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Hi, I'm Jim O'Shaughnessy and welcome to Infinite Loops.
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Sometimes we get caught up in what feel like infinite loops when trying to figure things out.
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Markets go up and down, research is presented and then refuted, and we find ourselves right back where we started.
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The goal of this podcast is to learn how we can reset our thinking on issues that hopefully leaves us with a better understanding as to why we think the way we think and how we might be able to change that to avoid going in infinite loops of thought.
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We hope to offer our listeners a fresh perspective on a variety of issues and look at them through a multifaceted lens — including history, philosophy, art, science, linguistics, and yes, also through quantitative analysis.
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And through these discussions help you not only become a better investor, but also become a more nuanced thinker.
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With each episode we hope to bring you along with us as we learn together.
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Thanks for joining us, now please enjoy this episode of Infinite Loops.
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Disclaimer: Jim O'Shaughnessy is chairman and Co-Chief Investment Officer of O'Shaughnessy Asset Management, where Jamie Catherwood is an associate.
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All opinions expressed by Jim, Jamie and podcast guests are solely their own opinions and do not reflect the opinions of O'Shaughnessy Asset Management.
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This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions.
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Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.
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Jim O'Shaughnessy: Well, hello everyone.
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It's Jim O'Shaughnessy with another addition of Infinite Loops.
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Today, I am doubly blessed.
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My old friend and comrade, Jamie Catherwood, James Frederick Catherwood III, has decided to grace me with his presence.
1:59
I feel blessed, Jamie, thank you for being here, but as usual, you're getting trumped because our guest today is Tracy Alloway who's the Markets Executive Editor at Bloomberg.
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The co-host of a much more successful podcast than this one, Odd Lots.
2:18
And just going through your CV, you are very, very impressive.
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You're an American, but you were raised in Melbourne, Hong Kong, London, Abu Dhabi.
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You have a BS from the London School of Economics. Wow, daunting. Welcome.
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Tracy Alloway: Thank you so much for having me and for those very flattering words, we're going to have to share download figures later and figure out who's actually bigger.
2:47
Jim O'Shaughnessy: I will take the over on you and I'm willing to put up a lot of money on it.
2:53
Well, so one of the first things I wanted to ask you about when we were doing research on you is this idea of massive hindsight bias that everyone seemed to exhibit after the financial crisis.
3:00
This is a favorite topic of mine, but I'd love your take on this because at the time I was like, [inaudible] because I read everything on computer.
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I was listening to some people who I know and who I had talked to before saying, "We knew this." They didn't know it. What are your thoughts?
3:30
Tracy Alloway: So the reason why I'm quite interested in financial crisis hindsight, as you put it, is because I actually started in financial journalism covering markets, covering banks and the financial system in September, 2008.
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That was when I- Jim O'Shaughnessy: [inaudible]. Tracy Alloway: ...
3:47
which was a great time to be doing it.
3:48
So I joined FT Alphaville which was the financial times as financing markets blog at that period.
3:54
And it was such a good time to actually get into it because you were actually on really level footing with almost everyone who was writing and thinking about the markets at that point in time.
4:06
No one had had to consider what was going on in the repo market before, and this idea of a shadow crunch of collateral.
4:12
No one had thought about what happens if a money market fund breaks the bunk.
4:18
What happens if treasury rate start going negative and things like that.
4:23
Tracy Alloway: It was all completely new.
4:23
And it was really great to start covering it at that time because you were on that sort of even footing.
4:32
But what it does mean is that ever since then, I have probably been inordinately obsessed with financial risks, systemic stability and things like that.
4:40
So it's colored my viewpoint of the markets and of the financial system ever since then, perhaps in ways that haven't necessarily been useful to me in my career.
4:52
Jim O'Shaughnessy: Interesting.
4:55
Can you give us an example? Tracy Alloway: Sure.
4:58
So I think after 2008, for many, many years after everyone was on the lookout for the next big risk.
5:05
And I remember writing a lot about shadow banks, writing a lot about the idea of a lack of the liquidity in the bond market.
5:10
This idea that credit markets were overheating that at some point those were going to become problematic and none of that was necessarily wrong.
5:21
We saw all of that happen in early 2020 when the global pandemic caused the markets to crash.
5:29
And we had that very extreme reaction.
5:29
It's just, it was never on the scale of what we saw in 2008.
5:34
Tracy Alloway: And the worst thing that could happen actually happened, which was the federal reserve came in and basically propped up the corporate bond market. And it was no big deal.
5:43
Maybe we should have thought about it as a bigger deal.
5:49
Like, wait a second, the central bank has come into a market that it has never had to intervene in before come in to stabilize this market and it's changed it forever.
5:59
And you can actually see it in a lot of the risk premiums and credit.
5:59
Now you can see hints of what the fed has done there, that fed backstop, but it didn't lead to the collapse of the financial system like it did in 2008.
6:09
Jim O'Shaughnessy: And what's interesting is once a player like the fed normally thought of as the lender of last resort, right?
6:20
It was in the crisis of '07 and I'm getting on Jamie's turf here.
6:20
In the crisis of 1907, JP Morgan, the man basically solved it by getting everyone locked up in his office and telling them essentially you're bankrupt, you're selling to him, et cetera.
6:36
And the government thought probably not a good idea that an individual investor can do this.
6:42
So that's what actually led to the forming of the fed in 1913.
6:50
But what interests me was your comment.
6:50
The fed took actions that it had never taken in the past.
7:00
They came in and put their thumb on that scale.
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Tracy Alloway: Absolutely.
7:09
Jim O'Shaughnessy: Such a way that predicted a lot of the craziness that we actually saw.
7:13
Jamie, since you're our history expert, you want to drop in a question here?
7:20
Jamie Catherwood: I just wanted to ask Tracy about what kind of historical parallels she looked into at the time during 2008, if you had kind of started your historical interest yet.
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But if during that, you kind of looked the past and started researching anything that you found relevant.
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Tracy Alloway: The answer is no.
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At that point in time, my knowledge of financial history was pretty limited, but the one thing that I did learn quite quickly and particularly at an unprecedented era like Lehman Brothers, is there's only so much usefulness when it comes to historical analogies.
7:55
So yes, history repeats, there are shades of previous crises in everything, but every crisis is sort of unique in its own special and confusing way.
8:06
So for instance, if you fast forward to now and the crisis that we're having in markets, again, not on the scale of what we saw in 2008 or even early 2020, but certainly there's been a lot of volatility.
8:18
Tracy Alloway: Back in 2008, everyone had to scramble to learn how financial plumbing actually worked.
8:20
What was the repo market?
8:27
How much did banks actually rely on it for their funding?
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How did collateral work for it? That sort of thing.
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Nowadays, everyone has to learn about commodities financing. So wait a second.
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How is oil actually bought? How is it shipped?
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What's going on with food prices?
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How do commodities brokers actually fund themselves?
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The answer is mostly through bank credit, not necessarily through other means like banks and that is a unique aspect of this moment in time.
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Every crisis, there's a new sort of thing that everyone needs to get up to speed on and start to unpick.
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Jamie Catherwood: What's your process for learning those new things in each kind of major crisis?
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How do you approach going from no knowledge of plumbing or commodities kind of nitty gritty details today to being able to talk about it?
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Tracy Alloway: So this is one of the reasons I really like the podcast format.
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And this is one of the things that we do on all thoughts quite a lot is we try to go as micro as possible.
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So if we know that there are supply chain issues, we will talk to people who are into trucking, people who are into shipping, people who are experts in the world of wooden pallets, which I didn't know we had experts on wooden pallets, but it turns out we do.
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We have on the economics of nails, experts on trust plates, lumber, the list goes on and on and on, but we'll try to talk to those people as much as possible to get a handle of what's going on in their individual markets so that we can connect that back to the macro.
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Jim O'Shaughnessy: That's nice try by the way there, Jamie, trying to get her to subscribe to Investor Amnesia.
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I like it, always, always- Tracy Alloway: I am subscribed.
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Jim O'Shaughnessy: [crosstalk]. Look at that.
10:19
I got the pull quote for you though, Jamie.
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I do a lot of research for our guests.
10:24
And then I also have a couple of colleagues who do research as well.
10:30
And I love this quote that somehow got connected to you.
10:36
And it's on this idea, it's a tale quote, which it's basically, it's much easier to be a macro bullshitter than a micro bullshitter, right?
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Tracy Alloway: I'm not sure why that quote's connected to me, but I do like it. I like it a lot.
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I think there's a kernel of truth there, which is, you see a lot of prognosticators, a lot of forecasters who will come out and say, "The economy's going to do this, inflation's going to do this."
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I give this eventuality a 40% chance, which is the ultimate MBS of prognostication.
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And with the macro, it feels like there are so many variables swirling around that.
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You always have an excuse if you're off, right?
11:23
Well inflation, maybe it was transitory, but now there's possibly World War III with Russia and that's led to more supply shocks.
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Tracy Alloway: So really I was right.
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It was going to come down, but no one could have predicted that Russia was going to invade Ukraine.
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You see that all the time.
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With the micro, it is the ultimate expression of individual expertise.
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And if someone is living and breathing a sphere like wooden pallets or nails, the economic contribution of nails throughout history, they know that market.
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And if they fail to predict which way it's turning, I feel like that's really like, they have skin in the for something like that.
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So that's why we really enjoy talking to the micro people.
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We enjoy talking to the macro people too, but you get different things from each group.
12:15
Jim O'Shaughnessy: So for want of a nail, a kingdom was lost, right? Tracy Alloway: Exactly.
12:23
Jim O'Shaughnessy: And well, I think it's a good [inaudible] to use in many areas.
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For example, in business one of the things that I always tried to do was push the decision down to the people who were actually using what we were talking about.
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And I would often find people scratching their heads like they had been so educated in this. No, no, no.
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We, we're the executives, we make the decisions and the beauty of having my own firm is I can say, no, that's budget crazy.
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Complex adaptive systems, emergent behavior comes from the bottom, not the top.
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So let's see what these guys think.
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And when you do it, you learn very, very quickly that most of your own so-called insights about something that you frankly never do are, of course, completely wrong.
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Jim O'Shaughnessy: So we've saved ourselves from a lot of problems by doing that.
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The next thing I wanted to get your thoughts on was our very human need to see cause effect.
13:27
I think that's deterministic thinking, right?
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And we're deterministic thinkers living in a probabilistic world, hilarity or tragedy often ensue.
13:44
But I just thinking about things like Lehman Brothers, thinking about the crash of '87 there's, as far as I know and I read a lot of the academic papers, I've seen valiant efforts to take a stab at talking about what caused the crash of '87.
14:04
But I was there, I was young, I was 27, but watching the people on financial TV because of reasons, nobody honestly knew.
14:12
And what do you think about this whole area of the market with people refusing, steadfastly refusing to say, I don't know.
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Tracy Alloway: Well, I can see why people do it in this particular industry.
14:33
I think it's not necessarily about what people know.
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It's about trying to understand motivations between people and what's driving them in individual decisions.
14:48
And again, this kind of gets back to the people that we like to talk to on Odd Lots.
14:53
And the people that I get the most value out of are the people that understand the motivations of a particular industry or a particular financial branch or whatever.
15:03
And one name springs to mind.
15:03
Zoltan Pozsar are the Credit Suisse interest rate strategist.
15:09
One of the reasons his research is always really interesting is because he goes out and he talks to participants in the market and he asks them, how are you feeling at the moment?
15:19
Would you want to extend credit to a European bank that does business with Russia?
15:19
How are you thinking about it?
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Tracy Alloway: And again, so much of what happens in finance and markets are driven by these individual decisions.
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So you can look back at 2008 and say, okay, the housing bubble burst, AAA rated subprime mortgage bonds were no longer considered AAA.
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They've been used as collateral for repo financing for the banks.
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So there was a big financing crunch and that's what happened.
15:45
But there were all these individual decisions along the way to getting that outcome, someone had to decide, actually housing prices are going down, actually it looks like these mortgage bonds aren't what we thought they were.
16:02
Someone had to go out and say, wait a second.
16:02
The banks are actually on the hook for a lot of financing that it's based on this collateral.
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And then someone had to make decisions about stepping back.
16:10
Tracy Alloway: Collectively, we could have had an alternate parallel history where everyone decided we're just going to hold on and kind of see this through.
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We're going to suspend mark to market accounting, which is what they ended up doing.
16:23
They could have done that earlier and maybe we wouldn't have had a Lehman situation at all.
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Jim O'Shaughnessy: So I love alternate histories.
16:31
So it's like catnip to me.
16:31
And I think that they're valuable because even though it didn't happen, they can teach you a great deal about various outcomes, right?
16:49
So if you look at life as not zero to one, but 0 1, 2, 3, 4, 5, all the way to a hundred and most of the outcomes happen in that region, not at a hundred and not at zero.
16:59
It's good to know like my colleague, Jamie, it's good to know how humans reacted historically.
17:08
And that would be the only addition that I think I would add was you're absolutely right.
17:15
The crisis’s themselves are always different, right? Or normally different.
17:22
Jim O'Shaughnessy: One thing that I have found by studying human psychology, evolutionary biology, et cetera, is that, well, the crisis’s differ humans’ reactions to them rarely, if ever do.
17:34
So our approach is essentially being a quant and I often joke quants are the ultimate tree riders, right?
17:44
Because we aggregate up all of those individual decisions you were talking about because they all do matter.
17:56
And if you look at the market that way and understand that it's very memetic, highly memetic.
18:04
Tracy Alloway: Absolutely.
18:05
Jim O'Shaughnessy: Switching gears a little bit here.
18:06
What can you tell me about fancy chickens?
18:13
Tracy Alloway: I have an inordinate amount of interest in the subject of fancy chickens.
18:16
I don't know, my dream is to, Jamie knows this, one day I will own so fancy backyard chickens and they'll be beautiful.
18:21
And my dog Pablo will chase them around.
18:28
And Jamie, your dog is invited too.
18:28
So the reason I took an interest in chickens is I'm just interested in chickens, but there's actually a really interesting financial history nugget that comes out of reading and researching about chickens, which is, there is a massive- Jamie Catherwood: Great pun by the way, [inaudible] nugget talking about chickens.
18:48
Tracy Alloway: There we go.
18:49
So in the late 1800s or mid 1800s, there was a massive chicken bubble driven by this Victorian fashion for having chickens.
18:54
So the world was opening up.
19:00
There was lots of travel.
19:00
There was lots of exploration.
19:00
People started discovering that you can go to Indonesia and find this really cool looking chicken and bring it back to London and sell it for a lot of money.
19:10
So this industry of collecting and breeding chickens became a thing.
19:17
Price has became absolutely crazy.
19:17
There are pamphlets written about this.
19:17
People saying how ridiculous it was that people were spending money on birds and objectively, there are a lot of weird financial bubbles that have occurred throughout human history, but chickens is probably one of the weirder ones alongside maybe be rabbits in Japan and things like that, beanie babies.
19:41
Tracy Alloway: But there's actually a really interesting outcome of the chicken bubble, which is that it gave the raw materials for research to Charles Darwin, right?
19:52
When he was really starting to think about evolution.
19:57
So suddenly he was surrounded by all these wild chickens that had been brought in from Indonesia or Asia.
20:01
And he was able to breed them with domestic chickens in Europe and then say, well, they can breed together.
20:08
So they must be related even though they're from opposite sides of the world, there's a link here.
20:13
And that was one of the foundational pieces of research to his theory of evolution that would come out a few years later.
20:20
So, whenever we talk about economic bubbles, we usually talk about the economic damage that they reek on the rest of the world.
20:30
But in this one instance, we can say that actually something useful came out of the crazy Victorian chicken bubble.
20:34
Jim O'Shaughnessy: I love it.
20:38
The idea that I have a thesis around, which is bubbles, they're horrible, they're painful when they pop and lots of people lose their entire investment, but they leave a lot of interesting things on the ground, so to speak.
20:53
I think of the dot-com bubble and all, literally, a lot of the stuff that was, the infrastructure, for example, that was done became incredibly useful to later investors.
21:08
And I think if you pay attention to things that you normally think are unrelated, like your example of Darwin and the fancy chickens, when human, I always say we're all running human operating system, and it would be great if we could get an upgrade.
21:31
Jim O'Shaughnessy: But so far mother nature has not graced us with one, despite aggregate societal evolution, which is a whole different thing.
21:34
But I think that one of the aspects of bubbles that are really interesting is this focus of attention that people who normally wouldn't be thinking to your version about chickens, fancy chickens are in fact suddenly looking at everything, maybe kind of through new eyes and making these sort of cool additional discoveries.
22:02
So that is very interesting.
22:02
And I think if you kind of think like that and you as a journalist, look at yourself, I know you do, which is pretty cool.
22:16
Jim O'Shaughnessy: And that leads me to the other thing that you're well known for.
22:19
And I actually just kind of became interested in the more in depth part of this, but forensic accounting.
22:26
When I started my career, if I said that to another person who'd been in the market all their life they'd look at me like I had three heads, but it became extremely important.
22:39
And I believe it's going to only get more important as innovation takes us further away.
22:48
I know that's an interest of yours.
22:48
So I guess, one of the things is I'd love to have you say is, can you give me an example of what you kind of think is the stupidest thing people tried to get away with?
23:02
And then on the opposite end of the spectrum, what was the most clever that took a long while for people to kind of figure out and unwind?
23:14
Tracy Alloway: I'm going to have to have a think about the clever one.
23:18
Well, so one clever example and it took a long time for people to actually caught onto it, even though it was pretty much out in the open was valiant.
23:29
And it's very, very aggressive use of ad backs in order to secure more financing.
23:35
And the reason I like forensic accounting is because if you think about corporate balance sheets as a numerical expression, they're supposed to be a numerical expression or reflection of reality, but all those numbers, A, they're coming from humans who have the ability to, I don't want to say manipulate, but certainly they can impose opinions on those numbers.
23:58
And then they're filtered through a bunch of rules.
24:04
And often what's shown on the balance sheet is not necessarily a good reflection of reality.
24:08
Tracy Alloway: So in the case of valiant, what we saw was they had a roll up strategy where they would buy company after company, after company.
24:11
And every time they did that, they were able to add back the value of those acquisitions onto their business, and basically flatter their leverage ratios so that they could get even more financing.
24:28
And everyone was fine with this, rating agencies thought it was okay, investors or lenders thought it was fine until it wasn't.
24:34
And suddenly everyone looked at that dynamic and they said, I can't believe that we let valiant get away with this for so long.
24:40
So that was kind of clever.
24:46
Tracy Alloway: A less clever thing, last year I wrote about one of China's real estate developers.
24:51
One of the larger ones called Sunac in September of last year, they started removing certain lines from their financial statements on short term financing and minority interests.
25:04
And they started doing that at exactly the time that China was cracking down on real estate space and saying, you're not going to have as much short term financing or as much minority interests in order to hide your liabilities.
25:21
Low and behold had anyone looked at the balance sheet and said, "Wait a second, these disclosures that were there three months ago or a year ago are not there anymore."
25:27
That is a massive clue as to the direction of that company.
25:33
Tracy Alloway: And I was looking at the share price just on Bloomberg they're down 85% since they made that accounting switch.
25:41
So anyone who was actually watching the numbers would've gotten an incredibly powerful signal.
25:46
You don't necessarily know all the details of what's going on in the business, but the fact that they're obscuring something that people are very, very interested in this certainly sends a message.
25:57
Jim O'Shaughnessy: And we have a whole suite of composites, which try to suss out financial irregularities because they seem to, A, be happening more and more, although the savings and loan crisis, which happened eons ago.
26:15
Everyone was cheating and the government literally had to bail everyone out.
26:25
But as you were talking, I was remembering the old wall street joke, which is, a company's looking for a new CFO and everyone they interviewed, they simply asked one question, what's two plus two, and everyone answers four with the exception of the woman they offered the job to who looks at them and says, "What number did you have in mind?"
26:46
Tracy Alloway: It's true.
26:46
You you can reverse engineer a lot of these things. Jim O'Shaughnessy: Yes.
26:50
And that's the thing that gets harder for the money launderers, the cheats, the obvious cheats, right?
27:00
Like Enron, obviously, a classic example of it just being pure fabrication.
27:00
What about the connection, if you will, between forensic accounting and money laundering, is it my imagination or is there more attempted money laundering going on now through things like NFTs, crypto, things that aren't really well understood rather yet, but hopefully will be understood better. Or am I just crazy?
27:34
Tracy Alloway: Are you asking me if crypto's a Ponzi? Jim O'Shaughnessy: No. No, I'm not.
27:39
I'm asking you if you think that a lot of, for example, the banana taped to the wall at the Miami Art Festival, I saw that and my wife looked at my face and she's like, "What?"
27:57
And I went, "Come here."
27:57
Because we often go to that.
28:02
We're art collectors and we often go and I show her the picture and she's like, okay.
28:07
And she's not into finance.
28:07
And she looks at me and she goes, "Money laundering."
28:16
So I'm not asking you if it's a scam or...
28:16
Because by the way, for an old, I'm very open to a lot of these new things like NFTs crypto, et cetera, especially blockchain and Ethereum.
28:23
I think that there are a lot of amazing use cases for these new technologies.
28:28
But I'm kind of asking more for, what percentage would you guess of...
28:34
She's like, I'm not going to let you trap me.
28:45
What percentage- Jamie Catherwood: [inaudible]. Jim O'Shaughnessy: ...
28:47
what percentage of these NFT projects, crypto projects do you think are actually being used actively as money launder?
28:59
Tracy Alloway: I would say a decent chunk of them, but I do not have a good estimate.
29:02
What I would say and this kind of concerns me more about the crypto space.
29:09
So, a, before we launch into it, let me say, I find crypto very interesting.
29:15
And anytime anyone goes and says, we want to start a new monetary system from scratch using new technology, that is fascinating to me and I will cover it and write about it and dig into it and find it very, very interesting.
29:31
However, the problem that I see with and NFTs more broadly is that it is still primarily about self-dealing.
29:39
It's crypto dealing with crypto.
29:39
And in fact, the whole defi space, all the stable coins that are now invented, they're basically synthetic dollars in order to enable people to stay within the crypto ecosystem.
29:53
Tracy Alloway: So putting fiat into an exchange can be a difficult process, taking it out can be a difficult process.
30:02
You have tax liabilities that you have to think of.
30:02
If you're laundering money, you have legal liabilities that you have to think of.
30:06
So almost all of crypto seems to be focused on keeping people within the crypto space and it's lending crypto for crypto purposes.
30:20
It's NFTs, a buyer of an NFT will sell it to another buyer of an NFT.
30:20
It feels very self-referential self dealing-ish to me, I haven't yet seen an economic, an outside realistic economic purpose for a lot of this activity.
30:35
I've heard a lot of talk about what it might be able to do.
30:41
I have yet to see it really in action.
30:49
Jim O'Shaughnessy: I think that I'm still studying both crypto and NFTs.
30:55
We did an experimental NFT here and then my friend, Alex Danco lectured me about how I was wrong and how I was right.
31:02
And he was a pretty good lecture actually, because he sees NFTs as, you've got to have them unlock something.
31:10
He thinks they're going to work really well in the music space for obvious reasons, right?
31:14
Because of Spotify and what's been happening most musicians and even very, very famous acts are getting almost all of their revenue from live appearances and t-shirts.
31:30
So selling an NFT for them is probably going to be a way for them to right size, right?
31:39
Tracy Alloway: And look, I can see people using...
31:43
Crypto it's essentially digital tokens, so I can see people selling tokens and you get something in return for that.
31:48
Is that the right format for everything? Probably not.
31:48
Where I do start to question it is for things like art, digital art, because when you're buying an NFT and this has come up numerous times on Odd Lots.
32:01
But when you're actually buying an NFT, you're basically buying a ledger entry, right?
32:06
You're buying a number that points you to a ledger entry that says that you own this thing.
32:12
Tracy Alloway: But the thing that says that you own it is actually probably an exchange like open sea or something like that.
32:22
You don't actually own that digital art.
32:22
You just own the ledger entry.
32:26
You still have to have something pointing you to the art that you own.
32:26
And that's where I question the use case of blockchain technology in NFTs.
32:33
What are you actually buying?
32:33
Is it the thing that you think you're buying?
32:39
Jim O'Shaughnessy: One of the on running jokes, of course, is I just right click and I'm saving your NFT that you paid 62 million for.
32:48
Tracy Alloway: Actually don't be a right clicker. Don't do it.
32:51
Jim O'Shaughnessy: I agree.
32:53
But I think that's a bad example.
32:53
It's a good joke, but it's a bad example because you don't actually own it.
32:58
You own a JPEG and it's worthless.
33:06
Your point about the pointing brings up the whole authenticity, how do you actually get it?
33:13
One of the ideas that I had around NFTs is deceased musicians.
33:13
John Lennon, for example, I know someone who works for the family and there is this huge archive of Lennon's work. I'm a Beatles fan.
33:31
So to me they're priceless, but poems and drawings he did and everything.
33:38
Jim O'Shaughnessy: And I was toying with the idea, well, what if they NFT, say, a John Lennon drawing that they didn't feel bad about losing and then lit it on fire destroying the original, giving the NFT much more value. I know I'm crazy.
33:54
But even then you run into the chain of ownership and how do you actually get that?
34:04
Do you think that there is a path forward that would be the path that would allow for NFTs blockchain, et cetera, to really succeed in their goal of the ability to sell tokens with benefits, et cetera, or do you think we're not there yet?
34:24
Tracy Alloway: I think the crypto world would be a much better place if we just fully admitted to ourselves that what these essentially are, are tokens and not even ownership tokens, but tokens that we think maybe represent something.
34:38
They're not necessarily trustless because often there's an intermediary there that's telling us this is what you own, but if you want to talk about them in that context, I bought a token and now I get a John Lennon painting, I bought a token and now I get something called Bitcoin that I believe I can exchange for something else.
34:54
Who knows what the exchange rate will actually be.
35:00
But I believe it's worth something.
35:00
That to me would be a lot more intellectually honest than saying you bought an NFT, you now own this JPEG, which isn't necessarily true or saying that you bought this cryptocurrency and now you have a claim on the U. S. dollar that is X.
35:19
That would immediately make the space, I think much more open and much more useful in many ways.
35:26
Jim O'Shaughnessy: I agree.
35:28
And your colleague, Joe, called me, what did he call me?
35:28
Jamie a techno anarchist, something like that.
35:35
I am not a techno anarchist.
35:35
I just like, for an old, especially, I just love this new stuff because I see a ton of development down the line, right?
35:40
We're way, way at the starting gate here, I think, in terms of how this stuff can develop. And you know what?
35:55
In those early years, it's like in 1900 America had 200 car makers, right?
36:02
And as Jamie has pointed out in his Investor Amnesia series, many of them were electric cars that didn't catch them on, most of them, right?
36:09
So the idea that during early stages of innovation, if you study it and I have, and Jamie certainly has, man, what you see is the railroads, the trendy of people willing to build railroads.
36:26
Jim O'Shaughnessy: And I realized that, that is the derivation.
36:32
When something is a full blown catastrophe, you say, what a railroad wreck.
36:38
We can see that railroad wreck coming from miles away.
36:38
Well, the reason for that is because it was really dangerous to take the early railroads.
36:50
Your chance of dying was very, very high, but then it improved, improved, improved.
36:50
And Jamie, I'll let you pick it up because it shook out a lot of the speculative wrong investors, right?
37:03
Jamie, can you turn this into a question that we can try to nail her down on?
37:07
Jamie Catherwood: Well, one thing I wanted to mention, I think it was in Liverpool or Manchester when they, in the 1830s or '40s when they unveiled the first railroad mine in one of those cities.
37:17
I think the mayor took the first trip and died on the ride.
37:26
I feel like I'm missing [crosstalk].
37:26
Tracy Alloway: Great advertising.
37:29
Jamie Catherwood: Something along those lines of, because people were worried.
37:30
And it wasn't really until, I think Queen Victoria rode the train that people kind of really trusted that it wouldn't kill them.
37:44
Because there's some quotes of scientist saying that, that wouldn't work because people will die of asphyxiation just because you're going at such high speed.
37:51
Jim O'Shaughnessy: The high speeds, like 40 miles an hour.
37:53
Jamie Catherwood: Exactly.
37:55
So it was just funny, the grand unveil makes someone trust in the railroads and dies in railroad.
38:02
Jim O'Shaughnessy: Let me pick up on that because I think that is something I'd like Tracy's viewpoint on.
38:05
What Jamie just said basically was a well-known and well trusted personage in this instance, Queen Victoria associated herself with the railroad and then suddenly everyone is like, "Okay, that's good."
38:23
Is that possible anymore?
38:23
Or have we so atomized the world that the Queen of England associating herself with something we'd be just like, whatever.
38:40
Tracy Alloway: So this is something that I think about a lot, which is one of our very early episodes was with an archeologist called Arthur Demarest, who he's often described as the real Indiana Jones of archeology, he's out in Guatemala or wherever digging pits.
38:58
And I don't know, finding offs snakes and that sort of thing.
38:58
But he came on a couple times really in the early days of Odd Lots to talk about his research into the collapse of civilizations.
39:11
And the thing that he pinpoints a lot of collapses on, particularly in South America is this over extension into complexity.
39:19
Tracy Alloway: So the society has become too complex to function both on a sort of a societal level, the way people are interacting with each other, but also on a logistical and supply level.
39:31
So the way the cities are actually supplied from outside and the difficulty of getting resources in as you get bigger and bigger, and this is something that I think about a lot.
39:42
I think there's a very fractious media environment.
39:48
My dad's American, I just got back from visiting him.
39:55
We watched a lot of Fox News and other [inaudible] content.
39:55
And I can tell you, it is polar opposite to what I'm seeing elsewhere and when you have an environment like that, it becomes very, very difficult to be on the same page and to have those conversations about what is possible and what's reasonable.
40:11
Tracy Alloway: And again, just talking about my dad, I can tell my dad emphatically that this is the reason that inflation is happening.
40:19
Or this is how I see price pressure, this is what's caused them.
40:25
But the story he's getting from elsewhere is completely different.
40:25
And even though he knows me and presumably trust my judgment, or maybe not, he's probably going to listen to the Fox narrative for me.
40:37
It's very hard to come to consensus.
40:37
Jim O'Shaughnessy: So that's one that I've done a very, very deep dive on and that's happened all the time.
40:40
It's not recent, it's literally a description of human OS and our desire to tribe up to join a certain tribe that we believe is going to succeed, that we believe is going to be able to, in the hierarchy of tribes, outdo the other ones.
41:05
And then once you're in that tribe, the othering of everyone else.
41:11
And it's something that when I went into the research I thought, this has got to be new. No, it's not new.
41:18
It's as old as humanity and- Tracy Alloway: Does it feel to you like it's gotten more extreme recently though?
41:26
Jim O'Shaughnessy: Well, does it feel to me, yes.
41:26
Jim O'Shaughnessy: Well, does it feel to me, yes. I stopped watching TV news 10 years ago and I stopped watching it because of what you mentioned and what I was gleaning from watching was that, like Scott Adams, who himself is now controversial, the cartoonists,
41:49
he says he does a good job of saying, you can put people sitting right next to each other, watch the same movie and they're going to walk out and they're going to tell you completely, diametrically interpretations, opposed because of the way, again, back to human OS because of the way that. Jim O'Shaughnessy:
42:07
Jim O'Shaughnessy: We process things.
42:09
I'm reading a book right now by Will Storr about the scientific analysis of storytelling.
42:15
And he's got a wonderful thing that I've been trying to find as many references as I can, which basically he says, "We're all hallucinating our own reality and what we're trying to do is we're trying to make sense and try to create a cause and effect, right, and when we can't do that, it drives us nuts."
42:33
And he uses as an example, the people who've had the surgery where they cut the, I think it's the corpus callosum between the brains.
42:39
If you have an epilepsy, it stops the seizures.
42:47
Jim O'Shaughnessy: And one of these tests, you got to admire the ingenuity of these PhD candidates.
42:55
One of the tests was for these people, they can function normally in life.
42:55
But what they would do is they would hold up a card to the right side of the person's brain, right?
43:01
On the [inaudible] that doesn't link to language, right?
43:12
They'd hold up a card that says, walk, these people would get up and start to walk.
43:17
And then the researcher would say, "Why are you walking? Where are you going?"
43:24
The explainer, if you will, I call it the prover in the brain makes up a story on the spot.
43:32
"I am walking because I was tired of sitting, you're bothering me and I need some fresh air."
43:38
Tracy Alloway: Interesting.
43:39
Jim O'Shaughnessy: So it leads to this idea that, essentially, we're all confabulating all the time.
43:42
And I emphasize, we all, me, you, Jamie, every human operating normal human OS, trying to make sense of things ends up, when it can't make sense of things that challenges are illusion of control.
43:59
You do not want to take an illusion of control away from a human being.
44:07
Very, very bad things happen, which leads me to the question that I thought I would love to get your take on because you wrote, I think the title of your article was, Fair Wages for Robots.
44:20
You wrote it in 2017 and this- Tracy Alloway: This was something on my blog.
44:28
I think you're digging very deep to have unearth this from the not very well trafficked Tracy Alloway [crosstalk].
44:35
Jim O'Shaughnessy: We do our homework.
44:36
Tracy Alloway: Excellent.
44:41
Jim O'Shaughnessy: So we thought it was really interesting because you were ahead of the pack, that's for sure.
44:42
I think you wrote this in 2017, so in the five years that have transpired since then, this is becoming true and truer.
44:57
What do you see as shaking out as the future of work for all of us regular people.
45:06
And by that, I mean people who are not doing landscaping or plumbing, electrician, but your average knowledge worker, probably the vast majority of the people listening to this podcast.
45:21
Tracy Alloway: So I'll just go back to the article and article is a very grandiose term, because it was mostly me just thinking out loud on my blog.
45:25
But at the time, 2017, people were not worried about inflation.
45:30
They were worried about deflation, which again, is kind of ironic.
45:35
If you think back, we were worried about sub 2% inflation for so many years and now we finally have our inflation and we don't want it.
45:41
And back then, one of the arguments was that you've had this technological advancement.
45:47
So much of economic growth is now coming from capital i. e.
45:53
the owners of capital are really driving that growth.
45:53
It's not filtering back to people who can then consume and further boost growth.
45:59
So you have a mismatch between consumption and capital investment.
46:05
Tracy Alloway: So my joke was, well, we should pay the capital, which is the robots, the machinery, give them some pocket money to spend.
46:15
And that would end up boosting consumption.
46:20
I was joking obviously, but what we did get in 2020 was we did get fiscal stimulus that went to a lot of people.
46:26
And I don't mean to suggest that those people are robots, but we did basically get helicopter money dropped onto the population.
46:31
And that did cause inflation to spike or at least contribute to some of the inflation that we're seeing.
46:37
So I think that was kind of correct.
46:42
Tracy Alloway: Now, what happens now is an excellent question.
46:44
We talk a lot about the pendulum swinging from capital back to labor, but it's not difficult to argue the counterfactual to that and say, well, at some point prices continue to rise, capital investment continues to be very strong.
46:58
Most of our economy is still geared towards technology.
47:05
And the path is towards fewer and fewer jobs that need to be done by humans.
47:13
It's not hard to see the pendulum swinging back and people going, well, actually I need to make money.
47:18
Price increases are kind crazy.
47:18
Now I need to go back into the workforce.
47:22
Jim O'Shaughnessy: Well, I know that you're on a tight schedule.
47:24
So I have end question that I ask everybody, but you have managed to interview some of the most interesting people, frankly, at least to me, in the world today.
47:37
So anyone that you would point out and say, you got to listen to this interview, or you got to read this piece I wrote, or this blog post.
47:46
Who's been the most insightful, the most interesting over your career?
47:52
Tracy Alloway: So I am a massive, massive fan of Matt King over at Citigroup.
47:57
For those who don't know him, we started this conversation talking about 2008 and the financial crisis and who knew what, when and the individual motivations that were at play.
48:11
He was at, I'm pretty sure he was still at Citi at that time writing about banks.
48:16
He was the bank analyst.
48:16
He wrote a note called, "Are the brokers broke?"
48:22
And I think he did this in early September, 2008.
48:22
Imagine working at Citi and hitting publish on the note called, "Are the brokers broke?"
48:29
And he went into massive amounts of detail on the collateral crunch within the shadow banking system that was so painful for banks at the time.
48:40
And he got everything right.
48:40
And the depth of research in that piece is amazing.
48:48
The fact that he understood the motivations that were driving the banks at the time.
48:53
This is why their funding actually looks like this.
48:53
And this is what they're going to do when there's a funding issue was incredibly impressive to me.
48:57
And I continue to be very impressed by his research.
49:02
Tracy Alloway: And then the other one, and I'm slightly biased, because we literally just recorded another episode with him.
49:08
But Zoltan Pozsar at Credit Suisse.
49:08
I love reading him and he will go places, again, where a lot of sell side analysts fear to tread.
49:14
So his big thing at the moment is talking about the birth of a new monetary system and the idea of the dollar becoming less prominent as the world's global reserve currency.
49:25
And I know we've heard those arguments at various points in time over the past couple of decades and they tend to come and go, but I love people who want to tackle those big picture ideas.
49:36
And I love people who tackle them from a very detailed perspective that doesn't set aside the human beings who are actually making these decisions.
49:49
And Zoltan is great at that. Jim O'Shaughnessy: Wow. Thank you.
49:52
I wish we had another hour because this has been a fantastic conversation.
49:59
So the, first off, thank you for joining us. Really appreciate it.
50:02
Tracy Alloway: Thank you.
50:03
Jim O'Shaughnessy: Trying to be mindful of your time here.
50:07
The last question we ask is kind of a fun one because the various answers have been like, I think really cool.
50:14
And what we do is we say, we're going to make you empress of the world.
50:21
You can't kill anyone, you can't put anyone in a reeducation camp, but what you can do is accept them.
50:27
We're going to give you a magic microphone and you're going to say whatever you want to say, two things and everyone on the planet is going to wake up the next day, thinking that they thought of that idea.
50:38
And they're going to start doing things that way. What do you [inaudible]?
50:43
Tracy Alloway: So anything I say, people will believe it? Jim O'Shaughnessy: Yep.
50:49
Not only will they believe it, they're going to think they came up with the idea themselves. Tracy Alloway: Okay.
50:54
I think I would say that ESG is not the most effective tool for change on the planet. Jim O'Shaughnessy: Okay. That's number one.
51:07
Tracy Alloway: Is that self-explanatory, do I have to do another one?
51:08
Jim O'Shaughnessy: You have to do two. Tracy Alloway: Two. Okay. And you know what?
51:11
I think I would go back and I would say, cryptos are tokens.
51:18
The utility is in a token and anyone reading more than that into them is probably overplaying the space. Jim O'Shaughnessy: Wow.
51:29
That's a really [crosstalk].
51:29
Jamie Catherwood: There are two communities that aren't passionate, it's ESG and crypto. So I'm sure [crosstalk]. Tracy Alloway: I know. I going to...
51:33
Jamie Catherwood: [inaudible] that's enough.
51:36
Tracy Alloway: Just thinking about all the Twitter pushback that I'm about to- Jamie Catherwood: [inaudible].
51:40
Jim O'Shaughnessy: Well, that's the beauty of this podcast because I do this just because I get to talk to super smart people like you and I'm not trying to monetize it.
51:47
I'm not trying to do anything around that.
51:47
So I love having people saying things like that on the podcast, because you know what?
51:54
If it engenders a conversation, a true conversation, as opposed to a shouting match, which I have no interest in, that's great.
52:06
And I think you've offered us some awesome ideas today and you can come back anytime. Thanks for coming on.
52:12
Tracy Alloway: Thanks so much.
52:13
It's weird to be on the other side of the microphone, but I really appreciate the opportunity.
52:18
Hopefully I haven't annoyed too many people and it's good to know that I haven't offended your sponsors.
52:24
Jim O'Shaughnessy: We don't.
52:26
No I'm- Tracy Alloway: Because you don't have any.
52:28
Jim O'Shaughnessy: I'm the sponsor.
52:29
Tracy Alloway: Excellent.
52:30
Jamie Catherwood: Jim, just doesn't know.
52:31
I've been monetizing this for a while.
52:31
He has no idea how many [inaudible].
52:36
The first 10 minutes of every episode is ads.
52:36
Jim O'Shaughnessy: So before we let you go, I will tell you a great quip and please don't repeat it, that my son made when I told him I was doing this podcast and he's like, "Dad, what the fuck? Why are you doing this?"
52:50
And I'm like, "Because I have this opportunity to talk to really smart people.
52:57
You know how I feel, I love to learn.
52:57
And he's like, "So what are you going to talk about?" I tell him the topics. And he goes, "Okay.
53:01
So it's going to be a rich guy podcast, right?"
53:05
And I'm like, "Well, no, no."
53:05
And then he looks at me and he goes, "Well, you do know dad that I am a much better host, but what I will give you is you are a better guest." So I know how you feel.
53:21
Tracy Alloway: Honestly, I really do appreciate the opportunity. It was really good fun.