We could sum up much of the market chatter through April as the following question: “Is it a good thing, or is it a bad thing, that Central Bank actions have thrown so much support behind markets at this stage of the cycle?” This question is posed under the premise that a “good thing”, presumably, is continued asset price appreciation and consequent further extremes of wealth segregation in societies. Does the Central Bank unlimited intervention (in both size and breadth) make this the greatest equity buying opportunity of all time? Or, is the fact ‘they’ are having to do this,…

Our thoughts on the world rarely change! Endogenous risk builds in the system over long periods of time, eventually becomes unsustainable, then corrects. Generally, everybody wants to blame the correction on some seemingly unforeseeable exogenous event and claim that it is a never before seen and utterly unknowable oddly coloured animal. The builders of the house of cards claim that they can’t be held responsible for the wind that blew it over (again). The build up of risk is forgotten, only the event is to blame. Not hard to imagine that this cycle, at peak all time global credit outstanding…

Concerns about the economic and financial implications for the spreading Corona Virus pandemic finally cracked the markets seemingly unshakeable complacency. In the last several days of the month, stock markets globally turned off their recent highs (historical highs in many cases) and fell sharply, right into the last day of February. This resulted in sharp and fast rises in the two risk factors that matter the most to any diversified portfolio, volatility and correlation. Our Volatility / Correlation “Comet” in Figure 1 shows the jump in those two factors (big white dot) on February 28th, 2020. We also highlight (slightly…

Our friends from the CME sent us this nice paper recently. https://www.cmegroup.com/education/alternative-investment-resource-center/research/alternative-investments-belong-pension-fund-portfolios.html Simply put, it is an analysis on the longer term portfolio benefits of diversifying strategies, in this case looking at replacing a portion of a traditional 60/40 portfolio with a Commodity Trading Advisor (CTA). As you are all aware, we love this type of analysis, so we thought we would see how it would look against our preferred (true) diversifier – Long Vol. The main chart from the paper compares Funding Ratios of a 60/40 portfolio against the authors hypothetical portfolio where they replace 6% of the Equity…

A certain dichotomy has come to our attention. The whole ream of senior, past and present, central banking elites kicked off the New Year with a stream of comments about the past successes and the future challenges of monetary policy. We’ve copied in a few of their quality quotes here, but would also highly recommend that you take the time to read, in particular, Mr Bernanke’s speech/paper: https://www.brookings.edu/wp-content/uploads/2019/12/Bernanke_ASSA_lecture.pdf https://www.brookings.edu/blog/ben-bernanke/2020/01/04/the-new-tools-of-monetary-policy/ The gist is, everything they did to save the world post GFC worked. None of the nasty side-effects came to fruition, with “the possible exception of risks to financial stability”. Further,…

We suspect most of you have heard quite a lot lately about something along the lines of “monetary policy is running out of its potency, so it is time for the fiscal side to step up”. We certainly have. The, deemed obvious, solutions run the gambit of traditional fiscal stimulus, to helicopter money, to something called Modern Monetary Theory (MMT), but in the end it all amounts to more or less the same thing: somehow additional government spending, whether financed by debt or otherwise, will set economies on their elusive sustainable paths. We found the linked piece below from Beijing…

As any regular readers will know, we are passionate about what we do and, along the way, hope we can also change how people think about fiduciary management of other people’s money. It sounds relatively straightforward, but there are multiple things that add up to one overriding problem, what we would call “bad convexity”. Most often we distil that to what we see as a simple truth; fix your convexity – change your life. We have previously shown the below hypothetical return profile, and the impact that such concavity has on long term geometrically compounded returns. The impairment to terminal…

With ever greater extremes in global monetary policy, what some might call currency debasement wars, and the resulting unprecedented historical lows in interest rates the world over, it is tempting to write a piece on the structural damage that is being done to society: the pulling at the thread of socio-political stability as wealth segregation reaches breaking points in country after country. Instead, however, we will go back to our bread and butter, and pull together some of our past work on portfolio strategy and expound further the ever-increasing benefits of strong risk mitigation, and the ongoing supremacy of “barbell”…

As widely anticipated, the Federal Reserve cut the Fed Funds rate by 25bp on July 31st. In the official statement they claimed that they did so “in light of the implications of global developments for the economic outlook as well as muted inflation pressures”. The Fed also announced that they would cease the balance sheet reduction exercise immediately, two months earlier than previously targeted. Hard not to come back to what we quipped last month – “ten years of extraordinary monetary accommodation and all we got was this T-shirt”. By some accounts, we are now in the longest US economic…