Most will by now be aware that both the Federal Reserve Chair, Jerome Powell, as well as the US Treasury Secretary (a former Federal Reserve Chair), Janet Yellen, have officially announced the retirement of the word “transitory” in terms of how they describe the, now deemed to be “persistent”, rises in their various price measures, eg PCE and CPI. We have been mocking their ongoing use of the word “transitory”, in their justification of maintaining all-time extreme levels of accommodation, going back to early this year. In our April 2021 Update https://convex-strategies.com/2021/05/21/risk-update-april-2021/ we said “ The Fed and their mouthpieces…

Our June 2021 Update https://convex-strategies.com/2021/07/23/risk-update-june-2021/ led off with what must surely be dubbed the “Quote of the Year”: “The Fed says it will no longer react to anticipated higher inflation but only to actual higher inflation. Yet they are failing to react to actual higher inflation because they anticipate it will decline. Perhaps the real framework is anything that justifies not tightening?” Bill White; Financial Times, June 28, 2021. If you thought that Bill’s quote rang true back in June, you’d be ready to carve it in stone after what we saw in the tussle between central banks and the…

“Mainstream economics is replete with ideas that “everyone knows” to be true, but that are actually arrant nonsense.” Jeremy Rudd. Federal Reserve Board. September 2021. We don’t often go looking for valuable insights from papers originating out of the Divisions of Research & Statistics and Monetary Affairs of the Board of Governors of the Federal Reserve. However, when an author leads with the above opening line, it will certainly get our attention! We’ve linked in Mr. Rudd’s paper, entitled “Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)”, and highly recommend giving it a thorough read….

Like many, our attention this month was drawn towards a non-market related set of events. The US 20-year war in Afghanistan finally came to an end. What really got our attention can be visualized by the time-lapse map embedded in the BBC link below. https://www.bbc.com/news/world-asia-57933979 For ease, we’ve cut and pasted a series of the maps in succession. Their nature is self-explanatory. Figure 1: Time-lapse of Afghanistan Provincial Control 2021 Of no surprise to those familiar with the concept, the dynamics around the culmination of the US war in Afghanistan perfectly displayed the characteristics of self-organized criticality (SOC), aka ‘sandpile…

“Not merely the validity of experience, but the very existence of external reality was tacitly denied by their philosophy. The heresy of heresies was common sense.” George Orwell’s 1984. Once again, we feel obliged to throw in a quote from Orwell’s 1984. We might go so far as to make the claim that Orwell, way back in 1949 when he wrote 1984, did a better job of forecasting what a July 2021 Federal Reserve press conference would sound like, than the Federal Reserve did in forecasting changes in their chosen price index from just one month previous. In classic Orwellian…

We absolutely must open this month’s Update with a wonderful bit of prose submitted to the Financial Times from our favourite poet laureate of the economics fraternity, Bill White. “The Fed says it will no longer react to anticipated higher inflation but only to actual higher inflation. Yet they are failing to react to actual higher inflation because they anticipate it will decline. Perhaps the real framework is anything that justifies not tightening?” Bill White; Financial Times, June 28, 2021. https://www.ft.com/content/d313dc26-b87c-459d-86db-ac27f652693d The esteemed Mr White, no doubt, recognizes what central bankers likely know in their gut, it is a debt…

One of our old sayings, dating back to pre-Asian Crisis days, is that when you have positively convex portfolio construction, “more risk is less risk”. We can put this many ways. It is not the forecast, but rather the payout that matters. It is not “x”, the uncontrollable outcome of the underlying, but rather f(x), your exposure to the outcome, that matters and that you can control. Back in our December 2020 update (https://convex-strategies.com/2021/01/22/risk-update-december-2020/) , we touched on this concept and used Jensen’s Inequality to visualize the differing payout functions of a Volatility Swap versus a Variance Swap. Figure 1:…

A question we often get asked, as we discuss building convexity into investment portfolios with large Pension Funds/SWFs/Insurance Companies/Endowments/Banks, is something along the lines of “How much can we realistically do? Can we do enough to make a difference?”. The honest answer is plenty enough to make a major difference! In last month’s update https://convex-strategies.com/2021/04/16/risk-update-march-2021/ figures 10-17 showed the nearly identical concavity of a range of familiar investment strategies. We observe, regularly, how the near universal incentive around short-term arithmetic returns, conveniently paired with flawed risk methodologies, leads unsurprisingly to fiduciaries in all forms targeting the mean of short-term probabilistic…

Not so long ago, there was a Federal Reserve Chairman by the name of Paul Volcker, who was preceded by William Miller and, before him, Arthur Burns. We will leave it to readers should they like to dig up and read the history of these gentlemen but suffice to say they were the chaps that had to deal with the initial aftermath of Nixon’s de-pegging of the USD from gold, which ushered in the post-Bretton Woods era of a pure fiat-based currency system. Burns and Miller presided over the greatest spike in CPI, thus far, in modern US history. CPI…

Last month we touched on how the misrepresented risk underlying short positions in GameStop led to sufficient dislocations to feed through to a correlated impact on overall equity market volatility. Interestingly, we had a similar, if seemingly unrelated, incident at February month end as the grind higher in global interest rates triggered sufficient volatility to feed through to equity market volatility. Positively correlated movements in bond and equity prices, as well as volatilities, has, as we seem to endlessly discuss, potentially dire implications for a preponderance of portfolio management strategies and is what leads us to dub “rates can’t go…