Navigating the Age of Uncertainty with Trend Following ft. Mark Rzepczynski

[00:00:01] Intro

You’re about to join Niels Kaastrup-Larsen 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.

[00:00:22] Niels

Welcome and welcome back to this week’s edition of the Systematic Investor Series with Mark Rzepczynski and I, Niels Kaastrup-Larsen, where each week we take the pulse of the global markets through the lens of a rules based investor. Mark, it’s great to finally be back with you. I’ve missed you a couple of times. Alan has had the distinct pleasure of talking to you.

So how are you doing?

[00:00:43] Mark

I’d like to say I’m more than surviving, but surviving might be the key word. I’m looking at you on our podcast and your listeners don’t get to see us, but I think you got a few more gray hairs and I think I’ve lost a few hairs, since the last time we talked, given all of the things that have been going on in markets in 2025.

[00:01:06] Niels

That may well be true for sure. Anyways, it is great to be back with you, and we’ve got a great set of topics we’re going to be tackling. As always, you have a wealth of topics to talk about, given your very successful blog. Anyways, we’re going to be tackling some of them but before we do that, I have a few things on my radar.

I always want to offer the opportunity for you to go first. If there’s anything that we haven’t listed on our list of topics that you wanted to bring up that’s been topical. Otherwise I’m happy to dive into some of mine.

[00:01:46] Mark

Let’s dive into what you’re thinking because, you know, we haven’t talked for a while so I need to hear what’s on your mind.

[00:01:54] Niels

Okay, so the first question is a little bit offside here. Do you follow ice hockey?

[00:02:01] Mark

A little bit. I should be, given that in New England this is a big thing, but I feel like there’s a very strong set of ice hockey fans in New England and they’re rabid fans. But beyond that it’s not as well followed.

[00:02:18] Niels

The only reason I bring this up on this Friday afternoon is because of the sensational win last night where Denmark beat Canada to make it to the semifinals of the world championship. Canada, the most successful ice hockey team of all times. And actually as far as I Understand a pretty good team at the moment and little country like Denmark beats them. I thought that was quite sensational. So, that was on my radar this morning.

Literally, 10 minutes ago, when I sat in front of the computer, a headline pops up on the Financial Times that I thought actually is interesting. It’s completely unrelated to trend following or anything like that. And the headline is Trump threatens Apple with 25% tariffs on iPhones.

And basically, what the article is saying that, you know, he wants Tim Cook to produce iPhones in, in the US not just in India. The reason I want to bring it up is because I think last week I may have mentioned a book. I came across a book that just was released by a guy called Patrick McGee or written by a guy called Patrick McGee, which I found fascinating.

I listened to a conversation about it. I started listening to the book. But it’s really about how Apple built their supply chains in China, but also to cut a long story short, how it is completely impossible for them to produce iPhones outside of China. Really. I mean, all the components are produced in China. And the technology and the skill set it requires to build these iPhones outside of China, it doesn’t exist according to this chap. So, I find this highly, highly interesting because even if Apple wanted to, I wonder if they can. And then it’ll be an interesting dynamic to see if there’s a little bit of a break between sort of big tech and Trump, in that sense.

[00:04:16] Mark

Well, there’s an old adage that the policymakers of today were educated by their economic textbooks of the past. And I think that a lot of people when it comes to trade have this view of, okay, we’re just thinking in terms of comparative advantage. You trade one good for another good. And this is how trade occurs.

And in the modern world globalization is based on supply chain integration. Every country does a little bit of a component and then we put it all together as a final product. And so, the global supply chains drive overall demand. And that’s sometimes missing in the whole discussion about tariffs and trade.

I feel as though that’s missing and I don’t think we could bring some of these activities back to the United States. And a perfect example is T-shirts. We made a lot of textiles in the United States. All of that moved offshore. I don’t know if American workers or the United States… That’s not what we have in mind when we say we’re going to bring good, high quality manufacturing jobs back to the United States. That’s never going to happen.

[00:05:45] Niels

No, and I get that. What I found fascinating about this book and actually some of the write ups is actually where, according to, I think it was the New York Times who did a write up on it, according to their sources, and this is, I think, Apple numbers, part of what makes this fascinating is the fact that you might argue that Tim Cook and company is the reason why China is probably ahead in terms of technology because of all the training the Chinese received from Apple over many, many, many years.

And according to this review I read (and then I promise to move on from this, and because I’m so flabbergasted by the number), according to the numbers Apple seemed to have trained 30 million Chinese. That is just a crazy number.

So, it’s no wonder why they have superior technology in some cases. Anyway, let’s move on to something completely different and maybe not.

I heard another conversation. This was with an interesting guy, Vincent Deluard (I’m not entirely sure what his last name was). Anyways, he was on Jesse Felder’s podcast, and they discussed number of things and one of the things I found really interesting that he said was, if you look at long term inflation there’s a very high direct correlation to social trust and the faith that people have in institutions.

So, to give you an example, apparently there was a study done where economists in nearly 200 countries left their wallet with money in the public place to measure the likelihood of it being returned to the person who left it.

And I think, actually from memory, that he said that the country, where it’s most likely you would get your wallet will money back, is Switzerland, which is where I live. So, I thought it was interesting. And then I thought, well, you know, actually maybe he’s right because there is very little inflation in Switzerland and there’s a lot of social trust in the country. In fact, the country I’m born in, Denmark I would probably say to some degree there’s maybe a link there. I thought that was fascinating, actually.

He also talks about some of the low inflation periods, in the 1950s, in the US, where social trust was pretty high and we believed in science, we believed in the army, and we believed in the government. Of course that trust got eroded in the 70s and, and Paul Volker had to come back and restore trust, in a sense, in these public Institutions. I don’t know what you think about that when I throw it at you like that, but I thought it was a kind of interesting way of looking at it.

[00:08:34] Mark

That’s an interesting issue between correlation and causality. So, you could sort of say that these things are correlated, but is one causal versus another? That’s my initial reaction.

Trust is a very interesting economic problem, and I think that a lot of people have written about this, trust is very much cultural. That there are cultural differences that causes people to have different levels of trust.

And surprisingly, Anglo Saxon law, or we’ll say the Anglo Saxon systems have a higher level of trust. So, in some sense, we’re willing to make contracts with other people without ever meeting them. And we could just sort of say, like, well, I’ll promise to send you goods, you’ll promise to make payment, we’ll sort of, you know, fax a document or email a document and then we agree to do some business together. Which is astounding when you think about it. Other cultures, they have a harder time doing that.

What we find is that trust is very much built on what the relationship is with families and relationships with government. And we’ll sort of say that those people in Southern Europe seem to have a lower trust level. Those in Asia seem to have a lower trust level. And what happens is that those then have stronger, you know, family networks. It could be a failure of governments. But what we find out is that there is a cultural component to trust.

And so, given your idea, if there’s a breakdown in trust with government, and that could be caused by inflation, it could be caused by bad policies, then you’re going to see that there’s also a breakdown in trust.

[00:10:43] Niels

Yeah, anyways, I’ve got a couple of more things that were on my radar that’s unrelated to what we’re going to be talking about. Yesterday I went to see the premiere of the latest Mission Impossible. Actually, it was pretty cool, in a very small local theater in Denmark, where I am today.

And I hope it’s not a good sign for the box office numbers because this little cinema. It wasn’t even full. I was like 25 people, something like that. Anyways, it was very cool. There was a message from Mr. Cruise himself, which they said they only play on the night of the premier. So, I thought that was very nice.

But the title, of course, Mission Impossible, it kind of reminded me of my own experience for 35 years now, trying to get investors to put a meaningful amount in trend following. It certainly has been a challenging mission, so to speak.

[00:11:38] Mark

I could see Mission Impossible, or listen to the Mission Impossible theme song and then, and then have, Jay Powell run across the screen. There are so many government officials that are fighting a Mission Impossible these days, and investors are doing the same thing. So, we’re all facing the Mission Impossible of how to capture higher returns and protect our downside.

[00:12:07] Niels

Speaking of running, Tom Cruise running, there was actually a fun little competition here in Denmark where at the royal premiere, whatever you call it, the red carpet one in Copenhagen, they had done a little competition.

I’m not sure what the prices were, but they invited all these people to try and run, and it would be filmed and all that, to run as close as they could to how Tom Cruise was, because, apparently, has a unique running style. And then the person who came closest would win something. It was quite funny. It was on television.

Anyways, let’s pivot again. Let’s shift gear to something completely different. I’m not entirely sure if there’s a question or a comment in here, except for, as you rightly said, that a lot of things are going on in the financial world, in the world at large. And I was just listening. And a lot of the problems, you and I know, from our experience, when things break, a big part of the problem is leverage in systems and whether it’s something you could have thought about in advance or not.

Then I was listening to a podcast conversation this week which was actually about bitcoin, and it was a conversation where (and I don’t know the details of these companies) apparently there’s a big bitcoin services company called Strike. Their CEO was on the podcast and he was talking about, even though I don’t think it had been approved yet, he spoke quite a lot about some new products that they were rolling out, lending facilities and what have you. So, essentially you could lend cash against your bitcoin so you don’t have to sell them. And he explained this in a lot of detail, with a lot of passion, even though I don’t think it was actually approved by any authority yet.

But what, what caught my attention, really, and this is what I’m trying to get at, is that throughout his explanation and promotion (let’s call it what it was), he kept on saying yeah, well, if you have an asset like Bitcoin that keeps compounding at 50%. And I’m thinking, how can you say, how can you even give people the impression that you think it’s going to continue to compound at 50%? Even if it did, you can’t say that. It’s completely crazy talk.

But the whole point about this was now you’re just introducing even more leverage. Now people can take out loans. The idea was you can just lend against that, and, because it’s compounding at 50%, after a year you can pay back the loan. You have made more money. It just went on, and on, and on like that.

Luckily, the host, which is a guy that I respect and who’s been on this podcast as a guest, he did counterbalance a bit trying to raise the issue of risk and you can’t rely on that. But it just reminded me a little bit about, as we go through this uncertainty, all this financial engineering, and more leverage ideas of products coming into the system, it really makes me a bit concerned about the future path of some of these things.

[00:15:18] Mark

Well, I remember, I won’t get this exactly right, but, ‘you can ignore the facts, but you cannot ignore the implications of the facts’. So, you know, nothing compounds at 50% for an extended period of time. And, I probably would say that that’s a dereliction of your duty. And part of podcasts, we’ll say, the educational component, is to sort of give people a realistic sense of what is possible and what is not. And there are limitations to what you can do in finance.

[00:16:04] Niels

Let’s talk a little bit about… So, I have one more topic, but I know we’re going to be talking about that. It’s to do with bonds. So, we’ll talk about that as we get into some of your topics. But let’s do the usual sort of trend following update.

By the way, I loved your analogy from last time you spoke with Alan, and I made it the headline of the episode – Nothing Good Happens Below The 200 Day Moving Average. I think it was recorded around the crisis.

And, of course, something good did happen because we got some financial advice from the Oval Office just to buy stocks at a certain date. And what do you know, it goes up by nine and a half percent in a single day. And since then it almost hasn’t looked back since.

So, so something did happen, something good did happen below the 200 day moving average that time but not so much for trend followers. Trend followers, we don’t really like these V shaped market moves and erratic reversals, and there’s been quite a few of them not just this year but actually in the past year, more or less. I think we made a high, generally, in the industry around April last year. Stocks, bonds, currency, we’ve seen many, many reversals.

I can’t really remember when we last saw that many reversals in a 12-month period but. And it’s reflected, I mean, some of the managers who’ve been around for decades are seeing their worst drawdowns ever. So, it is showing up in the numbers. I’m curious, from where you sit whether you have any thoughts on trend, you know, generally speaking so far this year, big picture or small picture, whatever you feel like.

[00:17:45] Mark

Well, let’s look at a very high level and then we can go down into a deeper level. At the high level, I think that this causes us to rethink the relationship between crises and trend following. So, you know, we’ve used a term ‘crisis alpha’. We think in terms of, like, if there’s a drawdown in stocks, that trend following will do well, that this is a safe asset, to some degree, which we’ll talk about in just a second.

But we’re finding out that there are different types of crises. All crises are not the same. And it’s harder for us to generalize what the behavior will be in a given downturn in the stock market. It has to do with its length. It has to do with the type, it has to do with how fast, maybe, the market comes back. So, we can’t have a one-size-fits-all view between trend following and crises.

[00:18:52] Niels

Yeah, as we’re speaking right now, the headlines are flashing on my screen here. Trump has now proposed a 50% tariff on Europe even though I thought they had like 90 days to find out, negotiate something.

So, of course, markets are doing another reversal as we speak, just to underscore my point. My own trend barometer is certainly reflecting this difficult time. It closed yesterday at 30, which is pretty weak. It aligns well with the numbers.

These numbers that I’m going to say are from Wednesday evening. The BTOP 50 down 1.7% so far this month, down almost 5% for the year SocGen CTA index down 1.78% for the month, down 8.5% for the year. The Trend Index is down 2.6% for the month, down 11.66% for the year. Short Term Traders Index pretty flat for the month of 18 basis points and only down 69 basis points. So, they’re holding up well this year.

MSCI World up 4.5% so far this month, up 3% for the year. The S&P US Aggregate Bond Index down 1.5%ish this month and down 1.5%ish for the year. And the S&P 500 Total Return up 5% so far this month as of last night and they’re flat now for the year, which is not what you necessarily expected.

Now, before we get into your topics, Rick sent in a question that I wanted you to comment on, if you don’t mind. Rick writes, “Admittedly I didn’t stress test this with my own math and took a shortcut using ChatGPT. I sent it two charts, SG trend and the Vix since 2000, and asked, ‘does trend work better in low vol environments?’ I assume the answer would have been yes, but this is probably recency bias. SG Trend is poor this year and vol are elevated. Here’s what it told me.

No, historically trend following, eg SocGen Trend Index, tends to perform better in rising or high volatility environments, not low vol. The reason? Trends emerge more forcefully during market dislocations, macro shifts and regime changes often accompanied by elevated volatility. Periods like 2008, 2009, 2014 to 2015, 2020 to 2022.’” And Rick just ask, you know, what does our work and experience tell us in this regard? Any thoughts on that?

[00:21:28] Mark

This is really a complex issue because we’ll sort of say that we need a certain level of volatility in which to identify trends and exploit trends. If you don’t have volatility, then you’re not going to be able to either find a trend or if you do find a trend, actually be able to take advantage of it. So, we do know that extremely low volatility in any given market could be a period of poor trend following performance or, we’ll just sort of say, modest performance.

Now what will happen sometimes is that you can increase your position size to offset some of that, but then what happens if there’s a change involved? Then you could be caught on the wrong side, and it could be detrimental. We also know that at higher vols that there’s going to be more dispersion, more opportunity for trading and that’s going to be better. But then we also know that if there’s a spike in volatility, usually there’s going to be a reversal in trends.

Given that reversal in trends there’s going to be sort of a potential for short term losses. And then what happens is that you have to wait or, as the volatility comes down, then there’s then going to be another new opportunity for trends.

So, you have to break down volatility into different segments and then you have to look at the type of model that’s being used. So, it’s not an easy question. I think that ChatGPT sort of highlights some of these issues, but it’s more nuanced.

[00:23:09] Niels

Yeah. The way I think about it is that if we can get the initiation of a trend in a low vol environment, then certainly for the people who don’t adjust their position size, it allows them to put on a big position. For those who are dynamically position sizing, it’s maybe less of a concern in that sense. But then it really depends on how vol evolves during the trend because often, from memory at least, what I note is that if it’s a really long sustained trend, actually part of that trend can actually be relatively low vol in itself. And then, of course, you’re absolutely right, often around at least periods of consolidation or even potential reversals, volume tends to go up.

Which is why it kind of makes sense, to me at least, that that’s the time where dynamically you would reduce your risk. Yes, you can then be a little bit low, have low exposure if the trend continues. But often it doesn’t. And so, you have a chance, maybe, to reduce your risk before the actual kind of give back happens through the reversal of price.

Anyways, so, you’re right, I mean, it is complicated, and I don’t think you can say… Because the markets we trade are so different, I mean, what’s the vol in cocoa? How does that relate to the vol in the S&P? It doesn’t.

So, I think that it’s much more nuanced, as you said, in terms of the word volatility and I’m not sure we can really talk about regimes, per se, because the regime we often think of is the financial part of the portfolio but doesn’t really take into account what goes on in the agriculture or the commodity part of the portfolio.

[00:25:00] Mark

Now, the one thing I guess I would sort of say, that I could not say with certainty but I have high conviction, is that if you’re in a period of extended low volatility, and you say that I’m not getting the returns that I expect and so therefore I’m going to lever up all of my positions to offset this low volatility. If you don’t dynamically adjust quickly, you could be in a situation where once again, leverage is not your friend. Leverage could be your enemy.

So, if, let’s say, normal vol is 12, the market goes down and it’s only 6, and you say, well, now I should increase my position size across the board because I want to keep my vols fixed at a certain level and I just want to sort of make up for the lower vol with higher leverage. That’s a recipe for potential disaster.

[00:25:57] Niels

Sure, but to calm the nerves of any investors who are listening to this, I think it’s fair to say that most experienced managers at least, they will always have a flaw. So, whatever vol does in real time, like when the interest rate went to zero and just stayed there, it doesn’t mean that you could have, you know, infinite amount of short-term interest rate contracts on. You obviously look at long, long-term vol flaws to make sure that that doesn’t happen. But of course, yeah, there are volatilities, very important ingredients in all of this.

So, okay, let’s pivot to your topics, Mark, because, as usual, they’re really good. I’d love to hear where we’re going to go with this. I’m just going to throw some guidance to you and then you can kind of take it from there and I’ll try to keep up.

The first thing just to remind you was this, you know, naming periods and I think you have, well, you have a name for this period. So, I’ll hand it over to you.

[00:27:01] Mark

Well, I like to actually sort of… and I think a lot of investors like the idea that they want to say, well, categorize where we are now. Give it a name. Tell us what you know, and give us a theme associated with 2025.

So, you know, I started thinking about this and I said, well, this is The Age of Uncertainty. You know, we’ve been having tremendous uncertainty on policy – monetary policy, trade policy, politics. But then I look back and there is actually a BBC series called The Age of Uncertainty, by John Kenneth Galbraith, in the 1970s. You can still get it on YouTube.

His major view at the time, you know, it was in 1977, is that we had market failure and that what we needed is the state to come in to solve this uncertainty. So, this was during the ‘70s, we had the stagflation period.

So, he argued that this was necessary for the state to solve the problem in The Age of Uncertainty. And then I sort of said well, what makes this period different? And we’ll say that this is the uncertainty that was created by the state as opposed to excesses in the market.

So, if we go back in a lot of our crises that we’ve seen in the past, it’s been, we’ll sort of say okay, housing bubbles, tech bubbles, that there was excesses that were built into the economy and then those excesses were now sort of… We had to return back to normal and there was a revision and that caused a financial crisis. It may have caused markets to dislocate. But this one is different because it’s actually the state that sort of created this.

So, we don’t want to get into a blame game per se, but we’ll sort of say that with many of the trade wars, that trade tariff issues are a man made problem, it’s not a corporate problem. And so that’s what’s causing a lot of the uncertainty. That’s what makes this sort of unique.

So I’ll call this The Age or The New Age of Uncertainty because it’s a different type of uncertainty than what we saw in the ‘70s. But it’s important for us to think about this because that will come back to how we view trend following.

And in particular, there are a number of descriptors that we could use for markets and they have different implications on how a quant model, and a trend model in particular, will work. So one is that there’s risk. Okay, we can measure that by the VIX index, as just a general.

So, we just had the discussion about volatility, but interesting is that we had risk falling, actually, since the middle of April. It’s above the six month moving average. But, you know, I think I said earlier this week the VIX was at about 18, which is, you know, fairly low when you consider all of what’s going on. So, we’re not in a risk environment, surprisingly.

So, many people say that, well, if there’s a spike in VIX, that means that there’s going to be a reversal in the stock market, and a spike in VIX or spike in volatility is good for trend following. Surprisingly, we had a spike, but now we’re back to normal, but it doesn’t feel like we’re normal. So, the markets are sort of not discounted in terms of a risk perspective.

The second way in which we look at markets is by dispersion, and that will be the spread of returns over a period of time. Now, what we’re sort of seeing is that the CBOE has a dispersion index. And what they’re doing is they look at the volatility of a given market relative to the VIX. I always want to look at the dispersion of returns across a set of assets. But, on that, we had less dispersion because we had only a key causal driver or single driver that was causing or not causing dispersion. So, dispersion is up, but it’s not at an extreme level.

So, which again is interesting. If there’s less dispersion then there’s less opportunities to diversify and make money on trend following. So, what I also look at is what I call the market network. So, this is looking at network analysis. We can look at correlations, we can look at causal networks.

So, the network has become very tight earlier, in April, and that was because everything was driven by a focus on one single theme which is the tariff issue. Now, you will recall, that the network has less compressed. There’s more dispersion across the correlation networks across all markets. So, we’re turning back to normal.

Now. The one thing that we have, say, is now we can look at uncertainty, and uncertainty is different than risk. We do, now, have uncertainty indices which they look at word count in different newspaper stories where if different policy issues are brought up in the stories. But we have a monetary policy uncertainty index, we have tariff uncertainty indices, we have global and country volatility uncertainty indices.

And what they’re doing is that they’re giving us some interesting stories. All of them were elevated earlier in the year. Trade was actually out of control in terms of it was almost off the charts as an outlier.

We’ve seen that the uncertainty in trade has come down but is still elevated. Uncertainty in the United States policy, uncertainty, is higher. And it’s interesting that policy uncertainty in the United States is higher than the policy uncertainty around the globe and in Europe.

So, if we have less uncertainty in Europe, called policy uncertainty, than in the United States, then that can explain why there’s been more of a flow of capital to Europe than relative to the United States. Because, if you sort of said I’m a foreign investor, if I say that there’s more uncertainty in the United States, I’d say like, well, then that makes a place that it’s a less likely place I want to invest in. And it makes Europe a more interesting place.

Now, what happened is that we had uncertainty spike, and then it’s still elevated. And so, uncertainty has not been fully resolved, it’s been partially resolved. And this uncertainty spike and then reversal can maybe explain why trend followers haven’t done as well.

Finally, the final issue that I look at is financial stress, which is also interesting. The financial stress indices, there are a number of them that comes from the ECB. There are also stress indices that come from large banks as well as the St. Louis Fed. Stress is elevated, but it’s still nowhere near what we saw in 2020 or 2008.

So, we have lower volatility, we have less stress, we have elevated dispersion, but it’s not out of control. And we had spike in uncertainty, but it’s come down, but it’s still very high. And so, given that is the framework we see around the world, the question is how does that translate to markets?

And what we’re seeing is that the markets have sold off significantly based on uncertainty. Uncertainty has been partially resolved, or the uncertainty has come down, and now there’s been a reversal. So, you say like, okay, well how did I lose money then?

Well, when we think of uncertainty, uncertainty is actually, in a very broad sense, our level of ignorance. It’s what we don’t know. Uncertainty is resolved once we have new knowledge or that our ignorance is eliminated. That’s one type of uncertainty (we’ll call it intrinsic). There’s also just uncertainty where you can’t sort of say what maybe government officials are going to do on tariff policy. That’s a different type of uncertainty. But what we’ll sort of say is that when uncertainty is resolved, it could either be a good result or a bad result.

Most times when we thought about crises, and where trend following has made money, has been when there’s been uncertainty, but then the resolution was something that was negative. Here we had uncertainty resolved. So first you had a premium. Do you say like, well, I want to avoid markets because there’s high uncertainty. But then the resolution of this uncertainty, the elimination of this ignorance, was on the upside or positive. So, we didn’t get the effect we… In fact, we went from uncertainty that was biased to be negative to uncertainty resolved to be positive. And that caused a big reversal in markets and that caused a big reversal in trend behavior.

It’s a long-winded answer to say what I’m looking at…

[00:38:14] Niels

Sure.

[00:38:15] Mark

I could actually sort of make it more succinct in that some people calls called Donald Trump ‘the long gamma president’, in the sense that you’ve got to get long convexity because you never know what’s going to happen. And if I have to use one word for the last couple of weeks in the markets, is that the Donald Trump term is that markets are ‘yippee’.

[00:38:44] Niels

Yes, well that’s certainly one of his terms.

I mean, another way of thinking about these periods, in my simple way of thinking about it, is just that we have these “crises or sell-offs” or let’s call them reversals. But there’s no follow through. That’s kind of what is missing here. It reminds me… This is also why I think, in previous conversations, I’ve said that this reminds me, so far, a little bit about COVID where we had this very violent initial reaction. The follow-through didn’t actually come because the central banks step in and, you know, it was “solved”.

And at that time trend followers, at least I think most of them, had kind of gotten ready for the follow-through. The positioning had changed. We were ready for a further sell-off in and risk-off, so to speak. But it just never happened. So, it was a difficult environment. This feels somewhat the same to me.

There’s another component that I think we’ll come to. But let’s stay with what I think you also wanted to maybe tie into all of this and it’s kind of, you know, what we’ve learned. Diversification didn’t help, did it help, the whole correlation problem. Did you want to…

[00:40:16] Mark

Yeah, well first I could sort of say that, yes, it does have a feel very much like the March/April period of 2020. And again, it’s sort of interesting, and it’s at a very high level, that we’ll sort of say, part of the whole COVID crisis was manmade in terms of lockdowns and then a response. Trade crisis, again, was man made. And so, what is unique with these crises is that they’re manmade events, which means is that they could be turned on and turned off fairly quickly.

You use the word follow-through. We would like, as trend followers, I guess, a behavioralist response by markets. And when I say a behavioralist response, that people will then slow up their investment decisions. They will start to cut back in some of their exposures. That there’s behavior that then takes time to occur which causes trends in markets. If you have quick response from government, you don’t get that behavioral response in markets because they have to react much faster.

[00:41:48] Niels

Yeah, and in an odd way, and I hope people won’t misunderstand this when I say it because it’s not a political statement, I would have the same view regardless of who’s in the Oval Office, but we have, in a sense, we’ve had intervention in the markets like we had the stimulus packages back in 2020. We’ve had the narrative, the good day to buy stocks, or we’re going to put tariffs on hold. So, this is what’s preventing markets from follow-through. It is intervention by politicians or central banks. And that does make it a difficult environment to navigate.

Now, it doesn’t change my view that these things will resolve themselves over time. And if it’s a really bad crisis looming, it will overpower anyone giving stock advice. And this could be just a really good example of how trend following is not the first responder. We’ve talked about that at length, and where the second responder role becomes really important if this really does end up being a much bigger thing than what it seems after the last couple of weeks of relative calm.

[00:43:12] Mark

Now, trend followers are just saying we take prices as is. We just sort of say, whatever the prices are telling me that’s what I’m going to use. So, when we talk about this man-made crisis or a man-made uncertainty, we’re not making political judgments other than the fact that the judgment is that if there are quick reversals in policies, whether it’s monetary policy in 2020, trade policy that moves from one extreme to another very quickly, we’re not judging whether that’s good or bad. We’re just sort of saying it is a fact. Now, what does that impinge on markets?

Now, getting back to the lessons we learned, I’ll go back to some of my old adages. There’s the general view is that, okay, if you’re trend following, your long convexity, your long volatility. And this period of time tells us that that’s not exactly true.

So, by that I sort of say that I’ve been a strong believer that what trend following is (and this goes back to the question, and it goes back to the events here). It’s long long-volatility, but it’s short short-volatility. We’re long long-volatility because long volatility or longer-term volatility gives us more dispersion in returns, there’s more movement in prices. You could have, you know, strong movements in low volatility, but, generally, if you take the standard deviation times square root of time, that’ll give you the dispersion that you could possibly have in returns.

So, on the other hand, we’re short short-volatility. What do we mean by that? Everything we create in trend following is usually a trend with a stop or some kind of, you know, risk management underlying this. And with the fact that your short short-volatility, if you have large movements in short term volatility, there’s a greater likelihood that you’re going to get your stops hit. When your stops get hit, you lose your positions.

And so instead of having just like a long option or longest straddle ,which you hold until expiration, when you’re holding a trend model with a stop loss, you’re like a knockout option in the sense that I’m holding my position, and if the short volatility works against me and I get my stop hit, then I’m getting knocked out of my position or knocked out of my option, which is the trend component.

If you look at a lot of the charts ,and you put candlesticks, and you then look at moving averages, what you find out is that what was really problematic for I think a lot of trend followers. And I’d say it’s problematic for models that I’ve looked at, okay, if you sort of say that I’m going to have stops intraday, if you have a large intraday move, then it’s a more likelihood I could get stopped out, and then the market closes above whatever my moving average should be. If I have my close, I can sort of say that I can have a large move before you actually have the market close again and as I said, it could cause me a large amount of losses.

So, in this long vol/short vol environment I can have a situation that, even if I’m a longer term-trend follower, given the high intraday valuation and where I execute could have a big impact on what the positions are that I hold, and what I lose, and what do I keep.

[00:47:15] Niels

Yeah, I think actually, I mean you kind of hit it on the nail in the sense that, at least one of the things that I try and talk to clients and prospects about is, I think one of the biggest challenges we have as trend followers is that on one side we know, because all of the data tells us that we need to be longer-term but we also know that, for risk management purposes and also for other reasons of course, sometimes you have to react quickly. And that balance is really, really tough to…

And also ,how do you do that? Do you do that by just having models with different time frame or there are other more, kind of, interesting, innovative ways of striking that balance.

So yeah, right now, it’s definitely a situation where you kind of called upon both, depending on which day of the week it is, and that makes it a challenge.

[00:48:17] Mark

The best way to say… or at least what I think, and you know, we talked a little bit about the SocGen piece which shows the box plots of performances and wide dispersion. And what you find out is that whether you think that if you’re a short-term trader, that the intraday move is critical to whether you make profits or not.

Okay, so it’s the difference between the high and the low is, if you’re only trading for one or two days, if you miss something in that very intraday it’s going to have a big impact on performance. Now, surprisingly the view is that if I look at very long-term trading that then the execution doesn’t matter as much because, well, do I really care that there is a large intraday move if, let’s say, I’m trying to hold a position that might last for weeks or months?

That’s true on one level, but at the same time, if you make a mistake on execution with your long-term trend model it may take you a long time before you can reverse that. So, in some sense you’re going to have higher short-term impact on performance. But it also might have an impact that you may lose positions, or you may gain positions, that you’re stuck with for a while that you may not want.

[00:49:53] Niels

All right, you have another headline in your list of topics called The Fallout. Let’s talk about that and, of course, any other topics from your list, your long list I should say, that you think we should be focusing on today.

[00:50:07] Mark

Well, on the one hand, you know, we always talk about that this has not been a strong period for trend following for 2025. April was not a very pretty picture whatsoever. And so, you could sort of say well, I’m talking my book, next comment.

But there may be that the fallout from all of this is that we’ve learned some lessons about how you should behave in uncertainty. But it still comes back to that bonds were not really a safe asset during this period at all. And, in some sense, the classic argument is that, well, I could just hold stocks and bonds. I really don’t need trend following. If I hold my bonds and I’m going to get this safety because of this negative correlation between the two. What I’ve seen historically, albeit that has changed recently, and I still clip my coupons so I don’t really need this because I’ve got my bond exposure. What we’re finding out is that now, okay, there’s a negative correlation because stocks are flat to up, bonds are down. But at the same time we did not get safety from bonds in the April and May period.

We look at where the 30-year yields are in the United States, it’s above 5%. You’re looking at above 4.5% for 10 years. I think that you look at some meme talking about bond vigilantes, we just had the budget approved or the Wonderful Bill for Congress.

[00:52:01] Niels

The Beautiful Bill, let me correct you.

[00:52:06] Mark

The Beautiful Bill.

But now we have a situation. We’re still going to have high deficits, and we know what happens when you pass a bad budget bill in the UK.

[00:52:17] Niels

It’s called the trust moment.

[00:52:22] Mark

Is a similar event going to happen in the United States? I hate being a doomsday sayer because we’ll sort of say that the whole idea of April/May was that uncertainty was resolved. But it was for the positive.

But at the same time, the one clip that came to mind, in 1925 the UK was considered the premier economy, and the sterling was still the top currency 50 years later. In 1975 the IMF had to bail out the UK government. So, 50 years, that means in my children’s lifetime. It’s possible that you could have a bailout of the United States government if you go down certain paths. So, what that means is that you have to start to look at other concepts of safety or hedge assets than what we’ve looked at in the past.

[00:53:30] Niels

I completely agree. And one of the interesting things is that this week I published a conversation where Alan spoke to the authors of this Annual Return Yearbook. I’m not sure, exactly the right wording of the yearbook, but it’s essentially some academics who each year for the past 25 years have gone back and analyzed historical data, inflation adjusted data, I should say, in many different countries, and put together this wonderful piece of work that it is.

And in the conversation, I think Alan quite rightly raises the point about, for example, bonds. I mean, if you look at the data, it has not really been a very good investment yet it has such a big allocation. Not so much in the US, maybe 40% is what people think about, which is high. It’s too high if, really, we’re in the 40 year cycle now where interest rates are going higher, which I tend to fall in that camp. But in other countries, especially over here in Europe, Mark, 40% is not, I mean that’s not where the level is. It’s 60%, it’s 80% fixed income.

And you can’t help asking yourself, based on what evidence do they put so much trust in these bonds, let alone the risk that you introduce? Because I think maybe a couple of years ago you would say, well, the risk of a US default is zero. It’s not zero anymore. And, in fact they’ve talked about ways where they could do “technical defaults”, Malaga accords, or whatever.

So, yes, I really do feel strongly that I think trend following, despite the fact that it hasn’t worked so well in the short run the last few weeks, but it should be thought of by people or by investors as a very, very constructive element in the portfolio in terms of risk mitigation.

[00:55:48] Mark

So, this goes back to, and it’s a longer piece of research, I didn’t highlight this in this conversation because I’m working on this, the idea of the difference between a hedge asset and a safe asset. And there have been academics who have been talking about that there’s a shortage of the safe asset. Treasury bills have usually been viewed as the ultimate safe asset. We lost our AAA rating. But on a relative basis, we could still be safer. But a safe asset is one that has low correlation and negative correlation when markets are down.

And a Princeton economist talked about a safe asset is a good friend to have in the portfolio so that when things are going bad, that you can depend on your safe asset to help you out, and in times of stress. What I’ve concluded is that the safe asset is not a good friend. It’s a fickle friend. And it’s fickle in a sense is that it should be your good friend, but it may not be. Treasury bills, or treasuries in general, may not be your good friend’s safe asset. It may become a fickle friend, which means that you’re going to have to find some new friends to serve as your safe asset.

Now, gold has done a good job recently, but there’s been a recent paper where they looked at how gold performs in different types of crisis. It does very well during tariff periods. So, if there’s tariff uncertainty, gold is a really good safe asset. Other times it doesn’t.

You could think of treasury bills, too, are a safe asset, except during inflation. So, then it’s not a safe asset.

So now you have to sort of say, okay, if I know that my safe asset friends are fickle, is there something else I could choose that could offset this risk? And my view on trend following could be that it also seems to be a fickle friend. It didn’t really do well in April and May, so, it wasn’t there as a safe asset.

[00:58:15] Niels

Agree.

[00:58:16] Mark

But we’ll sort of say that the dynamic characteristics may mean that if we go into an extended period where traditional safe assets are no longer safe, that maybe a strategy that actually picks and chooses between long and short positions, at different parts of the world, may actually provide more safety.

So, we’ll go back to the empirical definition – low correlation and negative, when markets are down. Okay, that’s what you want to have as a safe asset. If you’re something that’s close to that, that may be something that you want to hold in your portfolio because the normal safe assets may not do their job.

[00:59:02] Niels

Yeah. And you know, it reminds me, also, of something I listened to, and I’m sure we’ve spoken about this on the podcast over the years, you know, the question about what makes a really great investment? You know, a really great investment, you can say that the easy part is to say, well, it’s one that you can stick with. But what I think is more interesting and more relevant is that it’s one you can stick with because you’re comfortable with the process of the investment, and as you rightly say, the process of having something that adapts long and short, that is globally diversified.

So, the how and the why, I think that’s how I’d love for people to think about trend following and why it makes a great investment, in my view. The process is very rational and understandable, and it gives me a lot more safety, really, to think about the fact that, yeah, it doesn’t really matter if it’s going up or down.

And by the way, you and I have talked about, and also the last few weeks we’ve focused on the current environment and the fact that it’s been a difficult start to 2025 and all of that stuff. But I do want to actually ask people to just zoom out.

I was listening to Warren Buffett talking conjunction with the last annual general meeting at Berkshire Hathaway. I can’t remember, but I think something in the conversation comes up about, you know, drawdowns and so on, and so forth. And, and he just said, you know, Berkshire Hathaway has had three or four drawdowns over the years of more than 50%. But, for him, you know, corrections of 20%, 25% in the share price, in his view (and we can say the same about trend following), I mean, it’s just not really something you should worry about.

What you should worry about is what it’s going to do for you over the next 10, 20, 30, 40 years. And we have a lot of good evidence based on that. Anyways, I’m not entirely sure why I got sidetracked into that.

[01:01:13] Mark

I think your comment on processes is critical because you’d say let’s go back to the idea of a safe asset. So, treasury bills are our safe asset. Is there something about the issuer of treasury bills, if they change their process or behavior, that would change that level of safety associated with that? And you can sort of say that a safe asset today may be less safe tomorrow. So, the concept of a safe asset is dynamic.

And if you believe that the safe asset concept is dynamic, well then on a relative basis there could be other substitutes based on, let’s say, trend following that could serve as this safe asset haven. And that’s what we need to think about. And so even though it may be fickle, as we should say, that it could still be a good friend.

[01:02:15] Niels

Can still be a long-term friend.

[01:02:16] Mark

Yes, a long-term friend.

[01:02:18] Niels

A long-term… Well, you know what they say, I mean, long-term friendships are the best. So maybe we can end on a positive note on that.

Anything else you want to highlight before we wrap up, Mark? This was great. Lots of different things, but we obviously didn’t get through all of the things we had planned. But that’s how it is when we talk.

[01:02:41] Mark

There are a couple things I want to come back to because there’s been a recent paper that talks about that riding bubbles can be a strategy. And when you think about it, a trend follower can ride bubbles. A trend follower can, you know, buy overvalued markets. It could also buy undervalued markets.

So, that’s the thing that is unique about trend following, is that it is valuation agnostic in the sense is that could you still find a trend in an overvalued market? You say, absolutely. You say, that could still be a very good trend if, let’s say, that people are causing a meme that drives a bubble. So, I think that that’s an interesting concept that people should take into mind that we’re valuation agnostic.

The second thing I want to come back to is that there’s a recent work on machine learning and currency trading and, lo and behold, they found out that with all the different models they use, still the two features that are most important is momentum and carry, which we’ve been probably talking about for years and years. There are different ways you could extract it, but it still is that, if you want to be a currency trader, you’ve got to look at momentum and then sprinkle in a little carry.

[01:04:05] Niels

Yeah, absolutely. This was wonderful. So glad to be able to catch up with you this week, Mark. I really appreciate it. I appreciate all the preparations you did. And if people want to show their appreciation for Mark as well, head over to your favorite podcast platform, leave a rating and review. We certainly read all of them and we really do appreciate them.

Next week I’ll be joined by Alan. So, if you have any questions for Alan, which I hope you do, then you can email them to, as usual, info@toptradersunplugged.com. I’ll do my best to get you an answer.

You can, of course, follow us on all the social media channels. There’s been a lot of activity on Twitter following some of the recent episodes we’ve released with Cem and some of his guests, which has been very fun to follow. We have, of course, our Trend Barometer published every day on the website and you can sign up for the weekly email update that I send out.

Anyways, from Mark and me, thanks ever so much for listening. We look forward to being back with you next week. Maybe by that time Denmark might be world champions in ice hockey. You never know. We do live in a surprising world, I have to say. Anyways, until next time, as usual, take care of yourself and take care of each other.

[01:05:29] Ending

Thanks for listening to the Systematic Investor podcast series. 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 info@toptradersunplugged.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 anything about future performance. Also, understand that there is 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.