The Long Runway for Bond Shorts

would work only when pigs fly. Well, look out above, because anyone who had the conviction to bet against the bull market in bonds has had a great year this year. I suppose we should have asked the hog farmer we had on last week for his take on the flying pigs. But we've got the perfect guests this week to talk about shorting bonds and whether it's not too late to get in on that trade. Her name is Katie Kaminski. She is the chief research strategists and portfolio manager at

Alpha Simplex Group. Can you welcome to the show, hihike, Thanks for having me. Why don't we start Katie? Just for those who aren't very familiar with Alpha Simplex, Uh, when you talk a little bit about the firm, Uh, you know sort of what its strategies are, and I know that notion of adaptive markets hypothesis is very important, if you can talk a little bit about that, just to give us sort of the background of where you're coming from. Yes, Alpha Simplex is a quantitative investment manager

who focuses on systematic trading strategies. In particular, we apply UM rules based and UM quantitative based approaches to trade in the markets. So in particular we follow the futures markets and we have been are one of our largest strategies as managed futures, which is a trend falling strategy using a pure, really systematic process. So of course trendfling is an exciting strategy because it's easy to explain but

is a little complex to implement. So we buy things when they're going up and we sell things that they're going down, and we do it in a way that's very systematic. And so when it comes to thinking about the adapted markets hypothesis, and the idea is that you want to build systems and processes that adapt with markets as they change to find opportunities. And so what that means is that our models are looking at what's working now, not sort of sticking to sort of theory or what

makes sense because of some narrative. And that's particularly important now. Um, if you look at a year like this year, I mean really a lot of things that have worked in the past aren't working, and so being able to adapt to that is really important. Yeah. Absolutely, And I know the managed features mutual funds having a tremendous here, it's up like thirty percent or something like that. Is that mainly, um, due to having the right call on Bob Runs or

is it? Are there other explanations behind it too? What was the secret secret sauce this year for for having such a good year? So, I wish I could say it was one thing. It's been multiple. One of the best trades this year has been shorting bonds. Another great trade has been being long energies, especially in the first part of the year, and more recently, we've also seen tremendous opportunities in currency markets. As you've seen the US dollar really sort of you know, skyrocket in its in

its strength rolled to to other currencies. So what that kind of shows you it's not really sort of a one trick pony it's not one as a class. It's really about adjusting to this current macro environment and using the information that we're seeing in market moves to adjust to positioning, which in many historical context is seems complicated, but actually in this environment makes a lot of sense,

especially from a macro view. Absolutely well. I feel like if you had, you know, asked a discretionary macro UH fund manager UM, in what world would you be long both the dollar and oil? I think their head would have exploded. But I guess that kind of gets to

the whole notion of adapting with the markets. Yeah, exactly, And I think you brought up the bonds and let's talk about that because that's fun um before, and we actually wrote a paper on shorting bonds recently because it is so sort of out of the scope of most investors that I talked to. If I asked a group of people, how many of you think that rates are going to go up, they'll all raise their hands. But if you ask them how many of you are willing

to short bonds or have shorted bonds, nobody does. And that kind of highlights the fact that most of us are used to this idea that we only go long bonds. That bonds always help us. They're sort of like are

tried and true safety trade. And so for the sixty forty and the typical investor, this year is sort of left them standing there going, I don't know to do UM, where someone like us who was really looking at what are the strategic tactical opportunities UM in the short run, and that's a fantastic trade, even if it's uncomfortable from sort of a historical perspective. UM, it's a strategy that hasn't worked since So you know, think about that. That's

that's a long time. Yeah, absolutely, And so in managed futures, it's this is mostly shirting treasury futures, I imagine was that the main so in the futures markets. What's great is that futures markets have grown substantially throughout the years and now there's a very large range of different futures contracts that you can trade, whether it's the guilt in the UK or U S treasuries or also other government

bonds globally. So there's actually a pretty large range of liquid futures contracts out there that many investors can use as a way to take a position short bonds UM as an example, right, And I'm curious, you know how sort of fast reacting trend following can be, because obviously we started the year with bonds doing terrible, yields going up UM. Then there was, you know, an interruption in

that yields came back down over the summer quite a bit. UM. Are you able to sort of ride both ends of that trend or is it is it more important what the long term trend is. So treadfully is a pretty adaptive strategy and it's relatively quick in terms of relative positioning to long term investors. But what we saw this year is exactly what you're saying, is that there was different macro themes that were evolving over the course of

the year. So in the first quarter we saw inflation rising rates as a theme that manifests itself across the long commodities and short fixed income. This particular trade man sort of shifted to a short bond and also long dollar trade later in the year as commodity started to dissipate, so we saw that sort of positioning and views on commodities moved much more to that recession versus non recession environment.

And then in June, we saw sort of the markets made a pivot, as you suggested, where volatility increased, cross asset correlations increased, and sort of a general sentiment that this themes were in some sense consolidating UH came into the market and you started to see sort of a tremendous de grossing of some of those positioning that you saw earlier this year. And then we started to see a pivot this month and last month back to what

we saw earlier this year. And I think some of that comes with the fact that the central bankers have remained steady, which has basically said, you know, this pivot towards I think this is over is a little preemptive. I think it's time to wait a little bit to see, you know, how we really do deal with this inflation problem and how we handle things going forward, right, right, And so you'll never try to sort of front run

the trend at all. You know, if if you're watching drone pal speak and he says that's it, we're done cutting UH, we're done raising interest rates, um, unless the bond market reacts violently to at you, you're not going

to try to trade those remarks at all. I imagine so there's a lot of noise in all of this and you guys, you you know this better than anybody, and that you know one day moves incorporate a lot of noise and a lot of overreaction under reaction, and part of what we try to do is be very systematic and smooth and the way that react to trends over longer horizons, so that you know, you can balance

between what is real information what is noise um. And this is very important because over the long term, what you'll see is that we're capturing a lot of these macro themes that do on the margin have a lot of noise um, and that's sort of where we're seeing that we're not trying to sort of pick things based on one data point. We're trying to use a lot of data and use that data to come up with a view on where we should be in the different

asset classes over time. Yeah, So what do you think has the short bonds trade sort of run its course for the years? There is there more to be had from it in your opinion? Yes, I do. I think the short bond trade has more legs to run, particularly with the commentary that we saw recently with the fed um in the recent period where they've really kind of

hold steady um. The reason is a lot of the core problems that have driven to the point where we are now have yet to be completely solved, and I think we're gonna have to see inflation actually dissipate and we're gonna have to see that we're in a situation where things are much more stable before we can actually

call this over um. And so in that sense, I think we could be in a rising rate environment for some period of time, and what we'll see, what we've seen using more longer term studies, is that we're going to be a lot more short in fixed income if we are in a truly secular rising rate environment then we've been in the last forty years. And that's something to kind of think about from an investor's perspective, and that, you know, how do you think about your bond exposure

if we have a prolonged rising rate market for bonds? Yeah, yeah, absolutely. I mean, as you said, something no one has really experienced since the early nineties. I guess I think everyone thought, you know, this was it, this is the new normal for the bond market. So you know, on the other side of the pandemic. UM, it seems like you're not expecting a sort of a reversion to the to the pre pandemic world. It's it's going to be a brave new frontier where rising rates are are here to stay.

Is that your main thing? I mean, I think what we've seen is that even though the narrative has shifted over time, the core issues related to inflation need to be solved before we can actually call it a win. UM. And I think you see that in the markets, and it's probably what surprising is that there is a lot of hope. I mean, people love things to go back

to the way they were. And the truth is is, until we can actually see that inflation is really under control and that real rates have actually you know, gone more positive, UM, it's gonna be hard to imagine that someone can stab their fingers and we'll just go back

to the world we're in. And I think for us as tactical traders, this is an interesting environment because tactical strategies and any sort of dynamic approaches haven't worked well until recently, because it's been very much a world where you have this put you have you know, you know, stocks always go up, but if they don't, then it will get better UM. And the same with bonds, like you know, if something goes bad, you've always got your bonds.

And I think that investors are really going to have to grapple with the fact that it's a very different world when we add inflation to the problem and when we have to deal with what the impact of rising rates has on just different asset classes and different sectors UM in general. Yeah, you know, it's interesting. I was

looking at the Bloomberg. We start getting the survey results trickling in for the CPI report for next week, and the last time I checked, the consensus is for I think month over month UM, you know, negative point one percent a year over year eight percent in cp I, So a little bit, you know, off of the boil to some degree, but I'm guessing that's not mission accomplished as far as you know, whether yields will keep going up.

It's still a high number. I mean, the differential is still big, and I think that you're not seeing it in the commodity markets right now, but that's pretty typical, right so you see the commodity markets sometimes lead that process and then inflation is very insidious. It starts to go in different areas. So things like wage inflation and other areas of the economy is where we have to start looking real estates and other areas that aren't measured

in some of these core materials. They're the after effects of that UM. And so for our view is when we see inflation numbers back closer to their target of two UM eight versus two is still a really big difference. It's a long way off. But I would imagine, you know, a lower than estimated CPI would still trigger some kind of rally in the bond market. But I would that just be noise, you think, not not anything that would uh,

you know, really cause you to change your thinking. No, I'd say that, you know, we saw that this summer, we saw recently. You know, any sign of the good news is bad news. Bad news is good news. Situation where anything that confirmed that things were better was actually a good thing. Things were worse. It's a good thing is maybe they'd stop raising raids UM And so I think that you know, you're going to see that until

this kind of dissipates and gets under control. And I think people like to think that things get fixed in a second by one print. I mean that's the way we are, Like, we love hoping and it's a great thing. But I think in terms of understanding financial markets, sometimes we're ready to be hopeful a little quick. Um, yeah, how about equities? Um? You know? Were they shorting equity? Future? Is part of what the fund did this year? Is that part of the success? And sort of where do

we stand now? It's been such a choppy year. I mean, long term trend down for the year, but there's been so many little little rallies in the middle of it are not so little, you know. The last one was about how did you navigate through all that? You caught me? I have to be honest, equities have been just super noisy, and we've had almost no equity exposure. Uh. Signals and

equities have been really weak and extremely noisy. So what that means is that there has been very very unclear trends and equities this year, despite the fact that they're down quite a bit. As you said, it hasn't ministrate line um and that has been very consistent with the idea that I don't think this is an equity story. I think this story starts with the bond market. And with inflation, equities is a bride product of a situation

that we're in. And that's why it's so hard to call um because you know, we're trying what's really the focus is inflation. It is really sort of how do we manage that and how do we manage raising rates and balance sheets? And I think equity is just sort of gone back and forth in the wake of that theme um this year. So it's been very hard to call the equity markets and signals have been very mixed, right, right? And how about the dollar? How how have you played

the rising dollar? I know we had a guy from Dynamic Beta, Andrew Beer, who's they have a mant of future c ETF that's done well too. They were very short the end um. Is that something you guys managed

to do? So so that has been the biggest surprise to me this year because I tend to be pessimistic on currencies because currencies tend to rebound be somewhat range bound, and as you know, I mean, the dollar has not hit parody with the euro in a long time, and so I think the biggest surprise has been that the dollar strength and we've seen that across the board particularly against the end but also against the Euro and also

against other core developed currencies. Just has been really really clear. And this makes a lot of sense sex posts in the sense that the dollar is much better positioned than other regions based on the fight for inflation and sort of how the central bank response has been UM. And so I think that is really coming out in those trends, and that you've seen that the dollar has come ahead as the winner in this environment, um, just as a

relative positioning point as opposed to other things. I mean, also adding into the fact that there's just less energy dependence concerns. There are some, but they're not as severe as a Europe. So all of these things added up has really put the dollar in the win um for

this year, and you expect that to continue. I mean, it seems like, you know, as long as Europe is struggling to keep the lights on and China's you know, locking down cities again today I saw, um, is that dollar strength just inevitable until these issues are cleared up. It seems to be the case, and signals in the dollar versus other currencies have remained strong and steady despite you know, as I said, I tend to be skeptical in the dollar, UM, just because currencies tend to be

a little bit more complicated and more range found. But it is really looking right now going into the winter season, and with the news out of China that the dollar is still very much holding its own UM, despite the fact that it's really come quite a long ways this

year already. How about this, you know, we've seen a pretty fierce reversal in oil over the last couple of months to UM, I'm curious if if you've played that at all on the fund or if it's you know, how you see oil fitting in to to all these other things. I mean, as you pointed out, I think that the initial inflation impulse was was mainly from watching the commodities markets UM. And you know now the bond

market is sort of forgotten about oil. It seems like it's it's looking at rent and owners equivalent rent and all the other sort of lagging drivers of inflation. How do you see the oil developing for the rest of the years. This downtrend something that will concern you, do

you think? So it's interesting you say that because we saw extremely strong signals in oil all the way until the conflict in Ukraine, and then we saw what would be sort of a perfect situation for a trend follower, and that oil volatility exploded, and then obviously oil went way up in value, and that created a lot of noise, which consolidates um your views, UM. And so we've really seen oil stay steady and as a long view, but

much more muted UM. And so what I would think about this is that you've typically seen this even if you look in the seventies, during inflation cycles, commodities have sort of up and down periods. Um. We've consolidated an energy but we've seen some you know, but you have to remember it's September, like September and October is kind of in that low period before we know how serious

the energy issues are in the winter. And so I think that that sort of to be expected that you're going to see a little lull in energies, but they could come roaring back um easily UM going into the end of the year. Considering sort of that the real problems that we had around white oil prices spiked haven't disappeared. Thus, you know, I would say that there's a good chance and we might see high oil prices again later this year in energy prices in general, UM particularly going into

the winter season for north the northern hemisphere. Yeah, and how important is Europe to that story? Do you think? Is that is that the entire story more or less? I mean, I think I think it's gonna be. It's it's so complex, right because you have also demand in China that's part of this as well. That's another factor that's caused UM oil prices to to reduce as well.

So I think it is complex. I'm sure that you know, given the issues with sanctions and other issues, there's going to be some issues related to that in the winter time. So that is one thing that is definitely a you know, a tailwind for for energy prices to be a potential problem later this year. But it is complex, like if those ones are complicated, Okay, I know correlations are are super importance to you and and alpha simplex and how you follow trends. What are you know, I'm guessing it's

the stock treasuries correlations is the most important. But what else you know, what shifted, uh, what's going to shift back? You know, what sort of the lay of the land with all the correlations you have your eye on and markets across asset classes at the moment. So the biggest one you hit on, and I'll talk about the others in the second is the stock bond correlation. And an interesting point I might make is that if you look at rising rate environments, UM, stock bond correlation tends to

be positive on average and bond volatility is higher. And that's exactly what we've seen this year. So that type of feature where stocks and bonds aren't in the same relationship in an inflationary environment, is there, and it's in the data. UM. We've seen over certain periods of time, particularly in the last month, we started to see that correlation in the short run spiking as well. UM. You can see it in the sense that stocks and bonds

are trying to sell off simultaneously. And that's something that we are paying attention to, and that's an important factor in building a portfolio, because if you count on those correlations, you have a very different diversification level than you thought, UM, and that's something that people are experiencing this year, is

that they're not experiencing that diversification that they thought. The other correlations that we have seen that are interesting is that you've also seen some interesting correlations between fixed income and currencies. Obviously, the dollars connection to the rising right narrative has also been something that we've been watching. Um And you've even seen very different correlations between energies and equities this year. So equities and energies are usually positively

correlated because their risky assets. Look at the period in Q one, energies were up, well, equity markets are down. You starting to see negative correlation. And this kind of goes back to the issue that in this type of environment, structural relationships that we often count on can change, and it's important to be aware of that because your portfolio is going to behave very differently than sort of your longer term expectations in these type of environments. Yeah, are

you able to sort of quantify when they change? You know, is it will once it gets into the eighties and nineties that that correlation flips, or when treasure yields get above a certain level or or rising at a certain speed. Um is you know? Is that too wishful thinking to think that you can sort of quantify when those relationships

change or flip. I think it's more over a time horizon, so you can see for short periods of time that correlations and can be very different from a longer term behavior. And you're right, obviously it's going to depend a lot on the macro theme. So I mean, if you look at the first part of the year, this example I gave where energies and equities were, UM, you know, behaving differently under the backdrop of inflation being the core driver of the markets. UM. Those correlations changed UM. And this

is something we've seen this year. What is the theme that is driving markets this year? It's rising rates and inflation, and thus those relationships that we usually think are there sometimes disappear UM and they become different. And I think that's exactly what we're seeing, is that in their more extreme environments, sometimes those correlations can change. I mean you brought up as a level of price. For me, it's more sort of the extremity, like how extreme the market is.

And that's something like this UM crisis that we had in March, or at least the event that we had late February. March was really sort of a supply chain issue and an inflation issue at the same time, which really had a very different effect on how asset classes related to each other. Versus the longer term typical things that we would expect. Yeah, yeah, I want to get

back to the shorting bonds idea. You know, I'm curious if you have a number in mind, like a yield that we should be bracing for, you know, is it four percent? Five percent? Saying the ten year or the two year? And to to pile one more question on top of that, you know, everyone's sort of bracing for a recession, which traditionally would have been bullish for bonds. Uh caused everyone to pile back in and bring those

yields down. I don't get the sense that that's as given of a scenario as as it normally would be this time, given given the inflation problem. So to talk us through those two ideas, you know, what's that sort of you know, what what should I steal myself for as far as uh, you know, a peak interest rate, and whether or not a recession would would actually be bullish for bonds or not. So that's where I think trend flers have a different view. We think things will

go as far as the market wants to go. So we don't have sort of a target like Okay, it's going to get to this level we're done, we think that the market is going to continue to go in

the direction until the problem solved. And so the best way to think about that, and that's why I focus a lot on the differential between the inflation rate and interest rates, because that differential gives you an idea of how far they have to go across, and then that gives you some sense of like at what point the market might sort of say like, okay, this is over um. And so I think that's more the way I'm seeing it is that we're going to see those rates go

up until we see that number go down. And the scary part is if the inflation number doesn't go down fast enough and the it's keep going up to try and catch it um. And so I think that's my view is more that we could continue to see um rates rise, perhaps even farther than people are willing to go. And your exactly point is right on. Everyone wants that anchor.

They want to know like, if it hits there, we're there, it's over right, right, But sometimes the market sometimes that's not where the market ends up, right, So market could have to go farther and that's where you're actually going to see a big surprise and a very interesting trade in the markets as well. Yeah, and I think your your other question was about about whether a recession would would cause a bid for bonds or whether this sort

of stagflation. Hi, Hi, you know, I think you've sort of answered it with that uh answering that you know, with inflation at eight percent, you know, you can't really expect bonds to settle down. I would think even even in a recession, if inflation is still that high. So, I mean, that's where this year has been so fascinating. Is the reason nobody ever wants to short bonds is because that's a really dangerous place to be because anytime

the market sells off, you are in the wrong position. Um, but that is not what we've seen recently, And I think that shows you that this narrative is not driven purely by the recession narrative. It's the inflation narrative is number one. And so that's where the summer we did start to actually see the recession narrative come in a little bit and sort of the bond positioning and bond signals started to go more flat and to be less aggressive.

And so what I've seen historically is that short signals are going to be very common when the curve remains inverted to flat. But if we start to see a recession type trade and of steepening of the curve, then we're actually might see long signals again because at some point that trade becomes a long trade um. And so I think that's where the dynamic approach is so important, is that these things are not you know, two or

three year trades. They're sort of they happen over shorter horizons than how many investors think about sort of longer term. They're really more tactical type of events than strategic. Yeah, you know, could you see a situation where inflation comes down enough and fields go up that we're actually looking at, you know, positive real ills or is that is that crazy talk? I mean, I think we're going to get there. I just think it's going to take longer than people

want it to take. And that's pretty typical, right, And so I think that people are easily hopeful and slower to deal with sort of challenging information. So I think it will take longer than we would like. And thus I think the trade will be around for a little bit longer unless we overshoot, and then we might end up in some cycles as well, which is you know, kind of why I say that it could take a while because it's not something that's easily solvable and you

know one month print. Yeah, not a eight line either, I guess. And ah okay, I also wanted to ask you just about it's not only the drop in bonds this year that I think UM has been pretty alarming to a lot of people. It's the volatility. You know, you'll see you'll see yields moving ten fifteen basis points, usually on the upside. Maybe you know it's not as much on the down side when when bonds are rallying. Does that sort of volatility and rates affect your strategy

at all? Or is that you know, have you looking at your chops to you know that that's the type of thing you'd like to see. I mean, for us, this is just a relative volatility positioning. I mean, if you look at how much ball stocks have and how much ball for you know, let's talk about energies have. UM, it's really for us just a relative sizing question. UM. If bonds are more volatile, you take smaller positions. UM, so on our side, it's really something you have to

measure and you have to account for. But it's something that we're set up to do, and it's something that like I said before, which talked a little bit about asset class correlations of patterns, during rising rate environments, bonds have exhibited higher volatility, and that's exactly what we're seeing now. So for those of us who are much more on the quand side, this is not at all surprising. I think it is a new experience for investors who are

used to thinking about bonds as being global. Um So I think for us it's more that's just the function of the environment as opposed to sort of something has changed or wrong. It's just the way that things are going to be. When rates rise, it's disruptive to assets

that you own that have duration exposure. Yeah. Period. So so it's not sort of you know, there's been a lot of talk about, well, there's seems to be some sort of liquidity issue in the bond market, especially you know, after the Dot Frank reforms and all that, with banks, you know, committing less less of their balance sheet to market making and bonds. But it doesn't sound like necessarily

you think, at least that's not the main driver. It's more just when rates rise, you know, rates get more violent, I guess, is the bottom line. I mean, if you think about it this way, most risk assets have more volatility on the downside. We just we just didn't know that bonds had downside, so so I mean that's that's a funny way to put it, is that you know assets, risk assets have more vol on the downside. Bonds just haven't had downside, so now they're having downside and someone

says something's wrong. It must be liquidity, and that's where I say, I don't think so. I think it's just the fact that, you know, when rates rise, it's bad for cash flows that have duration exposure period and that has more volatility because it's a downside volatility. Yeah, that makes sense. It's the old take the stairs up in the elevator down, I guess type of situation. We thought that was only for equity markets. Maybe maybe maybe the

same for treasuries. If I had to boil it down to a cliche, which I sort of have to do as a journalist, I guess this after came Kenny, what else? What else should we know about how to think about the markets? For the rest here, What am I messing here?

What's some sort of top of mind for you? And I think the thing for me that I have have stressed with many of the clients that we talked to in Investors is like, if we're in a different regime, you have to think differently as the class properties have changed in an inflation environment, and then you need to just accept that and try and see what is there for you to do in that environment? How do you protect yourself against um inflation and other issues as opposed

to just pretend it's not here um. And that's why I think so many people want to just go away quickly, because then they don't have to really sort of change the way they invest. And so I think that's probably the best lesson is to say, Okay, this is a different macro environment and we're going to see some interesting trends. I think for us, the biggest one to watch this fall is going to be what happens to the energy complex and what happens to bonds um And if we

do actually have a recession, what does that mean? How deep is that recession? Is this something that that is going to be sort of a moderate one which we can wait out but just takes a while, or is it going to be something that's more drastic. I think that's what we'll be watching, probably like anybody else. Well, and it doesn't you know, I correct me if I'm wrong, But it doesn't sound like you think this new regime we're in is is transitory to use a dirty were

these days. This is a new, a new sort of secular thing we're gonna be dealing with for several years. I guess I think I love the point transitory when people are talking about it, because we've never thought it was transitory. I don't think we ever did. UM the reason and as we were watching the commodity markets and the movements in those markets were you know, just unprecedented, and that is sort of a good worrying signal to

any sort of crisis event. I find that these commodity markets really give you a good barometer of where we might be going. And we've seen short signals in the commodity markets recently that to me is a recession trade. That is a you know, a risk off trade. And so that's why I'm focusing on what might happen deputy markets following UM in the next couple of months. So I'd say transitory is definitely something that that we never were really thinking and I think people stopped talking about

that anyways. Yeah. So well that's interesting though, because you know, sometimes, especially the oil market, it feels like a risk on, risk off type of market. Other times that's you know, we're supplied to demand dynamics, but um, you know, in the supply chain issues. You know, when we saw negative oil prices during the pandemic, um, it seemed obvious to me that you know, uh, drilling in exploration companies were not going to start spending a lot of their capital

on on making new investments and that sort of thing. So, um, you're reading it as clearly a risk off signal at the moment. Yeah, at least for now, we've had more negative signals. You've seen it, particularly in the base metals more than the energies. Um. And that is sort of makes sense because commodities were the first part of the cycle and so but if you look at the seventies, let's just give that as an example period where we

have high inflation rising rates. There were actually multiple waves of inflation and there are also multiple waves of energy prices.

So I think that's something that I'm preparing myself for, and I think people should be prepared for, because overshooting and undershooting is sort of a phenomenon in all markets, not just equities um, and so I think that's something that we haven't really talked about for a long time, But we can easily have some cycles or supercycles coming in the commodity sector just as a function of demand

destruction and supply chain disruption going back and forth. So it's definitely an interesting place to be looking at what's going on there um going forward? How about gold? Does gold makes ever make sense to for one thing, or as a trend follower, or I mean maybe as a trend follower it makes more sense than the rest of us trying to figure out sort of what the narrative behind gold is. You know, uh, for one thing, you know, this high inflationary environment, you would expect it to do well.

But then again we have a super strong dollar. So is it a matter of those two are just canceling each other out? Do you think? Yeah? It's been interesting because the precious metal complex in particular has been not that reactive to the inflation narrative, which makes sense in some sense that they're kind of a fixed supply um and less affected by sort of weather and sort of supply chains and things like this. But where recently gold has been much more short in terms of its its signals.

And I think that is always complicated because it has some to do with the dollar, but also has to do with interest rates and sort of the real rate. So that's that's been a tricky one, to be honest with you. But it has definitely been a short signal more recently, So we'll see maybe if the dollar comes off, might see some resurgence there. Yeah, And what are some of the signals you actually react to? Is it you know,

things like moving averages? Is it you know month over month or trailing thirty day type of moves all the above. What what are some of the sort of most important signals for you as a trend follower. So we use a wide range of different methods to to measure where markets are moving, and it could be something as simple, you know, in explanation as a moving average, or could also be um other types of filtering techniques that try

to understand the direction of prices. And I think sometimes for fundamental investors it's kind of seem strange because you know, you're following the prices. But to me, what it means is that in particularly an environments where we're not sure what's happening, oftentimes the market has a lot of information. It's aggregating all of the views, and when people make decisions, they incorporate that information. And so what we're doing is following the market as what the market is doing, not

trying to determine what the market shouldn't do. And that's why this environment in particular is good because none of us as one individual know what the market should do really, or even if we think we do, it's a hard to it's a it's a it's a tall order to think that any one of us is going to be

able to determine that. And so I think our strategies really complement more fundamental approaches because it's those moments where it's really difficult that it's actually good to try and follow, where the prevailing trends are us opposed to sort of saying, well, you know, rates should be four point five. Well, even if I think they should, that doesn't mean that they're going to And I think that's kind of how I

think about it. Well, and it's you know, it's been the type of year where I think fundamental investors have been pulling their hair out trying to you know, reconcile all these issues, whereas you know, you're like, I'm gonna ride the bus this direction until it turns around, and then I'm gonna ride it the other way. And uh, you know, I'm not gonna ask too many questions about who's driving the bus. I'm just topping on. I mean,

it's it's kind of as simple as that in a way. Yeah, and it's it works really really well when it's really difficult, and that's I mean, that sort of makes sense the

two thousand and eight environments March this year. And it's nice because we have a plan, we have a process, we follow the plan, we follow the process, and the only times that are hard for us is when nothing's really happening, or if they're sort of v shaped, you know, recoveries or things like that, which is sort of just shocks to the market that those are harder for us because it's hard to figure out how to handle that with data. Um, but big secular macro themes that nobody

likes are good. So yeah, yeah, well it's uh, congratulations on a heck of a year for the MANTAGE Tutures Fund. I mean it must I'm assuming it's the best year. I haven't looked it up. It must be the best year in the fund's history. And people beating a path

to your door, phone ringing off the hook. Well, I think it's nice because people are trying to find solutions in a hard environment, and they're realizing that they need to be a little bit more tactical and a little bit more dynamic, and so they're you know, asking us questions and trying to understand, like what do we do if this keeps going and it changes um And so I'd say that it's been one of the better years

for managed teachers in a while. But managed tuchers also has done well in other very disruptive environments, like two thousand and eight and also two thousand four teen when we had some major energy events. I mean it wasn't an equity event, but it was definitely an energy situation. So this type of disruptive and macro change, I've been waiting for bond you know, the bond bearer market for for like a decade, so so it's been very interesting

this year to watch that actually happened. I guess your nightmare is just quiet, range bound markets, everything trading sideways. That it's big, big years like this, regardless of the direction or what you dream about. I guess, yeah, we do well when things are uncomfortable. So if things are comfortable, that's actually not good. So it's really sort of environments where there's nothing really happening and sort of things are very sort of range bound and there's no directional volatility.

That's not a great environment because you're looking for trends and there aren't any. Um. What's good for us is that if you trade multiple asset classes, there's usually something going on most of the time. I was going to say that the futures market is so wide open there's always something to uh, although I guess you don't want to get too esoteric, you know, palm oil futures or something like that, or you know, you stick with the main big liquid futures contracts. I would imagine, yes, I mean,

because liquidity is an important part about being dynamic. I mean, if you're going to trade a wide range of different asset classes at a fast you know, it's sort of a regular basis, it's important to have that liquidity. UM two thousand and eight was a perfect example of that, and even you know, as you look at COVID, futures markets were functioning very well. Um the liquidity is there versus cash markets, where you know you're sometimes OTC or

doing more complex things. So I think futures market is a great way to get risk exposure to different asset classes, either long or short over time. And what we've seen in the last three years, sometimes it's good to be short energy, as you point out, Sometimes it's good to be long, Sometimes it's good to be long bond. Sometimes it's good to be shut um, and that's gonna vary depending on what the prevailing market. Themes are fascinating stuff.

Katherine Kaminsky, she's the chief research strategist and a portfolio manager at Alpha Simplex Group. But Katie, I can't let you go until I hear the craziest thing you saw in markets this week. Hopefully it's something good. I gotta I have high hopes for you. Oh hard one. I mean, I think the craziest thing we've seen and we continue to see, it's just how incredibly week the yen is versus the dollar, and we keep getting questions like, at what point are they going to do something? And I

don't know. I mean that to me is I think the craziest is that, um how you know, how far can that go? I think that's probably the craziest thing you've seen out there. So I wish I had some leak more crazy than that. That's good and I think, I mean, I think that's been one of the one

of the most important stories of the year. And talk about a market where people have grown complacent in the thinking, you know, nothing's ever going to change, and uh, you know, well maybe it hasn't as much as they'd like, but it's been uh in general, it's been fascinating to see, you know, I worked with a lot of former f X traders who you know, those markets have gotten so boring for so long. Uh that this is you know, to see them come back to life in this this

is why he is amazing. Well. And I also think the dollar going below parody and beating out the euro, that's another crazy thing. I did not expect that. I mean, I think earlier this summer, like I told you, I thought that was going to revert and because it always does um, but it didn't, and that just shows you, like, the trend sometimes goes longer than you think, and that's usually what surprises me is when it goes farther than

I would expect. Yep, absolutely, well, my crazy thing is is an honor of you and your short bond trade. You know, earlier the year, when when you know, fixed income was really starting to look shaky. I remember having a discussion with someone at work about well, someone had said, well, predicted a bear market in bonds, and we were all like, well, what does that mean? You know, in stocks it's a

twenty percent drop. You know, you can argue about intra day versus closing, but in general everyone agrees you're in a bear market. I don't think anyone ever really thought we'd see a twenty percent drop in bonds, but we had the headline just a few days ago, the Bloomberg Aggregate Index down from its peak, which to me is kind of it's kind of mind blowing in a way.

I think like, if you were to, you know, remove yourself from this situation, and I were to tell you, Katie, uh, what's the world look like when the Bloomberg GAG index is down? I wish they could be a scarier scenario than we're in. You know, I'd expect a lot of bankruptcies on the corporate side and a lot of governments just you know reeling, you know, for for shrop in in uh, you know, global bonds. I don't know, it seems like it could have been worse. I feel like

we could be dealing with an uglier environment than we are. Well. I think the challenge of bonds is bonds hurt from rates going up for what you already own. But it's actually a positive thing in some sense for having positive yield. So it is a little complicated with bonds versus stocks, right, I mean, I guess you could say the same thing for equities. When equities are down, that means they're cheaper, right, Um, I would say that to me, It's not at all

surprising if you look at historical trendsit bonds. We've been in a very very artificial, very very long sustained um bull market for bonds, and maybe the bull market and bear markets are much much longer than what we experience in equities, and so for those of us in the industry, forty years it's a long time to wait for something, um. But if you do look at historical data, you actually will see that there are a lot of periods, and

I think i'll give you a stat on this. During a falling rate environment, we're probably going to see short signals only twenties something percent of the time. And in a rising rate environment, we historically, especially the seventies, you see it's sixty percent of the time. So this type of environment, even though higher rates is good for future investments, but what it hurts is it hurts investments you have now, UM.

And I think that's where to me, it's not at all surprising from sort of an empirical perspective that we can have an environment like that. I guess most of us don't remember environment like the seventies were interest rates went that high, but they could. I mean, it doesn't look like it now, but you know, like I said, it always goes far as they think, yeah, yeah, so that that's not off the table. You think that type of eighties type of interest rates point, I hope not

like that. That's that's pretty far. That's a big let's not. I think I don't think so. UM. I think we're much more inclined to have it extend further than we would think. But I think that is a big move. I mean, that's a much much larger variation than what we have now. But you know, I think we just have to watch that and see how markets react. My guesses is probably much more in a range that seems reasonable.

Of course, those started from higher levels as well, right, Yeah, especially if they know that we're really talking about when, when and if the Fed ever pivots, you know, if the unemployment rate starts going up and that you know, employment mandate is you know, back on center stage. I guess uh, you know, it's hard to imagine them letting it get that out of control, but who knows. Get your back one and if update next step. Katie Kamitsky of Alpha Simplex Groups. Such a pleasure to catch up

with you. Congratulations on a great year. Thanks for having me, Mike. Yeah, what goes up? We'll be back next week. And so then you can find us on the Bloomberg Terminal website and app or wherever you get your podcasts. We love it if you took the time to rate and review the show on Apple Podcasts, so more listeners can find us. And you can find us on Twitter follow me at reag Anonymous Bill, Donna hierarch Is at Bildonna Hirach. You can also follow Bloomberg Podcasts at Podcasts. What Goes Up

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