Don’t Blame Market Turmoil On Machines: Salient’s Ben Hunt

Hunt is chief investment strategist for Salient. They are based in Houston, and he is also one of the bloggers for a website it's called the Epsilon Theory and you can follow them also on Twitter at Epsilon Theory. Ben Hunt, maybe just tell people why is it called epsilon theory. That's a great question. Tim, It's great to be here, by the way, Thanks you and Lisa for having so. It's called Epsilon theory after the standard formula that you

learned about. Well, what goes into a portfolio? Right? We talked about a portfolio and its returns being a combination of alpha. Everybody knows what alpha is, right, That's that special sauce that you bring to to get better. It is to be honest, and the execution is a unicorn. That's that's that's well put, Lisa. And also everyone knows what beta is, which is, okay, I want to get the market. I want to get the returns of the

world or the market gives to you. But if you if you look at that equation, right, and it's always set up as an equation in your textbooks and the like, which is a whole another thing. Yeah, yeah, well the equation is absolutely actually alpha plus beta plus this E term out there E for epsilon, which is E for error. Right, that that in all of econometrics, you've always got that

error term that's sitting out there. And the point about epsilon theory is that, well, actually, let's unpack that error term a bit, because it's not just all randomness and and um what they call stochastic error in statistics. That's where market behavior lives. That's that's where game theory lives, that's where history lives, that's where market behavior lives, and there are patterns to that. It's not just random their patterns. There's a way to get real market information out of that.

So that's what I'm trying to explore all right. So that's a great place to start with understanding market behavior. In the past few weeks, a lot of people say that it was the market behavior of computers, and that they took over everything and created a big mass, and then humans were left to try to darn these darn machines.

Why were they? Why were they so complicated? H and other people were saying, well, people were just nervous, and uh, stocks are a good And then we had a ton of investment managers come on and we would ask them, all right, so are you buying and they said, well, not yet. What was The fundamentals are sound? Correct, correct, the fundamentals are sound? Are you buying? Not so much? Exactly every single one? So what's going on here? Well, I'll say this first, a couple of points to quit. First,

it ain't the machines, right, it really isn't. And I say that from a perspective of well, it's only we managed about thirteen billion, right, so you know, not a huge fish. But we know what we're doing and we've got a wide range of strategies. A chunk of those strategies are these systematic strategies, including the boogeyman du jour risk parity. Right. So we've been in this for a lot. I know I know right, right, and and what I think is important to tell everyone about risk parity. I'll

use that as the example here. These strategies are barges. They're not speedboats, right, and they and they react, they do react, and they react to volatility, but it's historical volatility they look at. And so I will tell you from our strategy and they say, we're not one of the giants here like in a q R or a Bridgewater, but the bones of all of these strategies are very similar. So I know what we're doing. I'm highly confident that I've got a strong sense of what those other risk

parity strategies are doing. We're not selling on a on a Monday when the markets declining. We don't even take the VIX, which is what most people think of when they think of volatility. That's a forward looking thing. We don't even use that. We don't even use that. These strategies are barges. And that ain't it. What is it? What is it? What is it? What was it? I'll tell you what I think what I what I think it is, because this is what we're wrestling with with

our own strategies and and asset management. In my conversations, I think this is what everyone is wrestling with. How how do you invest best in a world where inflation isn't going down, but it's starting to go up? How do you invest our our portfolios off sides for a world where inflation is increasing, not decreasing. That's a big change. Look, you don't have to go back thirty years to really

be in in an inflationary environment. And even if you were investing thirty years ago, and I certainly was, and I don't know a many people who were. Even if you were, those muscles they've atrophied a lot. So so I believe so strongly that every asset owner in the world is wrestling with these questions. And when you get an event like that kind of hot wage number we had on Friday, February of the two, those wheels start turning. You start thinking, well, am I off sides? Is my

portfolio right here? And when you've got a market that has very low i'll call it volume to it, that it has really quite thin liquidity to it. It doesn't take a lot of people changing their minds about where their portfolio sits to have an outsized impact in the market. All Right, I'm gonna make you dig a little deeper. Good.

What is coyote math? Alright, that's something I've written about recently, and it's I like to use these kind of examples from Yeah, I'm this dilettante farmer out in the wilds of Connecticut, right, So we have coyotes out there, and you are, well, I am, I am, and and the I admire the coyotes, right because they're smart, they're clever, they're they're much smarter than my dogs, for example, My my, my dogs don't even know they exist. But they're too

clever by half. They're too clever by half. And what I mean by that it's the same thing with Wiley coyote from the Looney Tunes, always scheming and planning. And that's the case with with real world coyotes. But it's also true for the coyotes in our business, because this business of financial advice and financial management attracts people who

are frankly too clever by half. All right, So real quick, thirty seconds, what has been your biggest allocation shift concept shift that you think investors should know based on the signs of nascent inflation. So what you have to distinguish between is inflation going up and interest rates going up. There are two different things. They follow each other, but that connection between inflation going up and interest rates going up is the thing that everyone needs to be focused on.

And this is why, Lisa, to your question, people say, oh, the fundamentals are sound, but I'm not investing. It's because the fundamentals have not been a sufficient condition to invest for eight or nine years. Now. What you have to have is some notion of Okay, I like the fundamentals, but what are the central banks going to do? What are they going to do about interest rates? So we can talk about inflation going up, but it's thinking about

interest rates as well. Ben Hunt, a pleasure having you on. Thank you so much. Thank You'll let you go back to your coyotes. Ben Hunt, chief investment strategist at Salient, which is based in Houston, Texas and overseeing about thirteen

billion dollars of bassets. There has been so much focus in the past few weeks on Russian interference in US elections and UH their encroachments in the cyber world of the US, but there are many other states sponsored actors out there trying to infiltrate UH the technological ecosystem of the U S. And here to talk about that is John halt Quist, director of intelligence analysis for fire Eye based in Washington, d C. He joins US Now, John, thank you so much for being with US. I wanted

to start with North Korea. Fire Eye has identified them as behind a very sophisticated state sponsored cyber attacker. Can you give us a sense of what that effort looks like and what they would or have or will target in the US. So, we released recently released a report on a group that we call APT thirty seven. They're a North Korean hacking group that's been primarily focused on South Korea carrying out espionage sort of a classic mission for quite a long time. But we've seen them since

actually UH start developing missions outside of South Korea. They've shown up in Japan, Vietnam, in the Middle East. UH, and our concern is that this is another tool that could be used by the North Korean regime to project power. UM. They a lot of the activity that we hear about North three and hacking activity has actually been attributed to

another group UH. This team has been able to remain relatively obscure, which makes them an ideal choice for attack operations or even crime because they're not as well known. What have they attacked so far that you've been able to trace? So most of their operations now appear to be uh focused on sort of classic intelligence operations, are classic intelligence collections, so uh things like defectors or sanctions or unification efforts. Even the Olympics have been have they've

targeted individuals associated with the Olympics? Um, So they're right now doing a lot of the low and quiet activity, which is precisely the side type of activity we see most nascent capabilities first focus on. For instance, the other acting groups that have been that are out of North three that they are very well known, first appeared to

US as espionage operations mostly focused in South Korea. So John, I know, perhaps it's premature to talk about whether North Korea will be able to infiltrate the US cyber ecosystem, but I'm wondering, from your perspective, what areas are the most vulnerable in the US. And uh do any of these sort of state sponsored actors work together? Do they? Uh? You know, do you have a sense of how many there are trying to infiltrate a system at any given time.

So UH, as far as working together, we're always concerned that lessons are being passed between some of these countries that have longs like Russia, uh Iran and North three. They have long standing relationships in military and move military armaments and the training which sween them. We haven't necessarily seen that play out from our visibility. Um our biggest concern is that they're actually learning from each other though

as far as their offensive actions go. So each time one of these actors carries out a major attack, a disruptive attack, or um more of an influenced type of attack that we saw during the elections, there each each one of them is sort of pushing the edge for the other and pushing the norms and the red lines that the other other actor feels now more comfortable operating within. So UH, in that in that regard, they are sort

of learning from each other. Would you would you say that all heads of information technology or even the boards of major corporations need to ask themselves are you happy? And I use that term because that's what you describe something tell people about are you happy? And why they

need to be particularly wary. So one of one of the concerns that we've had with any North Korean actor is, um, are they are they going to carry out some sort of disruptive and destructive attack And uh, that's one of the tools that we came across with regards to this actor. They do have a destructive tool that could be used

in a wiper type attack. It's a fairly simplistic attack, um and that's the name of the tool, and uh, it's a fairly simplistic attack, but it can have a lot of pretty strong effect on a on an organization if they can wipe uh, you know, wipe important systems simultaneously.

And that's happened on several occasions already. From a lot of that is the Russians, Russian actors that have done that quite recently with a with a ransomware attack and it actually caused billions of dollars and damages to the economy. So it's a very real concern. So John, just real quick here, which organization in the US is most vulnerable at this point? Well, it's because they because a lot

of their it's of the incidents focus on critical infrastructure. Uh, there's record that that recognized that represents often the biggest opportunity. We anticipate that any sort of major disruptive or destructive attack would focus on an area like that, and there's been a lot of other incidents UM that have that have played out like that. Uh. It's important to also remember that critical infrastructure is not just utilities. I think there's a lot of people to often focus on utilities,

but UM logistics and finance. UM. I want to thank you John hould Quist, director of Intelligence Analysis or fire Eyed talking about cyber attacks. Everybody wants it, but now Apple wants to get it even more directly. Jack Farchie is the senior Energy and Commodities reporter for Bloomberg is based in London. Jack tell us the story about Apple

and why does it want its own direct supply of cobalt. Yes, we've had this amazing shift in the cobalt market really in a matter of a little over a year, where the change in expectations for electric vehicles. You've seen almost every major automaker come out with with forecasts for how many electric vehicles they're going to build in the next few years. Glen Core, who reported results today, had a

nice little toss up. They said it's going to be there's a ninety billion dollars of investments announced by the auto industry in electric vehicles, and that's had a huge impact on the cobalt market because cobalt is an essential commodity in the in most lithium ion batteries which are used in electric vehicles, where cobalts also uses in licking iron batteries in gadgets like smartphones and tablets and laptops until now, in fact still now, Apple is probably one

of the largest end users of cobalt in the world.

Apple gadgets along with things companies like Samsung UH some of the largest users of cobalt um As these car companies are beginning to come out with huge forecasts for how many electric vehicles are going to build over the next five or ten years, they are going out into the market, people like VW BMW going into the market and seeking to sign big long term deals to buy up supplies of cobalt to ensure they're gonna have enough cobalt to build all the electric vehicles they want to

UH and now we're seeing Apple doing the same thing, essentially, looking at what's happening in the in the car market and what some of the car companies are doing, and in our in our understanding, wanting to make sure that they are going to have enough cobalt to UH to build to carry on building iPhones and iPads into the future. All right, So who does Apple currently buy cobalt from? And basically who's going to be losing business as Apple cuts out the middleman and goes direct to the miners.

It's not so much a question of Apple losing business at the moment. Apple would go and buy batteries from battery producers, who in turn are buying components of batteries from people who produced those who in turn are buying the WAW materials in a in a supply chain that goes down the chain. So at the end of the day, Apple is not gonna, we don't think, immediately start building batteries of itself. They're just it's it's a question of securing the supply of cobalt for their supply chain, for

the companies in their supply chain. Now, a cobalt is a byproduct of mining for copper and nickel primarily, that's right, Where does it come from? Well, that's one of the main problems. The vast majority of it, about thirds uh, and that's a number that's set to grow, comes from the Democratic Republic of Congo, which is not the most Even if it were the most stable country in the world, that would be a pretty significant concentration risk for any

commodity UM. But uh, Democratic Republic of Congo is not the most stable country in the world. They've just announced a big planned increase in taxes on on minors uh, and so that's a big concern. So I'm looking at cobalt prices and they have skyrocketed in the past few years. Wean just to give you a sense, from the end of twenty sixteen, they've more than doubled uh. And I'm just wondering it is the actual demand going to keep up with the perceived demand that is driving prices now?

I mean, in other words, is applicant to lock in prices that are much higher than which you might be able to get later on. That's a very good question. I think from what we have heard about the discussions that are going on in the market, it's not so much a question of locking in prices as locking in supply.

So probably believe the deals that have done. Not just talking about Apple here, but v W, BMW, the big car companies, some of the battery makers like Samsung, SDI are also saying that they're seeking long term cobalt deals. They're probably gonna have a floating price, so it will be whatever the market price is. It's more a question of of locking in supply. Whether the price stays at

this very high level is another question. If the shortage that some people are looking at and fearing for the future does materialize, then you'd have to say that prices would go higher. But that's several years down the line. I'm surprised that they're not lacking in a price for a long term contract. It's very hard to lock in a price in in the cobalt market where it's going. It's gone through this kind of um real complete paradigm shift because of electric vehicles. So the price has tripled,

as you said, in the past eighteen months. Who knows what the right price is? Yeah, it's it's very it's very hard to say, you know, you do you you take five different forecasts for what electric vehicle production UH and UH and and sales are going to be in UH, and they're wildly different. UH so who can tell you what the correct price for cobalt in five or ten years time. Nobody can. Jack Fartie, thank you so much

for joining us. Jack Farchie, senior Energy and Commodities reporter for a Bloomberg News coming to us from our London bureau. You can find his story on the website Bloomberg dot com or the terminal itself. Yes, let's talk about housing. US existing home sales in the month of January falling a little bit more than three percent. Here to help us understand what's going on is Brad Hunter. He is the chief economist of Home Adviser. They're based in West

Palm Beach, Florida. He can be followed on Twitter at Bradley Hunter. Alright, at Bradley Hunter. What what's your view of the of the housing market and this time that we saw on the run rate of about five point four million units morning, Pim. Well, Yeah, I think that clearly the housing number was lower than expected, and I think there are three different things that play. Number one is the inventory and that's what everybody's talking about right now,

three point four months of supply of unsold inventory. And secondly, uh in January mortgage rates were starting to edge up, and of course they've gone up a lot more since then, and I think they will go up a lot more going forward. And the third factor is that prices were up also in this reading, and uh, I think that the rate of home price appreciation is going to slow. So Brad Home Advisor helps homeowners figure out how to

renovate their homes in an effective manner. Correct. Yeah, we connect where the marketplace that connects homeowners with the pros that they need to get their projects done. So, just can you give me a sense of what you're seeing from that perspective and what it tells you about the sort of mental state of homeowners? In other words, are they looking to invest in their homes and expand them because they don't want to move out? Or are they investing in their homes in order to sell them at

a higher price. Can you get a sense of that? Yeah? Sure, Well, uh, we just talked about the low inventory situation and it's actually part of a vicious cycle. Um. Low supply of homes for sale causes people to stay frustrated and I have trouble getting the home that they want, So some of them say, you know, I'm just gonna stay put

and remodel the house that I have. A lot more people are looking to move because they are tired of their current home, according to research from n A are than people who are moving for a job that's in a different area or what have you. So that further reduces inventory because people stay put and then the cycle just lather, rense, repeat, right. Um. The other thing that

I'm noticing is trend I'm calling nesting is investing. There's all this stock market volatility, and I think it's going to drive some people to say, you know what, instead of staying fully invested in the stock market, up all some of my chips off the table, and maybe go ahead and reinvest in my home and you know, expand or improve the property. And you know, that's a pretty safe investment in terms of any risk. On the downside, Brad, you note that the size of home improvement or renovation

projects is increasing. Expand on that, sure, we're seeing more what we call major renovation projects. Our year end survey actually showed that most home improvement companies and professionals saw an increase in the size of their average job, whereas only five point eight percent reported a decrease in the average size of the job. So people are taking on projects that they had deferred years ago. Now that the economy is stronger, and more importantly, either equity in their

home is much higher. They're saying, Okay, you know what, it's time to do that kitchen update that I've been wanting to do, Or it's time to turn that basement into a man cave or into a rental unit, or redo the garage or the tile or whatever it is that they've been wanting. So they're taking on more discretionary projects, more of what I called lifestyle projects. I'm wondering bread which parts of the country are seeing the fastest rates

of spending on home improvement. For the past few years, it was the markets that we're seeing the greatest increases in home prices and therefore homeowner equity, So San Francisco, San Diego, New York, Miami, Seattle, Portland's and now it's starting to shift. Those markets are starting to um kind of slow down because they've had these very, very rapid increases during the slowdown, and so now that some of the interior markets and second tier markets are starting to

take off in a big way. So Milwaukee Columbus, Tampa, markets like that are starting to see um very strong growth. And uh I've been working with the Harvard Joint Center on Housing studies and they are predicting strong growth in those kinds of markets and and uh I can to continue to watch those with them. So, Brad, does that imply to you the prices in the big cities that you mentioned are going to stagnate while they continue to

accelerate in the more central parts of the country. Right, So, I think what we're going to see is um these continued increases in homeowner equity. We've seen already at doubling in equity in the country in the past five years. That's huge, and so the markets that have already experienced

a big boom are going to just taper down. But the the the rest of the country is now just playing catch up and just quickly bred Any any change in where people are going to be buying homes because of changes in tax laws and the deductability of interest payments, Yeah, I actually don't think that the tax law change is going to have a huge impact on the aggregates home sales numbers. It could shift the mix geographically or even um across the different strata, for example, luxury home buying.

The luxury home buying population, if you will, will start to enjoy higher after tax income, which will help home buying and remodeling at the high end and in the expensive markets, and the rest of the housing market won't be affected very much either way in my opinion. Brad Hunter, thank you so much for joining us. Bread Hunter chief economist for Home Advisor, which is based in West Palm Beach.

We will continue attracking the housing data that we just received, as well as the auctions later today of US Treasury. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo wits one. Before the podcast, you can always catch us worldwide on Bloomberg Radio.