Deutsche Bank's Ozan Tarman and Aditya Singhal on Understanding the Macro Risks | Odd Lots

0:00 Someone needs to make like a motivational poster that says, ‘Lord give me the confidence of an equity investor trading on an Axios headline.’ Yeah, like I feel like that would that would sell out. Yes. We have one open. Yeah. Okay. Generally we, we have no choice. If you were to look at the rates market, for example. Yeah, as an example. Right. There was, Six Sigma event that happened within it. At some point the pricing gets to a level where it doesn't make any rational sense.

0:29 Okay. So you start to look at that on a, on a more structured basis, and you start to ignore the noise in the middle. And whether we like it or not, we have to operate with that kind of philosophy. So you take one side or the other. It's very difficult to trade the headline because it's impossible, because as of now you had two conflicting headlines and you can get caught out. So most people have come to that understanding.

0:54 So you've taken a perspective or a view that either this is going to get resolved or you believe it's not going to get resolved. There's a way of expressing it within the five asset classes where you might get the most convexity. Similarly, if it gets resolved, there are certain things that actually might work which haven't yet worked. So you take those sides and you just sit and wait. Hello and welcome to another episode of the Odd Lots podcast.

1:22 I'm Tracy Alloway and I'm Joe Weisenthal. Joe, our live show in London, recorded May 7th at Wilton's Music Hall. A lot has happened since then. in markets, it’s hard to have a markets conversation that you know isn't out of date within like a minute or two. Yeah. But but I think this one, this one carries on. I think this one is still relevant. Well, you know, I have to say, I always feel a little anxious about recording markets episodes because of this very phenomenon. But this is true for a live.

1:50 And our recording shows that by the time it comes out, who knows how much all have changed. This is why you should go to the. This is why you should get this exactly where I was going to go. It's actually good to record markets episodes of the live show because it's like, all right, you create an inducement to get people in to buy a ticket. But again, you know, with a lot of these things, like how traders are digesting this particular moment in time, sure.

2:10 The headlines and the prices on the screen change, but there are certain like principles and frameworks for understanding what's going on that will be sort of useful regardless of what's happened in the meantime. You mentioned frameworks, and that is the perfect framing for this discussion. So we indeed had the perfect guests. We spoke to someone who's been on quite a few times before. One of our favorites for letting us know what the big money is actually thinking about and trading.

2:33 We spoke with Ozan Tarman He is, of course, vice chair of Global Macro over at Deutsche Bank. We also spoke to his colleague, someone who hasn't been on the show before, but who has quite a reputation as one of Deutsche Bank's star bond traders. Aditya Singhal he is the head of EM, trading across rates FX and credit at Deutsche Bank. So take a listen. Let's start with the obvious question. Lines on the chart. Keep going up.

3:00 Despite what would seem to be some challenges to the global economy, to put it mildly. Why? First of all, even when I walked in, I was checking for you guys. It wasn't like that 15 minutes ago when, we're now recording this at 733. Exactly. 20s. And when, one agency claimed that, Operation Freedom was back on that, President Trump could try to open the Hormuz by force. S&P and oil S&P didn't like that at all. Oil was surging higher than Al-Jazeera denied.

3:33 So we're all calmer again. But, bottom line is why we keep going higher despite everything that Javier and Lorcan said is because busses are empty. When I say busses are empty, you know, I only I don't only talk to my, portfolio managers about men on the street, to my college classmates. One of them was like, what do you mean? Busses are empty? That means investors don't have it. The analogy is a bit like, closer to April 2nd, April 9th of last year when we had the big tariff shock billboard up, we thought that it would be the end of the end of the end of the year, end of the markets.

4:07 And then President Trump, stepped back. Yeah. And the markets never looked back. I mean, similar coincidence or not, March 31st is the is the first time, he claimed through Wilshire Journal that he would separate state of foremost and operation that the two could go separately. None of that happened. But that was the first, big breath market took. And on April 9th, exactly the same day, the big first postponement came, I said, you're not going to do anything for two weeks.

4:39 And since then, markets never looked back. The historic led by tech Nasdaq and S&P rally. And you know, I talked to a lot of people a lot of, you know, key ladies, guys, honestly, maybe three, 4 or 5 people really believed in this rally since April, April 1st, April 9th. That's one big part of it. But it can't be all positioning also fundamentals right. Earnings. Yeah. Again head of sales. One of my legendary researchers Jim Reed just today, he was on Bloomberg as well, talking about earnings in Q4 of last year, just 13% growth, Q1 record is biggest in five five years, led by take 24%.

5:25 That engine keeps us keeps us going. Yeah. The earnings are what they are. So, here's something, Caruso Ozanne came in and he gave us the latest headlines. Thank you. Because I haven't I hadn't been looking at on my job. Yeah. You didn't look at his phone for 15 minutes. Yeah, yeah, it's a record. You know, I mean, how do traders deal with the market in which they're just the sheer number of headlines? How would you and how do they know what to take seriously?

5:52 And like, you know, what's real? What's not real? Like, how are they how are they ingesting news? So from a trading perspective, yeah, fundamentally five asset classes. Right. So you have a thematic view and you have rates of credit equities and commodities. And a lot of people are, fixated or are mandated or asset class or say, right. So they, they have no choice but to stick within that kind of regime. And, and then, of course, are you if you're a real money investor or a hedge fund or if you are, a sell side trader, just depending on how you are positioned.

6:24 Right. It's not really it's difficult to get in and out. Right. So thematically, you have to take a structural long term view, see what every asset class is pricing on that particular view and, define an upside. Downside kind of scenario. And based on the liability profile you have. And that how you define that is the function of the money you have. Or what kind of drawdowns are acceptable. You take a particular position and you let it play out.

6:48 So in this kind of environment this is difficult. So what is the upcoming kind of positive news that you can you can rely on to the market? Right. Today if you were to sit here today you say, okay, so the fact that not much action has happened in the last, 3 to 4 weeks within the street, means that at some point or the other, the resolution will come. Pakistan is is mediating, as we can see, there's been enough talks happening.

7:13 So you assume that resolution should come. That's what the market is. Pricing theoretically. You also have a situation with Russia which is developing, right, Russia-Ukraine war, which could be positive also. And then you have, the visit, the US visit to China, which also has the atom positive. Now of course, there's a lot of it isn't the price per se, but fundamentally speaking, as a trader, you position yourself and, and then you just choose, you know, at some point to, close it to the time, get out.

7:44 That all make sense to me. But, like, are traders sitting there with a truth social window open, like the literally congestion of news? How do you do it? I'm just getting the messages from you. Yeah, right. Just kidding. Well, someone needs to make, like a motivational poster that says, Lord, give me the confidence of an equity investor or trading on an Axios headline. Yeah. Like I feel like that would that would sell out. Yes. We have one open. Yeah.

8:10 Okay. I just, I genuinely we, we have no choice. But but fundamentally, it's, it's it's like this. Right. So you, you make up, you see what's so so we had, if you were to look at the rates market, for example, just as an example. Right. There was, a Six Sigma event that happened within it, at some point the pricing gets to a level where it doesn't make any rational sense. Okay. So you start to look at that on a, on a more structural basis, and you start to ignore the noise in the middle and whether we like it or not, we have to operate with that kind of philosophy.

8:47 So you take one side or the other. It's very difficult to trade the headline because it's impossible, because as of now, you had two conflicting headlines and you can get caught out. So most people have come to that understanding. So you've taken a perspective or a view that either this is going to get resolved or you believe it's not going to get resolved. There's a way of expressing it within the five asset classes where you might get the most convexity.

9:13 Similarly, if it gets resolved, there is certain things that actually might work which haven't yet worked. So you take those sides and you just sit and wait. You know, you mentioned, irrationality just then, which means we should talk about AI, right? Because all of the stock market rally at this point essentially seems to be a bet on AI. What are you hearing from your clients? I was on on how comfortable they feel with us. Well, just two days before the yuan war began, we were in West Palm Beach and Miami with us as well, visiting clients and then the whole talk of at least that town.

9:50 But the US in general was, that famous 3D piece, the other comedian snaps, something big is about to happen. How, in 12 to 18 months, 50% of white collar jobs could be wiped out. And what that could mean for, for rates, that in itself is very, very telling. Right. And because of that, and one source claims numbers, if you remember us, ten years, that Friday before the bombs came in close at 393. Okay.

10:20 And one of my more famous friends clients sends me a message on that Friday night bond. Is the new gold 393 top. They close then, it on more happens. Not that surprising, but of course the how it played out is very, very surprising. War elation hikes getting priced in for people completely pushed aside the slowdown job growth labor part of it and then started completely focusing on the equity the growth of the AI engine.

10:52 Again, if you just go back to January, February, we were quote unquote happy because the thing was building out. It was a rally, but it was a rally led by Russell as well. Would it be? Oh, yeah. Oh, it's like a long time ago Magnificent Seven was forgotten. And now, Lord, behold, on the some of us, thank God, have three months memories. Now, now you're complaining about. Oh, it's all about seven stocks. The breadth is to two.

11:16 We're just fighting ways. You try to, fight and wrestling. We wrestle with the rally. But. So back to your question at the moment. Yeah. The Kool-Aid is to believe that this I, Ron, may have another 1 or 2 years, to go pull to the John's public, one of definitely my, more famous friends clients today claimed that that's the case and made the 1999 technology. So either you swim if that's or try to feed it.

11:48 You know, this is the other thing. All right. So we talk about the, you know, these very worrisome scenarios, the price surge in oil, but very worrisome scenarios about deep shortages in various commodities. And that's one reason to be worried. But then there's this other thing that basically, you know, the disinflation is stalled out. If arguably it's going in the other direction, rates around the world, in, you know, we're I think, you know, there was some sort of what was UK 30 year, the highest since 1998.

12:18 Yeah. So again, just intuitively, you would say these things compound each other and should really take the wind out of the sails of risk appetite. And yet. So how is it that like, even like, you know, what we see going on and selling a how does the selling and sovereign bonds mix into this market, in their view? So let me, let me take this to actually give you a thematic kind of how to take care of things. Right?

12:45 Okay. Just just to give a perspective. Right. So ultimately, there is only one thematic view that matters for the next few years. Right? And that is, if you would, as you, you have China in China, allied countries, and you have the West. Right? If you were to take China and China line countries, right, and they were in space, what does West need theoretically, in both manufacturing and services? And if you go to the reverse route, what is and if the West was in space, what is China and China aligned countries need both in manufacturing and services?

13:17 And the reason I'm bringing to this point is because I want to give a perspective. So what happened right in the last many years. So this microphone, for example, right. This most of the materials in here comes from China. Right? China aligned countries almost 90% right. Manufacturing capacity. The world is 55% right now China link. But some places almost 90 to 95%. Take an example of cobalt cobalt refining oil in China. Now in the past what happened was they would give you this microphone and you would give them dollars or pounds or euros or whatever it is.

13:49 So they hold that. So China holds that. What is the most rational thing for them to do? The most rational thing for them to do was to buy your land with that money. But you said no. Then they said, I'll buy equities. You said no to that, to then they said, what? You know what? I'm going to buy the commodities that you might need in the future. We said, fine, do it. Which is what China did for years.

14:13 Then here's the interesting thing you said in return, let me send you my services. So let me sell you fine wine. Let me send you the Gucci. You know more, you know, phenomenal bags, top educational service, education, education and a lot of other things. And then also services, services, whether it's, Microsoft Excel or whatever it is. Right. Sure. But now what's happening is you have that side of the world which is also building their own services.

14:39 Tax. So tourism is now onshore. They started building their own cars up the chain value chain. So you're getting to a stage where if you expand this, you kind of thematic view, you in the West have to literally build all of it from ground up. So if you assume China was in space, they can still disrupt the services sector, but they can't disrupt the manufacturing sector theoretically anymore because you can you will have to build it all up.

15:04 So if you want cobalt and if they say no, you have to refine it minute refine it. You need to have companies that refine it. You need to have the engineers that that do that work. And fundamentally, that's what the fundamental paradigm of the world is. So when you talk about sovereign debt, yeah, any holding of or any equity holding, ultimately the creditor is China and China allied countries. They are the creditor in the West, and we are the debtor.

15:31 And this is only increasing. So if you believe the wizard, what is the ultimate objective agenda of the Wizard of, of the US? To China is to balance the current account to some extent. That's one agenda. And there's of course there are certain other aspects to it, but fundamentally that's what defines the the kind of make shift of the next kind of year to three years. And whether we like it or not, we have to build this.

15:58 I want to come back to China versus the US on AI in just a second, but I definitely want to also ask this question because we are in London, how big a deal are the UK elections? From your respective perches, the local elections that are happening tonight is important because basically the UK and abroad, there is for the past two years at least, a big fight between fiscal dominance leaves, ten years, 30 years, more importantly, 30 years, around the world.

16:30 Will they get more out of out of control since we are in London, will we have the the Liz Truss two moment or, will financial repression mean meaning emerging markets style Treasury and central bank for working more closely together, especially on issuance, issuing less on the, long end, more on the short end, taking a name, taking a risk. But, making sure that ten and 30 years are under the leash, in fact, a really key investor less so much as in a smaller roundtable.

17:06 What happens if all four of them? This was probably August. This before back to school September races began. Us, France, Japan and UK, if all of them had their trust moments. And then September. Damien I remember I was talking about this. Yes, it happened, but only four hours in the gilt market. That was it. I remember that little mini moment. So now there is an excitement again, you know, because UK has a different risk premium. Net international investment portfolio i.e.

17:34 has a budget deficit and the current account deficit has to be nice to the foreigners because they will buy your, our are that question marks on what this local election may mean for the government. Will there be a change there or in the Chancellor? Will somebody more to the left come in all these are, on the question mark. Famous last words. My feel is, for the moment, still, the financial repression, will win. We won't have the trust the moment two, but obviously we they will need a little bit of luck, for the Iran situation to continue to calm down because, unlike the Truss moment, Truss moment one now, all of this is happening for reasons much beyond the UK.

18:22 Joe, I am impressed that we always managed to schedule these macro conversations for maximum event risk between when we record and when it actually publishes. So we have the UK elections, everything happening with Iran and we have non-farm payrolls tomorrow. There's so much going on and we just apologize in advance. This is why people should buy tickets to the event. That's right. If you have to hear this conversation on the podcast feed, who knows, it could be out of date.

18:46 But those who are here don't have that issue. Is Emma ification of Western policymaking. Is that a is that an apt characterization of it? Setting aside specific, you know, elections here or there, you hear that term ramification of and is that apt? It again, it depends. Right. So it's country to country. In this again paradigm, you have this so so let's the legalistic UK is an example.

19:22 Let's elaborate further. Real rates are reasonably high. The country's gone through a difficult situation. We could see what happened with oil, the pass through effect. But it's happening pretty much everywhere else in the world. You have, current account, which matters mostly in most countries, including UK. You have an input factor of energy and you have an output factor of services effectively that you said. So depending on where you are in the world, which country you depending on who you are, if you have a situation where you are an energy importer.

19:54 And your exports are highly dependent on effective services, which are getting disrupted. Courtesy. Yeah. You're in trouble. Alongside if you are an importer of manufacturing also or goods again you're in trouble. So this adjustment will happen. So you have to have allies. You have to have people who you do a quid pro quo with. And that adjustment is what we are seeing effectively. And markets are finding a true balance of risk premium along side.

20:25 Well, okay. So on this point, two things you've said which sound very rational on stage, having a series of allies, I don't know if those are stable. And then also, you know, this aspiration to balance the, you know, balance the current account between the US and China. And sounds nice, but like, do you think like you. Yeah. Again, it sounds nice. Are there actually any real prospects of moving the dial on that kind of thing? So, again, I don't want to comment here.

20:57 This is in terms of our house view, but, but I'll give you a general perspective on the same example. If you were to get West in space and ask China, what does it need from the West? Yeah, it's not much. Yeah, I've heard apart from Boeing and Airbus by parts, if you were to just look it from that perspective. So you there is a desire and maybe there is and they will oblige. I do think there is certain things like are for example, agricultural products that could benefit, that has certain aspects.

21:31 But fundamentally, unless we choose within the West to build the whole manufacturing stack, it's going to be very difficult to keep this current account balanced. Yeah. And on top of it, the biggest worry and again, I'm maybe jumping on this point is when people talk about the fact that the West is investing in the CapEx type, that the West is investing in the key is not what the West is doing. The key is to understand what China is doing in it, understand what they are doing with the deep sea version for models to glorify the Hawaii clusters.

22:04 I can go on with an optical computer, quantum computing. There are many more things that they are actually investing a lot in, which effectively becomes a true competition and a cost factor reduction. If there is a risk, that is the risk to watch out for, right? It's not to study what we are doing here because we will find ways to keep evolving. But you have, yeah, an ecosystem there which is actually quite, quite well versed and also has a lot of capital behind it.

22:35 And, you know, there was somebody who was quoted that most of the engineers today actually are like, yeah, that part of the world. Wait, another sorry. Go ahead. Another thing that the market miscalculated, right? Right after Trump got elected the second time. December 24th January 25th. By far the big consensus rate besides the US ten years going to 550. You know, everybody being the long was to buy these the other few options strikes at 775. Everyone I knew was buying dollars.

23:04 You know there you go. And they keep going. Yeah. And what happened is it's the stock the start currencies were on CNN. So that shows you even though some people are really into saying markets are never wrong, you're wrong. That can be very, very wrong itself. So we are all human beings and certainly that can make markets very wrong itself. One more Asian country that we need to talk about to bring you right to the markets, Japan. Right.

23:29 So to your question, high in oil, higher rates, why doesn't this thing bring down equities. Why are these no why is this guy all is on sending messages busses empty. Nobody's buying it. It can be quite frustrating right? That Thursday Friday it almost happened because, you know, it just feel itchy, and looked like it would break 162. Looked like, us it would continue to sell off, Hormuz again. Question mark. There was there wasn't a detente. And then, just like the rate check of, at the beginning of the year, one of my closest friends on not on our trading floor, but on the sector, I had heard this big Irish voice, you know.

24:08 You know, this is in fact, New York calling in on behalf of Bank of Japan. I'm like, what's going on with this guy? And because he was shouting around because they they want to make sure that, you know, public information, they told the three banks that they called would let others know that they were watching similar this time around. They didn't call. Bank of Japan itself came and they punted for risk parity. What does that mean?

24:32 They punted for lower volatility, common waters, and stable rates. The moment, they push down yen, dollar yen, lower yen, stronger U.S rates, calmed down, equities got a bit, etc., etc. so it's always or tug of war on one side. Respect the camp. Mostly central banks trying to keep things calm and on the other side sometimes my dear fast money friends looking for more 2022 like years Christmas come early every Friday, another 50 basis point sell off on TV, us ten years higher volatility, etc. etc.

25:09 and I'll stay in the middle and try to decide which one is right. Can't you just tell your fast money friends to calm down for a little bit? They usually listen to me a detail. I want to go back to what you were saying about U.S versus Chinese AI models, because if we think about how much the stock market rally is actually dependent on AI at the moment, and how much of the AI story is dependent on this idea that, like, well, the West has these amazing, more sophisticated, albeit more expensive models for which the, you know, Tam is basically the entire world, and you're arguing that actually that's not the case.

25:44 And China's models are perfectly suited for its own needs. Elaborate on that. How are you as a sort of trader, evaluating these models? How much of your day basically is now just trying to figure out AI? So it's a very, very good question. And the key here is, is to understand what are you currently. There is a whole there is a very strong narrative. Yes. Also a very strong use case. Now the valuation stack was as a forward earnings kind of multiple.

26:17 Right. If you were to look at it right, sees that there is going to be a huge CapEx investment within the Western stack for the next 3 or 4 years. And that's what's created this rally within various companies. And the second order effect companies. China is doing something similar. It's very clearly said in the West that they are effectively using Nvidia chips. And Nvidia is just a companies, just to give an example, but just their chips to train the models.

26:42 In reality, now they have Huawei chips, which are pretty much parallel or comparable to H100 processors. The big problem, and that the West is not appreciating is, is that the reason West is investing so much in CapEx is because they want to effectively get to superhuman intelligence very quickly. So almost everybody's saying, okay, you have a model that has 7 trillion parameters. Now we go to 15, maybe 25, 50 and it becomes self-learning and it's reinforcement.

27:11 But the reality is you have things like distributing the AI. You have things like which is actually being worked on in the West. You have also things which are very different, which is something as simple as quantum computing. Or I would say optical GPUs. Right, is another concept. Please read about it. So you have currently, there was a there was a narrative in the West where you had GPUs of Nvidia and you got a copper connector between them.

27:39 Now you have optical compute phones or optical phones effectively, that have done very well in the last many kind of months. So this narrative will remain right. Having said that, if you keep an eye on what's going on on the other side of the world, also use case in terms of actual uptake of usage, because it's not like I'm going to run five different AI models together. I'm going to probably converge to one at some point, will eventually cause some kind of a problem in the future.

28:03 The second thing that you have to keep an eye on is also robotics. That's the other aspect, which is going to be the second narrative that is actually going to start within the Western stack, which is the Elon Musk revolution of Optimus. And again, something to keep an eye on what's happening in China within it versus what's happening in West, and how deficient is West on it? Just real quickly because we have like a minute left, you're talking about, okay, this microphone that we're talking to almost certainly, the majority of it or all of it probably made in, China.

28:33 How much do you see clients or people that you talked to purchasing Chinese financial assets, including Chinese government bonds, which more and more people are talking about, not just the safe haven, but a safe haven that's done well in a diversifier. And how much is that becoming a meaningful part of portfolio construction? It can grow. I mean, already it's happening with, effects. But, you know, people, first, denial, then anger, then acknowledgment. Right there. They realize that a free trade train has moved.

29:06 To your question, government bonds, Chinese. Let's say it's, just 2 or 3 years ago, even when I went to, Singapore and Hong Kong's of the world, people were either fearing, claiming, being very confident that China was an investable. Yeah, I remember and deep inside I was saying, if Chinese aren't investable, you know your future in Singapore and Hong Kong. I turned out to be correct. Right. But it turns out, it it it starts with effects, but there is still a lot more room to go in, Chinese equities and Chinese bonds.

29:37 That boss is also not fooled. Okay. All right. Lots of empty busses around. Ozan and Aditya thank you so much for coming on Odd Lots Really appreciate it. That was our conversation. Recorded live in London on May 7th. I'm Tracy Alloway. You can follow me @tracyalloway And I’m Joe Weisenthal You can follow me @thestalwart Follow our producers Carmen Rodriguez @carmenarmen, Dashiel Bennett @dashbot and Cale Brooks @calebrooks and Kevin Lozano @kevinlloydlozano And if you want more Odd Lots content, you should definitely check out our daily newsletter.

30:15 You can find that@bloomberg.com/oddlots And you can chat about all of these topics 24-7 in our discord, discord.gg/oddlots And if you enjoyed this conversation then please like the video, leave a comment or better yet, subscribe! thanks for watching!