Top Traders

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• Traditional portfolio management and risk models are obsolete due to the surge in structured products, record debt levels, and shifting correlations.
• Prioritize understanding current market positioning, leverage, and structure over predicting the future or using standard diversification.
• Conventional volatility strategies are suboptimal. Instead, seek historically underpriced volatility beyond traditional markets and capitalize on rising debt and global imbalances.

As we enter 2025, global financial markets stand at a critical inflection point — with profound structural shifts fundamentally redefining investment paradigms. The confluence of geopolitical tensions, technological disruption, and macroeconomic realignments creates a landscape where conventional wisdom and traditional portfolio strategies are systematically challenged.

David Dredge, Chief Investment Officer of Convex Strategies, underscores the intricate interconnectedness of markets, economies, and geopolitics. “Politics and geopolitics are downstream from economies, and economies are downstream from markets,” Dave argues, highlighting the complex systemic dynamics reshaping investment strategies.

The current market environment is marked by unprecedented volatility and structural transformation. Structured product issuance is projected to double to $1 trillion while correlation patterns are breaking down, rendering traditional portfolio management approaches potentially obsolete.

For institutional investors and market strategists, understanding these emerging dynamics is not just an academic exercise — it's a critical imperative for survival and success in an increasingly complex global financial ecosystem.

The fragility of the system

Dave identifies a critical but initially overlooked phenomenon in the FX markets.

“2024 was to FX convexity what 2021 was to interest rate convexity,” he explains, highlighting a period where the nuanced pricing of FX options created remarkable opportunities for astute investors. “Now we'll see if 2025 is to FX vol what 2022 was to interest rate vol,” he adds, suggesting the potential for even more significant moves ahead.

Drawing on his three decades of experience, Dave warns of deep-seated vulnerabilities in the global monetary system. “I've written a lot over the last few years about the fragility of the global monetary system, the U.S. Reserve Currency role and in particular the relationship with China,” he notes, emphasizing how these interconnections create systemic risks that many investors overlook. The complexity of these relationships is further complicated by what Dave describes as unprecedented levels of leverage in the system.

The parallels to historical market regimes are particularly telling. “Just nostalgia that I feel at the moment for the 1995 to 1999 period when U.S. assets, U.S. equity markets just ripped straight higher, and the dollar ripped straight higher and tore apart all the rest of the world,” Dave reflects.

During that period, the S&P “compounded at 28, 29% for five years, with every year up over 20%.” This comparison is a potent warning about how dollar strength can create devastating imbalances across global markets.

The state of global debt markets makes today's situation even more precarious. As Dave points out, “You've now got every major country in this game through 100 percent of debt to GDP, most specifically the keeper of the global reserve currency.”

This unprecedented debt level adds a new dimension of risk to the market structure, particularly as central banks navigate the interest rate policy.

At the heart of Dave's philosophy lies a fundamental truth about market risk: “Positioning is the only thing that matters. Everything else is just gaming a flawed risk or prediction system.” His approach focuses on understanding current market structure and leverage rather than attempting to predict future events. This perspective has proven particularly valuable as traditional portfolio strategies face unprecedented challenges.

The counterintuitive nature of volatility markets

Cem Karsan brings a unique perspective, emphasizing the critical importance of patience and structural analysis. As Founder and Senior Managing Partner of KAI Volatility Advisors, his insights illuminate how dramatic changes in market structure create risks and opportunities.

One of the most significant shifts Cem has identified is the explosive growth of structured products. “Structure product issuance in two years is twice now tied to the S&P 500, in particular, here in the U.S.,” he notes. “We're talking 500 billion of issuance per year two years ago to a trillion.” This dramatic increase, combined with the proliferation of hedged equity ETFs and similar products, fundamentally alters market dynamics.

The implications of this structural shift are profound. “Counterintuitively,” Cem explains, “It creates exactly the opposite effect in that vol actually tends to underperform relative to the places where people aren't hedging.” This insight challenges conventional wisdom about market protection and highlights the importance of understanding where true opportunities lie.

Cem's experience at a recent endowment conference underscores the industry's reluctance to adapt to these new realities. “The amount of groupthink, the amount of just unwillingness by a hundred seasoned — probably the average time that those people had been in that seat was 25 years,” he observes. The ability to think outside of a stock and bond portfolio was almost zero.” This institutional inertia, he argues, is creating significant market inefficiencies.

A prime example emerged in August 2024, when market positioning created what Cem describes as an overwhelming amount of skew and volatility sold into the market. “That means in the case of a decline that is meaningful, there is blood out there in the back of the curve,” he warns. These situations create opportunities for investors who understand the structural dynamics at play.

Covering perspectives on risk

While Dave and Cem bring distinct approaches shaped by their unique market experiences, they reveal a powerful convergence of views on the fundamental problems facing investors today. At the core of their shared perspective is a stark warning about the dangers of conventional portfolio management.

“Everybody's taking more risk counting on their diversification benefit of some sort of constant steady correlation,” Dave warns, highlighting how traditional risk management approaches are creating hidden vulnerabilities. “And then whenever correlation surprises them, they have to reduce risk because they don't have enough capital for the risk they were taking because they assumed they were diversified.”

Cem builds on this theme by highlighting how structural market changes have invalidated many long-held assumptions. “The structure product issuance, the size of all markets has gotten so big relative to underlying markets,” he observes. “I find it incredibly interesting how poor relative value trading is working. It's actually the opposite is working incredibly well, right? Taking the other side of positioning better than it's ever worked.”

 

The Path Forward: Adaptability in an Evolving Market

Dave and Cem illuminate a critical insight: successful investing demands a sophisticated approach that transcends conventional strategies. Their dialogue underscores the importance of recognizing systemic risks and identifying nuanced market imbalances that often escape traditional analytical frameworks.

The path forward requires investors to embrace intellectual flexibility, cultivate a keen understanding of global monetary dynamics, and maintain a strategic perspective that challenges prevailing market narratives. Patience and deep analytical insight are powerful tools for identifying opportunities amid economic uncertainty.

As markets evolve, the ability to think critically, remain adaptable, and develop a contrarian perspective will be paramount.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes. 

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• Self-awareness is the foundation of successful investing. Cognitive biases, like blindly following experts, can derail even the most promising portfolios.
• Emotional discipline is the key to navigating market volatility. Managing your reactions to market fluctuations, not trying to time the market, is crucial for long-term success.
• True wealth extends beyond the balance sheet. Relationships, health and purpose are essential components of a rich and fulfilling life, often overlooked in the pursuit of financial gains.

When we talk about investing, most of us tend to think about picking stocks, chasing returns and beating the market. We pore over financial statements, analyze charts and follow the latest market gurus. But what if the key to succeeding is about understanding ourselves—our biases,  emotions and deepest aspirations?

William Green, author of “Richer, Wiser, Happier”, and a keen observer of the world’s greatest investors, suggests this is exactly the case. He’s discovered that understanding your psychology is as crucial—if not more so—than understanding the intricacies of financial markets. Through countless hours of interviews with legendary figures like Charlie Munger and Bill Miller, William has discovered that true wealth isn't just about accumulating money; it's about cultivating wisdom, building resilience, and living a life aligned with your deepest values.

“It’s like you’re borrowing from the future,” William observes, describing the dangers of prioritizing short-term financial gains at the expense of other crucial life aspects. He cautions against sacrificing health, relationships, and personal values on the altar of financial success, as this can lead to burnout, regret, and a diminished sense of overall well-being.

The importance of self-awareness

In his interviews with top investors, William discovered a recurring theme: the crucial role of self-awareness in achieving long-term success. He emphasizes that even the most seasoned investors are not immune to cognitive biases, which can cloud judgment and lead to costly mistakes. To illustrate this point, William shares a personal anecdote about falling prey to authority bias, a common trap where we overvalue the opinions of perceived experts.

He recounts being swayed by the optimistic outlook of Charlie Munger and Lou Simpson, two legendary investors, on the Chinese company Alibaba. “I listened to these two legendary investors,” William recalls. Caught up in their enthusiasm and influenced by his desire to be accepted by these financial titans, he admits to skipping his usual rigorous due diligence. “So I then, at some point in the following weeks, buy Alibaba, which since then is down something like 57%,” he confesses.

This painful experience served as a wake-up call, highlighting the importance of independent thinking and the dangers of blindly following even the most respected authorities. William stresses that recognizing our biases, particularly authority bias, is the first step toward making sound investment decisions.

Defining your version of a rich life

Beyond recognizing biases, William emphasizes the need to define what a “rich life” truly means on a personal level. He argues that society's narrow definition of wealth, focused primarily on financial accumulation, often leads to an unsustainable and ultimately unfulfilling pursuit of money.

William urges readers to engage in honest self-reflection and identify their core values, priorities, and what truly brings them joy and fulfillment. “You have to really figure out like…what's a rich life for me,” he emphasizes. By defining our own unique version of a rich life, we can make more conscious and aligned investment decisions and life choices that lead to genuine and lasting prosperity.

The power of emotional discipline

The financial markets are inherently volatile, capable of triggering a whirlwind of emotions, from euphoria and greed to fear and panic. William has observed that the ability to manage these emotional swings is important to long-term success. He cites Charlie Munger as a prime example, highlighting Munger's exceptional emotional discipline and his ability to detach from short-term market fluctuations.

William recounts a telling anecdote from a meeting with Munger, where he questioned the billionaire investor about his significant position in Alibaba despite the stock's recent decline. Munger's response, “What if you're wrong?”, encapsulates a crucial aspect of emotional discipline—the humility to acknowledge fallibility and the willingness to adapt. This simple question, William suggests, underscores the importance of avoiding emotional attachment to investments and maintaining a clear, objective perspective. Emotional control allows investors to weather market storms and capitalize on opportunities that others, driven by fear or greed, might miss.

Building resilience through community

Beyond managing one's internal emotional state, William emphasizes the power of external support systems and shares his experience of cultivating close-knit groups of “friends along the path”—individuals who provide intellectual stimulation, emotional support, and a sense of belonging. These groups, ranging from a book club with fellow writers to a weekly Zoom call with fund managers discussing philosophy and investment strategies, have played a vital role in William's personal and professional development.

He explains that these connections offer a safe space to share vulnerabilities, learn from each other's mistakes, and gain valuable perspectives. “In a time where we're so isolated in certain ways…to have a group that you meet regularly…is very powerful,” William observes. This echoes Munger's emphasis on the importance of surrounding oneself with a trusted circle of friends and colleagues. By building strong relationships and fostering a sense of community, investors can develop greater emotional resilience, weather market volatility and achieve long-term success, both financially and personally.

Learning from the greats

In “Richer, Wiser, Happier,” William profiles many successful investors, each with a unique approach to the markets. He emphasizes that the key takeaway is not to blindly copy their specific strategies, but rather to understand the underlying principles that drive their success and adapt those principles to your circumstances.

He highlights Bill Miller, known for his contrarian approach and independent thinking, as a prime example. Even when faced with criticism from figures like Warren Buffett and Charlie Munger for his investment in Bitcoin, Miller remained steadfast in his conviction. William argues that this independent streak, this willingness to go against the grain, is a crucial element of Miller's success.

Similarly, William points to Ray Dalio, founder of Bridgewater Associates and a proponent of radical transparency and algorithmic investing, as another example of an investor who has built a system perfectly suited to his unique personality and worldview. Dalio's emphasis on rules and systematic processes, while seemingly at odds with Miller's contrarian style, nonetheless reflects a deep understanding of himself and his strengths.

The pragmatism of successful investors

William observes a common thread that unites many of the great investors he's interviewed: a deep-seated pragmatism. They approach investing, and life in general, with a clear-eyed focus on what works. They are not driven by ideology or dogma but by a relentless pursuit of effectiveness and a desire to optimize for happiness and peace of mind. “As Charlie would say, I observe what works and doesn't work and why,” William explains.

This pragmatism is evident in their investment strategies, risk management practices and focus on building strong relationships and communities. Munger's famous weekly lunch at the country club, where he played bridge and engaged in intellectual discussions with a close circle of friends, exemplifies this pragmatic approach.

These gatherings were not just social events; they were opportunities to learn, connect, and cultivate the emotional and intellectual resilience necessary for long-term success. By adopting a similar pragmatic mindset, William argues, investors can move beyond simply seeking financial returns and focus on building a truly fulfilling life.

Practical strategies for investing and life

The allure of quick profits often tempts investors to chase short-term gains, jumping in and out of positions in an attempt to time the market. William emphasizes the importance of patience and long-term thinking for sustainable success. He highlights the approach of Guy Spier, a successful investor known for his disciplined, value-oriented approach, who avoids being “sold” on investment ideas and instead focuses on deep, independent research.

Inspired by Spier and other long-term investors, William adopted a simple yet powerful rule for himself: a five-year minimum holding period for any investment. This self-imposed constraint, he explains, serves as a powerful antidote to impulsive trading and encourages a more thoughtful, patient approach. By committing to hold investments for at least five years, William avoids being swayed by short-term market noise and allows the power of compounding to work its magic.

Optimizing for peace of mind

Beyond specific investment strategies, William emphasizes the importance of optimizing for peace of mind. He suggests that excessive complexity, both in our investments and in our lives, can lead to stress, anxiety, and ultimately, poor decision-making. He advocates for simplifying wherever possible, whether it's by adopting a streamlined investment portfolio or by decluttering our physical and mental spaces.

For many investors, this might mean embracing the simplicity of index funds. He acknowledges the perceived “boring” nature of this approach but points out that even investing legends like Warren Buffett, Joel Greenblatt, and Howard Marks recommend index funds for the majority of investors. William follows a simplified approach, holding a concentrated portfolio of carefully selected investments and avoiding the constant churn of active trading.

“And so I think that the idea of finding simple ideas with profound power and then making them central to the way you invest and live is really important,” William advises. He encourages investors to identify the core principles that resonate most deeply with them and to build their investment strategies and lives around those principles. By simplifying and focusing on what truly matters, he argues, we can achieve not only financial success but also a greater sense of peace, purpose, and overall well-being.

The path to true wealth

The pursuit of wealth is not just a financial endeavor; it's a deeply personal journey of self-discovery. It requires more than just market knowledge; we also need to be acutely aware of our psychology, biases, and aspirations. By recognizing our vulnerabilities, like the pull of authority bias, and cultivating the emotional discipline to weather market storms, we can begin to build true resilience.

Learning from the greats, adapting their wisdom to our circumstances, and optimizing for peace of mind, rather than simply chasing returns, are essential steps on this path. Ultimately, it’s about defining what a “rich life” truly means to us, encompassing not just financial prosperity, but also strong relationships, vibrant health, meaningful work, and a profound sense of purpose.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes. 

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• Current data collection methods are outdated and inadequate for capturing the complexities of today's workforce and economy.
• A new approach to data infrastructure, leveraging administrative records and modern technologies, could revolutionize economic analysis and policymaking.
• International examples, particularly New Zealand's integrated data system, offer valuable lessons for modernizing U.S. data collection and analysis.

Our understanding of the workforce and economy is only as good as the data we collect. Yet, our methods for gathering this crucial information have not kept up in an era of rapid technological change and evolving work patterns.

“No one can tell you what data sources to use, and no one can tell you what data sources are any good,” asserts Julia Lane, professor at NYU Wagner Graduate School of Public Service and the co-founder of the Coleridge Initiative, underscoring a critical issue: our data collection methods are woefully outdated.

Julia knows what she’s talking about, having worked with major statistical agencies like the U.S. Census Bureau to develop innovative approaches to data collection and analysis. She is also the author of “Democratizing Our Data: A Manifesto”.

Julia argues that the U.S. system for producing high-quality data is broken and in desperate need of change. “The economy has changed so rapidly over the past 20 years, and we're using a system that was developed a hundred years ago,” Julia explains. This mismatch leads to significant gaps in our understanding of crucial economic trends, from employment patterns to the impact of emerging technologies like AI.

Julia's proposed solution? A fundamental rethinking of how we collect, analyze, and use data. She advocates for moving beyond traditional surveys to harness the power of administrative records and other modern data sources. This approach, she argues, could provide a more timely, actionable, and comprehensive picture of our workforce and economy.

Read on to learn about the limitations of current data collection methods, the potential of new approaches, and the implications for economic analysis and policy-making.

The limitations of current data collection methods

When it comes to measuring the impact of transformative technologies like AI on our workforce, our current methods are just not advanced enough. Julia points to a recent Census Bureau questionnaire as a prime example of this inadequacy.

“It is a questionnaire that is sent. They ask a respondent in a firm to answer, and it says, ‘Tell me about the impact of AI. In your firm, which could be a thousand people, has it increased employment, decreased employment, or had it about the same?’ How is one person going to be able to answer that?” Julia wonders.

This approach, she argues, is fundamentally flawed. It relies on a single individual to provide complex information about large organizations, often leading to inaccurate or incomplete data. As Julia puts it, “If I'm a survey respondent, I'm going to skip that question, which may be why the Census Bureau is only saying only 5% of firms are using AI because the human being that had to answer it skipped it.”

The problem extends beyond just AI. Julia points out that our current measures of employment and unemployment, developed in the 1920s and 30s, are no longer adequate for capturing the complexities of today's labor market.

“For example, the unemployment measure is actively looking for work. In the survey, they call people on a phone for employment. They say, ‘Were you paid for at least one hour in the survey week? Are you in paid work for one hour in the survey week?’ Those are not measures of what's going on in the labor market, which is much more complex than that,” Julia explains.

These outdated methods are leading to a fundamental disconnect between our economic statistics and the realities of our modern economy. As businesses and policymakers grapple with rapid technological change, this disconnect becomes increasingly problematic, hindering our ability to make informed decisions about workforce development and economic policy.

A new approach to data collection

Julia advocates for a radical shift in how we gather and analyze economic data. Instead of relying on traditional surveys, she proposes leveraging the wealth of information already being generated through various digital and administrative sources.

“You don't have to ask people the answers to questions. What you have to be able to do is to figure out what data there are to ask,” Julia explains. She suggests starting with the fundamental questions we want to answer about the economy and workforce, then identifying existing data sources that can provide insights.

Julia gives a concrete example of how this approach could work in practice, particularly for understanding the spread of new technologies like AI across different industries:

“The way in which you build that system is you trace who is funded to do science in a particular area—quantum computing, AI, synthetic biology, or whatever. You could, it's not just the principal in this debate, it's the graduate students, undergraduate students, postdocs, clinical scientists. And then you trace how those people who've been trained to think about a problem, where are they being hired?”

This method provides a more accurate and timely picture of how innovations are diffusing through the economy. It captures the movement of skilled workers and the transmission of ideas, offering a deeper understanding of economic trends than traditional industry classifications.

Julia also emphasizes the importance of using administrative records, such as unemployment wage records, to gather information about workers' skills and employment patterns. This approach, she contends, is “a much more powerful and timely way of understanding what's going on in the economy than asking people the question.”

By harnessing these rich data sources, Julia believes we can create a more comprehensive and nuanced picture of our workforce and economy, one that better reflects the complexities of our modern, innovation-driven world.

Towards a new data infrastructure

Julia's vision for revolutionizing data collection and analysis extends beyond just changing methodologies. She advocates for the creation of a new, independent entity to spearhead this transformation.

“What I had recommended in the book was that a federally funded research data center be set up,” Julia explains. However, her thinking has evolved since writing the book. “It could be an independent think tank like the National Bureau of Economic Research,” she suggests. This approach would provide more flexibility and robustness in addressing our data challenges.

Julia outlines three key elements for this proposed institute:

1. Closer connection to data users: The institute would prioritize direct engagement with states, businesses, and workers to ensure the data collected meets their needs and reflects real-world conditions.
2. Development of new data standards: The focus would be on creating innovative standards that capture the complexity of modern data types, ensuring the resulting products are trustworthy and reliable.
3. Community-driven approach: Julia envisions a democratized process that's more inclusive than her initial recommendations, emphasizing a bottom-up approach driven by community input and needs.

Maintaining political neutrality is crucial in this endeavor, Julia emphasizes. “The absolutely critical thing to generate trust from a operational point of view is set up a governance structure that is clearly nonpartisan,” she explains.

Julia cites examples like the National Bureau of Economic Research, which “does not set up policy recommendations. They provide the facts; they provide the answers.” This approach, she argues, is essential for maintaining credibility and trust in the data produced.

By creating this new infrastructure, Julia envisions a future where our understanding of the workforce and economy is not only more accurate but also more responsive to the needs of businesses, workers, and policymakers alike.

Learning from other countries

In her quest to revolutionize data systems, Julia draws inspiration from successful models around the world, with a particular focus on New Zealand's approach.

“Bill English saw that data that had been built in at the beginning in New Zealand could be used to inform the decision making of the New Zealand government,” Julia explains. This experience opened her eyes to the possibilities of a more integrated, comprehensive data system.

The New Zealand model, according to Julia, demonstrates how integrated data can effectively inform government decision-making.

She notes, “Bill was absolutely brilliant at figuring out how it could get integrated across the government. And now with the new government, it's turned into a Ministry of Social Investment and much of the decision-making has to be made on a cost-benefit calculus and they have integrated it into the entire decision-making of New Zealand policy.”

Julia sees this as an aspirational model, stating, “We looked at it a lot when, when I was sitting on those White House committees, what New Zealand has done.”

But New Zealand isn't the only country making strides in this area. Julia points to progress elsewhere: “I think there are other countries that are starting to head that way. I hate to say this, but the Australians. But yeah, I think in the UK, I sit on the advisory committee for the UK data service. They're moving it.”

Julia emphasizes that this shift towards more modern, integrated data systems is inevitable: “This is inevitable. The survey is just too slow, too expensive, not granular enough, not timely enough. So really the question is not whether it's going to happen, but when and how and how strategic we can be.”

She sees potential for quick returns with each new administration, suggesting that modernizing data infrastructure could be a priority area for improvement. By learning from these international examples, Julia believes the U.S. can leap forward in its approach to data collection and analysis, creating a system that's more responsive, accurate, and useful for all stakeholders.

Implications for economic analysis and policymaking

Julia raises significant concerns about the reliability of current economic data, particularly those used by investors and policymakers. When asked about the confidence we should have in data like GDP statistics and unemployment figures, her response is candid and sobering.

“I don't think we can be confident,” Julia states. This lack of confidence, coming from an expert of her stature, underscores the urgency of the problem.

Julia points out that even the experts at the Bureau of Economic Analysis are aware of these limitations. She references a recent conference at Stanford, where officials from the Bureau admitted they're “really struggling with how to measure the changes in the economy.”

The issues are multifaceted: “Part of it is they don't have the resources. They don't have a framework within which to really operate.” She highlights that the current system of national accounts has been “stitched together, not purposefully, but kind of haphazardly in order to meet the [requirements].”

To drive home the magnitude of the problem, Julia cites Diane Coyle's work,

“GDP: A Brief but Affectionate History”, which suggests that “four-fifths of economic activity is not measured. 80% is not properly measured.” This statistic is staggering, suggesting that our current economic measures might be missing more than they're capturing.

Julia emphasizes the need for a systematic, standardized approach to building a new data infrastructure. She sees this as a crucial step in addressing the current shortcomings in economic measurement and analysis.

A call for data infrastructure

Julia's insights reveal a system ill-equipped to capture the realities of today's economy. From outdated survey methods to fragmented collection processes, the challenges are numerous and significant. Yet, Julia's vision for the future is both ambitious and hopeful.

She advocates for a fundamental reimagining of our data infrastructure, one that leverages modern technologies, administrative records, and community-driven approaches. This new approach could transform how businesses operate, how policies are crafted, and how we measure economic progress.

The question now is not if we'll transform our data systems, but when and how quickly we can rise to meet this critical challenge. The future of economic understanding depends on robust data infrastructure.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes. 

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• AI is set to drive significant productivity gains, similar to past technological revolutions, while clean data and proper implementation will be essential for its success.
• Speculative market behavior, such as rising valuations in Bitcoin and tech stocks, echoes past melt-up scenarios, which Yardeni warns could lead to corrections.
• Geopolitical risks, including tariffs and trade policies, could disrupt markets, but a stronger U.S. dollar may offset some inflationary effects.

As the “Roaring 2020s” unfold, economic growth and innovation appear to define the decade, echoing the optimism of a century ago. Ed Yardeni, President of Yardeni Research, remains optimistic about the global economy's trajectory. However, he cautions against overlooking the risks that historically culminated in financial turmoil. “People remind me that the Roaring 1920s ended very badly,” Yardeni explains, “but it doesn’t have to this time.”

The current decade, marked by fiscal tightening and significant technological advancements, invites comparisons to both the past and future. Yardeni’s “Roaring 2020s” thesis highlights the potential of a productivity-led boom fueled by innovation, while also addressing the complexities of inflation, geopolitical tensions, and speculative markets. His perspective underscores a critical challenge for investors: balancing optimism with a measured awareness of looming risks.

As he puts it, technology remains a driving force behind the decade’s promise: “There’s no particular reason why the technology revolution, the digital revolution, isn’t going to continue to play out in coming decades.” This article explores the trends shaping this transformative period, providing insights to help investors navigate an evolving economic landscape.

Trend 1: Macroeconomic resilience

The global economy continues to defy expectations, showing resilience despite aggressive monetary tightening. While past rate hikes often triggered recessions, today’s labor markets remain robust, and GDP growth has persisted, challenging conventional wisdom.

Yardeni attributes this to a mix of fiscal policies and structural adaptability within the economy. “We’ve gone through massive tightening since 2022,” he explains, but markets have adjusted rather than collapsed​.

Still, Yardeni warns that prolonged periods of tight policy could “wait for an accident to happen”​. Even the most resilient economies can face unexpected cracks under pressure. Investors would do well to remain alert to shifting fiscal conditions.

Trend 2: AI-driven productivity growth

Artificial intelligence is emerging as the latest force driving productivity, echoing technological shifts of the past. From autonomous systems to data optimization, AI promises to improve efficiency at levels previously unattainable.

Yardeni sees AI as a natural evolution of data processing, tracing its roots back decades. “We’re in a digital revolution… AI is really just a continuation of that,” he says, emphasizing its far-reaching potential​.

However, AI’s benefits depend on its implementation. “Garbage in, garbage out” remains a real risk, Yardeni cautions​. For businesses and economies, the challenge lies in applying AI thoughtfully to realize meaningful gains.

Trend 3: Geopolitical and trade policy risks

Trade policies and global geopolitics remain major forces shaping the markets. Tariffs, deficits, and trade imbalances are back on the table, raising concerns about their long-term effects on economic stability.

Yardeni draws a parallel to the past, recalling the disastrous impact of the Smoot-Hawley Tariff Act in the 1930s. “We’re probably going to get a test of something like that in the next six to 12 months,” he warns​.

Yet trade policies are not just threats; they are also negotiation tools. A stronger U.S. dollar and evolving relationships between nations will create both challenges and openings for investors in the years ahead.

Trend 4: Speculative market behavior

Speculation is once again gaining momentum, with assets like Bitcoin and tech stocks reaching lofty valuations. While optimism fuels these gains, history reminds us that speculative surges rarely last forever.

Yardeni observes rising signals of excess: “We’ve got Bitcoin at $100,000, and valuation multiples approaching highs” reminiscent of the late 1990s​. Melt-ups, he explains, often precede meltdowns.

The real challenge for investors is distinguishing hype from genuine growth. As markets test new highs, Yardeni urges caution, noting that corrections are an inevitable part of market cycles.

Trend 5: Energy as a competitive advantage

Energy production in the U.S. has reached impressive levels, thanks to advancements like fracking. With fewer rigs, producers are achieving record output, boosting domestic industry and global competitiveness.

This abundance of affordable energy matters even more as AI demands massive infrastructure and power. “Artificial intelligence requires a lot of electricity,” Yardeni says, and natural gas remains a reliable source to meet these needs​.

Looking ahead, energy independence offers both opportunities and challenges. Balancing resource availability with environmental goals will be critical as demand grows worldwide, especially in industries built around technological expansion.

Conclusion

Yardeni’s observations provide valuable context for this era of change. He envisions a future where AI revolutionizes industries, and energy independence strengthens economic stability. Success in this environment comes from understanding the bigger picture, preparing for volatility, and embracing innovation without losing sight of the risks. The future may be uncertain, but the opportunities are too significant to ignore.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes. 

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• Public perception of inflation often focuses on frequent purchases, like groceries, leading to misconceptions that don’t align with broader economic realities.
• Tariffs, while politically popular, increase prices for both imported and domestic goods, reducing competition and placing a long-term burden on consumers.
• Productivity is a complex metric often misunderstood and underestimated due to untracked activities like gig work and technological shifts.

Inflation has a direct impact on daily life, eroding the purchasing power of households and increasing the cost of essential goods and services. This burden is felt disproportionately by lower-income households, for whom a greater percentage of income is spent on necessities like food and fuel.

Public perception of economic realities often hinges on personal experience rather than data, leading to misunderstandings that persist for years. “Consumers focus on high-frequency purchases like groceries and fuel,” says Paul Donovan, Chief Economist at UBS Global Wealth Management. “but this creates an illusion of inflation that doesn’t reflect broader trends.”

Paul, who has been with UBS since 1992, is a seasoned political economist knowledgeable in complex economic concepts. He is the author of several books, including “The Truth About Inflation”, and regularly provides insights to wealth management clients, helping them understand long-term macroeconomic trends and their implications. His approach emphasizes cutting through jargon to help people recognize the economic decisions they make every day.

Paul believes that many misconceptions about inflation, growth, and policy persist because of how narratives are shaped by frequent purchases and sensationalist media. His insights challenge us to look beyond personal biases and consider the structural drivers of economic outcomes.

Analyzing common economic myths

Economic myths often stem from how people perceive their daily lives, especially when complex phenomena are boiled down into oversimplified narratives. These misconceptions, while easy to adopt, fail to account for the nuanced realities of global economic systems. As a result, they not only misinform public understanding but can also influence poor policy decisions.

Here are four prevalent myths about inflation, growth, and policy and the truth behind these misconceptions.

Myth #1 – Inflation is always what it seems

The belief that inflation is entirely reflected in the rising prices of everyday goods is deeply ingrained in public perception. This is particularly evident in items like groceries and snacks, which people purchase frequently. Paul explained, “If you’ve got it stuck in your mind that the Snickers bar used to cost me two euros, that’s the fair price for Snickers. And now it costs three euros. Every time you buy a Snickers bar, you’re thinking the fair price is Snickers two euros, and I’m paying three.”​

This perception is further distorted because these frequent purchases reinforce the illusion of constant inflation. “For 18 months minimum, every time you buy a Snickers bar, you’re thinking, ‘Oh, inflation is out of control,’” Paul said. However, he noted, “The price has been three euros for the last 18 months. It’s just that mentally, you’ve still got a benchmark of two euros stuck in your brain​.”

High-frequency purchases dominate consumer focus, overshadowing the broader picture of inflation. Paul emphasized this bias, stating, “The problem is that two euros is the fair price stuck in your mind, and it typically sticks for 18 months to two years​.”

Debunking the myth

Inflation is not a uniform phenomenon; instead, it consists of distinct phases driven by different factors. Paul described the first of three separate inflation episodes in recent years: “The first inflation episode back in 2021 was transitory inflation. Temporary inflation. And it was temporary​.”

He elaborated that the first wave stemmed from pent-up consumer demand after the pandemic, which overwhelmed global supply. “People concentrated their spending on goods,” he said, noting that demand surged to the highest levels since 1948. As supply reached record highs, demand still outpaced it, driving prices upward. By 2022, however, “durable goods prices were starting to fall. Not lower inflation—lower price levels.”

The second wave arose from the war in Ukraine, leading to an energy price shock unrelated to goods inflation. As Paul put it, “The energy shock fades, and we then come into the third wave of inflation… profit-led inflation,” where retailers raised prices disproportionately to costs, driven by consumer acceptance of higher prices​.

Myth #2 – Tariffs are harmless or beneficial

There is a persistent belief that tariffs, as tools of economic policy, protect domestic industries and create minimal impact on consumers. Many proponents argue that tariffs force consumers to buy local, strengthening domestic economies while having little effect on overall prices.

Paul, however, challenges this view, particularly when discussing the impact of tariffs on consumer goods. “Consumers end up paying a tax to the government every time they buy a product, so there is no way that that doesn’t come through in terms of inflation,” he states​. This misconception often leads to the false assumption that tariffs can fix trade imbalances without significant costs.

The belief in tariffs’ harmlessness is often bolstered by political rhetoric suggesting that tariffs are a good thing. Paul highlights a historical example: “President Trump put in place a tax on foreign washing machines in the United States. And the result was, prices went up by about 30%. Domestic manufacturers also raised their prices because there was less competition​.”

Debunking the myth

The reality is that tariffs are inherently inflationary and often harm consumers by raising the prices of both imported and domestic goods. Paul elaborates, “When tariffs were lifted, prices came down, but they didn’t return to international norms. Competition never came back. The lack of competition has then put the U.S. consumer at a permanent disadvantage​.”

Selective tariffs, which apply to specific countries or products, can have temporary effects, but universal tariffs—applied broadly—are far more damaging. “Selective tariffs decay over time as supply chains reroute. But universal tariffs don’t have a workaround. That would be very economically damaging,” Paul warns​.

Furthermore, the political framing of tariffs as tools to “pay for deficits” is fundamentally flawed. “China’s going to pay for our deficit,” Paul recalls of past rhetoric, emphasizing, “Of course, that’s complete nonsense.” In practice, tariffs are a tax borne by consumers, eroding purchasing power and creating long-term economic inefficiencies.

Myth #3 – The U.S. economy is exceptionally resilient

The narrative of U.S. exceptionalism often paints the American economy as uniquely robust, driven by superior innovation and entrepreneurial spirit. This belief is particularly prevalent when comparing U.S. growth rates to other regions, such as Europe or Asia.

Paul, however, points out the selective nature of this narrative. “We hear a lot about American exceptionalism and Europe dragging behind. There isn’t actually that much exceptional about the United States in terms of growth differentials,” he explains​. Much of the perceived resilience stems from high deficits, which fuel short-term growth but carry long-term risks.

Sentiment polls further reinforce the myth, but Paul argues these are often skewed by political biases. “Sentiment polls are, however, completely useless,” he remarks. “One of the interesting things here is that Republicans are more emotional than Democrats are in surveys. So the negativity of Republicans is far more negative, and the positivity far more positive​.”

Debunking the myth

The U.S. economy’s growth is heavily reliant on deficit spending, which is not sustainable indefinitely. “Real wages are well above where they were four years ago, but that’s largely driven by deficit spending,” Paul notes, adding that this reliance obscures the underlying structural vulnerabilities​.

Furthermore, the introduction of random tariffs and unpredictable policy decisions underlines significant risks to the U.S. economy. “The President-elect is coming up with random tariffs, left, right, and center, of random amounts. That’s extraordinarily disruptive to complex supply chains,” Paul explains​. Such disruptions could weaken the very resilience touted by advocates of U.S. exceptionalism.

Despite these challenges, Paul acknowledges that the middle-income consumer remains a stabilizing factor. “Low unemployment, low fear of unemployment, and real incomes higher—all of this provides a solid basis for the economy,” he says. However, he cautions that this foundation could erode if policy uncertainties persist​.

Myth #4 – Productivity can be easily measured and improved

Productivity is often presented as a straightforward metric for economic health, with the assumption that governments can implement policies to boost it effectively. This belief persists despite the complexity of measuring productivity and understanding its drivers.

Paul is blunt about this misconception: “Productivity is everything economists do not understand summarized in a single statistic. It is literally a residual,” he states​. The difficulty of measuring productivity stems from untracked economic activities, particularly those enabled by technological and societal changes.

For example, Paul highlights the gig economy’s impact: “There is economic activity taking place that the statistical agencies are just not able to track. You will not find TikTok content creator listed as a job. Yet, it is entertainment, advertising, and it pays substantial amounts of money​.”

Debunking the myth

The inability to measure productivity accurately complicates efforts to improve it through policy. Paul points out, “Governments can’t put in place policies to raise productivity because we don’t even know how much productivity growth is at the moment​.” This gap in understanding underscores the limits of policy interventions aimed at boosting productivity.

Additionally, technological advancements often lead to more efficient use of existing resources rather than measurable output growth. “The UK economy is making better use of its capital stock,” Paul explains, but GDP data fails to capture this improved efficiency​. As a result, traditional metrics of productivity often understate actual economic progress.

Ultimately, Paul emphasizes the importance of adapting to structural changes rather than attempting to impose top-down solutions. “A new economic model will emerge whether we want it or not,” he concludes, underscoring the inevitability of change​.

Rethinking Economic Myths

Economic misconceptions shape public perception and influence policy in profound ways. By examining these myths with a critical lens, we uncover the deeper complexities of inflation, tariffs, growth, and productivity. Understanding these nuances is essential for making informed decisions in an interconnected global economy.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes. 

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2024 has been a year of big swings, bold moves, and plenty of surprises in the world of finance and beyond. At Top Traders Unplugged, we’ve been privileged to sit front-row as the drama unfolded, capturing the year’s defining themes in conversations with some of the sharpest minds in our industry. This year has been anything but predictable –  and we’ve loved every moment of unpacking it all with you.

WHAT HEADLINES HAVE KEPT US ON OUR TOES?

A US election season that feels more consequential than ever; central banks grappling with inflation; and the relentless rise of AI reshaping everything from investment strategies to daily life. These massive shifts have sparked countless conversations on how to make sense of it all. Through it, our guests have shared candid insights, strategies, and even a few laughs, proving that even in uncertain times, curiosity and collaboration can lead to clarity.

What’s stood out most this year is how interconnected everything feels. Markets aren’t just responding to monetary policy – they’re reacting to geopolitics, tech innovation, and even shifting societal values. The themes we’ve explored this year go far beyond finance; they touch on what it means to navigate change, make bold decisions, and stay resilient in the face of uncertainty. If 2024 has taught us anything, it’s that adaptability is the ultimate superpower.

As we look ahead, one thing is clear: the need for candid conversations is perhaps more important than ever. But for now, let us reflect on some of our favorite themes this year.

THE MARKET DRAMA!

As 2024 comes to an end, we can’t help but look back on what has been an eventful year in the markets. This year has been filled with twists and turns, giving us plenty to discuss on the podcast!

The first quarter of 2024 saw trend followers riding high, carving profits from the market’s steady march upwards. But as the seasons changed, so did the tide. By August, a perfect storm blindsided investors – a gut-wrenching reminder that financial waters can turn from calm to chaotic in the blink of an eye. A potent mix of factors stirred the tempest: the abrupt unwinding of Yen-carry trades, surging bond yields, rumblings of discontent in the tech sector, pre-election jitters in the U.S., and a looming cloud of economic unease. Stock markets faltered, plunging into a swift yet sobering correction. On the podcast, we unraveled these events, peeling back the layers to uncover the lessons buried in the chaos.

The U.S. elections added a whole new layer of drama this year. With Donald Trump back in the White House, markets were left to process what this shift in leadership could mean for the future. Historically, markets tend to rally after elections, and this time was no different. Investors were weighing the potential changes in policies and what they could mean for growth, trade, geopolitics and regulation. These discussions reminded us all that political events can be just as unpredictable as the markets themselves.

One of the biggest surprises of the year came from Cocoa. Yes, Cocoa! Prices soared due to supply shortages in major producing regions like West Africa. Weather issues, disease, and logistical challenges all contributed to this spike. On the podcast, we explored how this impacted not just traders but also global supply chains and everyday consumers. Who would’ve thought a small commodity like Cocoa could steal the show, producing such a sweet trend?

Trend following strategies had an interesting year too! The sharp downturn in August tested their resilience, but the volatility surrounding elections and rising commodity prices also created opportunities. We had plenty of discussions on how trend following can thrive in unpredictable markets, and this year reminded us that sticking to a proven strategy can pay off, even when the markets seem chaotic.

If there’s one lesson 2024 taught us, it’s that the only certainty is uncertainty. Markets will always be unpredictable, and the best thing we can do is stay prepared. Diversification remains crucial, not just as a buzzword, but as a real tool to protect portfolios. And perhaps most importantly, staying adaptable and disciplined helps us navigate through the unknowns. As we close the chapter on this year, we take these lessons forward, ready for whatever the markets have in store next.

THE SHOWS YOU LOVED

This year, we've had an incredible lineup of episodes that resonated deeply with both our long-time listeners and newcomers. Let's take a stroll down memory lane and revisit some of the standout conversations that made this year truly exceptional.

Authors Who Stole the Spotlight

This year also saw us hosting celebrated authors whose insights reached far beyond the world of investing. Their participation added extra flair to this year!

Amy Edmondson taught us how to embrace failure with her book, “The Right Kind of Wrong: The Science of Failing Well.” Her advice was as inspiring as it was transformative.

Philipp Carlsson-Szlezak gave us the tools to navigate economic risks with “Shocks, Crises, and False Alarms.” If you’ve ever wondered how to separate real danger from overblown headlines, his episode was a must-listen.

Peter Oppenheimer’s new book called “Any Happy Returns” sparked plenty of conversations about market cycles and structural shifts. His practical advice was a hit with listeners trying to think long-term.

Allocator Spotlights: Big Names, Big Lessons

This year, our Co-Host Alan Dunne expertly hosted some incredible conversations with allocators who manage billions of dollars in assets:

Casey Clark, CIO at Rockefeller Capital, shared his insights on mega-trends like climate change and demographic shifts and how they’re reshaping investment opportunities.

Tad Fallows, co-founder of Long Angle, Inc., gave us a peek into the world of private wealth management, discussing the balancing act between preserving capital and taking calculated risks.

Representatives from SITFO (State of Utah School & Institutional Trust Funds Office), CPP (Canada Pension Plan), and UPP (University Pension Plan) shared their strategies for navigating challenges like inflation and geopolitical shifts while ensuring long-term returns. These episodes were a hit among listeners keen to understand institutional approaches.

A Big Nod to All Our Incredible Guests and Co-Hosts!

While we’ve highlighted some standout moments, it’s impossible to capture the brilliance of every guest and co-host in just one recap. Each of them brought their unique expertise, perspective, and energy, making every episode a rich learning experience. We are extremely grateful for everyone who showed up and shared a piece of their wisdom. And a special thanks to Alan Dunne for always stepping up to sit in for Niels during his travels as well as for hosting lots of great Global Macro conversations.

LAUNCHES YOU MIGHT HAVE MISSED

It’s not every year that we get to say we’ve published a book — let alone two! Yes, 2024 saw us release not one, but two exciting books that are now available for free to our audience. We couldn’t be prouder to share these resources, each designed to educate and empower investors on their journey.

The first book, “Trend Following: Is It For You?,” is a practical guide that takes readers through seven essential questions to determine if this investment strategy aligns with their goals and mindset. It’s a reflective tool to help investors understand the patience, discipline, and risk management needed to succeed with trend following.

The second book, “Ten Reasons to Add Trend Following to Your Portfolio!” makes a powerful case for incorporating trend following into your investment strategy. It highlights the unique advantages of this approach, like how it is able to navigate both bull and bear markets and its ability to deliver diversification and resilience during market crises.

Another exciting launch this year was our new blog, the Trend Following Week in Review. Published every Saturday, in this blog, my Co-Host Richard Brennan and I break down the standout markets from the trend-following space and keeps you up to date on what’s moving and shaking. It’s a real treat for anyone passionate about trend following.

Lastly, we also released the 6th Edition of “The Ultimate Guide to the Best Investment Books,” featuring over 400 handpicked titles to inspire and educate investors at every level. They say great leaders are great readers, and this guide is a treasure trove of wisdom from some of the sharpest minds in finance.

We’re thrilled to announce that the 7th Edition of The Ultimate Guide to the Best Investment Books will be coming out at the start of 2025. So, stay tuned — there’s so much more to come!

LOOKING AHEAD…

As we look to 2025, we’re more excited than ever. There’s so much more to explore, and all of us at Top Traders Unplugged can’t wait to bring you even more engaging conversations, fresh topics, and wonderful guests.

Of course, none of this would matter without you – our loyal listeners. Every download, every comment, and every shared episode and blog post fuels what we do. Whether you tuned in for the first time this year or have been with us from the start, your engagement and feedback are the heartbeat of this podcast.

We know there are many podcasts vying for your attention, and we’re deeply grateful you chose to spend your time with Top Traders Unplugged. Here’s to another year of learning, growing, and, most importantly, enjoying the journey together.

Here’s to you all – guests, listeners, co-hosts and not least, everyone behind the scenes at TTU – for making 2024 a year to remember. Bring on 2025!

Top Traders Unplugged, is a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes. 

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• True wealth encompasses psychological and emotional well-being, not just financial success.
• Your financial decisions should align with your values and life purpose for greater fulfillment.
• Simple strategies like automating savings and setting meaningful goals can significantly impact your financial well-being.

When we talk about wealth, most of us fixate on the tangible: growing our investment portfolios, increasing our income, and acquiring material possessions. We might diligently track our net worth and celebrate every market upswing, but what if this narrow focus is precisely what's preventing us from experiencing true wealth?

“There's this massive disconnect where there is simultaneously so much financial abundance, and yet this deep impoverishment at the spiritual, existential, psychological level,” says Dr. Daniel Crosby.

Daniel is a New York Times bestselling author and behavioral finance expert. As Chief Behavioral Officer at Orion Advisor Solutions, he develops technology designed to help people make sounder financial decisions. What sets Daniel apart is his unique background, which combines financial expertise with a PhD in clinical psychology. This gives him a rare understanding of the complex interplay between our minds and our money.

In his latest book, The Soul of Wealth, Daniel explores the paradox of wealth, arguing that true wealth encompasses far more than just monetary assets. It's about aligning your financial decisions with your values, purpose, and overall well-being.

“People need a framework for making sense of the world,” Daniel says, and in this blog post, we'll explore the framework he proposes for cultivating true wealth — one that goes beyond the balance sheet and into the very heart of what it means to live a rich and fulfilling life.

The disconnect between money and happiness

Daniel has spent years observing people's relationships with money, and a recurring theme in his work is the surprising disconnect between financial success and genuine happiness.

He's encountered countless individuals who, from the outside looking in, seem to have it all — the impressive job title, the comfortable home, the enviable investment portfolio — yet they remain profoundly unhappy. “My job puts me in orbit of some financially successful people,” Daniel explains. “And many of them are supremely happy, but many of them are not.”

Rates of loneliness and depression are climbing, and many people, despite having more than previous generations, feel “less rich than their grandparents.” This seeming paradox suggests that our focus on material wealth might be misplaced.

The behavioral investor

Traditional financial advice often misses the mark. It tends to focus on spreadsheets and algorithms, overlooking a crucial factor: human psychology. We're not always rational actors when it comes to money. “Everything we do in markets is psychologically difficult,” Daniel explains.

“We are wired for immediacy, we are wired for current pleasure, we are wired for certainty,” says Daniel. These tendencies often clash with long-term investing, which requires patience, as well as a tolerance for uncertainty and delayed gratification.

Our early experiences with money also play a significant role. Daniel shares his story of starting to invest just before the 2008 financial crisis. This experience shaped his perspective on markets and risk, highlighting how formative early experiences can be. The principle of “primacy,” he explains, underscores the lasting impact of our initial encounters with a particular concept or phenomenon.

This psychological baggage can lead to suboptimal financial decisions. We might be overly cautious, clinging to low-yield investments out of fear, or we might be reckless, chasing high-risk bets in the hope of a quick win.

These same ingrained tendencies, however, can be harnessed for good. Humans are naturally resistant to change, often sticking with the default option. This “laziness and status quo bias,” as Daniel calls it, can be leveraged through automation. Just as we “set and forget” recurring subscriptions, we can automate savings and investments, making it a painless and consistent process. Understanding these biases — both their potential pitfalls and advantages — is crucial for making sound financial choices.

Mastering the mental game

One of the biggest challenges in investing is managing our emotions, particularly our fears. “What's the biggest downside for you?” he asks. “Is it fear of missing out, or is it fear of regret?”

Recognizing which fear dominates our thinking can help us make sound investment choices. Are we holding onto declining investments because we fear the regret of selling at a loss? Or are we chasing the latest market trends, driven by the fear of missing out on potential gains?

Another psychological hurdle is the tension between what Daniel calls “spreadsheet optimal” versus “behaviorally optimal.” Sometimes, the mathematically correct choice, according to spreadsheets and financial models, might not be the best choice for our emotional well-being.

He explains that while lump-sum investing is often statistically the best approach, gradually entering the market (dollar-cost averaging) can be “behaviorally optimal.” This is especially true for those new to investing or those with a strong aversion to risk.

Similarly, paying off a low-interest mortgage might not make the most financial sense on paper, but it can provide invaluable peace of mind. “While it is not on average spreadsheet optimal,” Daniel notes, “[it] could be behaviorally optimal.”

Building a Wealthy Mindset

How we think about money matters just as much as how much money we have. Daniel introduces the concept of “mental accounting,” explaining how we tend to categorize and treat money differently depending on its source or intended purpose.

A bonus, for example, might be treated as “fun money” to be spent freely, while money earned through hard work might be viewed as more precious and deserving of careful saving. This mental compartmentalization, while seemingly illogical, has a profound impact on our financial decisions.

Daniel emphasizes the importance of giving your money a “why.” He cites research showing that named accounts — for example, “Kevin's Retirement Fund” versus a generic “Account #12345” — tend to accumulate 15% more wealth. This is because a specific name connects the money to a tangible goal.

Daniel recommends creating a vivid mental picture of what we want to achieve with our money to significantly boost our motivation and commitment. He uses the example of Olympic swimmer Michael Phelps, who meticulously visualized every detail of his races before competing. This same principle, Daniel argues, can be applied to our financial goals.

Ultimately, Daniel believes that finding meaning and purpose in life is essential for true wealth. He breaks this down into three key elements: “believing, belonging and becoming.” Having a strong belief system, a sense of connection with others and a clear vision for personal growth are not just important for our overall well-being but also for our financial health.

The Role of the Advisor

Many people underestimate the value of a good financial advisor. Their role extends far beyond simply managing investments. “There's a lot of data on people who work with financial advisors having higher levels of aggregate happiness, sleeping better at night, being less likely to get divorced,” he explains.

Advisors can bring a sense of calm and objectivity to our often emotional relationship with money. They can facilitate better communication about finances, particularly within couples, where differing views on money can often lead to conflict. They also help us prepare for the unexpected, ensuring we have adequate safety nets in place for emergencies.

Perhaps most importantly, advisors protect us from our own worst impulses. “They're encouraging them to take an appropriate amount of risk,” Daniel notes, “and they're saving them from investing in their son-in-law's business.” He illustrates this point with a sobering anecdote: “I had lunch with a friend yesterday who lost millions, plural, in meme coins. If he had had a financial advisor, that would not have happened.”

The Importance of Values-Based Investing

Values-based investing, often referred to as ESG (Environmental, Social, and Governance) or SRI (Socially Responsible Investing), has gained significant traction in recent years. Daniel admits that he has little faith that these types of investments will have “change the world impact” but believes in their potential to positively influence investor behavior.

He suggests that aligning investments with personal values can foster a deeper sense of purpose and commitment. This can be particularly helpful during times of market volatility.  When our investments reflect our values, we're less likely to make impulsive decisions driven by fear or panic. This psychological benefit can contribute to greater long-term investment success.

The True Measure of Wealth

True wealth isn't measured solely by the size of our portfolios but by the richness of our lives. It's about aligning our financial decisions with our deepest values, pursuing goals that give our lives meaning, and cultivating a sense of belonging and purpose.

By focusing on the “soul of wealth,” we can move beyond the endless pursuit of more and create a life that is both financially secure and deeply fulfilling.

Building a solid financial foundation is essential, but it's only a means to an end. The ultimate goal is to use our resources to create a life that we truly love — rich in experiences, relationships, and personal growth.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes. 

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• Macroeconomic trends are now key to investment success. Understanding these forces is no longer optional.
• The dollar's global role is evolving, influenced by potential policy changes, especially deficit reduction. This shift has significant implications for investors across all asset classes.
• Active management, with discipline and adaptability, is essential for success in volatile markets. A robust process and a willingness to change course are crucial for capital preservation and growth.

When we talk about investing, we need to think beyond stocks and understand the macroeconomic forces playing an increasingly significant role in shaping market outcomes. “The game now,” says Keith McCullough, “is materially dominated by the flows of the machine.”

Keith, a former hedge fund manager with experience at firms like Carlyle Blue Wave Partners, Magnetar Capital and Falcon Hedge Partners, now heads up Hedgeye Risk Management, which provides macro insights to institutional investors. He also hosts a daily webcast called The Macro Show, and he is the author of Diary of a Hedge Fund Manager.

Keith believes that understanding factor exposures, options flows, and the influence of algorithms is essential. He emphasizes the importance of being a “self-directed investor,” equipped with the tools and knowledge to make informed decisions rather than simply chasing narratives and stock charts. “If you're called a retail investor,” Keith argues, “that generally means that you’re macro unaware.” He provides valuable insights into how macroeconomic trends are driving market behavior and offers practical advice for negotiating this new reality.

The four quadrants

Keith isn't just observing the market; he's developed a framework to decode it. Central to his approach is the Growth-Inflation Process (GIP) Model, which he calls “the quad”. This model helps investors understand how economic growth and inflation affect different investments. Keith has tested this framework against historical data, creating a playbook to guide investment strategies in different economic environments.

So, what exactly is the quad? It's a two-by-two matrix, plotting the rate of change of economic growth against the rate of change of inflation. This creates four distinct economic environments, each with different investment implications. As Keith explains, “If you get the rates of change of growth and inflation right, you can front run the P in the GIP.” Understanding these two factors, he argues, allows investors to anticipate policy changes and position themselves accordingly.

The four quadrants are:

1. Goldilocks: Growth is accelerating while inflation is decelerating.
2. Reflation: Both growth and inflation are accelerating.
3. Stagflation: Growth is decelerating while inflation is accelerating.
4. Deflation: Both growth and inflation are decelerating.

Keith emphasizes that these quadrants aren't static; the economy transitions between them. He warns, “The biggest risk in markets is when we hit quad four (deflation).” This is because quad four often signals a slowdown in both growth and inflation, creating headwinds for certain asset classes.

Trump, deficits, and the dollar

The 2024 U.S. Presidential election presented a unique scenario for investors. Leading up to the election, the prevailing narrative was that both candidates would pursue policies leading to higher deficits. This expectation had significant implications for the bond market, with many anticipating a “higher for longer” interest rate environment.

The market, Keith observed, seemed to be pricing in a Trump victory, evident in both equity and betting markets. However, he admits, “I would have never guessed that [deficit cutting] was going to be on the table.” The emergence of the “Doge” trade and the associated focus on meme coins like Dogecoin further complicated the picture.

Keith highlights the unusual market activity, linking it to potential policy shifts under the Trump administration. “Just look at the price, volume and volatility on Dogecoin,” he says. “It has nothing to do with anything an intellect could tell you […] It has everything to do with what the policy was going to be.”

Post-election, discussions around potential deficit reduction began to surface, challenging the pre-election assumptions. Scott Bessent, a potential candidate for Treasury Secretary at the time of writing, advocated for a 3% deficit target. This shift in expectations, Keith argues, has significant implications for the U.S. dollar.

He believes that the prospect of deficit reduction, especially against the backdrop of other countries maintaining or increasing their deficits, makes a strong dollar more likely. “I’m short euros, I’m short yens, I’m short any country that will not cut their deficit,” he states. He links this dollar strength directly to potential fiscal policy: “The implications of cutting the deficit are pretty straightforward […] the dollar signal to me is the most explicit signal out there.”

Keith emphasizes that it's not just the policy change itself, but its timing within the larger economic and political context that matters. “It’s this particular thing that’s happening to the deficit — cutting it instead of building it — at this particular point in cycle time that matters the most.”

Managing market risk

Keith's approach to investing isn't just about identifying macroeconomic trends; it's about understanding how those trends manifest in market behavior, particularly during periods of volatility. He pays close attention to market microstructure, recognizing the significant influence of options trading on short-term price swings. “If you don’t understand how gamma works and how dealers have to reposition,” he warns, “then that’s one thing we do.”

He highlights the impact of zero DTE (zero days to expiry) options, noting that he monitors the “ODT picture” multiple times a day to gauge market sentiment and potential volatility triggers. He specifically mentions the concentrated nature of the options market, dominated by a few key players like Goldman Sachs, Susquehanna, Citadel, and Jane Street.

Central to Keith's process is the concept of “signals” leading the quads. He explains that economic data is inherently lagged, often reflecting past conditions rather than current realities. His signals, based on price, volume and volatility, provide a more timely indication of market direction. He recounts a telling example: “I didn’t know anything about pandemics, but my signal in January of that year went explicitly quad four. And this was well ahead.” This ability to anticipate market shifts, even without understanding the underlying fundamental reasons, is a key advantage of his approach.

Finally, Keith emphasizes the importance of risk management through his “trade, trend, tail” framework. He utilizes three distinct time horizons: short-term trades (three weeks or less), medium-term trends (three months or more), and long-term tail risks (three years or less). This multi-duration approach allows him to adapt to changing market conditions while maintaining a long-term perspective. “Doing nothing,” he notes, “is obviously a very good strategy sometimes too.” This underscores his disciplined approach, prioritizing capital preservation and avoiding impulsive decisions based on short-term noise.

The go-anywhere portfolio

Keith advocates for a “go-anywhere” investment strategy, emphasizing diversification across asset classes. He believes that focusing solely on traditional asset allocations, like a 60/40 portfolio of stocks and bonds, limits opportunities and increases vulnerability to market downturns. “The ‘go anywhere’ diversification strategy across asset classes,” he argues, “it’s where it’s at for my hard-earned capital.” This approach allows investors to capitalize on opportunities in a wider range of markets, including commodities, currencies, and alternative investments.

He's also critical of passive indexing, particularly in the context of a macro-driven market. While acknowledging that indexing has outperformed many active managers, Keith points out a crucial flaw: “Indexing […] cannot tell me that they don’t have epic 20%, 30%, in some cases, 50% drawdowns.” He prioritizes capital preservation, emphasizing the importance of avoiding large losses. “Rule number one,” he states, “don’t have drawdowns. Don’t lose money.”

For Keith, active management, informed by a robust macroeconomic framework, is essential for mitigating downside risk. By understanding the forces driving market trends, investors can position themselves for better risk-adjusted returns. He adds, “If I could only get one thing in macro right […] I would take the U.S. dollar index all day, every day.” This conviction in the dollar's importance reflects his macro-driven approach and the central role it plays in his investment strategy.

The macro advantage

Markets are driven by more than just company earnings and product announcements. Ignoring the larger macroeconomic forces at play can leave your portfolio exposed. Understanding trends in growth, inflation, and policy shifts, as well as recognizing the influence of options markets and other factors, is key to making informed investment decisions.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes. 

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• Inflation has been a silent architect of American democracy since the nation's founding, shaping economic policies and political movements.
• The Federal Reserve's role has evolved dramatically, from crisis manager to inflation targeter, reflecting changing economic priorities and understandings.
• Political affiliations significantly influence inflation expectations, challenging traditional economic models and policy-making approaches.

When you think about the cornerstones of American democracy, what comes to mind? The Constitution? Voting rights? Freedom of speech? While these are undoubtedly crucial, there's another force that has been silently shaping our democratic landscape since the nation's founding: inflation.

“Inflation has really been part of the fabric of economic debate in the U.S. right from its founding,” explains Dr. Carola Binder, Associate Professor of Civic Leadership and Economics at the University of Texas at Austin. She challenges us to view inflation not just as an economic indicator, but also as a fundamental element intertwined with the very fate of our democracy.

But what exactly is inflation, and why has it been so pivotal in American history? At its core, inflation refers to the rise in prices of goods and services over time. However, its impact reaches far beyond the cost of your morning coffee. Throughout U.S. history, inflation has influenced political movements, shaped economic policies, and even altered the balance of power between different social groups.

From the early debates about currency to the establishment of the Federal Reserve and the implementation of modern monetary policies, inflation has been a constant force in shaping economic thought and policy decisions.

Understanding inflation is crucial for every citizen because its effects touch every aspect of our lives, from the value of our savings to the cost of our loans, and even influence how we perceive our political leaders.

As we explore the historical context, measurement challenges, and future trends of inflation in American democracy, we'll uncover its hidden influence on the world's oldest continuous democracy.

Historical context of inflation in America

In early America, the concept of inflation differed significantly from our modern understanding. Instead, early Americans observed price changes in individual goods and commodities.

The absence of a centralized system for measuring inflation didn't mean its effects went unnoticed. Farmers and traders were acutely aware of price fluctuations, particularly in crops and farm goods. These prices, often set on global markets, were influenced by conditions both in the U.S. and its trading partners' economies.

A key debate in early American economic policy centered on the choice between paper money and the gold standard. This debate embodied deeper tensions about the nature of currency and its relationship to value. Andrew Jackson, known for his populist approach, was “a really staunch supporter of hard money,” according to Carola. The Jacksonian Democrats viewed gold as a way to protect common citizens from the potential instability of paper currency.

Later, figures like William Jennings Bryan, also claiming to represent farmers and common people, advocated for a more flexible monetary system. This shift reflected changing understandings of how currency policy could affect different groups in society.

The impact of inflation (and its counterpart, deflation) on various socioeconomic groups was profound. Carola points out a crucial dynamic: “Deflation makes you worse off if you're a debtor, inflation makes you better off.” In an agrarian society where many farmers were in debt, these monetary fluctuations could have significant consequences.

Periods of deflation, often following wartime inflations, were particularly challenging for debtors. As Carola explains, “If there's deflation, prices fall, and you have a nominal debt, that increases the real value of your nominal debt. So it makes you worse off.” This economic reality fueled political movements like the Granger movement, with farmers demanding policy interventions to address their economic struggles.

The evolution of central banking

The establishment of the Federal Reserve System in 1913 marked a significant turning point in America's approach to monetary policy and inflation management. However, as Carola points out, the Fed's initial purpose was quite different from its current role: “The Fed was really more constructed as a lender of last resort to help deal with financial crises and also to provide elasticity in the currency.”

This original mandate reflected the economic challenges of the early 20th century, particularly the need for a more stable financial system following recurring bank panics. The Fed's role in managing inflation was not explicitly part of its initial charter.

The evolution of the Fed's responsibilities came gradually. This elasticity was crucial in an economy where seasonal demands, particularly in agriculture, created fluctuating needs for cash at different times of the year.

“It wasn't actually until the inflationary episode of the 1970s that we finally got an explicit mandate for the Fed to control inflation,” says Carola. This change represented a fundamental shift in how policymakers viewed the role of central banking in managing the economy.

The move towards prioritizing price stability was not without controversy. As Carola explains, “During wartime, there wasn't really any move to say, let's have the central bank stabilize prices. It was just the opposite. It was like, we need to just keep interest rates low.”

Central bank independence also emerged as a crucial aspect of monetary policy. Carola emphasizes its importance: “We have federal reserve independence, right? You do see the Fed and other central banks under a lot of political pressure for looser monetary policy. Luckily, the Fed seems to be able to resist that kind of pressure.”

This independence allows the Fed to make decisions based on long-term economic stability rather than short-term political pressures. However, it also raises questions about the balance between technocratic control and democratic oversight in managing something as crucial as the nation's money supply.

“The monetary arrangements we have now are not really democratic in the sense that our elected officials don't vote on monetary policy,” says Carola. “They recognize that that's not really democratic, but that if we did have democratically elected officials responsible for monetary policy, it would probably lead to a lot of inflation because politicians would be more short-sighted.”

Measuring and interpreting inflation

Measuring inflation and understanding how the public perceives it is critical but complicated. Carola's research sheds light on the challenges and nuances involved in this process.

The primary tools for gauging inflation expectations are surveys, primarily the Michigan Survey of Consumers and the Federal Bank of New's Survey of Consumer Expectations. But interpreting these surveys isn't straightforward.

Carola points out a significant issue: “They ask what do you expect inflation to be over the next 12 months or what do you expect to happen to prices in general over the next 12 months? And people give a number. Can we actually interpret that as inflation expectations?”

This ambiguity in interpretation is further complicated by recent findings about the impact of political affiliations on inflation perceptions. Carola's research revealed a striking phenomenon: “There's this huge divergence between Republicans and Democrats inflation expectations, especially in the Biden presidency.”

“Normally, people who support the president have lower inflation expectations, and people who are of the opposite party have higher inflation expectations,” says Carola. “And that's still true, but the gap just widened so much that during 2021-2022, when inflation was rising, Democrats' expectations didn't budge. And the whole rise in expectations came from Republicans.”

This political divide in inflation expectations raises questions about how accurately these surveys reflect genuine economic forecasts versus political sentiment.

Despite these challenges, understanding inflation expectations remains crucial for policymakers. Carola notes, “People are much more aware of inflation now and kind of likely to be sensitive to it.” This increased awareness can impact economic behavior and, in turn, actual inflation rates.

The concept of “anchored” inflation expectations is particularly important. When expectations are well-anchored, it means the public generally trusts that inflation will remain stable and close to the central bank's target. However, recent experiences have shown how fragile this anchoring can be.

“Even though inflation is back down, you also hear the story that the price level itself is not back down,” says Carola. “So people feel like inflation is high.” This perception gap between actual inflation rates and the public's experience of price levels presents an ongoing challenge for policymakers and communicators.

The future of monetary policy

Nominal GDP targeting has emerged as a potential alternative to the current inflation-targeting framework. Also described as a nominal income target, nominal GDP is the dollar amount of goods and services produced in the U.S. every year.

“So if inflation is 2%, real GDP — the amount of actual stuff we produce — grows by 3%,” says Carola “Then nominal GDP would grow by 5%. So the idea is you target some path for nominal GDP, and maybe it's 5%.”

The appeal of this approach, according to Carola, lies in its simplicity and potential to resolve conflicts between different policy objectives. “When the Fed has two targets — a price stability target and an employment target, there's trade-offs between those two,” she notes. “If they have a nominal GDP target, it's essentially telling them how to balance those objectives.”

However, implementing such a policy is not without challenges. “There's always information problems in monetary policy,” Carola points out. “Monetary policymakers have to set their policy despite a lot of unknowns — what's the natural rate of unemployment? What's the neutral rate of interest? Is the inflation that we're experiencing mostly demand-driven or mostly supply-driven.”

The debate over incorporating asset prices into monetary policy considerations is another area of potential future development. Many economists, including Carola, are uncomfortable about the central bank targeting relative prices rather than aggregate prices.

Ultimately, the future of monetary policy will require adaptability and innovative thinking. As economic conditions and our understanding of inflation dynamics continue to evolve, policymakers will need to remain open to new approaches while carefully considering their potential impact on both economic stability and democratic principles.

The pulse of democracy: Inflation's enduring impact

From early debates on currency to modern discussions on central bank policy, inflation has shaped our economic landscape and political discourse and has been closely intertwined with public perception, political affiliation, and policy-making. The gap between official statistics and lived experiences highlights an ongoing challenge: bridging economic realities with public understanding. As we navigate future economic uncertainties, the interplay between inflation, policy, and democratic principles will continue to influence the health of our nation's economy and the strength of its democratic institutions. In the end, inflation is not just an economic indicator — it's the heartbeat of our democratic economic system.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes. 

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• Why is risk control so important? Legendary traders Bill Eckhardt and Rob Sorrentino explain its role in systematic trading and why it should (almost always) take precedence over prediction.
• Most traders fail because of natural bias. To succeed in the market, you’ve got to learn to overcome these basic instincts
• Despite ongoing changes in the marketplace, trend-following is far from dead. But traders should be careful not to rely too much on following the crowd and getting caught up in shiny, distracting strategies with weak foundations.

What do turtles and trading have in common?

The man to answer that question is Bill Eckhardt — a name synonymous with systematic trading. As co-creator of the famous Turtle Trading experiment, Bill has spent decades refining trading strategies that blend rigorous research with a deep understanding of human psychology.

While markets never stop evolving, old traditions — like following trends — remain popular. They have their place, but traders should adopt these strategies with care. After all, human instinct can often be the main cause behind a trader’s downfall in the market.

The key to long-term market survival is risk control

Bill has a surprising take on market success: Traders who stay in the game succeed not because they’re great at predicting markets but because they’re great at managing risk. In fact, his guiding principle is clear: “Put 10 times as much emphasis on risk control as you do on trying to predict where the market’s going.”

For Bill, trying to consistently predict market movements is close to impossible. “You almost never know better than about 51 or 52% which way the market’s going,” he explains. Instead, he advocates focusing on what you can control: your risk exposure. This approach — which is deeply embedded in Eckhardt Trading Company’s (ETC) strategies — is grounded in utility theory.

Using this rigorous mathematical framework, traders optimize their decision-making under uncertainty. Utility theory is no abstract concept. It’s a practical tool that unsure traders can lean on. “You can’t predict where the market’s going,” Bill says. “You have to know what you’re going to do when the market goes anywhere.”

Overcoming human nature: Why most traders fail

Human psychology is often a trader’s worst enemy. Bill explains that the natural human inclination is to seek comfort, which can lead to poor trading decisions.Opt for “normal human reflexes [and] reactions, and you'll be losing,” Bill highlights. Successful traders aren’t superhuman. They just resist the urge to follow their instincts.

“Trading, by nature, doesn’t feel good,” Bill explains. “If you’re enjoying it too much, you’re likely doing something wrong.” The key to success is emotional discipline and resisting the human impulse to chase profits or hold onto losing trades for too long after it’s time to let go. It’s called loss aversion.

Letting profits run and cutting losses early is a central mantra for systematic traders, and accounts for much of ETC’s success.

From turtle trades to the modern era

From where did ETC originally emanate? Richard Dennis — once dubbed the “Prince of the Pit” — worked alongside Bill in the 1980s to come up with the Turtle Trading experiment, which sought to answer whether trading could be taught.

While the experiment was wildly successful, those days are long gone. The market’s changed, and so too has ETC’s trading approach.

“The Turtle systems were largely disclosed,” Bill says — referencing an original Turtle leak of its proprietary trading manual. Bill wasted no time in strategizing for the future: “Even while the Turtles were still in operation, I was already developing systems as different from the Turtle systems as I could make them.”

Following the “betrayal”, Bill quickly moved beyond the simple trend-following breakout techniques of the Turtle program, adopting more sophisticated risk management and research-driven strategies.

Trend-following is still alive and well, as expected. But staying ahead in the market means nonstop innovation and adaptation to endlessly shifting realities.

Why trend-following isn’t dead (with a caveat)

Despite increasing competition and changes in the marketplace, Bill remains confident in the longevity of trend-following. While some have proclaimed its death over the years, he believes it still holds a significant place in systematic trading.

“Trend following isn’t dead,” Bill asserts. The key is continuous research and adaptation. As markets evolve, traders need to innovate to stay ahead, but the fundamental principles of trend following — like identifying long-term trends and controlling risk — remain as relevant as ever.

Bill’s advice for modern traders? “Run as fast as you can just to stay where you are.” Constant improvement is what maintains an edge in today’s cutthroat environment.

Beware replication

Be mindful of trends, and even follow them if you must, but be wary of overusing replication techniques — especially those relying on historical market data to mirror the performance of broad indices like the SG CTA INDEX. While they might sound appealing, they often overlook critical risk factors, particularly the emotional and discretionary aspects of trading.

“Replication can give you a fitting portfolio based on the past, but it’s almost an invitation to overfit,” he says. This is especially dangerous because futures markets are notoriously non-normal and subject to unpredictable tail events, which traditional statistical techniques don’t account for.

Replication strategies often fail to effectively manage risk effectively — kryptonite for traders — in the face of high volatility periods or sharp market reversals. Bill advocates for a more robust, research-driven approach that adapts to changing market conditions and emphasizes risk management over blind replication.

Prioritize research, but avoid overfitting and underfitting

Research is at the core of ETC’s trading strategy. “We’re a research lab first and foremost,” Bill says, noting that this focus on research allows ETC to constantly improve its systems and stay ahead of market changes.

One of the major challenges ETC faces is balancing overfitting and underfitting. Overfitting occurs when a model is too closely tailored to historical data, making it less effective in real-time markets. ETC’s in-house techniques for controlling overfitting are unique. “We’ve really decreased the extent to which we’ve overfit,” Bill says, emphasizing that finding the right balance between using enough data without over-relying on past patterns is crucial.

However, underfitting — where a model doesn’t extrapolate enough useful data from datasets — is just as dangerous. To avoid it, ETC runs its models across multiple market environments and timeframes. Using decades of historical data, ETC ensures it’s versatile enough to recognize longer-term patterns that might otherwise go unnoticed. “We make sure we’re capturing all the relevant information markets provide,” Rob says.

Leverage volatility for better trading signals

Pay attention to volatility: It’s a key input in trading signals. ETC integrates volatility into multiple facets of their trading systems — using it to size trades, measure price changes and (of course) manage risk.

Volatility is both an opportunity and a risk. “Increased volatility often helps us, and we don't want to restrain that,” Rob adds. The goal is to harness it to improve the effectiveness of trading systems while mitigating the downside risks it can bring through overreliance on volatility metrics.

“We don't target portfolio volatility,” Bill says. However by incorporating volatility into multiple aspects of their strategy, ETC is able to capitalize on market fluctuations while staying mindful of the increased risk they bring.

In this way, ETC leverages volatility as both a signal for opportunity and a key tool in risk management — ensuring it remains adaptable across varying market environments.

Diversify, forever

If effective volatility and risk control are critical for market success, diversification is a natural bedfellow.

“Diversification was the greatest financial idea of the 20th century,” Bill states. Spreading risk across multiple markets gives traders as much reassurance as they could hope for amid any chaos. ETC trades around 70 markets, providing a broad base of diversification.

But beware: Not all markets are suitable for trading. “Alternative markets” can appear more profitable on paper but suffer from liquidity issues and high trade slippage — eroding profits in practice. “Alternative markets might appear better, but in practice, they’re actually worse,” Bill cautions.

Is short-term trading a risky business?

While ETC is best known for its long-term systematic strategy, short-term trading also plays a vital role in managing risk. “We try to cover the short, medium, and long-term perspectives,” Bill explains, emphasizing that their approach isn’t limited to any one time frame.

With flexibility critical to the company’s overall risk control philosophy, Bill notes that “Our systems are designed to be dynamic — responding to market changes across different time horizons.” As such, ETC manages to effectively navigate volatile periods.

“The shorter-term systems allow us to get in and out of trades quicker, especially when there’s an unexpected market shift,” Bill points out, underscoring how these systems help ETC limit drawdowns and manage volatility.

Although the business focuses primarily on longer-term trends, this short-term strategy provides an extra layer of protection allowing the firm to react swiftly to market changes. A combination of diverse timeframes gives ETC its balanced portfolio — reducing over-exposure to any single market condition.

The Gauntlet: Stress-testing trading systems

If you’ve got a trading strategy you think is the one to rule them all, consider running it through ETC’s rigorous stress-testing process: the Gauntlet.

“We’ve had people call us just to have their systems run through the Gauntlet,” Rob says. “It’s an intensive barrage of tests to tear apart a system and see where it might fail.”

The Gauntlet doesn’t just test the systems themselves, but also evaluates the software running those systems: “It can find very subtle glitches in the program that otherwise would be nearly impossible to find,” Bill says. This level of detail means that any system that runs the Gauntlet successfully should be robust enough to withstand different market environments.

What’s more is that the Gauntlet helps eliminate emotional bias from trading decisions. As Rob explains, “Bill has taught us to be as scientific as possible and eliminate the emotion from decision-making.”

By rigorously evaluating each system and eliminating the potential for overfitting or underfitting, ETC ensures that only the most resilient strategies make it to live trading, safeguarding client capital and long-term performance.

Keep your eyes on the prize — and the danger — to stay ahead

ETC leadership offers a clear roadmap for navigating the complexities of modern trading. From emphasizing risk control over market prediction to recognizing the critical role of research and innovation in systematic trading.

“The structure of the market is that the money flows from the many to the few,” Bill says. “So you have to be among the few, not among the many.” By focusing on risk, overcoming human instinct, and continuously improving trading systems, investors can easily position themselves as the chosen few who rise above the lagging many.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes. 

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• Activist treasury issuance is a hidden tool that is quietly impacting markets and the economy.
• The labor market isn't as weak as headlines suggest; slowing hiring doesn't always signal a recession.
• The US dollar's dominance endures despite geopolitical tensions and the rise of alternative assets.

When we talk about the resilience of markets and the U.S. economy, most discussions revolve around the Federal Reserve’s monetary policy. We analyze interest rate hikes, quantitative easing, and the elusive neutral rate. But what about the other levers influencing the economy? “Activist treasury issuance has had a profound impact on markets and, through markets, the economy,” says Stephen Miran, a Senior Strategist at Hudson Bay Capital and a Fellow at the Manhattan Institute.

Stephen brings a unique perspective to the table, blending academic expertise with practical market experience. He's not just a theorist; he's a seasoned market participant, having previously served as a senior advisor for economic policy at the U.S. Department of the Treasury and managed portfolios at firms like Sovarnum Capital and Fidelity Investments. His recent paper, co-authored with Nouriel Roubini, on activist treasury issuance has garnered significant attention in the financial world. Stephen also contributes to leading publications like the Wall Street Journal, Barron's, and Bloomberg.

In this blog post, we’ll explore Stephen's analysis of several key macroeconomic themes, including activist treasury issuance, the current labor market dynamics, the debate around the neutral interest rate, and the looming concerns about fiscal policy and geopolitical risks. His perspectives offer valuable context for understanding the intricate forces shaping the global economy.

Activist treasury issuance and its impact

One of the most intriguing aspects of Stephen’s analysis centers on activist treasury issuance (ATI). So, what exactly is ATI? In essence, it involves the Treasury strategically managing the issuance of government debt, favoring short-term bills over longer-term bonds.

“The way ATI works,” Stephen explains, “is it limits the creation of interest rate risk-bearing, duration-bearing, notes and bonds and instead gives them more bills.” This approach mimics the effects of quantitative easing by injecting liquidity into the market and lowering long-term yields.

Stephen emphasizes that ATI, while impactful, is not a magic bullet. He estimates its impact to be “about a one-point cut to the Fed funds rate,” acknowledging that other factors contribute to market buoyancy. However, he strongly believes that the Treasury's shift towards bill issuance has significantly influenced market behavior and economic growth.

Why is the Treasury engaging in ATI even though it deviates from traditional Treasury policy, which prioritizes minimizing long-term borrowing costs? Stephen suggests that the motivation behind ATI may stem from a desire to mitigate upward pressure on long-term yields and maintain favorable financing conditions. However, this tactical approach comes with its own set of risks.

The increased reliance on short-term debt raises concerns about future refinancing challenges.. “You eventually have to undo it,” he cautions, “and if you eventually undo it, then you know you're going to be raising yields at a time that might be very inopportune.”

The labor market paradox

Turning to the labor market, Stephen identifies a puzzling disconnect between GDP growth and slowing hiring rates. While acknowledging that the labor market has weakened from its peak, he doesn't see signs of a precipitous decline. Instead, he offers a nuanced perspective, challenging the conventional narrative that a slowing hiring rate automatically signals an impending recession.

Stephen observes that the initial increase in unemployment earlier this year was primarily driven by new entrants and re-entrants to the labor market, particularly younger demographics. These individuals may have benchmarked their salary expectations to the exceptionally strong labor market of 2021-2022, leading to a temporary mismatch between their reservation wages and available opportunities.

Furthermore, Stephen draws an analogy between the labor market and inventory cycles, suggesting that companies may be experiencing a bullwhip effect. “Everyone hired everyone they could,” he explains, and now, with growth moderating, they're slowing down hiring to “wait for their revenues to grow into their headcount rather than reducing headcount now.”

He emphasizes, “The reduced hiring rate is the number one concerning thing about the labor market, But the reduced hiring rate is not indicative of a sharp decline in aggregate demand as would normally be the case.” This nuanced view offers a more optimistic interpretation of current labor market trends.

The neutral rate debate and Fed policy

Neutral interest rate — the rate that neither stimulates nor restricts economic growth — is central to monetary policy discussions. Stephen weighs in on this debate, expressing skepticism about the Fed's current assessment of where neutral lies. “I'm willing to say with confidence that it's above where the Fed thinks it is,” he asserts, pointing to the continued robust GDP growth despite the Fed's insistence on restrictive policy.

Stephen argues that the Fed's recent rate cut was a misstep fueled by a misreading of labor market signals and an overemphasis on short-term data fluctuations. He advocates for a less interventionist approach, suggesting that the Fed should avoid micromanaging the economy and instead focus on responding to more significant and sustained trends. Excessive focus on minor data wiggles can lead to policy errors and exacerbate market volatility.

Stephen questions the Fed’s framework for determining the neutral rate, highlighting the inherent difficulty in accurately measuring both inflation and the neutral rate itself. The significant measurement error in these crucial economic variables should encourage greater policy humility and a less reactive approach to monetary policy adjustments.

He points out that the bond market, specifically the five-year/five-year forward TIPS rate, provides a reasonable guess for estimating the longer-term neutral rate. Stephen encourages a more cautious and data-driven approach to monetary policy, emphasizing the limitations of current economic models and the importance of avoiding overreactions to short-term market fluctuations.

Fiscal policy and deficit concerns

Looking beyond monetary policy, Stephen expresses significant concerns about the trajectory of U.S. fiscal policy. He emphasizes the importance of addressing the growing national debt and its potential implications for long-term market stability. “I’m worried about the bond market on a medium-term basis,” he admits, “unless we start to address the deficits.”

Stephen argues that the current fiscal path is unsustainable and that rising deficits will ultimately weigh on bond markets and potentially destabilize government finances. The impending exhaustion of the Social Security and Medicare trust funds are looming fiscal challenges that demand proactive solutions.

While acknowledging that immediate action isn't necessarily required, Stephen emphasizes the urgency of developing a long-term plan to address these fiscal imbalances. Delaying these difficult decisions will only exacerbate the problem and increase the risks to the economy. He advocates for a responsible fiscal approach that balances necessary spending with measures to control the growth of the national debt.

Geopolitical risks and the dollar's future

Geopolitical risks play an increasingly important role in shaping macroeconomics. Stephen acknowledges these complexities but downplays concerns about the U.S. dollar losing its global dominance, at least for the foreseeable future. He argues that the dollar's status as a safe haven asset, combined with the lack of viable alternatives, ensures its continued reign in international finance.

“There’s not really a good alternative,” Stephen observes, noting that other potential reserve currencies lack the liquidity, depth, and stability of the U.S. treasury market. While other countries may desire to reduce their reliance on the dollar, they are stuck due to the absence of a compelling substitute.

Even the rise of cryptocurrencies, Stephen argues, does not pose a significant threat to the dollar's dominance. The deflationary nature of many crypto assets makes them unsuitable for supporting the growing transaction and savings needs of the global economy.

Macro insights that matter

Don't just react to market headlines — understand the underlying forces at play. Stephen reveals the hidden impact of activist treasury issuance, challenges conventional narratives about the labor market, and reinforces the dollar's enduring strength, giving investors a crucial edge in uncertain times. This isn't just about understanding the present; it's about anticipating the future.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes. 

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• Inflation’s impact just won’t let up, and the Fed has its work cut out for it in trying to tame it. There’s a tightrope walk between maintaining economic stability and lurking recession.
• A soft landing is more likely than it was a year ago, but recession risks remain real: Any economic shock — be it from labor market disruptions or unexpected global events — could still send the economy into a tailspin.
• Meanwhile, the growing U.S. deficit heightens the pressure: While not yet at crisis point, it’s far from sustainable long-term. Fiscal policy and political gridlock could expand the deficit, driving up bond yields and exacerbating the Fed’s challenge to maintain inflation and growth.

Jason Furman, Harvard professor and former Chair of the Council of Economic Advisors, is no stranger to navigating economic uncertainty. And boy, is he the man for the hour.

As one of the most respected voices in modern economics, Furman is primed to share insights on persistent inflation, the Federal Reserve (Fed)’s complex balancing act, and the long-term risks of rising government debt.

At a time when central banks are struggling to rein in inflation without derailing economic growth, Furman gives a sober analysis of why traditional monetary tools may not be enough. Just look at the inflation data: “When we have a bad month, it’s really bad,”Furman says. Headline numbers show improvement, but underlying pressures remain uncomfortably high. Recession risk and inflationary pressure together paint a picture of an economy caught between a rock and a hard place.

And he knows how precarious the Fed’s current strategy really is. If it’s forced to keep interest rates higher for longer than markets expect — despite the growing calls for rate cuts — it’ll be clear why. And while Furman acknowledges the potential for a soft landing, he’s wary of a bumpy ride.

As if inflation and interest rates weren’t enough to worry about, Furman gives us one more thing: the looming threat of unsustainable government debt. Expect higher deficits as a result of rising borrowing costs and political gridlock, as fiscal policy causes headaches for both investors and policymakers.

Furman’s most crucial insights — from why inflation is proving so stubborn to how China’s economic recovery could send shockwaves through global markets — follow.

Inflation: Something’s gotta give, but it just ain’t letting go

Inflation’s decline has been slower and more erratic than expected. While some headlines celebrated the drop in inflation to its lowest levels since the pandemic, Furman cautions that core inflation — a key metric for predicting future inflation trends — is proving to be more resilient.

“The headlines were talking about the lowest inflation rate of the whole inflationary period. But every hundredth of a miss is a tenth of a miss at an annual rate,” Furman says. Even a slight deviation in the core inflation rate could amplify the problem big time, potentially complicating the Fed’s path forward.

The core issue? Inflation is “stickier” than many analysts expected, Furman explains. Labor markets are looser than they were pre-pandemic, but they continue to apply upward pressure on prices, preventing inflation from falling back to pre-crisis levels. “When we have a bad month, it’s really bad. When we have a good month, it’s just normal,” he says.

Labor market’s influence on inflation

One of the reasons inflation has been slow to decline is the continued strength in the U.S. labor market. While wage growth has slowed compared to the height of the post-pandemic recovery, it’s still robust enough to support consumer spending, which in turn is keeping prices elevated.

“The labor market is looser than it was in 2019 by a variety of different measures,” Furman says, but he cautions that this doesn’t mean inflation will drop quickly. The key issue is that while labor markets have eased, they haven’t weakened to the point where they put substantial downward pressure on prices. As a result, inflation could remain higher than the Fed’s target for longer than expected.

A heckuva dilemma

One of the most pressing macroeconomic questions is how the Fed plans to balance the twin risks of inflation and economic recession. There’s a very fine tightrope walk between maintaining credibility and managing inflation without triggering a recession.

The Fed may well be forced to cut interest rates more slowly than markets anticipate, with a faster decline reigniting inflationary pressures. “The neutral rate is a real thing,” Furman says, “but we don’t quite observe it. We don’t quite know what it is.” Such uncertainty makes the Fed’s task even more complicated, as it tries to gauge the impact of each rate decision.

But if the Fed moves too aggressively with its rate-cutting exercise, inflation may morph into a real threat: “There’s just this big question that we don’t know the answer to, which is what is the neutral rate today?”

Mission: Fed transparency

As it walks such a fine line, the Fed focuses on what it can control: its communication strategy.  Furman acknowledges that it’s recently moved towards greater transparency in a bid to manage market expectations and anchor inflation expectations. But even if it helps to be open, is it now too open? Furman reckons it may have gone too far, sometimes causing market volatility.

“Everyone I know is just so negative about the Fed’s transparency,” Furman highlights. While it’s a strategy designed to build credibility, it can lead to overreactions in the market. Investors hang on every word from Fed officials, sometimes misinterpreting short-term data shifts as signals for long-term policy moves. Furman’s take? “You know, a lot of people are profiting off it,” but that doesn’t mean the volatility is desirable.

However, he acknowledges that the Fed’s transparency is more good than bad overall, particularly in anchoring inflation expectations. It could just do with dampening the noise from time to time to regain some clarity. “They don’t know what the neutral rate is. They don’t know how many percentage points above neutral you should be,” he says. But it’s always difficult to give precise guidance in an uncertain environment.

Data dependence shapes policy decisions

One of the hallmarks of recent Fed policy has been its data-dependent approach. The idea behind data dependence is that the Fed will adjust its policy based on the latest economic data, rather than sticking to a preset path. While this allows the Fed to react to real-time developments, Furman points out that this can sometimes lead to increased volatility as markets respond to every new data point.

“We’ve had revisions to employment and GDP data: you get a slightly different picture than if you were basing policy just on the actual release,” Furman explains. He suggests that while data-driven policy is crucial, it requires a steady hand, and over-reliance on short-term numbers can create more noise than signal.

Furman advocates for a broader perspective, arguing that while data revisions are normal, the Fed should focus on long-term trends rather than reacting too quickly to minor data fluctuations. “Look at the 10-year rate: It moves around a lot,” he says. “These data points come out, and it can move up 5, 10, or 15 basis points — or down by the same amount.

The point underscores the challenge of balancing short-term reactivity with long-term stability.

Debt just keeps on growing and growing

Meanwhile, the long-term risk of growing U.S. government debt is ever-present. While he doesn’t see an immediate crisis, Furman points out that rising interest rates are already putting pressure on the federal budget, and this pressure could increase significantly in the coming years.

“When the 10-year yield is around 4%, it doesn’t really send me off panicking,” Furman notes, but adds that the growing debt is still unsustainable in the long term. He anticipates that future administrations — especially with rocketing debt-servicing costs — will need to bite the bullet once and for all.

Political gridlock might not help either: “Divided government can do plenty,” he says. “You get your stuff in exchange for me getting my stuff, and the union of everyone’s stuff might even be bigger.” Furman’s view is that fiscal policy could end up being even more expansive in the coming years, exacerbating existing challenges around inflation and debt management.

It’s ultimately all about the deficit

Furman stresses that the U.S. federal deficit will play a critical role in shaping financial markets in the coming years. He notes that while deficits have long been a concern, the current fiscal outlook is more worrisome due to the combination of these high debt levels and rising interest rates.

“We’re getting more manufacturing structures built,” Furman says, “but that’s because of the nature of fiscal policy.” The issue, however, is that this increased spending could crowd out other investments and eventually put upward pressure on interest rates. This would create a feedback loop where higher rates increase the cost of borrowing, leading to further fiscal strain.

The angle from the East: Global economic repercussions

Don’t forget to look to China, and how its economic recovery could affect the global economy. Furman argues that while the behemoth’s stimulus efforts are a welcome development, they won’t fully solve the country’s deeper structural challenges.

A ripple effect on global markets is likely, particularly in commodities. “China should stimulate, and now they’re finally doing it,” he notes. But while global commodity prices in the short term will send commodity prices up, the stimulus doesn’t address the long-term demographic and productivity issues that China faces.

Global investors should be wary of volatility in commodity prices and additional inflationary pressures in markets heavily reliant on Chinese demand.

Geopolitics and the future of the U.S. dollar

Amid rising geopolitical tensions, Furman also touches on the role of the U.S. dollar in global markets. He suggests that while the dollar remains dominant, its future as the world’s reserve currency isn’t guaranteed.As countries like China and Russia explore alternatives to the dollar in global trade, the U.S. could face increasing pressure to maintain its currency’s status.

“The dollar is the denominator of most global trades and FX transactions in the world,” Furman explains. But as the global economy becomes more fragmented, Furman warns that transitioning away from the dollar won’t be an orderly process. This shift could introduce significant volatility in currency markets and create new challenges for global investors.

Prepare for uncertainty…and anything

The economy continues to stumble between continued inflation and an outright downturn — with any number of factors potentially throwing it off balance.

“We’re probably having a soft landing,” Furman says, “but we’re not all the way there yet.” The Fed continues to weigh the risk of tightening too much against the risk of doing too little. The buzzword of the moment is uncertainty.

Investors and policymakers alike need to be prepared for multiple potential outcomes — from higher-than-expected inflation and increased geopolitical tension disrupting global markets to further Fed rate hikes or cuts.

“There’s still plenty that could go wrong,” Furman says. “Investors need to stay nimble.”

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.