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How today’s inflation stacks up to history: Stocks in Translation

Wall Street is bracing for Friday’s jobs report and next week’s Consumer Price Index (CPI) print, which will provide key insight into the health of the economy as inflation remains a stressor. These two reports will be weighed by the Federal Reserve in its next interest rate decision, with many hoping to see 1-2 cuts by the end of the year. Is it possible? And is the market ready?

Chairman and CEO of Computer Trading Corporation (CTC) Peter Borish joins Yahoo Finance’s Jared Blikre for the latest episode of Stocks in Translation to break down the history of inflation and how to best manage risk in an uncertain economy. “We are basically in this sort of tug-of-war until we get more data rats on a ship. We’re all running to one side thinking it’s gonna capsize and then when it doesn’t, we’re all running back to the other side, and it’s a bit frustrating as a trader,” Borish says of the current market. He emphasizes that beginner traders should manage risk by diversifying their portfolios and checking their emotions, saying, “If you’re younger and investing, you have to be willing to accept the pain.”

For more Stocks in Translation, watch here: https://finance.yahoo.com/videos/series/stocks-in-translation/

Video Transcript

Welcome to stocks in translation, our essential conversation.

Cutting through the mayhem, the noisy numbers and the hyperbole to give you the information you need for your portfolio today.

I’m joined by our Intrepid producer Sidney Fried, along with Peter Boorish, he is the chairman and chief executive Officer of Computer Trading Corporation.

Also spent years a decade with Paul Tudor Jones at tour investments.

We’re gonna get to the markets in a second.

Just a quick hello from you.

Thank you.

It’s a pleasure to be here and it’s really an honor to get through the noise instead of just talking about today.

I appreciate that.

And we’re gonna, we’re gonna cut through a bunch of noise here.

Uh Today’s theme is passed as prologue.

We’re be stitching together pieces of market history to assess what’s rhyming and what’s different this time in our phrase of the day, arguably the most important concept in investing risk management, what it means in today’s trading environment.

And this episode is brought to you by the number seven as in the seven seas of commodities.

It’s not just corn and cocoa.

All right, Peter Sid first, the story of the week we have the major indices that would be the Dow and S and P 500 the NASDAQ back to record highs just about jobs in focus this week.

Next reading on inflation is next week.

Uh But we’ve been here before, so just set the table for us, Peter.

Story continues

Well, as I said, thank you.

So my position has always been for, since 22 that the most popular job on Wall Street is every three months forecasting that the fed is gonna cut in three months.

So we had January, they’re gonna cut in March then in March, they said they’re gonna cut in June and now we’re in June and they’re gonna cut later on in the year.

There’s a lot of cross currents going on.

That’s why I look at those seven CS from Crude to Cocoa to give a sense of where we are and what interest rates are potentially gonna do.

All right.

And let’s dig into that a little bit.

Um What are you seeing specifically?

I mean, it’s funny you mentioned that, uh, every three months it seems or seems like everybody’s predicting that rate cut three months away a couple of years ago.

Everybody was saying, well, the next recession is two years away.

We’ve come a long ways from that.

But, you know, there’s a cyclicality to uh monitoring the business cycle itself.

Is there any surprises to you now or have you just, you think you’ve seen it all?

There’s always surprises.

That’s the beauty of markets.

But if I can steal a line from my old boss, Paul Jones, which you kindly uh introduced, he has a sign behind his desk, which is what is obvious is obviously wrong.

So last year was totally obvious that we were gonna have a recession that didn’t happen.

This year was totally obvious.

We were gonna have six interest rate cuts that didn’t happen.

This is a business where your word of the day risk management is critical.

We can gossip all we want.

But when it comes to trading, you have to have a defined methodology and a point at where one is going to be wrong.

So if we look at Friday, it’s like who, as you said, the market’s going to new highs.

It was great.

The dow was up.

Now we’re here four hours later in the trading and now the market’s down.

So we are basically in this sort of tug of war until we get more data rats on a ship.

We’re all running to one side thinking it’s gonna capsize.

And then when it doesn’t, we’re all running back to the other side and it’s a bit frustrating as a trader.

If you’re sort of a long term investor and you’re not looking at these things, you’re like, who cares?

Yeah.

So Peter, how do investors especially like beginner investors cut through noise, the noise being everybody gassing us, everybody forecasting the feds gonna cut the fed’s gonna cut her even honestly, the noise after you get a big data point and then everyone’s just forecasting what’s coming next.

How do you just cut through that and kind of honing on the data yourself to make smart decisions?

Well, if you step back and a lot of it depends on where you are in your investing cycle, but if you just starting and you look back in history, it’s all irrelevant.

You can go back to 1929.

Ok.

So that was really bad.

But we go back to sort of post world war two and you can look, oh, we had this gigantic problem in 1962 with steel.

We had 1987 et cetera, et cetera in the scheme of things.

If you believe in our markets and our policy as we move forward, the markets should go higher.

The question one has to ask themselves as we’re going into such a conflicted year.

Are those policies going to continue?

And that again becomes a risk management conundrum.

Let me, let me ask you about 1987.

You just mentioned that famous for a crash that happened this year.

And PBS filmed a documentary of you working alongside Paul Tudor Jones and you guys called it in real time.

Uh As in with anything in trading, nothing’s perfect.

But there were some rhymes you were looking at the past is prologue.

You were looking at some other crashes throughout history and you saw the analog, can you describe what that was like, just kind of living through that?

Yes.

And thank you for that.

First of all, we were a lot younger and I think that part of your risk tolerance when is a little higher when you’re younger and maybe a false sense of confidence as well.

So when I built this model, we were, had a lot of confidence in it, but the major thing that distinguished us and it’s not just as similar for today is that Paul was willing to invest a lot of money in data and computing power.

We were back when it wasn’t done that much.

That’s correct.

And it was expensive, data was expensive.

We had people, they had a higher summer interns and get books out of the library and put them in spreadsheets.

There wasn’t like today where you can go on a website and download the stuff in hundreds of a second.

So there was that commitment and then there was the notion of following the model and as the model unfolded and had more uh correlation with what we thought was gonna happen, it gave us better confidence.

But at the end of the day, we can’t take away from the fact that Paul was a great trader and well, he had, yeah, he had a game plan and he stuck with it.

And I always said if I could pick the exact low in the exact high, which generally speaking, I do the opposite a lot better.

Uh He’d still make more money because markets don’t go in a straight line and what we had there.

And it’s a little bit of concerning today.

Not from, we’re nowhere near set up for any type of crash or anything.

I just wanna make that clear is that uh we had new financial products in the case of financial futures were only five years old.

There was new ideas like portfolio insurance and they weren’t really fully integrated.

And it’s like when you have a young child and they’re five years old and you can talk to them and you think they understand you and they’re gonna behave, they, they’re not.

And so there’s a lot of new financial products out there recently that have the potential to cause havoc that we haven’t seen yet.

And by the way, when we saw problems in 98 in 99 2008, 2009, a lot of that had to do with misunderstanding the full amount of leverage that was embedded in new financial products.

So, you know, you just said, you know, we’re, we’re not facing a risk of a market crash right now.

We’re not in the same as the eighties.

Um But what are some of the problems from back then?

That kind of remind you of where we are now these new products.

So there are some new products, I think you have to take into account the products, the political environment and and the economic environment and all three of those together.

So some of the products one can talk about now are zero day trading options, right?

Are they embedded?

What’s the gamma if there’s a big move?

And is that gonna push things because gamma is always a problem uh the huge growth in private credit.

So there’s less transparency in the marketplace in global macro structure.

I don’t need to tell any of your audience of what’s happening around the world.

And we’ve seen that uh obviously in, in Israel with the tragedy there with uh Russia and Ukraine.

So when you think about the United States government, what is it?

It’s essentially an insurance company with a military Medicare.

Let’s, let’s think about that one second, an insurance company with the military, the US government.

That’s a powerful statement because Social Security and Medicare and, and our military, which given the uncertainty that spending is not going down.

Social security, Medicare is not gonna be cut, you can cut the rest of the spending.

It’s a rounding error.

So if we don’t address our fiscal issues, then the likelihood of interest rates going higher are very significant in interest rate cycles.

You talk about the crash, you talk about that period are very long and I don’t mean to be getting on a tangent, but this is, this is, this is a cut through the noise show.

So if we think about that from World War 2 to 1982 interest rates went up.

And by the way, nice 38 years, 44 to 82.

And like most markets, the moves, the biggest moves happened at the end 80 to 82 we then had shockingly a 38 year decline in interest rates from 82 to 20.

And when was the biggest move the last two years?

So now we are just in the very, very early stages, in my opinion of a longer term rising interest rate cycle.

And if we don’t get our fiscal house in order, and that has nothing to do in my opinion, with spending because it has a lot more to do on the revenue side.

So hypothetically if the Trump tax cuts are not repealed, I will say here today that I think the tenure will be going more towards its longer term median, which is somewhere around 6.5% and that is not gonna be good.

So for everybody that’s concerned about their tax rate, they’re gonna lose a lot more money because of the pressure that’s put on markets and put on housing and put everywhere else, if interest rates go up a lot higher than people think.

Now we know we, we, we anchor to pass prices.

This is the fallacy of trading.

I mean, market anchors are, what kind of a fundamental bedrock of technical we think?

Oh, the market was here, it came down, it has to go back to new highs.

There’s no law that says that or if you’re short, vice versa, if it was down there in rallies and it’s the same thing.

So we’re so mentally used to having interest rates decline.

That’s all we think about.

And we put there and we put them on a pedestal, all the fed economists.

And by the way, right, that’s where I started my career.

I was and Wall Street is littered with former fed economists.

I think it’s a great place for them to go.

As we say, economics is a good job for economists.

But if you’re gonna forecast, one should forecast often, you can’t get wedded to your position.

So if we go back to the markets today and I’m leaning towards, hey, guess what?

Crude is really weak.

That’s one.

See down the drain, right?

Coffee strong.

That’s ac that’s positive.

Cocoa strong.

But guess what?

Cattle is weak.

That hasn’t done it.

Coppers in the middle of its range.

Cottons at the lower end.

So there’s this cross circuit.

So I’m not super positive now on the strength of the economy as I was a few weeks ago when the supply and demand was saying this, oh, and the seventh one of course is corn and that too has been weak.

I’m gonna pause you there and really appreciate you getting to the Seven CS there.

Uh We do have to take a quick break here.

We are back with uh Peter Borsch of Computer Trading Corporation and we’re talking about risk management now.

And uh let me just give uh the investopedia definition.

Risk management involves identifying, analyzing, accepting and or mitigating uncertainty in investment decisions.

So uncertainty put simply it’s a process of monitoring and dealing with the financial risks associated with investing.

So I think there’s a lot of uh applications of risk management to trading, to investing.

But what does it mean to you risk management?

Pure and simple from a trading perspective means that you can live to trade another day that I am not right.

The market is right.

And I always say the right to change my mind starts as soon as I put my tongue back in my mouth because if I buy something, I buy it because I never think that it’s gonna hit that low price again because if I did, I’d wait and try to buy it lower.

The reality is you’re wrong most of the time.

So that’s where taking risk and measuring that risk and then getting out if you’re wrong permits you to do.

Well, it’s the same thing as if you’re playing Texas Holdem.

It’s not how many pots you win.

It’s the size of the pot when you do win.

And that’s why people who have right in my history being with CTAs is they’re volatile per se, but they survive and that’s the whole point.

If you survive, you can fight another day in an industry that’s built on leverage.

So risk management, job number one, arguably for commodities traders.

But if you, even if you’re just buying stocks, you need to have that strategy in place.

What I like what you were just, you were just saying is you’re usually wrong and I think this is, you know, if I’m just looking at Twitter, uh, the best traders, they’re, they’re right.

99% of the time.

Right.

Well, no, I mean, I, I used to be in the commodities industry myself and I did studies, I would read studies about traders.

They’re right.

Maybe a momentum trader, right?

One in three times.

So losing is part of the business is kind of how you lose.

Uh That really defines you as an investor, I would think.

Absolutely, I get all the time, right.

People ask, oh, so tell me about trading.

I’m like trading is easy and they go, what do you mean?

I go, well, you look at the best performing stocks over the past six months and then you go back six months and buy them because that’s how DeLorean.

Yes, it’s made to appear for most people.

And in a lot of sense, it does a disservice because in hindsight, right, we can always pick the low or pick the high, but we have to deal with an uncertain tomorrow.

So the further your time frame in terms of how long you wanna trade, the smaller you should trade because the uncertainty is larger.

So if you go back to my first example, if I’m like, ok, I think rates are going higher bonds have rallied today and that’s it.

I’ve seen the top tick.

Now, if I’m a nut, which many people think I am.

I could sell a whole bunch of bonds and risk that one tick and get stopped out.

And if I’m right, I make a lot of money quickly.

But what’s the real probability of being able to forecast that top within a tick and say to yourself, if it goes past that one tick, I’m gonna get out.

That doesn’t make sense.

Yes.

And then that’s the other issue.

You can trade yourself to death by getting in and in and in and in and in.

And if you’re a discretionary trader, you also have to take into account the moment, the intellectual and the emotional burnout and yes, too often individual traders, they think of themselves as fans, right?

They’re worried about the last game.

The professionals have to worry about the next game.

If I strike out with the bases loaded and lose the ball game, that game is lost.

I’ve got to learn from it and move on.

If I dwell on it.

I’m already history.

Peter.

Let’s talk about the early investor because we’re talking about a lot of, like you said, professional investors, maybe people who are trading stocks every day.

Is there such a thing as risk management for someone who’s just passively invested, you own some index funds, you know, and you’re just kind of letting them sit, what is risk management look like for those people, risk management for those people.

And by the way, that’s a really outstanding question because it’s a totally different kind of risk management.

The risk management for them is diversification and, and trying to understand that everything going up together at certain times which were a little bit and now raises short run risk.

But if you’re diversified, that’s ok. You’re going to accept some volatility.

If you’re younger and investing, you have to be willing to accept the pain.

And if you have to invest small enough amount that you’re willing to accept that because emotions are greater in losing, right?

Everybody hates losing more than winning.

In fact, if you use the economist term, right, there’s the marginal diminishing utility for more money.

But as a sports person, it’s why coaches have to sort of take time off because they expect to win and they don’t get a lot of pleasure out of it, but the pain of losing is too much.

So if the pain to a new investor of losing is too much, they have to have a smaller position.

Great analogy there.

Um I want to get to uh a segment that we like to hit in the bottom half of the show.

It’s called, who wore it better?

And this is now, I’ll just set it up for you.

We know that in Hollywood we have, uh, these various gossip shows and they have a who wore it better.

Somebody might be wearing the same dress to different galas.

Uh, but here we’re gonna, we’re gonna extend this metaphor.

We have the securities and exchange commission.

We have the commodities futures trading commission.

SEC versus CFTC.

Both regulators, one of stocks, one of futures.

Um We have Gary Gensler, he’s the head, the chair of the SEC over at the CFTC.

There’s Chairman Roston Benham.

Um and the CFTC is admittedly smaller, doesn’t get as much uh play in the media just because of what it oversees.

But I’m wondering who’s wearing the current regulatory regime better right now.

Is it the SEC or the CFTC?

Thank you for asking that.

I am a strong CFTC proponent.

They historically have been the innovators of financial markets in the United States.

Going back to 1982 with the introduction of stock index futures.

The SEC is more regulatory minded and in the sense that they are a little bit more paternal.

So if you take this early investor, which is kind of strange, right?

So there’s just a little bit of arbitrage, I can go on an online account and I could take a whole bunch of risk.

But if I wanna invest in an LP through a regulated SEC, then all of a sudden I have to be rich to do it.

So, if I’m not rich, I can take a lot of risk through online brokerage firms, but I can’t take the risk of investing side by side with me or with you.

And the CFTC is always been historically, more pro innovative than the SEC.

I’m glad we went there sid.

I could tell you you had a, perhaps a burning question, maybe burning question.

It’s, it’s a personal one though.

So I hear you’ve been a Knicks season ticket holder since like 1991.

I’m gonna ask you, we’re talking about alternative investments here.

Uh, athletic tickets.

Has that been a good investment for you over the last three decades?

Well, it’s been emotionally tough.

It’s like having a losing position on, in the markets and when you go back and I measure it through.

So my first child was born in 1991.

So to grow up and, and have those, uh, family togetherness is really, really special to watch Reggie Miller do it, do what he did in 1994 after the fact is special to see the pain of game seven of this year.

But the beauty of sport is watching it live, whether you’re there or whether it’s on television is in, in this polarized world that we’re in professional sports in general are the one place where people come together and are rooting for a single jersey.

In this case, the orange and the blue for the Knicks.

And they’re putting all their politics aside.

To me, that’s great and healthy.

That was a, that was a very touching answer.

I have to say I wasn’t expecting that.

We got 90 seconds to go real quick.

Anything we didn’t touch on here.

Anything that you’d like to communicate to the investing, uh, crowd here.

Uh Yeah, one do your own homework.

That’s the most important things.

There are no shortcuts and, and luck is not a strategy which is why our word of the day risk management, it’s good to be lucky, but it’s better to be lucky and good.

All right.

Um I, I lied because we actually have one minute left here.

Uh I wanna get your, your thoughts, quick thoughts on Jim Simons.

Uh Renaissance Technologies founder died.

Uh Just incredible returns, double digit returns for decades over the years.

Uh Why do you look up to him?

Well, first of all, it’s, it’s sad and I had the honor of, uh and still do of being on the board of Math for America, which he founded and I actually am chair of the audit committee.

And I told him, I said, you know, Jim, if you think you have enough confidence in me in numbers, that’s a good thing because in the history of the world, very few people have math theorems named after him, by definition, much fewer were alive.

And I, I said to him, Jim, I can’t even understand the title of your math.

So you have my utmost respect and that’s coming from somebody very tech oriented himself.

Uh We got to wind things up here, Peter.

Thank you for joining us today sid as always, keep your dial lock to Yahoo Finance.


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