the downside. And so we're just
16:45
Speaker 1: really conservative in our risk policies. We're not so conservative
16:49
Speaker 1: that there's no breathing room to make money, because if
16:52
Speaker 1: you're not willing to lose some money, you can't make
16:54
Speaker 1: any money. I mean, it's the age old thing and
16:56
Speaker 1: investing in trading. But uh, the question is how much
17:00
Speaker 1: and you know, and and and we're just very processed
17:03
Speaker 1: driven and how we look at risk, how we analyze it,
17:06
Speaker 1: and we we you know, we were we've learned that
17:09
Speaker 1: we just have to make some hard decisions, uh fairly
17:13
Speaker 1: quickly at certain moments. And we've had moments where we've
17:16
Speaker 1: had traders lose more than we would have liked to
17:19
Speaker 1: have lost. We've had trading systems that have had bad cycles,
17:22
Speaker 1: but we have prevailed over twenty nine years because in general,
17:26
Speaker 1: we avoid uh you know, uh, some some really bad
17:30
Speaker 1: experiences that sort of as you alluded to, we try
17:33
Speaker 1: not to let that happen to us our clients. It's
17:35
Speaker 1: pretty clear that a number of the funds that have
17:37
Speaker 1: blown up didn't seem to have a whole lot of
17:40
Speaker 1: risk controls in place. They just let Uh. It's one
17:43
Speaker 1: thing to take a loss, it's another thing to let
17:46
Speaker 1: a bad situation become a fatal one. Yeah, well, I
17:49
Speaker 1: think that, you know, it kind of speaks to who
17:52
Speaker 1: is Graham or a conservative firm. We've been doing this
17:54
Speaker 1: for twenty nine years. I've been involved in the markets
17:57
Speaker 1: for over forty. Uh. You learn all out over that
18:01
Speaker 1: amount of time that you know, you can't be in
18:03
Speaker 1: a hurry to try and make a profit. You've got
18:06
Speaker 1: to just you know, be a patient investor. You've got
18:09
Speaker 1: to be an opportunistic investor. And if you manage conservatively
18:15
Speaker 1: your business, I like the odds of you finding the
18:18
Speaker 1: moments when it's good for what you do and capitalizing
18:21
Speaker 1: on it. You know, I'm gonna editorialize briefly, but I've
18:26
Speaker 1: had this conversation countless times about just be long term greedy,
18:32
Speaker 1: just be patient. It will come to you. And everybody
18:36
Speaker 1: that seems to get into trouble, whether it's a traitor
18:39
Speaker 1: or a fund or whatever, it's always that hurry that
18:43
Speaker 1: seems to cause their disasters. Yeah, that that's a factor
18:48
Speaker 1: for sure. It's not the only one, right, Like, liquidity
18:51
Speaker 1: can change, and that is something that can bite you
18:55
Speaker 1: when something that was relatively liquid and easy to get
18:58
Speaker 1: in and out of becomes illoqui uh. And you know
19:02
Speaker 1: we've seen that in some of the situations you described
19:04
Speaker 1: earlier of funds having problems, and so one of the
19:07
Speaker 1: things we really scrutinize as risk managers is there is
19:12
Speaker 1: what's happening with liquidity, How is it changing? And is
19:15
Speaker 1: it is there any adverse behavior as relates to liquidity
19:20
Speaker 1: that we should be very careful and thoughtful about. And
19:22
Speaker 1: last question about the various teams, does everybody have a
19:27
Speaker 1: different benchmark? How do you track performance? Is it strictly
19:32
Speaker 1: absolute returns or people working towards a specific uh bogey
19:38
Speaker 1: that they're they're comparing themselves with. Yeah, it's really an
19:40
Speaker 1: absolute return business. And you know, we are trying to
19:44
Speaker 1: have our traders, you know, generate uh you know, call
19:49
Speaker 1: it high single digits, slow double digit returns with relatively
19:55
Speaker 1: moderate volatility, So annual volatility of four percent or something
19:59
Speaker 1: like that. And uh, that's a that's a pretty good
20:03
Speaker 1: ballpark idea of the parameters that we ask traitors to
20:07
Speaker 1: live within. And that's a pretty comfortable place for our clients, uh,
20:12
Speaker 1: you know, meaning the amount of risk they're willing to
20:14
Speaker 1: assume relative to potential reward correct really really interesting. I
20:19
Speaker 1: want to start talking about the current environment with a
20:22
Speaker 1: quote of yours that I really like. Uh. You said,
20:26
Speaker 1: I can't recall a more interesting time to be a
20:29
Speaker 1: macro investor since the financial crisis. Tell us a little
20:33
Speaker 1: bit about that. I haven't heard a lot of people
20:35
Speaker 1: describe this year two that way. Yeah. Well, you know,
20:41
Speaker 1: because we're a macro oriented fund, what we're really concerned
20:45
Speaker 1: with is what's happening with interest rates, what's happening with
20:49
Speaker 1: foreign exchange, what's happening with commodity prices, uh, and what's
20:54
Speaker 1: happening with equity prices and all of those four sectors
20:57
Speaker 1: have been moving a lot, and so that's a really
21:00
Speaker 1: fertile constructive environment for us to try and generate returns.
21:05
Speaker 1: And if they're moving, you finding opportunities exactly what you
21:09
Speaker 1: know for us, it's nowhere near as uh productive an
21:14
Speaker 1: environment if asset classes are really quiet. Um. If you
21:19
Speaker 1: think about interest rates as an example, you know, today
21:23
Speaker 1: is a FED meeting, but uh, you know, think about that.
21:26
Speaker 1: Germany didn't raise rates for ten years until recently, right,
21:30
Speaker 1: So just practically speaking, there's gonna be less to do
21:34
Speaker 1: if you're trading German interest rates and the and the
21:37
Speaker 1: central banks not moving them for ten years. Now rates
21:41
Speaker 1: are moving and they're moving a lot. Um. If you
21:43
Speaker 1: think about the US, you know, uh, the Central Bank
21:48
Speaker 1: uh started giving us something they never used to do,
21:52
Speaker 1: which was forward guidance, saying not only are we not
21:55
Speaker 1: changing rates today, but we're telling you we're not going
21:57
Speaker 1: to change rates for the foreseeable future. I'm so glad
22:01
Speaker 1: you said that, because I remember in the nineties nineties
22:05
Speaker 1: CNBC used to have the Greenspan briefcase in the cator.
22:10
Speaker 1: How thick or thin the briefcase? He carried into the
22:14
Speaker 1: FOMC meeting was their hint as to what was going
22:17
Speaker 1: to go on with rates. That's a different world. Now.
22:21
Speaker 1: They literally say this is what we're doing. Earlier this
22:26
Speaker 1: last week or two weeks ago. Um, somebody at the
22:30
Speaker 1: FED said to Nick Timorris at the Wall Street Journal, Hey,
22:33
Speaker 1: we're going seventy five basis points. There's no misunderstanding. They
22:39
Speaker 1: are not just telegraphing, explicitly telling us what they're gonna do.
22:44
Speaker 1: How does that affect your ability to find opportunities? Well, so, here,
22:49
Speaker 1: here's the thing. If they're telling us they're going to
22:52
Speaker 1: do nothing, that's not so helpful. If they're telling us
22:56
Speaker 1: that they're going to be moving interest rates a lot,
22:58
Speaker 1: and they're not just gonna do this at one meeting,
23:00
Speaker 1: but over some series of meetings and for the next
23:04
Speaker 1: year or something, then there's a lot to work with
23:07
Speaker 1: in terms of the markets. They're gonna move a lot,
23:09
Speaker 1: they're gonna overreact, they're going to give us, uh, you know,
23:13
Speaker 1: trading opportunities, both on the long and short side. And
23:16
Speaker 1: so when I say that markets are more interesting, they've
23:19
Speaker 1: been for a really long time. It's for a variety
23:22
Speaker 1: of reasons. Markets are moving. Uh. We've got some banks
23:25
Speaker 1: all over the world, uh starting to move. We've got
23:29
Speaker 1: equity prices moving a lot. You know, there's a there's
23:33
Speaker 1: a big realization of of pe s to lower levels
23:36
Speaker 1: right as earning to start to decline on the road. Uh.
23:39
Speaker 1: You've got commodity prices that went through the roof in
23:42
Speaker 1: the first third of this year because of supply chain issues,
23:45
Speaker 1: the Ukraine war and so on. Uh. And then you've
23:48
Speaker 1: got the dollar making one of the biggest moves that
23:50
Speaker 1: I've seen in a long time, like twenty years. I
23:52
Speaker 1: mean we we we've had a move in dollar again,
23:55
Speaker 1: it's we haven't seen that in a long time. So
23:59
Speaker 1: that that makes euro party is exactly. And so so
24:02
Speaker 1: you've had great moves and a lot of markets. And
24:06
Speaker 1: what I'm excited about is I don't see that changing
24:10
Speaker 1: into a quiet moment anytime soon. So so let's talk
24:15
Speaker 1: about next year. But before we get to that, I
24:18
Speaker 1: want to ask you about last year. So one, for
24:23
Speaker 1: equity investors, hey, plus twenty seemed like a great year,
24:28
Speaker 1: but if you're a volatility trader, markets were never less
24:31
Speaker 1: than five percent from all time highs. It was a
24:34
Speaker 1: shockingly quiescent year straight up, and hardly any move was
24:41
Speaker 1: one a less interesting year than Yeah, for sure, definitely.
24:46
Speaker 1: I mean we're able to generate on average returns last
24:49
Speaker 1: year they were positive year, but there's way more to
24:52
Speaker 1: do this year. Um. And you know, last year, if
24:56
Speaker 1: you were going to have a good year, you had
24:59
Speaker 1: to be essentially long data and we like from the
25:02
Speaker 1: beginning of the year and correct and just be patient
25:06
Speaker 1: and stay with it. And you know we uh we
25:10
Speaker 1: we certainly did that on a portion of what we
25:13
Speaker 1: look at as our risk budget. But there's we're much happier,
25:18
Speaker 1: We're going to be more profitable, there's going to be
25:21
Speaker 1: more interesting environment when uh, you know, you're not looking
25:25
Speaker 1: at one asset class and that's the only game in town,
25:27
Speaker 1: but rather there's something to do in foreign exchange, or
25:29
Speaker 1: something doing rates, or something doing commodities, something to do
25:31
Speaker 1: in credit, all of these asset classes. Now we're moving
25:35
Speaker 1: and moving a lot, so so not so interesting, very interesting.
25:42
Speaker 1: Why do you believe this high interest, high volatility environment
25:48
Speaker 1: is going to continue into next year? Yeah? So the question,
25:52
Speaker 1: of course is I expect there to be plenty of
25:55
Speaker 1: volatility next year. Will it be as volatile as twenty two.
25:59
Speaker 1: Maybe not, but it will it be bold enough for
26:02
Speaker 1: it to be fertile for what we do and constructive
26:04
Speaker 1: for what we do. And I think the answer that's yeah,
26:06
Speaker 1: some cautiously optimistic that will be the case. And I
26:09
Speaker 1: say that because I think of some of the problems
26:12
Speaker 1: that the FED is trying to manage through, and central
26:15
Speaker 1: banks in Europe are trying to manage through these problems.
26:17
Speaker 1: I don't see ending at you know, when we when
26:20
Speaker 1: we flip the calendar in twenty three, uh, you know,
26:23
Speaker 1: the supply chain bottlenecks gonna end, will go away, exactly
26:28
Speaker 1: my point. So, so there are secular issues that are
26:32
Speaker 1: causing inflation that I believe the FED really can't do
26:36
Speaker 1: that much about. And I think the problem that inflation
26:39
Speaker 1: causes for central banks are not going away so quickly.
26:44
Speaker 1: So I think this year maybe unusually good for for macro,
26:50
Speaker 1: but I think the upcoming several years are going to
26:53
Speaker 1: be also pretty interesting for what we do. So the
26:56
Speaker 1: consensus of economists have the FED using seventy five basis
27:01
Speaker 1: points today July and then another seventy in September, and
27:08
Speaker 1: then I think, is the basis is that way? That's
27:11
Speaker 1: now moving back towards because the prior hints was seventy.
27:16
Speaker 1: I think the economy really seems to be slowing. We've
27:19
Speaker 1: got that really bad inflation print a few weeks ago,
27:22
Speaker 1: and and and then you know, we've gotten some weaker
27:25
Speaker 1: data since. And so I think people have priced in
27:28
Speaker 1: fifty basis points in the next hike, and then that's
27:33
Speaker 1: the thing they're pricing. And also cuts in twenty three
27:37
Speaker 1: maybe maybe not. You know, I'm you're not in that camp.
27:41
Speaker 1: I'm waiting to see. I mean, I think we need
27:43
Speaker 1: to see inflation get a lot closer to the Fed's target.
27:47
Speaker 1: And you know, I don't see inflation coming down as
27:50
Speaker 1: rapidly as the market is pricing in Fed cuts. Oh really,
27:53
Speaker 1: that's very interesting, right, So in order for the Fed
27:56
Speaker 1: to want to cut, they're gonna need to see inflation
28:00
Speaker 1: and contract quite a bit. And it will contract from
28:04
Speaker 1: the very high levels it's at now. But will it
28:06
Speaker 1: go down to their target? I'm not sure. So so
28:08
Speaker 1: let's talk about commodities. Lumber cut in half, copper down,
28:13
Speaker 1: oil under a hundred. What are we like thirty two
28:16
Speaker 1: days in a row of gasoline prices falling? Industrial medals
28:19
Speaker 1: also do um. Most of the commodity complex, that really
28:26
Speaker 1: random uck seems to be starting to roll over and soften.
28:31
Speaker 1: How do you view that? Is that? I view that
28:33
Speaker 1: as helpful for sure, But you know, have rents collapsed,
28:37
Speaker 1: No housing is really tight, labor still really really tight.
28:42
Speaker 1: The employee still has the upper handed, you know, as relation.
28:46
Speaker 1: Is that still true? Because the scent seems to be
28:49
Speaker 1: you have layoffs at the tech firms. They were in
28:52
Speaker 1: a mad dash to hire, they over hired, and now
28:55
Speaker 1: some of the retailers are talking about easing Amazon and Walmart.
29:01
Speaker 1: It feels like the great resignation is over and whatever
29:05
Speaker 1: upper hand employees had, they seem to have lost a
29:09
Speaker 1: little hand over the past few weeks. I think that's
29:13
Speaker 1: a perception, not necessarily the reality. I think that will
29:17
Speaker 1: become a reality. I don't think we're there. I don't
29:19
Speaker 1: think psychology changes so fast. So I think you know,
29:24
Speaker 1: employees here at Bloomberg you have a three you know,
29:27
Speaker 1: a remote work policy. Uh. You know we have perspect
29:33
Speaker 1: and and and and most firms you know have similar policies. Uh.
29:38
Speaker 1: And I think that's reflective of employee having a lot
29:41
Speaker 1: of leverage over employers and these policies will probably evolve,
29:47
Speaker 1: you know, because they all got birth out of COVID
29:49
Speaker 1: and and so on in an incredibly hot labor market.
29:53
Speaker 1: But I don't see drastic changes yet and how employees
30:01
Speaker 1: are thinking and what their work expectations are. I think
30:05
Speaker 1: there will get to there, but we're not there. You know,
30:08
Speaker 1: it used to be how do you keep them down
30:10
Speaker 1: on the farm once they've seen gay Paris? And now
30:13
Speaker 1: it's hey, how the hell do you get them back
30:14
Speaker 1: into the city they want to work from the farm.
30:17
Speaker 1: The world has changed. Personally, I can't help but notice
30:23
Speaker 1: how much more productive and efficient I am up into
30:27
Speaker 1: a point where, all right, I gotta get the hell
30:29
Speaker 1: out of these same four walls. I'm wondering how that
30:32
Speaker 1: extrapolates out to the entire labor market. Yeah, I think
30:35
Speaker 1: it really depends on what people do, right. I mean,
30:39
Speaker 1: I think, you know, some people can be very effective
30:42
Speaker 1: working remotely, and I think others are more effective when
30:46
Speaker 1: they collaborate and there and there. And I think it's
30:48
Speaker 1: easier to learn right when you're around uh people who
30:53
Speaker 1: are very bright and very innovative, and you know, you
30:56
Speaker 1: can hopefully piggyback some of that knowledge and experience and
31:00
Speaker 1: you know, have it improve your knowledge base and your
31:04
Speaker 1: and your skill set. And so I'm a big fan
31:07
Speaker 1: of of UH, you know, people working UH in offices
31:13
Speaker 1: to a you know, a significant degree. UM, But I
31:15
Speaker 1: also understand that a lot of people really enjoy working
31:18
Speaker 1: remotely and and and I understand that. I mean, it's
31:22
Speaker 1: it's it's very efficient, right right, But it's pretty clear
31:25
Speaker 1: that it's there's going to be some form of hybrid
31:29
Speaker 1: at most major employers going forward. The question is is
31:33
Speaker 1: it four and one? Is it three and two? It's
31:36
Speaker 1: not gonna be oh and five like it was for
31:38
Speaker 1: two years. That that's pretty much done. I have to
31:40
Speaker 1: agree with that. Yeah, let's talk a little bit about
31:43
Speaker 1: some interesting trends that we've seen play out in two
31:48
Speaker 1: and what whether or not they'll continue for the rest
31:51
Speaker 1: of the year. We haven't talked a lot about equities,
31:54
Speaker 1: but if I think of anything in two, it's finally
31:59
Speaker 1: value has started to show it's UH advantage after lagging
32:05
Speaker 1: growth for practically a decade. Uh. Do you guys look
32:09
Speaker 1: at these sort of factors? Is that we do? I mean,
32:13
Speaker 1: it depends on you know, our A lot of our
32:16
Speaker 1: training systems are sort of momentum based systems. But then
32:19
Speaker 1: we also have value based quantitative models, and our traders
32:23
Speaker 1: are definitely looking at value. Um. And I you know,
32:26
Speaker 1: I think, look, equities have come down a lot, uh,
32:30
Speaker 1: but I think the question is what's next? And you know,
32:35
Speaker 1: to me, we're do we test the lows? You know,
32:38
Speaker 1: we've bounced about seven percent off the lows uh in
32:41
Speaker 1: the last few weeks. Uh. You know it would not
32:43
Speaker 1: surprise me as earnings slow down and and you know,
32:47
Speaker 1: the economy slows down and the effect of these rate
32:50
Speaker 1: hikes begins to kick in. You know, earnings should deteriorate,
32:55
Speaker 1: and the question is how much and how much we'll
32:57
Speaker 1: spending contract and things like that, and what kind of
33:01
Speaker 1: demand destruction are we going to see? So uh, I
33:04
Speaker 1: think equities probably have some downside in them. On the
33:09
Speaker 1: other hand, the bookcases, there's not a lot else to
33:11
Speaker 1: do with money, and so you know, uh, the sell
33:14
Speaker 1: offs are are pretty well bought by institutional you know,
33:18
Speaker 1: investors said differently, what's already in the price. So let
33:22
Speaker 1: me throw a couple of things at you. Um. We
33:25
Speaker 1: talked earlier down more or less prices in a recession,
33:29
Speaker 1: right or at least a mild recession. Is that a
33:32
Speaker 1: fair assessment the way you would think about the macro
33:35
Speaker 1: environment of of stocks as a leading indicator, You know,
33:39
Speaker 1: I don't. I don't know that that's the old priced
33:41
Speaker 1: in there, because think about it. We were up twenty
33:43
Speaker 1: eight percent last year, right, so there's a lot and
33:46
Speaker 1: we were down this year, um and up the year before.
33:51
Speaker 1: So this is just a little mean reveal. So you know,
33:54
Speaker 1: I think this is sort of a very normal correction
33:58
Speaker 1: after the years and years and years of unusually good
34:01
Speaker 1: performance for equities. And I'm not sure that our recession
34:05
Speaker 1: is completely priced then. I think I think a slow
34:08
Speaker 1: down the economy is somewhat priced then, but I think
34:11
Speaker 1: we could see lower prices from here. So let's talk
34:14
Speaker 1: about earnings. Both second quarter and third quarter. Second quarter
34:18
Speaker 1: earnings have started to trickle out a few disappointments, but
34:24
Speaker 1: stocks really haven't been punished the way when we saw
34:28
Speaker 1: a first quarter earnings come out in April. If you missed,
34:32
Speaker 1: you got shell lacked down. Walmart. Really, I can't say
34:39
Speaker 1: on radio what they did, but terrible. The stock was
34:42
Speaker 1: off eight or nine percent. It's really relative to how
34:45
Speaker 1: badly they missed. I was surprised that that's all they
34:48
Speaker 1: were down. Um. So the question is what does it
34:52
Speaker 1: mean when stocks aren't punished when bad news comes out.
34:56
Speaker 1: So I think perhaps part of the actually a nation
35:01
Speaker 1: is that there was a de leveraging that occurred in
35:03
Speaker 1: the first quarter, and I think that is somewhat behind us,
35:09
Speaker 1: so meaning that very richly valued stocks. Yeah, so this
35:14
Speaker 1: is more multiple contraction than being punished by missing earnings.
35:19
Speaker 1: I mean, you know, there were equity hedge funds that
35:22
Speaker 1: were pretty laverage, that had pretty highly concentrated you know,
35:26
Speaker 1: growth bats and you know a lot of technology companies
35:30
Speaker 1: and so on, and and and a lot of those
35:31
Speaker 1: equities went down a lot and those a lot of
35:34
Speaker 1: those funds had exit and a lot of investors and
35:37
Speaker 1: you know, exited some of those positions and they've come
35:40
Speaker 1: back to earth. And so I think some of the
35:42
Speaker 1: de leveraging has already occurred, and that's why the reaction
35:47
Speaker 1: functions not as severe. Uh as you see new orrangs
35:50
Speaker 1: at the hit the tape really really intriguing. Um. So
35:55
Speaker 1: let's talk a little bit about third quarter earnings. If
35:58
Speaker 1: the FED goes fifty or seventy five in September, is
36:03
Speaker 1: the market pricing in a potential decrease from record highs
36:08
Speaker 1: for sp I don't. I don't think we're pricing that yet. Uh,
36:13
Speaker 1: and I'd be a bit surprised if we don't. If
36:18
Speaker 1: we have continuing uh, you know, erosion of earnings, I
36:23
Speaker 1: think equity prices will follow that. Um. Well, I'm not
36:27
Speaker 1: forecasting another down, but I do think we could go
36:30
Speaker 1: down five or tending, right, I mean, what is that's
36:33
Speaker 1: a bad Tuesday? Down ten percent? We people forget it?
36:37
Speaker 1: What um or that's right? Or it's really just a
36:44
Speaker 1: fraction of that. So, so we talked about if this
36:47
Speaker 1: is pricing in recession, does it matter if we're in
36:51
Speaker 1: a recession or not now or will be next year?
36:55
Speaker 1: How do you contextualize the economic data? And the brew
37:00
Speaker 1: would stamp recession when you're thinking about managing risk. You know,
37:05
Speaker 1: we obviously have to be concerned with it. And you know, uh,
37:10
Speaker 1: we we would not be at all surprised to see
37:16
Speaker 1: our you know, the economy contract, the Feds, rate heights
37:21
Speaker 1: take effect. Uh, beta slips, um prices go down somewhat
37:27
Speaker 1: if you're talking about equities, uh, and then at some
37:29
Speaker 1: point buyers come back and invest because there's a perception
37:34
Speaker 1: and if you think about, you know, the last decade
37:37
Speaker 1: or more, UH, if you didn't buy the dips and
37:39
Speaker 1: equity prices, you're sort of punished by the market. And
37:43
Speaker 1: so there is a psychology that's been well trained into
37:47
Speaker 1: all investors, institutional and otherwise that when equities go down
37:51
Speaker 1: a lot, you need to buy, shut your eyes and buy.
37:53
Speaker 1: And so I think we're going to continue to have
37:55
Speaker 1: that behavior occurring, and you know, we'll just have to
37:58
Speaker 1: see how it plays out in terms of UH, where
38:01
Speaker 1: the you know, what does the market do not just
38:04
Speaker 1: over the lext quarter, but over the next several You
38:06
Speaker 1: were rewarded for buying the dip in when we had
38:10
Speaker 1: the flash crash. You were rewarded for buying the dip
38:13
Speaker 1: in the fourth quarter when we were down almost if
38:18
Speaker 1: you bought into the end of the quarter of the
38:20
Speaker 1: pandemic March Q one, you were rewarded. This seems to
38:24
Speaker 1: be the first year where the dip buyers really got
38:28
Speaker 1: their hands smacked by the market. How long does it
38:31
Speaker 1: take You've been doing this for forty years, How long
38:34
Speaker 1: does it take for that psychology of by the dip,
38:37
Speaker 1: by the dip, by the dip for that muscle memory
38:40
Speaker 1: to get broken. I think it takes a couple of years. Really, Yeah,
38:43
Speaker 1: I don't think definitely had a big impact on people. Yeah,
38:47
Speaker 1: I think it takes a couple of years. I don't
38:49
Speaker 1: really think it happens. And the face, let's face it,
38:52
Speaker 1: five six months into the year or six seven months
38:55
Speaker 1: in the year now, I mean, I don't think we're there. Um.
38:58
Speaker 1: I think, you know, if we were to see two
39:02
Speaker 1: years of poor performance and equities that buy the dip,
39:06
Speaker 1: psychology would really erode a lot. But if you see
39:09
Speaker 1: seven months of poor equity performance, I'm not sure we're there. Huh.
39:13
Speaker 1: So we're halfway through two. We're looking out at the
39:16
Speaker 1: rest of the year and into three. Any particular asset
39:20
Speaker 1: class or sector that strikes you as intriguing. Energy you
39:25
Speaker 1: mentioned earlier, had a great year the past twelve months.
39:28
Speaker 1: The banking sector really seems to have missed earnings. What
39:33
Speaker 1: looks interesting, Well, the dollars really interesting. I mean the
39:36
Speaker 1: dollars making a big move and it continues uh to
39:40
Speaker 1: be a currency right that has uh positive carry versus
39:47
Speaker 1: uh it's it's counterparts. So you know, rates in the
39:51
Speaker 1: Ice States are are still and servedly higher than the
39:54
Speaker 1: rest of the world look at it, and that attracts capital.
39:56
Speaker 1: That's gonna track capital so that, you know, uh, until
39:59
Speaker 1: for when otherwise. I mean, you know, Japan has committed
40:03
Speaker 1: to you know, uh maximum rate of twenty five basis points. Uh,
40:09
Speaker 1: while the US is marching on up seventy five points today.
40:13
Speaker 1: So you know, I think the dollar continues to intrigue me. Uh.
40:19
Speaker 1: You know, it's moved a lot. We have to be
40:21
Speaker 1: cognizant of that. We've seen you know, the dollar against
40:25
Speaker 1: the end, but could have go more I think so,
40:27
Speaker 1: and could have got more against hero I think so.
40:29
Speaker 1: So here's the pushback from my goldbug friends, um, who
40:34
Speaker 1: I have been tormenting for the past decade. Uh, yeah,
40:37
Speaker 1: the dollars up, but it's the only clean shirt and
40:40
Speaker 1: dirty hamper. We're gonna go the wand the end. The euro,
40:45
Speaker 1: everything else is junk. The dollar is just half decent.
40:48
Speaker 1: How do you respond to that sort of criticism to
40:52
Speaker 1: dollar strength? You know, I guess my question is doesn't matter.
40:58
Speaker 1: I mean, if the if the dollars going up because uh,
41:02
Speaker 1: you know, well, because it's got a much higher interest
41:05
Speaker 1: rate than other currencies. Uh, I don't know if I
41:09
Speaker 1: call it that it has a clean shirt. I think
41:13
Speaker 1: it's just uh, it has favorable fundamentals, and uh and
41:17
Speaker 1: and and people should buy things that have favorable fundamentals
41:20
Speaker 1: and not buy things that have allows the fundamentals. So
41:23
Speaker 1: if the dollar is strong, what does that say about
41:26
Speaker 1: our ability to export? What does that say about global
41:30
Speaker 1: macro travel. I had a buddy who in the late
41:34
Speaker 1: nineties and early two thousand's, the last time the dollar
41:37
Speaker 1: was this strong, was flying to Europe buying nine elevens
41:41
Speaker 1: and Z eights and other um European sheet metal. Ferraris
41:45
Speaker 1: bringing them back to the US, converting them and still
41:48
Speaker 1: selling them at a healthy profit versus what what the
41:51
Speaker 1: dealers were asking for. Because of the strength of the dollar.
41:55
Speaker 1: How does this impact global trade and other economic facts. Well,
42:00
Speaker 1: it's a big factor. I think. You know, keep in mind,
42:04
Speaker 1: your supply chain bottleneck problems are as persistent as ever,
42:08
Speaker 1: so you know, our ability to do what you just said,
42:11
Speaker 1: right to go and start buying Porsche's or something that's
42:14
Speaker 1: not happening because you can't get them. Uh So some
42:17
Speaker 1: of that stuff has to work itself out independent of
42:20
Speaker 1: the currency. But you know, one of the things that's
42:24
Speaker 1: causing inflation is secular trends such you know, such as
42:30
Speaker 1: supply chain problems and what have you. And that's one
42:33
Speaker 1: of the reasons I think inflation is gonna be around
42:35
Speaker 1: for a while. It's those secular trends are slow moving.
42:38
Speaker 1: So when you say inflation, we're obviously, or maybe not
42:42
Speaker 1: so obviously, we're not talking eight, but we're talking elevated
42:46
Speaker 1: above FED target of correct So four or five percent inflation. Yeah,
42:51
Speaker 1: maybe we get down to four or five, but that's
42:53
Speaker 1: the number of the FED doesn't like. I like four
42:56
Speaker 1: better than nine. Um, but that still means that they're
42:59
Speaker 1: gonna right direction. But but we're gonna move as fast
43:03
Speaker 1: as the FED would like. I don't think so. And
43:06
Speaker 1: that's why I think people who have this expectation that
43:10
Speaker 1: the FED is going to be cutting rates, uh, sometime
43:13
Speaker 1: in the first or second quarter next year. I'm not
43:16
Speaker 1: sure that's realistic. So so let's assume you're right, we've
43:19
Speaker 1: seen peak inflation, but transitory takes much longer than expected,
43:23
Speaker 1: and we slowly work our way down too. Maybe there's
43:26
Speaker 1: a six hands ale by the end of the year,
43:28
Speaker 1: five hands ale, and then sometime next year four percent?
43:31
Speaker 1: What does that mean in terms of wages and people
43:35
Speaker 1: demanding higher salaries? What does that mean in terms of
43:37
Speaker 1: consumer spending? That has to mean mortgage rates are going
43:41
Speaker 1: to be much higher. What does that mean for housing?
43:43
Speaker 1: And lastly, what does that mean for politics? I can't
43:46
Speaker 1: imagine the present occupant of the White House is happy
43:50
Speaker 1: with that sort of inflation forecast. Yeah, I'm sure he's not.
43:56
Speaker 1: And I'm sure you know, the Democratic Party is not
43:58
Speaker 1: very happy going into you know, a midterm election with
44:02
Speaker 1: really high inflation. And uh, you know, I'm not sure
44:07
Speaker 1: for good or for bad. Politicians are really bad involved
44:10
Speaker 1: in managing inflation. Right, it's not what they do the
44:13
Speaker 1: central banks really but but but they but they will
44:17
Speaker 1: take credit or blame accordingly, as you know, depending on
44:21
Speaker 1: what side of you know, the policy you're on. But
44:24
Speaker 1: I think, you know, we're going to have a pretty
44:29
Speaker 1: thorny issue, which is that inflation and the uh thing,
44:36
Speaker 1: the things that need to happen for it to go
44:37
Speaker 1: down just they're going to move slowly. And um that's
44:41
Speaker 1: you know, that's my base case. I could be wrong.
44:44
Speaker 1: We could we could really contract quicker. I mean you
44:47
Speaker 1: mentioned that energy prices will come down some you know,
44:50
Speaker 1: other commodity prices will come down a lot. But let's
44:53
Speaker 1: also not forget you know, crewdel still about a dollar,
44:56
Speaker 1: uh you know right now? Uh? And uh you know,
45:01
Speaker 1: could it could it come down? Sure, but it hasn't
45:03
Speaker 1: come down that much. Are we going to get down
45:06
Speaker 1: to eighty cents or something like that? Maybe, but we're
45:09
Speaker 1: not there. Really really intriguing. And and last um market question.
45:15
Speaker 1: So we've seen equity valuations come down. I get the
45:19
Speaker 1: sense you're expecting cheaper valuations, if not much cheaper valuations. Well,
45:25
Speaker 1: I wouldn't go so far as to say much cheaper evaluations,
45:28
Speaker 1: but I would say I think the risk is to
45:31
Speaker 1: the downside more than the upside. How do how do
45:34
Speaker 1: we get there? Do we get there through multiple contraction
45:36
Speaker 1: or do we get there? I think it's really choppy
45:39
Speaker 1: price behavior. I mean, yeah, a little bit. I mean
45:44
Speaker 1: you look at some of these rallies have had vicious
45:47
Speaker 1: bear market rallies. Is here right where the market was up,
45:50
Speaker 1: you know, three percent one day, and soon we were
45:51
Speaker 1: three percent the next day, and and so and so forth,
45:54
Speaker 1: and then the next week's the exact opposite. So I
45:56
Speaker 1: think that kind of erratic behavior. Um maybe out quite
46:00
Speaker 1: as volatle as that is what I would expect. And
46:04
Speaker 1: I think, you know, there's a lot of money that
46:06
Speaker 1: needs to get deployed. And uh, if I'm an investor,
46:10
Speaker 1: I'm an institution, I'm gonna have so much in hedge funds,
46:12
Speaker 1: i'na have so much in private investing, but I need
46:15
Speaker 1: to be in liquid markets and I'm not gonna do
46:18
Speaker 1: every I'm not gonna just exclusively invest in, you know,
46:21
Speaker 1: alternative assets if you will. So there is going to
46:25
Speaker 1: be a continuing bid for beta um because institutions need
46:29
Speaker 1: to invest a lot of capital. But where you know,
46:33
Speaker 1: will the economy continue to support ever higher evaluations? Who
46:37
Speaker 1: did the last ten years? I don't think we're there.
46:39
Speaker 1: H So you one one last thing I have to ask.
46:42
Speaker 1: You mentioned institution sitting with capital. Did you imagine I
46:47
Speaker 1: don't even want to go back to the eighties, but
46:49
Speaker 1: even two thousand, that there would ever be this many
46:55
Speaker 1: trillions and trillions and trillions of dollars looking for a home.
46:59
Speaker 1: I never, in my wildest dreams, imagine that so much
47:03
Speaker 1: capital would be amassed. How do you contextualize all this
47:08
Speaker 1: money looking for a place to be well, treated Yeah,
47:12
Speaker 1: I mean it's alms hard to fathom. I mean you
47:13
Speaker 1: think about all of you know, the quantitative easing that's
47:18
Speaker 1: gone on, and all of the stimulus and all of
47:22
Speaker 1: the capital that there is, all the cash in the world.
47:25
Speaker 1: It's it's it's it's really huge. And um, I think
47:31
Speaker 1: that is something that is a positive fundamental for equity prices,
47:36
Speaker 1: that cash has to get invested somewhere sometimes, somehow. So
47:40
Speaker 1: even if earnings aren't great, even if the economy continues
47:45
Speaker 1: to look slow, even if inflation is too high, I
47:50
Speaker 1: think there is an argument to be made that, uh,
47:55
Speaker 1: there's a lot of cash out there looking for a
47:56
Speaker 1: home and that and that that cash is going to
48:00
Speaker 1: periodically be deployed in equities. Yeah, no, that makes a
48:02
Speaker 1: lot of sense. All right. Before I get to my
48:05
Speaker 1: favorite questions, let me just throw a curve ball at you,
48:09
Speaker 1: Graham Capital Management's headquarters. Is that a site named rock Ledge?
48:14
Speaker 1: This used to be the office of General Douglas Macawthurd.
48:19
Speaker 1: Tell us tell us first, how did you find rock
48:22
Speaker 1: Ledge and make it the home of of GCM? And
48:25
Speaker 1: tell us a little bit about the place. Yeah, no,
48:28
Speaker 1: it's a back in. Uh. When I started Graham, we
48:35
Speaker 1: moved into Stanford, and we were in Stanford, Connecticut for
48:38
Speaker 1: some number of years, and that was a really good
48:40
Speaker 1: place for us to recruit and retain talent. And a
48:45
Speaker 1: lot of people you know, enjoyed as I did, uh,
48:48
Speaker 1: the ability to have access to New York City, but
48:50
Speaker 1: you know, also have good school systems and what have
48:53
Speaker 1: you in the suburbs of New York and in Connecticut.
48:56
Speaker 1: And a lot of hedge funds were in Connecticut. We
48:58
Speaker 1: outgrew the space and Stamford and so, uh, somebody called
49:02
Speaker 1: me and said, you know, this building in Row eight
49:04
Speaker 1: in Connecticut is available and it's pretty amazing. And I
49:07
Speaker 1: went up and I saw it and it's just, you know,
49:09
Speaker 1: beautiful campus setting, you know, about a hundred thousand square
49:12
Speaker 1: feet of office space, and you know, it needed a
49:16
Speaker 1: lot of work, but it was really pretty cool. And
49:18
Speaker 1: so I thought, Gee, what a better place, What a
49:23
Speaker 1: great place to try and attract the best people you
49:26
Speaker 1: want to you could find, uh to work in your fund.
49:30
Speaker 1: Uh from a quality of life work life perspective, this
49:34
Speaker 1: was just an amazing place to run a hedge fund
49:38
Speaker 1: to attract really talented people. Um, you know, the success
49:42
Speaker 1: of a hedge funds. All about the people who worked there,
49:45
Speaker 1: and having a great place to work is not unimportant.
49:48
Speaker 1: It looks like a college campus. It's it's quite beautiful. Yeah,
49:51
Speaker 1: it's been fantastic. We've been there a long time now
49:54
Speaker 1: and I've enjoyed every minute of it. Huh, well, glad
49:57
Speaker 1: to hear it. Let's jump to our favorite questions that
49:59
Speaker 1: I ask all of our guests, starting with tell us,
50:03
Speaker 1: what kept you entertained during the pandemic? What were you
50:07
Speaker 1: uh watching or listening to? Well, mostly the markets, uh
50:11
Speaker 1: you know, so obviously being in the position a man
50:16
Speaker 1: of of monitoring risk and performance and you know, uh
50:20
Speaker 1: position taking of all these traders and trading systems, you know,
50:24
Speaker 1: that's always front and center and my uh you know,
50:27
Speaker 1: uh conscious but uh, you know, uh, there's been some
50:32
Speaker 1: really good shows that have come out. I've enjoyed, uh
50:36
Speaker 1: you know that. There's recently something I've been watching. It's
50:39
Speaker 1: called Tehran. It's on Apple Plus. It's a pretty good show.
50:43
Speaker 1: Jeff Bridges in a good show. I think it's on
50:46
Speaker 1: FX or something like that called The Old Man. That's
50:49
Speaker 1: a great show. So uh, you know, uh, everyone needs
50:53
Speaker 1: a break from the markets. Once a while. It's a
50:54
Speaker 1: couple of things I've been watching. Uh tell us about
50:57
Speaker 1: your early mentors who helped shape you a career. Well, uh,
51:03
Speaker 1: you know, I think about some of the people who
51:06
Speaker 1: uh really uh were just you know, great great mentors
51:13
Speaker 1: and great people to learn from. Paul Jones comes to
51:17
Speaker 1: my mind. I met Paul about forty years ago, and uh,
51:22
Speaker 1: you know what an amazing person, philanthropist, great trader, visionary
51:27
Speaker 1: for the world of finance, and you know, it was
51:31
Speaker 1: very fortunate to have him help me get Graham going
51:34
Speaker 1: back in he's he's been an insane role model, not
51:39
Speaker 1: just for me, but for a lot of people in finance.
51:41
Speaker 1: When I was a teen winner, I had a really
51:44
Speaker 1: tough boss named Charlie fum Afraido that ran asset management,
51:48
Speaker 1: Charlie Brook no nonsense. Uh. He had a Monday morning
51:52
Speaker 1: meeting at eight a m every Monday, and you know, uh,
51:56
Speaker 1: all of his division heads, I was one of them,
51:58
Speaker 1: had to be down there in the World Trade Center
52:01
Speaker 1: at eight o'clock. And man, I left my house at
52:04
Speaker 1: six because if you got to that office at eight
52:06
Speaker 1: oh two, you waited for an hour till the meeting
52:09
Speaker 1: was over. Outside his office and then got to explain
52:12
Speaker 1: what you were doing, uh, you know, a one on one,
52:15
Speaker 1: which wasn't that much fun. So you know, he was
52:18
Speaker 1: he was a great boss because he was no nonsense
52:21
Speaker 1: and tough as Now, tell us about some of your
52:23
Speaker 1: favorite books and what are you reading recently? You know, Uh,
52:28
Speaker 1: I like spine novels. Uh So the Portrait of an
52:32
Speaker 1: Unknown Woman David Silva just came out. That's that's a
52:35
Speaker 1: great book I've always uh you know, loved uh you know, uh,
52:42
Speaker 1: the Trilogy I told him was something I read when
52:45
Speaker 1: I you know, I'm totally stressed out and I want
52:48
Speaker 1: to get into another world. That's a it's a great
52:50
Speaker 1: place to go. Uh. And then I just devour all
52:53
Speaker 1: financial news and technology news and things like that. Interesting.
52:58
Speaker 1: What sort of advice would you give to a recent
53:00
Speaker 1: college graduate who is interested in a career in macro
53:05
Speaker 1: investment or quantitative trader? You know? Here, the advice I
53:10
Speaker 1: would give is try and get a job at a
53:15
Speaker 1: really good macro fund that has some really bright people.
53:19
Speaker 1: And if you want to get a hat and you
53:21
Speaker 1: want to be successful, it's really simple. You show up
53:25
Speaker 1: before anyone else, you leave after everyone else. You never
53:30
Speaker 1: are screwing around on the internet. You're paying attention to
53:33
Speaker 1: everything that's happening. And trust me, if you have brains
53:38
Speaker 1: and creativity and innovation, there is no industry that rewards
53:41
Speaker 1: you better. Quite quite interesting. And our final question, what
53:45
Speaker 1: do you know about the world of investing today? You
53:48
Speaker 1: wish you knew forty years ago when you were first
53:51
Speaker 1: getting started. You know, there's a tough question. I mean, obviously,
53:55
Speaker 1: on one hand, our trading systems are traders are so
53:59
Speaker 1: much more sophisticated and so which it's more complicated. Uh,
54:05
Speaker 1: And you know, we've learned a lot of lessons about
54:08
Speaker 1: managing risk. We've learned a lot of lessons about being
54:11
Speaker 1: opportunists in certain market cycles and really conservative in other
54:14
Speaker 1: market cycles. And you know, the only way to learn
54:17
Speaker 1: those lessons is through experience and making some mistakes and
54:22
Speaker 1: overcoming those mistakes and ultimately prevailing. So you know, it
54:25
Speaker 1: would have been great they never have to learn through, uh,
54:29
Speaker 1: you know, making mistakes. But that's the way the world works.
54:32
Speaker 1: And I think we've been successful because we've been intellectually
54:37
Speaker 1: honest with ourselves. We when we make a mistake, we
54:39
Speaker 1: own it. Really really intriguing. Thanks, so much Kenn for
54:44
Speaker 1: being so generous with your time. We have been speaking
54:47
Speaker 1: with Ken Tropin. He is the chairman and founder of
54:49
Speaker 1: Graham Capital Management. If you enjoy this conversation, well check
54:54
Speaker 1: out any of the previous four hundred we've done over
54:56
Speaker 1: the past eight years. You can find those at iTunes, Spotify,
55:01
Speaker 1: wherever you get your favorite podcasts. We love your comments,
55:05
Speaker 1: feedback and suggestions right to us at M I V
55:10
Speaker 1: podcast at Bloomberg dot net. Sign up from my daily
55:13
Speaker 1: reading list at rialts dot com. Follow me on Twitter
55:17
Speaker 1: at rit Halts. I would be remiss if I did
55:20
Speaker 1: not thank the crack team that helps these conversations come
55:24
Speaker 1: together so well each week. Sarah Livesley is my audio engineer.
55:28
Speaker 1: Artica val Bronn is my project manager. Paris Wald is
55:32
Speaker 1: my producer. Sean Russo is my head of research. I'm
55:36
Speaker 1: Barry Riholts. You've been listening to Masters in Business on
55:40
Speaker 1: Bloomberg Radio.