Risk Update – June 2020

‘Really it’s about getting the labor market back and getting it in shape. That’s been our major focus. I would say if we were to hold back because…we think asset prices are too high, others may not think so, but we just decided that that’s the case, what would happen to those people? What would happen to the people that we’re actually, legally supposed to be serving? We’re supposed to be pursuing maximum employment and stable prices, and that’s what we’re pursuing.‘     Federal Reserve Chairman Jerome Powell, June 10th 2020. Not an unusual sentiment from policy makers, but is it…

Risk Update – May 2020

We’ve written a fair bit about China’s prominent role in the build-up of endogenous risk during the global growth cycle since the GFC. There are any number of ways of trying to reflect it. A chart we used last month gives a clear impression of China’s importance in terms of credit creation over the last cycle. In the March monthly, we used one of our regular views, China FX reserves to M2 money supply. Back in the December 2019 monthly, we showed some graphs from IMF and World Bank reports. This one shows the rates of change of Debt/GDP going…

Risk Update – April 2020

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,…

Risk Update – March 2020

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…

Risk Update – February 2020

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…

Risk Update – January 2020

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…

Risk Update – December 2019

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,…

Risk Update – November 2019

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…

Risk Update – October 2019

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…

Risk Update – September 2019

Ever lower interest rates is the answer. Nobody seems to know, or care, what the question is. Both the Federal Reserve and the ECB dialled up their monetary easing in the month of September with rate cuts and renewed balance sheet expansion, with seemingly little concern for the success of such policies to this point. Whatever it is / was that they hoped to achieve from years of unprecedented monetary extremes, they apparently have yet to achieve it. Their only answer is simply more of the same. We have discussed before the concept of the “Reversal Rate”. The concept that…