The Psychology of a Selloff

everything is down. There's a couple of things doing okay. But I think that's a little scary for people. Although I try to remind people that, well, it went up together for a while based on the FED and how accommodative they were. But obviously if they're gonna pull back and not help, then it stands to reason that they might go down together for a little while. But anyway, people freaking out. That's the big story this year, and

we need to address it. So to do so, we're gonna have John Mayer, chief investment officer of global x et F. He's actually been on the show before. Yeah, we did an episode called gate Keepers. I believe it was like I think we did. I think we played

off of Ghostbusters. It was y masters and gatekeepers. So because they call people at the big wire houses like Meryl, Ubs, Wells, Fargo gatekeepers and all the E t F fishers want to get onto their shelves, so to speak, because they have massive advisors connected to them that have billions of dollars. So anyway, John was working at a gatekeeper, and so is Marianna and John. Now is an issue where so John not only was at Meryl, but he managed their

model portfolio. Um and now he's a Global X, which is an E t F fisher, So he's going to have a real handle on how people are handling itself, the different player types, given you know, the E t F perspective he sits from now and then we're also going to have your boss on Gina Martin Adams, chief equity analyst at Bloomberg Intelligence. Now that there's something missing there, I want to say, macro strategist. You know, you just

call me whatever you want, really, chief faculty strategist. Technically she is okay this time on trillions psychology of a sell off. John, Gina, welcome to Trillians. Thank you, thanks for having me. Good to be in person with you and have you both back on the show. Like it's been a little bit for for Gina and and it's really been a second for for you. John. Yeah, it's

very two. It's very excited to just pinch yourself. Um, do you know I want to start with you because, um, we were just talking about how Eric um tends to make a lot of bold calls and sometimes those calls don't all go correctly, do they? And so I'm wondering as we approach this midyear evil uh kind of season?

You know what kind of evil? Talk about? That? It is one season exactly, So I just want to ask you have to do my one eight maybe you know, we'll see, but um, it's all anonymous, Eric, Uh, this one won't be anonymous. But Eric got a FED call kind of wrong, right, Gina? So what did what was the call and how did it work out? You know? Thankfully Eric is not responsible for the FED call for Bloomberg intelligence, So we did we did call that one, right.

I'll let Eric explain his interesting FED theory which we talked about the last time I was on here. I was out of my depths for sure, But My theory was the boomerati theory, which was that all of America's retirement money is in stocks and bonds, and the people who are in mutual funds to have the most money are the boomers. I think, like, what of the of all the stockhol otnership, I believe the boomers are seventy of it. And who's in control of all the wrongs

of power in business in Walt Washington the boomers. So whether you have a Republican president, a Democrat, or the FED chief, they're all What they all share in common is their boomers. And I thought they would do it anything to protect their nest egg. Apparently inflations more important. What the hell I totally missed that? Um I didn't see it. Maybe the print I didn't. I just never saw it. It It was like a black swan for me. But now that's all that matters to them, and they're

they've done yeah well. To be fair, we I think that the financial markets were somewhat conditioned on this notion that the FED would always swoop in and save the financial markets as well, especially once we get past fifteen. Kind of going towards corrections, the FEDS have become a very reliable player in the market over the course of the last decade, and change, always swooping in, always reversing policy at those nice loans. It's called the FED put

for a reason. But the title of my current equity market outlook for the US is life without a pet FED put, because I do think things have changed. Things have changed pretty precipitously over the course of the last year, and your spot on the reason things have changed is

because of inflation nary conditions. The inflationary conditions combined with something we talked about on a podcast not long ago, which is the FEDS sort of temporary shift to a mandate to achieve maximum employment not so long ago, that combination has created a really messy environment for the FED and they're now playing catch up to try to contain those inflate. The inflation, which many people are now worried, has gotten out of control and out of their grasp.

And one thing that I really it's set home. You look at a graph I think it was on Nate silver Sight. Most important issues in the election Number one is inflation. Yeah, and I know the FEDS not political, but come on, I mean, this is a big deal. And do you think they might lighten up after mid terms. Um, I think they are very data dependent at this point. They may lighten up after mid terms if that coincides with the material deceleration in the inflation prints, which are

definitely something they're worried about. But you know, it's no surprise that the midterms are coming into focus, particularly with inflationary conditions this fast, because it's the one thing that everyone feels is how much does it cost for me to go to the grocery store and how much does it cost for me to fill up my car or transport to and from where I need to go? And so when you have that kind of inflationary landscape, it

usually impacts the president most. And then when things roll downhill from the President to other folks in Washington, the Fed can get a lot of pressure historically when we're in this kind of economic environment because the president suffers. I can't believe you're leaving the door cracked for Eric to Lake. I know, let's there's going to be a new theory here. Okay, So so John, I want to bring you in. We've talked a little bit about the

inflationary environment. Markets doing what they do this this year, um, which is go down as well as up. UM. What has been something that sticks out to you and all of this, Well, first of all, when when a big self happens, it just never feels good, like you almost don't think it's going to happen. Don't root for a sell off. Nobody was for a shell so off. And inflation is very high and the FED has to act.

We should have seen this coming. And all the FED really can do is uh, work on the demand side, and but they can't really work on the supply side. And we know there's a lot of issues on the supply side with respect to China and all the supply chain issues and semiconductors and whatnot. But with respect to what's going on is different market participants are acting differently. UM. I would first say that that the the professional investors

hedge funds got it right earlier on. They were moving out of the market pretty quickly, and retail was still buying, and we saw a lot of flows into retail, and then that started to come off more recently and at the past few trading days, and this is the eighth week of a down week. I think some have said this is enough. I can't really handle the pain. As you mentioned earlier, that there's boomers who are going to

retire um and I'm down. That's a lot, you know, and maybe let's let's cut our losses because we've had some pretty good years. But if you look at at flows on the e t F side, e t f s have been that flows has been pretty up, stable and even growing in some instances in certain areas of the market. Certainly in income we're seeing broad bar broad market indexes are are holding up. So the core is

really holding up. And I do think that there's repositioning on the edges, and there should be there always should because of changing market conditions. But remarkably, at least on the e t F side and neerk as you mentioned, on the mutual fund fund side, there's a lot of outflows, but the et F side is fair. They're holding up well in terms of flows. I think this is somewhat generational. Boomers are mostly in mutual funds. Do you really want to watch this? You made so much money, might as

well just get out. So there's been two fifty billion out of active mutual funds, but there's been about two seventy into e t f s and passive, so we see this every sell off, but inside the passive there is a lot of tactical repositioning. So I think you know, you guys have like thematic ETFs, right, that's something I think people bought maybe in the bullmarket as you've seen

pullback there or the people hanging in there. That is also I just wanted to ask, like, I mean, you have this interesting thing at global X where you have thematics but then also some really broad based products, right, so how how does your portfolio perform during a sell off like this? So you know, we if you look at our assets, we have income or ETFs, income and thematics,

as well as country access on a few others. What you're seeing is some outflows on the thematic side, but not as much as you would expect because these are e t f s and e t s or a collection of companies, and not every company performs exactly the same way. You know, you look back to the dot com bubble and many of the companies just went away. A few existed of Amazon and eBay and price line, but you didn't know which one was gonna make it.

So not pets dot com not that's like not mail dot com BOO or like all all sorts of news, but you didn't know what was gonna make it. But in eat, whether it be a cloud or cybersecurity, which actually has some legs right now, you're putting a lot of different companies and so there's actually some inherent diversification there. But overall on the kind of the disruptive technology you're seeing, you've seen some outflows for sure, but we're actually capturing

them on the income side. So when you're moving towards more towards the value tilter, a covered call fund which still providing you a twelve percent yield if it follows the nastack or the SMP five less than that, but a good yield, investors are saying, wow, yields are still pretty low, even though short term rates are going up, not necessarily long term rates. It depends, Uh, so we're

capturing some on the income side. So flows have been pretty good, remarkably, Yeah, there, there's It depends where it's been a certain sectors. Cash short dation bond et has done pretty well. It reminds me of a typical sell off here, to be honest, and I do think that thematic ETFs probably have a little more tolerance these days, because if you're in a cheap index fun of your core and you have a thematic, you kind of have

your basis covered. You don't have to worry about your kids retirement being in like the cybersecurity ETF, because it's a small allocation. Gina, how much of this stuff, these flows? How much does that UM work into the intel for when you come up with sort of your overarching take on the markets. Well, I view it as a sentiment

indicator more than anything. So equity markets UM certainly move very quickly, but at lows, what you tend to find is lows are formed by an outright capitulation and sentiment. And so what you want to see to frame a low in the equity market is nobody wants to own any stocks anymore at all, and they generally just sell everything. They sell not only the losers in their portfolio, but the winners too. They just go to cash because they're terrified. That usually is what happened set lows. So I use

it as a sentiment indicator. UM. Certainly, no one likes to see flows out of the equity market, but when we start to see those week after week after week, outflows. It's one indicator we definitely would consider in the arsenal of indicators. How close to that moment are we We're getting closer. I can't say that we're there yet. I mean, you know, we use a whole laundry list of indicators,

but just a couple that are really getting close. It's like, oh, things are falling and they're still falling, but like the sky hasn't fallen yet. They haven't, right. So, just over the last week, we started to sign finally see some signs of capitulation in the income oriented stocks and the low volatility stocks, the stocks that everyone flees to saying, Okay, this is just a short term correction and I'm going

to get defensive. They finally started selling those off, mostly because Walmart missed earnings expectations and really just kind of obliterated everyone's confidence in the retail sector. But we have not seen it as much in energy stocks. For example, one percent to the constituents of the spenergy sector are up this year. That's extremely anomalous. So instead, investors seem to still be rotating into inflation hedges. Within the equity market.

It's a teeny tiny space within the stock market, but it's nonetheless an area where investors are hanging on. And you know, frankly, at lows, you very consistently see less than five percent of the stocks in the SNP five trading above their fifty day moving average. You see momentum among the entire market crash, and we haven't seen that yet, so it's very anomalous. It doesn't feel like a true

capitulation Low. That said, the bond market may be the ultimate indicator here, and bond yields do appear to have peaked potentially in the short run, and that may be enough to relieve investors concerns because, first and foremost, this equity market correction is a correction because of the volatility that we're experiencing in the bond market, which reflects that

inflation outlook. It's a very different type of correction than we've had in the past, and typically the corrections we've had over the last decade and change, the bond market rallies when the equity market is selling off. And I think this is a really important point that Eric made earlier this year. That's what's truly different about this correction is the bond market is selling off and that's the that's the creator of risk for the equity market right now.

And just to go on mutual funds, bond mutual funds are it's a total blood bath over there. I mean, we're talking a hundred and seven billion dollars out this year, thirteen straight weeks of inflows. And they these funds always taken money, but they've had the life of Riley over the past fifteen years because rates have been low and lower. But it's looking bad and I don't see how this ends because again they're owned by boomers. That's a constant

selling pressure on bonds. So until I see that charco from red to green, Um, I'm pretty skittish on everything. I just feel like that's the constant selling pressure on bonds will just sort of permeate into everything else, like almost like a wet blanket. Um. And on, let's talk about if you were let's say you're running Meryl's model, Um, what are you doing this year? Like what what theoretically would you be doing? Because I only see the flows, but models are a big part of the flows now,

so what what what would you do? Yeah, that's a good question. And what I I, Well, we're actually you know, we have modeled portfolios at Ovalex as well, and I'm sure they're not doing anything vastly different on the acid allocation models is increasing quality uh companies with strong cash flows that are less relied on the capital markets as short term rates rise. Uh So funding costs could be a problem for uh more growthier companies, but an Apple

or Microsoft which they don't necessarily have to borrow. Um. So you're looking for those stable companies. So although those are not necessarily value, but companies with strong cash flow, stable dividends, potentially rising dividends. It's an area that you certainly want to be in in this market. Um. And with regards to on the fixed stincom side shorter duration, I mean, we don't know exactly where long rates are gonna end up, so hold on time out now here.

I don't get the shorter I mean I get it because oh, you know cash is safe, right, But is it safe if inflation is what eight nine percent? Aren't you immediately losing that? And isn't that where the Fed is raising rates? So I don't is it or is it that bad? That's that's actually the best spot is

to sit there and lose eight percent. Well, I mean, yes, there's the inflation argument, but you don't want to lose money, right, So like if you're could be worth space treasure this year and I would you rather be in cash or down. So that's why for now short duration. At some point

we'll go alonger on duration. But you know, if we are not at the bottom on the equity markets and volatility is pretty low, Um, there's a lot of volatility with respect to equities on the right side, it's high, So there's I think there is some room to run on the equity side. But if that happens, then they're

gonna play. Everyone's gonna plow on a treasuries. You mentioned how the professional investor sort of saw this coming and sold off already and it was retailed that was a little a little late to that, And I'm wondering, like when what are the professionals watching right now, and especially you know, the global X kind of institutional clients, Like when does this become a buying opportunity again? Yeah, I

mean it's it's I don't think we're there yet. Um, today you're getting a little bit of a bounce because that's you know, just what happens when you have eight straight weeks of declines. But when you see for more capitulation, that's when I think there'll be some bottom fishing. I think, you know, when you see some bell weathers go down further, then I think there'll be some buying in the market

and that will kind of lift all boats. Capitulation. It is the word of the year, and people on Twitter us it all the times, like, oh, capitulation told you, Like the bears are loving this. They're like, oh, not enough. Like I. Sometimes I show ARC and sometimes that's it's, you know, inflow week here and there, like see they haven't capitulated yet. Anyway. You know what's worsky about that, though,

is that everybody's talking about it. Because I can remember in at the Lows and when we were talking about our capitulation indicators, and we were talking about the fact that at that point only two two percent of stocks were trading above their fifty day moving average and rs I had just crashed through the floor and no stocks were rising, And we're putting notes out talking about we're here, this is a capitulation moment. The FED is swooping in.

The FED and the fiscal policy makers are swooping in at the same time, now is the time to buy, And everyone told me I was crazy. Now everybody's on this train of look for the capitulation. This worries me because it means to me that people are hoping for a bottom to form, and you have to get to a point to have a true sentiment wash out. You have to get to a point where there's no hope for a bottom left. That's that's how you find a low in the equity market. I know this is so dull,

but that's realistic. Like that's where you were. That's where you were in People were telling me when I was at Wells Fargo, this is the next financial crisis, right, that's the darkness is overwhelming, and people who get bullish at that moment are completely villainous. So basically, we need to find Twitter mentions of the word capitulation and if when it starts to go down, that's in the moment that word is used, the more it's actually not capitulation.

Do I have that right? Yeah, because they're looking for it. This is the other thing I get. So many questions come my way right now, saying, well, when is the FED put Finally, everybody has given up and said there is no FED put anymore. That's the time to move. You have to get this outright existential crisis. Yeah, complete, I give up. I can't make any money in stocks anymore. But there's so many fundamental things that we just haven't

fully lived through yet. There's inflation, has it peaked? Um? What's going on with China and slower growth in China? Um, We've just started on the interest rate cycle seventy five basis points, you know, I think we could go to three even four, and they're gonna go that high to stop inflation because they obviously this is not the seventies when you had inflation for ten years. But Howell does not want to be known as the inflation guy, so

he's gonna squash inflation. There's a war, But what if that doesn't happen, dude, Like, there's the case that, you know, we raise interest rates and inflation doesn't get tamed, and then the bottom then they raise the war. Yeah, I mean they crushed demands. Yeah, so I mean, and then you have potentially like a vocal moment in all of this, right, Like, it does make you feel like this could be a long, long,

long year it does. I think a lot of things have been priced into the equity market frankly, but there is this lingering degree of hope. Um And you know, I get a lot of people tell me about Russia and China and the fundamentals are terrible, even though the fundamentals are fine, you know. So there's a lot. There

is a lot of capitulation out there. The equity market recognizes a tremendous amount of risk, but there's that lingering amount of hope that just needs to be wiped out of the market and then you finally have your sentiment wash out. So here's a question I have. So in past sell offs, the role of passive hasn't been as big, especially in two thousand eight. So take someone like me, Okay, I've got a mortgage, two kids saving for college. Where

the money that matters I have. I'm in low cost index funds, right, And I think it's a lot of people now, um am I part of the capitulation because I am resigned to this being the best deal I want to be in stocks. I believe over the long term they work for me. I'm not selling. Do I need to sell for capitulation to happen? Or are you looking at more of the active players. I'm looking more of the active players because I actually don't see that

the institutions have capitulated. I think the retail universe has, so I see it a little bit differently, say retail universal again we are talking about the non sort of vanguardian. Yeah, now I'm looking at more the traders. Right, So, if if I'm looking at retail and retails impact on the day to day movements in the equity market, it's the traders, and the traders left the market starting a year ago

and they haven't come back. They've just you know, they got wiped out with the meme craze, they got further wiped out through the through the contraction in the first quarter of this year, and they've largely just left the building. But when we look when we actually analyzed buys and cells and the flows of the institutional accounts, there's a survey that State Street actually does which is quite good at this and that survey of UM institutional sentiment has

historically reached the level of about seventy. It is currently at ninety above a hundred. As a risk to the market for you know, tops forming, So we're ninety. Now we've come down below hundred, but we haven't gotten to seventy, which is the typical low point. So I think you've got more institutional selling that actually needs to happen to really create that big, long term low. I think the

retail investors that are going to leave have left. The rest just stick around, and they always stick around like I too, don't sell my exposure because I've got to work for the next forty years to get my kids through college. So I'm just going to hang on. And I do think that's somewhat different than the back in the day you're in an active fund that's under performing and your thought as well, I should go to a manager who's outperforming. Now in an index fund, you never

have that thought. You're like, man, I'm not going to go chase something. I'm fine. I again, as you know, I study this topic all the time. I don't know if that effect will create a more stable base, which could have the effect of drawing this out longer, because there won't be that total vomit moment because there are going to be the vanguard flows always coming in and having some sort of bit on the market and maybe making hope stay alive for longer. It's very difficult to

get the whole sentiment for the retail universe in one number. Right. I think the retail trader feels terrible about the market. I think the long term investor is just going to hang on. And you do have I think, yeah, yeah it is. It's pretty bad, right, but you have you bring up the generational divides all the time. So I'll get on that bandwagon and talk about the boomers who are retiring, who are more accustomed to calling up their broker when they want to buy and sell in any

any individual stock. Those people are just getting their first quarter statements, absorbing those statements now, and we might be at that moment where they say, oh wow, this is actually happening. You know, the doctors and lawyers and people that have better things to do than to look at the financial market on a daily basis. They're feeling it at the pump, and they're feeling it at the grocery store, and they're feeling it when they go out to restaurants.

But they probably really haven't paid that much attention to financial markets because they don't have to like we do. So they're just now starting to absorb the first quarter losses, and we may see that dump in some of those positions yet to come. I totally agree. You talk to friends who are not in the financial business and yeah, there you're aware of what's going on in terms, but

they haven't looked at their statements. They don't often look at their statements and they're like, oh, I don't come back. We've lived through this before. But when you see down and who knows what some people have, it could be it could be more than that. That could be, you know, caused for further selling. What about this idea if you go back and look at the past five years, even with this year, the S and P is up eleven annualized, but you're historically you're only supposed to get like eight

or nine percent. So I mean, isn't shouldn't we like, are we a little coddled and spoiled here with the markets? Shouldn't we just be like, look, this year should suck um, and that's gonna get us back to the nine percent average. That's what I was promised, and the volatilities the price of admission. Um. Do you think more people are kind of mentally getting to that space or do you think it's the same old thing where it's like, oh my god, the numbers read, let me sell. I think there there's

a lot of fomo. You know, during the pandemic we're sitting at home. Many people had extra money because of all the stimulus programs. They're investing in meme stocks. There, things were going out you wanted to get in. I think a lot of that is being wiped out, realizing that yeah, with cryptos, I'm not people who are in cryptos are not making money at this point, so maybe I'm not going to go that route. Um and some of the meme stocks, well that was kind of fun.

But now I'm back to work and I have to commute and I have to whatnot. So I think more normalized returns are coming back into people's mind, but again still painful that when it happens, you know, you go to a certain level on on your you look at your statement, and then you lose. You don't you think you lost? You know, you don't. You don't put into annualized ten year return. Now it's like it's I do, but what happened yesterday? What's what am I gonna get tomorrow?

I play ment psychological games with myself. You know, I'm I'm glad you brought up bit coiner crypto John, because I think that that has a really firm place in today's psychology and today's sentiments. And I do worry that the crypto fanatic do watch daily prices and they do feel the pain because they're they're fanatical about their positions.

They're not like the long only sm investor like you and I, Eric, who are just going to hold on into perpetuity under the guys that it will eventually come back. They're much more emotionally invested in this as an idea. And I do worry about the psychological impact of losses in that market following onto or feeding into losses in the equity market, because they might have exposure in the equity market, Their parents might have exposure in the equity market.

They have to cover their children's positions, and there's a lot of risk taking that's gone on in that market that I think we're really struggling to totally capture. And it certainly has a great potential to have psychological impacts, behavioral impacts. You can get up in the middle of

the night and check. The people used to like that, now they don't like it, but isn't there are there is the hope here actually returned to normal and those traders that you mentioned that are on the sidelines, and I've been on the sidelines forever, like I'm out for a while, but like, is there a version of this, Yeah, that normal emerges again. Yeah, that's the one shining sort of silver lining of any corrective process, in particular, this one is I do believe it is deflating any mini

bubbles that may have developed during the pandemic. I mean, we have a lot of concentration risks that developed in the SMP five. Really everybody wanted to own a handful of stocks and that's it. We had retail investors that were dabbling in a market that they've never even touched before, got burned and probably won't dabble so much. May become longer term investors really sort of rationalize their exposure a

little bit. You probably had, you know, a whole group of people jump into the crypto markets one after the magnificent gains, have now suffered losses and are learning, you know, investment lessons that will hopefully last a lifetime and lead to a degree of rationality that didn't exist for the last two years, but there were certainly some mini bubbles that developed during that pandemic experience that are now being deflated, which leaves us at a position of more equilibrium, if

you will, when we're all when this is all said and done. But you also have a situation where we're not likely not going to be reliant on the FED going forward. So with the FED removing liquidity, rolling off their balance sheet, um just in a few weeks, raising rates and likely there's there's not gonna be monetary policy, uh and fiscal policy that will support the consumer, and

the consumer is going to be stretched. So we're gonna go into a period of adjustment, and I think over the long term we'll have much lower returns than we've had even since two thou because the Fed's been there. The SNP was flat during the two thousand's right about. Oh, it had a great run from two thousand two to two thousand seven. You gotta you can, like you you could have a decade where it just doesn't go up.

You can you can have a very volatile decade. It could work, could just be a nice not nice, but a long slow normal. Yeah, a lot of people you know, it's like the patient doesn't have the drug anymore and it has to like going through withdrawal. It's got to live to like work without that FED hit, which I think is probably the moral of the story. So other regular things matter now, which is probably good, right clash flow, Yeah,

I mean, look the alternative, the alternative here. I think that the alternative is it could be a lot worse if the FED warrant addressing the inflationary scenario. But they are addressing it. They are committed to it. They need to remain committed to it to get it as you know, right size and normalized policy to the degree possible because they were behind the curve. They have to do this or we risk having a much more volatile long term

economic climate than we've ever faced. But to the degree that they can write as policy and remove some of this sort of sugar high that we had developed in this you know, bubbly market. The faster we can get that done and sort of cleanse the access and move on, the better. But if they were to delay it, it would be much more painful a year, two years, three years from now. There there's some other things that get in the shot in the short term that I think

could help the market. Um, perhaps if the Biden administration removes the Towers of China, that certainly could be helpful. Maybe a gas tax holiday. That's those are short term things, not speaking to your your long term thesis. But in the short run there's there's some events that that could make the stock market pop. And the end of the war. Yeah, end of the war could be a huge catalyst. I

totally agree. Not for energy. All right, we'll leave it there, John Gina, thanks so much for joining us in Trillian. Thank you, thanks for listening to Trilliance. Until next time. You can find us on the Bomberg terminal, Bloomberg dot com, Apple Podcast, Spotify, and wherever else you'd like to listen. We'd love to hear from you. We're on Twitter, I'm at Joel Webber Show. He's at aerb faltrainess. This episode of Trillions was produced by Stacy Wong. Francesca Leed is

the head of Boomberg Podcast. Bye