On this bonus episode of “On The Tape,” Guy and Dan reflect on what’s been a volatile few months for the markets (1:30), and preview the big week for earnings (Apple, Amazon, Alphabet, Microsoft, and Meta) ahead (14:20). Later, they go “Off The Tape” with Cormac Kinney, founder of Diamond Standard, and discuss his background in innovation (22:00), diamonds as inflation hedges (35:00), tokenized commodities (37:20), and his path to an ETF (46:20).
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Shoot us an email at OnTheTape@riskreversal.com with any feedback, suggestions, or questions for us to answer on the pod and follow us @OnTheTapePod.
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Shoot us an email at OnTheTape@riskreversal.com with any feedback, suggestions, or questions for us to answer on the pod and follow us @OnTheTapePod.
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NewsTranscript
00:00 iConnections is the world's largest capital introduction platform in the alternative investment industry.
00:05 They bring the asset management community together through a membership platform that lets allocators and managers meet and connect both physically and virtually.
00:14 Over 3,000 allocators and 600 managers are part of the iConnections community, overseeing nearly $48 trillion and $16 trillion in assets, respectively.
00:24 iConnections first came to our attention in 2020 during the first wave of the pandemic.
00:29 That's when their first event, Funds for Food, became the largest virtual cap intro event in history.
00:34 To date, they've donated nearly $2.5 million to charities.
00:38 They are also the people behind the alternative investment industry's largest and most exciting in-person events.
00:43 To find out more about iConnections events and members-only platform, visit iConnections.io.
00:50 Monday, July 25th. Welcome, folks, to a bonus episode of On the Tape. Dan Nathan there, Guy Adami here.
00:59 We're going to riff about this market, which is really interesting, despite the fact that it looks pretty much unchanged.
01:04 In a few minutes, we're going off the tape with Cormac Kinney, founder of Diamond Standard.
01:10 That's going to be fascinating. This is all brought to you by iConnections. Dan, how are you?
01:14 I'm doing well, Guy Adami. Really fun to do a little Monday on the tape. And we're obviously going off the tape with Cormac Kinney.
01:22 But you just said a market that, I don't know, is kind of unchanged. I see a market that's kind of getting a little funky here.
01:28 I see a NASDAQ down, I don't know, 1%. I see the S&P down, I don't know, 35 basis points as we're kind of going into the close here on Monday afternoon.
01:38 I see some of the semiconductors that had a huge rip into the CHIPS Act and into Pelosi's fine trading last week. That was a good one, right?
01:47 Obviously, at the end of the week, I think Snap took a little air out of these ad-supported Internet models.
01:53 And you're seeing a little follow through to the downside there, although Snap's finding a little footing here.
01:58 And then we just have tons of earnings this week. I think by the end of this week, maybe 70% of the S&P 500 will have reported.
02:05 We have about 35%. We have the four big ones, Microsoft, Apple, Google, and Amazon.
02:10 We got a Fed meeting midweek. We got GDP on Thursday. It's like kind of the Super Bowl for markets, guys.
02:15 No question. And my sense is, and again, I'm not certain this matters and that's what makes markets, as they say.
02:21 But my sense is the White House and sort of that edict they put forth about trying to define what a recession is.
02:27 My sense is statistically or whatever word you want to use under the true definition, we'll probably find ourselves in one right now.
02:35 Again, I don't know if that changes anything that you and I do in terms of the markets, but that's that.
02:41 In terms of the market, though, I think you hit the nail on the head. Friday, I think we'll look back on Friday's action and say,
02:46 you know what, that was a really interesting day, a huge reversal in S&P that finally breached 4,000 on the upside,
02:54 only to give it back late into earnings this week. And I'll say this, and I know the folks that listen to On the Tape or listen to Market Call know,
03:01 since June 15th, when the S&P had basically a 3,600 or so handle on it, I thought the next move higher would be to 4,100.
03:10 Now, it didn't get there in a straight line, and quite frankly, it didn't get there at all.
03:14 But we got pretty close last week, and sort of my premise was the market would sort of grind higher into Apple earnings,
03:21 and Apple earnings would be what they were, but the guidance would be critical, and I don't think it's going to be great.
03:26 And the more you hear from different companies about demand, about layoffs, about the ad, about all those things,
03:33 leads you to believe that guidance for a lot of these companies is going to be, in a word, soft.
03:38 But you know, it's funny, I could have kept on going with that guy, with a weakening U.S. consumer,
03:42 with zero COVID in China, with the never-ending war in Ukraine, with continuation of supply chain issues
03:49 because of all the geopolitical stuff, because of the dollar strength, despite the fact it's come in.
03:54 I mean, the list goes on and on and on, and it's funny, you know, there's a scenario this week.
03:59 Let's just say Microsoft, Apple, Google, and Amazon throw Meta in there as a fifth.
04:03 Let's just say they all missed, and they all guided down.
04:06 Even in that scenario, the stock market's not going down in a straight line here.
04:11 And I guess the Fed meeting adds a little bit of a curveball to the situation, because now you're starting to hear about 2023 rate cuts, right?
04:20 After we've had this tremendous period of rate hikes here.
04:23 You saw a couple people on Twitter saying, "What would it mean if the Fed only did 50 basis points this week?"
04:28 You know what I mean?
04:29 I just don't think that those are the sorts of scenarios that are going to make investors rush back into the equity market
04:35 before we've seen a meaningful downgrade to expectations, earnings expectations, for the balance of this year.
04:42 So again, I think there's a good chance that a bunch of those big mega cap names guys kind of cancel themselves out a little bit.
04:49 But it might be really more interesting to hear about what does a consumer products company like Coke have to say,
04:54 or a consumer discretionary company like McDonald's have to say,
04:58 or the largest weighted stock in the transports, UPS, have to say when they report on Tuesday.
05:04 It gives us a pretty clear picture as to what these different verticals are seeing.
05:10 And I think what's going to wind up happening is it's going to put an exclamation point on so many of the things that we've heard over the last couple of months.
05:18 Starting to see demand destruction, layoffs starting to take place, obviously the impact of a stronger dollar, what does that mean?
05:26 Margin pressures, all of these things.
05:29 Now, the CPI that we saw, that 9.1% print, that very well might be the high print we see, maybe for the foreseeable future.
05:38 Hopefully for the foreseeable future.
05:41 But it doesn't mean we're not going to continue to see CPI with a high 7 handle, low 8 handle,
05:47 and that's not nearly close enough to the 2% that the Fed's trying to get back to.
05:51 That's probably for another show.
05:53 I'll say this though, I think your point is exactly right.
05:56 Those names that you mentioned, those five or six names, might very well cancel each other out.
06:01 We might see two decent reports, two miserable guides, and maybe one is neutral, something like that.
06:07 But again, it's how does the market interpret it, and now what are the right valuations going forward?
06:13 And I think that's what I've been struggling with, and I think that's what the market's going to continue to struggle with.
06:18 But I would submit that earnings expectations, in my opinion, are still too high, despite the fact that there are reports out today that earnings are coming in better than expected.
06:29 To me, it's all about guidance.
06:31 And the multiple put on those earnings is still too high as well.
06:35 Well, let's talk about yields for one second here, because again, on Thursday, I think the 10-year U.S. Treasury yield traded as high as 307.
06:44 It traded as low on Friday, Guy, down to 275.
06:49 Just think about that. I know, again, I don't need you to think about it, because you're trying to tee me up, and you're doing a great job.
06:57 I don't have to think about it. That's all I effing think about.
07:00 Almost every day, the fact that bond volatility is ridiculous.
07:05 You just hit the nail on the head, and you just did it over a three-day trading period.
07:08 Pull that out to six months, nine months, 18 months.
07:11 We've seen moves like this over and over again.
07:14 And what does that mean? It means the market doesn't know where rates should be.
07:18 The market is struggling with, are we in a slowdown?
07:22 Is inflation out of control? Where should 10-year be?
07:25 And that's a real problem.
07:27 Well, you know our friend Carter Braxton Worth. You know Carter Braxton Worth, right, Guy?
07:30 I'm very familiar with him.
07:31 Of Worth Charting. He sent out an email today from Worth Charting that it's-- well, you'll love this, OK?
07:37 "Not to the penny" was the title of the email, OK?
07:40 We know that that's his expression, "to the penny."
07:41 It was on the VIX, OK?
07:42 And if you looked at the low in November of 2021, this is right before the Fed pivoted.
07:47 The S&P was at a then all-time high. The NASDAQ was then at a then all-time high.
07:52 It traded 15.
07:54 And then it had a huge rally, OK, when the stock market started to sell off late that year.
07:59 And then the VIX bottomed out somewhere around 17.
08:03 And then the VIX rallied again as the market got a little kind of funky in January.
08:09 And February. And then it bottomed out, Guy, at about 18 or 19, early April.
08:15 Well, if you draw a line of all those lows, he's basically saying, "Not to the penny," but he thinks the VIX is going to rally.
08:21 And I'm trying to kind of put this together with that bond volatility,
08:24 because you've been highlighting the move index, OK, of U.S. Treasury yield volatility.
08:30 And you've been saying that you think the equity market volatility is going to follow that
08:35 because you can't have one likely without the other.
08:38 The only point I want to make also is that you had been calling for, since the last Fed meeting in June, a rally.
08:44 We got a 10% rally. You thought maybe we'd get to 4,100 in the S&P 500.
08:49 So now you're kind of changing your tune a little bit. You got just over 4,000 here, and you think that's about it?
08:54 Yeah, I'm trying not to change my tune.
08:56 But as you know, and you're not saying that in a derogatory way, trading is fluid, right?
09:00 Certain things happen.
09:01 It would have been perfect on Friday if we traded up to 4,100, sold reverse, sold off,
09:07 and then I would be looking like a genius.
09:09 Now, 4,000 obviously isn't 4,100, but you say to yourself,
09:12 "All right, did we get close enough in the time frame that I set forth?"
09:16 And it's starting to look like that may be the case.
09:19 So on June 15th, when I said 4,100 in the Apple earnings on July 26th, you know, it all started to get pretty close.
09:27 So here we are. It didn't get there the way that I thought it would.
09:29 It didn't get there, period. But it got pretty close.
09:33 And I guess what we say all the time, and it's really hard, I understand,
09:36 but you obviously have to have conviction in your calls, but you can't be dogmatic in your calls,
09:43 and you have to allow for some level of fluidity.
09:46 And I think that's the point I'm at right now, Dan.
09:49 You know, you have a bearish view on not just the economy, but on the market,
09:53 and you thought that we're going to continue to have these kind of bear market rallies,
09:56 and that's exactly what we had.
09:58 If you look at the rallies that we've had over the course of this year,
10:01 as the S&P worked its way down to, what was it, down 23% at its lows in June or something like that on the year,
10:08 there's been 3, 10% or so rallies off of intermediate-term bottoms.
10:12 And again, I'm also the camp guy.
10:14 Until we kind of have that reset, I know that a lot of the valuation metrics in the S&P 500
10:19 are starting to look really cheap to their history over the last five and ten years or so,
10:24 large part because earnings have not come in.
10:27 And listen, again, I think that one of the main reasons why we're going to see this reset for second-half earning
10:33 is that unemployment is going to start to tick up.
10:35 You just mentioned that we're starting to see delays in hiring from some of the major companies.
10:39 We're starting to see some actually announce cuts.
10:42 We talked about Ford last week, said they're going to cut 8,000 jobs.
10:45 This is all going to start to happen here, and especially largely because even if we are at peak inflation,
10:52 you've been saying this, that the levels of prices of goods, of services,
10:56 they're going to remain well elevated above the Fed's target.
10:59 I think they're now targeting like 4% down from that 9.1 CPI print,
11:04 and that's just going to eat into margins.
11:07 And so you rationalize costs, you cut costs, you cut jobs.
11:10 I mean, that's going to be a big part, I think, of this next three months or so.
11:13 So as unemployment starts to tick up, even though the inflation readings are going to be coming down
11:18 and lagging indicators, I think that's the one thing that has not been kind of incorporated into,
11:23 I guess, the economic estimates as we think about the back half of this year.
11:27 Agreed. And you look at a company like Pepsi, and if you go back and watch that interview with the CEO on CNBC,
11:33 and I don't want to say he was grinning, but he definitely was smiling.
11:37 And the growth that was associated with that call, I think it was 13% or so organic growth.
11:43 I'm putting up air quotes. I know folks can't see that.
11:46 I mean, 95% of that organic growth, again, air quotes, was based on price hikes.
11:52 So you just question is how much longer and how long, I mean, is that sustainable?
11:56 The answer is it's not. Obviously, at a certain point, there's a certain elasticity to these things,
12:01 and we'll see how it comes to fruition in names like that.
12:04 And again, for a lot of these stocks that have been so defensive,
12:07 the valuations probably don't make a lot of sense in this environment.
12:10 And that's probably for a market call or something.
12:13 But those are the things you have to look at. How sustainable are these things?
12:16 And that's why you're trying to navigate what's been a pretty difficult market over the last month or so.
12:21 Well, it has been. I mean, think about this, right?
12:23 There was a lot of bottom calls in the last couple of weeks that the S&P had kind of put in a bottom in some way, shape, or form.
12:29 You and I were not in that camp.
12:30 When you look at some single stock volatility, like we saw last week on Friday with Snap being down 39% in one day,
12:38 and that comes after its last quarterly report, where it was down 25%.
12:43 And the quarterly report before that, it was down 35%.
12:46 This was an $80 billion market cap company nine or 10 months ago.
12:51 And now it has an enterprise value of about $16 billion.
12:54 And you say to yourself, I mean, what did so many investors get wrong?
12:58 Now, I just want to be really clear.
12:59 You know, I've been buying a handful of some of these Internet names.
13:03 We were talking about it on the tape.
13:04 I started in late May.
13:06 And Snap's a great example.
13:07 And I just think for some of the listeners out there who are trying to make some sense of this single stock volatility,
13:12 Snap, I bought it at $12.80.
13:15 And then on Friday, I bought some at $10.50 and $10.
13:19 And I have about a half position now.
13:21 Listen, if you're a trader, this is a tremendous opportunity.
13:25 I mean, this could be on its way to $7.
13:27 It could also be on its way back to $13 or $14 or something like that.
13:30 So you kind of have to kind of pick your spots.
13:33 You have to have a view about the direction, the fundamentals.
13:36 Really also, what is your time horizon is going to be most important.
13:39 For me, I'm trying to build a position looking at one, two, three possible years.
13:43 And I think this could easily be a $30 stock in three or four years.
13:47 It could be a $50 stock.
13:48 I just wanted to kind of make that point.
13:50 I've also been really clear is that you're not going to be able to pick absolute bottom in any of these sorts of things.
13:55 Stocks that get cut in half can get cut in half again.
13:58 And we're seeing that.
13:59 Might we see that guy in a meta?
14:01 It's trading at $165.
14:03 I think the low in 2019 was about $120.
14:08 The COVID low was $140.
14:10 Might there be one more gap?
14:12 I think the company has been very clear about the headwinds that they have right now.
14:16 Google's another one, ad-supported.
14:18 And we know that there's a lot of headwinds with some of their businesses.
14:21 How are you thinking about some of these ad-supported web names?
14:24 Well, I mean, Google's the one that comes right to the forefront, right?
14:28 And how do you look at that?
14:29 Obviously, YouTube's been such a huge driver for them.
14:32 If you think about when they made acquisition and what YouTube has become over those many years, it's amazing.
14:38 And at the time, I think it didn't resonate with a lot of people.
14:41 Well, it resonates with everybody now.
14:43 How do I look at it?
14:44 Well, I guess, and this is going to be too simplistic, but to a large extent, Snap's pretty much a one-trick pony,
14:51 where Google, obviously, in terms of the company, has a lot more levers to pull.
14:55 But it doesn't mean they're insulated from exactly the problems that Snap faced.
14:59 The question is, what's the right valuation for a name like Google?
15:02 So for me, I'm going to look to Google to see where does the world look like.
15:07 Obviously, Facebook, there's a level of that.
15:09 There's a semblance of that as well.
15:10 But for me, first and foremost, what is Google seeing and how does that stock trade in the aftermath?
15:16 Yeah, one of the things, though, you had been pointing to Apple for, I think, a month now,
15:20 and again, you're going to look at some of these massive behemoths to kind of give a sense for just kind of the visibility that they have.
15:27 Some are more consumer-oriented.
15:28 Some are more enterprise-oriented.
15:30 We've been talking about the potential for enterprise weakness.
15:33 I think one of the themes when we came out of the calendar Q1 period is that we did not hear from enterprise companies saying the same thing about demand as we were seeing in consumer-related tech companies, right?
15:46 And so I guess we're going to get more clarity around Microsoft in that.
15:50 Talk to me about this one, Guy.
15:52 Is this the one that we should be most focused on?
15:54 Because if Microsoft confirms that there's going to be basically weakness in kind of cloud and SaaS and some of these enterprise areas here, is this the one that finally takes the NASDAQ back down through those recent lows?
16:07 Apple makes things that people want.
16:10 Microsoft makes things that people need.
16:13 So I would submit that Microsoft is probably, again, in my world, the most important company in the world.
16:19 Now, we can debate that, but that's not all that important.
16:22 To your point, their dialogue, their outlook, the language that they use is really going to tell a huge story.
16:29 And the trickle-down effect from a slowing down Microsoft is going to be, I think, pretty significant for so many different names and for the broader market in general.
16:39 So as much as I'm looking to Google on that one certain vertical of ad spend, Microsoft can tell a story for so many different things, specifically in the tech space, but outside that as well.
16:50 So I think it's crucially important.
16:52 And I think there's a conversation to be had that when nobody cared about valuation for Microsoft for so long, potentially, given what they say, everybody's going to start caring about a Microsoft that still trades at a premium valuation.
17:06 All right, before we get out of here, Guy, on Thursday, I'm going to sit down with David Rosenberg of Rosenberg Research.
17:12 We're going to break down that Fed meeting.
17:14 That's going to drop on the Friday morning on the tape that you and Danny and I are going to be on here.
17:20 What are your expectations, and what do you think the Fed, what are they trying to do with this meeting right here?
17:26 We know that, you know, I think Fed Funds futures, the CME Fed trackers pricing at about a 75% of a 75 basis point hike.
17:34 That would be the second in a row.
17:36 And then obviously, quickly, investors are going to be thinking about Jackson Hole, and they're going to be thinking about the September Fed meeting.
17:42 We're likely to see a pivot between Jackson and September.
17:45 I'm just curious, what do you think expectations are and where do you think that they kind of round things out?
17:49 I think for a lot of people, the expectations are, wait a second, commodities have sold off 35% since effectively that last CPI print, which means 9.1% might be the high print, which means we're going to see lower inflation, which means peak inflation, which means maybe hopefully they don't have to have their foot firmly on the gas.
18:08 And I think that's wishful thinking.
18:10 I think what you may hear is we acknowledge that some of the headwinds we've been facing, some of these inflationary forces have abated.
18:17 But with that said, our mandate and our task is still the same.
18:21 So I think basically what you're going to hear is, yes, we acknowledge that inflationary pressures have been diminished, but we still need to move forward with everything we put in place.
18:31 And I think the market will construe that as we still don't have that Fed put in place.
18:36 And it's going to be interesting to see how that plays itself out.
18:38 But that's just my opinion.
18:39 Yeah, well, I guess after that March meeting, we saw the market sell off into it and then rally out of it.
18:45 That was the first interest rate hike we had since 2018.
18:49 And then I think it was that June meeting that really caught a lot of investors off sides.
18:55 They were prepared for a 50 basis point hike, but then the Fed kind of floated that trial balloon that they do 75.
19:02 Stock markets started selling up hard into it.
19:04 It kept on selling off.
19:05 It reversed.
19:06 It had that huge reversal day.
19:07 But then a bottom and we got basically a one month 10 percent rally.
19:11 So who knows?
19:12 I kind of feel like they sell everything they sell into any good news as it relates to corporate earnings.
19:17 I think they sell into any perceived decent news that maybe the Fed takes their foot off the pedal on the hiking.
19:23 I just suspect we see new lows in the S&P and the Nasdaq in the next month or two.
19:28 But, you know, a guy that's what also makes a market.
19:31 I agreed.
19:32 Folks, a couple of times a month, you're going to be hearing these special off the tape broadcast as part of our new partnership with iConnections.
19:39 We're going to be hosting regular off the tape segments with members of the iConnections community.
19:45 Our first conversation, and I think this is going to be a fascinating one, is with Cormac Kinney, founder and CEO of Diamond Standard.
19:54 Diamond Standard is not only a member of iConnections, but will also be participating in their Global Alts event in Miami, January 2023, which will be the largest cap intro event of the year.
20:08 So stick around, folks.
20:09 iConnections is the world's largest capital introduction platform in the alternative investment industry.
20:17 They bring the asset management community together through a membership platform that lets allocators and managers meet and connect both physically and virtually.
20:25 Over 3,000 allocators and 600 managers are part of the iConnections community, overseeing nearly $48 trillion and $16 trillion in assets, respectively.
20:36 iConnections first came to our attention in 2020 during the first wave of the pandemic.
20:41 That's when their first event, Funds for Food, became the largest virtual cap intro event in history.
20:46 To date, they've donated nearly $2.5 million to charities.
20:49 They are also the people behind the alternative investment industry's largest and most exciting in-person events.
20:55 To find out more about iConnections events and members-only platform, visit iConnections.io.
21:01 Cormac Kinney is the founder of Diamond Standard.
21:06 With innovations cited in nearly 4,000 U.S. patents, Kinney has founded four startups acquired by public companies.
21:15 He is a quant finance pioneer who invented heat maps, designed more than 100 institutional trading systems,
21:22 and perfected sentiment analysis using it to manage $500 million for Tudor and Millennium.
21:29 As founder of Diamond Standard, he has solved the challenge of creating a standardized diamond commodity.
21:35 Transacted on the blockchain, it is the first physical and digital asset, forming a decentralized, reserve-to-asset-backed AnyDigital contract.
21:45 Cormac, unbelievable bio that we just read.
21:49 Nearly 4,000 U.S. patents founded four startups that have been acquired by public companies.
21:56 It's quite a laundry list, impressive list of accomplishments.
22:00 But let's talk about your background.
22:02 You were an undergrad student at Carnegie Mellon, computer science.
22:06 That's when probably, no pun intended, the light bulb sort of went off.
22:10 I started my first software company as a sophomore at CMU.
22:15 And it was a miracle that it got acquired by a public company, Northwestern Mutual Life Insurance.
22:21 I started my second company my junior year, and that got acquired by Oracle.
22:25 So that was it. I said, "Okay, I think I know my career path."
22:29 I loved building new ideas. I loved building software.
22:33 I loved solving things.
22:35 And I usually find something useful to work on.
22:37 And I don't have 4,000 patents.
22:39 That would be pretty incredible.
22:42 Well, I guess with innovations cited in nearly 4,000 U.S. patents.
22:46 But, I mean, for somebody like me, that's impressive regardless.
22:50 There's a lot of people who have patents, and you never hear from them again.
22:54 But my patents, I have a small number.
22:56 They get cited. Now it's over 6,000.
22:59 6,000 patents refer to my patents, which tells you, "Yeah, that was a pretty fundamental invention."
23:05 Which that's what I'm proud of.
23:07 Can you help us with a bet the guy and I have here?
23:09 Is it Carnegie Mellon or is it Carnegie Mellon?
23:12 We had this fight once, I think, because a very famous--
23:16 Who is the most famous Carnegie Mellon, other than Carnegie himself here--
23:20 I was going to say.
23:21 --that we talk about every once in a while on Fast Money Guide, Nami.
23:24 So we had this fight in the green room one day, whether it was which.
23:28 Can you help us finish this bet for us?
23:30 I always say Carnegie.
23:32 Guy owes me $10 there.
23:34 Yeah, no question about it.
23:35 So it's interesting.
23:36 Here we are, 2022.
23:38 And if you think about the way the markets are, driven by news, driven by headlines,
23:44 you obviously saw this coming, and you saw it coming anywhere from 15 to 20 or so years ago.
23:50 My question to you is--and I'd love to get a little granular here--
23:53 are you surprised at how quickly the world's come to that realization?
23:57 Are you surprised at how long it's taken for us to get here?
24:01 I'm surprised how long it took.
24:02 The evolution is--we've become disattached from valuation metrics of history,
24:11 the earnings, et cetera.
24:13 And you have to understand the potential by reading the opinion.
24:19 What do people understand that you don't quite get,
24:22 that Warren Buffett doesn't get many times?
24:25 And a lot of that comes from sentiment.
24:27 And if you can measure that, which is what I set out to do in 2005--
24:31 I was one of the first ones to figure that out--
24:34 is if you can read the crowd, it's the psychology of investing.
24:38 That's what is driving valuations more than many other things used to.
24:42 Yeah, talk to us a little bit about that in practice because, to Guy's point,
24:46 you identified that.
24:48 How would this be referred to now?
24:50 AI technology for all intents and purposes or natural language?
24:54 When you think about some of this stuff, I know a lot of, let's say,
24:56 normies like us will put it all together here,
24:58 but you wanted to use the sort of technology that you had been applying
25:02 to other processes that we just went through that got acquired by--
25:06 one of them was H.J. Hines, another one was J.D. Edwards, software space.
25:11 But you specifically went for the investment vertical.
25:15 It sounds like once you had some of these ideas underfoot here a little bit--
25:20 and why did you go straight for the investment world?
25:22 Because you thought there was just this huge gap between how traditional
25:26 investing had worked and how you saw it going forward?
25:30 The theme that ties everything together is I was always interested in huge data,
25:36 understanding data and patterns and trends.
25:39 And so the last company I started at Carnegie Mellon was Neo Vision.
25:44 And I was the first computational finance--before there was a program,
25:49 I kind of made that program, and I also built a trading floor
25:52 at the university with a couple of professors.
25:55 So I had access to this firehose of data.
25:58 We had a Reuters data feed.
26:01 And my first invention was heat maps, which you see on CNBC every day now.
26:08 That never existed.
26:10 And that was a very simplification attempt to present patterns of data
26:16 and what's changing, and your eye can react to a change much more quickly
26:20 than you can actually understand the data behind it.
26:23 And I ended up building that company, got funding from Deutsche Bank, Intel,
26:29 J.P. Morgan, and it ultimately got acquired by the Carlyle Group,
26:33 the SSEs, who they merged it into.
26:36 But I built over 100 trading floor systems, trading desks.
26:39 What I learned from dealing with hundreds and hundreds of traders
26:43 for about 12 years was that this mysterious thing called sentiment,
26:48 and that's the broad category.
26:50 The sentiment of the stock screwed up what should have been
26:54 the proper valuation based on cash flow or the earnings estimate.
26:58 And so that's when I became very interested in how can I quantify sentiment,
27:04 and that brought me back to CMU, which is a big program
27:08 in computational linguistics, as you mentioned.
27:11 And what that simply means is using a computer to read
27:14 and analyze the syntax, the semantics.
27:18 But what I learned was that that was not enough,
27:21 and this used to be a big secret.
27:23 I was running this for Paul Tudor Jones at the time.
27:26 I ran quantitative equities for Tudor for a couple of years in 2007, 2008,
27:31 which were the right years for me to be there, terrible years,
27:34 but I did very well.
27:36 It didn't matter if the news read was good or bad news.
27:41 What we detected, and it was a real breakthrough of mine,
27:45 is by looking at the word choice of the writer,
27:48 it could be the Wall Street Journal, it could be Reuters,
27:50 it could be a personal blog, you can tell based on word choice
27:55 the opinion of the writer, if it's positive or negative.
28:00 And the opinion is what drives the stock price is what we learned.
28:05 And we became experts at detecting changes in that opinion
28:09 by reading just every single bit of news that came out with a supercomputer
28:14 and measuring it distinctly for every company.
28:17 So bad news for a little biotech is very damaging
28:21 versus more bad news for Philip Morris, for example.
28:25 It's like, who cares?
28:27 No, it's absolutely fascinating, and I want you to continue that thought,
28:29 but I think a number of different things, and I'd love to get your thoughts.
28:33 Think about how important FedSpeak has become over the last three to five years,
28:39 where historically nobody was parsing through every word.
28:43 Now seemingly every word gets dissected, and I'm just curious,
28:47 did you see that iteration of effectively the system that you built?
28:52 Yeah, I was too dumb to trade bonds.
28:55 I always traded stocks.
28:57 But think about this.
28:59 Would you rather be the best expert at dissecting FedSpeak
29:03 or the best expert in understanding how people are interpreting it?
29:08 You want to be the one who knows the interpretation
29:11 because that is what leads to the action in the market.
29:16 And that's what I focused on is how are people interpreting this rightly or wrongly.
29:20 I didn't care.
29:21 I just want to be ahead of that crowd in the trades that they were about to make.
29:26 Talk to us a little bit about that because it's one thing to use the supercomputer
29:29 to analyze the data and then have all of the data from prior periods
29:33 arrive at how it will be perceived or how it will work its way into market sentiment.
29:39 But some of the stuff that you just mentioned, it could have been Paul Tudor Jones
29:42 or it could be some other guy with three initials with the word capital after it,
29:47 managing billions of dollars.
29:48 Oftentimes they make qualitative decisions about that data.
29:52 Or is the data really meant to be used as lots of traders like us,
29:56 you just said you were too dumb to trade bonds.
29:58 Guy and I have been too dumb to trade commodity stocks and options for 20 years
30:01 and we still do it.
30:02 But talk to us a little bit about how that has kind of merged into algorithmic trading
30:07 based on that data because those are two very different things.
30:11 There's a whole rules-based system depending upon whatever the inputs are.
30:16 That's really changed a lot in the last, I'd say, 10, 15 years.
30:21 A guy like me would have a system and you would trade that system
30:24 and it would work sometimes, then it would stop working, then it might work again.
30:28 And the new world of quantitative trading, people like World Quant,
30:32 which was now using my technology from millennium,
30:36 my fund went from Tudor to millennium at one point anyway,
30:39 they have literally tens of thousands of systems and signals,
30:45 and they're constantly testing them to see which ones are moving in and out of favor.
30:50 And when a signal starts to work, they just simply allocate more to that signal.
30:55 And it's a regime change of signals.
30:58 And there's really no economic thought of why this might work, why it doesn't.
31:03 It's just where does the data take me, which signal is starting to generate alpha,
31:07 I'm going to start investing that signal, and those guys can make incredible fortunes.
31:13 But it becomes an extremely high startup cost to get there
31:17 because you have to have that library of thousands of systems
31:21 that have worked at some point in history.
31:23 It's absolutely fascinating.
31:24 And what I find most interesting is how far ahead of the curve you were,
31:28 and quite frankly, continue to be.
31:30 And we're going to talk about Diamond Standard in a second,
31:32 the reason that we're effectively here.
31:35 But I just want to ask you one other question, because again,
31:38 I think COVID had such an impact on so many facets of not only our everyday lives,
31:43 but our investing and trading lives.
31:45 And you must have sat back in, again, not vindication,
31:49 but sort of fulfillment or reinforcement that your ideas were right
31:54 when you saw these message boards and how words were interpreted
31:58 and how stocks traded on the back of it.
32:00 Can you speak to that?
32:01 That actually, I think, was a devolution.
32:04 I agree with that, by the way.
32:06 But it is an iteration.
32:07 How about that?
32:08 It's like taking to the ridiculous.
32:11 You took a good idea and you make it so extreme it becomes absolutely ridiculous.
32:16 So we didn't follow private PTJ data and musings.
32:22 We only used public data that was well edited, it was published,
32:25 it was responsibly sourced.
32:27 They had to have a source for everything.
32:30 Using Twitter or something for sentiment, I think, is taken to the absurd,
32:35 where it's all manipulation.
32:37 It's people selling their own book,
32:39 and they're trying to lead you to a conclusion
32:42 and manipulate the sentiment.
32:44 And that's where I think it really started to fall apart.
32:46 So that's where you can really lose, and it's incorrect answer.
32:51 That's a really interesting point is that there's all these qualitative judgments
32:55 being made and then it's being amplified on one platform
32:58 and then a bunch of people who don't really have any experience
33:01 are kind of partaking in it.
33:02 We felt that way very clearly, and I think in hindsight,
33:06 the fact that it really only worked on a handful of securities
33:09 in a short period of time to the point devolution.
33:12 One last thing before we get to Diamond Standard here,
33:15 because I've been in the business for 25 years,
33:17 Guy has been in for, what, 35 years or so,
33:19 and I will tell you right now it's probably the most complicated macro environment
33:24 that I can remember.
33:26 And so when I think about all the different data points,
33:28 if you're just an equity investor that you have to pay attention to right now,
33:33 we're not things that, let's say, fundamental long, short equity people
33:36 20 years ago had to focus on.
33:38 They just had to get stories right, get secular shifts right,
33:40 get product cycles right, all that sort of stuff.
33:43 Talk to us a little bit about how some of these systems, though,
33:47 that we're talking about, are they leveling the playing fields?
33:51 Is some of this technology or is it just making it that much more advanced
33:55 for the institutional players who kind of have access to these sorts of resources?
33:59 Yeah, it's definitely not leveling the playing field,
34:01 and I think that's why stocks and Robinhood,
34:04 I think that's why they became that path.
34:06 It became much more like gambling.
34:08 You have that very small number of outliers that do tremendously well
34:13 because of this crowd, and it really becomes gambling,
34:17 where you're hoping for that slot machine pull that's a big payoff
34:20 and it's wonderful.
34:22 And I think that was destined to be short-lived.
34:26 I think the theme that I'm concerned about and thinking about
34:29 is the whole deglobalization, and that's going to impact
34:33 so many industries and markets so substantially
34:37 that if you can focus on getting that right--
34:39 and the problem is the timeline--
34:41 that no one knows--you can be right and be too early
34:44 and you'd lose a fortune.
34:46 So it's a matter about finding things where you can understand the timing,
34:49 and that's why the macro case is so complicated.
34:52 We all see a lot of things that seem clear,
34:56 but you have no idea of the timing.
34:58 It's very hard to build a position.
35:00 Let's talk about Diamond Standard.
35:02 I started my career in 1986 on a commodities desk.
35:05 Inflation hedges were something people threw around from time to time.
35:09 You're hearing more and more of it now.
35:11 There's obviously the great debate as to what is effectively
35:14 a great inflation hedge, not a great hedge.
35:17 Is it crypto? Is it gold, precious metals?
35:20 But you obviously took this to the next level with Diamond Standard,
35:24 and it's fascinating because, quite frankly,
35:26 it's something that we were talking about in the 1980s,
35:28 and that's clearly come into fruition now.
35:31 It wasn't possible in the '80s, really,
35:33 because you didn't have the technology to make this possible.
35:37 I have always focused on where can I get an advantage,
35:40 whether it's heat mapping or sentiment,
35:43 or in this case, financializing diamonds.
35:47 It all started with my wife. My wife is a diamond dealer.
35:50 That's what clued me into how interesting the market is
35:53 because it's a $1.2 trillion natural resource, 1.2 trillion.
35:58 That's more than all the silver, all the platinum, all the palladium,
36:01 all the rhodium combined.
36:04 All of those metals are financialized.
36:07 There's futures, there's options, there's ETFs,
36:11 and as a result, the investors of the world can use them as a hedge.
36:16 They can use them as a speculative asset,
36:19 and investors ultimately have built a 15% position in each of them.
36:25 Investors own 15% of all the world's palladium, for example.
36:30 Diamonds, at an order of magnitude more value,
36:34 investors hardly hold anything because every diamond's different.
36:38 So using my background, which was automated market making,
36:42 optimization, trading systems, exchange systems,
36:46 I realized that it was a computer science problem that we could solve today,
36:50 which is how do you turn the whole variety of diamonds
36:54 into a singular, fungible commodity?
36:57 I knew if I could do that, then we could trade it and use it as an asset.
37:01 You really thought of it as kind of like an unstructured data problem, if you will,
37:06 and that was one of the reasons why it never emerged
37:09 as one of these in the category of an inflation hedge.
37:12 Talk to us a little bit about how you standardized it.
37:15 Obviously, you're using blockchain technology,
37:18 and how important is that to it?
37:20 I know that it's funny in the investment community, you know this quite well.
37:23 There's a lot of people who are using a lot of fancy programs
37:26 to actually trade crypto assets,
37:28 and there's obviously a lot of huge computational effort that goes into it,
37:32 but oftentimes people will say it's a problem looking for a solution
37:36 or a solution looking for a problem.
37:38 It depends. I know that I just round-tripped that sort of thing,
37:41 but why did you come around to the fact that this had to be a blockchain-based solution for this?
37:47 Because the way you just started out by saying the size of those markets
37:51 versus gold, let's say, is the one that's the age-old inflation hedge,
37:56 and the introduction of diamonds into this category,
37:59 why did it have to be done the way that you're doing it at Diamond Standard,
38:03 or why did it make most sense to you?
38:05 It's a super interesting data set.
38:07 Diamonds are all different, and you have these characteristics,
38:11 the carat weight, the color, the clarity, the shape,
38:15 and they're all nonlinear, which means as a diamond gets larger,
38:19 as it gets more colorless, or if it gets more flawless,
38:22 its value goes up exponentially.
38:25 So it's a huge nonlinear data set.
38:28 Analyzing that was part of the breakthrough,
38:30 but where the blockchain came in is now that we've done that analysis,
38:34 I'm sure you've seen our commodity on our website, for example.
38:37 It's a plastic coin with eight diamonds inside of it.
38:41 It was a huge amount of work to get those eight diamonds together
38:44 because those groups in particular provide a yield curve of all diamonds.
38:49 We used the blockchain to make that public and permanent,
38:53 that we can never manipulate it, and it's the proof,
38:57 it's the certificates, it's the sourcing, the provenance
39:01 that made this one commodity the same as all others.
39:04 Number one, that's kind of the transparency that we needed.
39:08 But number two, now that we have that commodity,
39:11 we use the blockchain to trade it.
39:13 Inside of our commodity, there's a white layer,
39:17 it's a computer chip, and it's in there with the diamonds,
39:20 and that chip stores a blockchain token,
39:23 and whoever owns that token owns the commodity.
39:26 We actually have regulatory approval that if you deliver the token,
39:30 you've settled a futures contract, for example.
39:33 And so the blockchain provides this extremely efficient transaction medium
39:38 where we can trade right alongside Bitcoin on the same exchanges,
39:42 but you're actually trading a physical commodity that's sitting in a vault.
39:46 So we think it's one of the world's greatest applications,
39:49 and tokenized commodities we think are a big new play for blockchain.
39:53 Other commodities right now that are doing that,
39:55 I mean, obviously we saw what happened in the oil futures market
39:59 in April of 2020, when all of a sudden a lot of the holders of it said,
40:03 "Fine, take it." We saw what happened there.
40:05 And it's interesting with all this stuff about these stablecoins,
40:09 the collateral for them, you're basically creating the solution here.
40:13 I always find it funny, every story that you see about Bitcoin,
40:16 you see that von Bloomberg or whatever,
40:18 you see that gold coin with the B on it,
40:21 it's kind of misleading, it defeats the purpose.
40:23 But when you think about what you guys have done here,
40:26 you've taken the physical collateral,
40:29 you've basically made it, like you said, very transparent,
40:32 and you can't change the data on there because it's on the blockchain.
40:37 So where is this being custodied,
40:39 and then how do you basically arrive at a global market for this,
40:44 or is it going to be really a financialized product, if you will?
40:48 We custody at Brinks, and if you're an institutional investor,
40:51 you can custody at J.P. Morgan.
40:53 We're adding others globally.
40:55 But it's actually a little bit more than that.
40:56 There's other assets that have been tokenized,
40:58 other commodities like gold.
41:00 What that means is there's gold in a vault,
41:02 and they give you a token that represents part of that gold.
41:06 This is actually much more than that because the physical commodity,
41:10 because the chip is inside the commodity,
41:13 this is actually a node on the blockchain.
41:16 It's literally a physical and digital asset in one singular package,
41:21 which means it's not like you have a claim on a bar and a gram of gold
41:27 sitting in a big pile.
41:28 You actually own this physical asset.
41:30 It's in your name.
41:31 You can take delivery anytime you want,
41:34 and that makes it something different.
41:35 It makes it an asset that's native blockchain token that you can actually
41:41 transact and take delivery.
41:43 Not to bore you to death, but when you mentioned Providence,
41:45 it's interesting.
41:46 The last time I heard that phrase used that way was in the movie The Deep
41:50 when Robert Shaw was looking for exactly that for Jacqueline Bissett
41:53 and Nick Nolte as they were diving a wreck with buried treasure,
41:58 but that's neither here nor there.
41:59 What is absolutely here, though, is your fund,
42:02 half a billion dollars strong as I'm sitting here.
42:06 Maybe it's changed over the last couple of days,
42:08 but can you speak to the fund, the thesis,
42:10 some of the things that you're looking towards?
42:12 The first breakthrough was we've turned diamonds into an asset class
42:16 that you can invest in.
42:17 That's the foundation.
42:19 We have about 5,000 holders now.
42:22 Ninety percent of them hold their coins and bars at Brinks.
42:26 Ten percent actually take delivery, but for all of them,
42:30 they're owning a physical commodity whether they take delivery or not.
42:33 Turns out a lot of investors simply don't have a mandate to invest
42:38 in commodities, or in the case of an IRA account,
42:42 you cannot invest in commodities.
42:45 It's prohibited by the IRS.
42:47 So we formed a fund to enable IRA investors, RIAs,
42:53 wealth management companies, endowments,
42:56 funds who can't invest in commodities,
42:58 they can now allocate to diamond by investing in this fund.
43:03 This fund is convenient.
43:05 It provides custody.
43:06 It provides the trading.
43:08 It provides audit, financial reporting.
43:11 So it makes it very convenient and turns commodities into a share
43:14 that a fund can hold or a family office, et cetera.
43:18 So that's why it's taken off very quickly.
43:21 We had a huge pent-up demand from clients who understood the investment
43:25 thesis of diamonds.
43:27 Now that they're being financialized, that demand is going to drive up
43:30 the prices.
43:32 And they wanted to participate, but they really couldn't buy
43:34 the commodity directly.
43:36 How are people finding you?
43:38 Obviously, iConnections provides a tremendous platform,
43:41 but how is that organic incoming call taking place?
43:46 Well, we have a website, diamondstandard.co,
43:48 and that's where we sell the commodity and it links to the fund.
43:52 One thing we've learned is advertising doesn't work for a new concept
43:57 like this because people think it's a scam.
44:00 So we've really focused on analysts and spending the time with an analyst,
44:04 with an institutional investor especially,
44:06 and getting them to understand.
44:08 We recently, for example, got the commodity index listed on Bloomberg.
44:12 We have the data set going back 20 years now,
44:15 so that will be available for all of these quantitative modeling platforms.
44:20 And you mentioned, Guy, at the beginning, using commodities as a hedge.
44:25 We all looked for that because that increases your sharp.
44:28 I've never seen another asset like diamonds that have literally no
44:31 correlation to any other asset.
44:33 They're uncorrelated to gold.
44:35 That's a 0.1 correlation to gold.
44:38 That's crazy for another precious commodity.
44:42 So for financial engineering, we think once we have our futures
44:45 and options launched, it becomes a very, very useful asset,
44:49 like a neutral asset for financial risk management.
44:53 So since the advent of this product by you,
44:56 there's been a couple of frenzies here, if you will.
44:58 One was obviously into digital assets and the other was into inflation hedges.
45:03 So Guy, I just mentioned to you, the phone's ringing here.
45:06 Are you getting more interest of it as a digital asset that might be an
45:10 inflation hedge or is it that the underlying commodity is just so new
45:15 and now you've created a package that institutions will own?
45:20 I think individuals, it sounds like, will be able to own through futures options.
45:24 And we definitely want to talk about the ETFs.
45:27 You just mentioned the regulations as it relates to investment accounts,
45:30 and obviously that is putting a bit of a damper on probably plenty of investors
45:35 to get access to this asset class.
45:37 But I'm just curious, what is there more interest of it?
45:40 Is it just the inflation aspect or is it possibly a new digital asset
45:45 backed by something that is not like the things that have been blowing up of late?
45:50 Our first investor in our company, not in the asset,
45:53 was BlackRock Fund formed by their executives.
45:57 And back then, Bitcoin was a dirty word for firms like that.
46:00 So we decided early on not to focus on the whole crypto enthusiast world.
46:07 We really focused on institutional, let's get it on the CME,
46:11 let's get a NYSE ETF filed, which we did.
46:15 So all of our investors up until now that are allocated to the commodity
46:19 have all been macro traders by far. That's the largest group.
46:24 Macro traders, former FX traders, people from J. Aaron,
46:29 people like that who understand.
46:30 A lot of our original investors are big macro guys from those days.
46:35 I'm interested in your thoughts before we get out of here on ETFs.
46:40 I understand what an ETF will do for you in the short term,
46:44 the exposure it gives, access. I understand all of that.
46:47 But part of what you've created here is a scarcity factor.
46:52 Do you feel down the road the ETF can potentially take away from that
46:57 or is it just complementary?
47:00 It's definitely complementary. So we have a cart and a horse issue.
47:04 So we have 5,000 owners of these commodities.
47:07 We're trying to get to about 100 million in total market.
47:12 Now our fund is by significant factors increasing that.
47:17 We're having capacity issues.
47:19 We're right now building a new production facility,
47:21 which can handle about 2 billion a year.
47:24 But we also have to increase our sourcing where we get all these diamonds.
47:28 So we have to do a lot of things at once.
47:31 Most people think of an ETF as a way to access consumers.
47:35 That's not the case for us.
47:37 For us, the ETF main clients will be other ETFs, natural resource ETFs,
47:43 real asset ETFs, precious metal ETFs that want to allocate to diamond,
47:48 but really can't buy physical commodities.
47:52 Those ETFs will allocate to our ETF.
47:56 A lot of funds really can't buy commodities, and they can't have private funds.
48:00 So the ETF is really more of an institutional product in my mind than a consumer.
48:05 But all of them lead to what I think will be the major inflection point.
48:10 We need secondary trading to increase.
48:14 The ETF will cause that because it's authorized participants buying and selling every day to balance the shares.
48:22 Once there's enough spot trading in the underlying commodity,
48:26 diamonds for the very first time will be added to the commodity indices.
48:31 They've never been part of the Goldman or Bloomberg commodity index.
48:35 Once that happens, you have every single fund that allocates to the index,
48:42 every pension, every endowment, every sovereign wealth fund.
48:45 They may allocate 2% to 5% to 7% to commodities as a category.
48:50 That really means they're allocating to the index.
48:53 That trading volume gets diamonds added to the index,
48:57 gets an automated buying program implemented by institutional investors.
49:02 No, I totally understand that.
49:04 Inclusion in a Goldman Sachs commodity index, for example, would be tremendous.
49:09 Listen, clearly, Cormac, your track record speaks for itself.
49:13 I have no doubt that this will be successful as well.
49:16 I know you mentioned it earlier, but for our listeners, where can they find you the product?
49:20 Just a little more information.
49:22 The website that has where you can buy the commodity has a spot market where you can trade and you can access the fund.
49:28 It's all diamondstandard.co.co.
49:33 Thank you so much for your time. We look forward to it.
49:35 Hopefully, we'll see you on CNBC real soon.
49:38 Definitely. Thanks, guys. Appreciate it.
49:41 Thanks once again to CME Group and iConnections for sponsoring this episode of On the Tape.
49:46 If you like what you heard, make sure you hit follow and leave us a review.
49:50 It helps people find our show and we love hearing from you.
49:54 You can also email us at onthetape@riskreversal.com anytime.
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