You're about to join Niels Kostrup Larson on a raw and honest journey into the world of systematic investing and learn about the most dependable and consistent yet often overlooked investment strategy.

Welcome to the Systematic Investor Series.

Welcome or welcome back to this week's edition of the Systematic Investor series with Alan Dunn and I, Nils Castro Blasn, where each week we take the pulse of the global markets through the lens of a rules based investor.

Alan, wonderful to be back with you this week.

How are things in Dublin?

Oh, good here, thanks.

Yeah.

Enjoying the summer, bit of sunshine today.

So yeah, all good.

Has your summer, just out of curiosity, been as wet as it has on mainland Europe?

Because it really has been wet.

Not unusually, no.

I mean, July has been a bit dreary, but no, not, not terribly wet, but it hasn't been a bad summer.

Okay, pretty good.

We've got some really good topics as usual, dare I say.

And of course they are going to be related to some of the latest papers but also some articles that's been featured include including one of your own, by the way, regarding, you know, the, the environment for, for CTAs and trend predominantly today.

I'm sure we'll, we'll weave in some other stuff because we're also going to do some macro stuff initially but before we get into that, and I will say I struggled a little bit this week.

So I hope you got something good and that is what's been on your radar for the last, you know, recent time.

Anything exciting that you've focused on?

Well, the one thing I picked out was not it's not a left, left field.

A lot of people have been talking about it but it is quite dramatic in some sense.

Obviously Trump fired the head of the BLS last week in the aftermath of the weak payroll numbers, which it's funny having done that, I heard a bunch of people on CNBC defending it, saying, well, actually maybe it wasn't the wrong thing to do.

But it does raise all manner of questions like how far is the administration going to go in terms of if they don't get the right answers on the economic data front.

But it has obvious market implications too if the administration really started to tamper with economic data.

Take for example TIPS inflation protected securities.

They are priced on the basis of the actual CPI print.

So I had a look.

I didn't see any meaningful reaction in the tips market.

I saw it being referenced on Bloomberg that some participants there were concerned.

But you could have investors demanding a higher risk premium in the tips market because they Fear that the CPI might be manipulated lower than the actual.

If we start to see higher inflation.

That Trump felt wasn't correct.

I saw him on the tv, I think it was yesterday, saying, oil prices all.

Not oil prices.

Oil prices in the economy are down, except stock prices, which are up, which obviously not correct.

But for somebody who has that belief, then, you know, maybe they could start to tamper with data.

And obviously lots of things are linked to cpi, contracts are indexed to inflation, et cetera.

But I think, I mean, the broader narrative here is that it's just another example of the US kind of becoming more, at least in terms of how it appears externally, more like an emerging market.

It is the kind of thing that you hear more and more in emerging markets.

Obviously, for years, China, nobody trusted the growth numbers in China.

They felt they were manipulated.

Now we've got a developed market where they're firing the set decisions because they're not coming up with the right answers.

And bear in mind, Trump obviously challenged the election results because he didn't like those as well.

So where does it end?

I think it is quite interesting and potentially worrying.

Yeah, I completely agree.

I think it is disturbing when you, when you, when you look at it with that lens, for sure, very disturbing.

Here's my question to you, since you probably know much more about this than I do.

I think recently, not entirely sure who I spoke to on the, on the show about this, but there was a. I think I read it in an update from the Odd Lot Skies, and they talked about the percentage of the statistics that were now being guessed.

They use guesstimates rather than actual data.

And it had gone up quite significantly recently.

And so, and, and I don't know whether this is part of the Doge thing that we're, you know, we're getting rid of people, so there's not enough resources to do this in, in a proper way.

I have no idea.

But when these numbers come out, and I think the revisions were large.

Is.

It not possible to actually precisely say why and where these revisions came from?

I mean, so kind of to demystify whether it's a political number or not a political number.

Is that not possible, that precise question?

I don't know.

I think it probably is.

I know there are more revisions.

There's a whole bunch of revisions that come kind of annually, I think, in early September, the kind of the annual benchmarking.

So there will be more revisions coming, I suppose.

Important to bear in mind that these are all statistical measures.

It's not that they've counted up to 200,000 jobs or whatever.

It's that they've done a survey and they come up with an estimate based on the survey.

So it's not an actual number.

It's a statistical measure.

You're right in what you say about the lower response rate.

And I mean, that's in two ways.

For example, in the cpi, the percentage that's imputed now as opposed to actual market rates that's been going up.

But the bigger question is poor response rates, and people are less inclined to respond to these surveys.

Whether that's, you know, I mean, it started in Covid.

I mean, maybe they're using outdated ways of contacting people.

I think I saw Jeremy Siegel talking about this, and they were sending out faxes.

I mean, I don't know if that's a thing still.

But anyway, they're sending out faxes and.

They'Re surprised they're not getting a response.

Exactly.

Yeah.

I mean, that does sound odd.

But I mean, you know, should people be, you know, should it be mandatory to respond if you get this?

You know, should you be fined if you don't?

I mean, I think there is a general growing skepticism of government.

So if somebody calls you up and wants to ask you about your wages or your.

Some people generally don't want to answer.

People don't want to answer the phone at all.

There's so many bots.

So I think there's a whole range of things there that have made the job of assembling these statistics and data more difficult.

But, you know, I suppose on the other side, maybe in defense of Trump, you might say, well, maybe.

Maybe a new approach is needed, and maybe that's the point, to get more reliable stats.

Yeah.

Yeah.

No, you're absolutely right.

I hadn't thought about this, but I know that from personal experience.

I mean, every time you get one of these calls from a number you've never seen before, and the first thing they start is asking personal questions, you kind of just hang up and delete and block the number.

So.

Yeah, no, that's.

That's actually a very good, Very good point.

Anyways.

Okay, very interesting.

Now, as I said, I kind of struggle a little bit, maybe because, you know, I've been moving around so not focusing too much on what's going on in, in the, in the news flow, but also because I think in.

In many respects, so many things is happening in, in the news flow, but I obviously could not help noticing that Trump, on the birthday of my home country of Switzerland, actually put on a very large tariff rate for that country maybe I think one of the biggest ones we've seen so far of 39%, which will be interesting how they untangle themselves from that.

And I know from the Swiss news that people have really been very critical of the current prime minister or head of the government for, for that negotiation.

So, yeah, that's something I think is, is very interesting.

Although, and I don't know if this is true or not, I just seem to remember it like this that a lot of the trade deficit that the US May have with Switzerland is actually due to gold being, you know, coming from Switzerland into the US So I wouldn't really call that necessarily a real trade deficit.

But anyways, it is what it is.

So.

So we'll see.

We'll see.

Okay, well, we're going to stay with kind of the, the macro theme for a while and, and we're going to get into a, maybe spend a little bit more time than we normally do on this section because this is where you have some thoughts on the global macro situation.

And I'll try to, to chip in with a few things that I've noticed and so I'll hand it over to you, Alan, and talk about what you're seeing.

Sure, yeah.

Well, I just want to talk about two things in this section.

Firstly, just kind of appraising where the US Economy and policy is kind of six month into Trump and then linked to that is the Fed.

But I think a bigger question then is what the Fed is going to look like over the coming years.

And we'll get to that in a minute.

But it is interesting.

You know, we've obviously got the weaker data lately in obviously payrolls was disappointing.

We had negative revisions.

And I think it's interesting to look at how the economy is performing versus maybe what expectations were at the back end of last year when Trump came in.

Bear in mind, the idea was Trump's going to run the economy hot.

We're going to have stronger growth, deregulation, possibly fiscal stimulus.

It's going to be a positive backdrop for the markets, possibly inflationary.

And actually, I think what we've had is actually a much slower economy in the first six months of the year than probably what most people anticipated.

And the reason for that is obviously tariffs are a tax increase.

So I mean, we're seeing that in the data.

Obviously consumer spending is running at just about an annualized rate of 1% or even less.

So, you know, you'd normally expect that to be around 2% or so.

The savings rate has increased since last year, about 4.5%.

Now back in the late 2010s was more like 5 and a half, 6%.

So it still could go a little bit higher.

But I think if you think about it, what we've seen with Trump's policy is we've seen a reduction on the supply side because of immigrants.

So people are being deported or else immigrants are not coming out and working because they're afraid of getting deported.

So you're seeing a smaller labor force, actually lower labor force participation, and at the same time weakening job growth.

So it kind of creates a little bit of a policy challenge for, for the Fed because the economy is clearly weakening, demand is slowing, but supply is slowing at the same time.

So from, you know, in terms of the Fed's mandate, it's maximum employment and it's still more or less nearly there at 4.2%.

But the problem is that on the demand side, you're seeing weakening demand and slowing job growth.

And I guess the general sense now is that trend growth in the US might be more like 1%, whereas previously it was 2 to 2 and a half percent.

And bear in mind that I think it was 2023.

Yeah, 2022, there was a lot of pessimism on growth.

And 2023, the economy rebounded very strongly.

And that was largely driven by a surge of immigration into the U.S. i think from the perspective of what's different to what we expected, maybe at the start of the year, the tariffs have had a more negative impact, I think, on growth that was partially uncertainty, it's partially on demand.

But at the same time, the immigration policies have had a meaningful impact on supply.

And then on the other levers, there was hopes of kind of fiscal stimulus and the big beautiful bill, et cetera.

We're not really seeing that.

There might be a little bit of that next year.

And then obviously deregulation was the other side of it.

I'm not really seeing anything meaningful on that side yet.

So kind of the six month scorecard on Trump is actually been more negative for the economy.

But actually this impact on the supply side, if the economy was to rebound in 2026, that would mean that the threshold for raising rates would probably be lower in the sense that because you've got a smaller labor force, if the economy did rebound, you would expect to see stronger wage growth down the line.

So I think it's interesting the consensus now is that the Fed's going to ease in September.

Hard to argue with that.

We've got two more CPI numbers before then but certainly the Fed is already under a lot of pressure.

It had been saying that the labor market is solid.

The most recent data doesn't seem to support that, that it would be hard to kind of go against a rate cut.

At least 25 basis point in September could be more.

If the CPI was kind of in line or not rising, that would have the case for a bigger cut.

But yeah, I think the Fed is kind of painted into a difficult spot here.

So I'm imagining that when you say growth is slowing, maybe not just in the us, maybe elsewhere, I don't know.

And I imagine, correct me if I'm wrong here, that we look at GDP as the measure of growth to some extent, maybe to a large extent.

My question to you is when you think about this, and I guess it ties into a little bit about kind of the whole Fed discussion, but when we think about growth in gdp, I mean that's a number that was kind of designed a long time ago and the world or the economy today has changed a lot.

You know, we have a lot more services, intangibles.

We have a whole economy that maybe is very hard to measure.

I mean, for example, does an influencer count as someone who's employed.

Yeah, I'm just asking that question.

Or this morning when I went to the, you know, to buy some groceries, I mean, I do the checkout.

I mean there's no one checking out.

That's right.

Yes.

My work is not being counted anywhere but I do the checkout.

Right.

So I'm just thinking sort of out loud here is that it might not be so easy anymore to really, even with the best intentions, to really rely on a lot of the data we're, we're served up.

And I'm not an expert.

I know we have an expert coming on the show very soon on Kevin's series.

But I do think it raises a question in terms of, and of course as systematic rules based investors, of course we don't care whether the numbers are right or wrong for that matter.

But I imagine that most asset managers who don't do what we do, and investors in general, it's pretty tricky to figure out how good is the real economy, so to speak.

It's true.

And we had Paul Donovan at UBS on before he was big on this topic of, you know, as you say, doing his groceries and swiping him at Tesco and obviously not getting paid for that.

And it's true.

And obviously there's lots of kind of activities in the economy, TikTok content generators, etc who are providing podcasters.

Podcasters, yes.

We're not employed.

Unemployed.

Yeah.

All of the value add that's been generated here doesn't get counted in the GDP numbers.

And it's all true.

And I mean, I guess from policy's perspective, if you think about the Fed's mandate, at the end of the day it's maximum employment and price stability.

So they're the things to really focus on.

Obviously, everything else goes into helping them think about that.

And they acknowledge obviously the challenges of changes in the economy over time and how that might be influencing.

And I guess with all the PhDs and economists that they have at the Fed that they are grappling with how to address these issues.

But I mean, certainly we have seen divergences as well between the GDP numbers, even between GDP and production and income, as well as between those numbers and employment over time.

So it is something that you do see periodically.

As I say, I think the Fed has kind of concluded that for their purposes, although they say they look at a wide array of labor market data, the unemployment rate is probably the most important number that they watch.

So that somewhat simplifies the task for them.

But what you say is true, but they're kind of structural issues.

I guess they'll say what we're looking at from a cyclical perspective is the changes kind of month to month, quarter to quarter, which shouldn't be overly impacted by those kind of structural trends.

Yeah, well, of course, of course.

And I'm sure we'll come back to this in future episodes.

We're still probably yet to see the real impact of AI.

I heard Jim talk about recently kind of the changes you see in unemployment among really young people in certain, I think college graduates, young college graduates was really increasing a lot at the moment and so on and so forth.

So anyways, definitely worth watching.

You mentioned Jeremy Siegel.

Did you want to talk a little bit about some of his stuff?

And I know you also want to talk a little bit about the Fed as well.

Well, it does.

It's probably a, a natural segue into the discussion on the Fed.

There was I, he, Jeremy Siegel.

He, he's.

Well, he does a number of things.

He's a Wharton, but he's the chief economy economist.

So when it was in three, he, he had an op ed recently just talking about the need for reform at the Fed.

And his whole point is around, it's kind of a technical point that basically after a financial crisis, the Fed went through to this kind of ample reserves system whereby because they're doing A lot of qe.

The banks have a lot of reserves.

It's not a reserve constrained system.

The Fed pays interest on the reserves and that's an income to the bank.

But what it does mean is that the Fed funds market, which used to be the traditional kind of indicator of how tight or how loose monetary policy was, the Fed used to do open market operations to kind of target the fed funds rate.

That's kind of become a little bit defunct in the last while.

And he's saying they need to change this approach because it's not kind of serving their purpose as well, but it's kind of part of a broader narrative.

I think at the moment that the Fed is under threat from a number of different angles, obviously from President Trump, which has kind of been more so than we probably have experienced in any kind of Fed president relationship.

But we knew this would happen, or we had a good sense because it was a case in Trump 1.0.

He's been more vocal this time.

But it's not just Trump.

I mean, there's kind of an unusual coalition of kind of hard money and easy money people criticizing the Fed.

On the one hand, you have the likes of Trump saying policy should be easier, rates should be lower.

The likes of Jeremy Siegel said you need reform.

And at the same time, you've got Scott Besant, Treasury Secretary, saying you need root and branch reform of the Fed.

And then Kevin Warsh, one of the leading candidates to be Fed governor, also talking about regime shift.

And I mean, partially this comes from the fact that obviously they missed the 2021 surge in inflation that were too late to respond to that.

So they're still kind of living with the consequences of that.

But also there's a view that.

So that's kind of the hard money crew saying that we're too easy all along with policy.

But equally, some people saying you've had mandates drift at the Fed as well, because they started talking about climate change, they started talking about, well, it's inclusive maximum employment, so we want to have low unemployment for minorities as well as kind of for the broader economy.

So I think it's interesting that the Trump is about to make his decision on the new Fed chair at a time when the Fed is generally under criticism, not just from the administration, from lots of people.

And then when you look at the candidates, they're quite interesting.

So I do think it could be quite consequential.

I mean, there is a view out there.

Oh, yeah, it doesn't matter that much.

I mean, the Fed chair, he's only one vote on the fomc.

There's governors, there's the regional presidents, but I don't agree with that.

I think it is quite consequent.

I mean the Fed Chair is hugely influential in setting the agenda.

You can, you know, at the margin guide the direction of policy.

So, so I think it is very interesting and we're getting to the point now where, where some of the, the candidates are, you know, we're really seeing some of the credentials of the candidates.

Plus there's actually an extra space that's become available.

There's someone who resigned only a few days ago, a lady as far as I recall.

That's right, yeah.

So there might be two, two seats there.

Talk to me a little bit about you.

Send link to a CNBC interview with Kevin Wash there.

The thing is, it's a little bit confusing.

There are actually two Kevins who are up for the Fed Chair nomination.

This one I think is the least favorite of the two but not nonetheless probably important to, to listen to him.

What were your takeaways from him?

Because I've, I've made a couple of notes myself but I'd love to hear your.

What were your main takeaways from him?

He's an interesting guy because he's a former Fed governor.

He was a governor during the financial crisis so he had, you know, he was heavily involved with QE and the bank bailouts.

He had worked at Morgan Stanley earlier in his career in M and A and he was quite involved in at the time Morgan Stanley was changed into a bank holding company.

So he was kind of involved in those discussions and he was kind of live quite close to Bernanke through the period because of his Wall street connections and also he had served in George W. Bush's administration so he's quite connected politically as well.

So he's very kind of influential in that time.

So he does come with that background as a Fed governor.

Now he's not an academic economist and historically the Fed Chair has tended to be somebody with strong academic credentials like Volker or Greenspan or Bernanke Yellen, all kind of PhDs in economics and you know, have published, etc.

Powell wasn't like that.

Powell obviously a Swiss by background and Warsh isn't a trained economist either.

So he's more of a, I mean he's probably more of a political mover I think he also works with Stanley Druckenmiller so if he has Stanley Druckenmiller as ear, he's obviously saying something relevant and Interesting.

When you listen to him, it's quite interesting.

He's very much in the kind of more of what you might call the hard money school.

I mean, he's very critical of the use of QE in the last 10 to 15 years.

He was an advocate of it during the times of crisis, but he's opposed to it in terms of an ongoing policy tool because of the potential distortions it brings to the capital markets.

I mean, at the moment, he is kind of.

He seems to be in favor of lower rates.

He seems to be embracing the productivity, the potential productivity boom from AI, and he sees lower prices.

So it's kind of, my impression is he's aligned with Trump at the moment, at this point in time, because he is in favor of lower rates.

And a lot of what he says, I think will resonate with Trump.

He's very much critical of Powell.

So you've had mandate shift at the Fed, which I've talked about, which you shouldn't have had a crisis of confidence.

He pointed to the fact that the fed cut rates 100 basis points last year and long and Yields went up 100 basis points, and he highlighted that as a lack of credibility.

But one of the other things, he did a speech earlier this year called Central Banking at the Crossroads.

And in that, he was actually quite critical of the Fed for kind of facilitating US Fiscal profligacy.

I guess from the QE perspective, if you're doing a lot of qe, then that allows the government to issue a lot of debt.

So, I mean, I think, as I say, I think it's quite aligned with what Trump's mandate is at the moment.

But I could see it turning more problematic down the road, particularly if the administration is looking to the Fed to finance the deficits with a lot of bond purchases, then that wouldn't fit with his worldview.

And I think the other thing, that's a big unknown, he says the Fed should have tightened policy in 2021.

There was a lot of money printing from the government.

The money supply was growing.

But that leaves open.

What is his model?

Is he going to bring back monetary aggregates?

Is he going to look at credit growth?

So he has a very different perspective.

He's been critical of the Fed's models.

He said the models that they have are back from 1978.

It's kind a Keynesian Phillips curve.

You get inflation.

If you get wage growth, you get inflation.

And that's the only thing you need to look at.

He's kind of saying, no, you need to look at Money growth, you need to look at credit.

But that would be a very radical departure from what we've seen in major central banks in the last while.

So as I said, I think he would be the more interesting candidate in terms of more uncertain as to how things could go radically different.

And I think actually from a markets perspective, he could be a lot less favorable in the sense that if he's less in, you know, less inclined to do asset purchases, less inclined towards bailouts, more inclined for markets finding their own level that that could be.

There is a certain scenario where that could be quite more, quite a bit more challenging for, for equity markets.

So a couple of things I took away from that.

Some of it you've, you've already mentioned, but a couple of things he was very good at referring to Paul Volcker and, and kind of the things that he did, but he forgot to.

He left out one important point and that is that actually that Volcker specifically told Congress that they had to cut deficit.

And that's a very important point to leave out, I think if you want to go down that route.

The other thing I noted was he completely denies that the pandemic and the Ukraine war had anything to do with the inflation that came.

It was all down to the Fed.

Now I will agree because we talked about it at the time on the podcast that yeah, I mean, the Fed was out of touch and, and we could all see that inflation was going to come if they kept interest rates at zero and, and all of that stuff.

But to say that there was no influence from the fact that we had supply issues and, and all of that stuff, I think is that just kind of shows your.

The color.

Now the final thing, and this is something that when I hear you talk about this, and I did pay attention to it when he said it because again, he mentions Druckenmiller as a name.

We know Scott Bessant has a connection with Druckenmiller and so on and so forth.

There seems to, when I hear more and more about what's going on, there seems to be very strong links back to Drachenmiller.

Or you could say maybe it's back to Besant, I don't know.

But it kind of feels like there's now going to be this new small group, elite group of these hedge fund titans who may be extremely influential in terms of Fed and monetary fiscal policy going forward.

And given the fact that they're all billionaires, I'm not so sure that that's actually going to be in the country's best interest.

But what's also interesting about that is that as far as I remember, and, and so don't take it for more than, than my recollection here that that both Drachenmiller, I certainly Paul Tudor Jones, whom I think is part of that kind of group of, of, of people.

I mean they really talk about how they expect much higher rates in the future because of the ballooning deficit.

So that feels, that sits a little bit odd with me in, in the sense that they, they actually expect things to get much worse, but they're being put in charge to kind of solve the problem.

But if you have your own positions in one way, how, how likely are you going to go against that?

I don't know.

Yeah, no, you're right.

And I mean, I think the likes, as you say, Druckenmiller and Paul Tudor Jones, they all appointed to the coming wave of challenge with entitlement spending, et cetera.

And that has gone away and it's going to get worse.

On the back of the big beautiful bill, you're already at a huge deficit.

So I think that's where, as I say, that's where it could be a challenge point if you had the likes of Warsh in there because he has been critical of the Fed for facilitating this fiscal proficiency.

But what's he going to do if they stop doing that?

Does that push up?

I mean, in theory that would push up bond yields and kind of naturally force the administration to do something, but the Trump administration has already had a chance to try and do something on the deficit and they haven't.

So yeah, you could have a kind of a stress point there at some point in the future.

So yeah, I mean, I do think they are all in, in the camp of kind of deregulation as well and more kind of right wing types of ideas.

And you know, and Besson's philosophy seems to be to try and grow your way out of the deficit.

Whether that's achievable or not, who knows?

Probably seems optimistic.

So yeah, I mean your point on excessive influence from hedge fund managers.

Yeah, interesting.

Yeah.

But I mean it doesn't really.

Nothing really surprises you with this administration, does it?

No, no, no, no, no, no.

I mean linking it all back to kind of our world.

Right.

And for sure it seems like the Fed and maybe other central banks as well, seems like they've lost a little bit of their control, which is not unusual.

I think you go through cycles of strong central banks and weak politicians.

We are in the reverse at the moment.

Strong politicians and weak central banks.

I don't think that's anything new.

But obviously these cycles are long.

But I mean systematic strategies, we do try to build models that ignore the, the noise.

But maybe what we could say, and it kind of leads into our later discussion about the challenges we're seeing is that maybe at the moment, actually it's the noise that generates the signal.

It's the signal.

The noise is the signal.

So because we're not really geared for, for that kind of environment, maybe that explains part of why this narrative driven world is a bit more challenging for us.

Like it was really under Trump 1.0.

Frankly, if you look at the annual returns during that period, it wasn't the strongest as far as I recall.

But anyways, let's move on.

Let's do a quick update on the oh by the way, interestingly enough, I know you'll follow it it but for those who don't follow it later on this month we're going to have Jackson Hole coming up, which will always be quite of fun to hear what central bankers are thinking and, and all that good stuff.

Anyways, from a trend following point of view, my trend barometer finished at 34 yesterday.

That's a weak, that's a weak number and I think it ties in very early, very clearly what happened early this month, namely on August 1st with, with the jobs numbers and the big kind of fallout we saw in, in our industry from that with a, with a reasonably big hit.

And it was actually the day after Trump had come out with the copper tariffs which also led to a big drop in performance because of these reversals.

So I think the weak number we see right now reflects that.

But I also want to add that this week actually has been much better, much more constructive for Trend followers and CTAs.

So we're kind of digging our way out of that initial slump as far as I can tell.

But it has been a period so far where it's been a story of a few themes.

One is that equities recently again are doing well well for trend followers, well by themselves.

But we did have of course a huge correction in, in, in in response to the Liberation Day.

And that kind of that, that screws up the, the overall annual performance because we had to cut back a lot of exposure during that period of time.

So the recovery we've seen in equity markets have not been captured fully in terms of performance.

So that's the struggle.

But it is definitely one of few highlights this year.

And the other highlights this year has really been focused on Very few markets as far as I can tell, such as gold, we know that that's been pretty steady, pretty good.

A smaller one that most people probably won't trade, but we do, that's live cattle.

That's definitely been a really nice trend in, in that market.

And then some of the grains mostly to the downside, but I think is it soybean meal that actually is going the opposite direction or.

I can't remember.

But soybean meal actually has been a pretty good trending market as well.

So it's been selective to say the least.

And one of the big sectors, bonds, has been very difficult in terms of transitions.

I think we're transitioning right now again to become mostly short in the fixed income space, so we'll see where that leads us.

But it's definitely been a challenge.

And currencies, although we're seeing probably more volatility in that area compared with recent years, it certainly hasn't been a straight, an easy ride.

So I, I imagine that's also where we're seeing some, some of the losses so far this year as of the 5th of August.

So a couple of days ago Tuesday we saw the following numbers which were pretty flat actually.

Beta 50 up 5 basis points for August down 3.93% for the year.

SoC Gen CTA index down 33 basis points, down 7.76 for the year year.

The trend index up 10 basis points but still down just shy of 10% for the year.

And the Short Term Traders Index maybe That's the surprise one down 72 basis points but down almost 6% so far this year.

So clearly these narrative quick market moves we've seen has not even been able to be captured by, by shorter term models and, and on a volatility adjusted basis they're actually struggling more so I would say than, than the longer term trend models.

MSCI world of 40 basis points as of last night up 11.7 for the year.

The US aggregate bond index S and P from s and P of 80 basis points up 4 and a half percent for the year.

And the S&P 500 total return up 10 basis points in August up 8.7% so far this year.

So before we jump into the articles, Alan, anything you want to add to, from your perspective to performance?

No, I mean obviously things were looking much better in July until we hit the last few days of the month.

The last day of trading.

Yeah, exactly.

And then obviously with the payroll that impacted in straight markets as well.

So I mean it did feel like some of the Managers that maybe had outperformed a little bit, maybe by being a bit slower had lagged a bit and maybe the managers who had been underperforming were doing better in July.

So it'd be interesting to see if we see that.

I mean it certainly has been the case that kind of faster and more medium term has struggled particularly this year, whereas it's paid to be more longer term.

So I mean, I think that's something to monitor as we go a bit further out there, if that is sustained.

Okay, well, let's dive into some of these gloomy articles we're seeing.

Well, they're not all gloomy, but certainly Wall Street Journal had a one that was a little bit gloomy in terms of trend following performance, to no surprise.

But of course, whenever an article starts out by saying something like, oh, the trend following industry has, has the worst start since 1998, you know, you obviously think, okay, that's, that's, that is, is awful, that's awful news.

But let me just put it in context for the people before you, you take over a couple of things.

First of all, I did notice, and I'm just curious about this, I did notice that they were using an index called the Pivotal Path Managed Futures Index.

I've never heard about the Pivotal Path Managed Futures Index.

So I don't know how reliable that is in terms of an industry benchmark.

But even if it is reliable, I mean this is only like the sixth down year so far since 1998.

So you know, that's pretty decent for an industry to only have had six down years on that.

The other thing that when you start an article by saying, oh, it's been the worst period since 1998.

Now of course we don't have the Soc Gen Trend Index to reference back in the 90s, so I was just looking at our own performance at dawn and just looking at the 90s.

Yeah, okay, well actually 1998 was an up year.

Yeah, it was a little bit rocky in the beginning.

It was an up year.

Well, we also had an up year, a very Strong1 in 1995-1996-1997-1998 as I mentioned, 1999-2000-2001-2002.

So all I'm just saying when you use an article, a pinpoint like that, maybe you need to say, well actually this was just a bad, that six months out of a run for something like six or seven years that we're all positive for the industry.

So anyways, just, just putting a little bit of a caveat out there.

But anyways, tell me what you took away from, from Caitlin McCabe's article.

Yeah, so I mean, I think maybe the most interesting thing is when, when trend following performance justifies a big enough article in the Wall Street Journal or I mean, that's probably the main point.

It's not every, every week, every month that it is such a big focus.

I think that's the first point that I would make.

I mean, the article I think summarizes well the challenges and some of the debate that's been going in the industry.

And I mean it's not just purely focused on the trend following industry.

It kind of zeros in on Mana HL and the challenges they've been having.

And it highlights their recent results where I think their AUM has been growing.

They've had very strong inflows, but their fees have been going down because of not being in performance fees.

And obviously they've been challenged on the trend following side.

And the article has some quotes from the CEO and the CFO highlighting that it's been one of the toughest periods for 25 to 30 years.

And there's the classic line in there that trend following is not broken.

So how many times have we had to say that?

It does highlight as well.

It's not the first time the strategy has faced criticism.

All true.

And it quotes somebody highlighting the US 10 year yield very much up and down in a range.

So I would agree with all of that.

It's been very rangy for three years now.

It does highlight in the paper that it says it highlights one of the weaknesses of trend following.

It doesn't work when markets are choppy.

Well, yeah, you can't disagree with that.

As I say, you know, it's probably more interesting to think about, you know, are these articles a country indicator?

Is this, you know, is this the dark darkness before the dawn?

Possibly.

You know, if you go back, there was an article in August 2018, Lawrence Fletcher wrote in the Wall Street Journal the big hedge fund strategy that isn't working.

So that was definitely trend following was in the midst of a very serious drawdown and 2018 was a tough year as well.

And then Lawrence Ditcher, I think he must have moved TFT because in 2019 he wrote an article which is quite a. I think this is the article where basically David Harding kind of says they were downgrading or they were less optimistic, they weren't exiting trend following completely, but he was saying that the outlook wasn't as positive for trend following anymore.

So that was September 2019.

But actually in 2019 performance was starting to improve.

I would say by kind of the middle of 2019, performance for the industry was starting to improve.

So maybe we need a second article like this in the next six months to mark the bottom.

I'm not sure.

But certainly there is a sense that in the midst of drawdowns you will read more of this.

I don't think there's anything that people in the industry would disagree with.

We've seen the challenges before.

I think it is hard to argue with the narrative that as you say, markets in the current environment are choppier.

You've got these about turns on policy in relation to copper, et cetera.

So.

Yeah, but equally back in 2019 I heard plenty of people telling me, oh, trend following is not going to work anymore.

Central banks manipulate markets and they dampened the volume.

You're not going to have big trends in markets anymore.

And then we had good performance in the industry, 2021, 22 for a three to four year period.

So markets change.

We will eventually come out of the cycle.

But, but, but, yeah, I mean I think it's interesting that CTAs are back in the headlines on the Wall Street Journal for the, for the wrong reasons, as usual.

Yeah, no, absolutely.

And there was one quote that I thought was probably very.

Summed it up pretty well and that was the case for trend following hasn't changed, but the burden of patient has gone up.

I think that, that, that is true, but here's the thing and, and maybe they'll tie into our next conversation.

Next topic, which is a LinkedIn article you wrote as well.

But, but there are a couple of things that I think about when I read these articles.

Right.

So why do people in the first place want or why should they in the first place even consider managed futures?

Trend following.

Right.

It's because it's non correlated.

So you can do all your studies and it improves the overall portfolio.

There's no discussion.

There's never been any evidence to suggest otherwise.

So, so what surprises me is that a lot of people is quote unquote unhappy with their diversifying instrument or strategy in say an equity portfolio that it's not firing on all cylinders during a time where the equity market itself is compounding at 20 plus percent in the US at the moment.

I'm thinking this is wonderful news.

This is the best time that your diversifier shouldn't be, you know, first of all, it shouldn't be making money necessarily.

It could do, but it doesn't have to.

And you're making all this money in 60, 70, 80% of your portfolio.

Why do you even worry too much about your 1 or 2 or 5% allocation to trend following?

So from my point of view, I would flip it completely and, and, and, and look at it differently.

But of course the problem is also, I guess to a large extent that you have certain, I don't know, election cycles in boardrooms where people sit for a couple of years and they have to kind of defend something.

And, and, and maybe it becomes a challenge if you, if you just hit that wrong 24 period, 24 month period and if you're a believer in trend following and every time there's a board meeting you have to kind of of make excuses for it.

I understand that, but it's just, you know, then we're talking about again, kind of decisions based on the wrong basis really.

So yeah, those were some of my thoughts.

There was one thing, by the way, one thing that, that came up in my preparation.

I was thinking of, I mean, you obviously been on the side of, of the, of the allocation world.

You still are for that matter.

And I was wondering, is there a moment in your career where you have been the closest to cutting trend, maybe because of a period exactly like this?

I mean, is there something you can recall just to.

I definitely remembered it like the 2019 period as well.

You know, at the end of the day it's, you know, after a period of time, a tough performance.

You have to kind of go back to fundamentals and say it's kind of like what's your worldview?

How do you believe markets operate?

If you don't believe that markets kind of operate in a way that will eventually produce opportunities for trend following, then it would be hard to stick with it.

I mean, you can point to the statistics, but the statistics just tell you that you can prove that something is broken.

It would, would reject that hypothesis.

But I think you have to, it has to come back to something more fundamental that, you know, and I'd have that view that, you know, markets will are kind of inherently unstable.

You know, you go to periods of stability, but then something eventually will cause a trend.

But you know, I mean, even in the last few weeks I have been thinking about this, you know, for sure, you know, because it's, you know, performance, it's three years of, of meaningful, meaningfully negative numbers.

And I mean, I think the thing that's really frustrated me in this period has been, you know, that.

Well, can I just stop you there?

Can I just stop you there?

You say it's been three years, I mean a year and a half ago yes most managers was making new all time highs so I disagree with that.

I think it's been a 14, 15 month period that's been challenging.

Yeah the drawdown is nothing bigger than what it's been before so I view it a little bit differently.

I viewed more specifically as a period of just a number of big reversals happening in a few big sectors at the same time combined with lots of noise, political noise leading to equity V shaped sell offs.

That's how I see it.

I don't see it any other than that really.

Well my point is if you take the three year period performance has been poor flat and actually if you take the 10 year period the 10 year show up in the stock gen trend is 0.1 which is like I knew.

You brought that up which of course which is in your article and which Andrew jumped on straight away but then I looked at the numbers and actually in that episode I should correct that episode because well I can't correct the episode but I can correct it now I mentioned an armor saying well hang on I see that the suction trend index being up 96% over the last 10 years but when I went back to check the numbers because Andrew was saying to me afterwards are you sure?

I actually looked at the 10 year period but as of June last year, not June this year so it is true it's only been 30% in the last 10 years but hey a year ago it was almost 100% so you.

Know and I made that point, I made that point in my article that these long term measures are quite sensitive like that a meaningful drawdown does change the picture and if you go as you say if you go back to back 12 months it looked I think it was at annualized at 7% or something like that quite respectable And I mean I think if you go back to 2022 from memory I think like say in October 22nd if you did the analysis of kind of S and P versus soc gen trend like I think soccer trend was maybe ahead of S and P as of that point going back from 2000.

So these things long term measures do change But I do think yeah, I mean I think there are reasons it's easy to see why people might be concerned particularly in environment I think in my article I referenced that the 10 year Sharpe and the S and P is something like 0.8 or so you're at in a period where the realized Sharpe is above the long term expectations for equities and it's below indication of trend.

But as you say, sitting in the boardroom, sitting in the investment committee, if you decided to allocate a trend following 18 months ago and you were some research analysts and you said hey I've done a bunch of research, this is the greatest strategy ever.

Look at this zero correlation crisis alpha performance 2008, look at 2022, let's invest and then suddenly you're down 15%.

Well of course they're going to, you know, it's so easy to exit because people have careers, they got to look good in the committee, they got to look good in front of their peers.

So I mean I think narratives matter.

That's one of the points.

I said the narratives stories more than statistics.

Yeah.

Nothing is outside of statistical expectations.

But if the story is trend following won't work because of choppy markets and policy u turns, it's hard to argue, I mean hard to argue with or hard to to come up with a, a counterfactual to that.

It, you know what it reminds me of that thing you mentioned about the boardroom.

It reminds me and this is public knowledge so I, I, you know, even though I don't really like naming managers, but he went on OD lots to talk about it.

So I'm going to do it.

And, and that is this oil very successful oil trading firm, hedge fund that suddenly last year started taking bit bets, big bets on Coco.

And at the time he was saying oh yeah, but one of my analysts had come, you know, come by a few weeks ago saying look at this and, and here are all the reasons why Coco is going to go to 20,000 and all of that.

So they start buying into Cocoa.

You know, at the same time the CTA's were selling coco because of all constraints.

Right.

So they were buying into this and of course they came out, this came out in a news story this, this week or last week that that particular fund is down 57% or something like that this year.

A lot of that due to you know, mistaking bets on, on Coco.

So yeah, I mean you can be, you can be, you can have bad timing, let's put it that way for sure.

Now, is there anything else you want to highlight from your article?

People should go and read it of course on LinkedIn.

But anything else you wanted to, to highlight on that or do you want to jump into to the last paper that you brought along with you, which is from our friends over at aqr?

Yeah, I mean from my own article.

It's Kind of in line with what you've said.

I mean a lot of it is around the downside of zero correlation.

Right?

Exactly.

People like zero correlation.

But what comes with zero correlation?

It means that there will be periods when equities are going up and you're making money.

There will be periods when equities are going up, you'll be losing money.

And that's just.

But it comes back to the behavior aspect.

But yeah, so it's called the highs and lows of Allocating to trend following and it's on my LinkedIn newsletter.

But the final piece then is an AQR paper called Diversifiers Forever, which is an interesting topic.

It's back to this idea of if you're a really long term investor, do you really need diversifiers?

And very often I get this speaking to family offices, long term investors that say, oh, we're not interested in hedge funds.

Hedge funds are.

They're ball dampeners in a portfolio.

They're fine if you want a less smooth ride.

Exactly.

But for us long term investors, we don't need that.

But this paper takes the perspective of endowments who are long term investors.

They've got their ultra long term because you might have an endowment or foundation to support a university.

So the portfolio is forever.

Basically the idea is to maintain the real value of the portfolio and try and generate a return or an income that they can draw down annually, say something like 5% or the like.

So what AQR do in this paper they look at the kind of the typical asset allocation of UK foundations based on surveys from Mercer and Cambridge which show kind of, as you would expect, kind of a growth heavy portfolio, 45% public equities, 20% private equity, 10% real estate, hedge funds, bonds, a little bit of cash.

And then they look at, well, you know, is there a case for these types of portfolios?

Would they be better off if they added some strategies like trend following liquid diversifiers, I guess, long short equity.

But basically in their analysis they use trend following to represent liquid diversifiers.

Now it's a little bit contentious what they do because the analysis goes back to 1972.

They're basically looking at how this portfolio would have done back to 72.

And how would adding liquid diversifiers have done so?

I mean, to solve the question which you alluded to the lack of industry data in the 90s for trend following.

It's represented by the Soc Gen trend index.

And then they used the adjusted to 10% volume actually.

And then they used the HFRI Systematic Macro Index, they used that between 1990 and 1999, but they discounted by 60% to reflect, I guess that there's a survivorship bias because it wouldn't have been live back then.

And then prior to 1990 they use a hypothetical kind of in house trend following system and they also discount that by 60% but in some markets they wouldn't have actual futures markets.

So it's a bit hypothetical.

Were you going to say something?

Well, I was just going to say why don't they just look at managers who have been around to the 70s?

Because there's still a handful of those.

That might be, but they are the survivors.

So you know, sure, they live through it.

Right.

You could use John Henry or somebody as well.

And then you know, they would have obviously hit a big drawdown along the way and then gone out of business.

But anyway, what is interesting, I mean I think the big point of this analysis that they bring out is the importance of more stable returns.

So if you think about it, if you're an endowment and if you have an equity centric portfolio, if you go into an environment like, like 2008 or 2000, 2002 or 1973, 1974 bear market and that whole period of really challenged real returns, the value of your portfolio goes down and you're still drawing down your 5% every year.

So a smoother ride means a higher average payout for whatever it is you're funding, whether it's a university, university or whatever.

So that actually has implications if you think about it.

For like in Ireland if you have a pension, once you go into retirement, you move it into like a post retirement vehicle and you have to draw down like 4% every year from that or 4 or 5%.

So again the same logic applies for even you might be kind of long term having that stability is important.

So what it shows is that Even obviously reallocating 10% of, of the portfolio into liquid diversifiers did improve the statistics, the return, the sharp, et cetera.

And also they look at kind of more of a portable alpha approach of leveraging up by 10% or allocating to liquid divers on an unfunded basis.

And that also improved the numbers as well.

I mean it's interesting when you talk about, we talked about Sharpe ratios, et cetera.

I think it had the Sharpe for the liquid diversifiers historically at 0.44, which is that high or low, who knows.

They also do a forward looking analysis based on some assumptions and it was lower in that, but still the results were the same.

So I mean, I think interesting analysis.

You might debate some of the return assumptions.

They are quite pessimistic on equities as well.

I mean, one point in there that was quite interesting actually.

I mean, AQR have written plenty about private equity and the downside of private equity.

So no surprise that they're making some comments negatively on that.

But they did kind of highlight how the cost of debt, the real cost of debt has gone up from say 2.2% to 4.5%.

And they reckon that the return impact of that on private equity, it goes from a boost of the leverage boost goes from, from 4 percentage points down to 40 basis points.

So about 3.5% reduction in the expected returns in private equity because obviously in the last 10, 15 years we had close to zero funding costs.

Obviously for riskier transactions you would pay a risk premium.

So I guess their point is in an environment of more challenged equity returns, it makes sense.

I mean again, you might say, well this is very sensitive because they've added in the 1970s, which are was obviously a very tough period for traditional assets in real terms.

Bonds and equities were negative in real terms.

So what to do is to run another analysis where to take out the 1970s and to take out the last 15 year bull market to kind of say, okay, let's take a really good period and a really bad period for traditional assets.

So that was whatever that was 1980 to 2009.

And they say the results still stack up from that perspective.

But I mean again, I think it's one of these ones where people might be a bit skeptical of the results because it seems pessimistic under return assumptions for equities and a bit more optimistic maybe under return assumptions for liquid diversifiers.

So it comes back to your beliefs again.

But I think their point about stability of returns and how that reduces the volatility of the payouts and ultimately can lead to a higher average payout.

I think that's a very valid point and it's probably not something.

It's another way, I guess of presenting the argument for diversifiers even for long term investors.

Yeah, no, absolutely.

And it really does help on the compounding of returns if you don't have these huge drawdowns.

Speaking of which, just looked up some statistics while you were talking.

If you take the period January 2000 to June 2025 in terms of correlation, again, we're talking about diversifiers.

But a lot of people tend to go back into things like long short equity, well, the Barclay Longshore Equity Index Actually has an annual correlation to a 6040 portfolio of more than 60%.

0.6.

If you take some of the other ones, even Global macro is 0.34 correlation, positive correlation.

Right, right.

But they're all these, they're all positive.

Maybe with the exception of market neutral, it's been pretty, pretty flat.

But then comes the softened trend index.

In that period, it's negative 0.38 correlation.

So you know, these things are really important.

If you look at those four crises that we know of, the tech bubble, the debt crisis, the COVID the inflation period.

I mean again, most of these indices that you have in terms of traditional hedge fund strategies, they're all down.

Maybe with the exception of the tech bubble, there's a little, there's definitely a few positive numbers, but for the most part they're down in that, in, during those crises.

And of course, you know, the suction trend index were positive, strong with exception of COVID where it was just a little bit positive, but it was very strong.

And, and of course what it all comes down to, which you've alluded to already, is of course, what is the impact of these diversifiers on a traditional portfolio?

That's what we really should be concerned about.

And that just isn't any real competition when it comes to adding 20% of one of these strategies compared to adding 20% of say a Soctin trend index.

The improvement that you see in your overall portfolio chart up is just, you know, unbeatable, comes out with the highest sharp if you do that compared to any of the other sort of Barkley hedge strategies.

So it is.

Yeah, I mean the evidence is there.

It doesn't mean that people will embrace it, we know that, but I mean they will, after a good run they'll probably say, oh yeah, of course we should have some of that, but, but it's the brave ones, it's the real, it's the people with real conviction that, that, that keeps, keeps it in there.

But also maybe, actually as you say, maybe the, the, the articles we're seeing at the moment coming out is still some kind of contrary indicator that we may have seen the worst and that things get better.

It doesn't mean the world gets better, it just means that things get better from a trend perspective.

I would not be surprised personally, but only time will tell for sure.

Yeah, I mean, I mean in 2022 I heard a lot of people kind of saying, oh, allocated trend following.

I'm not hearing so many people say it now, but you know, the long term characteristics of the asset class haven't changed, have they?

No, no, absolutely not.

Anyways, this was fun and very educational as usual.

Thank you for preparing all of this Alan.

If you want to leave a little nice message review for this episode and in appreciation of Alan's hard work for that you can go to your favorite podcast platform is a good place to start and leave a rating and review.

It certainly helps more people find the podcast as usual.

If you have questions for any of the upcoming guests, you can email them to me.

Infobtraders on plot.com Usually I would say who's coming on next week.

I completely forgot to look it up so I have no idea who I'm speaking to next week.

I know it will be a fun and good conversation of course, but I just can't remember exactly who's on.

Anyways, from Alan and me, thanks so much for listening.

We look forward to being back with you next week.

And in the meantime, as usual, take care of yourself and take care of each other.

Thanks for listening to the Systematic Investor Podcast.

If you enjoy this series, go on over to itunes and leave an honest rating and review.

And be sure to listen to all the other episodes from Top Traders Unplugged.

If you have questions about systematic investing, send us an email with the word question in the subject line to infooptradersunplugged.com and we'll try to get it on the show.

And remember, all the discussion that we have about investment performance is about the past, and past performance does not guarantee or even infer any anything about future performance.

Also, understand that there's a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions.

Thanks for spending some of your valuable time with us and we'll see you on the next episode of the Systematic Investor.