Central Banks, Markets, Quants, and the SEC (Podcast)

the world to continue to fight inflation. Of course, we had the FED yesterday, the Bank of England and the e c B. This morning we heard from Christine Loclegard, uh still moving rates higher. We want to see what that means for markets and what that means for kind of you know, as we think about setting us up there, and we can do that with this round table that we've got together. Vince Signarella, global macro strategists with Bloomberg News. He joins us on the phone, as does Jennifer Lee,

Managing director and senior economist with the BMO Capital Markets. Jennifer, let's start with you here. Um again, the central banks have been nothing else if consistent. What is what is your takeaway from the last twenty four hours or so?

Good morning, I'm thanks for having me once day. Um, you know what I've if he had told me like ten years ago or so that on all the central banks, the ECB would be on the we're hawk, I guess you could call them on the on the spectrum of central banks, I would have said, get out of town, you know. But that's what's going on. And this is crazy, I mean, especially after her the press conference, and she

was extremely clear this morning. Usually she's you know, it's a lot of you know, everything's gonna depend, it's gonna be meeting by meeting, but she actually said that, you know, we're gonna be expecting fifty basis point hikes, you know, steadily for some time until we get to a significantly restrictive level, um, something like that, you know, which is very very clear and very un characteristic for for this for this particular central bank. I thought that was quite interesting.

Me on the bake of England, you know, you've got one person voting for seventy five two people saying let's let's do nothing, and the other six saying let's get let's do fifty. You know, if I were there, I'd be like, Okay, is anyone wanting a great cut? At this point? Everyone's all over the map. So I find

this very very interesting and very unsuddenly. Excuse me to see at least Vince hop On in here, because what's so striking to me is a very simple comment that Madame Laguard made, which was the recession risks skew to the downside. Obviously, Um, but as this a recession Europe that has been kind of inevitability for almost a year, and it was supposed to hit us the fourth quarter of this year, it was supposed to happen by now and actually hasn't yet happened. When do we get that recession?

How bad is it and how long is it going to be? I think you're going to see it show up in the numbers, probably starting in December, most definitely January. Um. You know, I think that Jennifer made a good point, without question. The ECP basically, as a trader said to me today, me kepped the market with their aggressive hawkish output. When you look at the data, and I must say, I'm actually a little surprised at the magnitude of the

cell up today. Um that you know, retail sales in the month of November holiday season declining, What is that going to say for us for the first quarter of next year. I think the consumer is absolutely tapped out now. If the market is selling off because they see a recession, uh and maybe a drop in earnings and therefore dropping stocks, I think they also need to see the fact that

that procession is going to bring a fent pivot. So it's a bit of a push and pull I think as to what what whether the cart leads to horse or the other way around. I think in this case, um, I think this sell off is is going to be

the last hurrah. And as the numbers start to come in quite um slow and uh and such, I think we're going to see markets tern Jen from Vince brought up the retail sales data today, and we just had a retail analyst on just before you guys, and she was suggesting that the weaker than expected retail numbers today reflect in part maybe the pull through that we saw in October when retail sales were up and surprised on the upside, up one point three. So maybe don't get

too concerned about the consumer. But boy, this data point that we saw this month has been highlighted. Kind of surprising, kind of disappointing. Another guest this morning says that he's concerned about rising consumer debt that they're buying stuff with on their credit cards. So you put all that together, how do you view the consumer right here and then going into next year? So we um, you know, this

is like today's retail sales report. I mean, this is another indication of how we can't we can always take one report, you know, with a with a grand assaults I guess, you know. I mean, we we have that upside surprise last month and everything was great, and now all of a sudden, you know, we said this big pull back, pullback, So it's almost like, um, a lot of expenses were being pulled forward. UM. But of course it is concerning that you know, there is more um

consumer credit being being taken on. You know some of that. I'm wondering if it could be you know, because you know some of the credit cards you get points, so you know, you could be using up more of your credit cards for for that reason. But I'm gonna go back to you know, the funnel metal um UM support.

I guess below the or beneath of the US consumer, and is that they are still they still have savings, you know, not as much as they used to obviously, but at least they have some savings to work awful right now. Job growth remains very solid. You know, the labor market is still tight as a fetch, your pala said yesterday. As long as wages keep increasing, you know, yes, they're they're they're whittling down there a pile of savings bellies.

It's still being replenished with rising wages, and I think that's the more important thing, I guess going forward. But of course, you know, the U. S consumer is not as healthy as it once was, just given that prices are still rising quite quickly. So we do see consumers

spending being pulled back. And then you know it's already being pulled back already now, but even more so um in the uh you know, in the next year probably, um, we're probably count see negative growth, I guess in consumer spending for the first half of Okay, Hey, Ben, I want to get your perspective from a trader's perspective. Talk to us about liquidity in the market price broadly defined.

You know, we've got the FED no longer flooding the market with liquidity, in fact, kind of the opposite here, How does that play out day to day for kind of just the plumbing of the markets? I think you just see bigger swings um, you know, a lot more volatility uh with liquidity shrinking a touch. But traders are just that they basically don't need as bigger position UH with higher liquidity and higher volatis excuse me, higher volatility UM to make the same nut they need to make

on a day to day basis. So the positions of smaller volatilities higher, and you're going to see bigger swings in the market. I just want to make one point about the employment issue that Jennifer mentioned one of them. I got an email yesterday from essentially someone covering resume builder dot com and they did a survey and found one there one third of responses predicted that they were going to do layoffs next year of upwards. Of Now, if that plays out, the FEDS idea of job is

being strong is gonna get totally trashed. And I just don't see how they go on the path, all of the central things go on the path that they're they're swinging at right now. Vince again, real real quick, what's the trade going into the end of this year. I think you look at fading the dollar. I think risk is going to turn as we head into the first quarter UM and if if not so, you'll you'll see

earnings decline. And that's been the big large cap companies getting hurt by what we've seen as a higher dollar this year. I think we've seen the peak in the dollar for a while. All right, good stuff, Vince Signarella, Global macro strategists with Bloomberg News and Jennifer Lee, managing

director and senior economists with BEMO Capital Markets. One of the issues that the market has been dealing with and the face of higher inflation depending the recession, the sumer has been pretty down strong through all of this, and when we got some retail sales today, they kind of put a pause in that retail sales. The headline number zero point and negative zero point six percent anti consensus was for negative zero point two percent, so a little

bit worse there. That compares to last month when it was positive one. So that's I mean some Paul's in the marketplace here, uh, you know, bringing up concerns about the strength of the consumer and maybe a recession. Um, let's bring an expert here. First of all, I've got a crick critic group, the Bloomberg Markets correspondent in our studio city and from mat so we appreciate that. Angie Solanki. She's a national director of retail services in the US

four Colliers. Uh, Andie, thanks so much for joining us here. What did you make of the retail sales data we saw today? Yeah? Thanks for having me. Um. So, what I would say is that in the sale did definitely drop the drop, but we believe that that's due to the pull forward in October where we saw significant sales in terms of holiday season shopping cyber you know, preparing for Cyber Monday and Black Friday. People decided let's go ahead and shop in October because we started to see

discounts from retailers each sooner. It actually started in the summer of So what does this mean, Angie? Again, we're you know, I like to say my holiday shopping is done, but it's not having started yet. But what what's the feeling you're hearing from your retail clients about just kind of how the holiday seasons shaping up and and maybe

their recession outlook for next year. Yeah. And one thing I have to just really highlight here is if we look at our year over year core retail sales, so excluding food service, car and gas, because prices have come down car prices have come down, we still have a pretty healthy retail sales here to date at five point

six percent. So we're actually looking at a pretty good i would say, first test to the holiday season, where the retail sector has cleared some hurdles, is still been looking positive, maybe not for the month in November, but it still should be a pretty solid holiday season, even though consumers are going to be mindful of how they're spending where they're spending, because we've still seen increases in pricing, especially in the grocery sector, um and some and also

some decreases in some of the other categories such as you know, the the apparel side, home furnishings, etcetera. So, and one of the concerns we were just speaking with the Dennis Gartman of the Garben Letter has been following markets for decades, and he brought up a concern that he has that consumers are running up their credit card debt after being flush with cash Uh, they've exhausted most of that. They're now running it up with credit card debt.

Is that a concern for as you think about retail sales? It is. I would say that would be in certain categories where we're going to see maybe the higher price points, electronics, things of that nature. Um, So we will see some debt creep. However, I think that hopefully we'll start to, you know, when we start to look at the spend and the type of spin in the differ and categories, we hope to see that that may start to slow

down a little bit and balance out. Um, but we are a little nervous about that looking into Q one, Q two, Well, Angie, as we see these numbers, these inflation numbers, at least on the headline novel decelerate. It's not a secret inflation is coming down. A lot of that is coming from the base effects. Though on the way up. Is that going to actually show up in consumer patterns? How long before the consumer says, oh, actually

things are getting more affordable. You know, I think if we have to look at, you know, the way the consumer is spending. So we're seeing some interesting trends, especially in the grocery sector. So that's a daily need, a weekly need. So they're coping with these different inflationary issues by adjusting those shopping habits and they're balancing that um you know, you know, the way of their spend through looking at private label goods, lower cost brands, um opting

for less expensive. So that pattern will continue, and I think when we if we continue to see gasoline prices, you know, decrease, that will also help in terms of just kind of that mindset in terms of where we're going. Now, keep in mind cp I still at seven point one per cent, whereas sales um growth have been less than that. So we're definitely managing and or monitoring. Managed to say, alright, Angie,

thank you so much for joining us. We always appreciate getting your perspective and we get some of these retail data points. Angie Solanki, National director of Retail Services for the United States for Colliers. Uh So, retail sales came a little bit weaker than expected. Look at the markets here, it's a little ugly. We've got a lot of stuff that digests. We had central banks moving over the last twenty four hours, raising rage, talking tough. We've got some

weaker retail sales. So we need to break it all down here with some smart people, and we got that going. Uh, we've got a roundtable this thing. Jonathan Hurdle, executive chairman of Hurdle, Callaghan and Company. Uh, he's been doing that. He manages about twenty million dollars. But for me, the highlight of his resumes he's a Penn State grad. So we're talking to Penn State football. Here. We got Ira Jersey,

he chief US interest rate Strategists with Bloomberg Intelligence. Both of these gentlemen joined pretty night in our Bloomberg Interactive Broker studio. John, you've been doing this a long time, managing money for others. What do you make of the last twenty four hours when we've got seemingly concerted effort on the part of these central banks that continue to raise rates. Well, I think today's action is just a

simple selling the news reaction. Okay, So this is what they did, what we anticipated, and they're selling on the news. So I think one of the things that people do that make a mistake in the market is they see trading action and they try to apply fundamental logic to it. And so if you've been long and you get this trip tick and you say, I've got to get away from that trade. All of a sudden, new cascades the markets down six fifty points. People say, what happened, Nothing happened,

it's just trading. They're selling on the news. That's one of the first things I was taught by one of my mentors on the prince side. He said, sometimes traders just trade because they trade. That's all they do. Ira hop on in here. Would you agree with that? Would you?

Would you say that's happening? Positioning matters so much? Right, So what happens is is that you get people in positions like right now, just about everyone in the world is in flattening trades in my market, in the in the rates market, particularly in the US, and then um, you know, so it makes it harder and harder because so many people are in those positions for the curve

to flatten more. But then all of a sudden, there's something fundamental that occurs, like you know, Christine Leguard being very hawkish, and the next thing you know, you know, you can you can flatten a little bit more because you now bring in what would be weaker hands. So

so I agree, I mean the intra day volatility. Sometimes it's just all about positioning and people, you know, just squaring positions and managing risk, as opposed to longer term trends, which obviously I think ultimately do have to come back to more fundamentals. Well, you're talking about the inversion. Talk to me about the depth of the inversion, because I think that's really significant. It's been in the two tents,

for example, has been inverted for a while. But the fact that we've got I think to like two I want to say negative at two basis points, that seems extreme going back to um even the seventies when we saw I think negative two hundred. Yeah, so briefly so negative two hundred, but but basically the market had spent about the better part of a year on nine months plus at negative hundred to a negative hundred and fifty

basis points. Now I'm not sure that we'll get to a hundred negative hundred and fifty again this cycle, although it's not out of the question. But our targets about negative a hundred, and the way that we get there is that the the the long end stays more or less where it is three point four to three point six on on the tenure um. But then the two year yield still is has to go a little bit higher.

So two year yields have to sell off a little bit because the market still doesn't believe that the Fed is going to hold interest rates at the five percent plus or mind us a little bit level for all of next year. The market is still pricing for there'll be a FED put and they think that if you know, unemployment starts to go up, that the Fed's gonna start cutting rates at the end of next year. Once we take out that pricing for cuts next year, that's where

you get two year yields higher. Hey, John, you know here in December two this is a year where stock there's just no place to hide stocks, I mean just ugly out there. And we haven't seen that in a in a long time. And I wonder what you're telling your clients here, and you're I'm assuming you're penning a

year ahead outlook letter to your clients. How do you put into context just set up for well, I mean it's um you know, one of the first of all, we're chief investment officers, so we're looking to invest in trade, and I want to draw a bright line between those two. I was struck by, you know, the there are two types of forecasters, those who don't know and those who don't. Those who don't know, they don't know, you know, So

we try not to forecast. We're looking at the current cash flows and reacting, so we like the US better than non US. We're managing global portfolios who are overweight US but fully invested in stocks. That doesn't mean we won't accumulate some cash. So in other words, when a lot of the risks that people think about in the marketplace should be addressed by portfolio construction, So the words, do you have enough cash and short term fixed income

in your portfolio that you can weather down terms? So this is a time where you might be accumulating dividends and putting them in things where like short term fixed income, the yield has gone up. There's nothing wrong with that. So that um, so we like that. We're neutral equity market overweight US. Shorter duration still we were, um we were, we were quite short, and then we took some of

that off recently, but we're still a little short. So short duration overweight US, fully invested in equities is sort of where we are. But like On the stock side, we like um sort of growth stocks with pricing power. But in general, UM, I just think. I mean, I'm gonna be controversial in a minute and say I think we're spending too much time talking about I don't mean this conversation, but the world is talking too much about the ft. We know about the fet you know, Chairman

Pal's trying to be as transparent as he can. There's nothing that I know that the market doesn't know. And so it's all in there, he said, he tells us what he's doing, and then he does it. So I really instruct by some of the more fundamental things that are going on that give us huge reasons for optimism that I never feel like anybody's talking about. For example, we actually may have fusion energy in my lifetime. People said the other day, oh yeah, this is don't get

over excited. It may take a few years before it really works. Really, I can wait a few years. I mean, this is unbelievable. And the other one is the m r N, a breakthrough that we just talked about in the news, and what that does for mankind. So we've got this never before positive environment in the world. I mean, if you go through every statistic, you know, birth rates, UH, health around the world, economic expansion, everything around the world

is better than it's ever been. And I would make the case that almost everything we're seeing is a trend in that direction. It's not linear, it's bumpy. But I just saw while I was waiting to come in that the China a d r D listing maybe delayed because we're gonna get access to audits. Well, isn't that interesting? The free markets, the truth will set you free. If you can answer transparency and you add value, you get

access to global capital, and good things happen. So there's a I do think we have a lot of rational reasons to be optimistic. UH. And the Fed's gonna do what the FED does UH, And it doesn't really change much for a long term investor, right it is what should what's gonna be the next data point that? You know, the FED the other central banks are just going to

be really looking at it. You know, as John said that the long term trends UH for most of the world are positive, but they have to live in the here and now. So how do you think they're gonna be playing this out? Because I don't I can't imagine either any center banks are going to push the economy into a significant recession. So so this we're just we're talking for here. I think a little bit about trend versus cycle. Right, So a lot of people, you know

where your news. I was on a trading desk for a long time, so we cared a lot about the cycle as opposed to the trend, right, and the long term trends in some cases are might be positive. So you know that the next data point, like and and the FED is right now data dependent in trying to kind of smooth out this cycle, right and trying to get inflation down. Um, so so the next inflation print is going to be important, right, So next next, actually

next Friday gonna be insanely busy. From a data perspective, You're gonna have so much data to talk about. You're not gonna know what to do. Because you get the PC data, we get the personal spending and income data, we get again, I'll see what I can do. So the importantly, though, I think it's going to be the January CPI print because because that that print and the PC print later in January are going to be both.

We get those before the February one FED meetings. So so with the idea that is the Fed going to go twenty five basis points or fifty basis points in February is going to be answered probably middle of January based on what the CPI number is. Well, Jonathan hop In here, because what do you think the tenure treasury being like after this news? It goes from three fifty

three to three sixty? Other words, it's not really doing much as an investor, And I think about discounting future cash flows, those farther out cash flows mean a lot more on the discounting than the short term cash flows to so I think that tenure at three sixty is still what's it telling us? I mean, what is it telling us about core inflation? Do you think? And I know it's a global number, but what do you think

it tells us about core inflation? Well, it's really very little about core inflation in and of itself, except that the markets anticipating that inflation over a long period of time is going to be three pc plus or minus fifty basis points right, So um, and probably a little lower than that. Um. So you know, I I used I do use the market numbers there was someone who was trying to convince me the other day that that the markets being still being manipulated by the FED, even

though the FEDS now running off its balance sheet. But you know, ten year yields at three and a half percent still is not saying that the markets worried about long term inflation. It's worried about inflation here and now. That's why we have two year yields at four and a half. Four and a quarter should be four and a half. But longer, longer term, the market is not

fearful that inflation is going to be particularly sticky, real quick. France, Argentina, God, I really I want Argentina in this one, just because I want Messy to be the goat, and there would be no question. But but the same time, France is so deep beautifully against Morocco. Their defense, the French defense. Morocco had some good chances though, you know hit the post.

I mean there was a really nice spicyclel kick yeah, Portugal and John I was actually a part owner of a minor league soccer club in central New Jersey, so he does actually know what he's talking about. So you know, he's actually been in demand now during this World Cup.

Nobody cares really about the Fed. Uh. Jonathan Hurdle, executive chairman at Hurdle Callahan based down Westconscha Hacken p a good part of the world in our Jersey Bloomberg Chief Us Interest Rate Strategies, both in our Bloomberg Interactor Broker study, breaking down what we've been seeing from the central banks. Lots going on in the marketplace. Tom King, send him home. He's been working like crazy keeping up with what's going on with the the central banks. Jason Greenbal joins us.

He's a senior portfolio folio manager at American Century Investments are located in Kansasy. He joins us here in our Bloomberg Interactive Broker studio and yet another Penn State grad in our studio. So these people are everywhere. Jason, what do you make of the last twenty four hours central bankers around the world raising rates? We've got some a little bit weaker than expected print on the retail sales um you know, on the on the credit side, global

fixed income side. What do you do after it's been such a brutal year for global fixed income? Yeah? Great, great question and great to be here with you today. Thank you. Um what do you do? So, I think you need to have dry powder. This this rally that we've experienced since October, the the expectation that inflation has peaked. We agree with inflation has peaked, but the central banks clearly do not like it. Um, there's more work to do.

Quoting Powell from yesterday, we agree there's more work to do. The markets are realizing that, and we've gone probably a bit too far too fast. Well, the markets are realizing that, but they're also pricing and cuts next year, which is the Federal Reserve is actively saying we're not gonna do believe us not gonna cut. We're gonna stay elevated for a while. What happens if they do? Though? How quick

does that decision happen? So I think you have to take a step back and ask why would they be cutting. It's not going to be for a positive event. And fundamentals are slowing. If you look at their UH Summary of Economic projections, they're coming down. Um, is the market prepared for that? There's a there's a huge question mark. And I think if you rewind the quock twelve months ago, many strategists did not anticipate the rate hikes and the

pace that we saw this year. I just think it's it's maybe two premature to look out twelve months and say, well, there's gonna be a rate cut. If that happens, I think that's a bad outcome. But isn't that the playbook that the FED has been operating on for the past two decades, essentially that the minute things go south, you cut rates. Yeah, we're we're accustomed to buying the dip. I mean that's we saw that this year. The FED has our back, and I agree with that. I mean,

why why let everything unwind since the financial crisis till now? Um, you're right, they have our back. It's so interesting to hear an investors say the FED has our back, Yes, exactly when the Feed has been raising rates. Here, Jace, I know in your in your career, you've done some high yields, some discrested credit. If we are in fact going into a recession in three and maybe it's a little bit deeper than most people think, how are the

credit markets going to react? How's the credit quality out there? Uh, it depends on which part of the market you're looking at. Investment create corporates were not too concerned about evaluations do look tight. We think there's some weakness, but that's not where the problems are gonna come. Problems are gonna come from the smaller companies. The companies who have you been battling to UH to bring workers onto wage inflation. Now they're laying some of them off. Um the rate hikes.

The rate hikes are are chewing into their free cash flow. These single be rated bank loans that have you know, floating rate capital structures. Those are gonna be the areas that you know, with with our credit expertise, we can go in and buy these these opportunities is cheap, but it's probably not going to be for another six to twelve months until we really start to see some of

this carnage. And what are your economists they're saying about a recession in is they talk to you guys the portfolio a moment, managers, the analyst actually putting the money to work. Yeah, probability in our minds from our investment committee is is a sixty plus percent chance of a recession. I think when we look back at third quarter earnings, there's some companies that you know, really struggled with margins. You're seeing that with retail um chemicals, there's probably more

of that to come. Um, So looking backwards, things look okay. Looking forwards were a lot more cautious in the corporate space. Are there any sectors that you guys like right here or maybe going into where there might be a you know, a six percent chance of a recession. Yeah. The spaces that we like is, you know, certainly high quality parts of the market, um, you know, single a's we we

certainly like the banks, Um, we like utilities. Those are those going to be more stable, they'll they'll come out probably unscathed in our minds, um. But there's certainly a lot of other sectors that we think, you know, we'll

feel some pain here. Well. I think it's interesting to me about just the carnage that we've seen in the markets, and it feels like it's been a no brainer that it's has the Federal reserve hikes rates, everything sells off, from bonds to the stock market, arguably in commodities, depending on how you look at it. But it almost feels like this year has been the year in which you're pricing in this kind of doom and gloom or sessionary scenario. Do we actually see some sort of turn around in

or is it just more of the same. Well, we think a lot of the pain has been done already in the rates market on the spread side and credit we haven't seen that yet. Fundamentals haven't fully caught up to what's going on. And again, Powell recognize that that this massive tightening that's taken place hasn't been fully filt yet by the market, and I think that's where the

opportunities are gonna uh to present themselves next year. Is that through though, has it not been fully felt by the market When you're looking at um, I mean it feels like what he's using to say that is financial conditions essentially, which are still sort of easing. But isn't that kind of the market's job to price this in and then to look six to nine months down the road.

So if they are easing a little bit, it's not saying that there isn't going to be paying in the front half three but that things will turn around later down the road. At least that was my interpretation. Yeah, yeah, So the pain that I think you're referring to is is really again from from treasuries being up two to four d basis points this year in terms of spreads, credit spreads are not pricing in a recession. They usually

peak about six months in advance of a recession. So if you're thinking six to twelve months out, the corporate O, A, S and I G at one thirty, typically it's two hundred plus basis points. So we've got quite a bit of way to go. If if that's the downs typical for typical for a normal run of the mill recession. Um, if it's worse, you know, I've seen strategist pencil in to fifty plus. We don't think it's going to be

that bad. So all right, putting perspective historic losses across many verticals in fixed income, given that at backdrop, what are your clients asking you today? Yeah? Um, what should we be doing about duration? So interest rate risk? Uh, you know we have an inverted curve. Should we be

adding duration? The answer is yes, in our minds, we should be going out the curve, should be adding duration because again our higher higher probability or recessionary risk you know, further out and inflation coming down that we should see at least stability in the long end of the curve. Tens thirties. UM, we do see some more upward pressure in the front end of the curve, so we would be adding duration in the longer end of the curve.

And this whole inverted yield curve stuff. It's I think it's like negative eighty basis points on the two tens. I'm an equity guy. I don't know. Is that important to you? It sure is. I mean, I think it's technical. You know, it signals whether you look at two s tens or the three months versus tens, certainly signaling that you know that there's stress on the way. UM. I think it's something that equity investors and fixed and investors should should certainly be aware of. All right, good stuff.

Jason Greenblath, senior portfolio manager at American Century Investments. UH, joining us here on a Bloomberg Interactive broker studio. UM, lots of good clients. I had an American Centry out in Kansas City. You got an office here in New York. You guys are everywhere. Uh, they've got about two billion in assets under management. How about that? There's money everywhere out there? All right, let's switch gears and talk a little quantity hate of analysis. How are the quant geeks

out there? How are they play in this market? Uh? So far? And what's the outloot going forward? And yes, I always refer to them as quant geeks UM. And you'll see why. George Patterson c I O Pjim Quantitative Solutions, PhD in physics from Boston University. Like he's like a rocket scientist and then he goes it starts getting investing during Thanks so much for joining us here. Really appreciate it. You know, how do guys like you and the way you guys look at the market and your clients. What

what do you make so far? Thank you very much for the introduction and uh and for the quant geek. Uh. I'm more than other people actually a rocket scientist because I actually did spend my first few years working at a NASA research facility before getting getting down getting into a quantitative quantitative investments UM. So if you look at the past three years, we've had three cycles. Really in

three years. We had a slowdown or a shutdown really from COVID, you know, extraordinary fiscal and government support and then the resulting inflation. So this has just been a massive shock to the system. I think the current environment is not surprising given that we've had such strong returns in the past couple of years, but those returns have really been fueled by, you know, huge stimulus from both central banks and governments, So so I'm not surprised we're

seeing a little bit of softness in the market. But the real what I see as the opportunity is that people have really just gotten out of equities and there's been a huge shock to the system because people are just selling things indiscriminately. So there's really a lot of relative value opportunities where where people are just getting out

of names wholesale and and not looking at fundamentals. Um that was really true in in but you know, we've really seen types of quantitative strategies that that are very broad based and look across markets, look across assets, really do very well because there's just been such a such a shock to the system, not unlike following the financial crisis, not unlike following the tech bubble, where it's really going to be several years of this going forward that there's

just been such a displacement, it's going to take time for things to get back into equilibrium. Well, George tell us a little bit about how quickly that could recalibrate if in fact the market is right, and if in fact we do see some sort of FED cut in the back half of that, the central bank is very I want to say, um um dogmatic for lack of a better term, in terms of saying no, that's not going to happen. But how quickly does the liquidity story change?

How quickly um does the positioning change if indeed the FED decides to pull that trigger. Uh, well, this is this is a challenge because everything we know indicates that the FED policy acts with a with a significant lag. So you know, we're we're seeing impact now from cut from from increases that were made months ago. And again it's a it's a challenging it's a challenging process. So, um, you know, from my perspective, how quickly can we get

back to equilibrium? It's going to take some time. There's a number of Um, there's a number of pressures on equity. I mean, first of all, people are just hesitant to be in equity when inflation is that level, at this level and rates are going up. All of our research shows that it makes sense to have, you know, some allocation of real assets, some allocation to commodities as as

a very good inflation hedge. Commodities may have pulled back a bit since the highs, but it's still had a great, great performance here today, and we still think it makes sense to have something like that in client portfolio. But there's a lot of pressure on equities because you know, many large institutions have just focused on private assets and that's been a great place to be. It's helped them

meet their long term return needs. But the challenges is that they're illiquid, so a lot of so what you've seen is as equities have come down, equities get marked to market every day. Your public portfolios get marked to market every day. Private assets don't get They're typically on a quarterly cycle. It's a slow moving cycle. So right now people are seeing their private allocations go up, mostly

because of the fact that they've just not adjusted. The problem is is that if you're in that position and now you're at where you need to be with your private assets and your public assets are worth less, you still may need to eat meat cash flows and you likely can't get out of those private assets, so you're gonna sell what's liquid, and that's likely going to be equities or fixed income. So this is gonna be structurally away on the market for you know, probably for the

next six to nine months. I think George as a quantitative manager, I just envisioned in your office, there's a black box sitting on your desk and it spits out trading and investment ideas all day long. Could you kind of lift the cover off that box force and tells kind of how yours works a little bit, how you guys identify opportunities. Yeah, so so so. Funny thing is that when people say quant I think, you know, quant gets you know, pictured as everybody's doing the same thing.

There's a there's a blackboard full of full of formulas, and that you know, all quantitative firms are the same across the street. In reality, there are many different types of quants. There are some that are kind of, you know, really much more like electronic market maker is very high frequency. We tend to and I view those more as a trading strategy, very short horizon. We tend to be much

more fundamentally driven. So you know, yes, we do have a number of you know, mathematical models about how we think markets behave, but one of the key hallmarks particularly at PIGION quantitative solutions, is that we're always thinking long term, you know, fundamentally driven or something that is really driven in research. You know, from our perspective, it's very easy with financial data to fool yourself. There's a lot more

noise than there are signals. So it's important to really have something that is that is driven by you know, long term investment beliefs, you know, long term models about how behaviors, how how investors behave, and how markets work. We find that that for a long term investor that's looking over a cycle is really the right way to

be thinking about things. So, yes, we do have we do have some equations, but a lot of times, like if you look if you look at our portfolios, you're going to find that they you know, they're a well diversified, but they oftentimes, you know, have stocks that we think are relatively attractive adjusting for growth um and and sector um generally slightly higher quality and places where we think that there's you know, like there's not really a chance

of a value trap. So if you look at our portfolios, you're gonna find they really make a lot of long term investment sense. And that's really the type of of equity portfolio that we build at at Pigeum Quantitative Solutions. On the multi asset side, we spend a lot of time thinking about how we position defensively, you know, whether we have stratg gs that provide downside protection or you know,

some strategies try to like offset with inflation. That's been a very successive I've been very successful call for us over the past cycle, where you know, we've always had a commitment to having some commodities in the portfolio, but it's really paid out very well for us over his past cycle. George, really interesting stuff. Appreciate getting a few minutes of your time, George Patterson, he's the chief investment officer at PGIM Quantitative Solutions. Well on other and I

think it's going to be potentially big news. US regulators took the first step towards the most widespread revamp in more than a decade of the way stocks are treated, a move that aims to spur better prices for investors and direct more business to traditional exchanges. Folks, That's all I know, um, but I need to learn more. I think it's important. Uh So, let's bring on Larry tab

He's head of market structure research with Bloomberg Intelligence. He actually does this for a living and he's very good at it. We also managed to have Barry Ridholts stick around a little bit. He knows a thing or two about market so he'll be joining us as well. Larry, can you, in layman's terms, tell me what the SEC

is proposing here? Well, they put out for proposals. The first is greater transparency on retail broker execution quality, so basically giving broker or individuals that the ability to see if Robin Hood or Schwab or Merrit Trade or whoever has better execution stats than the other. So so that's generally good. The second um is going to be reducing tick sizes. So the tick size now, which is basically the spread between the bit and the offer, is set

at a penny for all stocks over a dollar. They want to reduce that and they're going to create four different bands for the most active and tightest stocks. They're going to wind up making that a tenth of ascent. For the next tier, it's going to be two tenths of a percent. For the next year it's going to be half a penny. And then for all of the things that trade generally wider than a four cents they're

gonna make They're gonna lead at a penny. The the third thing, uh is they want retail investor orders to be auctioned off, so uh, they're going to try to get a larger percentage of retail float into exchanges to the auction. And then the last is the best execution rule, which not just only applies to equities, but applies to all other securities as the classes that the sec looks over, which would be uh, bonds, um option. I guess you know,

bonds and communies and corporates and things like that. So Barry hop on in here for the average investor, what does that mean? Good thing, bad thing? Yeah, anytime spreads tighten, anytime you you make the cost of execution a little cheaper, it's really good for for investors because their costs go down. And we know that costs are are a big drag. As much as we forget because the changes happened so

incrementally over time. This is and as much as you know, apps like robin Hood and the gamification have been in FOMO have been a crazy distraction. This really has become the Golden Age for investing, spreads are the narrowest they've ever been. You could buy and sell e t fs for free. And by the way, if you want to buy the whole market, the Vanguard Total Market or the SMP five dred it'll cost you three or four bits a year. So the world today is so different than

it's been over the past half century. We sometimes forget that. Yeah, I mean when I started trading on Wall Street it was price and increments of an eighth of a point. Boy, those were the good old days. Uh, Larry, you forget quarters. I know, I'm not sure. There are going to be some There are going to be some unintended consequences here.

Pricing stocks that tents um will probably hurt institutional investors who want to trade a lot, So we may see a lot of their orders go dark, go into a t s s, or go into hidden midpoint orders because they don't want to get their orders picked off. And with adding neither five or ten price points between each penny, what are size will go down. So the average order size now is about a hundred five shares, we will

absolutely see this go below a hundred shares. The average trade size will go below a hundred shairs UM and and any displayed order. You know, for five hundred or six hundred chairs, there's gonna be somebody who's going to penny you for a tenth of a cent or two tenths of a cent. So that's gonna push institutional flow into into the dark UM. And then the other question will be is you know right now the current wholesaling

process UM. The wholesalers work with the brokers to internalize a lot of this flow, but the swabs and the merrit trades and the Robin hoods hold them accountable, not just for the actively traded names, but for the ten or eleven thousand NMS names are basically all of the stocks. So we could see the most average stocks doing better, are the most um active stocks doing better and having

better pricing. But really we're retail investors do a lot of their trading in the less active stocks, the stocks that really have very little institutional demand. We could see their spreads getting much worse. So what's been the pushback or what do you anticipate? The pushback will be larry from the big Wall Street firms, the big trading firms. Uh, the big ones not not so sure. Certainly the retail brokers are going to push back because the wholesalers actually

take good care of them. These are the Citadels and the virtues in the Jane Streets and two stigmas. They take pretty good care of the institutional or the retail brokers, um, because not only do they give their clients price improvement. Now you can argue the price improvement should be more on the exchange and with auctions, will see that, but they also provide them with size improvement. Basically, they execute larger orders for for lower prices and they get they

get taken care of. In case, uh, you know, they have a bad trade, the market maker will make them hold. The question will be as um, what will happen there

and will the market makers continue to do that. The other thing is that the brokers receive a lot of money and payment for word flow, um, which the question will be, as will with tighter ticks and and this auction will will the wholesalers still provide them with payment for water flow And if there's not enough payment for water flow, the retail brokers could go back to charging commissions.

So I think, um, uh you know, on the institutional side, the brokers will probably be okay, they have algorithms that can trade in the dark, and a lot more of the flow will be automated. Um, it'll be the retail side that will and the whole sablers that will complain, and possibly even the exchanges because the exchanges, uh, they're going to see their access fees cut. Will probably see

fewer exchanges. There'll be some solidation there. Um, you'll see probably some some more concentration in the New York and nastac uh their formal exchanges, and I think you'll see New York NaSTA can see but maybe shutter some of their smaller exchanges. Currently there are sixteen exchanges. We may see that go down to ten, which probably wouldn't be a bad thing. All right, good stuff. We'll cap on

top of this. Larry tab he's head of Market Structure Research with Bloomberg Intelligence, and Bat Haults, head of Hults Wealth Management and the Masters in Business podcasts getting the latest on some chain just in the rules of how stocks are traded. It's kind of sounding like kind of the plumbing of the stock market to me, But I guess the takeaway, as Barry suggested, is and Larry suggested is lower prices for investors, and that's a that's a

good thing. Yeah, but I have to say on those headlines, you saw the likes of robin hood Shares, Virtue shares really take a hit, so you can see that this is going to have a very real effect for a lot of these brokers. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Put on false Sweeney I'm on Twitter at pt Sweeney before the podcast.

You can always catch us worldwide at Bloomberg Radio.