May 23, 2025 • 66 mins
In this episode, Niels and Mark Rzepczynski examine a market where the usual relationships have broken down. Bonds offer no shelter, volatility moves without conviction, and political intervention keeps distorting the signals investors rely on. What once served as protection now feels unreliable. Behind the headlines on tariffs, inflation, and eroding trust in institutions lies a deeper question about how to navigate when the frameworks built for one regime are carried into another. With a balance of macro insights, behavioral nuance, and hard-earned skepticism, this conversation looks at what really drives returns when narratives shift faster than the data.
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Episode TimeStamps:
00:13 - What Caught our Attention
04:16 - The Impact of Supply Chains on Global Trade
08:51 - The Complexities of Trust in Economics
17:45 - Understanding Trend Following in Financial Markets
27:18 - The Age of Uncertainty
32:51 - Understanding Market Uncertainty
36:52 - More than One Type of Uncertainty
49:53 - The Fallout of Trend Following
01:01:22 - The Dynamics of Safe Assets
01:02:41 - Transitioning from Concepts to Practical Insights in Trend Following
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:01):
You're about to join NielsKostrup Larson on a raw and honest
journey into the world ofsystematic investing and learn about
the most dependable andconsistent, yet often overlooked
investment strategy.
Welcome to the SystematicInvestor Series.
(00:22):
Welcome.
Welcome back to this week'sedition of the Systematic Investor
Series with Mark Risipsinskiand I, Nils Kasblassen, where each
week we take the pulse of theglobal markets through the lens of
a rules based investor.
Mark, it's great to finally beback with you.
I've missed you a couple of times.
Alan has had the distinctpleasure of talking to you.
So how are you doing?
(00:43):
I'm, I'd like to say I'm morethan surviving, but surviving might
be the key, key word.
I I'm looking at you on ourpodcast and your listeners don't
get to see see us, but I thinkyou got a few more gray hairs and
I think I've lost a few hairssince the last time we talked.
Given all of the things thathave been going on in 2025, that
(01:06):
may.
Well be true for sure.
Anyways, it is great to beback with you and we've got a great
set of topics we're going tobe tackling.
As always, you are a true, youknow, you have a wealth of topics
to talk about, given you avery successful blog.
Anyways, we're going to betackling some of them but before
(01:28):
we do that, I have a fewthings on my radar.
I don't know, I always wantto, you know, offer the opportunity
for you to go first.
If there's anything that wehaven't listed on our list of topics
that you wanted to bring upthat's been topical.
Otherwise I'm happy to to diveinto some of mine.
Let's, let's dive into whatyou're thinking because you know,
(01:49):
we haven't talked for a whileso I, I, I need to hear hear what
you're what's on your mind.
Okay, so the first question isa little bit offside here.
Do you follow ice hockey.
A little bit I should given inNew England this is a big thing but
I feel like there's a verystrong set of ice hockey fans in
(02:12):
New England and they're ravid fans.
But beyond that it's not aswell followed.
The only reason I bring thisup on this Friday afternoon is because
of the sensational win lastnight where Denmark beat Canada to
make it to the semi finals ofthe world championship.
(02:33):
Canada, the most successfulice hockey team of all times.
And actually as far as IUnderstand a pretty good team at
the moment and little countrylike Denmark beats them.
I thought that was quite sensational.
So that was on my radar this morning.
Literally 10 minutes ago whenI sat in front of the computer, a
headline pops up on theFinancial Times that I thought actually
(02:56):
is interesting.
It's completely unrelated totrend following anything like that.
And the headline is Trumpthreatens Apple with 25% tariffs
on iPhones.
And basically what the articleis saying that, you know, he wants
Tim Cook to produce iPhonesin, in the U.S.
not just in India.
(03:17):
The reason I want to bring itup is because I think last week I
may have mentioned a book.
I came across a book that justwas released by a guy called Patrick
McGee or written by a guycalled Patrick McGee, which I found
fascinating.
I listened to a conversationabout it.
I started listening to thebook, but it's really about how Apple
built their supply chains inChina, but also to cut a long story
(03:41):
short, how it is completelyimpossible for them to, to produce
iPhones outside of China.
Really.
I mean, all the components areproduced in China and, and there.
And, and the technology andthe skill set it requires to build
these iPhones outside of China.
It doesn't exist according tothis chap.
So I find this highly, highlyinteresting because even if Apple
(04:03):
wanted to, I wonder if they can.
And then it'll be aninteresting dynamic to see if, if,
if there's a little bit of abreak between sort of big tech and,
and Trump in that sense.
Well, there's an old adage, isthat the policymakers of today are,
were educated by theireconomic textbooks of the past.
(04:27):
And I think that a lot ofpeople when it comes to trade have
this view of, you know, okay,we're just thinking in terms of comparative
advantage.
You trade one good for another good.
And this is how trade occurs.
And in the modern world, it'sglobalization is based on supply
(04:50):
chain integration, is thatevery country does a little bit of
a component and then we put itall together as a final product.
And so it's.
The global supply chains driveoverall demand.
And that's sometimes missingin the whole discussion about tariffs
(05:12):
and trade.
Right.
I feel as though that it'smissing and I don't think we could
bring some of these activitiesback to the United States.
And perfect example is Tshirts, is that we made a lot of
textiles in the United States.
All of that moved offshore.
(05:33):
I don't know if Americanworkers or the United States.
That's not what we have inmind when we say we're going to bring
Good high qualitymanufacturing jobs back to the United
States.
That's never going to happen.
No, and I get that.
What I found fascinating aboutthis book and actually some of the
write ups that's been isactually where according to, I think
(05:54):
it was New York Times who dida write up on it according to their
sources and this is I thinkApple numbers.
You know, part of this, whatmakes this fascinating is the fact
that you know, you might, youmight argue that Tim Cook and company
is the reason why China isprobably ahead in terms of technology.
Because of all the trainingthe Chinese received from, from Apple
(06:17):
over many, many, many years.
And according to this reviewI, I wrote and then I promise to,
to move on from this andbecause I'm so flabbergasted by the
number.
According to the numbers Appleseemed to have trained 30 million
Chinese.
That is just crazy number.
(06:38):
So no wonder why they have,you know, superior technology in
some case.
Anyway, let's move on tosomething completely different and
maybe not.
I heard another conversation.
This was with an interestingguy, Vincent Duard or Durad or I'm
not entirely sure what hisfirst last name was.
Anyways, he was on the JesseFelder's podcast and they discussed
(07:00):
number of things and one ofthe things I found really interesting
that he said was if you lookat long term inflation there's a
very high direct correlationto social trust and the faith that
people have in institutions.
So to give you an example theyhad there's apparently there was
a study done where economistsin nearly 200 countries left their
(07:23):
wallet with money in thepublic place to measure the likelihood
of it being returned to theperson who left it.
And I think actually frommemory that he said that the, the
country that where it's mostlikely you would get your wallet
will money back isSwitzerland, which is where I live.
So I thought it wasinteresting and then I.
(07:44):
Well you know, actually maybehe's right because there is very
little inflation inSwitzerland and there's a lot of
social trust in the country.
In fact the country I'm bornin, Denmark I would probably say
to some degree there's,there's a, maybe a link there.
I thought that was fascinating actually.
He also talks about some ofthe low inflation periods in the
(08:06):
1950s in the US where socialtrust was pretty high and we believed
in science, we believed in thearmy and we believed in the government.
Of course that trust goteroded in the 70s and, and Paul Volker
had to come back and, andrestore trust in a sense in the,
in, in, in the, these public Institutions.
(08:27):
I don't know what you thinkabout that when I throw it at you
like that, but I thought itwas kind of interesting way of looking
at it.
That's an interesting issuebetween correlation and causality.
So, so you could sort of saythat these things are correlated,
but are is one causal versus another.
(08:47):
That's my initial reaction.
But.
Trust is a very interestingeconomic problem and I think that
a lot of people have writtenabout this, is that trust is very
much cultural.
That there are culturaldifferences that causes people to
be.
To have different levels of trust.
(09:09):
And surprisingly, Anglo Saxonlaw, or we'll say the Anglo Saxon
systems have a higher level of trust.
So in some sense is that we'rewilling to make contracts with other
people without ever meeting them.
And we could just sort of saylike, well, I'll promise to send
you goods, you'll promise tomake payment, we'll sort of, you
(09:32):
know, fax a document or emaila document and then we agree to do
some business together.
Which is astounding when youthink about it.
Other cultures that they havea harder time with doing that.
What we find is that thattrust is very much built on what
is the relationship withfamilies and relationships with government.
(09:56):
And we'll sort of say thatthose, we'll sort of say that those
people in Southern Europe seemto have a lower trust level.
Those in, in Asia seem to havea lower trust level.
Uh, and what happens is thatthose then have stronger, you know,
family networks.
(10:17):
It could be a failure of government.
But we find out is, is thatthere is a cultural component to
trust.
And so given your idea is thatif there's a breakdown in trust with
government, and that could becaused by inflation, it could be
caused by, you know, badpolicies, then you're going to see
(10:39):
that there's also a breakdownin trust.
Yeah.
Anyways, I've got a couple ofmore things that was on my radar
that's unrelated to what we'regoing to be talking about.
Yesterday I went to see thepremiere of the, the latest Mission
Impossible.
Actually pretty cool.
In a very small local theaterin Denmark, where I am today.
(11:03):
And I hope it's not a goodsign for the box office numbers because
this little cinema, it wasn'teven full.
I was like 25 people,something like that.
Anyways, it was very cool.
There was a, a message from Mr.
Cruz himself, which they saidthey only play on the night of the
premier.
So I thought that was very nice.
But the, the title, of course,Mission Impossible, it kind of reminded
(11:27):
me of my own experience for 35years now, trying to get investors
to put a meaningful amount in,in trend following.
It certainly has been achallenging mission, so to speak.
I, I could see, you know, theMission Impossible or listen to the
Mission Impossible theme songand then, and then have, you know,
(11:47):
Jay Powell run across the screen.
You know, as there, There areso many government officials that
are fighting a MissionImpossible these days, and investors
are doing the same thing.
So we're all facing theMission Impossible of how to sort
of, you know, capture higherreturns and protect our downside.
Speaking of running Tom Cruiserunning, there was actually a fun
(12:10):
little competition here inDenmark where at the, the, the royal
premiere, whatever you callit, the red carpet one in Copenhagen,
they had done a little competition.
I'm not sure what the priceswere, but they invited all these
people to try and run and itwould be filmed and all that, to
run as close as they could tohow Tom Cruise was, because apparently
(12:33):
has a unique running style.
And then the person who cameclosest would win something.
It was quite funny.
It was on television.
Anyways, let's pivot again.
Let's shift gear to somethingcompletely different.
Not entirely sure if there's aquestion or a comment in here, except
for, as you rightly said, thata lot of things are going on in the
(12:54):
financial world, in the worldat large.
And I was just listening.
And a lot of the problems, youand I know from our experience, when
things break, a big part ofthe problem is leverage in systems
and whether it's something youcould have thought about in advance
or not.
Then I was listening to apodcast conversation this week which
(13:17):
was actually about bitcoin,and it was a conversation where,
and I'm not, I don't, I don'tknow the details of these companies,
but apparently there's a bit.
A big bitcoin services companycalled Strike, their CEO was on the
podcast and he was talkingabout, even though I don't think
(13:38):
it had been approved yet, hespoke quite a lot about some new
products that were rollingout, lending facilities and, and
what have you.
So essentially you could lendcash against your bitcoin so you
don't have to sell them.
And he explained this in a lotof details with a lot of passion.
Even though I'm, you know,even though I'm.
I don't think it was actuallyapproved by any authority yet.
(13:59):
But what, what caught myattention, really, and this is what
I'm trying to get at, is thatthroughout the con, throughout his
explanation and promotion,let's call it what it was, he kept
on saying yeah, well, if youhave an asset like Bitcoin that keeps
compounding at 50% and I'mthinking, how can you say, how can
you even, how can you evengive people the impression that you
(14:22):
think it's going to continueto compound at 50% even if it did,
you, you can't say that.
Right?
It's completely crazy talk.
And how, and, and, but, butthe whole point about this was now
you're just introducing evenmore leverage.
Now people can take out loans.
The idea was you can just lendagainst that.
And because it's compoundingat 50% after a year you can pay back
(14:43):
the loan.
You have made more money fromyour, you know, it just went on and
on and on like that.
Luckily, the host, who, whichis a guy that I respect and who's
been on this podcast asguests, he did counterbalance a bit
and trying to raise the, theissue of risk and, and you can't
rely on, on that.
But it just reminded me alittle bit about, as we go through
(15:04):
this uncertainty, all thisfinancial engineering and more leverage
ideas of products coming intothe system, it really makes me a
bit concerned about the, thefuture path of, of some of these
things.
Anyways, there's, well, I, Iremember I, I won't get this exactly
right, but it's almost, yousay you can ignore the facts, but
(15:28):
you cannot ignore theimplications of the facts.
So, so, so, so you know,nothing compounds at 50% for an extended
period of time.
And, and I, I probably wouldsort of say that that's a dereliction
of, of your, you know, dutyto, and part of podcasts, we'll say
(15:51):
the educational component isto sort of give people a realistic
sense of what is possible andwhat is not.
And there are limitations towhat you can do in finance.
Let's talk a little bit about.
So I have one more topic, butI know we're going to be talking
about that it's to do with bonds.
So we'll talk about that as weget into some of your topics.
(16:14):
But let's do the usual sort oftrend following update.
By the way, I loved youranalogy from last time you spoke
with Alan when, when and Imade the headline of the episode.
Nothing good happens below the200 day moving average.
I think it was recorded aroundthe crisis.
And of course something gooddid happen because we got some financial
(16:36):
advice from the Oval Officejust to buy stocks at a certain date.
And what do you know, it goesup by nine and a half percent in
a single day.
And since then it almosthasn't looked back since.
So, so something did happen,something good did happen below the
200 day moving average that time.
Not so much for trend followers.
Trend followers.
We don't really like these Vshaped market moves and erratic reversals
(17:01):
and there's been quite a fewof them not just this year but actually
in the past year more or less.
I think we made a highgenerally in the industry around
April last year.
Stocks, bonds, currency, we'veal, we've seen many, many reversals.
I can't really remember whenwe last saw that many reversals in
a 12 month period but.
(17:23):
And we've it's reflected, Imean some of the managers who've
been around for decades areseeing their worst drawdowns ever.
So it is showing up in the numbers.
I'm curious from where you sitwhether you have any thoughts on,
on, on trend.
Right.
You know, generally speakingso far this year, big picture or
(17:43):
small picture, whatever youfeel like.
Well, I think that let's lookat a very high level and then we
can go down into a deeper level.
At the high level.
I think that this causes us torethink the relationship between
crises and trend following.
(18:03):
So you know, we've used a termcrisis alpha.
We think in terms of like ifthere's a drawdown in stocks that,
that this is a, a trendfollowing will do.
Well, it's a safe asset tosome degree which we'll talk about
in just a second.
But we're finding out thatthere are different types of crises.
(18:28):
All crises are not the same.
And it's harder for us togeneralize what the behavior will
be in a given downturn in thestock market.
It has to do with its length.
It has to do with the type of,it has to do with how fast maybe
the market comes back.
And so, so we can't have a onesize fit, fit all view between trend
(18:52):
following and crises.
Yeah, I just as we speakingright now, the headlines are flashing
on my screen here.
Trump has now proposed a 50%tariff on Europe even though I thought
they had like 90 days to findout, negotiate something.
So of course markets are doinganother reversal as, as we speak.
(19:12):
Just to, just to underscore mypoint, my own trend barometer is
certainly reflecting thisdifficult time.
It's closed yesterday at 30which is pretty weak.
It aligns well with the numbers.
These numbers that I'm goingto say is from Wednesday Evening
beat up 50 down 1.7% so farthis month down almost 5% for the,
(19:33):
for the year sock gen CT indexdown or 1.78% for the month, down
8.5% for the year.
The trend index is down 2.6for the month, down 11.66 for the
year.
Short Term Traders Indexpretty flat for the month of 18 basis
points and only down 69 basis points.
So they're holding up wellthis year.
MSCI World up 4.5% so far thismonth, up 3% for the year.
(19:58):
The S&P US Aggregate BondIndex down 1.5% each this month and
down 1.5% each for the yearand the S P500 Total Return of 5%
so far this month as of lastnight and they're flat now for the
year, which is not what younecessarily expected.
(20:21):
Now, before we get into yourtopics, Rick sent in a question that
I wanted you to comment on, ifyou don't mind.
Rick writes Admittedly Ididn't stress test this with my own
math and took a shortcut using ChatGPT.
I sent it two charts SG trendand the Vix since 2000 and asked
does trend work better in lowvolume environments?
(20:44):
I assume the answer would havebeen yes, but this is probably recency
bias.
SG Trend is poor this year andvolume are elevated.
Here's what it told me.
No.
Historically Trend followingeg SocGen trend index tends to perform
better in rising or highvolatility environments, not low
volume.
(21:04):
The reason?
Trends emerge more forcefullyduring market dislocations, macro
shifts and regime changesoften accompanied by elevated volatility.
Periods like 2008, 2009, 2014to 2015, 2020 to 2022 and Rick just
ask, you know, what does ourwork and experience tell us in this
(21:25):
regard?
Any thoughts on that?
This is really a complex issuebecause we'll sort of say that we
need a certain level ofvolatility in which to identify trends
and exploit trends.
If you don't have volatility,then you're not going to be able
to either find a trend or ifyou do find a trend, actually be
(21:51):
able to take advantage of it.
We do know so we do know thatextremely low volatility in any given
market could be a period ofpoor trend following performance.
Or we'll just sort of say thatmodest performance.
Now what will happen sometimesis that you can increase your position
size to offset some of that,but then what happens if there's
(22:13):
a change involved?
Then you could be caught onthe wrong side and it could be detrimental.
We also know that at highervolumes is that there's going to
be more dispersion, moreopportunity for trading and that's
going to be better.
But then we also know that ifthat there's a spike in volatility
(22:34):
usually then there's going tobe a reversal in trends.
Given that reversal in trendsthat there's going to be sort of
potential for short term losses.
And then what happens is thatyou have to wait or as the volatility
comes down, then there's thengoing to be another new opportunity
for trends.
So you have to break downvolatility into different segments
(22:57):
and then you have to look atthe type of model that's being used.
So it's not an easy question.
I think that ChatGPT sort ofhighlights some of these issues,
but it's more nuanced.
Yeah.
The way I think about it isthat if we can get the initiation
of a trend in a low volumeenvironment, then certainly for the
(23:19):
people who don't adjust theirposition size, it allows them to
put on a big position.
For those who are dynamicallyposition sizing, it's maybe less
of a concern in that sense butthen it really depends on how VoL
evolves during the trendbecause often what from memory at
least what I note is that ifit's a really long sustained trend,
(23:40):
actually part of that trendcan actually be relatively low volume
in itself.
And then of course you'reabsolutely right, often around at
least periods of consolidationor even potential reversals, volume
tends to go up.
Which is why kind of makessense to me at least that that's
(24:02):
the time where dynamically youwould reduce your risk.
Yes, you can, you can then bea little bit low, have low exposure
if the trend continues.
But often it doesn't.
And so you have a chance maybeto reduce your risk before the, the
actual kind of give backhappens through the reversal of price
(24:25):
anyways, so, so you're right.
I mean it is a complicated andI don't think you can say because
the markets we trade are so different.
I mean, what's the volume, Coco?
How does that relate to thevolume in the S and P?
It doesn't.
So I think that it's much morenuanced, as you said, in terms of
the word volatility and, andI'm not sure we can really talk about
(24:48):
regimes per se because theregime we often think of the financial
part of the portfolio butdoesn't really take into account
what goes on in theagriculture or the commodity part
of the portfolio.
Now, now the one thing I guessI would sort of say that I could
not say with certainty but I,I have high conviction is that if
(25:10):
you're in a period of extendedlow volatility and you say that I'm
not getting the returns that I expect.
And so therefore I'm going tolever up all of my positions to offset
this low volatility.
If you don't dynamicallyadjust quickly, you could be in a
situation where once again,leverage is not your friend.
(25:33):
Leverage could be your enemy.
So, so if, let's say normalvol is, let's say 12, market goes
down, it's only 6 and you saylike, well now I should increase
my position size across theboard because I want to keep my vaults,
you know, fixed at a certainlevel and I just want to sort of
make up for the lower volumewith higher leverage.
(25:55):
That, that's a recipe forpotential disaster.
Sure.
But, but, but to calm thenerves of, of any investors who are
listening to this, I thinkit's fair to say that most experienced
managers, at least they willalways have a flaw.
So how, you know, so whatevervault does in real time, like when
interest rate went to zero andjust stayed there, it doesn't mean
(26:16):
that you could have, you know,infinite amount of short, you know,
short term interest ratecontracts on.
You obviously look at long,long term volume flaws to make sure
that that doesn't happen.
But of course, yeah, thereare, there are volatilities, very
important ingredients in, inall of this.
So.
Okay, let's pivot to yourtopics, Mark, because as usual, they're
(26:40):
really good.
I'd love to hear what we'regoing to go with this.
I'm just gonna throw someguidance to you and then you can
kind of take it from there andI'll try to keep up.
The first thing just to, toremind you was this, you know, naming
periods and I think you havea, well, you have a name for this
period.
So, so I'll, I'll hand it overto you.
(27:02):
Well, I like to actually sortof, and I think a lot of investors
like the ideas is that theywant to say, well, categorize where
we are now.
Give us, give it a name, tellus where, what you know, and give
us a theme associated with 2025.
So you know, I startedthinking about this and I said, well,
this is the age of uncertainty.
(27:24):
You know, we've been havingtremendous uncertainty on policy
and monetary policy, tradepolicy, politics.
But then I look back and thereis actually a BBC series called the
Age of Uncertainty by JohnKenneth galbraith in the 1970s.
(27:45):
You can still get it on YouTube.
It's.
But we'll sort of say hismajor view at the Time, you know,
it was in 1977 is this is thatwe had market failure and that what
we needed is the state to comein to solve this uncertainty.
So this was during the 70s, wehad the stagflation period.
(28:08):
So, so he argued that, that,that this was a necessary for the
state to solve the problem inthe age of uncertainty.
And then I sort of said wellwhat different.
And we'll say that this is theuncertainty that was created by the
state as opposed to excessesin the market.
(28:30):
So if we go back in a lot ofour crises that we've seen in the
past, it's been, we'll sort ofsay okay, housing bubbles, tech bubbles,
that there was excesses thatwere built into the economy and then
those excesses were now sortof, we had to return back to normal
(28:50):
and that, and there was arevision and that caused a financial
crisis.
It may have caused markets to dislocate.
But this one is differentbecause it's actually the state that
sort of created this.
So we're not sort of saying wedon't want to get into a blame game
(29:11):
per se, but we'll sort of saythat many of the trade wars is that
trade tariff issues is a manmade problem, it's not a corporate
problem.
And so that's what's causing alot of the uncertainty.
That's what makes this sort of unique.
So, so I think that that's.
(29:32):
So I'll call this the age ofthe new age of uncertainty because
it's a different type ofuncertainty than what we saw in the
70s.
But it's important for us tothink about this because that will
come back to how we view trend following.
And in particular what we'llcall it is that there are a number
(29:52):
of descriptors that we coulduse for markets and they have different
implications on how a quantmodel and a trend model in particular
will work.
So one is that there's risk.
Okay, we can measure that bythe VIX index.
(30:14):
So as just a general.
So we just had the discussionabout volatility but interesting
is that we had risk fallingactually since you know, the middle
of April, it's above the sixmonth moving average.
But you know, I think I saidearlier this week the Vix was at
about 18, which is, you know,fairly low when you consider all
(30:38):
of what's going on.
So it's.
So we're not in a risk environment.
Surprisingly so many peoplesay that, well, if there's a spike
in vix, that means thatthere's going to be A reversal in
the stock market and a spikein VIX or spike in volatility is
good for trend following.
(31:00):
Surprisingly, we had a spike,but then we didn't have.
But now we're back to normal,but it doesn't feel like we're normal.
So the markets are sort of notdiscounted in terms of a risk perspective.
The second way in which welook at markets is by dispersion,
and that will be the spread ofreturns over a period of time.
(31:22):
Now what we're sort of seeingis that the CBOE has a dispersion
index.
And what they're doing is theylook at the volatility of a given
market relative to the vix.
I always want to look at thedispersion of returns across a set
of assets.
But on that sentence, this isthat we had less dispersion because
(31:45):
we had only a, a key causaldriver, driver or single driver that
was causing or, or not causing dispersion.
So dispersion is up, but it'snot this, it's not at an extreme
level.
So which again is interesting,if there's less dispersion, then
(32:06):
there's less opportunities todiversify and make money on trend
following.
So what I also look at is, iswhat I call the market network.
So this is looking at network analysis.
This is sort of.
We can look at correlations,we can look at causal networks.
So network has become verytight earlier in April, and that
(32:33):
was because everything wasdriven by, you know, a focus on one
single theme, which is thetariff issue.
Now you will call that thenetwork has less compressed, there's
more dispersion across thecorrelation networks across all markets.
So, so we're turning back to normal.
Now.
The one thing that we havesay, say is, is now we can look at
(32:58):
uncertainty and uncertainty isdifferent than risk.
Okay.
We do now have uncertaintyindices which they look at word count
in different newspaper storieswhere different if policy issues
are brought up in the stories.
But we have a monetary policyuncertainty index, we have tariff
(33:25):
uncertainty indices, we haveglobal and country volatility uncertainty
indices.
And what they're doing is, isthat they're giving us some interesting
stories.
All of them were elevatedearlier in the year.
Trade was actually out ofcontrol in terms of.
(33:46):
It was almost off the chartsas an outlier.
We've seen that theuncertainty in trade has come down,
is still elevated uncertaintyin the United States policy uncertainty
is higher.
And it's interesting thatpolicy uncertainty in the United
States is higher than thepolicy uncertainty around the globe
(34:11):
and in Europe.
So if we have less uncertaintyin Europe and called policy uncertainty
than the United States, thenthat can explain why there's been
more of a flow of capital toEurope than relative to the United
States.
Because if you sort of saidI'm a foreign investor, if I say
that there's more uncertaintyin the United States, I'd say like,
(34:33):
well, then that makes a placethat it's a less likely place I want
to invest in and it makesEurope a more interesting place.
Now what happened is that wehad uncertainty spike and then it's
(34:53):
still elevated.
And so uncertainty has notbeen fully resolved, it's been partially
resolved.
And this uncertainty spike andthen reversal can maybe explain why
trend followers haven't doneas well.
Finally, as I'll throw, thefinal issue that I look at is financial
(35:14):
stress, which is also interesting.
The financial stress indices,there are a number of them that comes
from the ecb.
There's also stress indicesthat come from large banks as well
as the St.
Louis Fed.
Stress is elevated, but it'sstill nowhere near what we saw in
(35:37):
2020 or 2008.
So we have lower volatility,we have less stress, we don't have
elevated dispersion, but it'snot out of control.
And we had spike inuncertainty, but it's been, but it,
it's come down, but it's stillvery high.
(35:59):
And so given that is theframework we see around the world,
the question is how does thattranslate to markets?
And what we're seeing is, isthat we've had the markets have sold
off significantly based onuncertainty, uncertainty has been
partially resolved or theuncertainty has come down and now
(36:23):
there's been a reversal.
So you say like, okay, wellhow did I lose money then?
Well, when we think ofuncertainty, uncertainty is actually
in a very broad sense is ourlevel of ignorance.
It's what we don't know.
(36:44):
Uncertainty is resolved oncewe have new knowledge or that our
ignorance is eliminated.
That's one type of uncertainty.
We'll call it intrinsic.
There's also just uncertaintythat just you can't sort of say what
maybe government officials aregoing to do in tariff policy.
That's a different type of uncertainty.
(37:05):
But what we'll sort of say isthis is that when uncertainty is
resolved, it could either be agood result or a bad result.
Most times when we thoughtabout crises and where trend following
has made money has been whenthere's been uncertainty, but then
(37:28):
the resolution was somethingthat was negative.
Here we had uncertainty resolved.
So first you had a premium.
Do you say like, well, I wantto avoid markets because there's
high uncertainty.
But then the resolution ofthis uncertainty, the elimination
of this ignorance was on theupside or positive.
(37:49):
So we didn't get the effect we had.
In fact, we went fromuncertainty that was biased to be
negative to uncertaintyresolved to be positive.
And that caused a big reversalin markets and that caused a big
reversal in trend behavior.
(38:11):
It's a long winded question tosay what I'm looking at.
Sure.
I could actually sort of makeit more succinct is that some people's
calls called Donald Trump thelong gamma president and in the sense
is that you got to get longconvexity because you never know
what's going to happen and, oryou know, if I have to use a one
(38:35):
word for the last couple, youknow, weeks in the markets, is that
the Donald Trump term is thatmarkets are yippee.
Yes.
Well that's certainly one ofhis terms.
I mean another way of thinkingabout these periods in my simple
way of thinking about it isjust that we have these quote unquote
(38:59):
crises or sell offs or revert,let's call them reversals.
Right.
But there's no follow through.
Right.
That's kind of what is missing here.
It reminds me.
This is also why I think inprevious conversations I've said
that this reminds me so far alittle bit about, a little bit about
COVID where we had this veryviolent initial reaction.
(39:24):
The follow through didn'tactually come because the central
bank step in and you know, itwas quote unquote solved.
And at that time trendfollowers, at least I think most
of them had kind of gottenready for the follow through, the
positioning had changed.
We were ready for a furthersell off in and risk off, so to speak.
(39:46):
But it just never happened.
So it was a difficult environment.
This feels somewhat the sameto me.
There's another component thatI think we'll come to.
But let's take, let's staywith what I think you, you, you also
wanted to maybe tie into allof this and it's kind of, you know,
what we've learned.
(40:09):
Diversification didn't help.
Did it help the wholecorrelation problem?
What did you want to.
Yeah, well first I could sortof say that yes, it does have a feel
very much like, you know, theMarch, April period of 2020.
And again it's sort ofinteresting is that.
(40:34):
And it's at a very high levelis that.
And we'll sort of say part ofthe whole Covid crisis was man made
in terms of lockdowns and thena response trade crisis again was
man made.
And so what is unique on thesecrises is that they're man made events,
(40:58):
which means is that they couldbe turned on and turned off fairly
quickly.
You use the word follow through.
Is that we would like as trendfollowers that we would like, I guess
a behavioralist response by markets.
And when I say a behavioralistresponse is that people will then
(41:20):
slow up their investmentdecisions, they will start to cut
back in some of their exposures.
That, that there's behaviorthat then takes time to occur which
causes trends in markets.
Is that if you have quickresponse from government, you don't
(41:42):
get that behavioral responsein markets because they have to react
much faster.
Yeah.
And in an odd way, and this ispeople, I hope people won't misunderstand
this when I say because it'snot a political statement, I would
have the same view regardlessof who's in the OV office.
But we have in a sense have,we've had intervention in the markets
(42:06):
like we had the stimuluspackages back in 2020.
We've had the, the narrativethe good day to buy stocks or we're
gonna put tariffs on hold.
So, so this is what'spreventing markets from follow through.
It is intervention bypoliticians or central banks.
And, and that does make it an,a difficult environment to navigate.
(42:31):
Now it doesn't change my viewthat these things will resolve themselves
over time.
And if it's a really badcrisis looming, it will overpower
anyone giving stock advice.
And this could be just areally good example of how trend
(42:52):
following is not the first responder.
We've talked about that atlength and where the second responder
role becomes really important.
If this really does end upbeing a much bigger thing than, than
what it seems after the lastcouple of weeks of, of relative calm
right now.
(43:13):
Now trend followers are justsaying we take prices as is.
We just sort of say whateverthe prices are.
Telling me that's what I'mgoing to use.
So when we talk about this,you know, man made crisis or a man
made uncertainty, this is thatwe're not making political judgments
other than the fact that thejudgment is, is that if there are
(43:36):
quick reversals in policies,whether it's monetary policy in 2020,
trade policy that you know,moves from one extreme to another
very quickly.
It's.
We're not judging whetherthat's good or bad.
We're just sort of saying itis a fact.
Now what does that impinge on markets?
Now getting back to thelessons we learned is this is, I'll
(43:58):
go back to, you know, some ofmy Old adages, there's the general
view is that, okay, if you'retrend following, your long convexity,
your long volatility, okay?
And this period of time tellsus that that's not exactly true.
So and by that I sort of saythat I've been a strong believer
(44:21):
is that what trend following is?
And this goes back to thequestion and it goes back to the
events here.
It's long, long volatility,but it's short, short volatility
we want to have.
We're long, long volatilitybecause long volatility or longer
(44:41):
term volatility gives us moredistribution, dispersion and returns,
that there's more movement in prices.
You could have, you know,strong movements in low volatility.
But generally if you look atyou take the standard deviate deviation
times square root of time,that'll give you the dispersion that
you could possibly have in returns.
So on the other hand, we'reshort, short volatility.
(45:04):
What do we mean by that?
This is that everything wecreate in trend following is usually
a trend with a stop or somekind of, you know, risk management
underlying this.
And with the fact that youhave your short, short volatility.
If you have large movements inshort term volatility, there's a
(45:25):
greater likelihood that you'regoing to get your stops hit.
Okay, when your stops get hit,you lose your positions.
And so instead of having likea, just like a long and option or
longest straddle which youhold until expiration, when you're
holding a trend model with astop loss, you're like a knockout
(45:51):
option in the sense is thatI'm holding my position and if the
short volatility works againstme and I get my stop hit, then I'm
getting knocked out of myposition or knocked out of my option,
which is the trend component.
If you look at a lot of thecharts and you put candlesticks and
(46:12):
you then look at movingaverages is what you find out is
this, is that what was reallyproblematic for I think a lot of
trend followers?
And I'd say it's problematicfor models that I've looked at this
is that okay, if you sort ofsay that I'm going to have stops
intraday, if you have a largeintraday move, then it's a more likelihood
(46:37):
I could get stopped out andthen the market closes above whatever
my moving average should be.
If I have my close, I can sortof say like I can have a large move
before you actually have themarket close again.
As I said, it could cause me alarge amount of losses.
So in this long volume, shortvolume environment I can have a situation
(47:01):
is that even if I'm a longerterm trend follower is that given
the high intraday valuationand where I execute could have a
big impact on what thepositions I hold and what I lose
and what do I keep.
Yeah, no, I think actually, Imean you kind of hit it on the nail
in the sense that at least oneof the things that I try and talk
(47:22):
to clients and prospects aboutis that I think one of the biggest
challenges we have as trendfollowers is that on one side we
know because all of the datatells us that, that we need to be
longer term but we also knowthat for risk management purposes
and, and, and you know, andalso for other reasons of course
(47:45):
sometimes you need, you need,you have to react quickly and that
balance is really, reallytough to.
And also how do you do that?
Do you do that by just havingmodels with different time frame
or there are other more kindof interesting, innovative ways of
striking that balance.
So yeah, right now it'sdefinitely a situation where you
(48:08):
kind of called upon bothdepending on which day of the week
it is and, and that makes it,that makes it a challenge and.
The best way to say or atleast what I think that.
And you know, we talked alittle bit about the soc gen piece
about, you know, which showsthe box plots of performances and
wide dispersion and what youfind out is that whether you're a,
(48:35):
you think that you, you knowthat if you're a short term trader
that the intraday move iscritical to whether you make profits
or not.
Okay so it's the differencebetween the high and the low is,
and if you're only trading forone or two days, if you, if you miss
something in that veryintraday it's going to have a big
(48:58):
impact on performance.
Now surprisingly the view isthat if I look at very long term
trading that then theexecution doesn't matter as much
because well, do I really care about.
There's a large intraday moveif, let's say I'm trying to hold
(49:19):
a position that might last forweeks or months.
That's true on one level, butat the same time is that if you make
a mistake on execution withyour long term trend model it may
take you a long time beforeyou can reverse that.
So in some sense you're goingto have higher short term impact
(49:42):
on performance.
But it also might have animpact that you may lose positions
or you may gain positions thatyou're stuck with for A while that
you may not want.
All right.
You have another headline inyour list of topics called the Fallout.
Talk about that.
And, and and of course anyother topics from your list, your
(50:04):
long list I should say thatyou think we should be focusing on
today.
Well on the one hand you knowwe always talk about, you know, this
has not been, you know astrong period for Trend following
for 2025.
April was, was not a verypretty picture whatsoever.
And so you could sort of saywell I'm talking my book on one of
(50:26):
my next comment.
But there may be the falloutfrom all of this is that we've learned
some lessons about how youshould behave in uncertainty.
But it still comes back to isthat bonds were not really a safe
asset during this period at all.
And in some sense the classicargument is that well I could just
(50:50):
hold stocks and bonds.
I really don't need trendfollowing this is that if I hold
my bonds and I'm going to getthis safety because of this negative
correlation between the two.
What I've seen historically,albeit that has changed recently
and I still clip my coupons soI don't really need this because
(51:15):
I've got my bond exposure.
What we're finding out is thisis that now okay, there's a negative
correlation because stocks areflat to up, bonds are down.
But at the same time this isthat we did not get safety from bonds
(51:35):
in the April and May period.
We look at where the 30 yearyields are in the United States,
it's above 5%.
You look at above 4.5% for 10 years.
This is that I think that youlook at the some meme of talking
about bond vigilantes.
(51:57):
We just had the budgetapproved or the wonderful bill for
Congress.
The beautiful bill.
Let me correct you, thebeautiful bill.
But now we have a situation.
We're still going to have highdeficits and we know what happens
when you pass a bad budgetbill in the UK right.
(52:20):
So you know it's called thetroughs Trust moment.
Is a similar event event goingto happen in the United States?
And I hate being a doomsdaysayer because we'll sort of say that
the whole idea of April Maywas this is that uncertainty was
resolved.
But it was for the positive.
(52:40):
But at the same time as isthat the one clip that came to mind
in in 1925 the UK wasconsidered the premier economy and
you know, the sterling wasstill, you know, the top currency
25 or 50 years later.
In 1975 the IMF had to bailout the the UK government so 50 years,
(53:08):
that means in my children'slifetime, it's possible that you
could have a bailout of theUnited States government if you move,
go down certain paths.
So what that means is that youhave to start to look at other concepts
of safety or hedge assets thanwhat we've looked at in the past.
(53:32):
I completely agree.
And one of the, one of theinteresting things is that this week
I published a conversationwhere Alan spoke to the authors of
this annual return yearbook.
I'm not sure it's the right,exactly the right wording of the,
(53:52):
of the yearbook, but it's,it's essentially some, some academics
who each year for the past 25years have gone back and analyzed
historical data, inflationadjusted data, I should say, in many
different countries, and puttogether this wonderful piece of
work that it is.
(54:12):
And in the conversation it'sit, I think Alan quite rightly raises
the point about, for example, bonds.
I mean, if you look at thedata, it has not really been a very
good investment yet it hassuch a big allocation.
Not so much in the US maybe40% is what people think about, which
(54:34):
is high, it's too high.
If really we're in the 40 yearcycle now where interest rates are
going higher, which I tend tofall in that camp.
But in other countries,especially over here in Europe, Mark,
40% is not, I mean that's notwhere the level is.
It's 60, it's 80% fixed income.
(54:55):
And you can't help askingyourself, based on what evidence
do they put so much trust inthese bonds, let alone the risk that
you introduce?
Because I think maybe a coupleof years ago you would say, well,
the risk of a US default is zero.
It's not zero anymore.
And in fact they've talkedabout ways where they could do technical
(55:19):
defaults, Malaga accords or whatever.
So, so yes, I think, and Ireally do feel strongly that I think
trend following, despite thefact that it hasn't worked so well
in the short run the last fewweeks, but it should be thought of
by people or by investors as avery, very constructive element in
(55:46):
the portfolio in terms of risk mitigation.
So, yeah, so this goes back to.
And it's a longer piece of research.
I didn't highlight this inthis conversation because I'm working
on this, that the idea of thedifference between a hedge asset
and a safe asset, and therehave been academics who have been
(56:08):
talking about there's ashortage of the safe asset.
Treasuries bills have usuallybeen viewed as the ultimate safe
asset.
We lost our AAA rating.
But on a relative basis, wecould still be safer.
But a safe asset is one thathas low correlation and negative
(56:29):
correlation when markets are down.
Okay.
And a Princeton economisttalked about a safe asset is a good
friend to have in theportfolio so that when things are
going bad, that you can dependon your safe asset to help you out.
And in times of stress, whatI've concluded is that the safe asset
(56:53):
is not a good friend.
It's a fickle friend.
And it's fickle in a sense isthat it should be your good friend,
but it may not be treasurybills or Treasuries in general may
not be your good friend's safe asset.
It may become a fickle friend,which means that you're going to
(57:15):
have to find some new friendsto serve as your safe asset.
Now, gold has done a good jobrecently, but there's been a recent
paper where they looked at howgold performs in different types
of crisis.
It does very well duringtariff periods.
So if there's tariffuncertainty, that gold is a really
(57:38):
good safe asset.
Other times it doesn't.
You could think of treasurybills, too, is a safe asset, except
during inflation.
So then it's not a safe asset.
So now you have to sort ofsay, is that, okay, if I know that
my safe asset friends arefickle, is there something else I
(58:02):
could choose that could offsetthis risk?
And my view on trend followingcould be is this, is that it also
seems to be a fickle front.
It didn't really do well inApril and May, so it wasn't there
as a safe asset.
Agree.
But we'll sort of say that thedynamic characteristics may mean
(58:23):
that if we go into an extendedperiod where traditional safe assets
are no longer safe, that maybea strategy that actually picks and
chooses between long and shortpositions at different parts of the
world may actually providemore safety.
So we'll go back to theempirical definition.
(58:45):
Is that low correlation andnegative when markets are down, okay,
that's what you want to haveas a safe asset, is that if you're
something that's close tothat, that that may be something
that you want to hold in yourportfolio because the normal safe
assets are not.
May not do their job.
Yeah.
(59:05):
And you know, it reminds mealso of something I listened to,
and I'm sure we've spokenabout this on the podcast over the
years.
You know, the question aboutwhat makes a really great investment,
you know, really greatinvestment, you can say, the easy
part is to say, well, it's onethat you can stick with.
But what what, but I thinkwhat's more interesting and more
(59:25):
relevant is that it's one youcan stick with because you're comfortable
with the process of theinvestment and as you rightly say,
the process of havingsomething that adapts long and short,
that is globally diversified.
So the how and the why, Ithink that's how I'd love to, for
(59:46):
people to think about trendfollowing and, and why it makes,
it makes a great investmentin, in my view, the process is very
rational and understandableand it gives me a lot more safety
really to think about the factthat, yeah, we can, it doesn't really
(01:00:06):
matter if it's going up or down.
And by the way, you and I havetalked about, and also the last few
weeks we've focused on, youknow, the current environment and
the fact that it's been adifficult start to 2025 and all of
that stuff.
But I do want to actually askpeople to just zoom out.
I was listening to WarrenBuffett being, talking about maybe
(01:00:28):
in, in conjunction, inconjunction with the last annual
general meeting in BerkshireHathaway, I can't remember, but I
think some, some in theconversation comes up about, you
know, drawdowns and, and, and,and, and so on and so forth.
And, and he just said, youknow, Berkshire hathaways have had
three or four drawdowns overthe years of more than 50%.
But, but for him, you know,you know, corrections of 20, 25%
(01:00:52):
in the share price, in his view.
And we can say the same abouttrend following.
I mean, it's just not reallysomething you should worry about.
You should, you should worryabout is, is what it's going to do
for you over the next 10, 20,30, 40 years.
And, and, and we have a lot ofgood evidence based on that.
Anyways, I'm not entirely surewhy I got sidetracked into that.
(01:01:15):
But, but I think your commenton processes is critical because
you'd say let's go back to theidea of a safe asset.
So treasury bills are our safe asset.
Is there something about theissuer of treasury bills, if they
change their process orbehavior, that would change that
(01:01:39):
level of safety associatedwith that?
And you can sort of say thatso a safe asset today may be less
safe tomorrow.
So the concept of a safe assetis dynamic.
And if that's, if you believethat the safe asset concept is dynamic,
well then on a relative basisthere could be other substitutes
(01:02:02):
based on, let's say, trendfollowing that could serve as this
safe asset haven't.
And that's what we need tothink about.
And so even though it may befickle as we should say that it could
still be a good friend, it.
Can still be a long term friend.
Yes, a long term friend.
A long term.
Well, you know what they say,I mean, long term friendships are
(01:02:23):
the best.
Right.
So maybe we can end on apositive note on that.
Anything else you want tohighlight before we wrap up, Mark?
This was great.
Lots of different things, butwe obviously didn't get through all
of the things we had planned.
But that's how it is when we talk.
There are a couple things Iwant to come back to because there's
(01:02:45):
been a recent paper that talksabout that riding bubbles can be
a strategy.
And when you think about, youknow, a trend follower, you know,
can ride bubbles, this is so atrend follower can, you know, buy
overvalued markets.
It could also buy undervalued markets.
So.
So that's the thing that isunique about trend following, is
(01:03:09):
that it is valuation agnosticin the sense is that could you still
find a trend in an overvalued market?
You say?
Absolutely.
You say that could still be avery good trend if let's say that
people are causing a meme thatdrives a bubble.
(01:03:31):
So I think that that's aninteresting concept that people should
take into mind that we'revaluation agnostic.
Second thing is I want to comeback to is that there's a recent
work on machine learning andcurrency trading and lo and behold,
they found out that with allthe different models they use, that
still the two features thatare most important is momentum and
(01:03:54):
carry, which we've beenprobably talking about for years
and years, is that there'sdifferent ways you could extract
it.
But it still is that if youwant to be a currency trader, you
got to look at momentum andthen sprinkle in a little carry.
Yeah, no, absolutely.
This was wonderful.
So glad to be able to catch upwith you this week, Mark.
I really appreciate it.
(01:04:14):
Appreciate all thepreparations you did.
And if people want to showtheir appreciation for Mark as well,
head over to your favoritepodcast platform, leave a rating
of review and review and andwe certainly recommend read all of
them and we really doappreciate them.
Next week I'll be joined by Alan.
So if you have any questionsfor Alan, which I hope you do, then
(01:04:35):
you can email them to, asusual, infotoptraders unplugged.com
I'll do my best to get you an answer.
You can, of course, follow uson all the social media channels.
There's been a lot of activityon Twitter following some of the
recent episodes we've releasedwith Jim and some of his guests,
which has been very fun to to follow.
(01:04:57):
We have of course our TrendBarometer published every day on
the website and you can signup for the weekly email update that
I send out.
Anyways, from Mark and me,thanks ever so much for listening.
We look forward to being backwith you next week.
Maybe by that time Denmarkmight be world champions in ice hockey.
(01:05:19):
You never know.
There you go, you know.
Exactly.
We do live in a surprisingworld, I have to say.
Anyways, until next time.
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Thanks for listening to theSystematic Investor podcast series.
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rating and review.
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And remember, all thediscussion that we have about investment
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or even infer anything aboutfuture performance.
Also, understand that there isa significant risk of financial loss
(01:06:04):
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(00:22):
Welcome.
Welcome back to this week'sedition of the Systematic Investor
Series with Mark Risipsinskiand I, Nils Kasblassen, where each
week we take the pulse of theglobal markets through the lens of
a rules based investor.
Mark, it's great to finally beback with you.
I've missed you a couple of times.
Alan has had the distinctpleasure of talking to you.
So how are you doing?
(00:43):
I'm, I'd like to say I'm morethan surviving, but surviving might
be the key, key word.
I I'm looking at you on ourpodcast and your listeners don't
get to see see us, but I thinkyou got a few more gray hairs and
I think I've lost a few hairssince the last time we talked.
Given all of the things thathave been going on in 2025, that
(01:06):
may.
Well be true for sure.
Anyways, it is great to beback with you and we've got a great
set of topics we're going tobe tackling.
As always, you are a true, youknow, you have a wealth of topics
to talk about, given you avery successful blog.
Anyways, we're going to betackling some of them but before
(01:28):
we do that, I have a fewthings on my radar.
I don't know, I always wantto, you know, offer the opportunity
for you to go first.
If there's anything that wehaven't listed on our list of topics
that you wanted to bring upthat's been topical.
Otherwise I'm happy to to diveinto some of mine.
Let's, let's dive into whatyou're thinking because you know,
(01:49):
we haven't talked for a whileso I, I, I need to hear hear what
you're what's on your mind.
Okay, so the first question isa little bit offside here.
Do you follow ice hockey.
A little bit I should given inNew England this is a big thing but
I feel like there's a verystrong set of ice hockey fans in
(02:12):
New England and they're ravid fans.
But beyond that it's not aswell followed.
The only reason I bring thisup on this Friday afternoon is because
of the sensational win lastnight where Denmark beat Canada to
make it to the semi finals ofthe world championship.
(02:33):
Canada, the most successfulice hockey team of all times.
And actually as far as IUnderstand a pretty good team at
the moment and little countrylike Denmark beats them.
I thought that was quite sensational.
So that was on my radar this morning.
Literally 10 minutes ago whenI sat in front of the computer, a
headline pops up on theFinancial Times that I thought actually
(02:56):
is interesting.
It's completely unrelated totrend following anything like that.
And the headline is Trumpthreatens Apple with 25% tariffs
on iPhones.
And basically what the articleis saying that, you know, he wants
Tim Cook to produce iPhonesin, in the U.S.
not just in India.
(03:17):
The reason I want to bring itup is because I think last week I
may have mentioned a book.
I came across a book that justwas released by a guy called Patrick
McGee or written by a guycalled Patrick McGee, which I found
fascinating.
I listened to a conversationabout it.
I started listening to thebook, but it's really about how Apple
built their supply chains inChina, but also to cut a long story
(03:41):
short, how it is completelyimpossible for them to, to produce
iPhones outside of China.
Really.
I mean, all the components areproduced in China and, and there.
And, and the technology andthe skill set it requires to build
these iPhones outside of China.
It doesn't exist according tothis chap.
So I find this highly, highlyinteresting because even if Apple
(04:03):
wanted to, I wonder if they can.
And then it'll be aninteresting dynamic to see if, if,
if there's a little bit of abreak between sort of big tech and,
and Trump in that sense.
Well, there's an old adage, isthat the policymakers of today are,
were educated by theireconomic textbooks of the past.
(04:27):
And I think that a lot ofpeople when it comes to trade have
this view of, you know, okay,we're just thinking in terms of comparative
advantage.
You trade one good for another good.
And this is how trade occurs.
And in the modern world, it'sglobalization is based on supply
(04:50):
chain integration, is thatevery country does a little bit of
a component and then we put itall together as a final product.
And so it's.
The global supply chains driveoverall demand.
And that's sometimes missingin the whole discussion about tariffs
(05:12):
and trade.
Right.
I feel as though that it'smissing and I don't think we could
bring some of these activitiesback to the United States.
And perfect example is Tshirts, is that we made a lot of
textiles in the United States.
All of that moved offshore.
(05:33):
I don't know if Americanworkers or the United States.
That's not what we have inmind when we say we're going to bring
Good high qualitymanufacturing jobs back to the United
States.
That's never going to happen.
No, and I get that.
What I found fascinating aboutthis book and actually some of the
write ups that's been isactually where according to, I think
(05:54):
it was New York Times who dida write up on it according to their
sources and this is I thinkApple numbers.
You know, part of this, whatmakes this fascinating is the fact
that you know, you might, youmight argue that Tim Cook and company
is the reason why China isprobably ahead in terms of technology.
Because of all the trainingthe Chinese received from, from Apple
(06:17):
over many, many, many years.
And according to this reviewI, I wrote and then I promise to,
to move on from this andbecause I'm so flabbergasted by the
number.
According to the numbers Appleseemed to have trained 30 million
Chinese.
That is just crazy number.
(06:38):
So no wonder why they have,you know, superior technology in
some case.
Anyway, let's move on tosomething completely different and
maybe not.
I heard another conversation.
This was with an interestingguy, Vincent Duard or Durad or I'm
not entirely sure what hisfirst last name was.
Anyways, he was on the JesseFelder's podcast and they discussed
(07:00):
number of things and one ofthe things I found really interesting
that he said was if you lookat long term inflation there's a
very high direct correlationto social trust and the faith that
people have in institutions.
So to give you an example theyhad there's apparently there was
a study done where economistsin nearly 200 countries left their
(07:23):
wallet with money in thepublic place to measure the likelihood
of it being returned to theperson who left it.
And I think actually frommemory that he said that the, the
country that where it's mostlikely you would get your wallet
will money back isSwitzerland, which is where I live.
So I thought it wasinteresting and then I.
(07:44):
Well you know, actually maybehe's right because there is very
little inflation inSwitzerland and there's a lot of
social trust in the country.
In fact the country I'm bornin, Denmark I would probably say
to some degree there's,there's a, maybe a link there.
I thought that was fascinating actually.
He also talks about some ofthe low inflation periods in the
(08:06):
1950s in the US where socialtrust was pretty high and we believed
in science, we believed in thearmy and we believed in the government.
Of course that trust goteroded in the 70s and, and Paul Volker
had to come back and, andrestore trust in a sense in the,
in, in, in the, these public Institutions.
(08:27):
I don't know what you thinkabout that when I throw it at you
like that, but I thought itwas kind of interesting way of looking
at it.
That's an interesting issuebetween correlation and causality.
So, so you could sort of saythat these things are correlated,
but are is one causal versus another.
(08:47):
That's my initial reaction.
But.
Trust is a very interestingeconomic problem and I think that
a lot of people have writtenabout this, is that trust is very
much cultural.
That there are culturaldifferences that causes people to
be.
To have different levels of trust.
(09:09):
And surprisingly, Anglo Saxonlaw, or we'll say the Anglo Saxon
systems have a higher level of trust.
So in some sense is that we'rewilling to make contracts with other
people without ever meeting them.
And we could just sort of saylike, well, I'll promise to send
you goods, you'll promise tomake payment, we'll sort of, you
(09:32):
know, fax a document or emaila document and then we agree to do
some business together.
Which is astounding when youthink about it.
Other cultures that they havea harder time with doing that.
What we find is that thattrust is very much built on what
is the relationship withfamilies and relationships with government.
(09:56):
And we'll sort of say thatthose, we'll sort of say that those
people in Southern Europe seemto have a lower trust level.
Those in, in Asia seem to havea lower trust level.
Uh, and what happens is thatthose then have stronger, you know,
family networks.
(10:17):
It could be a failure of government.
But we find out is, is thatthere is a cultural component to
trust.
And so given your idea is thatif there's a breakdown in trust with
government, and that could becaused by inflation, it could be
caused by, you know, badpolicies, then you're going to see
(10:39):
that there's also a breakdownin trust.
Yeah.
Anyways, I've got a couple ofmore things that was on my radar
that's unrelated to what we'regoing to be talking about.
Yesterday I went to see thepremiere of the, the latest Mission
Impossible.
Actually pretty cool.
In a very small local theaterin Denmark, where I am today.
(11:03):
And I hope it's not a goodsign for the box office numbers because
this little cinema, it wasn'teven full.
I was like 25 people,something like that.
Anyways, it was very cool.
There was a, a message from Mr.
Cruz himself, which they saidthey only play on the night of the
premier.
So I thought that was very nice.
But the, the title, of course,Mission Impossible, it kind of reminded
(11:27):
me of my own experience for 35years now, trying to get investors
to put a meaningful amount in,in trend following.
It certainly has been achallenging mission, so to speak.
I, I could see, you know, theMission Impossible or listen to the
Mission Impossible theme songand then, and then have, you know,
(11:47):
Jay Powell run across the screen.
You know, as there, There areso many government officials that
are fighting a MissionImpossible these days, and investors
are doing the same thing.
So we're all facing theMission Impossible of how to sort
of, you know, capture higherreturns and protect our downside.
Speaking of running Tom Cruiserunning, there was actually a fun
(12:10):
little competition here inDenmark where at the, the, the royal
premiere, whatever you callit, the red carpet one in Copenhagen,
they had done a little competition.
I'm not sure what the priceswere, but they invited all these
people to try and run and itwould be filmed and all that, to
run as close as they could tohow Tom Cruise was, because apparently
(12:33):
has a unique running style.
And then the person who cameclosest would win something.
It was quite funny.
It was on television.
Anyways, let's pivot again.
Let's shift gear to somethingcompletely different.
Not entirely sure if there's aquestion or a comment in here, except
for, as you rightly said, thata lot of things are going on in the
(12:54):
financial world, in the worldat large.
And I was just listening.
And a lot of the problems, youand I know from our experience, when
things break, a big part ofthe problem is leverage in systems
and whether it's something youcould have thought about in advance
or not.
Then I was listening to apodcast conversation this week which
(13:17):
was actually about bitcoin,and it was a conversation where,
and I'm not, I don't, I don'tknow the details of these companies,
but apparently there's a bit.
A big bitcoin services companycalled Strike, their CEO was on the
podcast and he was talkingabout, even though I don't think
(13:38):
it had been approved yet, hespoke quite a lot about some new
products that were rollingout, lending facilities and, and
what have you.
So essentially you could lendcash against your bitcoin so you
don't have to sell them.
And he explained this in a lotof details with a lot of passion.
Even though I'm, you know,even though I'm.
I don't think it was actuallyapproved by any authority yet.
(13:59):
But what, what caught myattention, really, and this is what
I'm trying to get at, is thatthroughout the con, throughout his
explanation and promotion,let's call it what it was, he kept
on saying yeah, well, if youhave an asset like Bitcoin that keeps
compounding at 50% and I'mthinking, how can you say, how can
you even, how can you evengive people the impression that you
(14:22):
think it's going to continueto compound at 50% even if it did,
you, you can't say that.
Right?
It's completely crazy talk.
And how, and, and, but, butthe whole point about this was now
you're just introducing evenmore leverage.
Now people can take out loans.
The idea was you can just lendagainst that.
And because it's compoundingat 50% after a year you can pay back
(14:43):
the loan.
You have made more money fromyour, you know, it just went on and
on and on like that.
Luckily, the host, who, whichis a guy that I respect and who's
been on this podcast asguests, he did counterbalance a bit
and trying to raise the, theissue of risk and, and you can't
rely on, on that.
But it just reminded me alittle bit about, as we go through
(15:04):
this uncertainty, all thisfinancial engineering and more leverage
ideas of products coming intothe system, it really makes me a
bit concerned about the, thefuture path of, of some of these
things.
Anyways, there's, well, I, Iremember I, I won't get this exactly
right, but it's almost, yousay you can ignore the facts, but
(15:28):
you cannot ignore theimplications of the facts.
So, so, so, so you know,nothing compounds at 50% for an extended
period of time.
And, and I, I probably wouldsort of say that that's a dereliction
of, of your, you know, dutyto, and part of podcasts, we'll say
(15:51):
the educational component isto sort of give people a realistic
sense of what is possible andwhat is not.
And there are limitations towhat you can do in finance.
Let's talk a little bit about.
So I have one more topic, butI know we're going to be talking
about that it's to do with bonds.
So we'll talk about that as weget into some of your topics.
(16:14):
But let's do the usual sort oftrend following update.
By the way, I loved youranalogy from last time you spoke
with Alan when, when and Imade the headline of the episode.
Nothing good happens below the200 day moving average.
I think it was recorded aroundthe crisis.
And of course something gooddid happen because we got some financial
(16:36):
advice from the Oval Officejust to buy stocks at a certain date.
And what do you know, it goesup by nine and a half percent in
a single day.
And since then it almosthasn't looked back since.
So, so something did happen,something good did happen below the
200 day moving average that time.
Not so much for trend followers.
Trend followers.
We don't really like these Vshaped market moves and erratic reversals
(17:01):
and there's been quite a fewof them not just this year but actually
in the past year more or less.
I think we made a highgenerally in the industry around
April last year.
Stocks, bonds, currency, we'veal, we've seen many, many reversals.
I can't really remember whenwe last saw that many reversals in
a 12 month period but.
(17:23):
And we've it's reflected, Imean some of the managers who've
been around for decades areseeing their worst drawdowns ever.
So it is showing up in the numbers.
I'm curious from where you sitwhether you have any thoughts on,
on, on trend.
Right.
You know, generally speakingso far this year, big picture or
(17:43):
small picture, whatever youfeel like.
Well, I think that let's lookat a very high level and then we
can go down into a deeper level.
At the high level.
I think that this causes us torethink the relationship between
crises and trend following.
(18:03):
So you know, we've used a termcrisis alpha.
We think in terms of like ifthere's a drawdown in stocks that,
that this is a, a trendfollowing will do.
Well, it's a safe asset tosome degree which we'll talk about
in just a second.
But we're finding out thatthere are different types of crises.
(18:28):
All crises are not the same.
And it's harder for us togeneralize what the behavior will
be in a given downturn in thestock market.
It has to do with its length.
It has to do with the type of,it has to do with how fast maybe
the market comes back.
And so, so we can't have a onesize fit, fit all view between trend
(18:52):
following and crises.
Yeah, I just as we speakingright now, the headlines are flashing
on my screen here.
Trump has now proposed a 50%tariff on Europe even though I thought
they had like 90 days to findout, negotiate something.
So of course markets are doinganother reversal as, as we speak.
(19:12):
Just to, just to underscore mypoint, my own trend barometer is
certainly reflecting thisdifficult time.
It's closed yesterday at 30which is pretty weak.
It aligns well with the numbers.
These numbers that I'm goingto say is from Wednesday Evening
beat up 50 down 1.7% so farthis month down almost 5% for the,
(19:33):
for the year sock gen CT indexdown or 1.78% for the month, down
8.5% for the year.
The trend index is down 2.6for the month, down 11.66 for the
year.
Short Term Traders Indexpretty flat for the month of 18 basis
points and only down 69 basis points.
So they're holding up wellthis year.
MSCI World up 4.5% so far thismonth, up 3% for the year.
(19:58):
The S&P US Aggregate BondIndex down 1.5% each this month and
down 1.5% each for the yearand the S P500 Total Return of 5%
so far this month as of lastnight and they're flat now for the
year, which is not what younecessarily expected.
(20:21):
Now, before we get into yourtopics, Rick sent in a question that
I wanted you to comment on, ifyou don't mind.
Rick writes Admittedly Ididn't stress test this with my own
math and took a shortcut using ChatGPT.
I sent it two charts SG trendand the Vix since 2000 and asked
does trend work better in lowvolume environments?
(20:44):
I assume the answer would havebeen yes, but this is probably recency
bias.
SG Trend is poor this year andvolume are elevated.
Here's what it told me.
No.
Historically Trend followingeg SocGen trend index tends to perform
better in rising or highvolatility environments, not low
volume.
(21:04):
The reason?
Trends emerge more forcefullyduring market dislocations, macro
shifts and regime changesoften accompanied by elevated volatility.
Periods like 2008, 2009, 2014to 2015, 2020 to 2022 and Rick just
ask, you know, what does ourwork and experience tell us in this
(21:25):
regard?
Any thoughts on that?
This is really a complex issuebecause we'll sort of say that we
need a certain level ofvolatility in which to identify trends
and exploit trends.
If you don't have volatility,then you're not going to be able
to either find a trend or ifyou do find a trend, actually be
(21:51):
able to take advantage of it.
We do know so we do know thatextremely low volatility in any given
market could be a period ofpoor trend following performance.
Or we'll just sort of say thatmodest performance.
Now what will happen sometimesis that you can increase your position
size to offset some of that,but then what happens if there's
(22:13):
a change involved?
Then you could be caught onthe wrong side and it could be detrimental.
We also know that at highervolumes is that there's going to
be more dispersion, moreopportunity for trading and that's
going to be better.
But then we also know that ifthat there's a spike in volatility
(22:34):
usually then there's going tobe a reversal in trends.
Given that reversal in trendsthat there's going to be sort of
potential for short term losses.
And then what happens is thatyou have to wait or as the volatility
comes down, then there's thengoing to be another new opportunity
for trends.
So you have to break downvolatility into different segments
(22:57):
and then you have to look atthe type of model that's being used.
So it's not an easy question.
I think that ChatGPT sort ofhighlights some of these issues,
but it's more nuanced.
Yeah.
The way I think about it isthat if we can get the initiation
of a trend in a low volumeenvironment, then certainly for the
(23:19):
people who don't adjust theirposition size, it allows them to
put on a big position.
For those who are dynamicallyposition sizing, it's maybe less
of a concern in that sense butthen it really depends on how VoL
evolves during the trendbecause often what from memory at
least what I note is that ifit's a really long sustained trend,
(23:40):
actually part of that trendcan actually be relatively low volume
in itself.
And then of course you'reabsolutely right, often around at
least periods of consolidationor even potential reversals, volume
tends to go up.
Which is why kind of makessense to me at least that that's
(24:02):
the time where dynamically youwould reduce your risk.
Yes, you can, you can then bea little bit low, have low exposure
if the trend continues.
But often it doesn't.
And so you have a chance maybeto reduce your risk before the, the
actual kind of give backhappens through the reversal of price
(24:25):
anyways, so, so you're right.
I mean it is a complicated andI don't think you can say because
the markets we trade are so different.
I mean, what's the volume, Coco?
How does that relate to thevolume in the S and P?
It doesn't.
So I think that it's much morenuanced, as you said, in terms of
the word volatility and, andI'm not sure we can really talk about
(24:48):
regimes per se because theregime we often think of the financial
part of the portfolio butdoesn't really take into account
what goes on in theagriculture or the commodity part
of the portfolio.
Now, now the one thing I guessI would sort of say that I could
not say with certainty but I,I have high conviction is that if
(25:10):
you're in a period of extendedlow volatility and you say that I'm
not getting the returns that I expect.
And so therefore I'm going tolever up all of my positions to offset
this low volatility.
If you don't dynamicallyadjust quickly, you could be in a
situation where once again,leverage is not your friend.
(25:33):
Leverage could be your enemy.
So, so if, let's say normalvol is, let's say 12, market goes
down, it's only 6 and you saylike, well now I should increase
my position size across theboard because I want to keep my vaults,
you know, fixed at a certainlevel and I just want to sort of
make up for the lower volumewith higher leverage.
(25:55):
That, that's a recipe forpotential disaster.
Sure.
But, but, but to calm thenerves of, of any investors who are
listening to this, I thinkit's fair to say that most experienced
managers, at least they willalways have a flaw.
So how, you know, so whatevervault does in real time, like when
interest rate went to zero andjust stayed there, it doesn't mean
(26:16):
that you could have, you know,infinite amount of short, you know,
short term interest ratecontracts on.
You obviously look at long,long term volume flaws to make sure
that that doesn't happen.
But of course, yeah, thereare, there are volatilities, very
important ingredients in, inall of this.
So.
Okay, let's pivot to yourtopics, Mark, because as usual, they're
(26:40):
really good.
I'd love to hear what we'regoing to go with this.
I'm just gonna throw someguidance to you and then you can
kind of take it from there andI'll try to keep up.
The first thing just to, toremind you was this, you know, naming
periods and I think you havea, well, you have a name for this
period.
So, so I'll, I'll hand it overto you.
(27:02):
Well, I like to actually sortof, and I think a lot of investors
like the ideas is that theywant to say, well, categorize where
we are now.
Give us, give it a name, tellus where, what you know, and give
us a theme associated with 2025.
So you know, I startedthinking about this and I said, well,
this is the age of uncertainty.
(27:24):
You know, we've been havingtremendous uncertainty on policy
and monetary policy, tradepolicy, politics.
But then I look back and thereis actually a BBC series called the
Age of Uncertainty by JohnKenneth galbraith in the 1970s.
(27:45):
You can still get it on YouTube.
It's.
But we'll sort of say hismajor view at the Time, you know,
it was in 1977 is this is thatwe had market failure and that what
we needed is the state to comein to solve this uncertainty.
So this was during the 70s, wehad the stagflation period.
(28:08):
So, so he argued that, that,that this was a necessary for the
state to solve the problem inthe age of uncertainty.
And then I sort of said wellwhat different.
And we'll say that this is theuncertainty that was created by the
state as opposed to excessesin the market.
(28:30):
So if we go back in a lot ofour crises that we've seen in the
past, it's been, we'll sort ofsay okay, housing bubbles, tech bubbles,
that there was excesses thatwere built into the economy and then
those excesses were now sortof, we had to return back to normal
(28:50):
and that, and there was arevision and that caused a financial
crisis.
It may have caused markets to dislocate.
But this one is differentbecause it's actually the state that
sort of created this.
So we're not sort of saying wedon't want to get into a blame game
(29:11):
per se, but we'll sort of saythat many of the trade wars is that
trade tariff issues is a manmade problem, it's not a corporate
problem.
And so that's what's causing alot of the uncertainty.
That's what makes this sort of unique.
So, so I think that that's.
(29:32):
So I'll call this the age ofthe new age of uncertainty because
it's a different type ofuncertainty than what we saw in the
70s.
But it's important for us tothink about this because that will
come back to how we view trend following.
And in particular what we'llcall it is that there are a number
(29:52):
of descriptors that we coulduse for markets and they have different
implications on how a quantmodel and a trend model in particular
will work.
So one is that there's risk.
Okay, we can measure that bythe VIX index.
(30:14):
So as just a general.
So we just had the discussionabout volatility but interesting
is that we had risk fallingactually since you know, the middle
of April, it's above the sixmonth moving average.
But you know, I think I saidearlier this week the Vix was at
about 18, which is, you know,fairly low when you consider all
(30:38):
of what's going on.
So it's.
So we're not in a risk environment.
Surprisingly so many peoplesay that, well, if there's a spike
in vix, that means thatthere's going to be A reversal in
the stock market and a spikein VIX or spike in volatility is
good for trend following.
(31:00):
Surprisingly, we had a spike,but then we didn't have.
But now we're back to normal,but it doesn't feel like we're normal.
So the markets are sort of notdiscounted in terms of a risk perspective.
The second way in which welook at markets is by dispersion,
and that will be the spread ofreturns over a period of time.
(31:22):
Now what we're sort of seeingis that the CBOE has a dispersion
index.
And what they're doing is theylook at the volatility of a given
market relative to the vix.
I always want to look at thedispersion of returns across a set
of assets.
But on that sentence, this isthat we had less dispersion because
(31:45):
we had only a, a key causaldriver, driver or single driver that
was causing or, or not causing dispersion.
So dispersion is up, but it'snot this, it's not at an extreme
level.
So which again is interesting,if there's less dispersion, then
(32:06):
there's less opportunities todiversify and make money on trend
following.
So what I also look at is, iswhat I call the market network.
So this is looking at network analysis.
This is sort of.
We can look at correlations,we can look at causal networks.
So network has become verytight earlier in April, and that
(32:33):
was because everything wasdriven by, you know, a focus on one
single theme, which is thetariff issue.
Now you will call that thenetwork has less compressed, there's
more dispersion across thecorrelation networks across all markets.
So, so we're turning back to normal.
Now.
The one thing that we havesay, say is, is now we can look at
(32:58):
uncertainty and uncertainty isdifferent than risk.
Okay.
We do now have uncertaintyindices which they look at word count
in different newspaper storieswhere different if policy issues
are brought up in the stories.
But we have a monetary policyuncertainty index, we have tariff
(33:25):
uncertainty indices, we haveglobal and country volatility uncertainty
indices.
And what they're doing is, isthat they're giving us some interesting
stories.
All of them were elevatedearlier in the year.
Trade was actually out ofcontrol in terms of.
(33:46):
It was almost off the chartsas an outlier.
We've seen that theuncertainty in trade has come down,
is still elevated uncertaintyin the United States policy uncertainty
is higher.
And it's interesting thatpolicy uncertainty in the United
States is higher than thepolicy uncertainty around the globe
(34:11):
and in Europe.
So if we have less uncertaintyin Europe and called policy uncertainty
than the United States, thenthat can explain why there's been
more of a flow of capital toEurope than relative to the United
States.
Because if you sort of saidI'm a foreign investor, if I say
that there's more uncertaintyin the United States, I'd say like,
(34:33):
well, then that makes a placethat it's a less likely place I want
to invest in and it makesEurope a more interesting place.
Now what happened is that wehad uncertainty spike and then it's
(34:53):
still elevated.
And so uncertainty has notbeen fully resolved, it's been partially
resolved.
And this uncertainty spike andthen reversal can maybe explain why
trend followers haven't doneas well.
Finally, as I'll throw, thefinal issue that I look at is financial
(35:14):
stress, which is also interesting.
The financial stress indices,there are a number of them that comes
from the ecb.
There's also stress indicesthat come from large banks as well
as the St.
Louis Fed.
Stress is elevated, but it'sstill nowhere near what we saw in
(35:37):
2020 or 2008.
So we have lower volatility,we have less stress, we don't have
elevated dispersion, but it'snot out of control.
And we had spike inuncertainty, but it's been, but it,
it's come down, but it's stillvery high.
(35:59):
And so given that is theframework we see around the world,
the question is how does thattranslate to markets?
And what we're seeing is, isthat we've had the markets have sold
off significantly based onuncertainty, uncertainty has been
partially resolved or theuncertainty has come down and now
(36:23):
there's been a reversal.
So you say like, okay, wellhow did I lose money then?
Well, when we think ofuncertainty, uncertainty is actually
in a very broad sense is ourlevel of ignorance.
It's what we don't know.
(36:44):
Uncertainty is resolved oncewe have new knowledge or that our
ignorance is eliminated.
That's one type of uncertainty.
We'll call it intrinsic.
There's also just uncertaintythat just you can't sort of say what
maybe government officials aregoing to do in tariff policy.
That's a different type of uncertainty.
(37:05):
But what we'll sort of say isthis is that when uncertainty is
resolved, it could either be agood result or a bad result.
Most times when we thoughtabout crises and where trend following
has made money has been whenthere's been uncertainty, but then
(37:28):
the resolution was somethingthat was negative.
Here we had uncertainty resolved.
So first you had a premium.
Do you say like, well, I wantto avoid markets because there's
high uncertainty.
But then the resolution ofthis uncertainty, the elimination
of this ignorance was on theupside or positive.
(37:49):
So we didn't get the effect we had.
In fact, we went fromuncertainty that was biased to be
negative to uncertaintyresolved to be positive.
And that caused a big reversalin markets and that caused a big
reversal in trend behavior.
(38:11):
It's a long winded question tosay what I'm looking at.
Sure.
I could actually sort of makeit more succinct is that some people's
calls called Donald Trump thelong gamma president and in the sense
is that you got to get longconvexity because you never know
what's going to happen and, oryou know, if I have to use a one
(38:35):
word for the last couple, youknow, weeks in the markets, is that
the Donald Trump term is thatmarkets are yippee.
Yes.
Well that's certainly one ofhis terms.
I mean another way of thinkingabout these periods in my simple
way of thinking about it isjust that we have these quote unquote
(38:59):
crises or sell offs or revert,let's call them reversals.
Right.
But there's no follow through.
Right.
That's kind of what is missing here.
It reminds me.
This is also why I think inprevious conversations I've said
that this reminds me so far alittle bit about, a little bit about
COVID where we had this veryviolent initial reaction.
(39:24):
The follow through didn'tactually come because the central
bank step in and you know, itwas quote unquote solved.
And at that time trendfollowers, at least I think most
of them had kind of gottenready for the follow through, the
positioning had changed.
We were ready for a furthersell off in and risk off, so to speak.
(39:46):
But it just never happened.
So it was a difficult environment.
This feels somewhat the sameto me.
There's another component thatI think we'll come to.
But let's take, let's staywith what I think you, you, you also
wanted to maybe tie into allof this and it's kind of, you know,
what we've learned.
(40:09):
Diversification didn't help.
Did it help the wholecorrelation problem?
What did you want to.
Yeah, well first I could sortof say that yes, it does have a feel
very much like, you know, theMarch, April period of 2020.
And again it's sort ofinteresting is that.
(40:34):
And it's at a very high levelis that.
And we'll sort of say part ofthe whole Covid crisis was man made
in terms of lockdowns and thena response trade crisis again was
man made.
And so what is unique on thesecrises is that they're man made events,
(40:58):
which means is that they couldbe turned on and turned off fairly
quickly.
You use the word follow through.
Is that we would like as trendfollowers that we would like, I guess
a behavioralist response by markets.
And when I say a behavioralistresponse is that people will then
(41:20):
slow up their investmentdecisions, they will start to cut
back in some of their exposures.
That, that there's behaviorthat then takes time to occur which
causes trends in markets.
Is that if you have quickresponse from government, you don't
(41:42):
get that behavioral responsein markets because they have to react
much faster.
Yeah.
And in an odd way, and this ispeople, I hope people won't misunderstand
this when I say because it'snot a political statement, I would
have the same view regardlessof who's in the OV office.
But we have in a sense have,we've had intervention in the markets
(42:06):
like we had the stimuluspackages back in 2020.
We've had the, the narrativethe good day to buy stocks or we're
gonna put tariffs on hold.
So, so this is what'spreventing markets from follow through.
It is intervention bypoliticians or central banks.
And, and that does make it an,a difficult environment to navigate.
(42:31):
Now it doesn't change my viewthat these things will resolve themselves
over time.
And if it's a really badcrisis looming, it will overpower
anyone giving stock advice.
And this could be just areally good example of how trend
(42:52):
following is not the first responder.
We've talked about that atlength and where the second responder
role becomes really important.
If this really does end upbeing a much bigger thing than, than
what it seems after the lastcouple of weeks of, of relative calm
right now.
(43:13):
Now trend followers are justsaying we take prices as is.
We just sort of say whateverthe prices are.
Telling me that's what I'mgoing to use.
So when we talk about this,you know, man made crisis or a man
made uncertainty, this is thatwe're not making political judgments
other than the fact that thejudgment is, is that if there are
(43:36):
quick reversals in policies,whether it's monetary policy in 2020,
trade policy that you know,moves from one extreme to another
very quickly.
It's.
We're not judging whetherthat's good or bad.
We're just sort of saying itis a fact.
Now what does that impinge on markets?
Now getting back to thelessons we learned is this is, I'll
(43:58):
go back to, you know, some ofmy Old adages, there's the general
view is that, okay, if you'retrend following, your long convexity,
your long volatility, okay?
And this period of time tellsus that that's not exactly true.
So and by that I sort of saythat I've been a strong believer
(44:21):
is that what trend following is?
And this goes back to thequestion and it goes back to the
events here.
It's long, long volatility,but it's short, short volatility
we want to have.
We're long, long volatilitybecause long volatility or longer
(44:41):
term volatility gives us moredistribution, dispersion and returns,
that there's more movement in prices.
You could have, you know,strong movements in low volatility.
But generally if you look atyou take the standard deviate deviation
times square root of time,that'll give you the dispersion that
you could possibly have in returns.
So on the other hand, we'reshort, short volatility.
(45:04):
What do we mean by that?
This is that everything wecreate in trend following is usually
a trend with a stop or somekind of, you know, risk management
underlying this.
And with the fact that youhave your short, short volatility.
If you have large movements inshort term volatility, there's a
(45:25):
greater likelihood that you'regoing to get your stops hit.
Okay, when your stops get hit,you lose your positions.
And so instead of having likea, just like a long and option or
longest straddle which youhold until expiration, when you're
holding a trend model with astop loss, you're like a knockout
(45:51):
option in the sense is thatI'm holding my position and if the
short volatility works againstme and I get my stop hit, then I'm
getting knocked out of myposition or knocked out of my option,
which is the trend component.
If you look at a lot of thecharts and you put candlesticks and
(46:12):
you then look at movingaverages is what you find out is
this, is that what was reallyproblematic for I think a lot of
trend followers?
And I'd say it's problematicfor models that I've looked at this
is that okay, if you sort ofsay that I'm going to have stops
intraday, if you have a largeintraday move, then it's a more likelihood
(46:37):
I could get stopped out andthen the market closes above whatever
my moving average should be.
If I have my close, I can sortof say like I can have a large move
before you actually have themarket close again.
As I said, it could cause me alarge amount of losses.
So in this long volume, shortvolume environment I can have a situation
(47:01):
is that even if I'm a longerterm trend follower is that given
the high intraday valuationand where I execute could have a
big impact on what thepositions I hold and what I lose
and what do I keep.
Yeah, no, I think actually, Imean you kind of hit it on the nail
in the sense that at least oneof the things that I try and talk
(47:22):
to clients and prospects aboutis that I think one of the biggest
challenges we have as trendfollowers is that on one side we
know because all of the datatells us that, that we need to be
longer term but we also knowthat for risk management purposes
and, and, and you know, andalso for other reasons of course
(47:45):
sometimes you need, you need,you have to react quickly and that
balance is really, reallytough to.
And also how do you do that?
Do you do that by just havingmodels with different time frame
or there are other more kindof interesting, innovative ways of
striking that balance.
So yeah, right now it'sdefinitely a situation where you
(48:08):
kind of called upon bothdepending on which day of the week
it is and, and that makes it,that makes it a challenge and.
The best way to say or atleast what I think that.
And you know, we talked alittle bit about the soc gen piece
about, you know, which showsthe box plots of performances and
wide dispersion and what youfind out is that whether you're a,
(48:35):
you think that you, you knowthat if you're a short term trader
that the intraday move iscritical to whether you make profits
or not.
Okay so it's the differencebetween the high and the low is,
and if you're only trading forone or two days, if you, if you miss
something in that veryintraday it's going to have a big
(48:58):
impact on performance.
Now surprisingly the view isthat if I look at very long term
trading that then theexecution doesn't matter as much
because well, do I really care about.
There's a large intraday moveif, let's say I'm trying to hold
(49:19):
a position that might last forweeks or months.
That's true on one level, butat the same time is that if you make
a mistake on execution withyour long term trend model it may
take you a long time beforeyou can reverse that.
So in some sense you're goingto have higher short term impact
(49:42):
on performance.
But it also might have animpact that you may lose positions
or you may gain positions thatyou're stuck with for A while that
you may not want.
All right.
You have another headline inyour list of topics called the Fallout.
Talk about that.
And, and and of course anyother topics from your list, your
(50:04):
long list I should say thatyou think we should be focusing on
today.
Well on the one hand you knowwe always talk about, you know, this
has not been, you know astrong period for Trend following
for 2025.
April was, was not a verypretty picture whatsoever.
And so you could sort of saywell I'm talking my book on one of
(50:26):
my next comment.
But there may be the falloutfrom all of this is that we've learned
some lessons about how youshould behave in uncertainty.
But it still comes back to isthat bonds were not really a safe
asset during this period at all.
And in some sense the classicargument is that well I could just
(50:50):
hold stocks and bonds.
I really don't need trendfollowing this is that if I hold
my bonds and I'm going to getthis safety because of this negative
correlation between the two.
What I've seen historically,albeit that has changed recently
and I still clip my coupons soI don't really need this because
(51:15):
I've got my bond exposure.
What we're finding out is thisis that now okay, there's a negative
correlation because stocks areflat to up, bonds are down.
But at the same time this isthat we did not get safety from bonds
(51:35):
in the April and May period.
We look at where the 30 yearyields are in the United States,
it's above 5%.
You look at above 4.5% for 10 years.
This is that I think that youlook at the some meme of talking
about bond vigilantes.
(51:57):
We just had the budgetapproved or the wonderful bill for
Congress.
The beautiful bill.
Let me correct you, thebeautiful bill.
But now we have a situation.
We're still going to have highdeficits and we know what happens
when you pass a bad budgetbill in the UK right.
(52:20):
So you know it's called thetroughs Trust moment.
Is a similar event event goingto happen in the United States?
And I hate being a doomsdaysayer because we'll sort of say that
the whole idea of April Maywas this is that uncertainty was
resolved.
But it was for the positive.
(52:40):
But at the same time as isthat the one clip that came to mind
in in 1925 the UK wasconsidered the premier economy and
you know, the sterling wasstill, you know, the top currency
25 or 50 years later.
In 1975 the IMF had to bailout the the UK government so 50 years,
(53:08):
that means in my children'slifetime, it's possible that you
could have a bailout of theUnited States government if you move,
go down certain paths.
So what that means is that youhave to start to look at other concepts
of safety or hedge assets thanwhat we've looked at in the past.
(53:32):
I completely agree.
And one of the, one of theinteresting things is that this week
I published a conversationwhere Alan spoke to the authors of
this annual return yearbook.
I'm not sure it's the right,exactly the right wording of the,
(53:52):
of the yearbook, but it's,it's essentially some, some academics
who each year for the past 25years have gone back and analyzed
historical data, inflationadjusted data, I should say, in many
different countries, and puttogether this wonderful piece of
work that it is.
(54:12):
And in the conversation it'sit, I think Alan quite rightly raises
the point about, for example, bonds.
I mean, if you look at thedata, it has not really been a very
good investment yet it hassuch a big allocation.
Not so much in the US maybe40% is what people think about, which
(54:34):
is high, it's too high.
If really we're in the 40 yearcycle now where interest rates are
going higher, which I tend tofall in that camp.
But in other countries,especially over here in Europe, Mark,
40% is not, I mean that's notwhere the level is.
It's 60, it's 80% fixed income.
(54:55):
And you can't help askingyourself, based on what evidence
do they put so much trust inthese bonds, let alone the risk that
you introduce?
Because I think maybe a coupleof years ago you would say, well,
the risk of a US default is zero.
It's not zero anymore.
And in fact they've talkedabout ways where they could do technical
(55:19):
defaults, Malaga accords or whatever.
So, so yes, I think, and Ireally do feel strongly that I think
trend following, despite thefact that it hasn't worked so well
in the short run the last fewweeks, but it should be thought of
by people or by investors as avery, very constructive element in
(55:46):
the portfolio in terms of risk mitigation.
So, yeah, so this goes back to.
And it's a longer piece of research.
I didn't highlight this inthis conversation because I'm working
on this, that the idea of thedifference between a hedge asset
and a safe asset, and therehave been academics who have been
(56:08):
talking about there's ashortage of the safe asset.
Treasuries bills have usuallybeen viewed as the ultimate safe
asset.
We lost our AAA rating.
But on a relative basis, wecould still be safer.
But a safe asset is one thathas low correlation and negative
(56:29):
correlation when markets are down.
Okay.
And a Princeton economisttalked about a safe asset is a good
friend to have in theportfolio so that when things are
going bad, that you can dependon your safe asset to help you out.
And in times of stress, whatI've concluded is that the safe asset
(56:53):
is not a good friend.
It's a fickle friend.
And it's fickle in a sense isthat it should be your good friend,
but it may not be treasurybills or Treasuries in general may
not be your good friend's safe asset.
It may become a fickle friend,which means that you're going to
(57:15):
have to find some new friendsto serve as your safe asset.
Now, gold has done a good jobrecently, but there's been a recent
paper where they looked at howgold performs in different types
of crisis.
It does very well duringtariff periods.
So if there's tariffuncertainty, that gold is a really
(57:38):
good safe asset.
Other times it doesn't.
You could think of treasurybills, too, is a safe asset, except
during inflation.
So then it's not a safe asset.
So now you have to sort ofsay, is that, okay, if I know that
my safe asset friends arefickle, is there something else I
(58:02):
could choose that could offsetthis risk?
And my view on trend followingcould be is this, is that it also
seems to be a fickle front.
It didn't really do well inApril and May, so it wasn't there
as a safe asset.
Agree.
But we'll sort of say that thedynamic characteristics may mean
(58:23):
that if we go into an extendedperiod where traditional safe assets
are no longer safe, that maybea strategy that actually picks and
chooses between long and shortpositions at different parts of the
world may actually providemore safety.
So we'll go back to theempirical definition.
(58:45):
Is that low correlation andnegative when markets are down, okay,
that's what you want to haveas a safe asset, is that if you're
something that's close tothat, that that may be something
that you want to hold in yourportfolio because the normal safe
assets are not.
May not do their job.
Yeah.
(59:05):
And you know, it reminds mealso of something I listened to,
and I'm sure we've spokenabout this on the podcast over the
years.
You know, the question aboutwhat makes a really great investment,
you know, really greatinvestment, you can say, the easy
part is to say, well, it's onethat you can stick with.
But what what, but I thinkwhat's more interesting and more
(59:25):
relevant is that it's one youcan stick with because you're comfortable
with the process of theinvestment and as you rightly say,
the process of havingsomething that adapts long and short,
that is globally diversified.
So the how and the why, Ithink that's how I'd love to, for
(59:46):
people to think about trendfollowing and, and why it makes,
it makes a great investmentin, in my view, the process is very
rational and understandableand it gives me a lot more safety
really to think about the factthat, yeah, we can, it doesn't really
(01:00:06):
matter if it's going up or down.
And by the way, you and I havetalked about, and also the last few
weeks we've focused on, youknow, the current environment and
the fact that it's been adifficult start to 2025 and all of
that stuff.
But I do want to actually askpeople to just zoom out.
I was listening to WarrenBuffett being, talking about maybe
(01:00:28):
in, in conjunction, inconjunction with the last annual
general meeting in BerkshireHathaway, I can't remember, but I
think some, some in theconversation comes up about, you
know, drawdowns and, and, and,and, and so on and so forth.
And, and he just said, youknow, Berkshire hathaways have had
three or four drawdowns overthe years of more than 50%.
But, but for him, you know,you know, corrections of 20, 25%
(01:00:52):
in the share price, in his view.
And we can say the same abouttrend following.
I mean, it's just not reallysomething you should worry about.
You should, you should worryabout is, is what it's going to do
for you over the next 10, 20,30, 40 years.
And, and, and we have a lot ofgood evidence based on that.
Anyways, I'm not entirely surewhy I got sidetracked into that.
(01:01:15):
But, but I think your commenton processes is critical because
you'd say let's go back to theidea of a safe asset.
So treasury bills are our safe asset.
Is there something about theissuer of treasury bills, if they
change their process orbehavior, that would change that
(01:01:39):
level of safety associatedwith that?
And you can sort of say thatso a safe asset today may be less
safe tomorrow.
So the concept of a safe assetis dynamic.
And if that's, if you believethat the safe asset concept is dynamic,
well then on a relative basisthere could be other substitutes
(01:02:02):
based on, let's say, trendfollowing that could serve as this
safe asset haven't.
And that's what we need tothink about.
And so even though it may befickle as we should say that it could
still be a good friend, it.
Can still be a long term friend.
Yes, a long term friend.
A long term.
Well, you know what they say,I mean, long term friendships are
(01:02:23):
the best.
Right.
So maybe we can end on apositive note on that.
Anything else you want tohighlight before we wrap up, Mark?
This was great.
Lots of different things, butwe obviously didn't get through all
of the things we had planned.
But that's how it is when we talk.
There are a couple things Iwant to come back to because there's
(01:02:45):
been a recent paper that talksabout that riding bubbles can be
a strategy.
And when you think about, youknow, a trend follower, you know,
can ride bubbles, this is so atrend follower can, you know, buy
overvalued markets.
It could also buy undervalued markets.
So.
So that's the thing that isunique about trend following, is
(01:03:09):
that it is valuation agnosticin the sense is that could you still
find a trend in an overvalued market?
You say?
Absolutely.
You say that could still be avery good trend if let's say that
people are causing a meme thatdrives a bubble.
(01:03:31):
So I think that that's aninteresting concept that people should
take into mind that we'revaluation agnostic.
Second thing is I want to comeback to is that there's a recent
work on machine learning andcurrency trading and lo and behold,
they found out that with allthe different models they use, that
still the two features thatare most important is momentum and
(01:03:54):
carry, which we've beenprobably talking about for years
and years, is that there'sdifferent ways you could extract
it.
But it still is that if youwant to be a currency trader, you
got to look at momentum andthen sprinkle in a little carry.
Yeah, no, absolutely.
This was wonderful.
So glad to be able to catch upwith you this week, Mark.
I really appreciate it.
(01:04:14):
Appreciate all thepreparations you did.
And if people want to showtheir appreciation for Mark as well,
head over to your favoritepodcast platform, leave a rating
of review and review and andwe certainly recommend read all of
them and we really doappreciate them.
Next week I'll be joined by Alan.
So if you have any questionsfor Alan, which I hope you do, then
(01:04:35):
you can email them to, asusual, infotoptraders unplugged.com
I'll do my best to get you an answer.
You can, of course, follow uson all the social media channels.
There's been a lot of activityon Twitter following some of the
recent episodes we've releasedwith Jim and some of his guests,
which has been very fun to to follow.
(01:04:57):
We have of course our TrendBarometer published every day on
the website and you can signup for the weekly email update that
I send out.
Anyways, from Mark and me,thanks ever so much for listening.
We look forward to being backwith you next week.
Maybe by that time Denmarkmight be world champions in ice hockey.
(01:05:19):
You never know.
There you go, you know.
Exactly.
We do live in a surprisingworld, I have to say.
Anyways, until next time.
As usual, take care ofyourself and take care of each other.
Thanks for listening to theSystematic Investor podcast series.
If you enjoy this series, goon over to itunes and leave an honest
rating and review.
And be sure to listen to allthe other episodes from Top Traders
(01:05:41):
Unplugged.
If you have questions aboutsystematic investing, send us an
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And remember, all thediscussion that we have about investment
performance is about the past,and past performance does not guarantee
or even infer anything aboutfuture performance.
Also, understand that there isa significant risk of financial loss
(01:06:04):
with all investmentstrategies, and you need to request
and understand the specificrisks from the investment manager
about their products beforeyou make investment decisions.
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