Masters of Business: How will passive investing weather the interest rate hikes?
Bloomberg Radio host Barry Ritholtz speaks with Dr. Maria Vassalou, who is co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management.
RITHOLTZ: Right. Well, let’s stay with this a second because I’m intrigued by the concept of the market becoming less efficient. When I look at the ‘60s, the ‘70s, the ‘80s and ‘90s, it seems as if we’ve gotten more and more heavily focused on technology and program training, and now algorithmic and high frequency trading. And I would assume that that would make the market more efficient and harder to spot arbitrage opportunities and these various anomalies. You’re suggesting passive is creating less efficiency. Does that mean there’s more opportunity for active traders?
VASSALOU: I think there is more intraday trading now than it used to be. So you have the passive investors and then you have a lot of intraday trading, and that’s based on algos that are looking for short-term trends to capitalize. Some of them are AI-based, so they may be looking for particular words, and then they will extrapolate from that. For instance, it was interesting to notice in the last Fed meeting, Chair Powell used the word disinflation a few times and —
RITHOLTZ: Disinflation?
VASSALOU: Yes.
RITHOLTZ: Not deflation, just slower rate of inflation.
VASSALOU: Yeah. So that means that the inflation is coming down. And the markets will start rallying as soon as he will pronounce that, not because he was suggesting an inflation, by and large, is coming down. But he did say that in certain segments of the CPI, we were observing disinflation, such as in the goods markets. And that could have been a case of, you know, AI-based algorithms that were utilizing words to really take advantage of developments in the markets. And the following day, the market will reverse the rally, once people will digest what he actually said.
RITHOLTZ: So perhaps some of these algorithms are making markets less efficient then because they’re keying on a word, but not necessarily the full meaning of the speech. Is that what we’re thinking?
VASSALOU: They certainly create more intraday volatility. Maybe in some cases they make them more efficient, maybe in some cases less efficient. But I think what is likely the case is that they create more intraday volatility.
Mar 03, 2023
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