Editor’s Note:The following is an interview done in conjunction with RealWorldTrading.com. After you read the interview, talk about ithere. Brice
Hi, I’m Dave Goodboy, RealWorldTrading’s Executive Producer. Today we will be chatting with Donald Luskin.
Donald was Vice Chairman of Barclay’s Global Investors (formerly Wells Fargo Investment Advisors) one of the largest investment management firms in the world with over $500 billion under management. He was involved in the creation of the OEX index and was lead market maker in Chicago for OEX options at the contract’s introduction.
He presently specializes in providing cutting-edge research to hedge funds and money management firms via his website, www.trendmacro.com. Donalds’s current interest and expertise lays in the application of his knowledge of macroeconomic forecasting to market strategy. How politics and governmental intervention affect the market is one of his primary areas of focus. He is a media provocateur and publishes the popular web blog, www.poorandstupid.com. On the eve of the presidential election, I can think of no one timelier to interview. Let’s get started!
DAVE: Let’s first get into a bit of your history, your evolution as a trader.
DONALD: My interest started with an interest in gambling. Back in the 1970’s, I learned the skill of card counting and started beating the casinos. This was back in the single deck blackjack days; one could actually do this without being thrown out of the casino. Many of the card counters then were market makers on the Pacific Stock Exchange, which I joined in 1979.
DAVE: This was before option models become commonplace?
DONALD: The Black Scholes model was still relatively new and personal computers were still novelties. If you had real-time access and computer models back then, you were the one-eyed man in the land of the blind. The models were imperfect, but they were enough to give one a significant advantage.
DAVE: I know you involved in the creation of the OEX options in Chicago. One of my first trades was in the OEX options, so I find this part of your history fascinating.
DONALD: Yeah, those were the days. When I was a market maker on the Chicago Board Options Exchange, my business was based around certain aspects of the tax law. Those laws changed in 1984 and pretty much put me out of business.
DAVE: What was your involvement in the early days of the POSIT ECN?
DONALD: It was my idea. And I wrote the business plan for Investment Technology Group, as a unit within Jefferies & Company. It’s now a separate public company, and POSIT now does somewhere around 10-15% of NYSE volume everyday.
DAVE: Wow, I’ll say that was a success! Tell me a little about your open mutual fund MetaMarkets.com.
DONALD: MetaMarkets.com was a web site that offered a web-based mutual fund called OpenFund. It was the first interactive mutual fund. All the trades, all the positions, everything was done in real time on the Internet. The investors could talk to the portfolio manager and traders in real time. It was meant to be a fusion between online trading and mutual funds.
DAVE: That seems like a really cool idea. Is the fund still operating? What happened?
DONALD: Well, we launched MetaMarkets.com in the late 1990’s during the dot-com craze. Like the other dot-coms, we invested heavily in advertising when getting market share was the top priority — always assuming you could get more venture funding when you ran out of money. But after the bubble burst, the money dried up. In addition, public interest in the stock market took a dramatic hit. We went from being massively in favor to massively out of favor. It doesn’t take long to get crushed when this happens.
DAVE: I know exactly what you mean. I was involved in the E*Trade Media launch. I worked on their radio programming. They spent tons of money, built a monster studio in NYC, then all of a sudden, poof, they were gone.
DONALD: Yeah, it can happen fast.
DAVE: Ok, Lets jump into how you view the financial markets. What is your primary method of analyzing the market?
DONALD: My firm, Trend Macrolytics, takes a top-down approach. We apply macroeconomic forecasting to market strategy.
DAVE: Please explain this a little deeper.
DONALD: We don’t recommend individual stocks. The deepest we get into the details is stock sectors. Our primary focus is broad asset classes. The only time we even think about individual stocks is to the extent they are symbolic of the macro economy, such as, say, Microsoft. Our analysis is based on forward-looking market-based indicators.
DAVE: What do you mean by forward- looking indicators? Is there a way our audience can apply these indicators to their own trading?
DONALD: Sure, I’ll give you some examples. Right now the key to the macroeconomic picture is inflation and deflation. My partner, David Gitlitz, was the first American economist to forecast deflation, back in the late 1990s. Respectable economists never even mentioned the word then. It was thought to be impossible. But David was right. And he didn’t make that great call with the typical macro indicators like the CPI, which are backwards looking by definition. They are kind of a scorecard for what has happened in the past. They are not much good for forecasting inflation or deflation in the future. So, back to your question.