YouSaid · the spoken record

Richard Bookstaber

lines on the record: 31
first: 2021-12-06
most recent: 2021-12-06
sittings or episodes: 1
sources: podcast

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“Into the markets, it's very recently some of the changes in the way people interact with the markets, and we haven't even seen the start of that playing out yet. I think that can be the next level of concern that we'll have because that would be a structural systemic change in the market structure.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“And I say, in a sense, sort of foolhardiness in terms of an investment perspective, but it's kind of an indication of how the markets are evolving. A lot of information, some of it not good information, the ability to trade for apparently no cost on your phone, the ability to make trades and bite-sized sort of dinner and a movie size where it's really inconsequential. All these things are moving the market in a direction where it starts to look a little more like what we've seen in social media. And if you don't like what social media has done to common discourse, you're probably not going to like what that might lead to in terms of the markets. But that's, so it's not just the move that we've had from banks. And institutions towards retail. And it's not just the increased embrace of retail.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“But you know, that being said, we've really moved towards the whole ethos away from defined benefit to defined contribution. That's true with pensions, and that's led people to be much more aware of the markets. The technology is now there so that they can monitor the markets, transact in the markets very, very easily for some people. I think the markets have become a source of entertainment and an extension of their social media presence. So this is sort of the world that we're in now. And I actually.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, if you think that you're behind and have to take risk, if you're in equities already in this market, you've got a problem. It's hard to envision a time where we've seen this sort of appreciation that we've had over the last number of years. So people who want to win even bigger, they may as well buy lottery tickets. We really are in an unusual time in terms of the opportunities that had been laid before us. And I think right now, you know, people get this exuberance and feel like, hey, I've made this much money. Let's really keep the party going.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Will you suddenly have expenses where you have to sell and de-risk on that basis? The complication as you get to the individuals, the level of complication in terms of risk is greater. The models that you need to use are different from what you have for institutions. So the move that we're seeing from the banks and the broker dealers and the larger institutions into retail not only is more difficult to control It also creates a different type of a risk dynamic.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Different sort of management than when you're talking about hedge funds or banks or broker dealers. And actually that's the center of what I've been doing at Fabric. If you're an individual, you have risks coming from two sides. You have the risk of your portfolio and the risk of your portfolio, by the way, has to be looked at over the course of years, not over the course of the next month. So you have a much longer timeframe. But you also have risk coming from your own decisions and your own need for assets. So you have to manage not just the risk in the market and not just look at that risk as it progresses longer term. You have to do that in the context of how you would react based on that. Would you suddenly reduce your risk tolerance if the market goes down? And on that basis, sell even more.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I guess the horses are out of the barn. And it's much harder to control what goes on in the market than, of course, what goes on in the banks. So this is the point I'm making that the risk now resides in the markets with institutions and much more than in the past with retail investors. That's a little harder to control than when it's within the regulatory system. So I think we sort of have little to do from a regulation standpoint than sort of watch things play out. You know, we do have controls, obviously, on how much leverage people can hold, but that's the main tool that's available. When you get to retail, the risks also are quite different and require”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“In REITs, people think now that rates of 2 and 3 percent are the norm. This is where life is supposed to be. In the early 1980s, I was building a house and I got a construction loan of 21%. I got a mortgage of 13.5%. In the mid-1980s, I was at Morgan Stanley, and one of the traders did a print when Treasuries got to 8% because the view is, ah, we're finally back to normal. And he wanted that to sort of memorialize that event. So rates can go up. Rates can be 5%. They can be 7% or 8%. That is sort of to many of our minds distant history. We sort of think that where we stand now in this bull market is It, but it may not be it, and we don't need rate scope to 8% for things to really be difficult for people who think they're in safe assets.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Is an average return inequities of around 7%. That's the actuarial rate that's assumed by pension funds, 7% average annual return. So if you're flat for 10 or 12 or 13 years, you're not really flat. You're down about 50% from where your expectations reasonably should have been. So when we look at what can occur, we need to sort of look at situations beyond 2009 on where of course we've had this stupendous run-up. And with rates, it's the same story. We've had, you know, as you pointed out this,”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“If you look from 1968 to 1982, if you were standing in 1982, you were in the same place in terms of your portfolio as you were in 1968. You know, we talk about Japan having lost decade. That was more than a lost decade for investors. If you look from 2000 to 2013, same story. You had a period where in 2013 you were in the same place that you were in 2000. There can be periods of a decade or more where things are flat. And if you're a longer-term investor, if you have a time frame of 10 or 20 or 25 years, that's a big problem because if you're saving for retirement, if you've got a portfolio with the idea of liquidating retirement, your reasonable expectation”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Is one of the things I think is an issue in the markets that people tend to be short sighted. They don't look at history with the broader scope. If you're a hedge fund or a broker-dealer, that's fine because you're going in and out in your timeframe, your perspective is daily or monthly. But if you're an individual or pension fund, if you're an asset owner, you have to be concerned about the nature of the market over decades. If you have that view, it's worthwhile to go back even to the 1970s to see what can happen.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“And individuals who are caught up and exposed in the market, it's really irrational exuberance type of a risk as opposed to fundamental structural risk within the banking and guts of the financial system. Cryptocurrency is a great example of that. It's on the edge. It itself is not, in my mind, systemic or sufficient to really trigger something for the markets broadly based, but what you see with crypto is just a dramatization of what is happening in the markets overall. We have a lot of speculative activity and we don't have a lot of people who are in a position of supplying liquidity in the face of people suddenly either needing to exit the market. Market or wanting to exit it.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Think banks are out of the game right now as we look forward towards risk. They've been, I wouldn't say neutered, but their ability to take risk or to be a source of resolving risk is much lower now than before. We talked about the restrictions in terms of market making. And that's proprietary trading on the client side. They also don't have internal proprietary trading for their own book. They have very tight leverage constraints and monitoring in terms of what they can do there. So I don't think banks can be part of the solution. I also don't think banks will be part of the problem. If we're looking at where the problem will come, I think it's, you know, we see the enemy and it is us. I think it's the institutions reach.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Banks short term lending. And as you point out, bonds that were supposed to be high quality actually weren't because of some of the magic between the packaging of corporate bonds and the rating agencies and the way that they rated them. That's not going to happen again. I would not really go back to 2008 as the type for what sort of issue we would have if I were going to pick an analog and no analog really exists for the markets because we change, we innovate, we grow with experience, I'd more pick 2000 as an example.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“You not only get very good returns, you'll get negative returns. Unless you are holding bonds that match your target, that where you have duration matching between assets and liabilities, even treasuries can drop substantially as rates increase. You get your principal back, but if you're needing to liquidate, you're going to find marked-to-market losses. And of course, if you're in high yield bonds, it's that times 10. We see periods where the spread with high yield can be 10% and up. You know, it's not just that it won't make the return you might have hoped. It's actually a risky asset in the face of higher rates and inflation means higher nominal rates. In terms of AAAs, 2008 is not a good example for just about anything other than things can go down. We had a crisis that hit at the heart of the financial system.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Move away from high-risk assets to lower risk assets, and the low-risk asset that makes most sense is something like cash, where I would define for investment purposes. I would define cash as, say, being anything that has a duration of less than two or three years because something with low duration is not going to be affected in a meaningful way should rates go up.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Another thing to realize is that what you think is safe may not be so safe. Treasuries, longer treasuries, say 10 year plus, you know, high duration treasuries are not really safe in some of these scenarios, especially the inflation scenario. And that would suggest that if you are going to take action to reduce exposure, you're better off moving it towards cash than simply moving it towards bonds. Certainly better than moving it towards high yield bonds, which also have a spread that's near a historic low. So step one would be diversify in a true sense, which means reducing the overweight that's implicit that you have in technology. The second is if you are willing to recognize that risk is high and you want to maintain some notion of a forward-looking volatility target,”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, there's no free lunch, right? So if you say, I'm concerned, I think volatility or potential volatility, potential risk in the market is very high. If you have a volatility target, you only want to have a certain value at risk. That means you're going to take your positions down. And that is not pleasant if the markets continue to do what they're doing. But there are some easier methods. One is diversification. which reduces risk people think they're diversified if they're holding a broad-based portfolio like the S&P 500. But as I mentioned, they're not really diversified. They actually have a big bet on technology. So one thing that you can do is take action to increase diversification, which means moving away from a capweighted index like the S&P 500.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Perhaps because treasuries, which people regard as safe assets, start to drop as rates go up. And that begins liquidation. All of these are stresses that could be the start of the avalanche.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“National Exuberance, people justified the crazy PE ratios by saying, oh, old accounting methods don't make sense anymore. Today they say, oh, rates are very low, so the discounting of future earnings should mean that price earnings go up. I don't think that's a good argument. But in any case, what's out there is plain to be seen. The things that I'm talking about should not be a mystery to anybody. But people aren't reacting to it in terms of adjusting their exposure accordingly. So it could be that people wake up and think, wait a minute, valuations are crazy here. A few people start to sell. That drops the market. It could be that Fed tapering or something even worse than along the spectrum from tapering to recession causes a dislocation to the markets. It could be that inflation causes a problem.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“One of the nice things about systemic risks, risks that really can be material to the overall market is they're sort of plain and open to view. I don't think there's any secret thing lurking that we aren't thinking about. It's just that we aren't thinking. We aren't looking at what's out there in terms of risk and taking it seriously. We have a PE ratio. We have price to sales that's in outer space. Talking about another thing that's either at or above recent history, various measures of price earnings and price to sales are up there and people justify it in various ways during the internet 1999-2000, the period that Greenspan called Iran.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“There was over 25%. And by the way, the 25% is a low estimate because we measure how many stocks are in the technology sector based on their main business. Of course, many companies have technology. Amazon is a case in point. They have cloud computing. And if you do things that way, you get a number where it's close to 40% of the SMP 500 is exposed to technology. By a lot of measures, we've got concentration stocks and we have concentration in one particular sector. That's leverage. And I already spoke about the issue with liquidity. The market making is not going to be there the way that it has been in the past. And the amount of cash that's available to supply in In the event that people need to head out the exit is low, the percent of liquid assets in money market funds is lower than it's been in recent history as well.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“In terms of concentration, you've already made the point the top five stocks in the S&P 500 make up around 20% of the S&P's market cap. Of course, if everything were equally weighted, they'd be 1%. The top 10 stocks are somewhere north of 25% of the total S&P market cap. And, of course, technology is dominant in that area. If you go and look at the exposure to technology in the S&P 500 using a standard measure like the GIX sectors, it's around 25%. That's a level that we've seen at other periods where we've ended up with market crises. For banks, it was over 25% in 2007. For the internet and TMT stocks, technology, telecom and media in 2000,”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“So let me go through one by one the issues in terms of leverage liquidity and concentration. In terms of leverage, margin debt, less free cash balances. Is that a, I'll say an all-time high? The date only goes back so far, but it's higher than even in 2000. And you have households that are more exposed in their liquid assets have more exposure to equities than any time in recent history. And that's not, strictly speaking, leverage, but that's what you might think of as hot money. If things turn south, households are going to realize that they have more risk than they might have thought about and start to liquidate.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Place, but it is a case that's reduced liquidity. And I'd have to say, reduced it in ways that are not really evident day to day because everybody's more than happy to make markets when there's no stress.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“And then Asia, we were losing money with every trade, but we did it anyway because we wanted to defend that franchise because pre-volule, you could make money trading proprietarily on the customer desks. Well, that's not there anymore. And so there's no incentive or certainly a much smaller incentive for a broker dealer to step up to make markets if things are not going well. So yes, I think The Volcker rule has restricted liquidity that market makers would make available in times of distress or crisis. Now, you know, you have to say, well, there's a devil's bargain there because on the other hand, you don't have broker dealers essentially front-running clients. So the balancing act was there. The Volcker Rules put in place.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“When I was at Treasury and the SEC, as you pointed out, I was involved with developing the Volcker Rule. And the big argument that the broker dealers and banks had was this is going to cramp liquidity. And the general sense among the regulators was, oh, come on, you guys. Yeah, you'll figure out some reason to not have this put in place because it does reduce their ability to make money on the customer-facing side, but actually they're right. And I pointed this out, that the incentive will no longer be there with the Volcker rule to be as aggressive in making markets because the profit capabilities are not there. When I was at Solomon in the 1990s and we had the emerging market crisis, actually crises, because he had Mexico.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Fed does not have in its mandate tempering the markets when you're talking about credit markets, you know, high yield markets, when you're talking about ETFs, when you're talking about equities. So I think it would be foolish from a risk standpoint to bet on that and to make decisions thinking that the Fed's going to back things up.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“What the Fed did in 2020 is really breathtaking. They're very aggressive, very quick on the trigger, and they really save the markets from a disaster. A lot of the ETFs were failing. Nobody could do the arbitrage to keep them in line with the underlying stocks. Treasuries, there's one day that the Treasury market traded $250 million. I mean, this is the most liquid market in the world and it basically was shut down. So what the Fed did then was I think one of the kind because the situation was one of a kind. And they did a lot to pull the market from the abyss. But there's two questions. Would they have the will to do it if what we have is simply a replay of, say, 2000s? I use 2000s as a better example than 2008. And do they have the bullets available to do it? I mean, typically the...”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Which is also high by a lot of measures right now is sort of the flammability of the space, how quickly can we get out? So we're in a situation now where there's a lot of crowding, a lot of concentration, where although we can't observe it day to day, the liquidity that will be available if people start to head to the exits is low. And there are a lot of people who are going to have to head to the exits because they're either leveraged or they're out ahead of their skis in terms of their exposure to the equity markets.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source
“Crypto and NFTs certainly are canaries in the coal mine. It's not quite like credit default swaps pre-2008 because they're not integral to the market. So that is a telling sign. But the key things that I look at in terms of vulnerability are the extent that the market's levered, the degree of concentration, and how much liquidity we have in the market. Right now it's like we're all partying in a nightclub and having a great time. But there's a lot of us jammed into that space. So if a fire gets started, we're going to have a hard time getting out of the exits. So we're very concentrated. And if we're in a nightclub, those exits are like the liquidity of the market. How quickly can we get out? And leverage.”
2021-12-06 · Odd Lots · Richard Bookstaber on the Big Structural Risk in the Market Right Now · IDENTIFIED FROM THE TRANSCRIPT · source