Richard Bookstaber on the Big Structural Risk in the Market Right Now

So we're recording this on the first of December. And one of the more interesting things about the past week or so is that the wobble started even before we had the sort of discovery or the big kerfuffle around the new COVID variant Oh my Crown. And it also started before we had the FED really start to signal that it was looking to potentially taper and raise interest rates at a faster pace than the market had been anticipating.

And this is really interesting to me because, like I was kind of thinking back to two thousand seven and the quant crisis that we saw that was sort of the forerunner to the big financial crisis, and I wouldn't want to say that we're about to see something as extreme, but it was pretty striking that, you know, in the last week of November, when stocks were still basically at their all time highs, we did have all this stuff that was sort of happening just under the surface. So

a lot of factor strategies getting hit. A lot of the stocks, you know, the growth stocks that were beloved by hedge funds UM seemed to be getting hit quite violently. UM. So that was kind of striking, like something is definitely happening.

I'm just not entirely sure what now. You flagged it early in a piece in your newsletter, pointing out exactly that that is some of There are all these things going on, particularly this concentration and this idea that they are these very popular investments, and maybe the public gets into them and hedge funds get into them, and they start to get sold for what might some might be called like non economic reasons. And nothing we've seen lately like comes close to say this the so called quant

meltdown the year before the financial crisis hit. But it is true that, you know, you have these periods where like these winners emerge and the way to win the game is to just double a triple down on a handful of names, and then as soon as there's any elevativation of volatility and you have to pull down your risk. You can see some really ugly charts, and there are some really ugly charts of a lot of tech but not just tech, sort of tech momentum names that have

been super popular for a while after over the pandemic period. Yeah, definitely the air getting kicked out of some of those tech tires, I guess. But all of it, I mean, look, all of it comes back to a question that people have been asking for a while now, I mean basically ever since two thousand nine, which was, you know, after the last financial crisis, and that is are we in a bubble? Are these types of asset valuations unsustainable in

one way or another? And secondly, if they are unsustainable, what is going to be the catalyst that actually ends up popping the bubble? Because so far we haven't really seen it. I mean, we've seen corrections, but we haven't seen anything on the magnitude of what people have been sort of worried about. March, of course, um was the big moment for markets, but that reversed amazingly quickly. Yeah, And I would have said one more thing, which is

a like, are there bubbles? Is there a lot of speculation, etcetera. But be is any of the bubblish activity, or if there is bubblish activity, does any of it pose a threat to financial stability? So it's like we could look at like cryptocurrency and say, look, this is unsustainable, and probably for many of them they are. But on the other hand, much of that activity, perhaps someone could argue,

is not a threat to financial stability. So these are all like big questions that people are always wrestling with. But I think, you know, again these days, I don't want to over dramaticize the moves we've seen as of now, but you know, once again, some of these questions have come to the come to the form. It's a good time to ask these questions again. I feel like we have a strong news peg in the form of recent

market development. So we're gonna seize on it, and we're going to be discussing all these big questions with really the perfect person, right, Yeah, we have the perfect person. I'm very excited. We're gonna be speaking to Rick Bookstaber, Richard Bookstaber. He is the co founder of a new firm called Fabric that provides risk management solutions to financial firms. He's well known for his writing and theory in the

world of like risk management. He has a well known book that came out prior to the Great Financial Crisis, Learning about Complexity and Derivatives is the title A Demon of Our Own Design. Many people view that book as having been prophetic about some of the uh some of the issues that helped blow up the financial system and

the economy. He's done risk management at various firms, including Bridgewater, So we're going to be speaking to him about financial stability and markets right now and how he thinks about risks and risks to the system. Rick Bookstaber, thank you very much for coming on odd lots, Thanks thanks for having me. Why do you start off by telling us like sort of what you're up to these days? Like you know a lot of people almost certainly know you from that book A Demon of Our Own Design, Tracy

is we're talking about a little bit before. Tracy kept it out our desk for a long time, wanted sort of a legendary book. What have you been working on in some in recent years. So I recently left the University of California where I was the chief risk officer

for their pension and endowment. Um interesting, the University of California has bet a hundred and seventy billion dollars to manage between the pension and endowment, and I left there to start this firm Fabric, which is really focused on providing risk management to wealth advisors and the investment advisory community, essentially taking the sort of risk capabilities that I developed as I've been in various institutional positions as chief risk

officer in order to deliver higher quality risk management capabilities to the financial advisors. So I'm just going to go ahead and jump to the big question to Jore, which has to be you know, are we in a bubble? Do you see signs or evidence here of bubble like conditions? Well, I hate to say bubble because when you say bubble, that's always got a sense of prediction to it. But I would say that we're in a very vulnerable situation,

a period of high risk. So the level of risk in the market is really greater than what you might observe looking at day to day price action, looking at volatility. So how do you establish that quantitatively or I mean we all feel it, right, we all look at crypto and to go, this is crazy, or we go might look at meme stocks, I think it's kind of nuts.

Or the degree to which people are just talking about trading is very intense, like nothing we've seen since the late nine days, for sure, But these are just like sort of like gut feelings, emotions, stuff like that. How do you go about, actually from a risk management perspective, attempting to quantify the level of risk in the market so that it's not just feel Crypto and n f T s certainly are canaries in the coal mine. It's not quite like credit default swaps pre two thousand eight

because they're not integral to the market. So that is a telling sign. But the key things that I look at in terms of vulnerability are the extent that the markets levered, the degree of concentration, and how much liquidity we have in the market right now. It's like we're all partying in a nightclub and having a great time, but there's a lot of us jammed into that space. So if a fire gets started, we're going to have

a hard time getting out of the exits. So we're very concentrated, and if we're in a nightclub, those exits are like the liquidity of the market, how quickly can we get out? And uh leverage, which is also high by a lot of measures right now, is sort of the flammability of the space. How quickly can we get out? So we're in a situation now where there's a lot

of crowding, a lot of concentration. We're although we can't observe it day today, the liquidity that will be available if people start to head to the excess is low. And there are a lot of people who are going to have to head to the exits because they're either leveraged or they're out ahead of their skis in terms

of their exposure to the equity markets. So this idea of rushing for the exits and everything getting rather crowded, that's something that we did observe in March with the big market crash, and in particular in the treasury market.

Um given these sort of relative value trades that a lot of hedge funds had taken on, and given you know, observations around liquidity problems in that market for quite some time, I guess my question is does any of that matter nowadays, like the experience of is that if things get bad enough, the authorities will step in and prop up the market, even with credit, which was one area of concern for many many years after the financial crisis, the Federal Reserve

announced a new corporate bond buying facilities to help that market. And even though we saw very dramatic price gaps on the way down, arguably because of liquidity issues once again and because of you know, crowded one way positioning, it was very short lived. And here we are, you know, almost two years later now or a year and a half later, and it doesn't seem to matter that much.

What the FIT did in is really breathtaking. They're very aggressive, very quick on the trigger, and they really saved the markets from a disaster. The a lot of the e t f s were failing, nobody could do the arbitrage to keep them in line with the underlying stocks. Treasuries. There's one day that the treasury market traded to hundred and fifty million dollars. I mean, that's this is the most liquid market in the world, and it basically was

shut down. So what the Fed did then was I think one of the kind because the situation was one of a kind, and they did a lot to pull the market from the ABYSS. But there's two questions. Would they have the will to do it if what we have is simply replay of say two thousands I used two thousands as a better example in two thousand eight. And do they have the bullets available to do it?

I mean, typically the FED does not have in its mandate tempering the markets when you're talking about credit markets, you know, high yield markets, we're talking about e t f s when you're talking about equities. So I think would be foolish from a risk standpoint to bet on that and to make decisions thinking that the FED is

going to back things up. So just on the liquidity point, I mean, you were involved in the vocal rule, and this is something that you know, the banks in particular like to blame for liquidity issues in almost any market. At the moment, they can't come in and take bets anymore, and so you know, it means there's less market makers and things get kind of weird because Wall Street doesn't have the same amount of risk appetite that it once did.

Is that an argument that you buy into or would you say that something like Vulcan has, at a minimum at the margins affected liquidity. When I was at Treasury and the sec U, you know, as you pointed out, I was involved with developing the Vocal rule, and the big argument that the broker dealers and banks had was

this is going to cramp liquidity. And the general sense among the regulators was, oh, come on, you guys, yeah, you'll figure out some reason to not have this put in place because it does reduce their ability to make money on the customer facing side. But actually they're right, And you know, I pointed this out that the incentive will no longer be there with the vocal rule to be as aggressive in making markets because the profit capabilities

are not there. When I was at Solomon in THEES and we had the emerging market crisis actually crisis because you had Mexico and then Asia, we were losing money with every trade, but we did it anyway because we wanted to defend that franchise because pre vocal rule, you could make money trading proprietarily on the customer desks. Well that's not there anymore, and so there's no incentive or certainly a much smaller incentive for a broker deal or to step up to make markets if things are not

going well. So yes, I think the vocal rule has restricted liquidity that market makers would make available in times of distress or crisis. Now you know you have to say, well, there's a devil's bargain there, because on the other hand, you don't have broker dealers essentially front running clients. So the balancing act was there the vocal rules put in place.

But it is a case that's reduced liquidity and and I have to say reduced it in ways that are not really evident day to day because everybody is more than happy to make markets when there's no stress. So

this is what I want to get back to. And I'm still like sort of searching for When you talk about if if people run to the exits, and you know that's gonna happen again at various times, there's going to be the exit is going to be smaller than people think, or that there is a high degree of concentration of assets, and that is going to exact a survey problems if or when when in fact they do come.

What are I mean other than the sort of theoretical things and also, you know, on vulcaral aside, what are the things specifically that you see sort of from a numbers perspective or from a sort of qualitative perspective about the trading, about position sizing that show you that this is a vulnerable market, or that you say, we're in an we're in an overcrowded nightclub and the fire warden would not be happy with how many people are in it. Yeah, yea.

So so let me go through one by when the issues in terms of leverage, liquid eating, concentration, right, in terms of leverage, margin, debt less free cash balances is that i'll say an all time high. The date only goes back so far, but it's higher than even in two thousands. And you have households that are more exposed in their liquid assets, have more exposure to equities than

any time in recent history. And that's not strictly speaking leverage, but that's what you might think of his hot money. Things turn south. Households are going to realize that they have more risk than they might have thought about and start to liquidate. In terms of concentration, you've already made the point. The top five stocks in the SMP makeup

around of the SMPS market camp. Of course, if everything we're equal weighted, they'd be one The top ten stocks are somewhere north of of the total SMP market camp, and of course technology is dominant in that area. If you go and look at the exposure to technology and the SMP using a standard measure like the GICKS sectors, it's around That's a level that we've seen at other

periods where we've ended up with market crisis. For banks, it was over in two thousand seven for the Internet and TMT stocks technology telecommic media, and two thousand was over And by the way, is a low estimate because we measure how much how many stocks are in the technology sector based on their main business. Of course, many companies have technology, and Amazon as a case in point, they have cloud computing. And if you do things that way, you get a number where it's close to of the

s and P is exposed to technology. By a lot of measures. We've got concentration stocks, and we have concentration uh in one particular sector that's leverage. And I already spoke about the issue with liquidity. The market making is not going to be there the way that it has been in the past, and the amount of cash that's available to supply in the event that people need to head out the exit is low. Uh. The percent of liquid assets and money market funds is lower than it's

been in recent history as well. So what would be the catalyst in your view for you know, that big rush to the exits. And the reason I asked is because the experience of the two thousands was that the thing that people thought was safe, um, you know, subpride bonds that were being used as collateral. Uh in the

rebo market. Suddenly we're not very safe at all. And I'm aware that, of course some people have been warning about this problem for a while, but you know, the majority of people were at least acting like everything was fine, um, and the collateral was absolutely perfect to use. But nowadays we've had so many warnings about specific risks. So people have been warning about over value tech for a long time, about concentration of big tech in the indusicries for a

long time. We've been worrying about the possibility of a COVID resurgence, you know, ever since the Winter of and the impact on economic growth. Now we're worried about inflation and the possibility of the FED hiking rates, and maybe that's going to impact risk assets. And you know, maybe a few years ago we weren't necessarily talking so much about inflation, but we were certainly talking about what happens

to the market when the FED raises rates. So all of these kind of feel like known risks in the market, And I'm curious if if there's one thing that you think is sort of less appreciated that could have a destabilizing effect. One of the nice things about systemic risks, risks that really can be material to the overall market, is they're sort of plane and open to view. I don't think there's any secret thing working, you know, that

we aren't thinking about. It's just that we aren't thinking, we aren't looking at what's out there in terms of risk and and taking it seriously. We have a pe ratio, we have price to sales that's in outer space. Talking about another thing that's either at or above recent history. Various measures of price earnings and price two sales are

up there, and people justify it in various ways. You know, during the Internet period two thousand, the period that Greenspan called irrational exuberance, people justified the crazy pe ratios by saying, oh, old accounting methods don't make sense anymore. Today they say, oh, rates are very low, so the discounting of future earnings should mean that price earnings go up. I don't think that's a good argument, but in any case, what's out

there is plane to be seen. The things that I'm talking about should not be a mystery to to anybody, but people aren't reacting to it in terms of adjusting their exposure accordingly. So it could be that people wake up and think, wait a minute, evaluations are crazy. Here, a few people start to sell that drops the market. It could be that fed tapering or something even worse than along the spectrum from tapering to recession causes a

dislocation to the markets. It could be then Asian causes a problem, perhaps because treasuries, which people regard as safe assets, start to drop as reeds go up, and that begins liquidation. All these are stresses that could be the start of the avalanche. So how do you actually adjust your exposure in a scenario like this? And for the past um decade or so, it feels like valuations were basically driven

by inflows. So if you wanted you know, to be a successful investment manager, you basically jumped on the stuff

that other people we're buying. And I'd be curious to get your perspective as well from you know, your previous position as the Chief Risk Officer UM at the University of California's Office of the c i O. Because as you mentioned, this was a huge portfolio, more than a hundred billion, and I'm assuming you have some sort of yield target that you need to be reaching, but it seems very very difficult to get there without taking on

some form of risk. Yeah, there's no free lunch, right, So if you say I'm concerned, I think volatility or potential volatility potential risking market is very high. If you have a volatility target, you know, you only want to have a certain value at risk. That means you're going to take your positions down and that is not pleasant if the markets continue to do what they're doing. UM. But there are some easier methods. One is diversification, which

reduces risk. People think they're diversified if they're holding a broad based portfolio like the SMP five, but as I mentioned, they're not really diversified. They actually have a big bet on technology. So one thing that you can do is take action to increase diversification, which means moving away from a cap weighted index like the SMP. Another thing to realize is that what you think is safe may not

be so safe. Treasuries, longer treasuries, say tenure plus, you know, high durration treasuries are not really safe in some of these scenarios, especially the inflation scenario, and that would suggest that if you are going to take action to reduce exposure, you're better off moving it towards cash than simply moving it towards bonds, certainly better than moving towards high yield bonds,

which also have a spread that scenario historic low. So step one would be diversifying a true sense, which means reducing the overweight that's implicit that you have in technology.

The second is, if you are willing to recognize that risk is high and you want to maintain some notion of a forward looking volatility target, move away from high risk assets to lower risk assets, and the low risk gasset that makes most sense is something like cash, where I would define for investment purposes, I would define cash is say, being anything that has a duration of less than two or three years, because something with low duration is not going to be affected in a meaningful way

should rates go up. I want to talk more about the the the lack of safety in the safe assets or how that could be a problem. And I think one difference between the Great Financial Crisis and the dot com bubble is, Okay, there was a big crash and assets in the dot com era, but no one really like thought those were like safe assets, Like no one thought at the time, like Amazon was like some like core retrospect, you should have bought it. But this course save asset or pets dot com or the Globe dot

com or some like. Of course safety in twenty in two thousand seven tight what we discovered of worse was that a lot of assets that were thought to be triple A literally we're not safe, and that is sort of what caused the crisis and why those two crashes were different. Do you believe that, I mean, you mentioned, Okay, if we get inflation, we get rate hikes, there's gonna be this hit to some of these so called safe assets.

But do you believe there's anything that's equivalent where people are truly thinking like there's like a bomb that we've somehow a bomb in here that we've somehow labeled triple A that could post systemic risk or is it more just about you won't get very good volatility adjusted returns because these assets won't behave the way you expected them to.

You will not only get very good returns to get nagod returns unless you are holding bonds that match your target that you know where you have duration matching between assets and liabilities. Even treasuries can drop substantially as rates increase. You get your principle back. But if you are if you're needing to liquidate, you're going to find marked market losses. And of course if you're in high old bonds, it's that times ten. We we see periods where the spread

with high yield can be temper sent end up. You know, it's not just that it won't make the return you might have hoped. It's actually a risky asset in the face of higher rates and inflation means higher nominal rates in terms of Triple A's two eight is not a good example for just about anything other than things can go down. We had a crisis that hit at the

heart of the financial system. Banks, short term lending, and you know, as you point out, bonds that were supposed to be high quality actually weren't because of some of the magic between the packaging of core reponds and the reading agencies and the way that they read it. Then

that's not going to happen again. I would not really go back to two thousand eight as the the type for what sort of issue we would have if I were going to pick an analog, and no analog really exists for the markets, because we change, we innovate, we grow with experience. I more picked two thousands as an example. How does UM you sort of touched on it, But

how does banking regulation actually play into this? Because, of course, one of the big changes between now and the two thousands is that we had all these new rules around UM leverage and liquidity coverage ratios and things like that come into effect that actually forced banks to buy what ostensibly should be safe assets like US treasuries or agency mortgage bonds, things like that, and so on the one hand, I could see I could see the potential to argue

this both ways. So you could say that because you have a buyer base that is basically UM forced to snap up a lot of these assets, the idea that they're suddenly going to sell them off if inflation picks up,

maybe that's less likely. But on the other hand, as you mentioned, if we get an inflationary scenario and bonds suddenly don't look as safe and maybe they start, you know, the movements and bonds start feeding into banks internal risk models and things like value at risk, then maybe you would have a moment where they decide, well, actually we need to do something about this. I think banks are out of the game right now as we look forward

towards risk. They've been I wouldn't say nude, but their their ability to take risk or to be a source of reasonvolving risk is much lower now than before. You know, we talked about the restrictions in terms of market making. Uh, they also and and that's proprietary treating on the client side. They also don't have internal proprietary treating for their own book. They have very tight leverage constrains and monitoring in terms of what they can do there. So I don't think

banks can be part of the solution. I also don't think banks will be part of the problem. If if we're looking at where the problem will come, I think it's you know, we see the enemy and it is us. I think it's the institution's retail and individuals who are caught up and exposed in the market. It's really irrational exuberance type of a risk as opposed to fundamental structural risk within the banking and guts of the financial system. Cryptocurrency is a great example of that. It's on the edge.

It itself is not in my mind, systemic or sufficient to really trigger something for the market's broadly based. But what you see with crypto is just a dramatization of what is happening in the market's overall. We have a lot of speculative activity, and we don't have we don't have a lot of people who are in a position of supplying liquidity in the face of people suddenly either needing to exit the market or wanting to exit it.

So I think this is super interesting. I mean, you know, when banks get in trouble, that's a big problem, obviously in part because normal more people have money with those banks and their their deposits are kind of loans to the banks, and they expect to get them back one to one, and if that ever blows up, that's a

real problem. It sounds like the main issue is, in your view, just that we're so exposed to risky assets all of us, either through retirement funds, are day to day hot money, are pension funds, and so forth, that it would be a really big problem if they went down. You know, one of the things that Tracy and I have talked a lot about on this show is like this sort of forty year I mean, we talked about the last year and a half, for the last ten years or whatever, but you know, the sort of forty

years simultaneous bull market in stocks and treasuries. And I'm curious if, in your experience, having looked at the worked at the pensions side, whether this sort of is just taken taken for granted that on a short term basis that treasuries sir at a short and medium term treasuries act as a volatility buffer for risk has it. But at the long term you start to get paid out on both, which has been a very sweet deal for the diversified investor, But perhaps it's just not always going

to be the case, to our detriment. This is one of the things I think is an issue in the markets that people tend to be shortsighted. They don't look at history with the broader scope. If you're a hedge fund or a broker dealer, that's fine because you're going in and out in your time frame. Your perspective is daily or monthly. But if you're an individual or pension funds, if you're an ascid owner, you have to be concerned

about the nature of the market over decades. If you have that few it's worthwhile to go back even to the seventies to see what can happen. If you look from nineteen sixty eight two, if you were standing in two, you were in the same place ace in terms of your portfolio as you were. You know, we talked about Japan having lost decade. That was more than a lost decade for investors. If you look from two thousand to

two thousand thirteen, same story. You had a period where in you were in the same place that you were in two thousand. There can be periods of a decade or more where things are flat. And if you're a longer term investor, if you have a time from a ten or twenty or twenty five years, that's a big problem because if you're saving for retirement. If you've got a portfolio with the idea of liquidating retirement, your reasonable expectation is an average return inequities of around seven percent.

That's the actuarial rate that's assumed by pension funds seven percent average annual return. So if you're flat for ten, twelve or thirteen years, you're not really flat. You're down about fifty from where your expectations reasonably should have been. So when we look at what can occur, we need to sort of look at situations beyond two nine on where, of course we've had this stupendous run up and and

with rates, it's the same story we've had. You know, as you're pointing out this incredible secular bull market in rates, people think now that rates of two and three percent or the norm, this is where life is supposed to be. In the nineteen early nineteen eighties, I was building a house and I got a mortgage. I got a construction loan of I got a mortgage of thirteen and a half percent. In the mid nineteen eighties, I was at Morgan Stanley and one of the traders did a print

when Treasury's got to eight percent. Because the view is off we're finally back to normal, and he wanted that to court sort of memorialize that event. So rates can go up. Rates can be five percent, they can be seven or eight percent. That is sort of too many of our mind's distant history. We sort of think that where we stand now in this bullmarket is it, but it may not be it, and we don't need rates go up to eight percent for things to really be

difficult for people who think they're in safe assets. I want to go back to what you were saying earlier and the distinction between risk on the cell side with the banks versus risk on the bye side with investors, whether they're big institutional investors or retail investors. And you know this because you were involved in post financial crisis regulation. UM. I remember you gave some speeches or guidance to Congress

on these issues. And this was really a conscious choice by the regulators to d risk the banks after the two thous crisis and move a lot of risk taking into either the by side or shadow banking institutions. UM, when it comes to things like lending. And I guess my question is, you know now we're talking about the risks that are facing primarily the by side the investors who have been buying all these overinflated assets. And is it I mean, this was the intended results of all

this reform. So how much of a problem would it actually be if we suddenly saw risk assets tank tomorrow. Yeah, the guess the horses are out of the barn. And uh, it's much further to control what goes on in the market then, of course what goes on in the banks the So this is the point I'm making that the risk now resides in the markets with institutions and much more than in the past with retail investors, and that's a little harder to control than when it's within the

regulatory system. So I think we sort of have little to do from a regulation standpoint, the sort of watch things play out. You know, we do have controls obviously on how much leverage people can hold, but that's the main tool that's available. When you get to retail. The risks also are quite different and require different sort of management then when you're talking about hedge funds or banks or broker dealers. And actually that's the center of what

I've been doing at Fabric. If you're an individual, you have risks coming from two sides. You have the risk of your portfolio, and the risk of your portfolio, by the way, has to be looked at over the course of years, not over the course of the next month, so you have a much longer time frame. But you also have risk coming from your own decisions and your own need for assets. So you have to manage not just the risk in the market and not just look

at that risk as a progress is longer term. You have to do that in the context of how you would react based on that. Would you suddenly I'll reduce your risk tolerance if the market goes down, and on that basis sell even more well, you suddenly have expenses where you have to uh sell and de risk on that basis. The complication as you get to the individuals, the level of complication in terms of risk is greater. The models that you need to use are different from

what you have for institutions. So the move that we're seeing from the banks and broker dealers in the larger institutions into retail not only is more difficult to control, it also creates a different type of a risk dynamic. So I want to ask a question, and it's kind of verging away maybe from finance more towards the realm

of economics. But this issue of like, we're all highly exposed to risky assets and this could feed through to uh, you know, pose problems would be a different set of problems that we saw in two thousand and two, thin, but it would be problems. Nonetheless. Would there be a case therefore to sort of think about macro policies that make the economy or make households, or make retirees less reliant on gambles? I mean, I think about crypto again. So it's just say, a sort of canary in the

coal mine. But how many people are trading crypto because they feel that they need to hit some level or they feel the level of financial pridcare procarity in their own life and they see an opportunity to rectify that by winning big on some coin. And so could some of these things that we identify as financial problems be addressed were we to have an economy and we don't, you know, there'll be different ways of getting about that.

Were we to have an economy in which households and individuals weren't so reliant on a stock market that just kept going up all the time, in order to basically make their monthly payments. Well, if you think that you're behind and have to take risk, if you're inequities already in this market, you've got a problem. You know, we've seen it's hard to envision a time where we've seen this sort of appreciation, uh that we've had over the

last number of years. You know, so people who want to win even bigger, they may as well buy lottery tickets. We really are, you know, in an unusual time in terms of the opportunities that have been laid before us. And I think right now, you know, people get this exuberance and I feel like, hey, you know, I've made this much money. Let's keep really, let's keep the party going. I don't think, but you know that being said, we've really moved towards the whole ethos away from divine defined

benefit to defined contribution. That's true with pensions, and that's led people to be much more aware of the markets. The technology is now there so that they can monitor the markets, transact in the markets very very easily. For some people, I think the markets have become a source of entertainment and UH an extension of their social media presence. So this is sort of the world that we're in now.

And and I actually think that crypto is not only an indication of exuberance and i'd say in a sensor of foolhardiness in terms of an investment perspective, but it's kind of an indication of how the markets are evolving. A lot of information, some of it not good information. The ability to trade for apparently no cost on your phone, the ability to make trades, and bite size sort of dinner and dinner and a movie size where it's it's

really inconsequential. All these things are moving the market in a direction where it starts to look a little more like what we've seen in social media. And if you don't like what social media has done to common discourse, you're probably not gonna like what that might lead to in terms of the markets. But that's so it's not just the move that we've had from banks and institutions towards retail, And it's not just the increased embrace of

retail into the markets. It's very recently some of the changes in the way people interact with the markets, and we haven't even seen the start of that playing out yet. I think that can be the next level of concern that will have because that would be a structural systemic change in the market structure. Rick. I think that was a great place to leave it. Thank you so much for coming on odd lots great to get your perspective, lots to think about, and uh, hope to be back

at someone. Okay, great, Well, thanks you guys after the crash. Yeah, take care of Rick. Thanks for I appreciate it. Tracy. I thought that was really interesting, and I really think that, you know, we go through this frame of thinking about the last crisis and I don't mean March because it was so weird, but you know, and it's like, oh,

what is going to blow up the system? And the idea that like maybe the next big problem is not like a blow up, but stocks go down and stay down, and a lot of people have lifestyles premised on stocks going up is sort of like a risk that we don't really talk about. Yeah. I also I thought your question about whether or not there's an economic reason for this was really good because I mean, I do think

that plays into it. Where we have seen lower levels of economic growth since the two financial crisis, people have been a lot more upset about things like wages or just general unfairness of the socio economic system. And so I do feel like people are by suing a lot of risk assets, not as long term investments, but basically

like a lottery ticket. I know, Rick said like, well, you might as well buy a lottery ticket, but that is essentially what people are doing with some of the meme stocks or some of the you know, coins and things like that. Yeah, you know what, And there's something that I've meant to bring up with you, and maybe

we should do another episode on it. But something that I think about a lot is what you've written about with this sort of degree of speculation that exists in China, and China obviously a poorer country and not a particularly robust safety net in China, and and then you have all these people who do things like trade iron or futures at home. Would you would us speculators retails speculators rarely trade commodities at home, and yet that's like a

big thing in China. And so I often wonder if there is this connection between countries that are like unequal, have procaredy sort of mediocre safety nets, and the impulse that people feel that they need to like speculate in order to like it's some level of income or some level of wealth because they can't get there through like

sort of like the normal job for ways. Totally, although I would say a, I mean, I'm kind of worried about the day that Wall Street bets wakes up, discovers commodity futures and decides to like drive up I don't know the price of oil or copper or something like that. Um, but be it is kind of ironic that in one when we have had all this craziness in the market and stocks up until recently we're at all time highs, that China is actually going in the other direction and

really cracking down on a lot of speculative activity. Um. So it's just interesting to see the West and the East sort of going in two different directions on this. Yeah. No, it is interesting hearing Rick's perspective, like from the port of pension fund manager, and it really does seem like

it's just been the gravy years. If you're like a long term investor and you have a big slug of stocks and you have a big slug of bonds, and you don't have to react to like every dip of the market like this has been like a dream several decades because you get this short term is short term counterbalancing,

but long term bowl market and both. And so if something were to change, and the thing that could change would be inflation and a sustained rate hiking regime and response to that inflation, like, how many of these like pension funds are like positioned to deal with that. I think it's an extremely interesting question. Yeah, I mean this gets into the whole sort of question of whether or not we're going to see a big regime change. And I think, you know, again, I'll just say it's December one.

There's a lot to talk about, but I have a feeling we're gonna be keeping up this discussion in the coming months. Should we leave with there? Yeah, let's leave it there alright. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthal. You can follow me on Twitter at The Stalwart. Follow our

producer Laura Carlson. She's at Laura M. Carlson. Follow the Boomberg head of podcast, francesco Leavi at Francisco Today, and check out all of our podcasts on Twitter under the handle at podcasts. Thanks for listening.