Odd Lots - Episode 1: Tom Keene on Mathiness and His Favorite Guitar

Episode Date: November 6, 2015

(Bloomberg) -- Tracy Alloway and Joe Weisenthal kick off the Odd Lots podcast by interviewing the legendary television and radio host Tom Keene. On Tom’s mind this week: Fat tail risks, mathiness on Wall Street and how he rediscovered his favorite guitar. And don’t forget Newtonian mechanics and bow ties.See omnystudio.com/listener for privacy information.

Thanks for listening to Oddlots. Follow the show on Amazon Music for more future episodes or just ask Alexa, play the podcast Oddlots on Amazon Music. Hello and welcome to the first episode of Oddlots. I'm Joe Wisenthall, co-host of What Do You Miss and editor at Bloomberg Markets. Now I'm Tracy Allaway, executive editor of Bloomberg Markets. Here at Oddlots, we want to have a discussion every week about economics, finance, markets, market structure. which Tracy loves, maybe some politics and culture thrown in, stuff that doesn't necessarily fit into the normal day-to-day conversation. We couldn't think of any guest better to have than Tom Keene. Am I guinea pig? You're the guinea pig. Okay, thank you. Tom Keen, as everyone should know, is the host of Bloomberg surveillance on TV and radio here at Bloomberg. He knows more about markets and economics and world events

than just about anyone else in the room. He's a very eclectic background in music and mathematics. And I wanted to have Tom Keene on the show because Tom is always interviewing people, but he's never answering questions, he's never behind a microphone. I try to avoid it like the plague, seriously. I'm not doing this for you, Joe. I'm doing this for Tracy.

Everybody knows that. But who are you, Tom? Why are you here? How did you get to be Tom Keene, who everybody knows and loves? I get it a lot. And what I would suggest is it's one part short-term stuff, one part long-term stuff, and one part blind luck. The long-term thing is being acutely aware when it was a kid and ever more every day knowing how twisted the early years were.

I felt something like that's a bad Stan Freeberg record. And you don't know who Stan Freeberg is. He was a great comedian. He just died this year. And then recently it was about the privilege of running into Matt Winkler. and basically Matt and I with the support of Al Mayors who runs Bloomberg Media and Ted Fine, who runs TV, they're the ones that made all this happen. Matt Winkler, for our listeners who don't know, is the guy who founded Bloomberg News essentially. So you got lucky, you met Matt Winkler.

You just hired me because of the bowtie, but to make a long story short, you get lucky. And I met Matt, and we basically invented what you see. That's a safe statement. What were you doing before then? Because when I think of you, I think you project this aura of someone who's been doing radio for decades. Yeah. But what were you doing before you did radio and TV? Well, before the media thing, I was in the investment business, but there's a whole sidecar thing in music and in entertainment.

For example, and I gauge it off my oldest child's age, I used to hold them in my arms and do the stock report in Boston. And this is the Vanilla Days, not cross-asset. The Dow Jones Industrial average up 42 points today, 842, blah, blah, blah, blah. You know, that. And so I did a little bit of investment stuff back then, but a lot of it was just the music business as well, which is the showbiz aspect, which a lot of people in business media try to ignore every day, and they're wrong. I mean, the FT's pink. It's pink for a reason.

It's pink. It's like what you did. I mean, you invented the modern headline in modern business journalism. So it's just, you know that Wysenthal wrote that headliner. You just know that. How has your investment experience informed your career? Oh, huge. Oh, huge.

It's a massive type two and that you learn so much enjoying losing money. It's, for those of you, Gauci, and it's log normal. You learn way more on the downside than the upside. Lots of fat tail risk? There's fat tail risk, but that's not that that's overemphasized. It's the joy of losing money within the fat, that tells, which is the way to play. I mean, I think that's probably counterintuitive. You learn factors more losing money than making money. Factor's more. But I can tell you that the way I

learned to lose money was enjoying losing money in the options market. And then so when you're doing the show, whether on radio or TV, how do you apply that? The fact that you learned so much more when you lost money, when you think about it's a humility thing. It's a humility thing of knowing every day how dumb you are and trying to always work at getting smarter, laughing at your mistakes. There's a lot, there's less now after the financial crisis, but there's lots of people strutting around with a certain intellectual arrogance about economics, finance, investment. And right now, nobody has arrogance in international relations. Did you have to learn how much you don't know? Like, was there a point earlier in your

career where you thought you knew it all and then over time you know certitude of 21 yeah you you learn from a wide set of mistakes and cycles which gives you a humility which forces you to get smarter for example i went to a wedding this weekend and half the wedding was from uruguay i know nothing about manna vadeo except one of my kids friends all went down there because he couldn't get a job in America. And I read seven articles this weekend on Uruguay just to begin to, I have no clue about Uruguay. There's that kind of madness, but compounded over time. I know nothing about Uruguay. I know nothing about Montevideo. It was a great humble brag because you slide in how easily you knew the capital now. I have to ask, you talk about certitude on Wall Street. And in addition to

having a musical background, you also have a mathematical background. Right. And it seems to It seems like one of the areas in markets where people start to get really certain and have that certain mathematical swagger is when it comes to models. And you love talking about models. How does your experience in mathematics feed into that? Yeah. The background there was growing up with it. I have the clearest memories of going to get him up on my tiptoes and looking over my father's desk

is he did a very sophisticated triple integration of space satellites. And I would literally play on the floor with the French curves. This is a million years ago. And like think Sputnik and IGY and all that. And all of that became a mathiness which culminated in Max Peters' fabulous program at the University of Colorado. Max Peters was a highly decorated Italian infantryman up the spine of Italy in World War II. And he went out to Colorado and put together the mother of all grinds in engineering

academics. And I was extremely fortunate to parachute into that for a couple years. So you take, you know, what I get in math and what I don't get. Trust me, there's a lot I don't get. And then you overlay that into some of the certitude of quantitative finance and you get a massive humility. I think the math overlay is a, it's a massive type one, you've got it. But what it really is, and I see it every day and it's getting worse. It's a little better in the last couple years is the math phobia with an economics finance investment's just stunning. It's just breathtaking how bad it is. That's interesting. So you see rampant math phobia because other people have argued that it's just the opposite that economics and finance have become too mathy to the point where people

can't explain in clear English what they're talking about. Do you see it the other way? Let me parse that debate. You're absolutely right, Joe. The basic idea is there was an era, coming out of World War II of math, too much math, math, math, anxiety, etc., etc. And then at the undergraduate level, not at the PhD, not at the doctor track level, the graduate level, but at the undergraduate level, a vast majority of people don't have the dynamics in their head to do even basic Marshallian macroeconomics, or, you know, name the flavor of macro you want to do. The British are very different in the French. they have much better, as a rule of thumb, undergraduate mathematics than we do.

If I talk to British students, their knowledge of first-order difference equations, off the chart. Honors undergraduate programs in the U.S., some of them, they have no clue what that is. I'm pleased to say I've forgotten almost all the mathematics I learned at university and college. However, I want to know, so when you see something like the events of August, when the market sold off, and a lot of people were talking about mathematical formulas and model-based equations and risk parity at the center of that sell-off. What do you think? I think some of it was extremely valid this time around. I think that the model fatigue is much more in the macro area.

The work Olivier Blanchard did at the IMF with Joe Stiglitz and others is really important to ask the non-sophisticated. in the very sophisticated differential equation models that pro PhDs use and I don't pretend to be fluent in them. They're very suspect after what we went through in August of 2007. Stepping back, so you have this interest in lifelong interest in mathematics and music, which I also want to get to. But then how did that, when did it click that markets and investments? When that earliest memories, earliest, it was permeating in my house. My grandfather knew AW Co and the point and figure guy. He did point and figure charts.

My mother did point and figure charts. Wow. So you come from a family background of technical analysis. Totally permeating investment theory and investment analysis. You know, just original Graham Don Cottle up on before Cottle. In addition to everything else you were always interested in, you always knew that this was something you wanted to. No, I didn't know it. It just was there.

It was just there. It was just there. kind of thing. I'm also, I don't think a lot of people know about your musical background, but what do you give us the 60 to 90-second version of Tom Keene's musical career? The 90-second version is real simple. At eight years old, I walked into a place called Stutzman's, which is legendary in the acoustic music business. My father, there were six Grutch White Falcons lined up. Where did you grow up? Rochester, New York, with Kodak. And my father bought me a $42, you know, acoustic guitar, and then I just began grinding away. And there were three or four iterations of it,

but to make a long story short, I ended up doing the New England singer-songwriter thing, juggling a bunch of other stuff. There's a place in Nashville called the Bloomberg Cafe, which is magical. Do you say the Bloomberg Cafe? The Bloomberg. The Bloomberg Cafe. You know, it was just the New England folks in it. It was sort of, you know, in terms of artists around it, it was post Tracy Chapman Suzanne Vega was really happening with Luca and Solitude Standing and then a whole host of people came on

really jump started by a guy named David Wilcox who did an album called I The Hurricane for A&M Records which just there was like this mini folk boom and what was so cool we knew when we this is before the internet that's a key statement even we had no idea what was coming in digital but we knew how lucky we were to do it when we were doing it. We knew it couldn't last.

What was the greatest guitar you've ever owned? The one I got now. The greatest guitar, my concert, Gibson J-100, which was picked out by Eric Schoenberg up in Boston, was stolen, and I got it back four years ago. I told Dave Drummond at Google, I got it off Google Images. Wow. There was my guitar in Google Images. but that and I've got some others now but I think that's you know I guess the best ones the one my father had but that's been lost so with your very very idiosyncratic background in mathematics it's almost like Joe Wisenthal's

and music and investment when you do your show today at Bloomberg and you look around the world what do you see is the most important story going on right now I think the number one story one of my kids said to me Daddy, when does this get to be fun? And I think there's a massive understanding by people of a certain vintage that the kids don't have, they have lots of wonderful digital stuff and medical stuff, et cetera, et cetera. But the optimism has been shattered. And the answer, Jeff Emmelt, I was with two years ago, I'm guessing, and he said, look, all we need is 3.2% GDP and that solves a lot of problems. That's a very smart comment by the applied mathematician

from Dartmouth. We don't have that. The younger people, people under about 32 have never known normal. So when you look at the world, you don't necessarily see problems of inequality. You see generational problems. No, I think they're both there. But I think in 2015 that the generation issues are less spoken, which to an extent speaks of the anger into politics today. When do you think it was normal? Or when was it fun? Well, you know, you stand on the floor of the Republican Convention, X conventions are going, and you go, well, this is surreal. Or the Democrat, it doesn't matter which party. But the answer is, we are programmed for a certain nominal and real GDP that ain't happened. There's a quarter here or a quarter there.

macroeconomic advisors right now has third quarter at 1.5%. The next quarter is a little bit better, but we have not had the run rate of GDP that provides base psychological comfort to a lot of people, whether it's overeducated twerps like my kids or, you know, people really struggling. Millions of Americans. Do you think, I mean, I remember thinking in 2010 and 2011 when we had the raging debt ceiling to And I think that was the first time that we saw this huge, I would say the crisis in the economy seemed to really spill over into politics. And we had this stark division, the Tea Party and leadership. But it hasn't faded as much as I would have guessed, given how far unemployment has dropped. I mean, the economy is much better than it was in 2011, but we still have, I mean, look at Donald Trump and leading in the polls.

Right. You have rise of more radical politicians everywhere. Do you think it's something beyond economic? It has to do with the media environment, internet? It has to do with the media, and it has to do with speed of Twitter and all that. I mean, the Cyprus crisis alone with Twitter was surreal. That Saturday morning when Cyprus blew up, how the Twitter dialogue changed the discussion. But what is under-emphasized from a Newtonian mechanic's standpoint is inertial force and the word chronic.

And the answer is you're totally right about 10 and 11. And what's different now is it may not be force majeure like it was then, but there's just this chronic weight of gridlock in Washington, this chronic sense of GDP underperforming, even while unemployment supposedly gets better. And that goes back to productivity. You know, we could bore everybody with three-ratio-productivity analysis. Did you say three- ratio productivity analysis? Yeah, productivity in the media is appallingly reported. There's capital, there's labor, and there's a separate ratio wrapped around something called Total Factor productivity or TFP.

And the pros know all that, and they sort of just, you know, when we talk about productivity, gloss over it. But the answer is labor ain't happening, and certainly for a part of America. This Angus Deaton winning the Nobel Prize is a big deal. Big, big deal. This is the death of aggregation of summing everything together. And that's a really big deal that I talked to Schiller today and I have a chance to talk about it. Well, that brings us to, again, to your show.

When you go out and talk to people, what makes them good interviews and who are the best interviewees that you think you've had? It's a chemistry. It's a mixture. And there's always exceptions. There's hyper-academic people that fail. I do think it's a chemistry. We keep very careful track of who we like and who we don't like. And I would say the third rail is we don't want people that are scripted or consulted. That was the rage two, three, five years ago. There's less of that now. We have less and less people on talking points, which is where a consultant comes in and tells them four things to say.

That's gone away. But mostly, you know, it's the media phrase pop. They've got to have pop, particularly in radio, is critical. So we talked about these sort of big generational issues that you see is the main thing. what about this moment specifically when you look at financial markets? What are the big things that you're watching? We're going to get into prediction season soon for 2016. What do you have your eye on?

What are the charts that you look at first thing in the morning? Well, my chart of the years, inflation-adjusted commodities back 60, 70 years. I've shown it on TV probably 10 times. You can steal. It's a great chart, great, great chart. What does it look like? It looks like a persistent decline in commodity prices over many years. And then there's a China aberration.

And we are off the top of my head, two-thirds to three-quarters of our way back to normal, which is commodity, long-term commodity deflation. So you don't think the long-term... It's not over yet. If we're going to return to normal... I would suggest not that it's not over. I'm not going to make a prediction. I would say the people predicting it is a...

over are on tenuous ground. That's Tom's media experience coming through there, refusing to make a prediction. Do you think one thing I feel is like everyone's talking about deflation and central banks around the world failing to hit their policies and how are they going to reflate? They can't do it. And then you see these conversations, the Phillips curve, this idea that the employment and the inflation rate are inversely related and how that's dead and broken. Do you think we could be getting to an extreme in the other direction? where everyone is just thrown in the towel on any sort of inflation coming back and anything like that? No.

To get wonky on you within a classic ISLM Matrix, John Hicks 39, and Krugman's written about this beautifully, what I would suggest is there's a total underestimation of real economy effects. Everybody's over in the bank, what's yelling going to do, what's Carney going to do, which is fine. I mean, that's what keeps us employed all three of us. But the real economy effects have been grossly underrated from day one of the crisis, August of 07. And the other thing I would suggest is the interest rate transmission between the real economy and the bank side of things. The LM curve is totally broken at the zero bound. And there's things we don't understand that are going on in the interest rate sphere right now.

There's a mystery here. I can't believe we've gotten this far in the segment without talking about your bow ties. And the fact that the bow tie was almost entirely responsible for bringing you to Bloomberg since Mr. Matt Winkler also enjoys wearing bow ties. It was a rumor. I found a picture of my grandfather, my mother's father, five years ago holding me and he had a bow tie on. I have no recollection of my grandfather having a bow tie. It started when I was sort of kind of like pre-med, and I was in emergency rooms, and they wouldn't let you wear a normal tie, because they're afraid the patient will grab you with a regular tie.

So I was forced to wear a bow tie doing what was called extern. This is a million years ago. This is before anesthesia. And, you know, it sort of started with that. I'm assuming back then they weren't Hermes ties, though, as they are now. No, they were not. No, they weren't. We did the clip-on thing minimally, I must admit.

That was like, no, I don't want to do that. Do you have a favorite tie? Does it mean something? No, not really. This one of the original... It's an orange tie for those listening. Thank you very much for joining us. That was a phenomenal discussion.

I learned a lot about you. Well, podcasts are really cool. We did them years ago. And I totally agree with a new enthusiasm over podcasts. Thank you for being our guinea pig, Tom. Thank you. Thank you for joining us on the first episode of Odd Lots. We'll be doing this every week, and you can find it on Bloomberg.com, iTunes, SoundCloud,

and just about anywhere else. You can follow us on Twitter at the stalwart for me, at Tracy Alloway. For Tracy, we'll obviously be tweeting out the links. And thanks again to Tom Keene for joining us and being our guinea pig on this first episode. And thank you for listening. The news doesn't stop on the weekend. context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gura. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Ruffini. We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world.

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