AI's Impact on Macro Trends With Andreas Steno's Larsen and Alex Campbell

0:01Hey all. You know, as a member of our Real Vision community, I want to give you something special. And that special thing is early access to our massive Black Friday sale with an incredible discount plus some more free stuff for you. You see, for me, getting prepared for 2024 is key for all of us. It's going to be a banner macro year. We've got a US election, a crypto bull market. We've got rate cuts to come. We've got technology. We've got everything at play all at the same time. And you need to be prepared for all of that. So realvision.com forward slash early Black Friday. Take advantage of the offers right now and set yourself up for an incredible 2024.

0:46Thanks.

0:54Hi, everyone. Welcome to the Real Vision Daily Briefing. In honor of the Thanksgiving holiday, the team is taking a much needed day off live programming. But it is Black Friday. So we are running a huge special, 50 % off all tiers. What does that mean? Well, it can help get you access to great content like this piece we are unlocking for you today. In this conversation, Andreas sat down with Alex Campbell, ex-macro hedge fund manager turned founder and CEO of Rose AI to talk about how AI can help investors improve their trading. Enjoy. How can we use artificial intelligence and data to trade macro themes?

1:35Welcome to this edition of BuySite meets SellSite. I'm Andreas Stinu, your monthly host on this show. And in this show, we allow the BuySite to talk. Enough talking from pundits from the SellSite. In this show, we want the BuySite to do the talking. And this month, I've found a perfect guest for a discussion on how to use data and artificial intelligence to trade macro themes. I'm joined by Alex Campbell, the founder of Rose AI, former Bridgewater Associates and Lehman Brothers, among other things. Welcome to the show, Alex. It's great to see you. Thanks for having me. It's great to be here. Alex, first of all, a very interesting cocktail you have on your curriculum with AI paired with investor experience from the buy side.

2:29I'm very curious on how you can utilize that cocktail to sort of project trends and macro themes. I know that the Chinese macro theme is one very close to your heart. So I'd like to start with a discussion on China and how to use data to sort of assess what's ongoing in China right now because it is very tricky from the outside to get a grip of the situation in Chinese real estate, for example. So how do you view the situation and how do you use data to assess what's ongoing in China right now? Yeah, terrific question and problem actually and one of the big, you know, focuses of my life for the past kind of almost five to ten years.

3:09You know, I really got into China studying it as the commodities guy over Bridgewater Associates, where China was consuming a lot of commodities and you had to kind of understand this big behemoth growth engine to try to figure out trends and demand and supply and what was going on in the world markets. And you end up with this, when you start looking at China, kind of immediate fork in the road with how you decide to interact with the data and information coming out of China. It's become increasingly hard to get good information from China. You know, lots of the stats are kind of massaged, public, quasi-private, you know, reporting agencies.

3:48And so the framework I try to apply for this problem is to think about what are the essentially public market or transparent prices or things you can observe that are not able to be futzed and then kind of everything else and put everything on this spectrum of, you know, we don't know how much we can trust GDPR numbers. We don't know how much we can trust provincial GDP numbers or whatever. But stock prices are generally harder to futz with. And so I think you have to kind of approach it from that perspective of look at market prices as much as possible. Now, they make it hard to look at market prices in a lot of context.

4:28You can't really short because of the way they do repo. There's a bunch of technicalities with regards to actually getting good liquid market pricing out of China. But that is a data problem essentially, right? And we started to answer that question by doing silly things, like just adding up all the bonds we could find on the property developers a couple of years ago. And this was when we thought Evergrande was going to have a problem. We said, look, their working capital needs are really voracious. They are very dependent on short-term dollar funding. It looks like it's going to blow up. It looks like the losses are basically bigger than the remaining market capitalization.

5:01And we made this call saying, look, just based on what we can see in the publicly reported numbers, they have more losses than they have market cap. And so we think that they're gone. And then that led us to kind of investigate, well, look, property has been this huge growth engine for China. And a lot of the kind of middle data, the credit data, the bond data, you know, the investment data, which are a little bit more and more distended from reality, would imply that it's not just a localized problem to Evergrande, it's a bigger problem. And I think Western investors then get overwhelmed by this because they go and they look at, you know, a bunch of, you know, hundreds of property companies that they might not understand the names of or where they're coming from or what provinces they're in even, you know, there's a huge language gap.

5:47And so we said, look, let's just add up all the bonds, literally, just find every Vanke bond you can, find every Shamayo bond, find every Sunak bond, and just see what they're saying. And even about two years ago, we saw that in the wake of Evergrande immediately, and then coming back later in the last two years for sure, people who were investing in particularly dollar bonds basically were washed out years ago. They've been washed out for years. And if you added up the actual implicit losses that you'd have to generate to create the losses on those dollar bonds, we're talking trillions of dollars of losses.

6:24This isn't like 10 billion here, 100 billion there. This is trillions, if not, you know, middle trillions of losses on, you know, what is essentially the biggest asset class in the world, Chinese real estate. And so, you know, you kind of then look at those numbers and you have to then go look at the official stats. So you look at GDP, you look at surveys, you look at things that are, you know, sometimes reliable, sometimes not, like the PMIs are notoriously unreliable. And yet in COVID, they were actually a great leading indicator, right? The PMI got crushed in March 2020 or whatever. And it was like a good wake up call.

6:57Like it's a 7Z move, what the heck's going on? And so, you know, I think that there's this kind of, I don't know if it's an aphorism or just a rule of thumb that we had at the old shop or whatever, which is there's no such thing as perfect truth. Like even US GDP numbers, US inflation numbers, like they get restated, there was revisions, you know, how much is the cost of living adjustment or whatever. And you have that problem in China as well. But it's the duality of kind of going back and forth and going back and forth and then just zooming out. And I think not enough people zoom out and go, wait a second, you're telling me that there's twice as much money supply in China as in the US?

7:34And that's according to them, right? You're telling me that you have trillion dollars of losses and the banks haven't taken a loss at all, right? And so we think that you can actually, when you kind of aggregate stuff and then zoom out a bit, start to get a much more dynamic, thematic understanding of where we are in this cycle and where we are in regards to their growth cycle, where they've had this gigantic credit boom. It's clearly was a bubble. They have popped the bubble. And we're in this kind of Wile E. Coyote moment where none of the banks have taken any losses whatsoever, right, which is shocking, shocking that they're able to get away with this.

8:09The equity markets are not really pricing that in yet. And so, you know, so far the emperor has no clothes and the emperor is getting away with it. But when you start to look at things like reserves, things we can count, like how many treasuries do they have? We can talk about that more later. You go, wait a second, like they don't have infinite resources to deal with this problem. Maybe that's part of the challenge that they're facing. This idea that they can't really take the losses because they don't have enough capital. And so that puts us in a very clear kind of timing and market positioning if you're managing money, right, which is you have a secular view, which is this thing's unstable.

8:45It hasn't hit the bottom. Wait till the banks go. And then the timing indicator, which is actually it's not that hard. Go look at the worst big banks you can find. Look at Minsheng. Look at a bank called Industrial Bank, which only lists on the mainland. And just wait for those banks to blow up, right? And this was basically the trading rule I got from my Lehman days, which was at Lehman, we're sitting there seeing the whole system kind of come down, come down, come down. And the indicators were actually pretty simple. It was just find the next financial institution that was reasonably big that was under the gun and just follow that rigorously, you know, maniacally.

9:20Like, look at Bear Stearns when it's under trouble. Look at Merrill Lynch. You know, look at Lehman. Look at AIG. Look at Fannie Mae, Freddie Mac. And when it's a systemic issue, you generally can see the problem as it manifests. But you have these big narrative waves you've got to deal with along the way. So look at public market data as much as you can. Triangulate that with kind of the thematic stuff you can come coming out of it. Don't care too much about is it 5 % GDP or 6 % GDP because we all know that's made up anyway. But, you know, the directions will tell you something and then that should inform your overall portfolio.

9:56Very interesting introduction to this discussion on China, Alex. I noted, I think last week, that we saw early signs of liquidity stress between the Chinese banks. One of the first signs, at least visible signs, of actual stress in the banking system in China. But since we've had a pretty visible crisis in real estate, how come we don't see the reaction in the banking space in China yet. Is it due to a lack of price discovery or what's your explanation of what's ongoing there? Yeah, there's a huge critical distinction between Western financial markets and Chinese financial markets with regards to how they deal with repo, repurchase transactions, right?

10:37So I don't want to get to, I'm not a repo expert. I don't want to get too into this, but you know, essentially I have collateral, I have treasuries. I use it as collateral where I give it to someone else for a while. They give me some liquidity. I can use that to go do other things without liquidity. I can buy stocks or what have you. And then I get the bond back and I get the money back later. Okay. The way that works in the West and in general, every big market is when we do that repo transaction, I actually sell you the fricking bond. You get the bond, you can do whatever you want with it, which means you can shortage, right?

11:06Because now you have possession of an asset that you owe later in the future. So China does not have this version of repo or it's like 10 % of repo is this kind of version. They have something called pledge repo. Okay. Pledge repo, you might know from the warehousing scandals about, you know, five, have a stack of copper in a warehouse and I'm going to pledge it to you for financing. It's yours. I'm not going to give it to you though. I'm not going to give you the title. I'm just going to give you a little piece of paper that says, oh, it's kind of yours. And eventually I'll give it to you. Right.

11:35The problem, there's a bunch of problems with this, but one of the easy, obvious problems is that people were repoing multiple turns on the same collateral. They'd say, oh, I'm going to lend it to you. And I'm going to lend it to you. And I'm going to lend outstanding for one bar of copper or whatever. So clearly fraud, right? But you can't find this stuff when you have pledge repo because you're never calling the actual asset. It also radically harms price discovery, particularly in fixed income, because you can't short bonds, basically. It's impossible to short bonds because you don't want to borrow.

12:06And so you have this kind of weird situation where the only time that banks really have to call their capital back or they have to call their loans back is when they're liquidity constrained, not when they're like insolvency constrained or asset constrained. You see this with the U.S. banking system, with the regionals, the Cary, you know, they have these these these NPV problems with their fixed income book because they went and bought a bunch of duration. And the Fed's like, no, no, no, we're just going to let you borrow money at LIBOR essentially or whatever to hold on to this for a year and not book the loss.

12:38Right. It's kind of a similar different with a different taste function over there. So what we think is the holdup behind the evergrand bankruptcy right this thing went under two and a half freaking years ago excuse my language or whatever is once they crystallize that loss by settling on an rmb loss not just screw the dollar holders right but screw the rmb holders then you have someone on admin chain who says holy crap we lent these guys 50 billion dollars we have to take a 25 billion write-down on this. We have to take delivery in busted parking garages and tower blocks that are going to get demolished or whatever they have as collateral.

13:18That's all they have left. So you have this kind of daisy chain of recognizing losses, which is why the classic alternative is called extend and pretend. Extend liquidity and pretend there's no problem. Well, the issue is you have a couple trillion dollars of distressed assets right now. How long can you pretend that that doesn't exist. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision daily briefing. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus 500 Futures, you can trade crypto without the hassle of opening a wallet.

13:55With just a few clicks, you can register and start practicing with their free and unlimited demo. See a trading opportunity? You'll be able to trade it in just two clicks. Feel ready? You You can move to real money with as little as$100 once your account is approved. And the great thing is that in addition to crypto, Plus500 gives you access to a wide range of instruments. S &P 500, NASDAQ, gas, and much more. Explore equity indices, energy, metals, forex, and beyond. With a simple and intuitive platform, you can trade anytime, anywhere. Experience the fast, accessible futures trading you've been waiting for with Plus500.

14:29With over 20 years of experience, Plus500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus.

14:50Well, apparently, they're still amidst this pretend and extend phase, given that we haven't really seen this huge spillover to the Chinese banking system and the Chinese banking stocks. And one thing I'd like your take on is how important this crisis in real estate is for the sort of official monetary policy of the Chinese central bank. You mentioned how the official numbers of the holdings of U.S. treasury bonds from the safe part of the People's Bank of China has been dwindling basically since 2014. you know, they're about. But how is this interlinked with the real estate crisis? And how do you view monetary policy in China right now?

15:39Are they just throwing money at the problem here? Yeah. So normally what happens is you get this kind of what I call like a 5B process where you have a boom, a bubble, a bust, a bankruptcies, bank failures, and then bailouts. Maybe it's six, depending on. Right. But the place we're at now is we've had bankruptcies and we haven't had bank failures, right? And so that's where we are in that system. It always works the same. You can go back 1837, 1870, you know, it's always the same. And it just depends on where in the banking system is the periphery infecting and threatening the core and how much collateral does it take to kind of bail the system out.

16:13So what normally happens, right, is the local government, the central government will, you know, give a bunch of bonds or give a bunch of collateral to the banking system, buy a bigger stake in the banking system, write down a bunch of the assets, impose losses on the existing, equity holder, existing bond holders, and start the machine anew. And this is what you would expect to have happened in about 2015, when all the off-balance sheet stuff in China started going crazy, where you have essentially companies like Evergrande and Country Garden and Shamayo and Sunac and all these folks selling bonds to households.

16:47This is ridiculous, and nobody cares about it, which is hilarious. But they are literally, not only do you have to prepay for your condo or whatever that doesn't get built. But they'll say, give me$100 ,000. I'll promise you a 7 % return. And we're going to run it through your local bank as something called a wealth management product. A little trust will kind of wrap this thing. So it looks like a CDO or whatever. And we're going to sell to households. Okay. So imagine if Bear Stearns, Lehman, we're taking their like junk CDOs and jamming them down household throats. And you had all these losses.

17:17Now you got to go deal with. This is what's happened in China. They have trillions of this outstanding where private companies, local government financing vehicles, this kind of real estate financial nexus has sold debt directly to households through non-bank channels that are kind of associated with the banks, but not yet call. And so you have people like on the internet, you can look at this up being like, I went Evergrande like 50K and like, I'm only getting back like$5 ,000, right? So what would normally happen is somebody bails out Evergrande or those assets go on a banking balance sheet, the bank makes them whole, and then we have to recapitalize the bank.

17:55Now, the issue is if all of this activity is local, this is where MMT comes in, then it's not that big of a problem because you can just print money, recapitalize the banking system, take some pain on the currency. What we're seeing at the same time is that the balance of payments in China is not as strong as everybody thinks. The FDI just went off a cliff. It's now negative. You have a lot of capital outflows, You have what I've reported on 1.5 trillion. No one cares about this. Trillion of errors and omissions in the balance of payments over the last 10 years. Trillion. OK, they have three trillion of reserves.

18:291.5 might not be there because they already left. OK, so this is where you start to go. Wait a second. Maybe that's why they didn't recap the banking system in 2015 or 2018 or 2020 or 2020. Maybe that's why. Just because they don't have the actual collateral. And then it affects Western markets because if they have to sell bonds to shore up their balance of payments, that's why bonds are going, yields are going through the roof. That's why NPVs are getting crushed. You know, they're selling foreign assets, basically. Alex, all of this sounds incredibly deflationary to me. You know, issues with the trust of collateral households being robbed, essentially, indirectly by Evergrande and other companies.

19:14and a very, very weak sentiment around the whole credit quality of the system. So how come China is stuck in this situation when the rest of the world is stuck in an inflationary environment? Yeah, it's a great question. I think to a certain extent, they've been leaning on this weakness to counter the inflationary force that's coming from everywhere else. So it's like actually like, you know, almost like fiscal policy leaning against monetary policy or whatever. where you have this huge kind of deflationary impulse that's happening at the same time as you have this kind of global inflationary impulse.

19:53You know, I think that the other thing to think about is that it doesn't for me, it doesn't really make me necessarily more of a deflationist or more of an inflationist. It makes me want to buy volatility on inflation because it's something that's going to be hard to control. Right. It's like you're going to have this really intense deflationary shock when the banks actually seize up. you're going to see selling of foreign assets. They're going to liquidate the rest of their bonds. That's going to be a big yield spike. Maybe we get yield curve control coming out of the Fed if they get too panicked like the BOE.

20:24But inevitably, I think they're going to print. And I think you can kind of tell that by the fact that they haven't taken the pain in the past. If they were going to take the pain, they should have taken it in 2018. They should have taken it in 2020. They're not going to. They're going to do extend and pretend until they have to, and then they're going to print a bunch, which is why I kind of end up saying, okay, as an investor or a family office or an endowment, you really want to have gold, but not denominated in dollars. You want to have a denominated RMB because that liquidity whipsaw, you're probably not going to get right trading the dollar.

20:58You just realize though that you have this huge stack of Chinese money. A lot of it's going to end up in gold. The RMB will probably fall. The gold will probably rally and the dollar is going to have some real swings along the way like we're seeing right now. but that if you want to bet on this theme, it's just a pretty clear expression of it. Alex, last time the two of us had a discussion, I remember you saying very explicitly that we need to remember that times of war are inflationary by nature. And obviously, you've been 100 % correct on that view over the past couple of years here. So given that we now have a new wall to deal with in the Middle East between Israel and the Palestinians, on top of the already existing conflict in Ukraine, what do you make of the inflation picture here amidst these wall times?

21:53Yeah, inflation is super interesting right now because we have the surge, we have the tight monetary policy. It looks like we might get the recession, that kind of Powell need softish landing to kind of really kill the bug or whatever. And yet, if you go back and look over long periods of time in history, and this is part of the data work that we spent a lot of time on, it's just so obvious that the big inflationary moves come from conflict. And if you think about COVID as kind of like a conflict, because it feels existential, and we kind of printed a bunch of money, or it's the beginning of Cold War II, or whatever you want to call it, it's very on trend.

22:27But, you know, usually the big surges, you think about demand and supply, right? Demand goes up a bunch because governments consume stuff and supply goes down because supply chains get broken everywhere. And that's like microcosm of COVID. And especially with energy markets, right? So you see, it's not the most novel idea, but look, if Israel turns into a regional conflict, then you can bet that oil pipelines and oil supply out of Iran is going to be disrupted. You can bet you have Straits or Hermes problems, supply chain issues. And so you have this notion of escalations and conflict almost always lead to energy price inflation, which almost always leads to broader inflation.

23:14And so absent of conflict, I think we're doing OK with inflation. It looks like we kind of have broken it in the U.S. potentially going forward. But oil just went back to 77 or something like that. If it goes back to 100, Powell's going to have to bring the short rate to 7 and all that entails. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

23:44Alex, if we look at conflict scenarios over the course of, say, the past 100 years or so, what does the big data tell us about how to deal with a conflict from a financial markets perspective? How do we trade it? And what performs through such a period here? Yeah, it's one of those things where investors hate betting on conflict because you have no alpha on conflict, which I kind of understand. I think of it as more something you need to hedge and just understand in your broader portfolio allocation. Absent of conflict, you really would want a very dispersed, diffuse collection of betas in what we call your beta portfolio, your market return portfolio.