“So I think financial markets perform best when they react to incoming data. I think the financial markets work less efficiently when they ask a question. How will the Federal Reserve react to that incoming information? The more that markets are paying attention to what’s happening in the real economy, deciding what’s good data and what’s less good data, the more financial markets can price what they believe is the most likely and what are the tail risks. Financial market prices are probably the most important source of information to guide central bankers. But when all the financial markets are doing is reflecting back what we’ve said, then we’re taking the most important source of information and we’re being blind to it.” Kevin Warsh, June 2026.
Transcript of Chairman Warsh’s Press Conference — June 17, 2026
And with that wonderful answer during his initial press conference, the new Federal Reserve Chairman, Kevin Warsh, ushered in a new era of central banking. At least we hope so. He has declared an end to forward guidance and good riddance, as far as we are concerned. It is well past time to return pricing to the markets and to return information to prices.
As Hayek referenced in his eloquent Nobel Prize Lecture Friedrich August von Hayek – Prize Lecture – NobelPrize.org, referencing the Spanish schoolmen of the sixteenth century:
“Pretium iustum mathematicum, licet soli, Deo notum.”
The mathematically just price is known only to God.
“We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based – a communication system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed… If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible… The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society – a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.” Friedrich von Hayek, December 1974.
Federal Reserve Board – Federal Reserve issues FOMC statement
Both the official statement, as well as the press conference, were a breath of fresh air, after decades of the mumbling and bumbling of Warsh’s predecessors, trying to regurgitate their highly scripted narratives in their efforts to guide the markets and influence expectations.
The entire press conference is really worth a read/listen. Mr. Warsh, at this very early stage in his new role, seems to be saying a lot of what we would claim to be, the right things. For example, he would appear to agree with our emphasis on initial conditions! To be honest, it is a bit sad that this is considered a revolutionary perspective in today’s central banking circles.
“What we’re really interested in is what’s happening right now.” Kevin Warsh, June 2026.
Of particular relevance, Mr. Warsh announced the creation of five task forces. It seems pretty safe to assume these are areas where he is hoping to orchestrate some changes from the practices of his recent predecessors.
- Communications
- Balance Sheet Policy
- Data
- Productivity and Jobs
- Inflation Frameworks
The Fed has subsequently announced the leadership groups assigned to oversee each of the respective task forces.
We may come back to these in future Updates but the one that we would first like to direct attention to, as further giving us hope that Mr. Warsh might indeed lean towards some of our own way of seeing things, is the Inflation Frameworks Task Force. We pay a great deal of respect to Mr. Warsh’s appointment of William White to this task force.
Federal Reserve Board – Inflation Frameworks
Regular followers will be aware that William (Bill) White may well be the most quoted/referenced economist in our journals. Certainly, the most favourably quoted one! We have even gone so far as to confer upon Mr. White the title of the “Poet Laureate of Economics”. We long ago lost recognition as to whether Bill, more than any other economist, accurately reflects or directly influences our own perspectives.
The beautiful thing about this appointment is that Mr. White has been, and continues to be, a prolific writer and speaker on precisely these topics (thus why we can quote him so often!). We would refer readers to his personal website for a vast library of his ponderings William White – Economist.
Of particular relevance to this specific appointment is his note just published earlier this month, “Rethinking Inflation Targeting”, and the accompanying appendix of several of his past notes, at the Institute for Research on Public Policy (IRPP). This is the first of what is rumoured to be three such notes and appendices that IRPP is publishing as an ode to Bill. We look forward, very much, to the next two fresh cover letters and collected past works. As ever, Bill lays out his thoughts with exceptional clarity and humility.
Rethinking Inflation Targeting
This note is directed at the Bank of Canada but is generally relevant to any and all modern-day central banks. Canada is no different from the rest.
Figure 1: Canada CPI Index (white). 1997 – May 2026. Fed FAIT Adoption as of August 2020 (purple). Pre-FAIT Trend 1.8% (red dash). Post-FAIT Trend 3.8% (green dash)
Source: Bloomberg, Convex Strategies
“I have been a dissenter from orthodox monetary policy beliefs for some decades, preferring empirical reality to theoretical elegance. In reality, the economy is a complex adaptive system subject to tipping points (crises) where positive feedback dynamics, particularly within the financial sector, are the principal threat to macrofinancial stability.” William White, June 2026.
Bill is a vocal advocate that economies are complex adaptive systems. He sharply disputes the simplistic models applied by the Sharpe World elites. We referenced him, yet again, in our April 2026 Update – “Unchanged” Convex Strategies | Risk Update: April 2026 – “Unchanged”.
“This gets to the very nub of the mistake central bankers (and all adherents to Sharpe World’s simplifying assumptions) continue to make. As our good friend Bill White has repeatedly declared: “They have the wrong model.” William White, more times than we could note.”
In the above note, Bill quotes Paul Volcker in a reference to the core of much of what gets covered in the note.
“Ironically, the ‘easy money’ striving for a ‘little inflation’ as a means of forestalling deflation, could, in the end, be what brings it about.” Paul Volcker, via William White.
Bill’s point is that history matters, decisions have consequences, risk is endogenous. Central bankers, as readers have heard us harp on about forever, are wrong to excuse all problems as the result of past unforeseeable exogenous events, only then to claim complete mastery over controlling an unknowable future.
Take as an example this epic comment from Bank of England (BOE) Chief Economist, Huw Pill, that we highlighted in our April 2023 Update – “Credibility” Convex Strategies | Risk Update: April 2023 – Credibility, and remember this is after the BOE had spent the last decade and a half orchestrating an unrelenting series of extreme policy measures (ZIRP, QE, etc) explicitly aimed at reigniting inflation.
“Somehow in the UK, someone needs to accept that they’re worse off and stop trying to maintain their real spending power by bidding up prices, whether higher wages or passing the energy costs through onto costumers……We’ve had a series of inflation shocks that come one after the other. Each of those shocks was transitory, but they were timed in a way that inflation never dissipated.” Huw Pill, April 2023.
Figure 2: UK CPI Index (white). 1997 – May 2026. Andrew Bailey Governorship Commences March 2020 (purple). Pre-Bailey Trend 2% (red dash). Post-Bailey Trend 4.5% (green dash)
Source: Bloomberg, Convex Strategies
Again, this appointment by Mr. Warsh is a real gift, if for nothing other than directing people’s attention to Bill’s sensational corpus of current and past works. We hold out hope that it won’t merely be educational but will also prove influential, on not just the Fed but on central bankers and economists everywhere.
As a counter to Bill’s view of things, we give you this little speech from former Fed Chair, Janet Yellen, extolling the contributions of outgoing Fed Chair, her successor, Jerome Powell.
Janet-Yellen-closing-remarks.pdf
“Powell has left the Fed sound. He has left it independent. He has left the economy, despite everything, in better condition than the challenges he inherited might have led us to fear. Those three sentences are not trivial. Together, they constitute a record worthy of this retrospective—and of our deep and genuine gratitude.” Janet Yellen, June 2026.
In this short speech, Ms. Yellen perfectly portrays our above criticisms of central banker blindness to the endogenous risk that they, as much as anyone, are responsible for. She extols Mr. Powell for having looked through the supply shocks that led to the inflationary bursts of 2021-2022, with no mention of how or if his previous policies contributed to said inflationary burst. She praises Mr. Powell for his response to the COVID shock of March 2020 but makes no mention of the accumulated fragility that made such an unprecedented intervention necessary. She credits him for his efforts to preserve Fed independence but makes no comment on the implications of the two of them, when she was Treasury Secretary, standing shoulder to shoulder espousing the forward guidance catchphrase of the time – “transitory”, while he maintained 0% policy rates and $120 billion of monthly asset purchases in the face of multiple trillions of deficits spending from her side. Was he fighting for his independence then?
Figure 3: US CPI Index (white) 1997 – May 2026. FAIT Aug 2020 (purple). Pre-FAIT Trend 2% (red dash). Post-FAIT Trend 4.5% (green dash)
Source: Bloomberg, Convex Strategies
It will be interesting to see how Mr. Powell and Ms. Yellen, and their respective tenures in the Chair seat, fair over the course of Mr. Warsh’s task force reviews. Of course, Ms. Yellen is far from alone in espousing quite the opposite of what Mr. Warsh and Mr. White would seem to be advocating. Virtually the entirety of the modern-day Sharpe World mafia is loudly criticizing Mr. Warsh’s proposed retirement of forward guidance. Obviously, that is going to be the case when you have a whole generation or two that would adhere to what we quoted then Deputy Governor Wakatabe of the Bank of Japan claiming in his farewell speech back in our February 2023 Update – “Sharpe World is Nefarious” Convex Strategies | Risk Update: February 2023 – Sharpe World!™ is Nefarious.
“The key to modern monetary policy is expectation management.” Masazumi Wakatabe, February 2023.
What hubris. We take little comfort that Mr. Wakatabe is now a key economic advisor to Japan Prime Minister Takaichi.
University of California economic professor, Brad DeLong, coined this note in support of forward guidance and enlisted comments from some other like-minded central planning enthusiasts.
(16) Is Kevin Warsh as Bad a Central Banker as He Seems? Perhaps…: TUESDAY MACRO
“By shredding forward guidance, Warsh isn’t restoring discipline – he’s deepening uncertainty”
Again, what hubris. Does Mr. DeLong honestly believe that uncertainty is mitigated by central bankers telling us it is so? Mr. DeLong, and the others that he references, would seem to believe that suppressing volatility through promises of certainty, will lead to smoother and higher growth. This is precisely our point of the utilization of Rational Accounting Man, their constructed tool of market manipulation and the very explicit target of their forward guidance. Hard code rules that define volatility as risk, put decisions in the hands of people that have no skin-in-the-game, and you will get the exact behaviour that advocates of forward guidance espouse.
“The Fed’s guiding principle in communication should be transparency in service of accountability.” Claudia Sohm, via Brad DeLong, June 2026.
What is this accountability of which she speaks? Which central bankers have been held accountable for anything?
It is unclear whether these advocates like fat tails or if they just don’t understand what fat tails are. Don’t construct a system that suppresses volatility and hides fat tails, aka Sharpe World. Create a system that prices and manages uncertainty, that adjusts and adapts to natural volatility. That system will manage against and, thus, reduce fat tails.
Here is a wonderful little note from ergodicity expert, Luca Dellana, on just this concept.
Insurance as a Warning Signal | Luca Dellanna
“The right response to unaffordable insurance is not automatically to force people to buy it, nor automatically to remove the requirement. It’s to ask what the unaffordability reveals… The stupidest thing governments and voters alike can do is to silence the signal and then act surprised when the underlying risk materializes.” Luca Dellana, July 2026.
This is what Mr. Warsh wants. He wants to know what the market knows. Not to force the market to price what Sharpe World priests think they should price.
Another one taking Mr. Warsh’s and Mr. White’s side of the argument is Stanford economist and champion of the Fiscal Theory of the Price Level, John Cochrane. It is worth noting that Thomas Sargent, a Task Force colleague of Mr. White, is also an advocate of Fiscal Theory of Price Level type views. This piece was published as an OpEd in the Washington Post. Mr. Cochrane echoes our own thoughts ever so succinctly.
(2) Warsh’s Challenges: Monetary Policy (full version)
“The Fed’s actions were backed by consensus in and outside the central bank. It was a collective, conceptual, institutional failure. The models don’t work. The forecasts don’t work. But there is no off-the-shelf alternative. Nobody really knows how monetary policy works, and certainly not with the complex technocratic expertise that the Fed pretends. Other forecasts do not reliably outperform the Fed’s… The Fed should instead act with more humility. Recognize the fog in which it is trying to steer the ship. Refrain from acting (again) based on forecasts and what-if analysis that have proved unreliable.” John Cochrane, June 2026.
Humility. How refreshing.
Unfortunately, for Mr. Warsh, restoring the efficient pricing and information quality of the risk-free yield curve is unlikely to be a simple task. As we have said before, fiscal dominance and financial repression are not the challenges of our future, they are how we have gotten to where we are today. This Medium note, and the accompanying paper, from Hanno Lustig, et al, is a wonderfully clear explanation of just this phenomenon. And makes clear why we say that Mr. Warsh has his work cut out for him.
(6) How do governments use financial repression to lower their cost of funding?
“Consider an environment in which fiscal policy makers are in charge. And the central banks simply accommodate. This is usually referred to as the fiscal dominance regime… In our model, policymakers – regulators, central banks, or the government itself – add a new tool to their toolbox: financial repression. First, governments or financial regulators can force some institutions to hold bonds… Second, financial regulators can exempt Treasurys from capital requirements imposed on banks… Third, central banks can resort to large-scale asset purchases… We conjecture that the government sticks to a financial repression rule: the intensity of financial repression – how overpriced bonds are – is governed by the size of the government spending.” Hanno Lustig, June 2026.
Spot on! We would, however, suggest that their model could be improved if they adapted their agents from being “asset market participants” and “hand-to-mouth agents”, which are already very close to our own methodology, to what we frame as “Rational Accounting Man” and “Boundedly Rational Agents”. This is a subtle but relevant distinction. In reality, what they are terming “asset market participants”, in the case of government bond markets, are almost exclusively our “Rational Accounting Man”, folks making decisions with somebody else’s capital and highly influenced by the institutional rules of financial repression. “Boundedly Rational Agents” would capture their “hand-to-mouth” agents, as well as those who independently make decisions on the management of their savings, across all scales of actual available savings. These are decision makers, in the realm of Herbert Simon’s Bounded Rationality, that are making decision based upon their own unique circumstances and capabilities. We think this gives an even truer heterogeneous agent emergent output.
We want to emphasize the point that Mr. Lustig makes as to the back-loaded nature of the losses to bondholders and leave readers to ponder for themselves how that truth might be deemed irrelevant to Rational Accounting Man and their own calendar year accounting cycle (ergodic vs non-ergodic views).
We have long argued that bonds were unprecedentedly overpriced, after decades of financial repression, and accumulating fiscal dominance along with sustained financial dominance (i.e. the financial system is so fragile you have to constantly intervene to support it), right up to the peak of the bond bubble in 2020.
Figure 4: 10yr Govt Bond Yields: US (blue), UK (purple), Germany (Yellow), Japan (light blue). Peak Bond Bubble (white oval). 1990 – June 2026
Source: Bloomberg, Convex Strategies
We do strongly agree with Mr. Lustig’s closing conclusion, and suspect that Messrs. Warsh and White do as well. The above picture would seem to concur.
“Credibility matters. That is, the credibility of the financial repression regime. If investors suspect that at some point you might abandon financial repression, then it becomes less potent as a tool, and all these effects we’ve documented are mitigated. A sudden exit from financial repression can be disruptive and would be accompanied by large drops in bond prices… In our work so far, we have not addressed the normative question of whether any of this really is a good idea. My own view is that it probably never is, except in exceptional circumstances, like a major war. It’s certainly not a great tool to deal with long-run fiscal challenges related to demographics. And in fact, financial repression often seems to lead fiscal policymakers to overestimate the true fiscal capacity they have.” Hanno Lustig, June 2026.
This all rolls into our analogy of the Hunger Games of debt issuance and the battle to get, or keep, capital in your respective domestic markets. As Mr. Lustig mentions, and as we rattle on about incessantly, this very much ties in with the demographic challenges that are key to the undergirding structural dynamic that has gotten us to where we are today.
The dynamics of the Hunger Games, financial repression, and de facto capital controls continues to rear its head across multiple points around the globe. The demographics issue is pervasive.
Here is a lengthy paper from the European Commission, entitled “Pension Reform Possibilities for Germany”, that calls for sweeping structural reforms in Germany – none of which are likely to prove popular.
Pension Reform Possibilities for Germany – Economy and Finance
“Without a sudden rise in contributors or a demographic bounce back, the equation is rather constrained: to compensate for the shrinking number of contributors and the rising number of retirees, pension contribution rates would have to be increased if pension benefits are to be kept unchanged. However, the scope to increase social security contributions in Germany is limited: the tax wedge is one of the highest in Europe, for various earning profiles and household compositions.” Balazs Palvolgyi, et al, June 2026.
Next is an article on UK pension reforms as proposed by former Bank of England stalwart, Andy Haldane, now president of the British Chambers of Commerce and an advisor to presumed future Prime Minister, Andy Burnham. According to the article, Haldane is advocating for a domestic focus for UK pension investments.
UK Pensions Should Be Invested in Domestic Companies, Says BCC Chief
“Britons’ pensions savings should be invested by default in British companies and the government should rethink tax relief where savings are invested internationally, Andy Haldane, the president of the British Chambers of Commerce, said on Thursday” David Milliken, Global Banking and Finance Review, June 2026.
Japan, likewise, very prominently vocalized their inclusion in this aspect of the Hunger Games competition courtesy of a rather surprising announcement from Finance Minister Satsuki Katayama at a regularly scheduled press conference.
Japan signals massive pension shift to domestic assets, sparking rally in yen, bonds | Reuters
“We would like to pursue measures that would encourage pension funds, including GPIF, to make substantially greater investments in Japanese financial assets.” Satsuki Katayama, July 2026.
For a fantastic review on the ubiquitous topic of demographics and Hunger Games dynamics, we refer you again to a wonderful note from Hanno Lustig, discussing the issue broadly as well as some pointedness towards France.
(1) Junior doesn’t vote – by Hanno Lustig – The Two Cents
“In countries like France, with large pay-as-you-go pension systems, the boomer generation has promised itself large payouts. Governments in these countries are struggling to keep these promises. And in order to avoid tough choices and trade-offs, these governments have resorted to issuing more debt.” Hanno Lustig, June 2026.
Figure 5: Gross Government Debt % GDP, 2024. Pension System Structure
Source: (12) Junior doesn’t vote – by Hanno Lustig – The Two Cents
We must not forget that we expanded our analogy to being the Hunger Games and Resource Wars. It is not just a competition for capital that is percolating around the globe, it is a competition for trade and the critical resources that are needed to sustain independence in the evolving complex, bifurcated, environment. Mr. Warsh’s key political partner, the one that so many seem adamant that he maintain independence from, Treasury Secretary Scott Bessent, gave a pointed speech on just this topic.
“…I detailed how the structural vulnerabilities that we allowed to accumulate over time precipitated a drift into dependence… it does compel us to know where our vulnerabilities are and to reduce them before a crisis rears itself.” Scott Bessent, June 2026.
Mr. Bessent, like Mr. Warsh, seems aware of the endogenous nature of accumulated fragility, as well as the need to attend to them before they result in crises. This strikes us as a fairly important policy speech. Mr. Bessent lays out five key principles tied to solidifying economic and national security.
- Economic security begins with national capacity: an emphasis on resiliency over cost.
- Reciprocity is the basis for durable cooperation: if you want to be an economic partner, with access to all the benefits that the US has to offer, you must play by the US’s rules.
- The US will write the rules of the evolving next economy: the new economy goes beyond the international trade of goods, in particular in the realm of financial technology, and the US will set the rules for the platforms, systems and protocols.
- Financial leadership is a central instrument of statecraft: the dollar plays a key role in overall statecraft.
- Economic statecraft must serve the American people: “America’s competitive advantage has never been confined to the bounty of our natural resources or the depth of our capital markets. It has always resided in the character and the capacity of our people…”
One can certainly see some similarities in structure from both the Treasury Secretary and the new Fed Chairman. Maybe that is because they are both to some extent proteges of legendary investor/trader Stan Druckenmiller. Or, maybe, there is an actual bigger plan of restructuring some of those long-accumulated imbalances. If you want to hear the rare, optimistic, argument that there is a broader plan, it is always worth listening to our friend Pippa Malmgren. She gave this incredibly broad ranging interview with our friends Niels Kaastrup-Larsen and Cem Karsan.
Why Optimism Could Be the Most Contrarian Trade ft. Pippa Malmgren | Top Traders Unplugged
As usual, with Pippa, the conversation covers way more ground than can be summarized here, but per our above claim we will just give this one succinct quote:
“There’s clearly a plan”. Pippa Malmgren, June 2026.
Hopefully, she is right and, if so, it has longer term benefits without inducing too much shorter term pain.
The discussions around trade imbalances are hardly constrained to the US Treasury Secretary. At the G7 Finance Ministers and Central Bank meetings earlier this year, they came out with this note – “G7 Economists Memo on Global Imbalances” – authored by heavyweights Chong-En Bai, Gita Gopinath, Helene Rey, and Axel Weber.
“The rise of excessive current account deficits and surpluses reflects increasingly unbalanced growth dynamics in China, the European Union (EU) and the United States (US). China has chronically low domestic consumption, the EU suffers from persistently weak levels of productive investment, and the US has enduring fiscal deficits that are too large relative to economic conditions. These structural divergences underpin persistent external imbalances and contribute to global tensions. These risks call for urgent policy action and not waiting for overly precise measures of excess imbalances.” G7 Economists Memo on Global Imbalances, March 2026.
They highlight that the growing imbalances have obvious implications on protectionism and national security concerns (see Bessent comments above!). As tends to be the case with our multi-lateral institutions, they softly point at the problems and even more softly propose solutions in the form of platitudes.
“In sum, reducing excessive global imbalances requires simultaneous macroeconomic policy actions in the major economies, while managing sectoral imbalances requires pragmatic trade governance, strengthened financial oversight, and enhanced information sharing and cooperation between existing international organisations with relevant and complementary mandates.” Gita Gopinath, et al, March 2026.
For a more-to-the-point analysis of global imbalances, we prefer to refer to Michael Pettis. We love his frequently made point that, if you are not setting your trade policies, then your trading partners are setting them for you.
Whose Government Should Intervene? – Michael Pettis
“In a globalized world in which governments in some major economies can intervene heavily to drive domestic economic outcomes, and in which they are also able to externalize the consequences of their domestic policies by controlling their trade and capital accounts and running persistent trade surpluses, their industrial policies effectively become the industrial policies of their more open trading partners.” Michael Pettis, June 2026.
Michael also sat down for a recent interview, this time with Alan Dunne, on Top Traders Unplugged. This is very much worth a listen.
His key point in this conversation is that Europe has no choice but to combat the aggressive trade policies of China. We are big fans of Michael, and very much share his views, in general, on the profession of ‘economists’. He responds to Alan with the wonderful description of what we would term Sharpe World economists.
“So, what I would argue is that academic economists do a very good job of describing a particular type of economy. Unfortunately, that economy doesn’t exist, probably never has existed, and bears very little relationship to the Anglophone economies, and even less relationship to the non-Anglophone economies, and are almost incompetent in dealing with something like the Chinese economy, which is a very different economy.” Michael Pettis, June 2026.
Alan pushes back, noting that economists would concede that their models are simplifications but that they can still provide reasonable and useful inferences. Michael will have none of it.
“Well, you know, the Ptolemaic model was also a simplification, but its basic assumptions were wrong. They didn’t apply to the universe. So, they ended up retarding the science of astronomy.” Michael Pettis, June 2026.
Touche!
Having furrowed our brows at the Sharpe World murmurings of Brad DeLong’s criticisms of Mr. Warsh’s ending of forward guidance, we return again to his note that we referenced much more favourably in last month’s Update – “The Erosion of Trust” Convex Strategies | Risk Update: May 2026 – “The Erosion of Trust”. In this note, “John (Hicks) the Apostate”, Mr. DeLong notes the abdication by famed economist John Hicks of much of his earlier life views on economics. In the note, Mr. Delong also provides this comment around John Maynard Keynes and his views on uncertainty.
(5) Not My John Hicks Lecture: “John (Hicks) the Apostate”
“Keynes in 1936 was writing about a world of radical, non-insurable uncertainty – a world in which investment decisions are irreversible bets on a future that cannot be known, in which ‘animal spirits’ are not an irrational departure from rational calculation but the only possible response to genuine ignorance, in which money is held not because of some friction in the adjustment of portfolios but because it is the one asset that preserves optionality in the face of an unknowable future. This is a vision of capitalism as inherently unstable, as resting on foundations of shifting expectation and herd psychology that no amount of fine-tuning can fully stabilize. It is, in the deepest sense, a tragic view.” Brad DeLong, April 2026.
This we can agree with, and no manipulations from the faux prophets of Sharpe World are going to make it otherwise.
We are nothing if not consistent in how we advocate coping with a world of radical uncertainty (the title of a book by Mervyn King, ex BOE Governor and member of Kevin Warsh’s new Communication Task Force) when it comes to one’s investment strategies. Be convex! Focus your efforts on resilience to divergences from the mean of the expectation. The average truly means nothing, stop optimizing to it. If you are worried that the current US administration, in their efforts to overhaul global trade and financial infrastructure, is going to blow up the world, then be aggressively defensive. If you think they are going to be successful in resetting the world for the next leg of growth and innovation, then be aggressively defensive, because that is what allows you to be aggressively offensive.
We discussed the concept of aggressively defensive in our so titled November 2025 Update – “Aggressively Defensive” Convex Strategies | Risk Update: November 2025 – “Aggressively Defensive”. To draw the analogy to the ongoing excitement of the World Cup, more aggressive defense/goalkeeping allows you to undertake more aggressive attacking. The key is growing resilience, in both directions, away from the middle of the pitch, not optimisation at the middle of the pitch, at the average.
Just to quickly rehash one of the hypothetical examples from that past note, we take the usual 60/40 Balanced Portfolio of equities paired with bonds and adjust its risk down, i.e. less equity and more bonds, to what we termed Defensive Balanced 40/60 (40% in the S&P500 Total Return Index [SPXT Index] and 60% in the US Treasury Total Return Index [LUATTRUU Index]. We then compare that to what we have dubbed Aggressively Defensive AGW, an adaptation of our frequently used Always Good Weather hypothetical portfolio. In this hypothetical example we load up aggressive goalkeeping, with a 50% allocation to our Long Volatility bucket (represented by our bootstrapped combo of the old CBOE EurekaHedge Long Vol Index and the new WITH Long Vol Index) paired with a 50% allocation to Nasdaq (the NDX100 Total Return Index [XNDX Index], our aggressive attacking players, aka topside convexity.
Figure 6: Aggressively Defensive AGW 50/50 (blue) vs Defensive Balanced 40/60 (red). Scattergram and Return Distribution. March2009 – June2026
Source: Bloomberg, Convex Strategies
Figure 7: Aggressively Defensive AGW 50/50 (blue) vs Defensive Balanced 40/60 (red). Compounding Path. March2009 – June2026
Source: Bloomberg, Convex Strategies
The results speak for themselves. The hypothetical Aggressively Defensive strategy has more return, on less risk. And, as we always point out, that is just on what actually did happen. It always had the potential for more upside participation, should things have gone even better, and the protection against disaster, should things have gone far worse. That is how you do it; you build around resilience, not around expectations.
As ever, the world is full of uncertainty: Warsh and his revolution in central banking, global Hunger Games and Resource War themes, unprecedented demographic challenges already carved in stone. It all leaves us where we pretty much always are, the future state of things that we don’t know is way bigger and much more important than the future state of things that we (think we) do know. Build your portfolios accordingly. Focus on what matters the most over what happens the most. Magnitude, not frequency, is what drives geometric, non-ergodic, paths.
A quality goalkeeper is not a drag on performance. It is the foundational convexity of survivability that allows the aggressive pursuit of the illusive right-tail of goal scoring. Championships are won by managing the tails, not optimizing time spent in the middle of the pitch.
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