Marko Kolanovic Is Back With a Warning for Stocks

25:14So I'm not as excited about that change. I think it's a way overdue change, you know, like, but there is a lot of optimism now. Well, I was wondering, because I was looking at your LinkedIn and you mentioned you have a PhD in physics, graduating from NYU in 2003, theoretical high energy physics, cosmology, string theory, and finance. I guess a two-part question, A, would you think there's a world in which if you were graduated today, you would have gone into AI instead of going into finance, because I imagine they would have hired you with those skills. But B, like, when you think about, and Tracy mentioned, you know, like the true AGI, do you think that the current AI research is on a path to that sort of AGI inventing God that a lot of the proponents believe?

26:01So, you know, I think eventually it will get there in a sense that it will sort of address some very important, you know, questions, which are kind of deeply what every person fears or wonders or sort of seeks, you know, kind of meaning of our lives, like, you know, future after we die and stuff like that. So there are definitely interesting things there that can be done. I mean, people are doing with these like assistants, right? Like you train, and I believe really this AI will have to be a lot more personalized, you know, like, so you will train it really on your life experience, you know, like, so if AI can see every image I So if it can read every email, you know, I believe AI will be able to tell me when did I make a mistake?

26:41When should I do something different? You know, did you overreact in this life situation? Did you not? Right. And going further, right, like that will stay. And my kids can, after I pass away, they can say, hey, what would that say in this situation? Right. You know, like what would maybe I'll be able to in some way talk to them. Right. So you blur all these things which were sort of not blurred in the past. Right. So you will start having these very, very interesting developments. But I would kind of not look at them from the sort of P &L perspective, earnings perspective. There is also going to be a lot of issues as we have already now.

27:16I mean, sometimes I can give you wrong answer. Sometimes it can be used to do bad things, to impersonate, to deceive, to manipulate. So there's going to be a lot of interesting, I would say, philosophical issues, technological issues and investing issues. But I just don't think it's going to be as simple as like seven companies are going to have PE of 50 and everyone else will have PE of 10 and it's going to persist that way. I don't think it's going to be like that in finance, at least. The other thing I wanted to ask you is, you know, you left JP Morgan in July and then pretty much a month later, we had a very sharp sell-off.

27:51When you look back at that particular sell-off, you know, we never got to hear from you, your thoughts on that particular week in markets. What did you actually see and observe there? Because there are still differing opinions out there about what the proximate catalyst was for some of those moves and what was exacerbating what. So the catalyst was definitely moving rates related to Japan and the currency, right? That was a sort of catalyst. But you always have like a spark and a bucket of fuel, right? And the bucket of fuel will stretch CTAs, stretched volt targeters, systematic investors, too much optimism, you know.

28:26And then you start basically hitting the stops across these strategies, right? CTAs hit their sell signals, VOL targets, VIX goes up, VOL goes up, they need to sell. If you were selling puts on AI names, you suddenly need to kind of close. So VIX behaved most synonymous. So it was a lot of short VOL covering as well. But again, I think what was missing for this to be the turn in the cycle was, I guess, GDP, employment, still fine, right? Still hope that Fed is going to cut. But, you know, so it didn't, it didn't, there was a little bit of conflagration, but it didn't kind of burn everything down.

29:05Right. So it was a little bit of satisfaction, but it didn't last too long. It is pretty remarkable because even with, we got a little sell-off, but it's a very minor sell-off. We're basically, the stock market is more or less at all-time highs. This is despite a pretty big repricing of the expectation of the short end of the curve, where people were expecting deep cuts to continue through last year and to this year. We might not get any cut this year. And yet still the market is close to all time highs. It must be nice on some level to be out of the game of having to come up with an end of your price target, because that sounds like a job I would never want to take.

29:39But I also wonder, you know, do you wake up in the morning and still like yearn to give end of your target? Talk to us about, you know, what you have a market outlook for right now. Like, give us some give us what's on your mind. Sure, sure. So, look, it's nice once in a while that you can be somewhere away and not look at the fact parse every single word. Although I did it yesterday, you know, but a few months ago I didn't. So it's nice to make a break or maybe it's necessary. You know, ultimately markets are a little bit of a sort of thing of compulsion when you feel like you need to understand what's going on in the world.

30:15You know, so I think it becomes part of your DNA if you do it for a long time. So I do always think and I do have an outlook. Yeah, so give us a... So, you know, on a sell side, you kind of need to put a price target. And I think it's a kind of poor way to summarize everything into one number. It's basically almost you're telling, you're trying to forecast probabilities in the world, you know, because real world actually works in terms of physics, deeply works in terms of probabilities, not just superficially, you know, in a quantum physics. So you need to sort of have a sort of that hyper-probabilistic view and you're forced to have one view, like 100 % or nothing.

30:52Right. So it gets oversimplified. I think media, you know, and not referring to you, but media does a bad job. They say, oh, what's your price target? They just want to talk about that. And they say, oh, you're right. You're right. So no. So I would say, like, you know, if if I can move away from price, I do think we'll go back down in the five thousands this year. Sometimes I think at that point in time, we will we will see whether the cycle is still strong or it's not. I think we need to see the whole new political climate, whether it will lead to turmoil. And I believe more likely than not, it will.

31:28So those things, I think, will get us lower, right? At that time, whether it becomes an end of a cycle and you go much lower into 4 ,000, I don't know. I think there's some probability of that. And then conversely, on the upside, everything goes. If really this is what they call the golden age of America, then markets will stay in $26 ,000, it can go a bit higher. I just see, I'm hard pressed to see it going much, much higher, right? Because valuations are there, positioning is already there. As you said, Fed is not cutting, right? So it's a little bit of a chicken and egg. I mean, I have been scratching my head like at these level of rates, which I do think are restricted rates for now more than two years with the commercial real estate.

32:11Here and there, we saw a few hiccups, you know, like, but, But, you know, I do think that it's sort of under the hood of economy, some damage is being sort of built up and down. So I don't think like market really, you know, going to 7 ,000 or, you know, 6 ,800 or something like that. So I would say maybe it can go 65, stay range bound, you know, like, so I would sort of formulate the view in terms of, okay, you perhaps want to sell upside, give yourself a little bit of a room for some more excitement for the first few months of the year. But then also be ready to assess once when you go in, you know, let's say 5 ,500 or 5 ,700 to assess is the cycle potentially ending, you know, or that's going to be buying opportunity.

32:51And I wouldn't want to sort of say, hey, like it's going to first stay at 6 ,100 and it's going to pull to 55 and then you buy with both hands at 55. and like that would be too predictive, you know. But I think some variation of that path will be whereby sort of the depth of a pullback will depend on trade war, China, domestic political situation, rates, and like one-off things like we had on Monday.

33:30For enterprise organizations, managing all your food needs is a tall order. But with EasyCater, you get a single workplace food vendor with the tools and resources to make it easy. Giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform. All while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. Being a small business owner isn't just a career, it's a calling. Chase for Business knows how much heart and effort go into building something of your own.

34:10That's why they make your business growth their priority. The Chase team takes the time to understand your mission, where you are now, and where you want to go. Their broad range of solutions is designed with you in mind so you can bring your ideas to life. From banking to payment acceptance to credit cards, you can conveniently manage all your business finances all in one place with their digital tools. Looking for tips and advice? Their online resources are always available to give you the solutions you need to help your business thrive. See how your business can get stronger and go farther with Chase for Business.

34:44Learn more at chase.com slash business. Chase for Business. Make more of what's yours. The Chase mobile app is available for select mobile devices. Message and data rates may apply. JPMorgan Chase Bank N.A., member FDIC. Copyright 2025, JPMorgan Chase and Company. I'm glad you mentioned domestic politics because one of the other weird things about this week when we had the DeepSeek sell-off was everyone was focused on that. And, you know, tech stocks went down, as we mentioned. But then on Tuesday, everything started rebounding, even though we had headlines coming out of the White House about cutting what amounted to a pretty big chunk of federal spending.

35:28The entire market seemed to look through that, which is kind of ironic because one of the things we've heard for the past four years or so is this idea that, you know, deficit spending is driving the entire economy and stuff like that. I feel like political risk is one of those things that investors really struggle to price in because there's so much uncertainty. A lot of it seems very binary. How do you deal with that? So you need to sort of, you know, put some scenarios, you know, what can happen in terms of taxes, regulation, you know, tariffs, trade wars, geopolitical conflict, you know, and then see how can they impact specific stocks and industries, countries, and maybe overall market sentiment, you know, and maybe put some scenarios.

36:11That's a kind of a blueprint, and market never goes by that blueprint, but at least gives you some framework to try to understand if it doesn't go by your sort of assessment, what have you missed and what else you need to take into account. But you put some blueprint sort of what can happen. So, you know, I think you pointed very well, he was talking about NVIDIA, Taiwan export sort of, so those type of things, right? So market, then market has its minds of its own, which is tied to sentiment, you know, and it's tied to momentum. You know, most people think momentum, you know, they don't calculate by the thing, They just feel good about market.

36:44They see good news about market. Their taxi driver or friend or family feels good about investing, right? And they choose then to ignore. You know, like, so on Monday, I was watching CNBC and every single guest was saying, oh, take your shopping list out, take your shopping list out, take your buy this, buy this, buy this, buy this, right? So, you know, it creates a little bit of a sentiment, you know, it creates a sentiment and people say, okay, you know, I'll make a punt. I'll buy if it's 20 % down, maybe next day it's going to, that cat bounce. So people buy, right? Some people rotate. Okay, I'm getting rid of Nvidia, but look, Apple has been underperforming, so maybe I put my money there.

37:18So the sentiment overall was still pretty strong. There's this aura of momentum, psychological momentum that is harder to break. You do need to have a few punches for it to break for people to sort of give up. So one of the other things I wanted to ask you, just again, looking back at the sort of long-term changes in the market, And we touched on this earlier, but we've just seen an absolute explosion in different types of options trading and volatility trading. And now you even have TikTok influencers who are like pitching options investing as passive income. Like, oh, don't buy a U.S. Treasury bond.

37:53Do an options bet, which is kind of crazy. How has that impacted the market? And how have you seen people, you know, trying to handle some of that new, I guess, dynamic that's been introduced? So that's a very good question. And it started sort of with around the COVID time. People were locked in. They got these stimulus checks. They started trading, right? Proliferation of these online brokers, no commission fees, options being traded as a sort of very short and short maturities, right? You know, options used to be sort of leaps and then maybe like a monthly options, you know, first, second and third month quarterly options moved to weeklies and dailies, you know, and then in the single names, you know, like so you had sort of people locked, they got money and they got these instruments, these extremely powerful instruments with leverage, about 100 times leverage, you know, like so you suddenly can make a bet of, you know, millions of dollars, even if you have like, you know, 10 ,000 or$5 ,000 to invest, you know, like so that changed, that changed a lot.

38:54And for most of these people, actually, it worked, right? Because since 2020, we had that pullback when the Fed started hiking. But for most of it, it worked, you know, like so speculative trading activity, especially on the long side, it worked. Then you also had in parallel sort of crypto markets growing, right? You know, like so if you think of it like, you know, a few trillions of dollars of wealth was created there with probably some of these similar type of investors and similar type of people, you know, like. So it changed, you know, so there is less leverage in terms of borrowing money, but a lot more leverage in terms of option trading activity, you know.

39:33So as you said, I'm always also surprised you go on some of these social media and then you see all kind of strategies that can't lose money, that are making like tens of thousands every day. You just need to follow him. And it becomes really kind of bizarre. You have like these people who are at the same time performer or like women who are like, you know, in like underwear suggesting how to trade options. Buy a zero day option. They're all big fans of mine. They follow me on Twitter and then they DM me. I'm very flattered. So it's kind of crazy, you know, like and we try to handicap it by looking at flows from Robinhood, see which names are being sort of bought, which names are being sold.

40:10Try to see where the retail may be forced out or something like that. So we did some quantitative work. We did a lot of the sort of language, large language models, sentiment-wise, like from Twitter and those type of other social medias, which we could get permission to do. So we're trying to incorporate it. But I think overall, it's hard to 100 % handicap it. But for sure, it added leverage to the market, added speculative element to the market. And at some point, it's not going to probably end up well, right, at some point, you know, but it's hard to say when exactly. Right. It's, again, one of those things that can go on for longer than you think.

40:46Since you mentioned getting data from Robinhood just then, this is the other thing I always wanted to ask an equity derivative strategist, because you alluded to this earlier. There's a lot of, I guess, misunderstanding or lack of understanding of what an equity derivative strategist actually does and exactly what data they're looking at in order to make some of their conclusions. Can you maybe give us like a quick 101 in where your data comes from? How much of it is from official sources like, I don't know, an EPFR or someone like that versus like color that you're getting from the market? Good question.

41:24Yeah, no, so there are all kinds of data. So there are price and volume data, all kinds of technical data that can be derived from those type of things, which can also be a different time horizons. You know, like they can be daily. Mostly they are daily, right? You know, but increasingly, you also want to look at the intraday data, you know, intraday correlations, intraday momentum, volumes, large blocks that are traded. So there is also high frequency one day, but most of it is daily, I would say. And then there are longer term data. When you look at the sort of, you know, some like a monthly statistics on positioning or up to the sort of filings, you know, 13F filings, like holdings and stuff like that, you know, like so different sort of frequencies of positioning, volume data, price data.

42:08Then so directly market observable data, like open interest, you know, options, volume and options, those type of things. Right. Then you have sort of fundamental data, you know, and fundamental data you have fundamental data for stocks, you know, which are related to earnings. But increasingly, you have a data which are derived from nontraditional sources, you know, so-called big data that can be sort of sentiment measures, but quantitatively derived measures, objective, not sort of guesswork to some very specific niche data like, you know, satellite, you know, all kind of like data that, you know, we didn't have, you know.

42:41How many cars are parked out in shopping malls? Correct, parking lots and in front of Walmart and those type of things, right? So you have these stock-specific data, earnings-derived, news-derived, sentiment-derived, and then also non-traditional ones, you know. And then you have, like, macro data, you know, typically lower frequencies, but increasingly also with some of these alternative data sets, big data sets, you can try to figure out, like, you know, shipping and, again, sort of storage and oil tanks, how full they are and stuff like that. So it's a whole host of data. As a quant and derivatives person, you probably focus most on market data.

43:14So open interest price volumes and all stuff that is derived from that. But you also want to supplement that with all these other data. And then some of the data sets, you derive it on your own. So, for instance, gamma imbalance in S &P options, put minus call. So I was running that for 15, 20 years. And first people tell me, what's that? You cannot know. But then now everybody has it, actually. You know, and same thing with like a CTA stuff, you know, and volt targeting exposure. I was getting so much sort of critique in 2011, 12, 13. You know, now everybody has it, you know, kind of CTA positioning percentiles.

43:50So you can derive some on your own based on your understanding of the markets. All right. I just have one take and I bring it up a lot. And I sort of feel like the Kool-Aid man. It's like every conversation I have to jump through the wall and interject this. But, you know, there's all sorts of like quant techniques and there's the definition of quant and changes over time. And obviously, there's an incredible amount of data that we can use now. And then there's sort of like old fashioned quant where you're just like, we're going to buy, you know, that I sort of associate with like AQR from years ago.

44:21We're like, we're going to buy the cheap stocks that are exhibiting momentum. Right. And we're going to short the expensive stocks that are declining momentum. And, you know, why doesn't this work anymore? And all these sort of hand wringing in the traditional quant industry. Why haven't things been reverted? How much is the fact that like so many of these sort of ideas about how the market should work have been broken by the simple fact that a handful of American companies that are very big exhibit year over year earnings growth that are truly remarkable? And this is a fact not about the market world, but about the real world that for whatever reason, these big tech companies just keep getting bigger despite their size.

45:04Wait, Joe, you have to end that by saying the Kool-Aid man catchphrase. What did he say? Oh, yeah. Oh, yeah. As long as the Metas and the Googles and the NVIDIAs and maybe the Apples of the world just keep growing earnings like crazy every year. How much does that bust any sort of notion of mean reversion in markets? So I think it busts the notion of a value as a factor, but value as a factor has been struggling for a long time now. So sort of probably since, you know, decline in interest rates post 2008, a lot of these, you know, and growth of indexation, right? Growth of indexation kind of sparked the momentum and changed the structure of the market.

45:41So some of these quant models or quant factors work less and less, you know. So there is also another aspect, which is, you know, once when you put money to work in these strategies, you kind of squeeze out the alpha, you know, and these things are fully priced in, so they stop working. So sort of growth of quant funds, traditional quant funds, you have quant ETFs, you have like broker dealers doing quant strategies, kind of squeezes out returns, right? You know, on your question, sort of like these big companies that keep on delivering. That's also a very good point. You know, quant strategies are designed for sort of steady state situation when kind of things are fluctuating around something which is in a steady state.

46:22And we had sort of, you know, big sort of big changes in the world, right? In technology. Yeah. And also geopolitically sort of, you know, capital move to U.S. and it move into this sectors of innovation, right? You know, and now, so you may sort of, you know, you may constantly be out of equilibrium, right? You know, where some of these mean reversion or quant strategies would work. certain type of quantitative value-based strategies, right? Question is how long, you know, how long can, you know, going back to the concentration, right? How long can it go? My question becomes like, let's say if you have like a social media company, like a Meta, right?

46:57I mean, once when they have all the users in the world, I mean, like, you know, they can't go much further, right? They can go to the... Right. There's limits. There's limits, you know, but number... They have to start creating fake AI. Fake AI or go like to Mars, like there's no one there. So there's some limitations, right? And then there's some sort of also historical, when you look at the weight of stocks in an index, right? So you take NVIDIA percentage weight in S &P and you run back history and you see that this basically never happened. And even if it happens, it never lasts forever, right?

47:26But to your point, it can last one or two or three years. It's enough to ruin a lot of investment strategies. All right, Marco Kolinovic, thank you so much for coming on Odd Thoughts. A real treat for both of us. Yeah, that was great. Thank you so much. Thank you so much.

47:53Joe, that was really fun. I'm so glad I finally got to ask him a bunch of questions about just being an equity-derived strategist. I love those questions so much because they're this sort of like dark fiber or the dark matter of how this industry actually works, what everyone just abstracts over them. It's like, oh, you look at the data and then you do this. Right, like what data? Where did the data actually come from? Like, I could listen forever to someone and we should do more of that, just like talk about these aspects, like paying for data and data costs and all that stuff. I really like Marco.

48:29It's a nice conversation. The one thing I would say is, you know, you asked that question about like, well, the S &P 500 overall didn't do too bad on Monday. And like, you know, if I'm an index investor, I have exposure to GE. And so that's good because I don't have to worry about AI. But I think the question really is like, how much is GE exposed to AI in very indirect ways? Yeah, that's correct. Right. And you do so. I mean, you know what I think? I saw a tweet about this, so I'm just going to say it. And it may not even be true. But if it's not true, it's truthy. Someone tweeted that apparently there was like a Sherwin-Williams earnings call.

49:08And someone asked about how much paint data centers were going to need to paint their walls. I don't know if it's true, because I just saw the tweet. But if it's not true, it doesn't really matter because it is true. Like every company is like, are you doing something that could supply? Do you sell some product that someone building an AI data center is going to need at some point? But my point about GE, though, is kind of the opposite, which is like GE did fine on that day, but I wish I had more exposure to GE, what I really have is a bunch of NVIDIA and Microsoft exposure through my index fund.

49:42Right. But you don't know how much indirect exposure you have to NVIDIA and Microsoft through GE. This is true. Skanda wrote that excellent column in the All Thoughts newsletter about how more and more of the economy is being driven by AI. We actually saw on Monday the treasury market move a little bit. Yeah, yeah, for sure. Which, you know, okay, treasuries will go up when there's a market sell-off. But a lot of people were saying, well, this impacts growth expectations as well. And so that's why you're getting this reaction. No, totally. I think the degree, I mean, especially, you know, you go back and like Trump announced the half a trillion dollar Stargate project, and I don't know what's really going to become of that.

50:23But like, I believe the data centers and AI specifically through the data center channel is a meaningful, important, is a growing important part of the real economy right now. And if suddenly they're like, you know what, this is a dead end, or suddenly like, we don't need this because we can get AGI so cheaply that it's just like on our laptop, that would raise some real econ concerns. Yeah. Shall we leave it there? Let's leave it there. Oh, yeah. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwart.

51:02Follow our guest, Marco Kolonovic. He's at MarcoNNY. Follow our producers, Carmen Rodriguez at CarmenArmin, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. For more OddLots content, go to Bloomberg.com slash OddLots. We have transcripts, a blog, and a newsletter. And you can chat about all of these topics 24-7 in our Discord, discord.gg slash OddLots. And if you enjoy Odd Lots, if you like it when we discuss the dark magic of equity derivatives, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free.

51:40All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

52:13How many vendors does it take to meet all your organization's food needs? Just one. Easy Cater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100 ,000 nationwide, all through a single vendor. In addition to all that variety, Easy Cater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. Every business starts with an idea. How can you go from daydreamer to industry leader?

52:54Amazon Business accelerates your journey. With smart business buying, get everything you need to grow in one familiar place, from office supplies to IT essentials and maintenance tools. Amazon Business takes the buying experience you know and love from Amazon, plus tools that help you save costs and make insights-based decisions. Ready to bring your visions to life? Learn how at amazonbusiness.com.