Markets Vs. Central Banks

almost feels like a different world. Well, our guests last joined the show in the summer to discuss the very trade that delivered a double digit return duringsh So now he's going to join us and he'll share how is from his position to capitalize on the recovery, and of course we will close out the episode with our tradition

the craziest thing I saw in markets this week? And if you saw something crazy, please do give us a call on the Bloomberg Podcast hotline at six four six three two four three four nine, oh and leave us a voicemail and maybe we'll play it on the show. Of course, can also tweet in our general direction. We're at the handle at podcasts are Bloomberg podcast Handle and Sarah.

I gotta say, for the crazy things I've sworn off of n f T s, I'm done with the n f T s there were I have plenty of n f T s to offer, and I did bring one non n f T crazy thing as well, because I know we've discussed n f T s the past couple but come on, there were just a couple of this past week that you couldn't ignore. I know, I know, but there, I feel like they're jumping the shark now there. There there were fun when no one had ever heard about an n f T. Now it's just get it's

getting everywhere, very commonplace. We're minting n f T millionaires and probably billionaires soon. You know. I it makes my head spin, But I look forward to your crazy n f T things. But before we get to that, let's welcome back our guest. He is the chief investment officer at Reminiscent Capital in Australia. His name is David Adams. David, welcome back to the show. Thanks guys, great to be here, and yeah, I guess it was nine months ago that we last caught up. So thanks for having us back

on the show. It was fun last time. Right right now, David, I know you made some trades that that worked out pretty well during COVID. Luckily for you, what goes up we allow for victory laps, So so we will allow allow a victory lap. Remind us about what worked for you in your trading strategies, what didn't work during COVID. Catch us up on and you know sort of how you handle the whole situation and kind of where things

stand now as far as how you're looking at opportunities. Sure, yeah, so we sort of, um we we I mentioned last time, we've we've been lucky enough that we're on lucky in some ways, had been through four crises previously, and so there was a certain sort of playbook when you've been been there. All a little bit to front, but they

have an underlying kind of similarity. So we sort of rolled out that playbook um in Q one of last year, and it was essentially, you know, bonds and then FX involved in equity downside, and then margin as people kind of have to post margin. We sort of went went through that and uh and and it played out much like the prior prior crisis had done. So we're fortunate enough to sort of capture that and avoid avoid trouble

and make money for investors in Q one. And I think when we caught up was around July from memory on the show, and and then what we were describing was what we thought was giving the opportunity possibly for the next couple of years, is a handover from the

developed markets um into the ear market, especially Asia. So what I mean that specifically is UM for for for for countries like China, India and Japan to extent, and and and one or two others in Asia to play a big catch up to the likes of the SMP and the NASDAC. And I was just against some some note last night, and this is an anecdote. UM you've had.

China since we last caught up peaked up at thirty eight point nine percent gained from that July level, India up at forty six point six, Japan the NICK up at thirty five point six, and meanwhile the SMP put up a healthy yame it was only twenty two point eight. So that's the sort of seventeen and a half PERCENTUM kind of relative catch up that Asia is starting to do, and a lot of that actually came in the fourth quarter.

So if we just take beta, you know, the beta of the market out for a second, you know, this is just starting to happen now. So this this sort of relative catch up which we started in a fourth quarter is beginning. I think last time on the show we described that could be as much as a sixty relative catch up. So it's definitely not too late for investors out there. And I'll talk in a minute about kind of opportunities for this year and how we're positioning

to sort of participate in that. It's quite interesting because UM equity markets had a strong start, but had you piled in so late jan mid web, you'd be sort of eighteen percent off side with this pullback that we've had. We'd have described how we avoided that UM. So that was one of the main things we were talking about as an opportunity UM that relative catch up for Asian equities, which is starting to occur, and we'll expand on that

maybe a little bit later in the show. That was one thing, and then we had a bit of an anecdote that I spoke about Mr Bunny and Terry age of turbulence book. But I'm pleased to say there's been no no books eaten since then. Probably probably probably you know, probably tells us this probably a little bit of smooth sailing a head still for a while. However, Um, we're seeing some stuff in our process that's very concerning, that's actually very interesting as well, and we'll talk to that

a little bit later. Um. So yeah, that just brings us up to speed. So I definitely want to get into what you said is possibly concerning. But you mentioned the pullback that we have seen in particularly in Asian equities. I was just pulled up the CSI three D. We

recently saw fourteen percent pullback. Granted we've seen a pullback in US equities and other equities around the globe as well, but more pronounced any um in Asian equities to We've spent a lot of time over the last couple of weeks discussing with guests this cyclical rotation that we've seen, but mostly focused on US equity is talking about growth to value or the move that we've seen into energy

and financials. Where does this rotation that we have seen from developed to emerging markets currently stand and even considering the pullback that we have seen in recent weeks, would you say that there is more room for a catch up and why would that be? What what will do here is I'll draw on you know what it typically in my career has been a north star and UM is very worthwhile paying attention to. I think we spoke about it last time. It was analogous back in February March.

UM been in many ways in the opposite direction. That was the bonde market, the rights market, UM. And you know, when when she wakes up and speaks, we should definitely listen. And last year I think I'm just bribed some of the intricacies of you know, dollar block funding. We spoke about how the informational value at the front end. You know,

she definitely knows what's going on. We spoke also about, you know, the type of price section whereby last year, when we're going into the crisis mode, UM, you know, very large percentage of the of the price section was happening on the offense side of futures are either we're getting bought with no pullbacks and that that tells you something. UM this time around is actually the opposite UM. So the so the bond market has woken up and shaken

her tail. It's not the front end I you risk off and rates lower, it's the back end rates higher, and in some way they won't call it a risk on. I'll describe in a minute when I think is going on. Um. And the opposite to the price section was relentless selling of bonds and fixed income and fixed income futures kind of across the board. Um. Okay, that's really interesting and and what's happening there. So my humble belief is that the central banks have completely overcooked this. There's way too

much kind of stimulus globally. Now granted that's probably not helping the real economy, but the financial asset reflation UM and some of the exuberant behavior, whether it's game stop or other anecdotes we want to choose from for people have been around for a while, it really is kind of um reminiscent to plug the name of you know, sort of uh overcooking, overcooking of of a stimulus. And I think, you know, um, I don't think if you

look at Stanley Drugconen was recent interviewed. He gave a fantastic interview and he quotes some really interesting stats about the extent of um kind of stimulus that was that was that was handed out in the first three months, something on the lines of it equal the prior three q q E episodes. Has been quite phenomenal. Now compliments of the Chinese, they've really matured out in terms of

their approach for for crisis management. It would be much more prudent, frugal um they didn't have to do anywhere near as much kind of disbursement of stimulus. And in addition to that, they've been quite prudent on commenting. They've had the bravery taken out to a comment on some sort of perspectative bubble like behavior in their equity market. Now they have suffered as a result, but just remember

I mentioned this last time. They're getting very very good at managing They've got a lot of leavers to manage their economy and their stock market. And we saw this recently on the recent pullback. You know, they had the ability to sort of um we were there was we were led to believe that the national team or there was some national support for their stock market that sort of halted the decline and started to recover a bit. So I don't feel like they're not until after they

came out and said that assets looked over price. I mean, granted they were talking about Chinese equities, but correct, yeah, yeah, correct. So so so going back on on the on point is UM. The bond market move that we had in February UM is a very important signal. And essentially what it's saying as the bondom market is saying, you know, to the center banks, you're wrong. There's you've gone a little bit too far. And whether it's you know, reflationary

assets through copper equity prices, UM. You know, they're also speaking as well. UM. So, so that's important. I'm also seeing some really interesting signs leads I've seen in the past. You know, if you think about the G ten. Oddly enough, we mentioned before in New Zealand for whatever reasons, partly is a small open economy and juxtaposed between EM and d M M is speaking as well. You know, they're they're over there in New Zealand recently they had UM.

The New Zealand government essentially's turned around to the central Bank and said, you know, you need to take house prices into account in your mandate. Your wire is this This is because it's very similar in the G ten um. The policies that are being deployed helping the top ten percent get richer. House prices are going up, equity prices are going up, but real folks, you know, they're real jobs that don't necessarily have any of those things, are

not benefiting from that. And your places like New Zealand and Australia to extended quite equalitarian. And then they said, you know, central bank policies not helping are our voters, constituents and and and they paid a lot of attention to that. So what does that mean? That means in some of these detaining countries where you've had property go up,

stocks go up, but people are not necessarily benefiting from that. Perversely, you could have say, what what what New Zealand could be sort of hinting at here is um you might need to raise rates, you know, to just cool down some of these asset prices. That's very different from where we were just three six months ago. And you know, whilst people might say that's just that's New zeal it's not not applicable here. That won't happen in the US.

Let's see, you know, I've been through many, many rate cycles up and down, and I'll get a lot of pushback on this, with a lot of that indemics, it will tell me why that's not going to happen. But I wouldn't be surprised we continue at going at this rate of commodity prices, asset prices, property prices, that the conversation gets brought way forward as to potential when rate

backs can happen. Now, why is that worrying? Well, in the real economy, um, you know, and in a very leveraged world that we're in now, I don't think markets will be able to take rate hugs all that well. And people say that, well, nor it's reflation that you can have higher stocks, you can have higher commodities, you can have higher rates, because it's all it's all in the recovery mode. Now, the first thirty basis points of that in rates is true, and we saw this in

the recent hundred basis points sell off. The last thirty basis points is not. Um whereby that started to really puncture things like long duration assets like tech. So you know, around at a minute, but what I'm saying, I think we're entering into a very kind of dangerous spiral in the later stages of and you can see a lot of that because retails participation is very high. Whereby m as we had that kind of nasty sell off in

bonds that started to prick things like the Nasdaq. Central banks had to come in and calm down verbally, and initially bond markets you could get what we're getting now, which is yields of calm down, you'll start to go back down, and you probably get equities rip higher again, and then you're back to the same problem whereby the bond market maybe two three months from now, we'll start

to go We'll hang on. We're back into a reflationary situation here, and I wouldn't be surprised if you make fresh significant highs and yields well up above two percent in U S tens for example, And that then puts us in the precarious situation of how assets going to be able to take that, things like tech. So it's gonna be a very interesting year, I think from that Bally, You know, David, it's good to get someone on who sounds even more worried than I am about how all

this stuff is going to shake out. You didn't even get into n f T price inflation, which which we we won't even go there. But I'm curious how um break evens fit into your thinking with all this. You know, at least in the US, if you look at UM five year break evens uh less I checked something like two and a half percent ten years, or at something like two point three roughly. Um, is this sort of

just uh indicator of exactly what you're talking about? That maybe the central banks have put a little too much whiskey in the punch pole, so to speak, or is there something you know, I'm just curious how much faith you put into the break evens as sort of a fortune teller when it comes to inflation, or is there anything about market structure and sort of this exuberance and massive risk taking mood that we see that would allow them to send a false signal? Perhaps? Yeah, that's a

good question. Um, good questions. So there a few components of that. One would be just in the very short run, you know, we're not actually seeing inflation. Yes, CPI called last last this week was not particularly stellar seven or something I think, Yes, yeah, and slightly underkindawhelmed intom x

X energy. So it's not turned up yet number one. UM. Number two would be that UM as we described, underlying within many of the economies, even just the US, for example, despite all the hype, if you look at the U s um that the small medium enterprises with five or less employees from memories something like forty center of the

entire employment workforce, and they're not doing so well. In fact, many of them are actually going out of business or struggling, So that that detracts a little bit from this UM feared kind of wage inflation and inflation that people think is coming UM and they're not. Also, in addition to if you look at China, you know their data is

slowing somewhat. If you look at some of the charts of what the Chinese aggregates are doing, they're very very much in contrast to the likes of Copper and commody. And then one the biggest UM one of one of the biggest consumers of energy and commodities in the world, if not the biggest, depending which ones you look at. And so that's that's painting a very different picture and kind of the real economies UM. So those two things make me sort of look at the world in the

following way. And that is, Um, there's asset price reflation just anticipation and kind of flows and money flooding into various markets, and then there's kind of real actual inflation.

Now will it work in the end if we kept on at this rate and starts to create more jobs and get more confidence feeds back into economy and you start to get in certain pockets by all means, I'm sure if you look at the safe exams restaurants when they reopen in New York and things like that, Um, you get demand for waiters and labor and things that you probably will start to actually get some actual inflation further down there down So the you know, the break

evens and such are probably a relatively decent predictor given where we are now. It's a long way of from the future, and a lot can change between now and then. So I think it's one of those that I need to think about asset price reflation, what actual inflation is doing now, what it could do further down the track.

For me to sit here and think I've got a view on where it could actually be five years from now, it's not that relevant because, um, you know, what is more relevant is letting the market speak okay, and in the in the in the in the investiable time wherese we're looking at, which is say, for example, this year, Um, what what's relevant by which we can make money for investors?

And it probably as follows, you know, as your real rates in the US go up a lot um what what what starts to happen then is you look at a world where say six months a year ago, there's very little yield, people having to chase the last little um a few basis points of returns, whether it's crunching in high yield credits or trying to receive that last little bit of five or ten year yields, or being an emerging market FX where there's a little bit of

extra carry and pick up money just chases that has been doing for quite some time. And that that bond market wake up call and and real rates going higher in the US means that um a lot of manage managers out their investors out there start to scratch their heads and say, do I really want to be in you know, um, some of these emerging markets currencies where I get very little from pick up for all of

that additional risk. So that's the interesting bit to me is you know, when if the market is speaking and real rates are going off in the US, you know, where are the monkey's going to run? As it was an expression people used to use, and um, you start to see little bit of a sign of that. Um just recently with money coming out of tech. Um some E M f X getting hit. How your credit getting hit? Um? I think it's probably just an early wake up call

for what can happen sort of later in the year. UM. So if that moves, it's to some talk points on that. When you say real rates moving up by a lot, I mean what exactly quantifies a lot? I mean, certainly we have moved a lot. We were negative one point one uh percent, Now we're closer to negative sixty five, negative seventy basis points or so. But when you say a lot, I mean what do you expect? Are you

talking positive? By chance? Yeah? I mean so in the great scheme of things, the moves not been to that secen different the speed of it has been. UM. So it's it's it's speed matters as well, because it can people can extrapolate and start to start to get concerned that you carry out at that sort of rate. UM. I think things will obviously um get dislodged. So so the speed of the moves obviously in February was important.

UM So further down the track, if you know, if we go to the example of um what I described, whereby after maybe some pullback in yields lower, if the reflationary story kind of gather steam again and yields dislodge later in the year, we get up above two two and a quarter in U s tens. You know, I guess bottom to top that would be a move of a hundred hundred and fifty basis points and starting to

push positive. And you know, positive is an important rubicon to cross because much like we've seen in European assets when they went negative, people just allows to individuals, allows to pay away native rates that that obviously starts to become relevant. UM So I would say crossing crossing over positive and don't have hundred fifty plus basis point It was mean you don't need to be chasing that last basis points in a very high yield bond structures or

an emotion markets maybe quite vicarious. It's fun to talk with you, David, because I know we can jump from asset class to asset class and you'll you'll jump along with us, which is nice. So I know, you know, as a hedge fund manager you must keep sort of at least one eye or half an eye on volatility markets to some degree. I think what's been amazing to

me is this continued grind higher inequities. Yeah, we had a little bit of a correction in the last month or so, but you know, continued grind higher, and yet the VIX just does not seem like it wants to go below twenty. It seems gets found a floor around twenty. I'm curious, you know what you're thinking about that and why that might be. I mean, my theories are are perhaps people are are worried about some of the things

you're talking about about. Maybe value valuations have gotten ahead of themselves, and if rates do perk back up, there could be another another dip. Also, maybe so many people got burned by selling volatility a few years ago that they're sort of gun shot to do it again. Um, how are you thinking about it? If you are at all? I mean, am I am I crazy for thinking that maybe that there's still a little bit of a hangover from that that short volatility trade that blew up a

few years ago. That's that's gonna make it tough for the VIX to come back down blow twenty. Okay, sure, good question. The US equity VOLS specialists will will be um much more granular their answer than myself. Um, I

pretty deferred to them. However, what I can give you from like a macro manager kind of response is is drawing on and forget the gentleman's name, but there was a two hour podcast given my VOLT specialist and his because I was quite curious that question myself a few months ago, about two months ago, and his response, which I'll sort of repeat here, was that there is still quite large portfolio hedging. Um, so to folks out there purchasing out of the money puts to portfolio hedge. That's

keeping aggregate vole high. And the shoulder vols is kind of short dated at the money volve where you know, things aren't moving necessary all that much apart from last month. As you said in many periods of the past of a couple of quarters, a slow grinding, sensible rally, that shoulder vols being sold as in the short dated vole at the moneys, you know, is not particularly expensive. Um after after a recent pullback. Of course, it spikes up

and then slowly settles back down. But that was the gist of it was portfolio um insurance kind of hedging, keeping aggregate vols still quite high. I suspect prove if we continued in this environment that would continue to come so gently come down. But that's that's the that's the reason's high than otherwise we'd be stand clear of the craziest things we saw in markets this week. You know

exactly what time it is, Mike. All right, all right, David, I'm sure you came prepared with the craziest thing you saw in markets. Let's start with Sarah. Sarah tease that she's got a lot to deliver this week, so let's let's get her going. So I actually believe that we have a voicemail, so I was hoping and thinking we should play that one first. Oh yeah, so I couldn't help myself. An entire choir actually called in to wish

you a happy birthday. Mike was gonna say that with the Vienna Boys choir called in to the hot last week. Mike gave us all the gift of his nickname, So this week it's Mike birthday, So happy birthday. Thank you, I will say that. Uh, And Sarah, don't bust me for repeating this joke a few times. In the Rigging family, we have a tradition. If it's funny the first time, it's funny the next four or five times too. But what I've been saying is, uh, you know, I share

the exact birthday, day and year with Johnny Knoxville. I don't know if you know who that is Johnny Knoxville, so it's debatable who the bigger jackass is. But thank you. I appreciate it. Big one for me number I'm not happy about it. But what are you gonna do, Dave? You know, now, give us a real crazy thing, Sarah, Okay, now I'll give you. Now, I'll give you a real and I'll give you a real one. So I'll stay

away from the n f T s first one. This was just a survey that was put out by Business in Cider and they ordered up thirty seven percent of American investors in a recent survey say they've made trades. Based on an Elon Musk tweet, seven percent of all Americans seems really high to me? Is that just me? Americans? Who actually actively trade were I mean, to be honest,

I didn't really think either. Is just very very high, very absolutely astounding, especially when he's pumping stuff like doge coin, you know, right, I mean honestly, I could say I know people who, on a personal basis have have bought doge after Elon must tweeted about it. So I guess I know people who are contributing to the very high share of respondence to survey. That is pretty good. That is pretty good, Sarah, you came you delivered with that one. Well, I have I have two n f t ones because

you can't, you can't ignore them. One just that Jack Dorsey selling the first tweet ever as an n f T and there have already been bids up to two and a half million dollars. But the best one is on Thursday, Digital artwork and n f T sold for sixty nine million dollars. I mean, how crazy. I can't even, as the kids would say, I can't even David, I know you keep an eye on bitcoin and crypto. What do you think of all this n f T stuff. Well, I think we spoke last something becomes of eight thousand.

I was sort of mentioning there was an angle whereby you know, folks wanted to essentially high it worse than such what might want to have their money, you know, in other assets like crypto and that it could do very very well. And it sort of looks like that's happened. There's there's also been much more of another victory lap for you, by the way, congratulations. Well no, I mean, you know things, but I mean we don't do it for the fun. It was more just think we were

talking thing. But the investors are probably okay with that, I imagine, so that you're you're not you're out out there putting their money in the cryptough I would guess, well, yeah, it's it's not with a strategy at this stage. Um. But but what I was going to say is that, um a lot more homework has been done by high it Worse and superannuation funds and pension funds around the world, and it really does look like it's getting adopted as a sort of you know, one to three percent of

your portfolio. That's a huge number. And you know, the more you look into these things that there's some great, great protocols and products in there. So UM, I can only see one way traffic, I would I would suspect that within three years, Um, we've got something like three point six billion people have phones. I'd say a third of those. I'd say within three years a billion people have some sort of digital currencies on their phone. And that's up from where we are now I think sixty

six million million wallets. So it's just phenomenal kind of inflowers, I thank you coming. Um. So, so that's what I would say with regard to that, And my sort of crazy thing for the week would be which is a combination of everything. So this is Mr Bunny's owner, my my eleven year old daughter, Holly. This is all of the monetary and fiscal and kind of liquidity that's out there. A little Holly turned around to me because I talked to a little bit about finance. She keeps reminding me

how I never bought Apple every day. Um, and she's a big gamer, so Minecraft and Fortnite all that sort of stuffiens hours on there and it hits me up on my credit card for skins and swords and all that sort of stuff. And you know, she she she's she's because I've talked a little bit about cryptize stuff and the punchline was she said, Dad, you should buy this coin engine E n j I n Jin said,

why is that? Well, you can smelt down your sword and then move it to a new game when you decide you want to be in a new game and use that credit in a new game. And um, interesting enough, this is a two hundred and fifty billion dollar business gaming, you know, worldwide, if not, if not more. Japan's just to prove this coin. And so Holly takes surprise her her trade idea investment if you will as up something like jeez, I think it's well of a two thousand

percent in about six weeks. Already two in six weeks, she sounded. You know, we're pretty dull in comparison to what the young kids are doing. That's pretty good. That's pretty good. Well, I'm going back to old school commodity markets for mine. And this one is courtesy of our chief Crazy Things correspondent, vil Donna Hirich, who's so as she's earning her keep again with a crazy thing. She

pointed out this story Bloomberg story by Andy Hoffman. Uh, there's a commodities trader called Mercuria Energy Group, and they bought thirty six million dollars worth of copper from a counterparty in Turkey. One problem is when the copper arrived for delivery, Um, it turned out it was a bunch of painted rocks, a bunch of rocks painted copper color. Uh. And it's the nightmare. It's big scandal. Thirteen people apprehended

by authorities in Turkey over this. And to give you an old man movie reference, Sarah Midnight Express from back in my day about a Turkish prison, not the prison you want to be in. Trust trust me on that, um. But I also wonder if it turns out they were paving stones that someone painted a copper color, uh, and somehow switched them out in in in transit between one

party to the counterparty. So David, I'm wondering if someone's probably awaiting a delivery of paving stones, maybe your neighbor whose house is being un construction, writing a delivery of painting stones, and gone, there you go, there you go. You figured it out. David's got construction going on next door, and we managed to squeeze this whole thing in before the before the jackhammers and whatnot started, Uh make a noise. So I'd call that a success, I would agree, but

we we still have to get David's crazy things though. Yeah, wow, I was. I was so into it, was so into the n f T conversation, just having a real, real conversation. Yes, actually I pulled out my phone and I started buying to courtesy of your daughter. So that's the truth of it all. But no, it's It's been an absolute pleasure. I'm so glad that we were able to have you on the show again. David Adams thinks so much for coming on the show. Thanks for much for having us.

Thanks David, that was great. What Goes Out We'll be back next week. Until then, you can find us on the Bloomberg Terminal website and app, or wherever you get your podcasts. We'd love it if you took the time to rate and review the show on Apple podcast. Some more listeners can find us, and you can find us on Twitter, follow me at Sara pont Sec, Mike is that Reaganonymous, and you can also follow Bloomberg Podcasts at podcasts. Also, thank you to Charlie Pellett of Bloomberg Radio and the

voice of the New York City Subway System. What Goes Up is produced by tofur foreheads. The head of Bloomberg Podcast is Francesco Levie. Thanks for listening, See you next time.