← Top Traders Unplugged
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- [00:01]
A
You're about to join Niels Kostrup Larson on a raw and honest journey into the world of systematic investing and learn about the most dependable and consistent, yet often overlooked investment strategy. Welcome to the Systematic Investor Series.
- [00:24]
B
Welcome or welcome back to this week's edition of the Systematic Investor series with Richard Brennan and I, Nils Kasselasen, where in each week we take the pulse of the global market through the lens of a rules based investor. And I also want to say a warm welcome. If today is your first time you're joining us, and if someone who cares about you or your portfolio recommended that you tune into this podcast, I want to say a big thank you for sharing this episode with your friends and colleagues. It really means a lot to us. Rich, it is wonderful to see you. To be back with you this week, I had a week off last week. I was traveling in Asia. Now, now I'm back. But so I'm thinking, what's going on down under? I only got to the equator in Singapore, but what's going on really down under?
- [01:05]
C
Well, I've just got back myself, Niels. I was up in the joyful tropics of Papua New guinea for a couple of weeks. So I've got back over the last three days and I'm in this mad catch up because unfortunately the wireless connection up there wasn't too great. So my work piled up and now I'm back, I'm back into it. So I haven't had a chance to look up and breathe at the moment.
- [01:31]
B
Sounds like you haven't embraced Starlink just yet.
- [01:33]
C
No, no, but we were talking about Starlink up there and they were certainly eyeing it off as a prospect to solve their communications problems. But lovely land, very interesting land. But gosh, I tell you what, it's a bit of an inversion from where I am and I love the experience, made me very creative and which is part of the things we'll be talking about today. It allowed me to take a rest from the noise and get into the creative spirit. So yeah, I'm looking forward to this podcast.
- [02:06]
B
Yeah, we certainly will. And you've already alluded to we're going to have a very different lineup of topics today, which will be super exciting. But before we go there, as always and kind of interesting maybe with you being out of your normal comfort zone, so to speak, what's been on your radar? I know it's been a few weeks since we last recorded, but what's been on your radar recently besides the topics we're going to be talking about? Today.
- [02:32]
C
Look, I suppose it's hard not to consider the uncertainty we're experiencing in the markets at the moment. Of course, the equities are being pummeled at the moment and associated with the uncertainty of perhaps the tariffs, the universal tariffs that have now come in place. But interestingly, you know, this whole quarter up to where we are now has been one of building uncertainty as far as I can see. So, you know, when I go back over the quarter and see how it's evolved, what do they say it's inevitable what we're experiencing now. So, yeah, that's been on my radar, Niels.
- [03:15]
B
Yes, well, you probably guessed what's been on my radar because you alluded to it before we started recording. But of course this is a week that's, you know, sad for, for those of us who work for, for Dunn Capital, namely the, the passing of our founder, Bill Dunn, who passed away earlier this week. Of course to many at Dunn and particular to our own Amarti Bergen. Bill really was a friend, a mentor and of course also the founder of Dunn capital more than 50 years ago, which makes him, you know, one of just a handful of true pioneers of the systematic trend following space. He was a very generous person, a real character as Michael Covell has talked about many times. And, and he has, he had this sort of no nonsense, investor focused approach to, to doing business which is something that we, you know, have continued and will continue to, to guide us in our operations. Now he retired from Don, you know, many years ago, more than a decade ago. But I will say that's kind of the DNA that he instilled with, you know, the people who work at dawn will without doubt continue to, to live on. And he was also known actually among, among us as someone who would always have kind of a, a, a great saying or quote. And I'm reminded of one of them as we, as we talk here. And he, he would often say, you know, the best time to invest in trend following is at the bottom of a drawdown and the second best time is today. And, and maybe that is more true that it has been for a very long time given where we are in the world right now. But in any, in any event, of course there's no way I can do justice to his legacy. So if, if people are interested in seeing something that describes his, his life and legacy, you know, There is a YouTube channel under the name of Don Capital Management and we just uploaded a memorial video about Bill and, and I encourage those people who want to, want to watch it.
- [05:26]
C
Yes, I Did listen to that and yours was very good. Just, just quickly, how many years is it since Dunn's inception now? What are we talk.
- [05:36]
B
No, so it's, it's more, more than 50. Right. So we held our anniversary, 50 anniversary last year. So we're in our 51st year of operations. So I don't know if there is.
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C
A longer surviving one.
- [05:51]
B
Well, I mean, Campbell was around the same time, maybe a year or two earlier. Milburn was also around that time.
- [05:58]
C
Okay.
- [05:59]
B
Bill Dries, he's retired though.
- [06:02]
C
He's retired. Yeah.
- [06:03]
B
But I will say though that maybe what you can say about Don is that perhaps the longest running, pure trend follower because as we know, some of these other firms have, have expanded into other things. So maybe that's the, the, the way we, we look at it. But besides all of that, in terms of things that's come across my radar and, and certainly, you know, as you, as you rightly say, I also had some, some, some time on my hand sitting, you know, 14 hours on an airplane and all of that good stuff. But it's also kind of the, maybe the realization. You mentioned uncertainty and that word is being used a lot. But it's also kind of the realization that the world is changing in a very dramatic way and maybe it's time for us to rethink how we look at markets. I know you've got your, you're going to talk about kind of one way of thinking about it. I'm going to go with a much more simple way of thinking about it. And that is if I think back on the last 20 years, I would say that markets have to a large extent been driven and focused on directions coming in terms of monetary policy. And we have been, you know, the experts, the analysts and the portfolio managers, they've been glued to the television every time people like Jay Powell and other central bank chiefs would come out and hold a press conference and make any statement about future monetary policy. Right. So that's really been the framework we've been operating in. But now it seems that that doesn't really matter much more. I mean, how, how much has really those things been featured in the last couple of months, for example? Not, not that much. So in, in my little mind, I'm thinking that maybe it's time to go about things completely different. Maybe it's now other things like fiscal policy. I mean, know, what does it mean when the US wants to cut their budget deficit by 50% from 6, 7% to 3? What does it mean when Europe is going the completely opposite way, and they have to expand their budget deficits from 2 or 3% to 5 or 6%. What does that mean for market? What, what are the drivers there? Because does it really matter whether the, you know, interest rate is 3% or 3 and a quarter percent compared to these forces that are, are being unleashed? So that's one thing. The other thing is that I think we investors need to focus on, if they're not trend followers, of course, is geopolitics. I mean, when was the last time markets were really driven by geopolitics? It's been a very, very long time. So I, I, it kind of makes me question whether many of the investors who are sitting with a responsibility of billions of dollars, maybe trillions of dollars today, how well are they equipped to suddenly have to look at things that they weren't, maybe they've never really focused on in their career beforehand. So of course that can bring me back to trend following and say, you know, how happy I am that we don't have to do anything different. We just need to do exactly what we've always done. You just mentioned it, you know, more than 50 years in our case. We just need to do the same. We need to fade the news, not look at it whatsoever, and just focus on price. And that's obviously something we're going to be talking much more about today. So I think we are probably when we look back, or maybe when our kids look back 20 years from now, we are making potentially history right now in terms of how things are changing in the financial system and the way the world operates. So we'll probably also come to that. A couple of other things I was reminded about on my long flights many years ago. I was curious about other things such as Elliot Wave analysis, because it seems very compelling the way they present their analysis. And you can just, you know, draw your five waves up and three waves down and, and it all looks great, right? But I also was reminded of the fact that, you know, back in 2010, after the great financial crisis that the market has moved up. These Elliott Wave guys became incredibly bearish again. And of course that was the beginning of a massive bull market. So they're completely wrong. However, some of these original people have always focused on this thing that we were, they were waiting for this, what they call a grand super cycle high, Right? So something that is profound, something that will last for a long time, and of course it never happened. Right. But if you start analyzing it again and you look at the way they, they have amended their counts, of course, you can make it actually fit quite well with that grand super cycle happening right now. I'm not saying that's what's happening. I'm just saying if it is the time that these things are happening, then again investors are looking into, you know, years, potentially years of equity markets not making new highs and potentially moving into deep, deep bear market territory. And I just wonder how well prepared investors are for that kind of environment.
- [11:16]
C
Well, it's interesting, Niels, because I remember Bill Dries, we were talking about him earlier, his fractal wave algorithm. He was initially caught up with Elliot wave theory and what he did was he recognized that these fractals that give Elliot wave structure, he agreed with that principle. The only thing is he just didn't agree with the count. And so his whole purpose, and we know of his success as a trend follower, but he was using this fractal wave algorithm which is certainly resonates with what you're talking about here.
- [11:53]
B
Yeah, no, absolutely. And this is also what was my problem and why I didn't pay much attention to it because it wasn't mathematically defined. And that means that you could, it was, it's subject to personal interpretation and you could make it whatever you wanted to make it, so to speak. Anyways, so we'll, we'll see. Again, this could be why it's, we're setting ourselves up for a very interesting time. And it also happens around the time I don't remember, I should know this, but I don't remember what year it will be. But we're around the time now where the US is actually turning 250 years old as a country. Right?
- [12:28]
C
Yeah.
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B
So wouldn't it be interesting to, to if in fact you get this major, major high in US markets and maybe other markets, it happens to coincide with an anniversary like that. I mean, it's just maybe things are not as random as we think they are. I'm pretty sure you go back over.
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C
History, look at the British Empire, look.
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B
At the Roman Empire. Exactly.
- [12:49]
C
Is there this 250 year period where things are shaking? The fourth turning, is it into this fourth turning?
- [12:57]
B
Indeed, indeed. So I think all of that is interesting, but just turning it back maybe to this week's events which you also touched on and that is, of course it's been interesting. We'll talk about that in our trend following update in a minute. But the other thing that intellectually interests me when things like this happen, that is what is the damage? In this case, I expect to leverage ETF products. You know, how would this financial engineering we've seen in the last few years, how does that fare, how does that unfold when you have things like what we're seeing right now. And again, okay, it may stop today, but it may also continue. And of course the other thing that's interesting and that is to see whether some of these new products that we've been talking about, portable alpha products and so on and so forth, that has been also coming out in the last couple of years in order to kind of alleviate some of the pain that equity investors are feeling. Are they delivering on that promise? That's going to be the other thing that's I think going to be super interesting to follow. I don't have any skin in the game in this, but I'm just curious about how all of this unfolds are my news.
- [14:08]
C
I'm thinking of Warren Buffett, where the tide goes out and you're caught naked. And I'm thinking of all of these leverage products. And this whisper comes to me, the whisper of margin call comes to me and I'm wondering what's going to happen if it keeps on going in this dreadly direction and the impact of a highly leveraged financial market, you've got to admit, I don't think in the decades that we've been trading Niels, I think leverage is just integrated so highly within the financial markets these days. Yeah, there's not much safety, there's not much place you can hide in these markets without that dreaded impact of the debt that's built into these financial markets unwinding. Exactly.
- [14:56]
B
And then on top of that, not to go down too much into this, but on top of that you can say we have this massively concentrated market with 70% of the value of all equities are being US equities and a high percentage of that being within the 10 largest companies in, in the U.S. so, so you have the concentration factor and you also have the, the, the issue of regarding passive flows, meaning passive investing. What are people going to do about that? Are they going to sell out? Because if they are, then all these funds have to by default just start selling regardless of price. So anyways, lots of us, lots of things for us to follow in the coming period of time. But let's bring it back to our usual segment which is kind of trend following where we are right now. You and I are recording the first episode after Q1 finished. So maybe it would be prudent to put Q1 a little bit in perspective and then with a little bit of a commentary on On a week like the one we're in right now, which is without a doubt, at least on my side, encouraging people to ask questions. I'm, I'm getting emails about how, how these things are, are unfolding from a trend following perspective. So I mean, of course if we just look at a big picture, trend followers would have been long equities because we made relatively new all time highs relatively recently. So now we're in this phase where a lot of those long positions will have to be reduced. So that's kind of the first thing that we see, at least from my perspective and love to hear your perspective as well. Then we have the bonds, I mean bonds, you know, have been diverging to some extent. Europe a little bit different than the US a little bit different to Japan, but generally speaking were moving somewhat in, in a southern direction. But then a lot of them have had a boost in the last few weeks and that's been, you know, causing trend followers to change positions, maybe even direction on some bond market positions. So I think there's a little bit of a, more of a mixed picture right, right there. But one thing that I think has been pretty universal for trend followers is the long dollar exposure going into this year. And with the Trump sort of effect, people really, you know, seeing strength in that. And that's been a big reversal in the last few weeks. So that's going to also be painful from a trend following perspective on the other side. And this is where I'm not entirely sure exactly how the industry would have been placed, but I guess that certainly on the longer term spectrum where you and I operate, energies have been quite constructive in this sense because they had already given signs of weakness. So there was short exposure that could have been built up in the energy complex, mainly the oil complex, not so much the gases, but it hasn't been an easy ride. It's not like they just went nicely down. There were some, you know, certainly moves higher last month at times. But of course yesterday when the markets really did sell off quite violently, so did oil. So for those models who have been able to hold on to some of this short exposure, there was one place of brightness in a pretty dark world yesterday. And the same, you could say has been the case for precious metals, gold and silver been operating much more consistently from a trend following perspective. That's kind of how I experienced it. My own trend barometer finished at 48 yesterday, which is neutral, but it has been moving up from very low levels in, in the last week or so. So maybe this is kind of the first signs that if these things continue, trend followers are adapting and, and depending on your time frame, of course, of the models. So love to hear your perspective before I run through the numbers, but love to hear your kind of perspective as we obviously look at the market slightly differently.
- [19:05]
C
Sure, Neil. So I view this quarter as a process of changing sentiment from an investment universe that didn't want to let go of the past. So the investor who loved the sort of last 10, 20 years, 30 years of fairly good stability, continuous growth in equities, the run that would never end. And I think that at the tail end of this year, we initially, the beginning of the year, we were thinking that this economy was possibly going into a soft landing. And then January arrived and we started seeing the Fed get more and more hawkish. We started to see it was a difficult month, January, for our models. We then saw in February a bit of joy from the commodities sparking gold. Things started moving in the commodity cycle. These things in January and February weren't really being driven by politics or geopolitics at this stage. This was a world not wanting to let go of this favorable past with the assumption that there'll be a bit of a downturn, but then there'll be a bounce, there'll be a bit of a downturn, then there'll be a bounce. So it was characterized in January and February for us in terms of whipsaws, one day down, next day up, one day down. Not really favorable for trend following at all. But in February, we started to see some emerging trends. Gold, silver. The energies in February were all bullish. We're doing very well in the energies. Then we started seeing uncertainty being expressed in geopolitics and politics. And this was where, of course, we had the US Elections, and of course we had the impact of the. The executive orders issued by Trump, which was the ripples were going out worldwide, but these ripples were continually being reversed. One day we'd have a significant Trump tariff imposed, then it would be redacted, et cetera, et cetera. Once again, whipsaws uncertainty. But to me, the current policy regime, we're finding of a bold statement, something that we haven't heard of in the past 30 years, something that comes from left field. It gets placed out there in the market, causing immediate uncertainty, and then there's a retraction and we get the bounce. People wanting to hold on to this degree of certainty from this prior regime. But in my mind, and I don't want to get political here, but in my mind, it's sort of a bit like the Boy who Called Cried Wolf. It's happening so frequently now that I think the bounces aren't necessarily going to come anymore to what we anticipate. I don't find on Twitter, I don't find on LinkedIn the statements, oh, this is a good time to buy because we're going to get a bounce. I did get that two weeks ago, but I don't get that now. I'm getting the fact that the investor sentiment has changed where the expectation is. Even if we get these weird wacky calls coming from left field, it isn't going to influence our decision that the past has been disrupted and now we're going into this fourth turning in earnest. That's the impression I'm getting. That's what I'm feeling. That's why I'm seeing gold right now, soaring silver, all of the expressions of uncertainty in full flight. And as you know, Moritz Seibert actually had a good statement to make to me when I, I was calling uncertainty and he said, hold on. He said the models are uncertain, the markets aren't uncertain, the markets are very definite. And he's totally right there. Our models that we've used to explain the system that we're trying to navigate for the past 30, 40 years, they're no longer working trend following, fortunately, because we're not looking at just the last 30, 40 years, we're looking at robustness over many cycles. We're only looking at risk management, covering our capital, protecting our capital, letting profits run long or short. That model is still timeless. So this period we're going into now is where I'm starting to see momentum, acceleration with positivity in our trend following models. But it has been a rough ride for these past three to four months, which I think is in our trend following speak. It's inevitable because our ships take a fair while to turn round. And also with this uncertainty of retraction statement, retraction statement or whatever, we are going to get those whipsaws. But as this gets into earnest, as this gets into this regime shift, we're experiencing this massive decentralization, this rush to protectionism. All of these things we're experiencing now the fragmentation of what was a cohesive world order, this fragmentation. Now we're getting deep into this. And this is a start as far as I'm concerned, because we've seen trillions that have been injected into the system to prevent this happening since 2008, 2009. We saw the first signs of this arriving way before Trump in 2008, 2009, this bloated debt ridden system and the liquidity events we saw in 2008, 2009 that emerged and then a coordinated central bank overture which was protect the system otherwise we're gonna lo lose it. And this massive injection of trillions, this leverage into the market, this is what I'm worried about now and this is why, you know, there's few strategies that's going to be able to navigate this and I think we've got a very good one.
- [25:16]
B
Yeah, no, completely agree. All right, so let's go down the hard and fast numbers as we always do. These numbers would be as of Wednesday night this week. So obviously not including yesterday. I think yesterday was a little bit of a down day. Not too bad I think, but it was a down day for I think most CTA. But anyways, as a Wednesday, beta 50 index was actually up 16 basis points for the month of April, up 42 basis points for the year. SOC Gen CT index also up 16 basis points for the month, down 2.37% for the year. Soc Gen trend up 18 basis points for the month, down 4 and a half percent for the year. And the Soc Gen Short Term traders index down 15 basis points but they're only down 17 basis points so far this year. Comparing that to the MSCI world, this is as of Yesterday, Thursday down 2.65% for the month, down 4.37% for the year. The S P U S Aggregate Bond Index obviously having a good time now, up 71 basis points in April, up 3.35% for the year. And the S P 500 total return index down 3.83% as of last night for April and and down almost 8% so far this year. Now let's move on to something much more exciting. Rich. I think everyone who listens to our conversations, Rich, they know you as a seasoned trend follower, someone who lives and breathes process over prediction. And you've done many, many, many great tutorials, let me call it that on, on, on, on the podcast. But today we're doing something a little bit different. I'll be stepping back actually for the most part and you are going to take us on a journey, one that starts with trend following. It's going to move through the world of complex adaptive systems and it's going to land in a place that challenges how we think about causality, randomness and even free will. So this is a place that you call super determinism. Now this might sound like a little bit of heavy stuff, but it's deeply, deeply relevant to the way we trade and the way we think. Because at its core, it's not just about physics or philosophy. It's really understanding why we as traders are very humble participants in the market. We're not fortune tellers with crystal balls either. It's about the why we can still, after all these decades, extract an edge in a system that is complex, it's dynamic, and it continues to unfold. So whether our audience have heard of super determinism or not, I hope they will stick with us, because you are about to thread together a very powerful set of ideas that just might change the way we all think about everything from markets all the way to meaning. Is that. Is that about what we're going to do? That is.
- [28:49]
C
That's right.
- [28:50]
B
Okay, so I'm going to hand it over to you now, and I will do my very best to keep up and hopefully be able to ask you a few questions along the way.
- [29:02]
C
All right, Niels. All right, so here we go. So, as everyone knows, I'm a trend follower, but I have also got a very strong passion towards the sciences. These discussions we've had over the past, Niels, where you've, you know, jokingly called me professor or whatever, it's sort of deeply resonating with me because I am fascinated by physics, I'm fascinated by the sciences, I'm fascinated by this universe. Now, it is quite a deeply personal podcast today, what we're talking about here, because what I'll be talking about is resonating with my personal philosophy. So I'm a trend follower, as we all know, but I'm not necessarily a trend follower because I want to be the richest man in the world. It's because the whole process orientated method of trend following aligns with my philosophy in the way I see the world. Now, this isn't uncommon to me, Niels. I know you deeply think about the markets. And I know that in the background, whilst you might not be openly discussing it, you're thinking about this universe. Empathy, love, all of these things. They're all connected, deeply connected. Then Jerry. I know Jerry well, and I know his outward character, his Persona, but I know how deeply he thinks about these things. I know he's connected to Process. I know that Ed Sakota, often we hear things from Ed Sakota which feel like Zen riddles. Coming from Ed Sakota, these Zen riddles are because he's deeply attached to Process. It's not a riddle to say, oh, I'm a spiritual. It's A riddle that says, hold on, take a moment to pause, take a breath, and deeply look at what we are embedded in. Not just the financial markets. The financial markets are an expression of something broader, complex adaptive systems. Not just complex adaptive systems. The complex adaptive systems are an expression of something broader, this universe. So this arc I'll be framing in this discussion starts from trend following. To dig into the roots of trend following, the philosophical implications of trend following, I necessarily need to go into complex adaptive systems. And then from complex adaptive systems, I need to go to this universe. Not in a way to say there is anything mystical about this. This is a logical train of thought, of narrative and of coherence. So my concern with the way science is going today is that it's fragmented. When I look at the indigenous inhabitants of Australia, when I look at the philosophers of the past, the questions being raised there were no different than the questions being raised today. Plato, Archimedes, Anaximander, Aristotle, atoms, Democritus, all of this, they were well known concepts back in the days where we did not have the hadron colliders and all of these technology to basically investigate this. So this is deeply embedded in who we are as people. Science is our tools to examine where we stand in this universe. I'm concerned that with the level of fragmentation that's in physics, physics is at a crossroad, it's at a stalling point. We had this beautiful period of time where Newton came out in the 16th or 17th century with his philosophy, encyclopedia of philosophy, Principia it was called, where we had this fixed arena of space and time and things moved in a mechanistic way. And if you knew the origination of everything and its movements, theoretically you could predict everything in the universe. So it's a very known world, a very certain world. But that was the domain of the very narrow relating to on Earth. And as we expanded this domain, we looked into the stars, we looked into the galaxies, the black holes, the tools that we started to use. We started to see holes in his argument, Newton's argument. And then along came Einstein, who said Newton was not wrong. His method is a single strict domain within a much broader domain. His models still work, we still use it to look at gravity, where planets rotates around other planets. It's a very parsimonious model. However, it's not extensive enough to cover all of the things we do know about today in Einstein's day. And so he resculpted the interpretation of what Newton did by not necessarily totally changing the maths. It was an extension of the maths, but the interpretation of it was so much more different. It struck people as bizarre because suddenly we found that there wasn't this dynamic arena of space and time, or this fixed arena of space and time. Now we saw that space and time were malleable. They were observer dependent. They were relational objects. How you perceive things is differently to how I perceive things. It became the thing of perspective, how an agent in a system embedded in that system peers out and starts relating or correlating to things, measuring things, observing relationships. We started going away from this fixed arena to one of relationships, correlations. And then as we are now stepping further into quantum mechanics, we started coming to a bridge that could not be crossed. One where we suddenly got this flourishing of alternative interpretations of quantum mechanics. From the Copenhagen interpretation, the many worlds. You might have heard of the many worlds interpretation of quantum mechanics, the pilot wave theory of David Bohm. And we had all of these different interpretations, which was basically saying we can interpret this realm of quantum mechanics with these different interpretations. One of them could be right, all of them could be right. But it was fragmented. It wasn't cohesively unifying quantum mechanics. And furthermore, it wasn't unifying quantum mechanics. With the classical theories of general relativity, special relativity, those things that Einstein basically came to the conclusion of looking at what we call the classical universe, the macro environment, the planets, the galaxies, the universe, they tended to work on this perceived different order than what occurred at the quantum world, where we got these really weird things happening. Because with these different interpretations, we had spooky things happening, entanglement at a distance, things that Einstein said with spooky action at a distance, things were either, if you looked at them, they could collapse the wave function to a definite point. These are all weird concepts. But this arises from this fragmentation. And if we peel away, what is the underlying reason for this fragmentation? It's perspective. It's the assumptions embedded in those different perspectives. And what we find, and this is the most amazing thing, that if we strip away the notion that the observer is separated from the observed, if we break that relationship and assume that both are correlated through their combined histories from the beginning of this universe, you find that those alternative interpretations fall away. And you're left with this concept called super determinism. It's a very powerful process of logic and coherence, because all we're assuming is that we understand what these financial markets are. We are agents who are traders embedded in the financial markets. So let's start at the trend following. We are embedded in These financial markets, we have our models, our trend following models, diversified trend following models. What we're doing there is we are not predicting anything. We are reacting to structure, we are reacting to relationships, we are reacting to what is, what is fundamentally tangible. Price is emerging, something is emerging from the noise. This trend is emerging from the noise. Now when we dig into what is a trend, we see it's a characteristic of what we call emergence. The way the agents in the system all interact together with feedback loops. They've all got their own models. Their own models are seeing things from the embedded vantage of an agent embedded in these financial markets. They don't have all of the information, they've only got what their perspective allows them to cover. It's limited, it's not the full picture, but their models are their best guess. And what they're doing is they're simply reacting to structure, not predicting. This is where other models from the camp that says we stand outside this system, we are exercising what we see as free will and control. For those other models, they see themselves as passively sitting outside the system, thinking that they can understand how that system's gonna unfold. But we as trend followers don't see that. We see ourselves embedded in that system. Limited vantage, there is no way, there is no external vantage we can see this system from. It's not in a laboratory where the person in the lab coat can stand outside the experiment and passively observe what's going on. This is where we are actually in the experiment, ourselves as agents in this complex adaptive system called these markets. And with many agents all interacting together, we get causal impacts, feedback. All of these influences start affecting the entire structure of the market. It reorganizes itself in step in processes dependent on what its agents are all doing, thinking with their limited vantage. So in a way, it's very much like the waves in an ocean where all of us are individual waves with our own expression, our own models. To understand us all, you've got to look at how they all interact together as an ocean. And these waves only have a limited vantage from their crest to see what's going on with their models. And so they sculpt their models, seeing what they can interpret from this incredible complex architecture that is so deep that there is no way they're ever going to see the end of it. But their models give them hope that when they see structure rising in that ocean, when they see a tsunami rising or a wave rising, they're reacting to it. They're not predicting it, they're simply reacting to it so this is where process becomes dominant. It's the process of trend following emergence. The understanding of emergence is applying a process to understand it. It's not prediction, it's process, reaction, embedded coherent embedding in the system. So in other words, we are aligning with the system. We're not trying to control, overthrow, go our own path, we are agents that are participating in that system. That's the trend following away. Before I move on to complex adaptive systems, do you agree with that in principle? Yeah.
- [41:40]
B
I mean this is obviously a completely different way of thinking about it, right. So I think it's something that one would have to reflect on to some extent, right. To fully take on board what it is you're saying. So I can say, yes, I agree, but I'm not sure I honestly fully can take it all in by just listening it to once.
- [42:03]
C
Well continue on. And now what I'm going to do is I'm going to expand out from this the financial markets, which aren't closed systems, they're open systems to external systems that are interacting or correlating with the financial markets. There's the man out there with the money and the mortgage, putting the money in the market, linked to mortgages, linked to housing, system upon system upon system upon system of different subsystems, all correlating with these financial markets. We cannot therefore predict these financial markets because we realize that they are just an expression of a much vaster landscape. To predict is futile. If we had the world's biggest computers, we might only be able to predict what's happening in the next two days with a degree of accuracy. Any further than that, the array of variables that can affect those financial markets, it's just impossible to be able to predict that. But as we step outside the financial markets, we see that these complex adaptive systems that outside the markets are all integrated, nested, nested within. Markets are nested within. As you drill down into any complex adaptive system, it's got a fractal structure. In other words, what we see at scale, when we zoom in, we don't see the detail disappearing. There's more detail at a lower scale. When we drill down further, it doesn't go away, it's fractal. There's more detail, different detail, nested systems and systems and systems. Now this is not only in the markets. If I go out to my garden and I start looking at the soil or the grass or the trees, if I peer into that, go into it in more detail, another system, a chromosome, a chlorophyll relationships, all of These things, systems within systems, all interacting. So I can't divorce myself from the systems viewpoint I have by just looking at the markets because they are all correlated. And when I sit here in these financial markets, I say to myself, gosh, I am a product of the things I've read. Einstein, Bohm, Wheeler, Everett, all of them. I am the product of having my discussions with Niels. He's influenced me. I am the product of discussions with Jerry. I am the product of what my parents raised me. I am the product of their parents that have raised them. I keep on going back, and I cannot disconnect myself from the coherent train of causality that stretches back not through just the human race, but then to how I've evolved back to the birth of the universe. I am stardust. It just goes back and back and back and back. You can't get away from this cohesive correlated whole. And what that cohesive correlated whole is doing. There is no room for randomness in that cohesive correlated hole. And this therefore brings out a central viewpoint of what coherence is. And what coherence is is what we call a covariant universe. Einstein first recognized this, which was the reason his general theories of relativity, special theories of relativity rang such a true bell. He also was the father of quantum mechanics, all of this. He had a deep, profound respect for this, what we call a covariant universe. Now, what this means, and this is where we have confidence, because there isn't any room for randomness in a world that has got coherence and causality right throughout it. No room for randomness, because randomness breaks the chain of causality. It's basically something that exists separate to it, that halts the entire process. We see this in computers, what we call the halting problem. If you get the halting problem, you get a program that stops. It doesn't continue. And that's why, as we peel away the layers of this very coherent universe, this covariant universe, which means, Niels, that if I conduct an experiment here on Earth, I've got a vast degree of confidence that if I go to a planet we've never discovered yet light years away and conduct those same experiments, I will be able to find the correlation that coheres the results over there with the results over here. Because it's covariant. Cause and effect is embedded right throughout the entire universe. There ain't no room for randomness, because if there was, there'd be a break, a juncture, a disconnected universe. So all I'm saying is that as we peel away the layers here, we don't need multiverses, we don't need randomness. All we need to recognize is that for this time, to recognize this, we are but an agent in. Embedded in this universe. We will never have the full story because this process of unfolding that's actually occurring with this universe as we speak, we have agency in that universe because we're not passive observers. We are actually participatory agents. In other words, let's imagine there was you, Neils and me. Neils, each of us have our viewpoint of how this universe works. You from your heritage, your causal linkages, your understanding, your perspective. Me from my vantage. Both are totally valid. They are coherent expressions. There is no randomness in your linkages, Niels, because you exist today and I can see you. There is no randomness in me. You can see me. But we have this causal lineage which when we interact with each other, we correlate with each other with resonance. There will be aspects of your life I can resonate with in mine. Not the full causal braid, but we correlate together. That's what happens when two agents start interacting. They interact, their causal histories and so together. Once you've done that, you can never reverse that, Niels. I can't reverse my memory of meeting you. Now that I've done it, I've interacted with you. This is a system unfolding. This is a universe unfolding. So trend following complex adaptive systems. Now we're deep in this world of super determinism. Now, as you know, Nils, I'm writing this book which hopefully will be completed towards the end of the year, which is putting this to pen, putting this to Quill. I've been on this for years now with my two passions, trend following and science, sort of moving together. I'm trying to relate both to each other because trend following is a deep expression of my wonder of this universe and science, they cannot be separated. I can't suddenly be this puppet talking trend following, but not connected to the other side of my life that I feel very deeply connected with all of my heritage, my writings. It's all causally connected. I am integrated with me. But this me is a very unique me. The same as this you is a very unique you. There will never be another you. There will never be another me. Now what this does is it gives us the ability to say, all right, if everything was super determined and preordained, doesn't that mean that I have no sense of self agency in this process? I am Butter, a leaf flowing in, a process I can't control. And this is where the conundrum of free will comes in. So you need to reframe it in the super deterministic viewpoint. And super determinism is just a theory of correlations. That's all it is. Deep correlations that go back to the birth of information. Because it's saying it's deeper than space, it's deeper than time, it's deeper than energy, it's information. We live in this, what we call this information theoretic universe. Information, coherence, causality, all of these things, such as energy, time, space, consciousness, everything that arises from that coherent braid, that meaningful coherent braid arises or emerges once it gets rolling. So we start from this state of the universe, the one, the singular. No things. But no things does not mean nothing in terms of absentia. It is a something, it just has no boundaries in it, no separation, no distinct identities within it. The universe is one. The first thing that arrives is a single boundary, Niels. A single it. A single bit. Sorry, a single bit. And from a bit comes an it, a thing. And from things emerges everything but this primordial state, what we call the Wheeler de Witt state. It's in physics, it's an expression that says, and this is where John Archibald Wheeler, a very famous physicist, very clever bloke, heavily invested in general relativity with Einstein, heavily invested in quantum mechanics, heavily invested in this notion of a participatory universe. Something where we're not just passive observers going with the flow. We are participating because you, Niels. Me, Niels, we are expressions of this universe. And if, Niels, if you disappear, Niels, that singularity of you, which is all you, that causal braid of you disappears. And I've got no cross reference point, no correlation with you. Once you're gone, you erase your entire causal braid if you weren't there. So the fact that you are here and I've correlated with you, that means that there is a piece of me and you, and you and me, we've correlated together. We're not separate, we're embedded. But you are an expression of the universe through you. I am an expression of the universe through me. We don't see the totality of this. We only have a limited perspective of our universe. We see it as a classical universe because our models aren't deep enough to see the causal braid that is quantum mechanics. And then deeper still to the origin, our interpretation of it is therefore that, ah, there must be a split. In the sciences, there's a split in how we see our classical universe. And there is a split in how we see quantum mechanics. And then if there is a hidden context underneath quantum mechanics, that is a split, there are interpretations from a limited vantage. Not seeing the entirety because you can't see the entirety, because every time I try and because this universe is continually unfolding, continually writing. Because you and I are agents, active agents participating in this universe. It's writing, it's writing, it's writing. It's not closed. There is no closure. We can't talk in terms of that. It's still writing, so it's still creating, it's undefined, it keeps on going. But the perspectives within that, as embedded agents within that is very much shaped by a limited vantage. And what we, how we interpret physics. And the amazing thing about science is that this philosophical crossroads we've reached where we haven't really gone forward for the last 30, 40 years, we've been stuck. String theory hasn't gone anywhere. Loop quantum gravity hasn't gone anywhere. Standard field theory still where it is. All of these different perspective of physics, they're sort of locked. No man's land, can't step forward. But now we're starting to see physicists like Sabine Hossenfelder. Tim Palmer. Remember I was on this podcast with you talking about Tim Palmer's book the Primacy of Doubt. These two, they've been instrumental in sparking this desire in me because they created a paper called Rethinking Super Determinism. And this is what prompted me, when I read it, about two years or I can't remember how long ago it was quite a while ago that prompted me to start this writing because I thought they're onto it, they're onto it. And I want to follow this and this is the track I'm taking.
- [55:38]
B
So I don't want to get you off track in some ways I want to get it back to, to the trend following part just because that's what we do. But before we, before we do that, sitting here listening to you, obviously a lot to take in. But what, what, what strikes me and I remember earlier when, when I int. Topic, I remember the words unfolding was part of it, right? This is something that's unfolding. And I'm thinking if we just. You talked about, you know, how you and I are correlated and how everyone we meet somehow ends up correlating with us. And I'm thinking one way to, to maybe frame the, how this complex adaptive systems really, you know, how it's really evolving is the fact that you know, go back not that many years ago. The people we would come across in our lives would be very local to us. Right? We would only meet our neighbors. There were no way of communicating with people across the world. And, and then with this, you know, technology revolution, etc. Etc. There are no borders for data. There is no, there is no border for, for, you know, technology, so to speak. You and I are having this conversation and we are thousands of miles away from each other, but we are still now impacting each other, something we would never have done even 30 years ago, right before the Internet. So I think we all. I think most people listening to us today will feel the enormous technology revolution that we've gone through. That's something that's, for all of us is very real. And again, I'm not using the right words here, I'm sure, but I can imagine how that has kind of compounded the expansion of complexities in this complex adaptive systems. It's just gone completely enormous in that way. Okay. So I hope that maybe that's a way for me to better internalize why this, you know, where you're coming from and, and, and, and how, you know, how this continues to unfold. Because the next thing I'm thinking of. We're not going to go there today is just. Well, how is this when we start introducing the virtual reality? Not even you and I talking, but maybe the virtual Nils and the virtual rich talk. I mean, this is endless. I mean, this is just incredible.
- [58:07]
C
So nested layer upon layer.
- [58:10]
B
Exactly. Exactly.
- [58:11]
C
What is that, the Russian dollar?
- [58:13]
B
Right.
- [58:14]
C
One door. One door.
- [58:15]
B
One door. Yes. So. So I, I fully. I wouldn't say I fully get where you're coming from. I, I think I get where you're coming from. And I think this is incredibly fascinating. But what fascinates me even more is maybe if you would spend the last time we have together today, and I'm sure we'll come back to this later this year for sure, is just the way that we have decided to let us guide by principles, by process, to deal with being part of a complex adaptive system where, in which we have no control in, In a, in a sense, and the humility, in a sense that, that, you know, that we need to, that we need to embrace to be part of the philosophy that we've chosen to. I mean, it's almost like the way Monk lives, right? We are very humble. We trade by rules. We're humble, we're kind of detached in some ways, and we're very disciplined in terms of learning and being wired into.
- [59:23]
C
This, that's all we need. We need a process that aligns with the system we are in. And we are in these financial markets, trading these. So we want something that aligns with it. Because as I've been stating, this whole principle of super determinism is about coherence. It's about following a narrative of cause and effect from the beginning of this universe to where we are now. It's a principle of understanding logical causal narrative. And because of that, as trend followers, we need to understand, we will not never understand all of that causal logic. We will have a vantage that can expand out under diversification and really have a good oversight over what this system is. It's not specializing in any particular market, it's diversified because we realize these properties of structure emerge from noise. And what we also realize is there is no such thing as noise. What noise is, is effectively like the quantum realm. It's too finely causally braided for us to be able to classically view it any differently than noise. But that is where trends emerge from. The seed of a trend emerges from noise and then it materializes with our models. The signals of our models identify, hey, here's a structure here, an emergent feature. From this, I'll put inverted commas around it. Noise, which we're saying, hey, doesn't exist. It's just too complex for us to resolve it. It's a bit like if I'm standing here on a very quiet night at the farm, for instance, where I am down at the farm, I can hear the river that's about two kilometres away. But in the day, when the noise of traffic, all of these things, the birds, the bees, the cicadas, all of these things, suddenly the noise of the river's gone. I can't hear it. It's not saying that the noise is just our ability to resolve a signal at the thresholds we can be used to identify it. So we, with our models, we're participants, humble participants. Why are we humble? We don't dare to assume we're cleverer than the system we're embedded in. That's where the predictor comes in. Because they're saying, hey, I'm a God, an omnipotent God. Standing outside this system, I can tell where the system's gonna go. But what they're forgetting is that when I insert myself in the system, being part of that system and interacting with that system, I'm actually gonna change that prediction because I'm asserted an embedded observer in that system, where you are an Active participant in shaping that system. Just like shaping the universe, Shaping that system, the trades, I do impact the market in a slight, subtle way. If I was a larger trader, a hedge fund with large orders, that's going to move price structure much more significantly. I can't divorce myself from the interaction as an embedded observer. And as an embedded observer, you only have a limited advantage. You don't have the ability to understand, like a benign God, everything that this market does. So you must be humble, but you must have a system, the system to fall back on that aligns you with process, aligns you with the system. This isn't prediction, control, free will. This is, hey, I've got a model here that has demonstrated that if I apply this model, not my brain, and you know, I might have a brain that's thinking differently. My limited brain at the moment's worried about Trump and all of these different things, but my models say, hey, don't worry about that. You can think about that. I'll take care of this for you, Rich. I'm gonna keep on trading the same old way I've always done with discipline, because I'm not smarter than the system. But I will align with that system and I'll follow the trend full stop.
- [63:41]
B
It's certainly a philosophy that matters much more than Sharpe Ratio.
- [63:45]
C
Ah, yes, the cold clinical equations. They don't do anything for me, Niels. It's recognizing that there's meaning. There's meaning. And when I say meaning, Nils, I say if we have a coherent universe and if you and I can share a laugh, get together, bond. The meaning is through the story. The word. A word alone doesn't have meaning. It's got to be inserted in a story, a context, to have meaning. If we start thinking that things are separated, fragmented from the coherent whole, we lose meaning. And consciousness, to be conscious arises from meaning. It arises from coherence. If I put an inert brain, my brain, into a world of randomness, the model, it's not gonna be able to create any model. It's not gonna be able to think. It's just gonna be inert, dumb. But if I put my model of my brain into a coherent laboratory, a coherence structure, the brain's gonna be able to make sense of it with its models. It's gonna make abstract relations and correlate with the system to actually come out with meaning, what it means to be inserted into that coherent whole. But if I insert it into Neil, I'm going to have a brain that can't function and separation, fragmentation, that's not what we are. We are recognizing that as trend followers, we are observing process, taking the time to observe the detail. Because in the detail the ordinary we find joy. A good example. Go out if you're worried about what you're hearing on the news. If you want to get excited, you go out, you throw a ball to your dog. Why? Because you are correlated with your dog, Niels. You've got a shared history. He knows you, you know him, you love your dog. When you throw the ball, there's joy, there's meaning in throwing a ball to a dog, because that is an ordinary task. But if you really drill into it, Niels, that's where the majesty comes from. Not from miracles, not from quantum wave functions that collapse from when you observe it. But that's mythical stuff. That's the stuff of unicorns. That's what a lot of our science was getting to, mythical. And what was happening was where physics started going wrong, was where they lost coherence and they started assuming that we were separate to the experiments we are undertaking. There is no separation. We all are correlated with the experiment, the apparatus, the history. Why I chose to set up the apparatus that way is correlated to my history, my readings, all of these things, my. They're all correlated. We co evolve along this causal braid to this point in time. We conduct this experiment. And there is a famous double slit experiment in physics that Richard Feynman said was really the only real mystery of quantum physics. And the double slit experiment was something that created all of this vast range of different interpretations because people were wanting to hold onto a notion that they were separate from the experiment they're observing. And to explain it, you had an electron gun firing electrons into a double slit. And then there was a photographic plate behind that double slit. Now, if you fired the electrons one at a time through the double slits, without measuring which of the slits it went through on the photographic plate, you'll get an interference pattern that physicists were saying, oh, this is spooky, this is spooky. This is wave particle duality. And they were saying, why is there an interference pattern if we're not measuring which slit it went through, but if you measure which slit did that electron go through, that interference pattern disappears magically and you find a cluster of electrons at the photographic plate, as you would expect. Now the reason this is spooked, just for the last hundred years, created this vast array of interpretations is because they always assumed that the electron gun was separate. And the method of the measurement of the polar, all of these Things which flip did it go through? These were separate to the observer and the gun firing those electrons. Now, this whole mess of physics evaporates when you realize that all of that entire system evolved and correlated. Co correlated from a single origin. And so it's a bit like saying the rules were written in advance a long time ago, which slit it would go through. And this is, here's the classic exam. So now it's simple to understand, because now I could say, all right, I'm not going to fire electrons through the slit. What I'm going to do is this is the experiment I'm going to do. I'm going to have 100 golf balls with my golf club. I'm gonna hit each golf ball one at a time, boom, boom, boom. Then I'm gonna look at the pattern of the balls that landed, where they're distributed, and it's gonna look very much like an interference pattern. And this is exactly the interference pattern you get in a double slit experiment when you're not measuring. Now, the reason when I'm hitting these golf balls is that each separate event is correlated with the prior event. My muscles are getting slow sore after the first hit. So therefore the next hit is gonna be correlated with the first hit. The third hit's gonna be correlated, the second hit to the first hit. The causal correlations that occur between it are not to be viewed separately. They're all part of a correlated whole. That's why we get this dispersion. And we find this in physical experiments. If I throw the ball to the dog, the reality is I can model what would happen as what we call counterfactual experiments, where I can think, well, if I throw the ball to the dog, it should have this particular trajectory land in the dog's mouth or whatever. But the reality is, I only have one shot at this. Because the minute I throw the ball to the dog, the next time I throw the ball to the dog again, it's a correlated event with the preceding one. The experiments changed, it's now correlated more broadly. So go back to that double slit experiment. You find that the reason that when you don't measure which way the electron's going, they actually do go through individual slits. The thing is, you're not measuring which one they're going through. You're not interfering with it, you're not correlating with it, because you're not measuring it. That's why we get an interference pattern. But if I now measure which slit I go through, now the measurement device is correlating with that system and creating a different system, not the same system. There was never any separation. Now I'm interfering with that system to say which slit did it go through? That's why that interference pattern disappears. You see, it's this process of correlations that if you go into it deeply enough, all of this mystery fades away. Entanglement, double slit experiments. Richard Feynman. If you don't understand quantum mechanics are in good company. Forget it. Classical quantum. They don't exist. They're different interpretations of the same thing. Bring it back. Super determinism, causal coherence. If you follow that process right to the end, right to the turtle upon turtle upon turtle upon turtle on turtle on turtle. As you're investigating, how many turtles is on the way down. If you go back to it, you see it's this entire causal coherent history. That's how I love trend following. And that's why I think it's a fantastic philosophy that fits so well into just appreciating. You are a very small speck, a participating agent in a magnificent universe.
- [71:51]
B
Well, this was. This was deep. This was deep.
- [71:55]
C
But we've got to do that sometime.
- [71:57]
B
No, it definitely. It definitely, definitely. And it's something that kind of elevates our usual conversations beyond models into meaning with without a doubt. And I'm sure we will continue on that. And I completely agree. Of course it does give joy when you throw something to your dog. Unfortunately, my. My dog passed away last year, so I can't do that. But I will say I. I get joy from having conversations with people like you. You, so.
- [72:26]
C
Oh, thanks.
- [72:26]
B
You know, me too. There are. And hopefully our audience will get joy from listening to these type of conversations. This was hope.
- [72:34]
C
Hope in a disconnected world. How's that?
- [72:36]
B
Yes, exactly.
- [72:37]
C
Traders unplugged. Hope in a disconnected world.
- [72:40]
B
The new slogan. Anyways, good stuff. Yeah, no, this, this was, this was great. I'm going to chew on that for a little bit and, and I'm sure we'll. We'll revisit parts of it as we move forward.
- [72:56]
C
Just to let you know, I'm releasing a chapter at a time. We're up to the second chapter released on the. The. My Twitter, you know, X and LinkedIn. But it's going till about September, a chapter at a time.
- [73:07]
B
So every week on a Sunday.
- [73:10]
C
Sunday's a good day to release this because you can relax and think a bit about it.
- [73:14]
B
But sure. No, I hope you enjoy it. Absolutely, absolutely. And of course, if, if people listening out there today also really appreciate this deep con conversation with Rich, then please go to your favorite podcast platform, leave a rating and review and show your appreciation for for all the work that Rich put into bringing us new ways of thinking about these matters. Next week I will be joined by a new co host, but not someone who hasn't been on the podcast before. He was actually on the show not that long ago with Rob and Graham. It's Yoav Git who is ex HL currently with Gresham. Super interesting, writes a lot on LinkedIn and so we'll be tackling some interesting topics no doubt. And if you have questions for him, he's a prolific writer actually on his LinkedIn channel. But if you have questions for him, feel free to email them to me and I'll try and bring them up. That's it for today. We will leave you to enjoy the rest of your weekend. So from Rich and me, thanks so much for listening. We look forward to being back with you next week. And until next time, take care of yourself and take care of each other.
- [74:31]
A
Thanks for listening to the Systematic Investor podcast series. If you enjoy this series, go on over to itunes and leave an honest rating and review. And be sure to listen to all the other episodes from Top Traders Unplugged. If you have questions about systematic investing, send us an email email with the word question in the subject line to infooptoptradersunplugged.com and we'll try to get it on the show. And remember, all the discussion that we have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also, understand that there's a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions. Thanks for spending some of your valuable time with us and we'll see you on the next episode of the Systematic Investor.