YouSaid · the spoken record

Huw Roberts

lines on the record: 56
first: 2021-11-05
most recent: 2021-11-05
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“But hopefully not nineteen seventy style, and that you will see a central bank policy response. But at the moment that policy response is probably going to be okay. It's going to involve maybe half dozen rate hikes once QT is finished. And that will mean tighter conditions at the margin, but not enough to derail growth. And that seems to me the main message that's coming from the US equity market. They're comfortable with the level of sensible tightening, if you want to call it that, that the Fed will engage. And therefore, at the moment, it seems to me that the divider-dip scenario will probably hold for a wee while yet.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Well, I guess money talks. So, you know, my PA account, I'm still long tech. So that's probably given you half the answer. I think some of these big companies, I'm not a bottom-up equity guy. Their valuations do look eye-watering at times, but they are genuine game changers. And they have enough cash to keep innovating. You look at what Amazon now potentially doing the same thing as Elon Musk's SpaceX program in terms of putting satellites up and taking coverage to a whole new level. You can look at the valuations and get scared, but I think you have to have skin in the game personally, at least that's my PA perspective. On the Fed and Central Banks, I think what you're seeing so far is that markets are telling you that, yes, the Fed are going to tighten, that inflation is more than transitory.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“this conversation is that by looking at these various macro factors shape the yield curve, level of real yields, strength of the currency, access to dollar funding, tightness of credit markets or not, credit spreads, I beg your pardon. When you throw”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“These various factors that speak to financial conditions. And we look at them in these Z-Score terms, i.e. where they are relative to trend. And we threw them together for kind of four geographical blocks. And that's the chart that you see before you now, basically, which just measures that credit impulse. So if you're north of the line, credit conditions are getting easier if relative to trend. If you're south of the line, then credit conditions are tightening relative to long-term trend. And you can see we've had easy conditions in credit terms for much of the post March 20 lockdown period, but started to roll over and roll over aggressively in the last few months. So that's just basically saying, again, the point we've made a couple of times in.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“on both the speed of rate hikes or rate cuts and what's known as the terminal rate i.e. let's say we're about to start a rate hiking cycle in the US what the terminal rate is it going to will the Fed stop at 1% 2% 3% that's the terminal rate and the the calendar spreads capture the speed of which markets discount we're going to get to that terminal rate those cross currency basis FOPs we talked about earlier they're really a measure of liquidity so we threw them in there as well other factors that we have in our models are the level of real yields you've seen a couple of times the shape of the yield curve the 530 yield curve was a critical variable you know you'll tend to see yield curve steepen in reflationary good times flatten when there's deflation and recession fears ahead and then obviously the relative strength or weakness of a currency again will be thrown into the mix all we did was we took all”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Bitcoin likes to thrill. Yeah, absolutely. Bitcoin is a unique animal, as we know. So that's slightly different. But yes, as a rule of thumb, most risky assets, equities, emerging markets want easy credit rather than tight. So what we've done here is we've literally just lumped together a bunch of our inputs and they include credit spreads, both investment grade and high yield. We've talked about proxies already in the context of QE. That's included here. The proxy we use for central bank rate expectations, policy rates is calumner spreads. Now for those who aren't familiar with that as a phrase, basically every currency's money market has a strip going out from spot prices all the way up to kind of two, three years maturity. And as that strip kind of flattens or steepens is really the market best.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“tighter financial conditions than risky assets will suffer. Risky assets generally like it when there's easy money and easy credit around.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Most investors, or certainly institutional investors, tend to look at markets as well, whether an asset is rich or cheap relative to trend. So we have all these macro factors and their movements in the Z score terms. And just basically we've bunched together a group of them to create a credit impulse. Now, the strict definition of a credit impulse really is kind of the availability of credit as a percentage of GDP. Is it going up? So conditions are getting easier, or is it going down? Credit is tightening. It's similar to those lots of FCIs, financial conditions indicators. And again, people will throw different variables into these models and there'll be slight differences in methodology. But what they're all trying to do is basically give you a sense of whether credit conditions are easing or tightening. And obviously the intuitive investment conclusion holds that if you”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so this is just, we're kind of at the background here. It's just that we're conscious that when we speak to macro people, they follow these moves and macro factors minute by minute so they don't really need much help. But for the equity long short crowd and maybe for other people who are just a bit time poor and don't have a big Bloomberg screen in front of them 24-7, you can't keep up with all the various shifts in macro variables. So we have all these macro factors as inputs to our model. We look at them all in Z-score terms. Now again, without getting into too much detail, all that basically means is we're looking at any time series relative to a long term trend. So we're just saying where is in the case of say the S&P model, we're looking at US growth relative to long term trend. US inflation expectations relative to long-term trend. And we think that's how.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, absolutely. And I think that's one of probably the attractions of Bitcoin and the crypto space in general is it can be many things to many people, can't it? It's in the eye of the beholder. Some people like it as a risky asset play. Some people like it as a safe haven play. Some people as an inflation hedge. For some people, it's a more fundamental challenge to the entire financial ecosystem and a way to upset the Apple cart and try and establish a new order. It's pretty unique in that sense. It has so many different attributes.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, wow, I didn't even notice that at the bottom. But as you did note, it is positively correlated, or I should say it is the big driver is the 530 swap in orange at the top, meaning that as the yield curve is steepening as essentially as growth is going on as people are flooding into risky assets, Bitcoin does well. So I'm really grateful that I met you, Hugh, and that I encountered QI because to be honest, this is the first time that I myself encountered evidence that the Bitcoin is a negatively correlated asset and that it's not a risk asset. In other words, like when the world is burning, Bitcoin is going to go up. I found evidence in your work and in your analysis and your data that that's not true. And I actually, on a much more basic level, just running correlations between Bitcoin and the S&P 500, I know what you do is well beyond correlations, but Bitcoin is positively correlated to risk assets.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, absolutely. And obviously, you know, some people would have listened to my last answer and said, well, I'm sure that Bitcoin just trades a risky asset these days. How could you possibly ever deem it to be a safe haven play? And a lot of people would disagree with that. But the reality is at this point this is pure math. This is not my interpretation. This is purely saying this is our long-term model. This is the last 12 months rolling look back period that the independent pattern between the movement in cross-currency basis swaps euro dollars and dollar yen and the spot price of Bitcoin is a negative relationship. So tighter dollar liquidity has been consistent with Bitcoin rallying. But yeah, so that's dollar liquidity specifically, dollar trade weighted, the actual kind of strength or weakness of the currency is another variable in capturing another factor really at work. So you've got a really quite”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“That's really interesting because at the same time, it benefits from a weaker dollar, as you can see that the third most negative macro driver is the US trade weighted index. So Bitcoin benefits when the dollar is going down, but it also benefits when supply of liquidity is tight, which generally once the supply of dollars is tight, the dollar tends to go up. So it's very, as you say, it's a macro is a complicated beast.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Bitcoin goes up to negative relationship here means that tighter dollar liquidity is actually positive for Bitcoin. So maybe that might speak to those people who believe that Bitcoin can act as a safe haven asset as well, that in times of stress, Bitcoin has value as a flight to quality trade to a degree. So the way to think about it is the way these cross-currency basis markets work is that if it's a positive number and if that market is rising, that's easier dollar liquidity. If it's negative, if it's inverted, that means that dollar funding is harder to come by. So if it's getting more negative and it's a negative relationship with the asset price, that means that tight dollar liquidity is beneficial to the asset price on question. And that's what you see here. Bitcoin benefits from tougher dollar liquidity. on current patent.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“So when a euro one year basis swap is at negative 1.93, what does that mean? Does that mean that when dollars are harder for European banks to secure, the price of Bitcoin goes up or down? What does that mean?”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“What you've just described, which is the ability of non US institutions to access dollar funding. So the dollar is the reserve currency of the world. It's the market that really kind of keeps the glues together the whole financial system. If non-US entities can't get access to dollars, then you know something's going wrong. The cross-currency basis swaps at the broader level are giving you an ability to track Japanese institutions access to dollars, European access to dollars, etc.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, exactly. So, this is another proxy like we talked about earlier where we use interest rate volatility to capture market expectations around QE and tapering. So during the financial crisis and in a few episodes since, you've seen funding markets start to creak and creak really badly. Funding markets are one of those kind of classic things. And most of the time you don't hear about them. When you do hear about them, it's time to start worrying because things are going wrong in a very boring part of the financial system, the plumbing that you don't really want to be reading about. So we thought it was important to have a variable that captures dollar liquidity. Now there's different ways you can do this. Other people might use different metrics, different money market instruments. We thought cross currency basis swaps, which are pretty niche, but what they capture is exactly.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Wow. And when I'm looking at the top drivers for Bitcoin, on the left, I'm seeing the Euro one-year basis swap as very negative. That's in green. And then also in green as number four is the Japan, Japanese yen one-year basis swap. What does that mean? Does it represent the foreign bank's ability to secure dollars? What is a negative correlation mean for Bitcoin?”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Inflation expectations and this time we've taken a global look. We've got Japanese inflation expectations, US inflation expectations, and there's European inflation expectations in there as well. They just don't feature as a top 10 driver. But they're all positive. So higher inflation means Bitcoin goes up. So that would speak to the narrative that Bitcoin is indeed a better inflation hedge at the moment. And if we go to the gold model, what we've seen is bizarrely that the inflation sensitivity is, well, it's out of regime. So as I say, there's a health warning when the model is not in regime. But the sensitivities gold is negligible and hasn't even been negative. So as things stand, the current pattern points to Bitcoin being the better inflation hedge.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so on the Bitcoin one, yes, our empirical framework does actually back that up. The first thing we think, I mean, our Bitcoin model, well, all our models, we think about the world via macro factors. Now, we'd be the first to admit that Elon Musk tweeting something can have as much of an impact, if not more of an impact, on various crypto currencies than growth or inflation or financial conditions. So you have to bear in mind that the quant insight model for crypto is looking at things exclusively via the macro lens as opposed to some of the more technical aspects, we call them. That said, you can see at the moment that macro is doing a good job of explaining price action in Bitcoin. We have 81% model confidence. And when we go down to the chart that hopefully we're all now familiar with, you can see that”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“The narrative that I encounter so often is that Bitcoin is an inflation hedge, and that's a version of the older truism, that gold is an inflation hedge. To what degree do these things hold out? Does Bitcoin benefit from a rise in CPI or a rise in inflation expectations, I should say? And to what degree does gold trade with real rates, as we've heard for so long?”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely no, agree 100%. It is a fixing come instrument. And as we all know that inflation is inherently of a very, very bad thing for anything that pays a fixed coupon. So you'd expect it to have a negative relationship with inflation. If inflation goes up, that's bad for the price of investment grade credit. So that does make it complete sense. And again, this is our key point, that the risk of being a broken record, for which I apologize, Jack, but this is the interconnectivity that macro investors have to cope with all the time. You have a myriad of different factors that are all moving around independently themselves and all will have an impact on the asset price. So how do you net all that out?”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“That makes sense because if you think of sort of the risk curve, there's treasuries here. And then next in the chain is investment grade credit. When the Fed buys a bond from a primary dealer bank, then buys that from a pension fund, let's say. And then the pension fund is left with cash, and then they use that to go out the risk curve. What's next? Investment grade credit. So the fact that the Fed would be withdrawing their support and reducing the amount of liquidity that they're supplying to the market every month, it makes sense that investment grade credit is also sensitive to that. And yet, Hugh, I'm looking at the LQD. It's within three or four percent of all time highs. I remember the big retreat that happened was actually between December and March of 2020 to 2021. And that was actually not over tightening fears. That was over inflation. Was that correct? And to what degree is LQD sensitive to inflation? Because after all, it is a...”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“just shy of a third of model explanatory power comes from our quantitative tightening expectations driver, and if we go down to look at the histogram, you can see they're all negative, whether it's Bank of England, ECB or Fed QE expectations, QT expectations, they're all negative, i.e. lower rate vol, ongoing QE, it's consistent with the LQD ETF going higher. So that's basically saying that investment grade credit needs the Fed to maintain quantitative easing. Now, given obviously expectations for this week are all about the Fed starting tapering, if not this month, then next month, but least announcing the start of the program with a view to it all being finished by the middle of next year, then that's a potential headwind for US investment grade credit that credit investors need to take into account.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, absolutely. So the one that we're watching probably most closely at the moment would be US investment grade credit. So we had that model either in raw form, i.e. the CDX spread, or we have it via the ETF, which is probably the more accessible way that most clients trade it. So if we look at our model for LQD, which is just the iShares ETF that tracks US investment grade credit, if we go down to the drivers, you can see from the pie chart that by far the biggest segment, and by the way, the way to think about this pie chart really is in terms of attribution. So we're saying we can explain 80% of the variance in US investment grade credit at the moment. Of that 80%, which fact there is doing most of the driving. That's what the pie chart is showing you.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so we did massive really we have several models. We have the Nasdaq, we've got the Qs as an ETF, the Vanguard growth ETF, Sox, the semiconductor ETF. We have a whole range of different models. And back in January, they all showed the same pattern. And that was that quantitative tightening expectations became the dominant driver and the sensitivity went up a lot and it was a negative relationship. They were incredibly reliant on ongoing QV.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Belly of the curve, exactly that. So all we do is we take swapsen vog for an intermediate maturity belly of the curve, and we're saying that when vol is low, that's consistent with the marketing ongoing quantitative easing. And when you see vol rise, that's because actually markets are worried about quantitative tightening. So that's exactly what the taper tantrum of 2013 was about. And that's really what we saw again in the first quarter of this year, whether you want to call it a taper tantrum or a data tantrum. That was the same kind of factor. So that's how we use a proxy variable. So it's not official data from the Fed balance sheet, but the big advantages it has is the interest rate volatility market moves every day. So we're getting kind of a real-time gauge.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“But what we've witnessed is since QE has come along, that has suppressed volatility across all asset classes, not just bonds but equities everywhere, financial repression means lower vol across the entire capital market structure. But the assets that they're buying are fixed income assets, their government bonds, their mortgage bonds, their credit bonds, etc. And it varies different maturities, but on average it's the intermediate sector, intermediate duration asset that they're buying. By intermediate, we mean kind of like, you know, five to seven years typically.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely. So there is data, hard data from the Fed, the ECB, the Bank of England about their asset purchases where they actually give you details on the size of their balance sheet and how many guveys or mortgages or credit bonds they bought in the last month. But that data comes out with a significant lag. It's not very timely, so it doesn't help people in a kind of real-time way. So what QI sometimes does is use proxy factors. And as you say, what we use for QT QE expectations, and yes, they are mirror opposites of each other, is interest rate volatility. Now, perhaps the simplest way to think about this is simply that what we've experienced since 2008, 2009, and because if you remember before that, QE wasn't a policy tool that the Fed or any other central bank employed. So it's really only since the Great Financial Crisis that this has become a weapon in their”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“So bank stocks like steeper yield curves give us a little more detail on the growth stock's sensitivity to quantitative easing expectation and is QE quantitative easing expectations the same as Q, just the inverse of QT or are they measured differently? Also, I know you click on the factor sets at quant insight, it says that it's measured via swap channel without going way over our heads. Could you just give us a little inkling about what that indicates and why it can be a good predictor of sensitivity?”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Chinese growth again commodities, inflation expectations, so it wants to see a reflationary environment and a steeper yield curve and all else equal, that is positive for financials. Very modestly about two and a half percent expensive on our modern.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“To a taper tantrum. If you started to see quantitative tightening come onto the table instead of on going QE, that was going to be most negative for the tech sector. Now again, that's probably an intuitive belief of most people anyway, but it's nice to see it vindicated in hard stats. So to the first part, yes, growth is still trading on our metrics like it wants lower rates. And to the second part of your question, yes, XLF in regime at the moment, 74% model confidence. It actually briefly fell out a regime. That's what this chart here shows you here. We had a small dip in model confidence, but we're back in a macro environment now. One of the main drivers of US financials. And on the positive, you can see, as you'd expect, a steeper curve. Most people will have in their mind a steeper yield curve is a positive for banks because of net interest margins. Borough, lend long, simple.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“If you're a day trader all the way up to the most sophisticated investor in a big blue chipper buy-side firm, what everyone is trying to do is predict price. And our point is purely that if you're going to be predicting price, you need to understand what's driving the price in the first place. You need to understand what's driving assets right here, right now, and then that will give you a better chance of predicting forward price. But anyway, the reason I raise all that is because we saw a pronounced change in factor leadership for US tech stocks looking at NASDAQ, looking at XLK. Doesn't matter which expression you had on. All of a sudden sensitivity to quantitative easing expectations stepped up dramatically and it became the dominant driver of all our growth models. And what that was saying was that these guys were the most vulnerable”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“And as macro variables have stopped explaining some of the moves in interest rate markets, that's why our model confidence number drops and why it's maybe positioning or sentiment or flows that are drived in those models instead. But the other kind of regime shift that we see is where leadership changes. Now, equity guys will be very familiar with this because they're used to look at kind of growth versus value versus momentum and kind of shifts between the various smart beta factors. It's the same in macro space. You can be, let's stick with the fixed income example. You might be bond bullish because you're a growth bear, because you're going to get low growth. That's going to see easier monetary policy. That's going to mean a lower rate environment. But sometimes bonds will rally not because of the growth situation, but because of a flight to quality dynamic. It's all a safe haven play instead. The bottom line is everyone doesn't matter.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Exactly, but what you have had in the bond market over the last couple of weeks obviously is a massive repricing in terms of what money markets are expecting from global central banks, not just the Fed, but the Bank of Canada, the RBA, the Bank of England. And I think what you've seen is a massive positional flush. The consensus trade for 2021 has been a steeper curve. Any bond market participant will tell you that if a central bank is describing inflation as transitory and is placing policy behind the inflation curve, then all else equal, that's going to result in a steeper curve. And that's the trade that the entire macro fixed income rates world would have had on and would have done very well out of, certainly in the first three months of this year, and probably still been running that risk for a large part of the balance of the year. And obviously October has been ugly. And I think you've seen a lot of pain and probably a lot of position capitulation.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Yet no, again, this is one that I think is a fair example. In fact, just to, before we get into US financials, we saw, I've been talking about regime shifts, regime shifts can happen kind of in two broad ways. One is that an asset just falls out of a macro regime. It's no longer driven by macro variables. Now, if you're a bottom-up equity guy earning season at the moment might be a good example, it becomes more about company fundamentals and idiosyncratic risks, so you don't really care about kind of bottom-down macro stuff. You're going to be looking at the minutiae of company earnings. There'll be other times when it might be a big positioning or a big sentiment swing. A lot of our interest rate models at the moment, about 50% crudely of our interest rate models are out of macro regimes at the moment. And fixed income is typically a macro animal.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Shu another shiboleth that I've encountered is that inflation is bad for all stocks but particularly growth stocks, and that when there's bad inflation, bond yield will rise and that will increase the discount rate and growth stocks most of their income is in the future via discounted cash flow model. So the ERGO inflation really takes the edge out of gross stocks, but it can be good for value stocks and in particular financial stocks like bank stocks or the ETF like XLF. When you put that through your model, to what degree does that truism hold true?”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Of different moving parts and the nature of the relationship between all those moving parts isn't static. It's fluid. So at any one point in time, you've got to keep an eye on what the macro factors are doing and how those macro factors are impacting your asset price. And that will vary model by model, security by security over time. So it's a tricky process, but that's what the framework here is trying to help people with, is trying to make it easier to keep an eye on these sudden shifts like you saw there.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, exactly. I mean, I think the kind of dollar smile theory has become more, because I've been around for ages, but it's become more prevalent in the last year or so. The dollar does well at the two extremes of the curve when things are really bad and it's kind of its safe haven status in risk off times is not a beneficial. And then obviously when the US is growing great guns and outperforming everything, it tends to perform as well. The sweet spot for other currencies versus the dollar is in the middle part of that kind of curve. What we are doing at Quant Inside is really that obviously we've got big moves in macro factors, the dollar itself is obviously rallying, is coming off at any bond point in time. Global growth is ebbing or increasing over time as well. And then you've got all these asset prices moving around. And that's really the point. Macro is an incredibly complex beast.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“And when I was looking at the chart, I thought there's a huge increase in that sensitivity, or I should say it went from a very low negative level to a less negative level. And I think that probably has to do with the switch in the dollar index because from let's say, I don't know, May of 2020 to January 2020, commodity prices were going up alongside a dollar. And actually, I think the commodities prices went up, you know. Trying to take a pulse of the economy and asset prices.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“These relationships over time that is one of the kind of main use cases that people use. I'll give you another very good example very quickly is we just talked about the Fed policy response last March and what the QI model for the S&P 500 showed at that point was if you did this same chart for S&P 500 sensitivity to credit spreads, US equity is always want tighter credit spreads. That's again an intuitive relationship but sensitivity just ballooned and the need for the Fed to keep buying credit and keep a lid on credit spreads became the main game in town and that was the dominant driver of the US equity regime throughout the middle part of last year.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“And all we're trying to do really is put a quantitative framework on that to try and help people. So the short answer to your question is these relationships between whatever asset you're trading and macro factors ebb and flow over time and all we're doing is measuring the sensitivity of any asset to that. So to come back to this specific example in the case of doctor Copper, what we've got here is on the vertical y axis here is just a percentage move in copper for a one standard deviation move in the factor on this occasion the dollar trade weighted. So you can see if the dollar trade weighted is bumped up by one standard deviation back at the start of the year in January this year that was consistent with copper going down by two percent all else equal and as you point out early in the summer around mid June time that sensitivity had waned to affectively zero. So it's the ability to track.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Vs. Wall Street. Now, how could US equities be rallying when so many people had lost their jobs? And the economy was clearly struggling. Then by the end of last year, it came to the election. And for really the whole decade since the Great Financial Crisis, all the response has fallen on monetary policy and on what the work the Fed has done and what change when the Democrats won in November and particularly when they won Georgia in January of this year was we saw more fiscal stimulus and that prompted the great kind of reflation rotation trade in equity space. Now they're all regimes we've moved from massive economic headwind, the deflationary shock of COVID to a huge policy stimulus as a result, to a main street versus Wall Street narrative, to a transition from monetary policy to fiscal policy. These are all regime shifts which people in macro space are very familiar with thinking about.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, absolutely. And I think as you say, it's just that these relationships ebb and flow. And if you think about the way we think about markets, and I think most macro investors think about markets, is in the context of regimes. No, you just think about the last two years. U.S. equities were at the highs in February last year and COVID at that point was deemed to be mainly an Asian phenomenon. It was looked at as like another SARS type episode. Then obviously we had very severe lockdowns, severe sell-off and an economic deflationary hit as we've seen in a long, long time. expanded the scope of QE. And that saw an equally quick very V-shaped recovery come back. Thereafter you had this whole kind of narrative of mainstream.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Hugh, if you were to scroll up to that pie chart and click on DMFX to get the US dollar traded weighted index, it's a point that you mentioned earlier that the sensitivity of assets to macro variables such as the dollar is not fixed in time. It's static. So I have this sensitivity of copper to the USDTWI trade weight index over time and it's gyrated a ton and it actually turned positive briefly in May and June. How do you explain that?”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“By the quant picture. So you've got dollar trade weighted as the biggest single negative driver. And again, you've got a pretty highly intuitive set of positive drivers, stronger Chinese growth, stronger commodity complex away from copper, so iron ore and energy prices down here. And then a general reflationary environment because it's not just Chinese growth, but really it's a broader global growth dynamic with Chinese apologies, Japanese and European tracking GDP as well. And the fact that you've got rising both nominal yields and real yields. So again, this is another kind of pretty intuitive and self-explanatory model on this occasion.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so yes, it's always nice when we see a outcome that is intuitive, but obviously that's one of the things that we try to do is to challenge people's mindset to think about whether existing relationships hold or whether things have changed. But here's our copper model. So we have fair value on copper at 446 at the moment. Again, we're in a macro regime, 77% model confidence. This, by the way, for the statistically minded viewers is a simple R squared measure. So it's just goodness of fit. So in the context of quant insight, all it's doing is saying, how good a job are these various macro factors doing in terms of explaining the variance on this occasion copper? Let's scoop down to the bottom and we can see the same histogram. And on this occasion, again, we're getting the kind of widely held perception out there in the market vindicated.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and I'm seeing a lot of other truisms I've heard confirm, such as emerging markets have a lot of commodity exposure. So when the price of iron ore goes up, the emerging market index goes up, the 530s swaps, that's positively correlated. So a steeper yield curve is good for emerging markets. China GDP is good. They import a lot of commodities. That's on the right side. Likewise on the left side, an increase in the China five-year credit default swap, Chinese credit stress, an increase in that is negatively correlated with the index. That makes a lot of sense. So so far, Hugh, I'm seeing the truisms about the dollar in emerging markets confirmed. Now, how about rising dollar as a threat to commodities, say oil and copper? To what degree is that true?”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“It does absolutely at the moment it's the biggest single negative driver so the truism in the market that you need a weaker dollar for emerging market equities to perform is borne out by the independent relationship that we see here as driven by the quantitative picture as opposed to this kind of hearsay or whatever phrase you want to use.”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT
“So on the left is negative drivers. We have the US trade weighted index. Perhaps some viewers will be familiar with that as the dollar index or the DXY. Well, actually, excuse me, the trade weighted index is that that's the dollar against sort of every single basket of currency, right?”
2021-11-05 · Forward Guidance · Deconstructing Macro Narratives About Inflation, Bonds, and Bitcoin | Huw Roberts, Quant Insight · IDENTIFIED FROM THE TRANSCRIPT