Richard Bookstaber on the Big Structural Risk in the Market Right Now

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:17)

And I'm Tracy Alloway.

Joe Weisenthal (0:19)

It feels like we're in a little bit of a moment of volatility. I mean, obviously the last 18 or 20 months now have been this sort of extraordinary bull run, full on grab for risk, et cetera. I have no idea whether that's coming to an end or not, but it feels like with the Fed and inflation and stuff, we're at a little bit of a wobble here.

Tracy Alloway (0:40)

Yeah, so we're recording this on the 1st of December. And one of the more interesting things about the past week or so is that the wobble started even before we had the sort of discovery or the big kerfuffle around the new COVID variant Omicron.

And it also started before we had the Fed really start to signal that it was looking to potentially taper and raise interest rates at a faster pace than the market had been anticipating. And this is really interesting to me because I was kind of thinking back to 2007 and the quant crisis that we saw that was sort of the forerunner to the big financial crisis. And I wouldn't want to say that we're about to see something as extreme, but it was pretty striking that in the last week of November, when stocks were still basically at their all time highs, we did have all this stuff that was sort of happening just under the surface. So a lot of factor strategies getting hit. A lot of the stocks, the growth stocks that were beloved by hedge funds seem to be getting hit quite violently.

So that was kind of striking. Something is definitely happening. I'm just not entirely sure what.

Joe Weisenthal (1:59)

No, you flagged that early in a piece in your newsletter pointing out exactly that.

There are all these things going on, particularly this concentration and this idea that there are these very popular investments and maybe the public gets into them and hedge funds get into them and they start to get sold for what might, some might be called like non-economic reasons. And nothing we've seen lately like comes close to say the so-called quant meltdown the year before the financial crisis hit. But it is true that you have these periods where like these winners emerge and the way to win the game is to just double or triple down on a handful of names. And then as soon as there's any elevation of volatility and you have to pull down your risk, you can see some really ugly charts. And there are some really ugly charts of a lot of tech, but not just tech, sort of tech momentum names that have been super popular for a while after over the pandemic period.

Tracy Alloway (2:54)

Yeah, definitely the air getting kicked out of some of those tech tires, I guess. But all of it, I mean, look, all of it comes back to a question that people have been asking for a while now. I mean, basically ever since 2009, which was after the last financial crisis, and that is, are we in a bubble? Are these types of asset valuations unsustainable in one way or another? And secondly, if they are unsustainable, what is gonna be the catalyst that actually ends up popping the bubble? Because so far, we haven't really seen it. I mean, we've seen corrections, but we haven't seen anything on the magnitude of what people have been sort of worried about.

March of 2020, of course, was the big moment for markets, but that reversed amazingly quickly.

Joe Weisenthal (3:44)

Yeah, and I would just add one more thing, which is A, are there bubbles? Is there a lot of speculation, et cetera? But B, is any of the bubble-ish activity, or if there is bubble-ish activity, does any of it pose a threat to financial stability? So it's like we could look at some cryptocurrency and say, look, this is unsustainable, and probably for many of them, they are.

But on the other hand, much of that activity, perhaps someone could argue, is not a threat to financial stability. So these are all big questions that people are always wrestling with, but I think, again, these days, I don't want to over-dramatize the moves we've seen as of now, but once again, some of these questions have come to the fore.

Tracy Alloway (4:26)

It's a good time to ask these questions again, I feel. We have a strong news peg in the form of recent market development, so we're going to seize on it, and we're going to be discussing all these big questions with really the perfect person, right, Joe?