text:
Most Journalists are Scientifically Unqualified
media • Jun 21, 2022
Why does anyone rely on reporters to interpret scientific articles? They lack the necessary training, experience and competence to interpret scientific publications and data, a skill which typically requires decades to master.
With few exceptions, corporatized media are not able to comprehend the complexities and ambiguities inherent in scientific discussions, and so repeatedly fall back on the interpretations provided by those who are marketed as fair and accurate arbiters of truth – the US Government, the World Health Organization, the World Economic Forum, and various non-governmental organizations who have an interest in promoting vaccines (Gates' Foundation, GAVI, CEPI etc.) or other scientific agendas. But these organizations have political and financial objectives of their own, and in the case of the CDC, have clearly become politicized as previously discussed. When combined with the increasing prevalence of "advocacy journalism" (which has been actively promoted and funded by the Bill and Melinda Gates Foundation), the result has been that the corporate media have become willing vehicles for distribution of biased interpretations promoted by authority figures presented to the public as credible sources, but who actually practice the pseudo-priesthood of Scientism masquerading as science. As a consequence, corporate legacy media have largely become distributors and enforcers of government-approved (and composed) narratives and articles rather than objective and impartial investigators and arbiters of truth. This is particularly true of the perverse branch of scientific journalism which has ascended to prominence during the COVIDcrisis, the factchecker organizations (some of which are sponsored by Thompson-Reuters). But how does this propaganda ecosystem work, and what can be done about it?
To a large extent science and scientists are granted an exalted position in western society due to an implied social contract. Western governments provide them support and society grants elevated social status in exchange for valuable services. These services include performing their trade (doing "science") and teaching others both their craft and findings. Government subsidized (non-corporate) scientists and science are trained and funded by citizens (through their taxes) to practice their craft objectively in a variety of technical domains including medicine and public health on behalf of the citizenry. This arrangement stands in contrast to corporate-funded scientists, who work to advance the interests of their employers, but who have often also been trained at taxpayers expense.
The social contract between scientists and general citizenry assumes that those scientists employed via government funding act in a manner which is free of both political partisanship and external influence from corporations and non-governmental advocacy organizations. This social contract is woven throughout federal government hiring and employment policies concerning the civilian science corps. These policies explicitly forbid these employees from engaging in partisan political activities while serving in an official capacity, and forbid conflicts of interest stemming from influence of non-governmental entities, whether for- or not-for-profit. When these terms and conditions are not upheld, the public justifiably objects to the breach of contract. This is why employees of the civilian scientific corps are protected from employment termination for political purposes by the executive branch, even though the Office of the President is tasked with managing the scientific enterprise. Failure of the civilian scientific corps to maintain personal and scientific integrity and/or political objectivity appears to have become a chronic condition, as evidenced by the politicization of the CDC. When politicization of scientific data and interpretation results in multiple policy decisions which fail to protect the interests of the general public, the public loses faith in both the scientists and the discipline which they purport to practice. This is particularly true when the breach of social contract is seen as advancing corporate or partisan interests.
There is an organizational paradox which enables immense power to be amassed by those who have risen to the top of the civilian scientific corps. These bureaucrats have almost unprecedented access to the public purse, are technically employed by the executive, but are also almost completely protected from accountability by the executive branch of government that is tasked with managing them- and therefore these bureaucrats are unaccountable to those who actually pay the bills for their activities (taxpayers). To the extent these administrators are able to be held to task, this accountability flows indirectly from congress. Their organizational budgets can be either enhanced or cut during following fiscal years, but otherwise they are largely protected from corrective action including termination of employment absent some major moral transgression. In a Machiavellian sense, these senior administrators function as The Prince, each federal health institute functions as a semi-autonomous city-state, and the administrators and their respective courtiers act accordingly. To complete this analogy, congress functions similar the Vatican during the 16th century, with each Prince vying for funding and power by currying favor with influential archbishops. As validation for this analogy, we have the theater observed on C-SPAN each time a minority congressperson or senator queries an indignant scientific administrator, such as has been repeatedly observed with Anthony Faucis' haughty exchanges during congressional testimony.
Into this dysfunctional and unaccountable organizational structure comes the corporate media, which has become distorted and weaponized into a propaganda machine under the influence of multiple factors. The most overt driver of this cooptation has been that the Biden administration, through the CDC, made direct payments to nearly all major corporate media outlets while deploying a $1 billion taxpayer-funded outreach campaign designed to push only positive coverage about COVID-19 vaccines and to censor any negative coverage. With this action, the corporate media behemoth has functionally become a fusion of corporate and state-sponsored media - a public-private partnership meeting the definition of corporatist fascism. According to the Associated Press, despite the 2013 legislation that changed the U.S. Information and Educational Exchange Act of 1948 (also known as the Smith-Mundt Act) to allow some materials created by the U.S. Agency for Global Media to be disseminated in the U.S., under the new law it is still unlawful for government-funded media to create programming and market their content to U.S. audiences. Nevertheless, this is precisely what was done in the case of the COVID-19 vaccine campaign.
Secondly there has long been involvement of the intelligence community in domestic US media. Operation Mockingbird is among the most well-known of the incursions of the CIA into US media, but the extensive and longstanding influence of the spy agency in crafting domestic propaganda has been well documented by journalist Carl Bernstein in his article "The CIA and the Media". Among the corporate media outlets identified by Bernstein as having fallen under CIA influence is the New York Times, which is intriguing in light of the precise knowledge of (former) CIA officer Michael Callahan's CIA employment history inadvertently revealed by NYT reporter Davey Alba while interviewing me. For further context, while speaking to me by cell phone early in 2020, Callahan specifically denied that there was any indication that the original SARS-CoV-2 virus sequence showed any evidence of intentional genetic modification, stating "my guys have gone over that sequence in detail and there is no indication that it was genetically modified". In retrospect, it is now clear that was propaganda- or speaking more plainly, an intentional lie. Disinformation. Many insiders now believe that the five eyes spy alliance has been exploited during the COVIDcrisis to enable reciprocal domestic propaganda activities by participant states against the citizens of other member states which otherwise forbid their own intelligence agencies from domestic propaganda activities. Consistent with this is the aggressive editing of my own Wikipedia page (discussed by sardonic humorist "whatsherface") by an unusually prolific editor/pseudonym (Philip Cross) who apparently works for British intelligence services. Based on the totality of evidence, it is reasonable to infer that the US intelligence community has remained actively engaged in crafting and defending the COVIDcrisis narrative, either through direct influence with corporate media and specific reporters, and/or indirectly via reciprocal five eyes relationships.
In addition to the above, there are many specific examples of Dr. Anthony Fauci and colleagues acting to exploit corporate media to advance their bureaucratic and public policy agendas. Weaponization of his relationship with the media by Dr. Fauci (during the time when AIDS was a major narrative) is well documented in the book "The Real Anthony Fauci". During the COVIDcrisis, email exchanges using government servers and addresses (obtained by independent investigator Phillip Magness under Freedom of Information Request) concerning the Great Barrington Declaration demonstrate that Dr. Fauci continues to exert considerable influence over both lay and scientific press.
How does this work? How is Dr. Fauci able to influence corporate media and its' reporters to compose and print articles about scientific and political issues which comport with his interests and perspectives as well as those of the Institute (NIAID) which he directs? The most straightforward of the ways that he influences corporate media and its reporters is through his proven ability to actually have reporters fired who write or broadcast stories which he does not like. In "The Real Anthony Fauci", Robert F Kennedy Jr. documents how Dr. Fauci had journalists that he disapproved of fired. More recently, Forbes fired journalist Adam Andrzejewski for revealing previously undisclosed details regarding Anthony Fauci's personal finances. Fauci also repeatedly attacked Fox journalist Laura Logan for likening him to Joseph Mengele, which she had correctly identified as a characterization widely shared throughout the world. Then there are the subtler reciprocal relationships that Dr. Fauci and his NIAID Office of Communications and Government Relations (OCGR) cultivate.
The NIAID OGCR is organized into five different offices; the Director's Office, the Legislative Affairs and Correspondence Management Branch, the New Media and Web Policy Branch, the News and Science Writing Branch, and the Communications Services Branch. A search of the HHS employee directory reveals that OGCR employs 59 full time employees, eight of whom staff the News and Science Writing Branch, and 32 of whom work for the New Media and Web Policy Branch. In contrast, only eight employees staff the Legislative Affairs and Correspondence Management Branch. It is important to recognize that NIAID is only one branch of the NIH, and these employees are dedicated to supporting the mission of that one single branch and its director, Dr. Fauci.
There is also a quid-pro-quo relationship between reporters and influential organizations or individuals. This relationship was nicely illustrated in the movie "The Big Short" that documented the corruption which lead to the "Great Recession" of 2007-2009. The movie included scenes involving investors and hedge fund managers confronting financial industry journalists and bond ratings agency employees. In both cases, individuals whose structural role is typically seen as serving as a barrier to corruption and malfeasance were coopted by the need to maintain good relationships with the industry and players which they were tasked with overseeing. The same holds true in the case of the federal bureaucracy. Basically, if a journalist wishes to be granted timely access to press releases, OGCR-drafted content favorable to Dr. Fauci and the NIAID, or other insider information, he or she must not write critical or unflattering stories. The NIAID OGCR operation is much larger than most corporate media newsrooms, who have struggled to maintain staffing in the face of declining reader and viewership, and so maintaining good relations while avoiding retaliation is critical for any reporter that works a health and science beat.
A recent example involving the immunology, structural biology and virology associated with evolution of SARS-CoV-2 Omicron escape mutants is useful for illustrating the problem of reporters interpreting complex scientific information. A group of Chinese scientists have recently had a tour-de-force study accepted for publication by the high status scientific journal "Nature". On 17 June, 2022 an unedited pre-print of a peer-reviewed article with the rather dry title "BA.2.12.1, BA.4 and BA.5 escape antibodies elicited by Omicron infection" was posted by Nature. As an experienced reviewer with a reasonable level of understanding of the subject matter, I found this article to be one of the more challenging papers to read that I have encountered during the COVIDcrisis. Rich granular detail concerning the recent evolution of Omicron spike protein sequence and specifically the receptor binding domain (focused on BA.2.12.1 and BA.4/BA.5) is provided, and the Chinese team uses an array of the latest technologies to generate a mountain of data which are presented to the reader as a stream of condensed information with minimal supporting text (in part due to the word length restrictions inherent in publication in Nature). This is a tough read, even for me, but clearly represents an amazing advance in understanding of the molecular evolution which is happening as Omicron continues to circulate in human populations who have received vaccines which fail to prevent infection, replication and spread of the virus. There are even data which may support some of the hypotheses of Dr. Geert Vanden Bossche concerning the probability of shifts in glycosylation patterns as part of the antibody evasion evolution of the virus continues, shifts which he predicts may lead to markedly enhanced disease as well as immunological evasion.
This highly technical article was reviewed and presented to the world by Thomson-Reuters journalist Nancy Lapid, who writes a column titled "Future of Health". Her body of work, largely focused on the COVIDcrisis, now includes 153 such articles. She is a journalist, not a scientist. By way of full transparency, Thomson-Reuters has a variety of organizational leadership ties with Pfizer, a fact never disclosed in any of these articles. Just to illustrate the point:
President and Chief Executive Officer, Thompson-Reuters
"Jim began his career as a journalist and rose through the ranks at Thomson Newspapers to become responsible for operations in North America. He then led a number of professional publishing businesses serving the legal, regulatory and academic markets. He served as global head of Human Resources before becoming Chief Operating Officer of The Thomson Corporation. Following the acquisition of Reuters in 2008, Jim ran the Professional division of the combined company. He was named Chief Executive Officer in January 2012.
Jim is a director of Pfizer, Inc. He also serves on the board of the World Economic Forum's Partnering Against Corruption Initiative and is a member of the Forum's International Business Council, as well as on the International Advisory Boards of British American Business and the Atlantic Council."
Nancy Lapids' article covering this technically challenging Nature article is titled "Early Omicron infection unlikely to protect against current variants", which is a gross misrepresentation of the findings of the paper, which provides no analysis of either clinical protection or of clinical samples obtained from a control set of patients who have been infected but not vaccinated. The Reuters coverage goes on to say:
"People infected with the earliest version of the Omicron variant of the coronavirus, first identified in South Africa in November, may be vulnerable to reinfection with later versions of Omicron even if they have been vaccinated and boosted, new findings suggest."
This is a misrepresentation of the actual findings of this team. To take a page from the current vernacular, it is either "misinformation" (meaning an unintentional false representation of scientific data and interpretation), or "disinformation" (meaning an intentional false representation designed to influence thought or policy in some way). To complete the triad, "malinformation" is defined by the US Department of Homeland Security (DHS) as information which may be either true or false, but which undermines public faith in the US government. Propagation of any of these three types of information have been deemed grounds for accusations of domestic terrorism by DHS. As I try to avoid drawing conclusions about people's intentions (due to my inability to read their thoughts), I cannot distinguish between these different labels in the case of the (clearly false) interpretation which Thompson-Reuters has published with Nancy Lapid's story.
What the actual manuscript describes is detailed characterization of the evolution (including precise structural mapping of specific domain clusters of antibody-Spike protein interactions) of the new Omicron variants in relationship to both marketed and newly developed monoclonal antibodies as well as "neutralizing" naturally occurring antibodies obtained from patients who have either been vaccinated with the Chinese inactivated viral vaccine called "Coronavac" or "ZF2001" (an adjuvanted protein subunit vaccine), or were previously infected with an earlier variant of SARS-CoV-2 (or the original SARS!) and then vaccinated with "Coronavac" or "ZF2001" or both (Coronavac x2 first, then ZF2001 boost). The authors describe this clearly and precisely. This research does not involve any of the vaccines available in the United States, a key fact which Nancy Lapid fails to disclose. Whole inactivated or adjuvanted subunit vaccines are very different from mRNA or rAdV vectored genetic vaccines.
Important things to understand in reading the paper is that the preponderance of information demonstrates that optimal acquired protection from infection by SARS-CoV-2 (via natural infection and/or vaccination) is not only provided by antibodies, but also requires a cellular (T-cell) adaptive immune response. This paper is only looking at one limited aspect of the rich and complex interactions between the innate and adaptive immune system in human beings and infection by the virus SARS-CoV-2 (and also addresses previously SARS-infected individuals who have been boosted with "Coronavax"). Even in the abstract, the authors are quite precise in their summary of this fact that they are not assessing "protection", clearly demonstrating the inherent bias of the Nancy Lapid/Thompson-Reuters story. They are assessing and drawing conclusions regarding neutralization evasion of the currently circulating escape mutants regarding antibodies from patients as well as various monoclonal antibody preparations.
"Here, coupled with Spike structural comparisons, we show that BA.2.12.1 and BA.4/BA.5 exhibit comparable ACE2-binding affinities to BA.2. Importantly, BA.2.12.1 and BA.4/BA.5 display stronger neutralization evasion than BA.2 against the plasma from 3-dose vaccination and, most strikingly, from post-vaccination BA.1 infections."
This brief example illustrates the problem with allowing untutored and unqualified reporters who reflect the biases of corporate media (and government) to serve as interpreters and arbiters of scientific truth. With few exceptions, they are just not qualified to perform this task. But both the general reader as well as government policy makers rely on corporate media to perform this task accurately and fairly.
Accurate presentation of scientific findings is necessary if the public as well as their elected representatives are to make both sound policy and medically informed personal choice decisions that are grounded in accurate and balanced quantifiable information obtained by best scientific practices. This is what they are paying for, and they deserve to have it delivered to them. If the public and policy makers wish to continue to rely on corporate legacy press to help them to understand complicated scientific and technical issues, "advocacy journalism" reporters need to get back in their lane and leave scientific and medical interpretation to experienced professionals. There are plenty of qualified scientists capable of reading and accurately communicating key findings from even such highly technical manuscripts as this recent Nature article. The corporate press has the resources necessary to engage such specialists, and to be able to integrate and present multiple points of view which may include the perspective of the NIAID OGCR. But as is required for all peer reviewed academic manuscripts in the modern era, the sources (and underlying data) should be disclosed in a transparent way, and potential conflicts of interest of those sources should also be disclosed.
In the interim, corporate media and their reporters should stop trying to spin that which they do not even comprehend.
By Robert W Malone MD
Most Journalists are Scientifically Unqualified Why does anyone rely on reporters to interpret scientific articles? They lack the necessary training, exper...
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Arirang TV (Arirang International Broadcasting) is a South Korean-based broadcasting company operated by the International Broadcasting Exchange Foundation. It provides English information on current events, culture, and history of Korea to the surrounding areas of Korea. Arirang TV (Arirang International Broadcasting) is name after the Korean traditional folk song "Arirang."

It began as a cable TV service in South Korea on February 3, 1997, and opened Korea's first overseas satellite broadcasting in 1999 in the Asia-Pacific region. It launched worldwide broadcasting in Europe, Africa, and the Americas in 2000.

Three channels are broadcast 24 hours a day with the main language English. In addition, they provide subtitles for Chinese, Spanish, Korean, Arabic, Russian, Vietnamese and Indonesian (multilingual subtitle services). In May 2022, Arirang Espanol, a Spanish-language YouTube channel, was launched.

Arirang International Broadcasting operates on three channels (World, UN, and South Korea), and uses a total of eight major broadcasting satellite relays. It has 36 programs covering the international economy, current situation, culture, and entertainment, and it consists of programs for domestic and foreign opinion leaders as well as programs for viewers of various ages.

Arirang Radio is the first English radio broadcast in Korea.

Currently, it is communicating with more viewers through various programs which has about 144 million households in 108 countries around the world.

Undertaking

Overseas satellite broadcasting projects to enhance the national image and the understanding of the international community

Domestic broadcasting business to promote foreigners' understanding of Korea and raise Koreans' awareness of globalization

Support project to enhance the international competitiveness of broadcasting videos

Broadcasting Supporting Project of Korean Broadcasting System via Foreign Media

International Exchange & Cooperation Business with Overseas Broadcasting Companies

Advertising projects; such as overseas advertising agency projects for government and public institutions

Slogan

Korea World Network (1997. 2. 3 ~ 2005)

Korea's Global TV (2005 ~ 2012)

Korea for the World, The World for Korea (2005 ~ 2008)

Korea's Multilingual TV (2007 ~ 2008)

Asia's Heartbeat (2012 ~ 29/6/2015)

The World On arirang (30/6/2015 ~ 2022)

RESONATING WITH THE WORLD( From 2023 )

Channel

Korea (Domestic Broadcasting): Launched February 3, 1997. It is broadcasting through cable, satellite, and IPTV throughout Korea.

World (overseas): World (launched August 12, 1999) The main broadcasting language is English, but also provides multilingual subtitles.

UN In-house Network (overseas): Launched July 14, 2015. It is available at the UN headquarters in New York and broadcasts current news reports and liberal arts programs.

Goal

World Channel: Real-time Korean Information Channel (providing Korean information + promoting own culture + promoting modern culture + international amity exchange)

Korea Channel: Multicultural channel (providing Korean information + promoting native culture + promoting modern culture + understanding multiculturalism)

Distribution

Arirang International Broadcasting operates on three channels (World, UN and Korea), and uses a total of eight satellite relays to serve as a messenger to inform 144 million households in 108 countries of Korea's past, present, and future.

In Korea, it can be watched on cable TV, satellite broadcasting, and IPTV.

Program

Arirang TV broadcasts various genres of programs covering the international economy, situation, culture, and entertainment, and through this, it consists of programs for domestic and foreign opinion leaders as well as programs that viewers of various ages can enjoy.

•NEWS
09:00	New Day at arirang

09:30	NEWs Generation

12:00	News at Noon

14:00	The Daily Report

14:30	Issues & Insiders

18:00	Newscenter

18:30	Within the Frame

21:00	Arirang Nightline

12:00	Weekly News Highlights (SATURDAY)

•TV

온라인(유튜브)

•Arirang TV

•Arirang News

•Arirang K-POP

•@KPOP

•Arirang Culture

•Arirang Issue (Current Affairs)

•Arirang Food & Travel

References

External links

Companies based in Seoul
Television channels and stations established in 1997
Television networks in South Korea
24-hour television news channels in South Korea
Korean-language television stations
Mass media in Seoul
English-language television stations

redpajama_set_name: RedPajamaWikipedia


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— Back to series: Systematic Investor
Episode 224 24 | 12 | 2022
224 Systematic Investor Series Group Conversation Part 1 – December 24th, 2022
Transcript Related Content Free Guide Giveaway
Today, the TopTradersUnplugged team get together for a group conversation on trend following and Volatility, leading up to the end of 2022. We discuss the possibility that the carry regime has ended and why 2022 was such a great year for trend following, why "the grind" has been so influential this year and why volatility strategies has been performing different than expected, and how CTAs performance compares to bonds. We also discuss how the volatility market is changing in the coming years and why you need to be active with your hedges, what the TTU team has learned from 2022 and why you have to be open to imagine the unimaginable, what the future might hold for the Crypto space and much more.
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And you can get a free copy of my latest book "The Many Flavors of Trend Following" here.
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Send your questions to info@toptradersunplugged.com
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And please share this episode with a like-minded friend and leave an honest rating & review on iTunes or Spotify so more people can discover the podcast.
Episode TimeStamps:
02:14 - Q1, Zach: Have we seen the end of the carry regime? And what are the indicators?
14:16 - The perfect year for trend following?
25:52 - The wrong kind of volatility?
31:04 - Trend vs. Tail Hedge
43:04 - What is happening with volatility?
50:38 - What did we learn from the year 2022?
01:00:40 - The future for Crypto
01:11:37 - Coming up next week
Get the Full Transcript
The following is a full detailed transcript of this conversion. Click here to subscribe to our mailing list, and get full access to our library of downloadable eBook transcripts!
[00:00:00] Intro
You're about to join Niels Kaastrup-Larsen on a raw and honest journey into the world of systematic investing and learn about the most dependable and consistent yet often overlooked investment strategy. Welcome to the Systematic Investor Series.
[00:00:23] Niels
Welcome and welcome back to this week's edition of the Systematic Investor Series with Rob Carver, Cem Karsan, Mark Rzepczynski, Alan Dunne and I, Niels Kaastrup-Larsen, where each week we take the pulse of the global market through the lens of a rules-based investor.
Now, today and next week will be very special episodes because we get together as a group (even if Rich is unable to join us today), for one big conversation and debate of topics we believe have been important during the year. Plus, we have a topic that was brought to us by one of our listeners that I thought was very relevant.
As you know, the podcast series is all about voicing our differences on the one topic that brings us together, namely systematic investing. So we hope that you will enjoy this group conversation over the next two weeks. We're recording today on December 6, and this conversation will be split into two parts and published on December 24th and December 31st. And therefore there'll be no market rep or performance updates.
We have a long list of great topics and we will be discussing those. But before we kick off with the first topic, maybe I could just start off like we did last year. Cem was not here, but like we did last year, some of you had made some special preparations for the conversation. I remember, Rob, you had warmed up well with some Christmas themes. I know people can't see us but maybe Rob, you can just sort of highlight a little bit how your preparations have been for this year's debate.
[00:01:48] Rob
Last year, actually, I had boxing gloves with me because our good friend, a good American friend, was on the podcast. So I knew there'd be some harsh debates, but things are probably a bit more gentlemanly today. So I haven't got boxing gloves with me, but I'm wearing my traditional Christmas jumper so I'm ready to go.
Admittedly, I think you are the one that is most Christmassy today. So why don't we just dive straight into it? Now, as I said, the first thing I wanted to bring up was really a topic that was brought to us by Zach. I think we can all agree that 2022 did not pan out the way many experts predicted. It would go down as a year where we used the word "unprecedented" quite a few times. Also, as we kind of talked about in 2021 and 2022, it has been the end of an era where central banks were fully in control for the prior two decades.
So Zach kicks off with a question that is written like this: "I recently finished reading The Rise of Carry," (which by the way, is co-written by one of our co-hosts namely Kevin Coldiron who hosts the Ideas Lab series). Zach continues, "Your requests for topics for the year-end roundtable discussion and the book got me thinking about this question: Have we seen an end to the carry regime that has dominated the past 12 to 14 years? What is the indicator that this carry regime has ended? Could the indicator be the performance results of divergent strategies? Have a good week. I'm looking forward to the conversation."
I'm going to just throw out to you first, Mark. [What are] your thoughts about this stable carry regime that we have defined? I don't know if you believe it's ended or not, but what would you be looking for in telling if it has ended or not?
[00:03:51] Mark
Well, I think it's just a matter of whether we're in transition. Looking at carry trades, for a long time in the FX area, and then looking at different types of carries (say, backwardation, contango-type trades in commodities), you find that there are periods of regime transition (that's what we may be in) when you have higher volatility. What you really look for, for carry (at least what I look for, for carry) is a dispersion in returns. So, as long as you can get dispersion in returns and differences in central bank behavior, then you can create opportunities in carry.
Specifically, we'll say that when there's high volatility or spikes in volatility, then you have to exit from carry. Those may last for months, it could be quarters, but eventually, they subside and then opportunities arise again in the carry space.
Cem, I also want to ask you. You come obviously with a different perspective to the rest of us and this is a topic that I think you and I have touched on quite a few times during the Global Macro series. To you, this definition of carry regime (however we define it), I define it as just this very stable environment where central banks were fully in control, what does it look like to you? Do you think that it has ended? What is the indicator for you that tells you that this may have ended?
[00:05:27] Cem
Well, to me, the biggest carry trade in the market always is upside versus downside in the market – skew. In the volatility markets that I trade in, there's usually an equity skew – a massive left tail skew. The reason that is, is because the whole world is long. You have $400 trillion of long assets. People hedge that tail, which creates a supply and demand imbalance (which is the defining characteristic of all carry trades), and a fat left tail with a positive bias. That has been exacerbated by massive flows, positive flows, into investment from 0% interest rates. It's that simple. That's caused more leverage to the trade and a fatter left tail but with a strong positive bias for some time now.
I do believe that regime is, for the time being (for the next decade), slowing. It's not something that goes away. There's always that carry trade. But it's a function of less leverage in the system, a rebalancing and a deleveraging, which removes some of that positive bias that we're seeing where the cost of money is going up. Ironically, this is counterintuitive to most, but this should reduce the fat tail over time here.
So, I think markets are likely to have a deleveraging process which eventually flattens over this period, the downside, and creates a put on the market with lower valuations and better cash flows. For the time being, we've seen that this year. That's been one of the defining characteristics of this year, which is a flattening skew. I think that's actually somewhat efficient in the medium to longer term even though most people out there are kind of running around saying, "This is crazy. This is the 0th percentile. This is unsustainable." But we can get to that later.
Sure. Rob, what are your thoughts?
I'm a little bit in disagreement. If I look at the empirical evidence I've got, which is, for the carry strategy I use is across a lot of different futures (different asset classes futures), so it doesn't cover spot effects. It doesn't cover options on nonlinear stuff. It's purely futures, but it is a cross asset class. So, it's moving away slightly from the very bull carry stories in certain parts of the space.
It's true to say that over the last 18 months, two years (really since COVID), carry hasn't done very well at all. But that's not unprecedented. Carry did very badly, as you might expect, in 2008, 2009. It did very badly in 1999 because those were obviously periods of the shit hitting the fan, which is what carry doesn't like. If I look back even further to the late 1970s, which is towards the start of my data, that actually was a really, really horribly horrific period for carry, much worse than what we're seeing now. And then after that, carry went on a 25, 30-year bull run.
Based purely on empirical evidence (if this is some kind of statistical distribution whose parameters I'm trying to estimate), I wouldn't say that there's been enough evidence in the last 18 months to say we should just stop trading carry because it's not going to work now. That's not the case.
There's one other point I'd like to make as well which is around this very common story that carry does really badly when volatility is high. Actually, I found that that's true to an extent. But interestingly, momentum does even worse, at least based on the measure of volatility that I've been using, which is on a market-by-market basis.
So actually, on a relative basis when things are really going crazy, carry seems to do relatively well compared to momentum, which is the other main tool in my particular bag, which may surprise some people. But again, for me, it's not necessarily clear evidence that at least the way I trade carry, I should be turning the thing off. I'm pretty happy to let it run with the current allocation.
I think in fairness, Rob, when I read the book the carry regime and when we first actually had Kevin on as a guest before he became a co-host, my impression was not necessarily that they defined it as "Does carry's strategies work?" It was also doing what they define as the carry regime (say from year 2000 up until end of 2019) what investors would have done really well from was just being long stocks and bonds (ideally bonds with leverage) and that worked perfectly. So, I don't necessarily mean that carry strategies have stopped working. Although it is interesting that you said that they work really well, but worked poorly at some point in the '70s and then went on this massive run. Of course, that ties in well with globalization and how everything became more stable in that sense. Of course, some carry strategies will probably always continue to work to some extent. Anything else you want to add to this? Yeah, Cem?
Yeah, I'll dive in. I actually agree with this. I don't think carry is dead or going away. I think carry is always a source of real edge in the sense that it's a supply/demand imbalance that's structurally in the market at all times. I think the argument here, for me at least, is that we're experiencing a deleveraging and in periods like '08, those deleveraging are fast, and they end quickly, and the carry trade comes back quickly.
Periods like the '70s, where they're inflationary, where the cost of money is going up secularly, those deleveragings are long and they're slower and they can lead to headwinds for extended periods of time. It hurts. It's a headwind for carry trades because the supply and demand imbalances are a bit more balanced during those periods. So, I think that would be my argument. Carry trades, again, represent $400 trillion, like I said. You can't hedge that. That creates a carry trade. That's not going away. It's just the headwinds that make that a bit more balanced and those types of carry trades a bit more balanced during these periods.
[00:11:34] Alan
Yeah. I think what maybe we're getting at is that there is a sense of a regime shift underway. It's just whether you call it the end of carry, whether that's the right characterization for us. There's a lot of pattern trends that have been in place for at least two decades, maybe four decades, in terms of declining interest rates, falling inflation rates, globalization, etc., that appear to be about to shift now.
Other characterizations of this are, we had Isabel Schnabel talking about the Great Volatility, whereas, previously, we had the Great Moderation. I think there is a sense, from a macro perspective, that we may be in the midst of a regime shift. At the same time, is calling it the end of carry the right characterization? As you guys have said, there are always carry opportunities. We've had a great carry opportunity in dollar-yen this year. If commodity markets get very backwardated, you could have great carry opportunities there.
We talked about a McKinsey paper (going back a few weeks). They talked about this issue and they just called it a new era. They didn't put a name on it. So I think the name is up for grabs. But from a macro perspective, I think lots of macro trends have reversed this year and you can make a good case for why we are in a new regime or a new era.
Yeah. Tying this back to what you were saying Niels, I think [because of] the regime change (perhaps as that easy money over the last 10 years has been going long financial assets, because of carry benefits, because of carry strategy), you can go short and you could also trade commodities and other asset classes. That's why I think there's still opportunities. It's just unlikely that you're going to make a heck of a lot of money just from doing a typical bond carry strategy or a typical FX carry strategy – which is going long everything.
That's the real distinction, I think. It's not so much that it's a change in carry strategies that we're seeing and that traders will adjust to the environment on their strategies, it's the leverage that's the issue. The idea that you had cheap leverage, that you could then borrow money and then buy assets and hold them for long periods of time, is the end of the era.
Now you're going to have to actually work for your money as opposed to just borrowing money, leveraging up and just holding assets. So, we'll say that before, or in the previous era, you could just hold and not have to work, and now you're going to have to work for your money.
Yeah. Well, absolutely. I think we all know that. All right, let's jump on to the first topic that we brought along, so to speak, and it's from Alan. I thought maybe today, what we can do is that I'll just give some of the highlights and then the person who brought along the topic can say a few words about it and set some context.
Alan, the first topic I chose of yours to talk about is (and maybe there's a theme in this conversation today, focusing more on the year 2022, and then next week, we will focus on maybe looking a little bit more into the future), you raised the question about why was 2022 such a strong year for trend followers and were there any particular holding periods that worked better than others? Do you want to set a little bit of context? I don't know, Cem, if you want to weigh in on this particular topic, but you can always do that, of course.
Yeah, sure. I guess this is kind of an end-of-year review. Typically, as somebody involved with managing multi-manager portfolios, when you went out to speak to clients, these are the kinds of questions that you got in these year-end review forums. Obviously, we've seen an exceptionally strong year for trend following. I think that will raise two questions. One is the mechanical: what did well, what did badly this year? Which I guess some of you guys will probably have more to comment on.
My sense is, probably across lots of different timeframes, it's been a pretty good year this year, as opposed to where, in some years, you get a big dispersion depending on whether you're commodity-focused or not or whether you're more financially focused. I think we've had trends across many markets. But I think there's a second question that people will ask. It's been such a good year for trend following. Was there something very unique about this year that led to that? Was it more of a one-off? This would be the argument that you would get.
I think the simple answer to the question is, obviously, we saw strong trends in markets. Obviously, trend following does well when you get persistent price action. Secondly, it was across a number of different markets. Sometimes, you'll get a strong trend in one market sector but fairly choppy action across the other sectors. But certainly, bonds, interest rates, commodities all did well this year, equities a bit choppier.
I think the third issue I wanted to just touch on was, in some markets, you did have very favorable setups, particularly in interest rates and bonds you had a very strong volatility expansion. So, if you went back to the start of the year in bonds and short-term interest rates or into the latter part of last year, volatility was low.
If you were getting signals to go short in those markets, you were putting those positions on in very meaningful size. That combination of strong directional momentum plus volatility expansion would have led to particularly strong returns in those markets. There could be a question there, was that a particularly favorable setup in those market sectors in that we're into a slightly higher vol regime and would it be less likely that we might see that persisting over time?
Certainly, we'd all agree, we wouldn't expect performance to be as strong this year and going forward. So in that sense, yes. There were exceptional things about this year. I would say, yeah, from my perspective, big moves, maybe unusually prolonged moves too. In some sectors like bonds, if you got a fairly simple moving average cross signal at the start of the year, you would have stayed in that all year.
We've also had higher interest rates this year as being a small additional plus, and we've all had that volatility expansion. So I think there's a number of dimensions to why it was so good this year beyond the obvious. Interested to get the perspectives from everybody else.
Yeah. Rob, what have you seen in your little machine?
Yeah. Obviously, it has been interesting. As we've said, it has been a bad year for carry and a good year for trend. Although I think it's also important to emphasize that most of that action, at least for me, happened in the first few months of the year. The rest of the year, basically, I've been treading water, and I'm actually down I think 4% since April.
The other thing I found interesting ( and I pointed this out in a podcast episode earlier in the year) was I've got a strategy called skew, which will be quite different from what other people out there would call skew. All mine does is look at the recent skew of an asset in the future. Basically, if that skew is unusually negative, it goes long, because the view is that the market is saying, "Well, this thing is horrible and unpleasant, and therefore, will be cheaply priced and therefore, it's a good time to buy." That works pretty well. But that's a classic kind of convergent strategy in a way. It should do badly when things like carry are doing badly, and it should be basically uncorrelated to momentum, and, generally, it is.
This year, I actually skewed very well indeed. So I wonder whether there is something particularly unusual in the market this year, and I haven't really got a good explanation for it. But I think it's the only time in my entire backtest that I've seen those two strategies do incredibly strongly at the same time. So that may be an indication there is something weird about this year whether it's because it's a rotation in environments, which we already touched on, or whether there's something really weird going on with the relationship between price and volatility. I'm not completely sure, but it's definitely been a weird year for me at least.
Okay. Mark, are there any things you can point to as to why this year was such a strong year?
I'm going to use a technical term. I'll call it "the grind". I don't know if I can say this on a podcast. Let's go back to 2020, March 2020. We had a tremendous decline in asset prices. It was a much bigger shock than what we've seen in 2022. Yet, trend followers, in general, some of you were positioned correctly in February and made money, but a lot of people lost money during that period of time. There was a huge move, but it was over a very short period of time. Models didn't get a chance to adjust or respond to that shock and so it never showed up in performance.
2022 has been slightly different. Why it was successful for trend followers is what I call "the grind", where you just had markets grinding lower and higher depending on which direction you were in for a longer period of time. And this is one of the things that, whenever you talk to clients, comes up in some discussion. I'll call it the Goldilocks environment. The sense is that they'll look at a chart and say, "The market moved, why didn't you make money if you're a trend follower?" You'll say, "The conditions weren't really that right." Then they say, "What do the conditions have to be?" You say, "Well, they got to move, but not too much. They got to move, but they got to have enough dispersion."
So if you look at 2022, in terms of the grind, we had the grind of central banks that were sort of consistent with their policy change in the regime. You had the grind of inflation; it wasn't just a shock, it just continued to move higher. You had the grind lower in growth. So, the combination of macro trends leading to price trends really drives markets. The question you have to ask, for 2023, is: is the grind going to continue? That will determine whether you're really going to make money in trends in the next year.
Yeah, we'll come to that. Cem, you want to say something about this?
Yeah. I think the grind to me means a secular trend, a secular force. I think that's what we're beginning to see. I think people are so used to thinking about cyclical moves, within the last 40 years, because it was a one-way secular trend with a bunch of cyclical changes.
Imagine a graph where you're on the turn, you're in a regime shift, and all of a sudden, the acceleration to a new trend is very fast at that first turn. It slows, the rate of change slows and kind of flattens out over time as that regime shifts. I think we're on that turn. So there's a real quick acceleration trend. That will slow over the years, in my opinion, but that grind is that secular trend that is now starting. I think that's very important to think about.
That's true for so many asset classes this year. You're really seeing a transition and a big push, a big force, towards what people are seeing as a massive beginning of a secular trend. Again, we'll have cyclical moves between that. But that should be secularly good in the short term for trend, I would think. Again, it'll slow over time. But I think you're in a period where that turn is really fast towards a new regime, a secular kind of push, and that's really good for trend in the short term.
Yeah. I think from my point of view, I was thinking about this question. There are three things that I seem to remember from the year. I completely agree with what has been said already that I think that the trends unfolded a little bit slower, at least in some of the sectors like interest rates and currencies. So, I think that was certainly beneficial up until the reversal, of course, in November.
I also felt (and this is purely from memory) that correlations were a little bit different between some of the markets and sectors than what we have normally seen. For example, the bond-equity correlation certainly was different. So, I wonder if there is some benefit that we may have had from that. I can't really articulate it better.
Then, to the point about were there any particular timeframes? I think Alan said it already that probably a lot of different timeframes did well. But actually, in our firm, we have a trend model that we run, from time to time, to see all the different timeframes pretty much, from a few weeks up until a couple of years, to see which timeframes would have worked the best had you known it.
It's very interesting because 2008 and 2014 have been the standout years where, up until now, every single timeframe would have worked to varying degrees. But actually, right now, I think at the end of October when we ran it last time, it's even stronger, it's even more pronounced that every single timeframe in 2022 would have worked.
So, there is something a little bit unusual about the year. But I would say, it's not that unusual. It's not like performance has been three times more than it has been in a good year. It's kind of a good year, but I don't think it's exceptional in that sense.
Now, someone mentioned that you can have the wrong kind of volatility. [Using that as a segue, I want to jump to one of Cem's topics, because of course, volatility strategies have been (you could say) performing differently to what a lot of people have expected given what unfolded. There are a couple of things, and I'd love to hear you expand on this, Cem. But there are a couple of things you said stood out for you in 2022.
We already touched a little bit on this regime shift: We had inflation coming back, and then this equity vol and skew underperforming (you talk about this not being a coincidence, actually), and also in terms of options in previous secular inflation (or should I say the lack of options in previous secular inflation regimes). So take this topic away and then we'll weigh in as best we can.
Yeah. Two things I actually just spoke about, the difference between secular and cyclical. I think that's so critical the way everybody should be thinking about everything that's happening in this market. We've had a secular trend for 40 years based on Federal Reserve activity and monetary policy dominance. That simple change, in my view, is changing the secular trend. That's the core issue here. So, we're no longer just looking at the cyclical, we're looking at secular changes, and that's what regime shift is all about. That makes things muddier. You have to look at two different things operating on two different timeframes and how they interact. It's a bit more complex.
We happened to see, this year, some cyclical effects pushing the same way as secular at the same time in the vol space. On the cyclical side, people crowded in after a big vol move in 2020, and into long skew and long downside protection before a decline in the market. That caused an oversupply of vol, over-hedging, which on the way down has compressed volatility, compressed skew. This is something we see cyclically that happens – we go one way on this and then we go the other.
Niels, you and I have talked about this quite a bit. It's really compressed implied volatility to the downside in the markets and we've seen this flattening of skew. So that's a cyclical effect. At the same time, secularly (and I kind of referenced this briefly at the beginning of the show), we're moving into a period of less Fed dominance – less monetary policy dominance and higher inflation. As that inflation creeps in the markets, it puts a put underneath the market and it actually, historically, has a longer timeframe to kill skew. It removes the upside trend in markets and makes for a more two-sided market. This is that rise of carry conversation we had.
If you look at the '60s, the '70s, over 14 years, '68 to '82, the market went nowhere for 14 years. [There was] above trend economic growth, earnings actually were quite strong over that period, [there were] more frequent recessions, but the market just died a slow death. In real terms, it lost 65% of its value, I believe, in real terms.
So, you're looking at a market that is more likely, if we continue to have secular inflation (which I believe we will), that's likely to have two-sided volatility and not have upside trend. That's going to make the stock-bond relationship break a bit as it did during the '60s and '70s for a secular amount of time (in my opinion). But that secular trend should kill skew as well.
So, those two things happened at the same time. The cyclical part, I would argue, is a bit overdone. Now people have moved completely out of skew in downside protection and are playing for that more secular trend. It's a bit overdone. Everybody's on the other side of the boat now, and that's likely to cause the second move phenomenon in the short term. But really, secularly, that reduction in skew, that reduction in the downside (this carry trade dynamic with the fat tail and the upside bias) is actually secularly on the way out anyway. So, you kind of think about those two things together.
Anybody who sold puts and sold stock this year, essentially, as a basic summary, absolutely killed it. That is the carry trade. A lot of people, if you look throughout the portfolios and try and summarize when things have done very well, it's basically that in summary, in some form or another. That never lasts too long in the short term because of those cyclical effects, because of the crowding in and crowding out, but I do think it is a secular time where that general trade will do better over long timeframes.
Now, I want to bring in you, Alan (a little bit here), to broaden out this particular topic because, as always happens, you end up with certain topics becoming quite popular. I think this particular topic has become even more popular because during COVID, there was a little bit of a Twitter spat between Universa and AQR, and now they're both coming out with papers, interestingly enough, on this trend versus tail hedge topic. So, maybe we can broaden out the conversation a little bit to take that into account. You promised me a summarization of some of their arguments and then maybe we can all weigh in on that.
Sure. There were two papers, one from Universa and then a second one from AQR, as you say, but both broadly on the topic of: are CTAs and trend-following sorts of protection portfolios, and how does that compare to tail hedge strategies? So, maybe we just go through the Universa paper first.
I suppose the point that it says is that CTA claims of being superior to other forms of risk mitigation are exaggerated. Now, some of the characterizations in the paper are maybe not things that we would agree with. It is claimed that CTAs reliably achieved positive returns during major sell-offs in stocks and bonds. I don't think we all will say "reliably achieve". It's more of a historical feature of CTA performance.
A further claim is that trend-following strategies have sufficiently large positive returns over the long run so that an allocation will add value. So I think that we probably would say that. Some proponents go as far as to assert that trend following is an insurance policy that investors are paid to hold. Again, I don't think we would go as far as to say that. In that sense, we wouldn't disagree with the guys in Universa for what they're saying here. At the same time, when you dig into this paper, there's probably four main parts to it really.
First, there's really just a review of CTA performance historically. I suppose there's an assertion here that maybe trend-following returns have kind of declined over time.
So the writer looks at the Barclay CTA Index, the SocGen CTA Index, and they actually include AQR's Managed Futures Strategy in the paper. So that may be a reference to the spat that you alluded to, Niels. The first point is that CTA performance has declined over time. They look at the returns, since the 1980s, of the Barclay CTA Index. Obviously, in absolute terms, you might question that because the volatility of the Barclay CTA Index has adjusted over time so you would have to adjust for that.
One thing that they don't do is they don't adjust for interest rates. Obviously, interest rates were much higher in the 1980s so they haven't factored for that. But by their basic calculations, the return to volatility ratio appears to be declining over time. They were saying it would be a huge leap of faith to unassign an allocation based on a high front-loaded historical return. So in other words, you shouldn't be allocating to CTAs because yes, they have done well historically, but most of those returns were back in the 1980s. But actually, I looked at the BTOP50 Index and looked at the five-year rolling Sharpe and it's at an all-time high now. That goes back to 1990. So that claim that CTA performance isn't as good as it was doesn't seem to stack up.
The second thing is to look at CTAs in terms of equity protection. I guess there is this general question here. I don't think we would portray CTAs as a protection strategy but we always emphasize diversification. But even this CTA has mitigators of equity risk.
The general point here is twofold. One is that you shouldn't be just looking at Sharpe ratio. You should be looking at the compound annual growth rate as the key measure. If you combine trend and equity, are you enhancing the company's annual growth rate? Then the question is, well, how much would you need to allocate? Then, the third thing is, well, if you make that meaningful allocation, what about the periods when you have underperformance relative to equities, what's the drag?
So, the general point here is that when you look at it from that perspective, they kind of say it's been a bit of a wash in terms of growth rate, and the drag in the 2010s was so great, that would be too great for investors to bear going forward if you had a repeat of that, and that's the reason for not including CTAs.
From my perspective, looking at how they present it, if you look at the period, say from 2000 to 2022, actually, combining CTAs does enhance the CAGR. The other point is they use the SocGen CTA Index here (which is a low vol index – it only runs at about 8%). So, if you use the SocGen trend index, which runs at 12% or 13%, you would see a much bigger impact. I think if you run the numbers, you do enhance the compound annual growth rate and you get a lower drawdown. So they very much downplay the drawdown benefit that you get from combining trend and equities. But there is this question that they leave outstanding: would you be able to live with that drag that you've had in 2010 for trend?
The third part, they kind of move into looking at bonds as another source of diversification or protection. They put up a chart here that shows the cumulative return on the SocGen CTA Index versus the Barclay US Treasury Index. It's kind of remarkable because- they say it's remarkable, but I think it's remarkable in a different way. The chart looks reasonably similar, but in no way statistically assessed for similarity under clear periods of divergence between the two lines, but yet they say it seems that CTAs have generated a significant portion of their profits from persistent long positions and fixed income based purely on this chart. So I think that's quite remarkable in itself.
Obviously, CTAs did benefit from the trends in bonds at times. But they also reference a paper from Niederhoffer and Weddepohl, which I think we're probably all familiar with, which is ironic that they reference that paper because that paper, at the time, made the suggestion that CTAs might struggle in a rising yield environment. We've obviously had that in 2022 and that hasn't been the case. So, this bit about CTAs comparison with bonds seems to be slightly unusual in the context of the overall paper.
The point is CTAs seem to behave a bit like bonds and they don't believe that bonds are a good protector. In conclusion, there are some kind of conciliatory remarks, I would say, in saying CTAs have performed very well in 2022 and that there may be a case, but basically, you have to have high allocation to move the needle. And then, would you be able to sit with the drag that you had in 2010s? So, to summarize, as I said, there are a few features within there, a few ways that they approached the analysis that are maybe a little bit questionable.
Then maybe quickly on the AQR paper, it's fairly simple. It's just looking at trend versus systematic put buying and versus tail hedging funds. Basically, the point is that yes, in short, sharp drawdowns, the tail hedges will work better but in more prolonged drawdowns, trend following will work better.
Then the second point is, if you take into account what they call the round trip, so if you think about when we had the selloff in March 2020, but then you had the recovery after that. When you account for that, the tail hedges look less attractive. Then there's the point about if you take account of the returns, in the period when equities are doing well, obviously, your put buying is going to underperform. So, over the whole cycle, adjusting for the two, trend following looks better than tail hedging, or the tail hedge funds, or systematic put buy. So that's the other side of the argument, I would say.
Sure, sure. Now, I want to get to you, Cem, at some point, because obviously, Universa is in your space, not our space. But Rob, you were itching to have a few things to weigh in on this.
Actually, pretty much all the points I was going to make, Alan made already. We obviously read the paper and had the same issues with the methodology. It's a pity, really, because in many ways the paper is correct in that if you do this straw man where trend following is this wonderful thing that does everything, and of course it doesn't, of course, you can argue with that, but the methodology and the paper is appalling. That graph about the bond chart made me feel physically sick, frankly, anyway.
So yeah, as he's done such a good job, I'll just add one thing, which is I think the AQR paper would have been nice if they'd added on both slow and fast trend following. Obviously, fast trend following is more similar to put buying in its characteristics and it probably would have done better in these shorter, sharper drawdowns while also paying more over time as an insurance premium. So that was the only thing I'd add.
I think the AQR paper is much better and not just because it thinks trend following is great. I think it's just a much better written paper. But that's the only thing I'd add to it.
Yeah. Mark, before we get to Cem, any thoughts on your side?
Well, I think the important point is the difference between allocation diversification and strategy diversification. I think, especially with that particular paper, they talked about if you held bonds, you would have done pretty well. When you tie this back to our idea of the age of carry, bonds were a great diversifier. Interest rates were coming down, you had negative correlation with stocks, this was a great way to protect your portfolio.
If we're having a secular change, if we're entering a new era, then you have to think beyond allocation diversification because that really works well in a carry environment versus strategy diversification. I think that we're into the new age of strategy diversification because bonds aren't going to give you the diversification you thought because correlations are now positive with equities. So you have to think about what is the environment and what is the strategy or allocation, given the secular environment you're in.
Now, in terms of strategy diversification, I think that's actually a good segue over to you, Cem, because a lot of people talked about volatility strategies and I think they implicitly just thought about long volatility. But at your firm, you obviously do different things and have had a very different, much better year than most of the volatility space.
Also, I guess maybe you know the people at Universa, not necessarily personally but of them. Because I seem to remember, they kept coming on my radar (and maybe this was part of this Twitter spat with Cliff Asness) because they claimed this 4,000% return during COVID but it turned out that they were calculating this based on the premium they put up as margin or whatever it was, so it wasn't really that comparable.
Anyways, I don't want to put too many words in your mouth, Cem. Tell us what you're thinking.
Yeah. Before I dive into the tail part, I just want to reference the trend piece real quick. As I mentioned, I think it's very interesting the Universa paper, when it looks at the data it starts in 1980. It's funny how much data analysis, when people want to support what's happening, takes that 40-year period specifically. Yes, there's been a secular factor during that period, but we are transitioning out of that now, and so I think just looking at that data set is a big problem for lots of investors.
So anytime you see something starting at '80, '82, '84, purposely treat that with some caution. In particular, for that over 40 years, we had a decline (in my opinion, a secular decline), in the effectiveness of some of these trends because the risk premia got compressed and that trend itself started to die recently.
We're having an acceleration of a new trend. So that new acceleration, as I talked about, is a positive and the beginning of a new opportunity, in my view. I think looking at that, I'm actually a big proponent. I'm actually boosting this kind of idea by thinking trend could be very good for a little bit here, and we can be at the beginning of a new cycle.
On top of that, risk premia has gotten so compressed that we're moving into a regime where risk premia, itself, should increase. That should help CTAs and others of the like as well. That's kind of a secondary effect that I think is very important. There's a difference between what's actually going to happen to realized volatility (and now we can kind of transition to volatility), and what's going to happen to implied volatility.
I actually think that spread, between implied/realized, is secularly going to increase. That's a good thing for people in the vol space. It creates more opportunity, and that risk premia is not just at the money, it's on the tail and other places, realized relative to implied. That doesn't mean skew is going higher or demand, it's just that spread itself between realized and implied should increase over time. And that's just because there's less liquidity, there's less money to go around. So, there's less ability to absorb liquidity, and that (in the short term) should create some opportunities and more pricing in of risk premia as a result.
So yes, in volatility, broadly, I think we're entering a period where the market is, again, as we talked about, changing. That demand for downside protection will continue to be strong, particularly in a market that's going to be much more two-sided and is not just secularly trending. If we look at the '60s and '70s, you had four major recessions in about a decade (just over a decade long, like a 14, 13-year period), very frequent crises, and quicker problems. But over time, the amount of volatility was much lower over the long term.
So, we did some data (we've talked about this) analysis recently, but five-year vol is actually about 10% lower on a realized basis during that '60s and '70s period than over what we've had. The majority of that difference comes from upside. There's just less upside vol. There's more mean reversion to these markets over longer periods of time, and that means actually, ironically, that these periods on a nominal basis (now we're looking at nominal assets, that's important to know), is actually a good opportunity. You have these first-order effects which are making assets cheaper and cheaper over time, but you have these second-order effects where there's less money going around, less demand for stocks, and all while risk premia itself is increasing.
So, now imagine you have this longer term period where there's more mean reversions, markets that over long periods of times don't really go much of anywhere in nominal terms. In real terms, they decline and those nominal assets then, also over that period, have higher risk premia. So, I think over longer timeframes, that doesn't mean right now, but over longer timeframes we're entering a period where there's less competition for that risk premia, there's less leverage. So, there's more opportunities, actually, to include risk premia harvesting strategies.
Now, to be clear, there's a tail on that. We have a long vol strategy, as you mentioned, well over a considerable period of time. That's very different. I'm talking about five-year outcomes. Now, let's talk about that cyclical window that we're just at the beginning of this turn, and we've had a period of dramatic underperformance of that vol. So, I think you're likely (within that) to have more opportunities to dynamically (if you're very dynamic and you're active and you're hedging) come in and really profit more frequently from short-term opportunities. That's what we see again in the data: more frequent problems in the market, more sharp turns, but more mean reversion, and ultimately a lack of equity performance over the long run. I think that's probably the most likely outcome.
So, I think you need to be active with your hedges. I think puts versus equities is just not going to work. It actually has worked okay because of the upside trend in the performance of equities and the geometric returns that that's provided as part of a long investment strategy. I think that won't work very well. I think that risk premia, you'll have to pay for it without that upside trend in performance in equities. So I think actually, ironically, over the next 5 to 10 years, I think more put writing strategies will do significantly well in a longer timeframe.
Again, in the short term, tail is important. The way Universa does it is probably the worst way to do it. I think Universa is going to have a tough haul. They just go and buy puts, little puts again and again and again. I think that world of rally, rally, rally, rally and then big blow up; rally, rally, rally, rally, big blow up is probably not what we're going to see for the next 5 to 10 years. So, the benefits of those big blow-ups, in the context of a longer equity portfolio, is going to be a tough argument, looking back in 10 years.
All right. I'm going to jump to one of Mark's topics, and it's very topical for a conversation like this, and that is: what did we all learn from events in 2022?
So Mark, maybe I can start with you. What did you learn from events in 2022?
Well, especially at the end of the year, you always want to sort of do the self-reflection. The conclusion I came to is that I don't really know that much. That's why, sometimes, I should be a trend follower or use that as the basis for trades. The perfect example would be if you started in 2022, when we were near zero interest rates – when they started raising rates. Let's go a year forward, we are going to have Fed funds rates up about 500 basis points. And so if someone said, "What's the over and under of a 500 basis point increase in Fed funds?" I probably should have said, "Yeah, that's a little crazy." So I think that the humility that you always need, at the end of the year, is important. What you figure out is that your forecasts, a year out, will be extremely poor.
Consequently, that's why we start with our priors of just following the trends because the trends can last longer than expected. There could be situations that you don't even anticipate what could happen.
Another sort of big surprise was we had the big spike in commodities at the beginning of the Ukraine-Russia war. By March, a lot of commodities spiked. You look at energy prices, you look at wheat prices, some of the grains, they were actually moving in the opposite direction. So again, that's something where you sort of say, "Well, did that surprise me?" Yeah. I was sort of expecting that commodities were going to further run up and, in reality, they mean reverted.
So I think that you're constantly surprised. You find out how much you don't know. Without sounding sort of trite, that's the reason why you follow the price action, because your long-term trends (based on exogenous variables, macro variables) could be poor. That being said, I always take the view that macro trends drive price trends. So, in some sense, you need to have an idea what the macro environment is doing. But you should always start with the price action first as your basis for any forecast.
Alan, what did you learn, if anything, in 2022?
I think similar to Mark, humility, open-mindedness. Things can happen a lot more quickly. It's like that thing (I can't remember the exact expression), "things can be the way they are for a long time and then they change very quickly," or whatever it is.
Going back, I think a lot of us (making the case for trend following managed futures strategies) expected that there would be a good opportunity, at some point, with low yields, elevated equity, valuations, etc. But that it all kind of happened nearly in the space of one year, or that we had a big adjustment in the space over one year, was probably a surprise to me (that we had that). And also, probably, that people adjust to a new regime so quickly.
If you'd said to somebody a year ago that inflation would be 10%, people would have said you were mad. It wasn't on the radar at all. I remember people forecasting five as an outlier event, but now we're into a new regime, and we deal with it.
I've always felt, literally, anything can happen in markets. You have to be very open-minded. But when you do shift to a new regime, the markets do adjust to that. So yeah, I would say being open-minded, humble, and anything can happen.
I was just going to say that the quote that I think you were referring to is by Rudi Dornbusch. It said, "In economics, things take longer to happen than you think they will, then they happen faster than they thought they could."
That's exactly it. Thanks, Mark.
That sort of is why you're a trend follower, in a nutshell.
What about you, Rob? What's your takeaway from 2022?
Exactly the same. I've long been resigned to my inability to make predictions that are successful. I did make one successful financial decision late last year, which was fixing my mortgage for five years at like 1.2%. I tell everyone that I meet about this so they come away with the impression that I'm some kind of financial genius without telling them secretly, the vast majority of my financial decision-making is made by frankly, trivially simple rules, and just leave it at that.
And yourself, Cem?
The thing with prediction is everybody thinks in two dimensions. Most of the wealth management space thinks, "Is the market going up or down? Is this thing going this way or that way?" I think that's a fairly hard, almost impossible task. But prediction of distribution is a lot easier – prediction of understanding environment, and the forces acting upon the structure and the shape.
I think that you started the conversation today about referencing The Rise of Carry. The Rise of Carry doesn't speak to directions, it speaks to shape of the distribution. You can understand these forces and begin to make pretty accurate assumptions about how that shape looks of the distribution. That, itself, can be incredibly profitable and really, secularly can improve your returns across strategies if you can get that part right.
I think that's what we're talking about here. What does the shape look like? What are the forces acting upon the environment? I think this year kind of emphasized that, being open to not just following some data but thinking about what the forces are that are acting upon the shape.
There's a lot of major things happening here. I think the biggest of all, is a very, very, very, very long, deep, important thing, which is demographic change, a change in not just the amount of millennials coming into consumption, but the underperformance of those people, and that inequality. That is driving a demand push economy and a move from record Gini coefficients back down across the market.
I think that simple, singular force is acting upon the distribution in very meaningful ways. It's going to force a normalization, a mean reversion to a much longer trend, and a normalization, and that changes a lot of things, a lot of shape. I think if we're open to those things and understand that, then we can start to profit on different parts of that distribution accordingly.
We probably all agree it is very hard to be predictive, but that does not mean that trend following is non-predictive. So oftentimes, people sort of say that trend following, "You don't have any view of the future. You're non-predictive." That's not true, or at least I don't think it's true. The fact that I could say I have a hard time forecasting and I say, therefore, I'm going to place more emphasis on prices, does that mean that trend following is non-predictive?
So there's a separation between the two. I think that Cem made a good point that we may not be very good about knowing the direction of markets, but we do have good ideas of what may happen if we're in a certain regime. We do know, conditionally, what might happen if we're in certain environments. So I always sort of talk about that there is a difference. The first thing you need to do, if you want to be a predictor, is say, "Where am I first?" Then I could sort of say, "Where am I going?"
It's almost like the driver who doesn't look at the map. First, you have to say, "What is the regime that I'm in? Given this regime, here's the likelihood of what might happen. I cannot predict for sure what will happen, but I know that I have a little bit of an edge of a likelihood given I know what the regime or what the conditional environment may be."
Cool. All right. Yeah, I don't think I can add much to that except just to say that the way I've always thought about this is just that we just have to be open to imagine the unimaginable. I think this is the reminder that I always get from a year like this. Unfortunately, it's a little bit like I've seen some of these. I think it's Sir Ken Robinson, who was most viewed on TED Talks about education, where he talks about how, regarding children, we're removing their creativity in education.
I think what we, in the financial world, have been slowly removing in the past two decades is just our imagination that markets can move in crazy ways, like near negative oil prices, just because we've had a couple of decades where everything has been pretty much under control. But I think that's coming to an end.
Anyway, let's move to something completely off base here. This came from Rob, of course. Rob only gave me two words in terms of a topic so I definitely need a little bit of context here from you, Rob. But the two words you gave for this conversation was "crypto" and "FTX". So please set the scene, Rob.
Well, the scene is that after many years of having crypto, people tell me I'm an idiot and don't know what's going on and all of this stuff. Finally, it looks like the sheen is coming off the market as we've had this huge FTX scandal that of course was on the back of a scandal earlier on in the year and the just general deflation of prices.
Now, this is not a podcast where I think we should sit around and pontificate about what the price of Bitcoin should be in a year because as we've just discussed, prediction is futile. I trade Bitcoin futures and I don't think I have a position on it at the moment, but obviously, if the trend goes one way or the other, then I'll buy or sell it. I'm completely indifferent about that.
But crypto is effectively an asset class and we talk about asset classes. Some people have said in the past, for example, that crypto is a tail hedge. I'm hoping that argument is kind of looking a bit silly now, but people have said it. So I think it's maybe worth spending just a few minutes not trying to predict but sort of saying, where do we feel crypto is in terms of its lifecycle? Is this it now or is it just going to disappear and just become, again, the chosen medium of drug dealers and money launderers or is it going to dip down and then sort of climb up again and become something respectable and useful in the future?
Upfront, I'm a skeptic, I've always been a skeptic. So I probably have the former argument that it's going to just be one of those things that will look back in 100 years' time, like the South Sea Bubble, and people will write books about it and people will say, "Isn't it hilarious that people used to spend the price of houses on a tulip bulb?" Replace that with Bitcoin and you've got the same story. So that's where I am, but obviously, I'd love to hear what you guys think because you may have different opinions.
Sure. I'd love to hear what Cem has to say about this because I don't think I've ever heard your opinion about crypto, actually.
We had a couple of conversations in there. Look, I've been pretty clear that crypto was a speculative bubble. That said, blockchain, itself, is a secularly important thing. Personally, I think Web3 is going to change the world we live in. So in many ways, it's not too different from the tech bubble of the late '90s, in some ways. People got way out in front of it.
I also think that money was misplaced. I don't think crypto, as a currency, is that money? If the argument is that it is money that is flowing into and being used for Web3 blockchain-focused projects, it's a different story. Those are two very different things. I think people often get those two things confused.
Despite it being a speculative bubble, I think it's important to note, it is the religion (we've talked about this, Niels) of this millennial generation. We're all sitting here 45, 40-ish plus years here, talking about something that really belongs to a younger generation, for the most part.
The reason crypto came about, in my opinion, is due to three major things. One, this generation grew up for 40 years during a period of technological innovation, money flowing into corporations forcing more and more technological advances. So they believe technology can cure all our problems.
Most importantly, to these people, this generation didn't benefit from the wealth creation. So they were the ones on the bottom of this inequality distribution. So, this idea of fairness and justice, that's all we hear about. Equality, equity, justice, during these periods of inequality, these are important things to this generation. And so they feel the system isn't fair. The idea is burn it down, break it, take the money, the power away from government. That was the other driving force.
Lastly, because they underperformed, they wanted to catch back up. They knew they'd catch back up. They're reaching primary household formation years and they're at 40% of where the baby boomers were. So let's make YOLO calls and let's bet on crypto, let's go for speculation and find a way to make money. It is the religion of this generation. It expresses a lot of the things they grew up with. So, they're not going to let go of it and they are now just growing to these important investment years of their lives.
I do think that there is, just because of that, some underpinning level and value to these just because of the generation that's coming to economic and political dominance. That said, I do think its uses and the speculation and where the money has been pushed is incorrect. I think that pivot to more blockchain, Web3, etc., over time will ultimately bear out. So that's my broad view. But yes, a speculative bubble in its current context, is much like the 2000 tech bubble.
Alan, what's the Irish view on FTX and crypto?
Hard to generalize. But I agree with what the guys have said. It's behaved like a speculative asset in the sense that as rates have gone up and liquidity has come out of the system, you've seen this in Bitcoin probably. It did peak before the S&P but it's pretty much traded like a risk asset. So it's kind of at the high beta end of the spectrum.
As Rob alluded to, we did see people circulating charts saying if you added 1% of Bitcoin to your portfolio, it would improve the Sharpe and all of that, and you had to claim that it would be an inflation hedge or that it was digital gold, and all of those have been proved to be incorrect. You had the typical bull market qualitative measures too.
Definitely, this time last year, I heard of at least two people who were setting up crypto trading funds here in Dublin and people were approaching me and somebody said to me, "There is money to be made for everybody here." So these are all of the things that you hear at the peak. I'm a little bit surprised it's held fairly okay in the last few weeks, but I guess it's been a favorable few weeks for risk assets.
I tend to agree, tokenization, all of that, does have the potential to be very, very interesting. If we take the 2000 dot com boom/bust as a template, technologies that were transformational did come out of it, so I'm certainly open to that possibility. But in terms of tokens, yeah, I haven't been a believer. I would guess, if we saw it under the wave for risk assets, that they would come under pressure in that type of scenario again.
I'm sure, Alan, that the guy who said to you there's money to be made for everyone was thinking about all the service providers to the fund, not the investors. Anyways, Mark, your thoughts, quickly, on crypto.
There are three things that I think are important from this. One is that (some have alluded to this) you have the bubble writers in the age of carry or high leverage. In a sense, a lot of people said, in an ability to borrow money cheaply, people set a strategy, and it's not just for crypto, is that I ride bubbles. I find a bubble and I sort of ride it as much as I can because I can borrow money cheaply, leverage as much as I can, and that's where I can create wealth. That is coming to an end because the cost of leverage and your ability to borrow is going to be diminished. So you're going to have to make money the old-fashioned way. You're going to have to earn it, as I said, from the '80s.
The second is that Charles Kindleberger talked about the Kindleberger cycle. With that, he said you could have bubbles, but that could actually have social value if it's for technology that pushes investment capital into new technology. It could then rise to a bubble, but then after the bubble bursts, the technology still exists, and that might have social value for the overall economy.
That may occur with crypto. We're going to wait and see on that. That still might be out. So we could sort of say you had bubbles and railroads in the 1800s where the bubble burst and then we were left with a lot of railroads that sort of had a big boost in productivity.
The third thing, when you tie crypto and FTX, is that we have to sort of realize that structures matter, regulation matters, and trust matters. In particular, let's take a more future example. The whole LME debacle with nickel, if the underlying structure of markets is put at risk or the trust in markets is put at risk, then that causes trading to grind to a halt and then people can't be able to allocate risk appropriately because the structure doesn't exist to do it. That's what you're having in FTX.
We'll sort of say regulation matters, because if you look at some of the things that have been going on here, you just say that as I've mentioned before as John Kenneth Galbraith talked about the bezzle, there is wealth created for those who did this and then there's the assumption that other people had wealth. And now as the bubble bursts, we find out that money was taken from one group to another.
So I think the final thing is that even for trend followers, we care about regulation and structure, because if we don't have the right regulation and structure, we can't be able to do our job.
Yeah, absolutely. I don't have much to add other than to say that I actually hope parts of it survives, but certainly not in the form that it is today. Most importantly, I really hope that a lot of the bad actors, I think we all know who they are, including some of the financial platforms or media platforms that have been pumping and dumping this space, will disappear, frankly. Anyways, we'll see.
All right, I'm going to end our conversation for this week on that note. This is Part 1 of our 2022 holiday season special group conversation. We hope that you've enjoyed it. If you did, please head over to iTunes and leave a rating and review so that more people can discover the podcast and follow the podcast.
Next week, we will be back with part two of this special group conversation, so make sure you go and check it out when it's out. In the meantime, we wish you all the best for the holidays.
From Cem, Rob, Mark, Alan and me, thanks so much for listening. We look forward to being back with you next week. Until next time, take care of yourself and take care of each other.
[01:12:22] Ending
Thanks for listening to the Systematic Investor podcast series. If you enjoy this series, go on over to iTunes and leave an honest rating and review and be sure to listen to all the other episodes from Top Traders Unplugged. If you have questions about systematic investing, send us an email with the word "question" in the subject line to info@toptradersunplugged.com, and we'll try to get it on the show.
Remember, all the discussion that we have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions.
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Peter Zeihan – Global Macro Series – April 27th, 2022
Ben Hunt – Global Macro Series – April 20th, 2022
Adam Rozencwajg – Global Macro Series – May 11th, 2022
Pippa Malmgren – Global Macro Series – May 18th, 2022
bonds carry regime commodities correlation CTAs currencies cycles deflation Diversification equities inflation investing leverage liquidity portfolio construction portfolio protection recession risk managemant risk mitigation risk premia skew Trend Barometer trend following trends volatility
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