No Way Out
Welcome to the No Way Out podcast where we examine the variety of domains and disciplines behind John R. Boyd’s OODA sketch and why, today, more than ever, it is an imperative to understand Boyd’s axiomatic sketch of how organisms, individuals, teams, corporations, and governments comprehend, shape, and adapt in our VUCA world.
No Way Out
Decoding Market Dynamics: How Relative Sentiment Transforms Investment Strategies with Ray Micaletti
Unlock the secrets of the financial markets with Ray Micaletti, an insightful investment manager, as he reveals the power of relative sentiment in shaping investment strategies. Wondering how institutions consistently outperform retail traders? Ray provides an insider's look at sentiment indicators like the AAII and put-call ratios and even touches on the retail-driven surprises like the GameStop saga. Discover how understanding the dance between institutional and retail sentiments can offer you a strategic edge, challenging the notion that retail traders are always at a disadvantage.
Navigate the complex world of systematic investing as we dissect the synergy between relative sentiment indicators and trend-following strategies. Join us as we explore historical market events and highlight how sentiment has repeatedly proven its mettle in predicting market trends, even when broader signals suggest otherwise. Sharing personal insights into managing ETF strategies, Ray underscores the importance of discipline amidst market volatility, offering a roadmap for integrating multiple data points to enhance market navigation.
In an ever-evolving financial landscape, adaptability is key. Drawing from John Boyd's OODA loop and complexity theory, we delve into the necessity of evolving investment models to stay relevant and effective. Challenging traditional views of market indices and risk, we explore how modern networks empower retail traders to potentially rival institutional giants. From historical lessons like the Barings Bank collapse to the disruptive potential of blockchain, the conversation underscores the need for innovation and self-disruption. Join us for a thought-provoking exploration of the past, present, and future of investing, all while reflecting on personal stories and the intertwining of culture and finance.
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so ray, we're both pittsburgers, we're both from pennsylvania. I'm clad appropriately for tonight's orange bowl and but tonight may not be the orange bowl.
Ponch Rivera:You know that or because of well you need to talk to future moose and go hey mood, future moose, moose, what? What should we talk about? Not current moose? Well, it's true, yeah, yeah, you could talk, we can. By the time this pump the bull.
Mark McGrath:I guess the story is ray ray went to notre dame, like many great Pennsylvanians goes on to Notre Dame to do wonderful things. So by the time this is published, one of us will have eaten their words by then. So it's either the Penn State fan or the Notre Dame fan. So we'll see. And, as I told you, you're the third Princeton alum we've talked to this week and the second Princeton PhD Very elite company that we surround ourselves. Not bad for a Marquette grad and a Colorado grad.
Ponch Rivera:No, I went to the University of Phoenix, okay.
Mark McGrath:So, ray, relative sentiment is your calling card as it comes to investing. We'll cover a lot of areas, but why don't you give us, from a high level, what the hell is relative sentiment?
Ray Micaletti:Sure. A relative sentiment is an investment factor that looks at how institutions are positioned in the market or how they feel about the market relative to how retail traders are positioned in the market, how retail traders feel in sentiment surveys about the market. If you compare those two sentiments the institutional sentiment to the retail sentiment you get what I believe to be more information than if you just looked at each of those in a standalone fashion. There are various measures of sentiment. People are probably familiar with the AAII, the American Association of Individual Investors. There's the National Association of American Investment Managers. You have put-all ratios. You have various other fear and greed that you can see, but they co-mingle both how investors are feeling and how retail is feeling.
Ray Micaletti:However, there's a lot of research academic research, empirical research that shows that institutions tend to have better outcomes in the financial markets than retail traders. So if you can find out how institutions are leading relative to retail traders, you might be able to take advantage of those better opportunities, better outcomes, by aligning yourself with the institutions. Now, real quick. I'd like to say that it's not the case that retail traders always lose in the financial markets. Imagine a casino where the slot machines never paid out. You wouldn't have any customers and there wouldn't be anyone there for the casinos to exploit. So small traders do win occasionally. It keeps them coming back and playing, which allows the institutions to exploit them over the longer term.
Mark McGrath:So I think, Panch, when we look at OODA Loop's sketch, it sounds to me like when we're fusing the institutional sentiment with retail sentiment. Ultimately, we're trying to enhance our orientation such that we can get better implicit guidance and control on what we're observing out in the capital markets.
Ponch Rivera:That's the big thing, and if the comparison is that institutions are going to outperform the retail investors on average, then that doesn't mean that you don't have a lot of weak signals inside of the retail investors that you can leverage. And I think that's what Ray can kind of look at too is when you identify what those weak signals are in the retail community. I can think of a couple of things. Back in the day, about three, four years ago, with GameStop right, they had a little bit of advantage over some of the institutions and I think they broke one of the institutions on that. So it's not a binary thing. However, it probably does lean more towards the institution, and I think in the past we've talked about using sense-making capabilities of the OODA loop and other tools out there to explore how we can get better insights into what's happening across the board. And I'm curious I don't know if you can share this, but how do you collect insights both on the retail side and on the investor side? What is it that you capture?
Ray Micaletti:So there's three particular data sets that I look at. And one is the commitments of traders report, which is a snapshot of how institutional investors, hedge funds and speculators and retail traders are positioned in the various financial markets commodities, currencies, equities, bonds, basically all the futures and options contracts. So that's a weekly snapshot of how those investor classes are positioned. So that's a big input into the measures that I use. Another one is there's a company in Germany called Centix and every week they send an email out to institutional investors and they send an email out to retail investors and they ask them how do you feel about these markets Equities, bonds, currencies, commodities how are you positioned? Do you have more risk on less risk on? How do you feel about the economy six months out? How do you feel about it today?
Ray Micaletti:So it collects all this information and it has an institutional index how the institutions feel about the various markets and how retail feels about various markets. So that's another input that I use. I compare those two indices to each other. And then a third piece of information that I use that isn't strictly relative sentiment, because it's looking at solely what small traders are doing, but it's the daily sentiment index. It's this index that's been published since the 80s by futures trader Jake Bernstein, and he's actually the one that I was paraphrasing when he said that the small trader doesn't lose all the time. He has to win some time to keep them coming back. So that was the wisdom of Jake Bernstein, and so that is a daily measure of how small traders feel about various futures markets.
Mark McGrath:So those three inputs are-. How's that collected? How do they just buy their actual like looking at volume and I don't even know how that's collected.
Ray Micaletti:I imagine Jake might have his methodology listed on his website. I don't know if he does. It could be a proprietary thing, but there's actually a lot of information in that data set, a lot of cross-asset information. So one interesting thing is that if you're looking at equities, some of the more predictive signals for equities is how do retail traders feel about commodities? Because when retail traders are extremely bullish on commodities, that means commodities have generally gone up because retail traders follow price.
Ray Micaletti:Well, if commodities have gone up a lot, such that retail traders are extremely bullish, that's inflationary. So you have these inflationary headwinds that hit stocks. On the other hand, if retail traders are extremely bearish on commodities, it means that commodities have gone down. You might be having growth slowdown or even deflation, and so there's basically, on a zero to 100 scale, that's what the daily sentiment index is for these various futures markets. If you look at certain commodities on that zero to 100 scale, if they're below, say 25, bad for equities. If they're above, say 75, bad for equities. But in that 25 to 75 zone, very good for equities. It's like the sweet.
Ray Micaletti:so you have like Goldilocks versus inflation and deflation.
Ponch Rivera:I'm just curious, is it more of a leading indicator or lagging indicator that? I mean, I'm leaning towards lagging, but if movement in a price is bullish, you know, and I'm a retail investor and I jump on the bandwagon, I would call that lagging. You know, I didn't anticipate that. I'm just kind of jumping in with everybody else. Anticipate that, I'm just kind of jumping in with everybody else. And if you ask me as a retail trader that why are you doing this, I'll be like, well, because everybody else is, and I'm just excited as this momentum moves up, I'm with it. So in my mind that would be a lagging indicator. I just kind of want to see where you stand with that.
Ray Micaletti:Yeah, so it does look over the recent past. So I look over the last few days. It's not like looking back three weeks or anything like that. It's a very short-term indicator but it seems to have predictive power of going out, say, a week, two weeks, et cetera, in terms of how equity markets behave when commodity retail sentiment is in certain orientations.
Ponch Rivera:Now that makes sense. Thank you, I was just kind of thinking through that. Let me ask you this what other indicators are you looking at other than I? Mean? Should a trader be looking at other than just relative sentiment, anything else?
Ray Micaletti:Well, I think that there certainly Relative sentiment. It doesn't end with relative sentiment. I mean people should be looking at an array of indicators, ones that I particularly like from the standpoint of having an idea of what the market might do over the next few days. The next week or so is for equities anyway mean reversion indicators. There are certain short-term mean reversion indicators that are very predictive of what the market will do, especially if relative sentiment is bullish. So the sweet spot is when institutions are bullish on the market relative to retail and the market's oversold. So basically, institutions are buying that dip or they're bullish and the market's dipped. That's usually a good entry signal to get long in the market. Conversely, if the market is overbought but institutions are bearish on the market, that's a good time to possibly lighten up your equity exposure or potentially get short.
Ray Micaletti:Now that's for equities For other asset classes like, for example, gold, silver. Now that's for equities For other asset classes like, for example, gold silver, say, mining stocks. They tend to be more what's called. Instead, they're oversold. You want to be long them once they cross, say, to 50. If it's a zero to 100 indicator, when it crosses 50, that's when you want to get long gold get long, silver et cetera. So you kind of want to follow the trend in certain assets and you kind of want to buck the trend in other assets so long as institutions are still bullish.
Ponch Rivera:I'm wondering what a zero-day options done to this type of thinking. Has it accelerated it or dampened it?
Ray Micaletti:That's a good question.
Ray Micaletti:I do think that with the rise of zero-day I'm not an authority here so I don't claim any expertise, but talking to traders who do say option market making it essentially you increase the options positions and then that increases the amount of hedging that the market makers and the dealers have to do. So for the longest time now we've had very big what's called gamma exposure, which means that when the market goes down the options dealers have to buy and when it goes up they have to sell. So it kind of lends some stability to the market. And then there's occasionally times where we have a negative gamma situation. Where the market goes down the dealers have to sell, so they're exacerbating the fall, and when the market rises they have to buy and it exacerbates the rise. So I guess whenever the zero-day options lead to positive gamma you have a little bit more stability. Whenever it leads to negative gamma, you have a little bit more of an unhinged market that can kind of move a little bit beyond what people expect. But that's a little bit outside of my expertise.
Mark McGrath:Do you do it quantitatively, or do you have an override? Or when you're looking at these indicators, do you just try to take the emotion out of it and mitigate your human factors?
Ray Micaletti:Absolutely. You know the funds that I manage. I manage an ETF in particular. It's all systematic and so I have five different relative sentiment indicators. They all range from zero to 100, and each represents a desired equity allocation. So indicator one might have, it might be, say, 37%, so it wants 37% equity exposure in a portfolio. You average those five indicators. Whatever that is, that's my equity exposure.
Ray Micaletti:If it's like currently right now, at 63%, 63% tends to be on the bullish side when relative sentiment is between 60 and 80. The market's had very good outcomes in the past. For December it was below 50. It was in the mid 40s. That's usually a bad, not so great, outcome for the market. The market was a little bit down in December and small caps got crushed, energy stocks got crushed, so there was a little bit of a bloodbath under the hood. But whatever that average is, that's my equity allocation. And then for the remainder of the portfolio, I also have relative sentiment models for gold, for the dollar, for long duration bonds, for commodities. I apply those and see what the desired allocations are for those other assets and you have this multi-asset portfolio driven by relative sentiment, where you're trying to align yourself based on what the smart money is doing relative to retouchers.
Mark McGrath:Generally, keeping it from your vantage point, keeping it systematic, reduces the things that cause most investors, or many investors, their problems. Absolutely the psychology you talk about going back to the casino right, like that feeling of oh I could win and I got to get in there and I got to get on it, fear of missing out, confirmation bias, recency bias, et cetera, et cetera, et cetera, et cetera.
Ray Micaletti:So we're going into December. December is historically the strongest month of the year. You have the Santa Claus rally. You tend to have a rally in December and we had all this exuberance on the election and my signals were saying you don't want to be too long. Equities they were in the 40s, so I had an underweight to equities and I'm like man, the market's going to be up 3%, 4%, 5% this month. I'm going to miss out because my signals are saying this, but you got to do it and so you know you stick to the signals. And it did turn out that the market actually was down in December, which was somewhat of a surprise. So I would say that these indicators are much more astute about the market than I am personally, like left to my own devices. If I had to guess you know what's going to happen I would systematically underperform these indicators.
Mark McGrath:They've also written about. We've had discussions too about how relative sentiment could be fused with an approach like trend following.
Ray Micaletti:Yes, so trend following is a great strategy. I mean, it's time-tested, it has the nice quality that you will never ride something down to zero, because you always get out once it goes below a certain trend, right. But there are two weaknesses that trend following has, namely and I'm thinking of the canonical trend following, like if you're above the 10-month moving average or below the 10-month moving average, which is the 200-day moving average. Essentially, I'm not saying that's the best example of a trend following strategy or the best-.
Mark McGrath:Yeah, just as a hypothetical example.
Ray Micaletti:Yeah, so, as a hypothetical example, that type of strategy has two weaknesses. One, it stays in the market too long after the market's topped. So the market goes up, it tops and you ride it down until it trips the trend and then you get out. The other weakness that it has is that it stays out of the market too long after the market's bottom, waiting for the market to indicate a positive trend again for you to get back in. So those are the two weaknesses of trend following, and relative sentiment perfectly complements it, in the sense that relative sentiment is institutions versus retail. Retail buys high and sells low. So institutions do the opposite they buy low and sell high.
Ray Micaletti:And if you look, whenever the trend is negative, whenever momentum is negative but institutions are buying the dip, relative to retail, the market has its greatest returns of any time period. It annualizes like 30%, 40% over a five, six, seven, 10-week period, you have these very violent rallies out of the bottoms. Whenever momentum's negative but institutions aren't buying the dip, you have the worst annualized returns for X. Basically, you don't want to catch a falling knife if institutions aren't buying that knife. And I can give you a little example of how I came to realize this. Let's do it.
Ray Micaletti:So back in 2015, I had kind of put together these, some of these not all of them, but a few of these relevant sentiment strategies had developed in 2014. And it was running them in 2015 alongside all kinds of other indicators. Like I had two dozen indicators One was relative sentiment, the other ones were momentum and value. So in September of 2015, the market had just sold off about 10%. All of my indicators were bearish, except for relative sentiment. And so I was bearish because, the way of the evidence, if you have 23 indicators that are bearish and one that's bullish, you're going to be bearish. Right, the market rallied 10% in a straight line over the next few weeks and I thought, oh, that's interesting. Fast forward six months. It was February of 2016. The market had sold off another 10% and all of my indicators were bearish, again except for relative sentiment. The market rallied 10% in a few weeks and then it just kept going and I said, wow, that is interesting. Both times, relative sentiment was bullish when everything else was bearish and the market took off. So I went back and systematically looked historically. When a momentum's negative and relative sentiment is bullish, what happens? You have these incredible equity rounds, and that's when I sort of most other, my interest in most other indices have just are indicators and started looking solely at relative sentiment and building up more relative sentiment indicators. But yes, it very much complements trend following. So the market's had, I think, 9% or 10% corrections since the 90s 10% or more corrections If you look at all of those corrections and you look at where the market was at the peak and what allocations relative sentiment had versus what trend following had. So at the peak, trend following is always 100% invested in equities. Relative sentiment tends to be about 50% invested in equities. At the peak. Then you fast forward to the trough and trend following is out of the market. Relative sentiment is increasing its equity allocation. It went from 50% at the peak to 60% at the trough on average, and then it keeps raising its equity allocation weeks after the bottom, whereas trend following is very slow to get back into the market, even at the market's bottom.
Ray Micaletti:So if you look from peak to trough to recovery, relative sentiment outperforms trend follow. When you look outside of those periods when the market's in a strong uptrend, trend following outperforms relative sentiment. So a combination of the two. What you tend to see is that it has thinner tails and you have less regret in terms of you have a lower tracking error to a perfect foresight strategy where imagine you had a crystal ball and you could see one month forward and you could see which strategy outperforms relative sentiment or trend fall and you switch to that before it happens. So that's the perfect strategy. If you had perfect foresight, a combination of relative sentiment and trend following has a much lower tracking error to that perfect strategy than either trend following or relative sentiment alone.
Ray Micaletti:So there are periods where, if you're just doing relative sentiment, you feel bad because trend following is outperforming and there are periods where, if you're just doing trend following, you feel really bad because trend following is underperforming. But if you do a combination of both, you don't ever feel euphoric but you don't ever feel despondent. It's sort of like just you know you go about your business. You have this nice diversification. They complement each other. You have thinner tails of your distribution.
Mark McGrath:It's you know, it's kind of a sweet spot to be in, as opposed to trading only relative sentiment or only trend fall. Yeah, I mean punch. Sometimes I, when I think of uh, because I'd read race paper and we've had these, he and I've had these discussions I mean, I think cheng chi like I think of john boyd talking about having a. You know you can't have one approach on its own, you have to have two. You have an orthodox and an unorthodox, a conventional and unconventional and I wonder if they complement each other in that way, ponch. The other thing it made me think of was the conversation we just had about strategy from unrestricted warfare. Yeah, by parsing activities, two sets of activities at the Golden.
Ponch Rivera:So let me throw this at you, mark. So when we talk about the direction of travel in a complex environment, you run multiple probes, right? Yeah, so in this case, you can run trend following and relative sentiment as probes to figure out what's going on, and I think that's what Ray did a nice job describing. There are probes and the idea is, in a complex environment, you probe sense, respond. Right, you got to get some confirmation of the direction of travel you're on. Something else is popping to mind In a cockpit, you have multiple instruments that tell you what's happening, right?
Ponch Rivera:Some are more important than others based on context, right?
Ponch Rivera:So you don't want to be looking out inside the cockpit to look at your VSI when you're well you do when you're landing on a carrier, but you don't want that when you're flying low. You want to be looking outside, right, looking outside to avoid running into anything on the horizon. So that context matters. And I think what's popping up in my head, going back to your point about strategy, is and what Ray just said if there was a map, if there's something that gave you an idea where the attractor states are combining multiple approaches, and I think what I'm hearing from Ray is that relative sentiment is going to give you maybe more of a leading indicator of a turn than a trend following. A trend following is going to tell you yeah, you're climbing up a mountain right now or you're climbing higher. It's your VSI, right, your vertical speed indicator. So what's more important to me is knowing where we're going to turn, right. If I have a map and a tractor map, they do not exist right now, as far as I know. We're trying to figure that out.
Mark McGrath:So because we do know several naval aviators that are in capital markets, so could we say you know, trend following is I'm in the groove. Relative sentiment is I got my LSOs down there telling me the different things that they see from their different perspectives. Yeah, that could be it.
Ponch Rivera:But it's like flying a low level or flying, you know, we don't have a map. We're trying to figure out where we're going and create that map while we're flying. A better approach is to have some type of map and the complexity theory says we have attractors, right Attractors, and then we get that from music, we get that from geometry. It doesn't confirm anything. It says we expect something that happened here, but it doesn't say what's going to happen. Right, and I think that's a very important thing when we think about music too. Music we can intuitively know when something's going to change. We just don't know what it is right or when exactly right. Well, you know when it's going to happen, because music has a pattern, but it doesn't mean it's going to change in the way. You don't know which direction it's going to change.
Mark McGrath:It may not change at all.
Ponch Rivera:Right, it just may be the same thing repeated over and over.
Ray Micaletti:What do you think, ray? Well, I think the analogies that you're coming up with, I think they make sense. The one that you mentioned where you kind of have your perspective of people on the ground or kind of giving you a different perspective. That is the case. You know, trend following can be entirely 100% long equities. But if institutions are selling, that rally market tends to stall out, tends to start going sideways and start drifting lower. So, in that sense, when momentum's negative but institutions are bullish, relative to retail market goes up. So in that case, relative sentiment's giving you more information than trend following.
Ray Micaletti:Whenever trend following is positive and bullish and institutions are bearish, market tends to stall out. So, again, sentiment's giving you more information than trend following in those examples, whenever they're both aligned. So relative sentiments bullish, that trend following's bullish, market tends to coast. It tends to have good outcomes, but not the best but good ones. And then, whenever they're both bearish, you tend to have very bad outcomes. So in that case, knowing what relative sentiment is telling you tends to give you more information than what trend following is telling you. But like directional, more, more directional information, more directional information tends to give you more information than what trend following is telling you, but Like directional, more directional information.
Ray Micaletti:More directional information. The one nice thing about trend following is that, again, in an end of the world scenario, you won't ride anything down to zero unless there's a big gap in the market and the gap's low and you don't have a chance to trade out of it. But presuming that's not the case, you won't ride anything down to zero where it is the case that institutions could be wrong and they might be buying a dip and the market could continue to dip, so there is that possibility.
Ponch Rivera:Now. So it's the fusion of these things. I think that's where you're going to have the most success, and I don't do this at the moment. By the way, we do look at gamma quite a bit on the daily side. That doesn't mean that's the way they're going to move when we get to options. We do look at some indicators. I subscribe to some folks that look at price volume and volatility. I use some stochastic from that, but again, that doesn't tell you that there's a turn coming. It just tells you you're heading in a direction and when that wall pops up it's too late. You already hit it right. So these are confirming indicators. So think about this. Multi-sensor integration is what we want in aviation. I want to know how to put many sensors downrange and not just trust one of them, but trust the coherence of them. All right, and that's the key.
Ray Micaletti:So I can give you an example of how that relates to relative sentiment. So, if you flash back to October of 2022, that's when the market bottomed most recently but leading up to the middle of October, everybody was bearish. Goldman Sachs was bearish, ubs was bearish, morgan Stanley Bank of America everyone was bearish, everyone expected an imminent recession and nobody wanted to touch equities, except for institutions who were basically backing up the truck in September and October of 2022. And not only were they getting long equities, they were getting short the dollar. And so if you look not only at equities, how they were positioned in the dollar, how they were positioned in equities, it was giving you the sense that, okay, we're probably going to have a change in trend. The smart money was preparing for a soft landing when everyone thought the world was ending. And then, if you flash forward from October of 22 to July of 2023, on July 29th 2023, the New York Times, wall Street Journal and Financial Times all had articles individually about the soft landing that had emerged that no one was forecasting nine months earlier, except for the smart money. If you look at my Twitter page, the pinned tweet is from October 10th 2022.
Ray Micaletti:And a lot of people were comparing 2022 to 2008. They were saying, oh, this market's going to fall off a cliff, it's going to keep going lower. And I said, well, we're seeing a lot of comparisons to 2008,. But in 2008, institutions were bearish equities and bullish the dollar, whereas now, in 2022, they're bullish equities and bearish the dollar. So let's see what happens. And, sure enough, the dollar fell, equities rallied. And so to your point about you know, seeing the coherence of you know, if it were just equities, well, maybe it would have been a short-term thing, but it was equities and the dollar and what happens. So they were positioning across multiple assets for a soft landing and whether or not we are going to get one or add one or that's another discussion altogether, but it was enough of a perception that eventually seeped into the market to allow the market to rally and for the smart money to profit.
Ponch Rivera:So a lot of retailer investors are fixated on equities and options and, if I understand everything correctly, if you look at the holistic everything in the market as a flow system and you're going back to your point about the dollar maybe the dollar and the yen it's flowing. Money's always flowing in a direction, so if you're getting relative sentiment on the dollar yen, that's an indicator for what could be coming too right.
Ray Micaletti:Absolutely, absolutely. Some of the biggest and most predictive things for equities are not how smart money's positioned in equities directly, it's how they're positioned in crude oil, how they're positioned in nat gas, how they're positioned in the two-year bond, the dollar, the yen, the 30-year bond.
Mark McGrath:Yeah, so it's very much Unpack that right, Because those things have more exposure and more connections to more things right In the broader economy.
Ray Micaletti:Yes so one of the big projects that I'm working on now. So I know that there are a lot of people that have a macro framework where they look at growth and inflation and you have four quadrants. You have positive growth or negative growth and you have inflation is increasing or decreasing. So you have these four quadrants and different assets and sectors do better in different quadrants. So I've always had trouble implementing that myself, because the question is are you looking at rear view at what the growth is? Are you looking at what the forward growth is? How many quarters are you looking forward rear view at what the growth is? Are you looking at what the forward growth is? How many quarters are you looking forward? What inflation are you looking at? What measures?
Ray Micaletti:I've always had trouble implementing that, but what I've had success implementing is looking at growth and inflation relative sentiment. So if you look at commodities and equities, I consider those to be indicative of growth. So if institutions are bullish on equities, bullish on certain commodities, that means that growth is likely increasing. Then I look at inflation or liquidity-related relative sentiment. How are institutions positioned in things that are related to liquidity the dollar, the yen, the two-year bond, et cetera, and the Fed funds, futures, the Euro, dollar and I combine those. If growth relative sentiment's bullish and liquidity relative sentiment is bullish, assets of all stripes tend to do well. If one or both of those is not the case, then assets tend to struggle. Now it just so happens that about 60% of the time you're in that good quadrant and then the other 40% is distributed over the bad quadrants.
Ray Micaletti:But yes, it's not only how the smart money is positioned in a certain asset directly. How are they positioned in other assets. If you're looking at gold, how the smart money is positioned in silver, how they're positioned in the dollar, how they're positioned in the Euro, has a lot of effect on what gold does. How they're positioned in the two-year bond has a lot of effect on what equities do. So there's a lot of cross-asset relationships, positioning relationships that affect these. So this is empirically true. But it's also not some crank in his basement, Ray Micheletti, telling you this. There's actually a paper that was in the Journal of Finance in the year 2000 by some people that were talking about if you want to predict equities, you also have to look at how the institutions are positioned in bonds. And if you want to, if you want to predict, you know, coffee futures, you have to look at how they're positioned in cocoa futures and things of that nature. There's a lot of these. They're called cross cross-edge pressure forces that have an impact on different assets. So it's tunnel vision.
Mark McGrath:It's a broad, holistic thing Like you don't have to know why something's happening, you just have to know, like the why is. Oh, okay, now I know, but it doesn't matter because I can just track the metrics. I don't have to second guess that, because isn't that where, when we start to wonder, well, why did that happen? That's where we're starting to put thinking that doesn't necessarily help with investment outcomes into the scenario.
Ray Micaletti:I agree. So it's nice to have a model that's transparent and you know why it works and when it's not going to work and what its weaknesses are. But by the same token, if you have a pattern that repeats itself and repeats itself and you can demonstrate that, even when adjusted for the number of different strategies that you might have tested, that it's still highly significant, then at some point you kind of just have to trust it if you're a systematic investor, so I'm with you. I'm sort of oriented as opposed to why exactly this is working. So long as it has high statistical significance when adjusted for data snooping and it's robust. You know, like if you change your factor just a little bit it doesn't materially change the result. So if you can change your parameters, you can change your indicator a little bit, and the results are still very robust and it's highly significant, then I think at the end of the day that's typically what matters most.
Mark McGrath:When, if ever, do you apply a subjective judgment in the contrary to what the indicators would say, or you just wouldn't do that?
Ray Micaletti:I really wouldn't do that. When I was sort of cutting my teeth in this industry, I was at Fortress Investment Group and people might be familiar with Mike Novogratz, the Bitcoin investor. He was the hedge fund manager. He was the guy who started Fortress' liquid market hedge fund. He was always saying if you trade models, you got to trade the model. You can't start overriding the model. You just have to trade the model. You just have to trade the model.
Ray Micaletti:Especially if you're part of a larger portfolio. You've been slotted into that portfolio based on the characteristics of your model and when you start overriding those characteristics, then all of a sudden you don't fit into that portfolio any longer. So I've had it drilled into me that you have to follow the model and what have you? But that's also why it's important to have models that aren't total black boxes, because I think the hardest thing about model investing is sticking with a model when it's not working, because you don't know is this going to work again? Why was it working to begin with? Should I shut it down? But if it's a model that's simple, makes sense, transparent, you know why it works, why it doesn't work, what its weaknesses are, then you have the confidence to stick with it when it might not be working.
Ponch Rivera:So From the perspective of the OODA loop, this is great. So I'll throw some complexity through here as well. We have to learn how to separate decisions from outcomes, right, because sometimes your model can be perfect and you're going to have a horrible outcome, and that doesn't mean you need to fix the model. However, within the OODA loop, we have orientation, which is a generative model, meaning it's a learning model. It has to adapt to the external environment. So the idea here is you do want and this also connects to what is known as implicit guidance control you kind of want that muscle memory built in. You want to take the biases out, the heuristics out from the human side, if you can and there's some research that says you don't need to do that you need the intuitive piece, which is built off of experience, by the way. So implicit guidance control is experience. Here you have it. You have a generative model. Some are good. You brought up a model that has four quadrants in it, um, that has policy growth and inflation built into it. That reminds me of a swat analysis, right, swat analysis, a two by two or however you want to look at it. That's not a good way to map the world, but it's a better model than not having one right. It's a better model than than just kind of winging it out there.
Ponch Rivera:The oodle loop tells us, and boyd's work in plexity Theory you need a model of the external world and we also know that all models are wrong. Right, all maps wrong. The map is not the terrain and all that. What's important here is, you know we would take all of these insights to generate a model and test it and operate off of it and try to take the human out of the system the best we can. There will be times when you'll need a judgment call and, like I said, we're looking for coherence in a lot of these signals. If you will, that'll give us a higher probability of a positive trade, meaning bearish or bullish, whichever direction the market's going and how we set our positions up. We want a higher P sub K, a higher probability of kill, right?
Ponch Rivera:So in fighter aviation I have a weapon that comes off the rail and I know it has a piece of cave about 80%, maybe 70%. Sometimes I have to shoot twice, right, I know that one shot's not going to give me what I need. So how do you mitigate risk against that? Well, you don't put all your eggs in one basket, right? You don't do that. Maybe you have some cash on the side, maybe your portfolio is set up where it's 3%, 2%, whatever it may be, but the bottom line here is there are so many great lessons we can borrow from complexity theory, which is fed into John Boyd's OODA loop that helps people understand these things that, hey, you do need a generative model of the external world. And, by the way, the three of us have a generative model. They're all different. It's called orientation. Different institutions have a generative model. It's whomever builds the best model is going to win, and I think that's what you're trying to do, right, ray?
Ray Micaletti:Yeah, I mean I'd love to have the best model. I keep working in that regard. I don't ever reach that position, but the market's always changing.
Mark McGrath:Let me compound what Ponch said the best model that's the closest aligned to what's actually going on Because you could have a model filled with plenty of Princeton PhDs at long-term capital management and that's misaligned from what's actually going on you're going to get, you're going to miss outcomes.
Ray Micaletti:Or you can look at the Fed and all those egghead economists in the ivory tower cutting rates and then markets rates shot up after they started cutting rates. Yeah, exactly.
Mark McGrath:There's only what? 700 of them.
Ponch Rivera:So they can't get a rate, they don't buy coffee, they don't buy tea, they don't buy eggs.
Mark McGrath:It's unreal. Well, that goes back to what? So now we're back at unrestricted warfare again. Remember Ponche? Talk about fuzziness. You're not going to see this stuff with empirical precision and empirical precision is also something that Boyd said. Because of the existence of empirical precision, there's no way out of the world of reorientation. So we have to constantly keep revising, updating, revising, updating, creating, destroying, creating, destroying, to make sure that our model is as closely connected to reality as possible, understanding that it's always going to be, as the Chinese officers say, in Unrestricted Warfare it's always going to be fuzzy, it's never going to be exact. As an example, does equilibrium exist? Yes, would you ever know when you're in it? Never, it's impossible to know that. So I just I don't know, just throwing that out there as a thought, if you'd add anything to that, ray.
Ray Micaletti:I mean, I think that the sentiment that I took from what you just said was that the market opens every day. So, no matter what you've kind of done up to this point, you got to keep going. You know, you have to keep managing money, you have to keep making the adjustments, because the world is constantly changing, constantly shifting, and you can't just kind of rest on what you might've done over the past, you know, a few months, or the past year. You continually have to keep moving forward and keep managing the portfolio.
Mark McGrath:So, yeah, yeah, it's almost like, rather than having a plan, you always have to be planning.
Ponch Rivera:Yes.
Mark McGrath:Exactly.
Ponch Rivera:Yeah, and that's what we tell folks is it's not the plan that matters, it's the art and science of planning right, it's adapting to the external environment and, like I said, the connections between what John Boyd has given us and others is phenomenal, because in a complex world, in a VUCA world and Mark said it already you have to update and go through the world of reorientation all the time. If you're not doing that, you're going to get your ass kicked and I think a lot of folks, even today on Wall Street, are not doing that quite well. And can you just? I don't know if you have the numbers off the top of your head, but what's the chances of a retail investor or an institution actually beating an index like an SPX or something like that?
Ray Micaletti:I don't have those numbers off the top of my head, but I know that you always read how it's a very small number of funds or investors that actually beat the market, and I certainly think that would be even fewer retail traders that have beaten the market. And to your point about Wall Street possibly not adapting to a vehicle world, I think we're probably people. 2008, 2009 is a distant memory. 2020 lasted for a month and a half and then the market was off to the races. I feel like we're going to be in a trend, in a phase shift, a phase change here pretty soon, where everyone's been accustomed to buying the dip for the last 15 years and it's gotten to the point where valuations are at the worst level of all time even worse than the dot-com bubble by certain measures that have high correlation to future returns. We also have a situation where the equity risk premium is extremely negative. So the 10-year bonds are offering you 4.7%, where the equity return over the next 10 years again based on these indicators that have strong correlation to the future returns is even it's negative. It's like 0.5% annualized return versus 4.7% annualized return of the 10 years. So you're getting almost minus 5% negative equity risk premium if you hold equities relative to holding bonds, and I don't think bonds are going to be that great of an investment. With sticky inflation. Bonds are probably going to have negative real returns.
Ray Micaletti:So I think we're the prime outcomes in the future the next five, certainly the rest of this decade, but possibly into the next decade gold, silver, energy stocks, material stocks, equity rates, things that do well in a highly inflationary environment. And I think if you look at I saw a few charts recently where, of course, so retail traders of the last 40 years the highest percentage of them now thinks that the market is going to be up over the next 12 months. So every year they say they ask retail traders, consumers, what probability do you think the market's going to be up or down? Then they aggregate that information and they say, okay, 30% of the population thinks the market will be up in 12 months. 40% think it'll be up. Now it's like 56, 57% of consumers think that the equity market will be higher 12 months forward. That's the highest percentage of all time.
Ray Micaletti:So what I think has happened is and it was a brilliant psyop is that we had this AI narrative, that basically told the retail investor because they watch CNBC, they get the research reports from the various banks that AI was going to be this panacea. It's going to be this utopia All these earnings, these firms are going to make trillions of dollars, and so that all became priced into the market. And anytime the market dipped, you had a White House that was selling down oil to keep inflation low. You had a treasury that was issuing debt on the short end to keep the long end stable so that equities could rise, and you would have fed that anytime the market would fall, they would jawbone it higher or they eventually cut rates. So you had all this institutional support for the market. You had this AI narrative, and it's gotten to the point where I think retail traders don't think that the market can fall.
Ray Micaletti:Yet here we are with the worst valuations of all time. Here we are with the market up 50%, when earnings expectations have gone up maybe two or 3%, and so you have this big vacuum that's been created where I think you could have a very negative outcome in the next several years. And because they've been inculcated with this narrative of AI, they're probably going to buy that dip all the way down. And so I think it was this massive psyop that's going to end with retail holding the bag as they typically do, and they're going to buy that dip all the way down until they finally sell. And I think the final sell will be when baby boomers, who have been inculcated to the belief that the market always comes back, they'll have this realization like the market isn't coming back and now my retirement is completely destroyed, so I have to sell and salvage what I can. That will probably be the last rush of selling and then the market will rise from there, but that might be 60 to 80% lower in equities.
Ponch Rivera:Yeah, Wow. I mean, there's an opportunity here that we could see a parabolic rise in the market and then that massive crash, or we could see that crash here soon, we don't know. And that's the whole point of this. There is no what's that saying? Prediction is hard, especially about the future right, yeah, absolutely.
Mark McGrath:Well, it's also what's the one from the big short where it says it's not what you don't know that gets you into trouble, it's what you're absolutely positive of. That just isn't so positive of that just isn't so. Yes, that's Mark Twain. Yeah.
Ponch Rivera:Mark Twain yeah, it's weak signal detection and I think, when you look at what you're doing, you're using the human-centered network to make sense of the environment, right, and that's important, I mean. To me that's a great indicator of what's happening.
Mark McGrath:There are other factors. I wonder about no-transcript. This kind of goes back to the reason to be systematic If I can be systematic in something but I also have to maintain the correct human orientation of how I view markets to understand what money actually is, what capital actually is, what actually causes business cycles. Only from my own edification, but it seems to me that those like I guess the biggest one that you probably encounter is what's the definition of risk? I would say that's the chance of the permanent loss of capital. Most look at risk as a volatility definition, like some kind of definition of getting a whipsaw which is not, which is not the classical definition of risk. And then I guess the other thing I wonder about is if you don't have a good definition of money and you don't have an understanding that prices are, are signals, that those signals are distorted? You're making decisions. You're making observations, decisions, actions and learning off of poor signals, oraligned or inaccurate signals, which also leads you to ruin.
Ray Micaletti:Like price controls.
Mark McGrath:Yeah.
Ray Micaletti:You know, if you don't allow the market to kind of give you the information like, hey, this is rising in price, so hey, entrepreneurs are going to go create more supply to take advantage of that, and then that brings prices down as supply comes online.
Mark McGrath:So I agree, you know when it comes to One of my favorites, and you know, I used to be an investment wholesaler, working with brokerage, with advisors inside of brokerage houses, and they would tell me the definition of inflation is the rise in prices. What's it caused by? Really, consumers control the prices of money. They control rates Really. Or you say what's your definition of risk? Well, volatility. I don't want it to be within so many standard deviations, but you only lose if you sell. You only lose money if you sell.
Ponch Rivera:Yeah. So to me, risk is just an increase of surprise, right? I mean, risk can be positive or negative, it's just our job is to minimize surprise, right yeah, generate mismatches for our opponents, minimize surprise for ourself, and that's what the orientation, implicit guides, control the policies, the plans, the way we do things.
Mark McGrath:Well, go back to what you said, ray. You say institutions try to buy low and sell high, and this is one of the famous open secrets of the market when they're buying low, who's selling low?
Ray Micaletti:It's the retail.
Mark McGrath:Exactly, it's retail when they're selling high. Who's buying high? You know, because every buy is a sell and vice versa. Exactly, and like you tell people that they would look at you like you were speaking.
Ray Micaletti:Klingon. Yeah, and when you think about it, retail traders are told how to feel about the market by the people that they're competing against in the market or the CNBC, blaring in their ear all day long. Right. So if you read Barron's Magazine, the institutional guy who's telling you about XYZ stock, he's already bought that stock and so when you rush Monday to buy this great deal, you're basically putting money in his pocket and he doesn't have any skin in the game anyway.
Ray Micaletti:Exactly so you know, you have institutions that are basically leading retail around by the hand, telling retail how they should feel, how they should think, what they should do, what they should buy, what they should sell. It's basically the wolf in sheep's clothing that's leading the sheep around. It's a permanent, structural advantage for institutions.
Ponch Rivera:Let me challenge that. I want to challenge that for a second, and I'm going to ask Mark to do this for us. Okay, so that may have been the case years ago, where today we now have a network of retail traders, right? So, Mark, walk me through and I'm going to throw you on the bus here. Mark, that's fine. Tell me how the retail trader can use a network to outperform the institutions. Is it possible?
Mark McGrath:Well see, the challenge that I'd have back is that's assuming that's my goal is to be the institutions. I don't know that it would necessarily be my goal. We could have a whole nother show on this. I have journal notes and journal notes of almost 20 years as an observer, as an investment wholesaler, going into brokerage houses and watching this stuff and going through. I started in 05 and going through all that in 07, 08 and a pandemic, everything. And you start to wonder. These assumptions are made like I have to beat the index.
Mark McGrath:Well, what's the index? Well, the index is passive. What does that mean? Well, it's just the market. Really, standard and Poor's didn't decide to tell you that it's this much percent of Microsoft, or does that stuff happen organically? So I think a lot of the fundamental starting points of how people look at markets, how people look at capital, how people look at price signals and stuff, their fundamental starting points, are completely misaligned. The only reason they believe that the index is the market is because they've been programmed to think that it doesn't mean that it is. The S&P 500 doesn't occur in nature.
Ponch Rivera:We are the market. Are you saying that?
Mark McGrath:That goes back to what we've been talking about with sacred geometry. Yeah, we're organic, we're part of the ecology, we're part of the environment, we're thinking sentient beings and we all act to our own, based off our own observations, decisions, actions within complexity as it unfolds and when we're told. Like the other podcast we were recording earlier, a lot of that is shaped in the medium that we're exposed to, be it social media, be it TV, satellite, radio phones, wherever we're getting our stuff. But that doesn't mean it's reality, right? Because, ray, add in on this I mean, the greatest investors of all time probably don't watch Kramer. They probably don't read Barron's of all time. Probably don't watch Kramer. They probably don't read Barron's. They probably aren't looking for stock picks from some send-away I pay a guy this much per month or whatever. They're probably doing something systematic and looking on things that we can actually know, we can know volume, we can know price and that's it.
Ray Micaletti:Right, and two things, or at least one relative sentiment, can be looked at as an implied fundamental indicator. So one of the advantages that institutions have is that every year they hire new armies of CFAs, mbas, phds, and they set them loose on trying to figure out the trajectory of the economy, the trajectory of corporate earnings, and they expend a lot of resources to figure that out. And then they take positions in the futures and options market that reflect their conclusions of that study. And now, not every institution is going to get it right all the time. But if you look at their net positioning, like which way are institutions leaning relative to other institutions, to kind of give you sort of like the aggregate institutional position, that kind of gives you heads up as to how the institutions think the macro landscape is going to evolve. And some of those inputs to their research could very well be inside information.
Ray Micaletti:Because, if you're an institution, you talk to corporate CEOs, you talk to the Fed, you talk to ex-Fed governors. You talk to lobbyists, you talk to politicians.
Mark McGrath:Yeah, on the golf course or at the squash courts.
Ray Micaletti:Exactly, blackrock was the institution that was doing the Fed's buying of bonds in.
Ray Micaletti:COVID right. So I'm sure there was information diffused in the BlackRock and to the trading desk about what was happening there. And if you look at what the institutions were doing in the futures and options market in February and March of 2020, they basically were selling in late February and then they bought back heavily on March 20th, which was one week which was like three days before Powell came out and said oh, we're going to start buying bonds. So there must have been some type of diffusion of information amongst the elite institutional establishment to get them buying back right a couple of days before the very bottom.
Mark McGrath:I was at the club last weekend and you wouldn't believe what Chaz said about this Exactly.
Ray Micaletti:It's like George Carlin said.
Mark McGrath:George Carlin said you don't have to have a formal conspiracy, when everybody went to the same school and they're all hanging out and they go to the same country clubs and everything else.
Ray Micaletti:Exactly yeah, when I used to work at Fortress Investment Group, every week we would have ex-Fed governors Slatney that are consultants now would come in and tell us what the Fed was thinking, because they still had friends in the Fed, right, the Fed was thinking because they still had friends in the Fed, right? So the average retail trader in his basement doesn't have access to that type of information stream. And so I think, yes, there are going to be retail traders that probably are very contrarian in their trading, that do well, but I think the bulk of retail traders are going to have a very hard time out-competing the institutions that have these permanent, deep-seated structural advantages.
Mark McGrath:Potch. What was John Boyd? What did he consider to be the greatest insults you could hurl at him? Expert analyst, an analyst, or an expert, or an analytical expert. That was the worst was analytical expert, but Wall Street's full of them. Yeah, I mean, they're full of analysts that can tell you they can break everything down. Well, boyd said that's not enough. You have to have synthesis. If I can't synthesize something and create something novel, there's no way. I mean the strategy that you've built, you've analyzed, and then you've synthesized that to a higher purpose and you have it directionally towards something. And then the expert, which there's plenty of those on, not just Wall Street but in every, every discipline. They're know-it-alls.
Ponch Rivera:Yeah, and Mark, let me try this on you. Yeah, going back to this, you can't change a system from within. So if you think about an analyst who's an expert, they're part of that system, right, correct? So they can't see what they're part of.
Mark McGrath:I would agree with that. Yeah, and I mean, this is the other thing. I used to hand people Destruction and Creation to read it, and they could never get no wait, I'm not in the system, I have my own.
Ray Micaletti:Can I ask you guys a question as experts? No, no, don't call us experts, we're students. Yeah, we just got done telling you don learning, you're constantly learning, you don't feel like you know enough and you're constantly striving for more knowledge, always, that's the maxim.
Ray Micaletti:Do you think that the US and the establishment falls into that category that we just talked about? They are in the system. They can't see where their weaknesses are in terms of the US empire trying to oppose its values on the rest of the world, the rest of the world having a backlash to that, possibly, the US having lost its military advantage versus Russia and China. We used to project power through aircraft carriers, but our aircraft carriers are vulnerable to hypersonic missiles that Russia and China have. And yet, yet, yet the US establishment keeps warmongering. They keep escalating in Ukraine. They keep, you know. Now Trump is talking about possibly preemptively striking Iran. You know Sable rattling over Taiwan. Do you think that the US elite doesn't see their potentially imminent downfall?
Mark McGrath:Yes, and it's not limited to them. So everybody is going to have their own orientation of the world, which, in turn, is going to implicitly guide and control how they observe, decide, act and learn. They're not unique. What Boyd would say is that we have to continuously challenge assumptions. And what you've described is characteristic of a excessively bureaucratic hegemon. And even though we might be the biggest one, it doesn't mean that there's not other ones out there.
Mark McGrath:And the idea is, in those types of environments, like what Ponch was just saying, you can't determine within the system its own nature and character. You have to be outside of the system. And the more that you try to determine the nature or character of a system within itself, you're only going to create more confusion and disorder, and that's what Boyd said. So Boyd analyzed and then synthesized three things entropy, uncertainty and incompleteness. And then synthesize three things entropy, uncertainty and incompleteness. That's exactly what his remedies and came up finally with OODA Loop Sketch of how you try to disassociate yourself with the system that you're within so that you can look without, such that you don't become obsolete, irrelevant, declining all the things that we see. I asked Sean this, sean Ring that we had on a few X Live broadcasts. We were talking about the Barings Bank trade, if you remember the rogue trader with Nick Leeson.
Mark McGrath:He did a lot of damage in and of itself with the trades that he had, with the losses that he incurred.
Mark McGrath:The reality was, or, and the reality was that culture there allowed that to somehow happen, unguarded, unsupervised or whatever it is, and that probably suggests to me that this had been going on for a long time, and not necessarily the crime that he committed or the trades that he did or the losses that he incurred which, by the way, happened with a quote-unquote active God right with the earthquake in Japan. It probably suggests that there was a long drawn decline that suddenly ended, and I forget who says like with bankruptcy, you know it's gradual at first and then sudden, and I think that's in a lot of these cases. With anything that's hegemonic, whether it's a company, a bank, a country, an empire, a civilization that if it's not breaking its models and reinventing itself, then you're in a lot of trouble. We had General Petraeus that we published yesterday and he was talking about how Netflix, when it originally beat Blockbuster, is not the Netflix that we have today, because it does keep smashing its models and reorienting and reimagining itself as time goes forward. What would you add to that Ponch?
Ponch Rivera:You just talked about destruction and creation there. You don't want, you don't want your opponents upsetting your own model. You want to do it yourself, and that that the only way to do that is go outside your system.
Mark McGrath:I'm going to disrupt myself, yeah, yeah, or think of this way, ray. Like a lot, a lot of companies, civilizations, cultures we don't want to put, we want to criticize and point out what everybody else is wrong with them. We don't want to hold the mirror up to ourselves. You know, and you can't make we had a guest on earlier you can't make any change unless you create that discomfort within yourself to to make the right decisions and actions, to to to actually actually change. So that's why that's why I don't think there's like one style of investing per se, because things are always changing. I mean, how many times for the last, however many years, have you heard Bitcoin, this, bitcoin, that and the bad, bitcoin, this and the good, and all the naysayers are sitting there looking at it at 100 grand or whatever it's hit. They're like, well, yeah, it's just a fluke.
Ray Micaletti:It's a bubble. That is an interesting debate. What do you guys follow on the Bitcoin? A fluke, it's a bubble.
Ponch Rivera:That is, uh, an interesting debate. What do you guys follow on the bitcoin? Uh, so I was anti-bitcoin a while ago, uh, wouldn't touch it. And then it just became clear that, hey, if it's a bubble, you can still make money off a bubble, and then if you can get in and out of it, so you could. So you got, you know, a couple people that are buying it and holding it forever and you're like, okay, that that may work out for you, I don't know. And then there's folks you know, like Bart's, saying, hey, he's giving us the attractor points on it and says, hey, buy it between here, look at it, here, it should bounce back down to this level. And I'm like, okay, we'll kind of monitor that.
Mark McGrath:And we're also using some of the stuff from the classical definition of money that I learned in the austrian school of economics. It's no secret that inflationary paper a fiat currency is. I mean, the track record of that from from the age of empires to now, it's never been good, um. So the intent to actually have sound money, it's certainly adm, and that would be my pro and from my perspective of like why I think Bitcoin's cool. I also like the technology of blockchain because with, with, with the visible public ledger you know I'm not going to know it's you and you're not going to know it's me, but we can all see that the transaction was legitimate, because no one's going to be able to crack a code of solving complex math equations in a nanosecond, so we can have a trustless system, which is good because you know the business.
Mark McGrath:There's so many things that have lived past their shelf life, that are on beyond life support. It's almost like they're corpses with sunglasses on some of these systems that Bitcoin would eradicate. I don't know what percent, but it has to be at least an 80, 20, like 80, 80, 80 percent of the of the uh things like processing and other things. Just you could be probably eliminated by the blockchain technology, which I also thought was cool. The only thing that I always kind of harbored is not a doubt, but like a concern was you know, know one EMP and the lights go out. Where's your Bitcoin, you know? So I never saw Bitcoin as superior to something like gold or silver, but I didn't see, I didn't think it would be exclusive, like you still shouldn't have.
Ponch Rivera:I would never think you could have Bitcoin, the volatility and something that people argue is a store of value the day, the day we're recording this. In the last three days, I think bitcoin is down almost 10. Right, that's. That's a pretty big move in three, three days. The dollar didn't move 10 in the last three days. I don't think so right now, but it's again. My view is I shifted my view on it. Uh, I don't like it to hold it. Uh, I'll trade it.
Mark McGrath:That's it I mean you can't use it everywhere, yet you know, like it's still. I mean you can there use it everywhere, yet you know, like it's still. I mean you can. There's etfs for it, there's, there's, there's all kinds of things with bitcoin. And back to the institutional imperative. Right, like so, people, institutions, were saying no, no, no publicly, but what were they doing behind everybody's back, you know? Or what were they doing in private? I mean, they're buying the crap out of bitcoin. Yeah, exactly, and that's like that. Those sorts of things like don't you think, like those are never going away, like there's going to be something that replaces bitcoin or something, some new thing most likely, and an institutional crap all over it, and then they'll, they'll, they'll do it. They'll say one thing publicly and do another thing privately. I think what will?
Ray Micaletti:be interesting. I've been bullish Bitcoin for the longest time and thought and would always talk to people.
Mark McGrath:What's your appeal? Tell us that. Share with us your Cuéntanos today.
Ray Micaletti:Cuéntanos so I started looking at it in 2015 and I kind of bought into the things that people say. Where it's trustless thing. It kind of circumvents the need for central banks and for intermediaries and what have you.
Ray Micaletti:And I kind of felt like we had a system, especially in the mid-2000s, in 2010s, where incentives were just so misaligned. I felt in this country we had the dot-com bubble burst and we didn't really properly take the necessary medicine. We lowered interest rates to 1%, then we blew another bubble and then that bubble burst burst and we didn't really fix anything. We just said, okay, you don't have to mark your garbage bonds to market and you could hold them for 40 years, and so it didn't really fix anything, but it kind of allowed the market to rally again and I don't feel like I think we just compounded all these monetary and fiscal mistakes. And I felt like Bitcoin was a way around that.
Ray Micaletti:And I would always talk to people that were even more into it than I was and I said can't governments just shut it down? Can't this happen or what have you? And they would always say, well, it's so decentralized, how are they going to shut it down? How are they going to ban it? If certain countries use it like El Salvador, I believe, is using it, it and you have human capital that flocks there because of it It'd be hard to shut it down.
Ray Micaletti:They have satellites in space that can keep the network running in case we have power outages, things like that. So that was all good, but now I'm starting to have some doubts again, and those doubts are like what if we do have a global bust? Will Bitcoin have positive correlations to equity markets and risk on assets and will it crumble as well? Or will the correlations break? And if we have a situation where the Federal Reserve is flooding the market with liquidity, trying to stem the bust, will Bitcoin do well while everything else does bad? So I'm sort of like in this region where I did not have doubts before, I now do have doubts. Yeah.
Mark McGrath:I thought, like I still think, that Bitcoin is still a piece of one piece of a much larger pie, and that was the technology of blockchain and the promises that it held of getting rid of a lot of archaic legacy systems, not even just around investing, but also things like medical records and other stuff, that it does have that digital permanence again, assuming the lights are on, um, that does have that digital permanent permanence. That's, uh, unable to um to be defrauded. One. Do you remember, uh, or is she still around Caitlin Long? I mean, she's a big Bitcoin blockchain advocate. I believe that she was from Morgan Stanley and I remember listening to a podcast of hers where she was talking about what's it?
Mark McGrath:The Deposit Trust? What is it? Cc, dtcc, the Deposit Trust, clearing Corporation, I think Clearing Corporation, and that there was a case in delaware's chancery court. Of course, everything happens in delaware because that's where all the companies, or many of the companies are, are registered. I forget the company, but basically it had, you know, a million outstanding shares, but like 120 million legitimate claims to 100 million shares. So there's a disparity that it all come from brokerage houses holding stock for benefit of and name only, not in street name, and it added up that these additional shares that were never issued were still legitimate.
Mark McGrath:Legitimate and and and and bitcoin not bitcoin, but blockchain technology as a public, anonymous, unhackable ledger, whatever would literally eradicate all that. Then you think all that apparatus, all the jobs, all the families, all the connections, all that other stuff would, would go away and that's probably why who knows why it's not there. But just to think of that, that there's so much legacy stuff that's so bulky and unnecessary that's out there, that these technologies that already exist are here to get rid of it that's crazy, absolutely.
Ray Micaletti:We could certainly streamline things and you know, just for, like, house deeds and things of that nature to have on the blockchain, where yeah of wills.
Mark McGrath:Why do we need these things? These things could all be digitally archived like that, and this entire pork barrel could go away tomorrow. Save the taxpayers a ton of money. What do we need these things for? You needed one, I guess, back in ancient England in the borough system or whatever but what do we need that for in modern urban planning or whatever Interesting stuff?
Mark McGrath:Let's wind down and bring it home with this. So what are the types of things that you read outside of the market intelligence, things that you do to inform your investment decisions. But what are some of the who doesn't read? I used to read a lot of books, a lot of books.
Ray Micaletti:A lot of it was mathematical stuff, a lot of it was sort of neuroscience and cognitive things of that nature. But then, you know, basically since the great financial crisis, my reading is just confined to essays and blogs and things of that nature. When I read a book, I feel like I should be studying the market, I should be coming up with new indicators, new strategies. I can't relax and read a book and so I'll read like the first couple of chapters of a book, put it down and go back to you know sort of my thing where I'm working and looking at the market. But you know, reading.
Ray Micaletti:I like to read a lot about geopolitics, the state of the world, because that's very impactful on the markets. So those are the types of areas that I'm interested in outside of the markets. I like music, I like to practice piano, things of that nature, but when it comes to reading books, I've never liked fiction. I'm always a nonfiction guy. Join the club. There's a few exceptions. I look forward to the day where I can kind of dial down my intensity in the markets, where I can actually start reading. I have a whole bunch of Kindle books that I bought and want to read that.
Ray Micaletti:I hope to get to at some point.
Mark McGrath:What about Ponch? What's your take on fiction?
Ponch Rivera:I don't read it. Yeah, my kids, do you look around my office? I don't have a single one in there.
Mark McGrath:I have one over there and it's Steven Pressfield, and historical fiction is about the only fiction that I can stomach, and I also say it is kind of fantasy. Yeah, I am random, I mean, again, I'm not a randroid, but I did like Fountainhead and Atlas Shrugged and I think that there's a lot of pertinent things that you can kind of see unfolding to an extent out there. But, like you, I also find too like you know, we were just talking about John Petraeus, about his book Conflict. I mean that's a nonfiction book that reads as exciting as any other, or even John Boyd's biography. You know that's an exciting book. My favorite I talked about it the other day was Chaos by Tom O'Neill. I mean that'll keep you up at night, but yeah, that's interesting, interesting stuff. And you're coming at us. Live from beautiful Puerto.
Ray Micaletti:Rico.
Mark McGrath:Yeah, so that's when we met. I was down visiting my ancestral homeland, ireland being one, puerto Rico the other. I met you in Puerto rico from our mutual friend. You saw my son catch his own fish and eat it that's right, that was a good time house things down in the south of our. Well, puerto rico is still our country.
Ponch Rivera:It's on the other side of the gulf of america, but that's yes it is.
Ray Micaletti:I saw I don't know if you saw this trump uh tweet the other day or it was actually the new y Times their cover. It said you know we have the Monroe Doctrine.
Mark McGrath:Yeah, it was New York Post, New York Post.
Ray Micaletti:Yeah, it said the Donro Doctrine. Yeah, we had Greenland and Canada and Panama and the Gulf of America.
Mark McGrath:It's going to be a wild four years.
Ray Micaletti:I mean, it hasn't even started and it's going to be a wild four years. I mean it hasn't even started and it's going to be pretty exciting.
Mark McGrath:I don't care what your political persuasion is. One of the most entertaining things to do in New York City is to get a New York Post. It never disappoints. You know a lot of people won't read it. They'll read the Daily News because you know the Daily News is left and the New York Post is right and the right is really for both of them. When they use words, you know like the sicko, like the sicko was dragged off the subway. You know like they, like some of the language is just like. It's so entertaining and interesting.
Ray Micaletti:It's very much down to earth. It's very much related. It's like what we would say to each other if we're talking about someone who you know did XYZ on the subway.
Mark McGrath:So, yeah, I mean, God forbid you're playing for a New York team and you're having a slump because they absolutely just eviscerate people. They light them on fire.
Ray Micaletti:It's entertaining just for that, you know. What's entertaining is that every year the New York media thinks that the New York sports teams have this birthright to do well Every year. And when they don't do well, then they lambaste them. But everyone from the outside is like why did you think they were going to do well? And they lambaste them.
Mark McGrath:But everyone from the outside is like why did you think they were going to do well?
Ray Micaletti:They had no business doing well because they have a bad team. The Jets have a bad team. The Giants have a bad team. There was no variety of hope for either of them. Yet whenever they don't perform, the media comes down on them as though they had these unlofty, unrealistic expectations. But that was when I was in school in New Jersey in the 90s. I noticed that it's like you know the Jets they had, I think, rich Coat tight at the time.
Ray Micaletti:They were like 1-15 every year, but every year the New York media acted like they were going to go to the Super Bowl until like week eight, and then they realized it wasn't happening. And then you know it's crazy.
Mark McGrath:It's ridiculous, especially in baseball, when the Yankees captain, aaron Judge, doesn't perform. I mean, you pick your poison. New York Post, daily News, whatever, it is absolute entertainment and we'll get one and we'll be at a coffee shop and we'll just be like, okay, who can find like the best article with like the most just abrasive, nasty language? It's so good. But but anyway, I don't think anything exists in finance to your point. You have to go to blogs or essays to find things. I don't think there's like. There's like a tabloid barons that, like you know, the bum was trading, that you know, like the insider trading bum, you know like none of that, none of that type of stuff that would, that would beg for a interesting business model.
Ponch Rivera:Yeah, certainly would that sounds like unusual whales when they pick up on what's going on in walser. Uh, yes, dc.
Mark McGrath:Yeah, that's what I'm saying. Like there's those things that exist but there's not like a, like a, like a tabloid sheet that you could pick up with like a sensational headline. You know that says something I don't know. Again, that's the value of Twitter, I guess. Or sorry, x, you know that's the value of those things. But anyway, all right, ray, tell us the website, bring us home here. Where should we look to get more information and how do we keep in touch and follow your work at your company?
Ray Micaletti:Sure, really simple. Our website is relativesentimentcom. One word. You could follow me on Twitter. It's at relsententech R-E-L-S-E-N-T-E -C. That's basically the bulk of where I post information. I have a free weekly newsletter. If you're interested in what smart money is doing where you should start looking to possibly add exposure or reduce exposure, feel free to sign up at relativesentimentcom. It comes out every Monday morning Tell you what their smart money is doing in equities bonds, gold, silver commodities, et cetera.
Mark McGrath:I'm a subscriber and I love it. It goes in the inbox, as Ray says, once a week, I guess. I guess Ponch. I was just talking about Sean Ring and his rude awakening That'll. That gives us some pretty colorful language in the markets and things like that. But yeah, I recommend RST. It's a really good read and it's a great perspective to look at markets. So, ray, thanks for coming and helping us reorient around the way we look at capital markets through the lens of relative sentiment, and we'll see you again soon.
Ray Micaletti:Thank you very much, guys. I had a pleasure and I'll speak with you guys soon.
