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Hello and welcome to another episode of The Odd Lots Podcast.
I'm Jill Wisenthal and I'm Tracy Alloway.
Tracy, Market's getting interesting again.
I love interesting markets.
We do.
We always say we're long volatility. That's right here at the Odd Lots Podcast. All financial journalists are long volatility.
I guess yes. I mean you can actually see it in the listeners and readership numbers. Our traffic follows the.
Vin there's some bad incentives. Yeah, perhaps perhaps, but if it bleeds at leads. I mean they've been saying this about the news forever.
Yeah.
So at the moment, we are recording this on Friday, November.
Fourteenth, at ten oh seven am.
Yeah, we have to say that we have to be very specific because things are changing so fast. At the moment, the S and P five hundred is down like zero point seven percent, but it was down more than one percent earlier, and then yesterday it fell, you know, one point eight percent. So this is a pretty substantial slide. And of course it comes at a time when people were already worried about things like tech valuations and the possibility of an AI bubble.
Totally. The US DOC market has had a phenomenal year, and this is all kind of minor in the grand scheme of things, but some of the moves haven't been that minor for some big things. It is some of the most volatile period since April. Really, I mean, it's kind of been a smooth rite up since the end of April or the middle of April, whenever that bottom. There's just a lot going on questions about the FED.
Gold interestingly had a massive year, and it also is selling off, so that sort of raises the question about what's been driving gold Bitcoin getting absolutely clobbered. Of course, you know, it's sort of a glorified tech stock and the way it trades, so many interesting things, so many market winners fading a little bit.
You know, it was really interesting this morning. For a second, bonds weren't really doing anything. They weren't rallying, And so if you can't go into gold, if you can't go into bonds, if everything's selling off at the same time, that seems kind of worried.
Well, this is really interesting and probably needs to be discussed more. But you're absolutely right. I think yields on the tenure were actually up yesterday, November thirteenth. In the last week I was looking at the work function on the Bloomberg terminal. Odds of a December rate cut have come in quite a bit. It's closer to a coin flip.
A week ago is sixty six percent. There have been some speeches from some of the FMC members talking about you know, they're uncertain, and part of the reason were uncertain because we've had so little data. I guess we're going to start getting data again now that.
The although it's still going to be messy.
It's still going to be super messy. You know, Understanding the economy in real time is hard in the best of times. It's really hard when there's no data, and then it's really hard when the data that does come out is going to be driven by the lack of government employment, which then make the data even more ambiguos. So a million questions, very interesting moment in a very interesting year for markets. We sort of got to get a better understanding of what's going on.
Can I say one more thing before we get to our guest, which is I think part of the discussion at the FED. We're kind of getting very circular here because I suspect what's happening is, yes, the FED is worried about inflation, so some FOMC members are getting a little bit more hawkish in their speech. I think they're
worried about AI bubble possibilities and valuations as well. And the longer they heat right slow, the longer this goes on, and then maybe the mess is even bigger when they eventually have to clean it up totally.
All kinds of crosswinds, yea to speak well. Anyway, I'm very excited to say that we do indeed have the perfect guest, someone we've never had on the show before, but very excited to talk to him. We're going to be speaking with Dirk Villa. He is the head of Global macro strategy at City. He brought us a book to that he co authored, Trading Fixed Income and FX and Emerging Markets.
It's going to be useful in the US, I know.
That's the thing. It's like suddenly all these em veterans like, let's tell you how some of these things really works. So, Derek, thank you so much for coming on the podcast.
Great to be here. Thanks for the invite to ask.
You a question. If you went back, say a month ago or a month and a half ago, you're talking to clients, et cetera. Did you ever encounter a single bear?
I mean, I'm trafficking more among the macro people than the equity folks, sure, and the macro guys always half class empty, right, So that you did find some bears, and I would say, actually only a few weeks ago that disappeared because there was a really strong buying into the center, really right, So meaning November and December have exceptionally positive seasonality always, and they've even better seasonality risk and risk and exactly. So I think the bears that
we found disappeared over the last few weeks. So maybe just at the wrong time you value, but that's how it goes.
Right, Yeah, How do you officially measure sentiment in this market? I'm always curious because obviously everyone has different methodologies, but sentiment seems quite key. When you're talking about a ball run that's really driven by tech stocks and this AI narrative, the story becomes so important.
It's actually really key to this because if you were to say, listen, this is the top of a bubble or something, you'd have to see really really into the
ztic sentiment and we never quite saw that. My favorite indicator is because the polls indicated stands for positioning and various other things, and that is something that we put out and that worked really really well this year and actually the last five years for that matter, and that never went into territory that really told us to be cautious.
We do a bunch of surveys, so we survey all the big asset allocators worth the futrillion in asset under management, and they never got as bullish on US equities because after April there was a big move outside of US equities, as you know, and they never really fully jumped into the US equity market as much as they went outside
of the US. So we always thought, you know what, there are certain stories here that definitely remind us of two thousand of a bubble, and on our definition, actually it is a bubble, but it's not close to the end of it. And one missing component was really the sentiment that never got as extreme on our measures.
We're definitely going to get more into the bubbles, especially the two thousands. But before that, I want to ask, how do you square I guess non frenzied sentiment with the amount of announcements that we're getting from companies. We're joking on the podcast that every day while we're recording this in studio, we get a new headline that, you know, Anthropic is going to spend fifty billion on data centers, or someone else is going to spend one hundred billion. It just goes on and on.
Yes, that is, It's very true.
I mean, I think the market is starting to question those numbers a little bit. Right when the Oracle deal came out, for example, the stock jumped. Guess what, We're back to where we were before the deal was announced. So I think there is a certain sense of skepticism a party because some people think they've seen all that before, right, and people bullish. I'm not telling you they're bearish.
I'm just telling you they're not as excited as you might have expected.
Just watching the price action, I think that is more than us here and the actually none of the indicators suggests that. I mean you, I'm sure everyone has their own favorite, but it's really very rare to find one that tells you, you know what, this is in line with what you've seen at other market tops.
You know what, since we've never had you on the podcast before and you know, the author of a book on and you have a great job global head of macro Strategy City. What do you give us the sixty second background of what you do and how you got here, like what's your job? And yeah, okay, how'd you land here?
Yeah?
I came over to the US in ninety nine. Essentially it's joining a macro hedg fund. We traded back then and again right now. Actually, I think it's all about the bubble. That's the single biggest call. Everything else will fall into place. Whenever the bubble bursts, the dollar weekends, the FED rates will go to zero on maybe not quite to zero, but you could AGGRESSI effect. So everything that's what you have to focus on.
And so even though I joined.
The hedge fund back then as an em specialist, very quickly I looked into companies because we really had to
figure out when is this dot com bubble over? And then we you know, we traded very successfully actually the run up and the run down, although I would say it's way very hard to trade a beer market because these bear market valies are really quite vicious, and so in the end, all the money was made being long fixed in come rather than being short equities, but broady speaking, that was me shifting from emerging markets to global macro, if you like.
But then I went back.
To the buyside party because you know, the particular hedge fund never became as poolish again on the bull market, having been successful bearish for a long time.
So people are cursed by good luck getting bear markets right and then ver rare haunted by that for the rest of their career.
Very rare, very rare.
But yeah, So at Citybank, I covered emerging markets for a long long time and switched back to global macro a few years ago. And and as you can imagine, it's mostly speaking to hedge fund clients, to some money clients, some corporates. What we do a bit differently is that I have a big quant team, So essentially we back test everything under the sun, at least to get your price right. Things are always lightly different, but I think it's very important to have the right prize, and that's
what the back tests give you. So we have a big quant effort, be a very trade sort of aggressive and putting a lot of trades out and Martin carefully and and I have a bigger major market angle than most, which I still think is extremely helpful in this environment.
So since you've been around for a while, let's talk about the two thousands dot com bubble or nineteen ninety nine two thousand dot com bubble. Obviously people are using that as an analogy for this period of time. But we had someone in our discord actually shout out to Burflyer asking, yeah, asking whether or not people were talking about dot com stocks tech stocks being in a bubble the way people are talking about AI stocks tech stocks
being in a bubble. Now, what's your experience? You know more than twenty years ago.
Back then it was even clearer than now. I mean, if you remember NaSTA when the fifty percent.
In Q four, Yeah, and.
I remember some stories and we had some analyst pictures all the time. So there was an analyst for Nokia who said, don't worry that we need more than one hundred percent cell phone penetration in the world because Petsville were cell phone like.
It wasn't wrong, but.
So you get My favorite pitch was for Akamai, where when analyst said, you know what, the reason why the company will do well is the only three people who understand the formula. That's that's basically at the base of it, and all three works for akama So I don't worry and.
No worry about it. We knew it.
It's literally there's just no one who could ever replicate this technology because only three people who could build it, and they got it right.
These type of things happened back then, and of course not to pick on Akamai, but it know it. It went up from I don't know thirty to three hundred after the IPO and back to one.
You know this is yah. Yeah, these type of things happened, which.
That was one of the more legit companies.
Yeah you know that exists.
Yeah I don't Yeah, I'm not covering them or anything, so I don't comment.
But yeah, yeah, yeah.
This reminds me of what you always say, Joe, things can always get crazier, right, Yeah.
Yeah, it really does feel like you see some event, you know, like there was that you know what I was thinking about when Jensen wan I think it was about a year ago now, maybe nine months ago. Remember he signed a woman's brat, right, remember, and everyone's like, oh, this has got to be the top, right, because that's just one of those things. A semiconductor top signed, that's right. You know, it's like why a CEO of semiconductor company getting like legit rock star treatment and how much is
in video up since then? Setting aside some of the recent wobbles, there is no point where you can definitively say, oh, this is the people, right, There's always it could always get weirder.
Yeah. You know what gives me sleepless nights is actually that the two thousand episode is not the right benchmark, right, because if you use two thousand, you could say.
Everything's fine, Yeah, everything fine, very bad.
But of course not every bubble has to get as crazy as the two thousand one, you know. I mean it wasn't extreme even by bubble standards, so that is a bit of a risk if you focus too much on that one.
Do you have a preferred historical analogy for our current period?
And I do think two thousand is probably the closest, just because it was also very tech heavy and it had a big CAPEX built out attached to it, so that makes it good.
I mean, the nineteen twenty nine mines.
Of All the Mother of All Bubbles, if you like, and that was about you know, like cars and electrification and consumer gadgets and appliances rather, so you could use that, and that is actually the one that people used in two thousands. So you always go one bubble back if you like to make your case and to argue maybe why things can go very crazy. But I think here the many things at rhyme.
So one thing that Tracy brought up in the intro, which is very important, is that rates in the recent days haven't come down that much. Today they're down a little bit, but by and large it's not like treasuries have been this great life preserver when the rest of your portfolio isn't working. In fact, actually right now and doing time stamps again, we're back at four point one one. We were down at four point h six earlier round nine. So even that once again we don't see this bid
into treasuries. Rates are sort of down overall for the year a little bit, but there's not this desire to grab them talk to us about what's going on in that space.
I think the reason is that a lot of the bullishness of the last three weeks was based on one simple statement is saying, listen, we're building a bubble and the FED is cutting into that. That never happened before it, right, And obviously in two thousand the hike behind the seventy five bass points, they hiked fifty basis points after the bubble had already beaked. So I mean, you know, they and they had inflation that it was not.
Without any reason.
But for sure, it's very unusual for the FED to cut into a bubble, and that was a great both thesis. And so now we're doubting that a little bit, right, I mean, so they are basically having a feed that might be more hawkish.
December went to fifty to fifty essentially, and so if.
You remove that plank of the argument, value should be all in inequity, it has consequences, right, And so we warbled a little bit for that reason. But I mean I would also remember, I mean, the hiked one hundred and seventy five basis points before the bubble peaked in two thousand, right, So will it be the end of the equitiable market if the FED doesn't go I mean, I doubt it.
Talk to us a little bit about these doubts that are creeping in for December. I mean, we're truly in a fog for multiple reasons. Because even if we had government data. I'm sure the conditions plenty of different crosswinds. We don't have the government data, but like one thing we do seem to know is that hiring has been very weak and so fourth and several of the months almost certainly that would be the case for October and November if we had clear indications on it. What is
the reluctance right now? Why is it a coin flip?
Yeah?
I mean well, I think the single biggest thing is, of course, all the comments were getting out of the FED right, and we had you know that, the tweet earlier this week, and so in the end, if you try to forecast the FAT, you better listen to what you're saying.
They were exactly given the weakness, so that I think the question is of course all about the job right.
The reason is a job market inflation.
You can argue maybe tele inflation were not tr up so far it has been way benign. Some FAT members believe it's s throwing up, some others don't. But I think the main crux of the question is the job market.
How week is it now?
The Dalla's FAT put a paper out arguing that if you get slightly negative net migration. The break even NFP is thirty k. If you get slightly positive net migration sixty k, so that that is somewhere the range where these days and FP should come in without there being a problem. Right, So if you if, then if p press and of course September we know is somewhat artificially strong. October, if we get it, would be artificially weak due to
the government buyouts. November is a really interesting one that might have a bit of an impact from the shutdown and so forth, so that may really clean one. Maybe we have to dad even longer. But let's say we take November is as good as it gets for now. So if that is below thirty, there'll be a cut, right, If it's below sixty, there'll be probably no cut. It's somewhere in between. They'll find it out. But without that data, it's just hard to you know, reassure the market yes.
There'll be a cut, or no, there won't be.
So the job market data will be very, very important. We've got a lot of alternative data sources. Of course, in the meantime, by be wading, they were a bit on the weakish side. So that's why the city call is actually for a cut, I mean the noises out of there from seever certainly a little bit all over the place, so it's not that obvious.
Yeah, and a lot can still change between now and the meeting. Okay, so if everyone I mean I realized, not everyone agrees it's a bubble. But for the sake of this argument, let's say we all know it's a bubble. It seems like one of the things that happened, especially since the financial crisis, is people stopped running away from bubbles and started running into them, right, and so everyone
wants to make money very very quickly. So if you see the line continuously going up, you just join the party, and everyone assumes that they are smart enough to time the top of the bubble and get out at the right point. What's your take on how long this is actually going to go on for and what are you looking at in terms of actually spotting that top other than sentiment, which we spoke a bit about.
Yeah, it's a big question actually even inside city USC strategists.
It's the cost believe me that it's a bubble.
But we have a definition, so'll you know, we cannet do something. So the definition for us is it's a little bit like the GMO one, which is essentially saying something goes up more than two standard deviations against the long term trend. In real terms, we call it a bubble, right, and then whenever you have a big sell off, you restart the clock, because when you have a big sell of, you essentially the sentiment goes to zero, and so you have to rebuild it.
And on that.
Framework we end up bubble territory sort of, I guess in May June of this year. And when you do that, the interesting thing about it is, as you point out, it goes up. So once you end up oup the territory, you're supposed.
To buy it.
And the only time and that didn't happen was nineteen twenty nine.
It went straight down.
And I think the reason for that is a little bit that the way people define water bubble is the use nine is twenty nine, right, and so and we did that too, and so therefore that's the only on all the other episodes, you.
Go straight up, so you buy it when you enter.
But the interesting thing is, and clients ask me, well, if that is true, what's the difference beween the bullmark and the bubble you tell me it's going up. And the difference is that if you buy it when it enders a bubble, you will give it back eventually most of it. Most of the in bubble gains will be given back, so it will lar badly, right, And so that I mean, you don't necessarily give back everything all the time, but in most episodes give back most of it,
And so that makes it an important definition. Now, Unfortunately, when you study that, it's not like clear how long they last. I mean, the on average, I can tell you the two years of above average returns followed by below average returns, and on a ten year time horizon your below average return. But it can vary a fair amount,
and so that makes it hard. I would say, if you look at two thousand again as a template, if it'll certainly not help you to look at fundamentals, right, I mean, so what happened was Nastik broke in March and everything still figher two thousands, okay, So and when that happened, fundamentals road over in September, so that there was a six to seven month period where fundamentals still look just the way that you had looked before.
I guess because everyone was spending so much money on capex, and like takes a while for that to roll on.
Yes, exactly, And of course it's highly circular.
But people spend on capex while the equity is going up, so actually stops going up. They start to reconsider what do we do next, So then everything wills over exactly. So so if you look at an immensive, probably not capture it, which means it will be a highly technical thing if you want to call the top.
And it would be helpful if you get a blow off top.
Like you know, if you get to the fifty percent in one quarter, you know you probably have a bigger chance to get it right. But I think it's really quite dangerous to be early in this thing because well you will not hit it precisely on the day your eyes earlier either or you're late, right, And I think if you're late, you can control a little bit more how much money you don't make in a sense.
Right.
And so one framework that we have we call it the general's framework, because what happens in this bubble generals the general because it becomes very narrow, and that's a feature of the bubble, it's not an exception, right, And so this, this narrowness means that if the leaders start
to break down, it's a real warning sign. And so what we look at and we just at the top seven leaders because people are excited about max seven, but it could be ten or basically on our numbers, if three of the top seven breakdown, meaning they fall below the twenty moving average, that's a really dangerous sign.
Twenty day moving day.
Okay, it will not be early, right because by the time it triggers, the market is obviously down from the peak. But I think following that has saved us a lot of money on the downside when these things happen. So that is something you can use because it will be technical, it will not be fundamentally this happened and get.
Out this is fantastic. So let's just sort of like just to sort of summarize this because that was actullent. So the bubble condition has emerged when the games are what is the timeframe we're talking about, So you say two standard deviations above the real long term?
Yeah, exactly.
So I mean they measure the long and performance. It's actually rolling windows. It shows every year and it's just the linear trend that you that you put through it, and then you can see how.
How much you go to standard deviations and trend in real terms.
So we deflate it because in the seventies a lot happened, right, you're in a bear market.
But the two standard deviations in like a certain period of time or like.
How do yeah, yes, it's the yearly returns.
It, okay, and then the warning sign So in your view, you know, if you think about sort of profit maximization or risk minimization or whatever, the thing to look for is when three of the seven leaders break down or why is that?
Like yeah, yeah, I mean just in a sense, we just back testa right, we just we realized, Okay, there's something special about these bubbles where the leaders carry the weight for a long time, right, And so you have to find out, well, when the leaders break, what is.
A danger signal that actually works?
And it's always a trade off between giving you too many signals you leave money on the table, and to a few signals where you you take part in the downside that you want to avoid. And so what we found is if you use that rule for two thousands or for others that we have in the sample, you know, once three of them break it's becoming the odds are not in your favor anymore.
Can you apply this framework to gold? So this is the interesting thing, which is that we don't typically associate booming stock markets with booming gold, especially because gold is associated with fear and pessimism, et cetera. Talk a little bit about what's going on.
Gold is just very very interesting. I mean, the first leg up was essentially this whole central bank story, right if if you think about it, all started really with the crimea issue and put in making innocent three bets. When he diversified away from the dollar, right, he bought euro he bought CNY, and he bought gold, and Europe was not a particular promising bed. In the end, CNY was a good bed for him. But obviously China cannot bet on the CNHY and that is gold for China.
And so the I think in the very very big picture central banks that are very important for the gold market.
That gold market boughtoned.
In the nineties seven the Bank of England was done selling gold, and it will probably peak when the PBOC is done buying gold, and they still could buy a lot. So that I have no issue with as a structural story, long term story. What happened this year was not the central bank buying, at least not as far as we can help from the official data. It was much more this whole debasement fears that trapped into gold. And the first leg was very easy for micro guys to understand
and participate in. That was just you know, the Fed is going to cut, and whenever the Fed cuts, you know, the dollars sold off into the first cut, rates fell into the first cut, and gold went up.
So that is as it should be.
Now, then what happened if you remember after the first cut, rates went up, the dollar went up and gold cut going up, right, And that was roughly the time and Stephen Marin talked about the third mandate for the Fed and things like that, and so the debasement fears became more acute and that propelled go higher. Now, the interesting issue is that it was really not that much the institution investors right, because all the other debasement trades didn't work.
I mean, the curve did not steepen, break evens did not rise, the dollar did not fall. So it was a retail driven debasement fear, and you saw people lining around the RBA in Australia trying to get physically gold out of the vault. Right, so it was it became a memestog almost for a while. And so while it hasn't actually triggered our bubble levels, if we apply the same methodology, it certainly I think became too dangerous. And so we actually got out of gold a little while ago. Now,
the debasement story is an interesting story. It could come back, right. You saw gold consolidated for a while and then when Trump discussed two thousand dollars for everyone, then gold started to take off again because people start to think, well, maybe that we have to trade the basement again.
And that's a very big call.
And personally I think the new AFMC will be more domash than the old one, right, I mean, we don't.
Know quite yet who will be the head of the FMC.
It's likely to happen, and so the debasement story could come back, but you have to time it fairly well because you have a lot of retail in it and it already moved a lot. Right, So in the debasement feres, I think it might be next year's story run this year's story. The central bank story will come back eventually, but it's I mean, China loves to buy pullbacks rather than the high, so I'm not quite sure how that then they will come back. But structure, I think gold
is likely still okay. In the short term, we're a bit more cautious.
Well, if gold is off the table for now, and bonds, no one really knows what they're going to do. How are people actually hedging and what are you recommending?
Yeah, very good question.
What people typically do, which is actually dangerous in a bubble, is that just buy some put spread in the SMP. Now, the issue is in a bubble, if you first go up another thirty percent, the strikes so far out of the money that it will just not help you.
And we saw Michael Burry who was like the poster boy for calling the AI bubble closes fun this week.
So yeah, so I think so the obvious thing actually became harder to do in a bubble. The other issue is can you use currencies? And that is also very interesting, right because the correlation between the dollar and there s
MP changed somewhat, and it changed in April. It used to be the case when there's some pieces off, the dollar goes up that correlation flipped on us in April, and while there's a lot of debate whether the correlation will move back to positive or stay negative, I think if we are talking about a bursting bubble, that would be done a negative, right.
So there are structures that allow you.
Cheap adges if you're fitting to bed on SMP lower and at the same time dollar weeker, right, so that might work. What we have actually recommended is to do something in credit because the way I see it, I mean, either, you know, the AI bubble continues to move higher and then credit will not benefit very much from it, and there's no you know, there's not that much a I related credit in the indsease, and in any case, people start to worry about credit on the I front and
spreads e extreme tight. Of course, on the other hand, if the US has a bigger problem than we're thinking and the labor market falls through trapdoor, and then you know, to credible to protect you really well, So so credit is something to look at.
Let's talk about your em background. This is one of those things that I think, I don't know, maybe it started as a joke. It's like, you know, people are joking the US is becoming an em and then it sort of gets a little more oh haha, oh oh, and then suddenly it feels less and less not funny. Yeah, it's not really funny anymore. A do you like buy this premise that you know there is something about em governance, et cetera that is applicable to thinking about the US right now, I.
Think people made the case in its first of all the questions, how you defined in them is actually a harder question, you think, because traditionally people do it just looking at GDP per ahead and then obviously right, it's.
A MSCI gets paid a lot of money to do this, that's right.
And so by putting that aside, I mean I think for trading the right definition is a little bit whether your bonds rally that's when the VICS goes up or they don't. Right, And on that definition, which is the trading centric definition of emergent markets, you actually find China is not emergent market because CGB is rally when there is a risk off, and and Korea is an emergent market. So it's a much more sensible definition for traders than the definition right.
And so in the this.
Is uncomfortable because we're about to get to what the US A bond have been doing during this volatility exactly so.
And of course the initial headline was for the UK right when the list trust issue happened and the pound sort of and then Gill sold off, and so people said, oh, yeah, the UK is moving in that direction.
And for the US again you can argue a little bit.
I would say though, that what will likely happen is that if that should become a problem. So if you see US rates selling off during risk a version, maybe because of fiscal voice or something like that, I do think the FED will come in and hammer rates back down. And I think they can do that as instance, they're physically able to do it.
I bet they could. The Treasure could phase out the twenty year.
Bond if they wanted to, They could do more buybacks, and yes, it will beaken the dollar for you, But it's not that they run out of rope in the way merger market would when these things happen, right, because in the sense of it happens in Brazil, it's not that the government can control or that the Center Bank is able to keep the bond yield at a certain level. The US has many tools that they have at these post that they could use.
I think, since you're in the trading space, or you pay very close attention to it, are you seeing anything in terms of positioning that could make a sell off either more extreme or unexpected or volatile in the current setting.
And the reason I ask is, you know, we had a few episodes about the dispersion trade and people selling volatility, and I was having lunch with someone in the market yesterday and they were very clear that a lot of people are still doing the dispersion trade, which kind of surprised me.
Yeah, no, it's true.
I mean that many crowded trades. I would say again, broadly speaking, we never found us acquity position all that heavy, but it certainly and people own it.
Right.
Gold was on our survey of these as that okay, this gold was for a long time to stand out.
It came back a little bit.
One other trade that people really quite like is the emcry trade, and that is a bit link to the volatility trade because it works levant volatility is low, right, and so that is a very heavily owned trade. It's very hard to forecast volatility spikes. I told you I'd have a quantitum, and we back test a lot of potential strategies that we think are credible, and we did not find a good rule to say volatility is low enough by volatility or volatility has been low enough for
extremely long time by volatility. On average, you're obviously meant to sell volatility because implies are higher than realized and yes, they're unpleasantly low right now, I would say, but on average, it's just not right to.
Buy volatility in these circumstances. So what do you do about it?
I think what you can do is you can find rules that essentially tell you, well, volatility has started to move up by x, and it's probably a good idea to get out because when it's it's positive recoridated, right, So if it starts to move, it can move a lot.
So we have one particular volatility index that is actually the sort of maximum Z score, if you like, of all the various different volatilities publicare about the move index, VIX index, two, ten, implied wall INDEXAM implied wall index, and high it spreads.
And but we take the maximum.
Of that, not the average, which is a bit different than than other people do. And the reason is that no matter what goes wrong, EMFX will not like it. Right, So if the stress comes from US rates and the move index, it will not like it. If it comes from VIX, and there's some people also not like it. So and and that volatility indicator so far is still relatively well behaved. And again I'm glad you you keep mentioning when exactly recording this, because it could could.
And if we have constructed I mean.
We'll look for it in your in your report. All right. I just have one last question, So I actually I really like this definite This is very useful mission of EM. Do your government bonds rally and a volatility spike? I guess what that implies is are your bonds safe havens or are they credits?
Right?
So you have this experience in them, et cetera. Are there any other bitter lessons if all sort of US investors are to some extent increasingly a little bit more trading in an EM space, you have any lessons for them from the EM world that we should all know about.
The strong lesson used to be that don't assume you get these sort of fairly well behaved politics that you get in the US and other countries.
But that less of course noticed somewhat on my mind. But you know, the.
Main issue is really politically risk and we have a lot of elections coming up, especially in that time right if we have Chile, we have Columbia with brazila and so these things can really make a I used to say, much much bigger difference than in the US, although that is more debatable at this stage.
That's interesting, all right, Dirk Villa, thank you so much for coming on odd large, thank you for bringing us this book, and I'll have to have you back sometimes. It's fantastic.
The new book is coming soon.
Okay, so what's the new book on.
It's the same idea about the global macrowat well, we'll read it.
Thank you so much, Thank you, Tracy. I like getting a sort of mathematical, precise definition of what a bubble is.
I find it.
Look.
I mean, obviously there are aspects of bubbles that are very sentiment driven, and I think pop culture driven. Just how much people talk about extra y and these are useful things to discuss, but it's also nice to think about. Okay, let's just come up with some rules that tell us when these things, what constitutes a bubble? And when it's over, precision is good.
I hope Derk will tell.
Us he's got to send us.
In the email, at least tell his clients, and we'll see the note.
Hopefully we'll see the note.
I mean, I do think the message. It's a very realistic message in some respects because the problem with bubbles is you can't sit them out. If you're a money manager, or even if you want to make more money, right, your clients are going to be really really angry if the S and P five hundred is going up twenty percent and you've been bearished for two years. And again Michael Burry has turned into a really good example of this.
But on the other hand, everyone wants to get out precisely at the top because we want to maximize our profits as much as possible. And I think when Dirk says like, well, you know, you kind of have to ride the bubble and then you kind of have to wait a little bit for it to start popping, and you just have to kind of figure out how much money or loss you are willing to take.
Except that you're not going to time the top.
Perfectly right exactly, and that reality, Yeah.
I think that's sort of an interesting approach to the bubble problem, and so just don't worry about nailing the time, but come up with some rules. And it is interesting these consistent patterns of the leadership narrows, et cetera. You know, one thing I've been thinking about. Ask about this, but
one thing I've been wondering about. You know, people look back at those two thousand analogies all the time, and one of the things that people say is that, well, this isn't a bubble like that, because you know, we don't have the pets dot com. We don't have like this proliferation of non profitable tech companies soaring. And I
guess that's true. But I think one of the problems I have with these analogies is private markets are so much bigger now, and so you look at these megavaluations that private companies are raising at and you know, it feels like there's like momentum trading almost going on in private markets, et cetera. Yeah, and it would be nice. You know, you can't really get an apples to apples comparison because so much of the bubbly activity appears to be happening away from this S and P five hundred
or away from the Nasdag. And so these charts about what percentage of companies are or aren't making money that only look at public markets, I think are a little bit unsatisfying.
Right.
Well, I would add on to that that, you know, the companies themselves might be profitable, but the business itself is as yet not generating positive cash flows and everyone just expects it to.
Yeah at one point, right or the spending is simply not sustainable, and that's another fact. Anyway, super interesting conversation. We've had them on Karthvik Center. And also likes that definition of em which is are your government bonds credits or are they save havens? And they don't love how in this recent volatility we haven't seen more of a bid into treasures. I don't love that.
Nope, not a good sign on that happy note. Shall we leave it there?
Let's leave it there, all right.
This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
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