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Risk Update: April 2023 – Credibility

What role do central banks play in such philosophical concepts as “the social contract/compact” and the “consent of the governed”? That’s a pretty big rhetorical question, even for us. Central banks are either part of or, at the very least, a creation of government. Broadly speaking, they operate on behalf of the “consent” granted government to manage the creation and control of money and credit (classically speaking, inflation). In today’s world that entails, most specifically, the oversight of fiat currency systems (ie. no longer any sort of hard currency backed by, say, gold) and fractional-reserve banking. Both of those, fiat…

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Risk Update: March 2023 – Probability vs Possibility

Last month, in our February 2023 Update, “Sharpe World is Nefarious”, we posed this question: “If a bank loses money in accrual books and can continue to fund the losses with government guaranteed deposit support, does it make a sound? https://convex-strategies.com/2023/03/16/risk-update-february-2023-sharpe-world-is-nefarious/ Apparently, the answer is yes. Eventually. Way back in our August 2021 Update, “Self-Organised Criticality”, we laid out how we saw “solvency” as the core fragility of the system and how, much like with the assurances of the “well trained and equipped Afghan National Security forces”, assertions would be made as to the safety of the financial system once,…

Risk Update: February 2023 – Sharpe World!™ is Nefarious

“…being accommodating toward anyone committing a nefarious action condones it.” Nassim Taleb in the Prologue of “Antifragile: Things that Gain from Disorder”. We like to think that we live up to the principle implicit in the above quote. As regards Sharpe World!™, we will not accommodate it. We do not condone bad actions and practices in the worlds of economics and finance. In this spirit, we link the following speech by outgoing Bank of Japan Deputy Governor Masazumi Wakatabe. Deputy Governor Wakatabe is not a particularly relevant player in what passes currently as BOJ monetary policy and whose term is…

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Risk Update: January 2023 – Understanding is a Poor Substitute for Convexity

Way back in our June 2021 Update we noted the insistence of several central banks to stick with their historically extreme monetary policy settings, despite clear indication that their traditional metrics of economic circumstances were running at the hottest end of historical norms. We led off with this quote from the Poet Laureate of Economics, 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…

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Risk Update: December 2022 – Restoring Market Function

“If something cannot go on forever, it will stop.” Stein’s Law. Herbert Stein has been proven prophetic, yet again, at least as it relates to the Bank of Japan’s (BOJ) commitment to holding their 10yr Government Bond (JGB) yields at 0.25%. By now, most will be well aware that the BOJ announced at their December 20th, 2022, Policy Committee Meeting the widening of the intervention band around their YCC (Yield Curve Control) target of 0.00% for the 10yr JGB yield from +/- 0.25% to +/- 0.50%. For practical purposes, this raised the ceiling (ie. BOJ’s commitment to buy unlimited bonds)…

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Risk Update: November 2022 – Fools or Liars?

“The economics discipline prefers to remain in fantasy land, ignoring real-world experience and far more realistic theories. It’s as if the Catholic Church not merely tried Galileo, but also destroyed all knowledge of his telescope. If they had, humanity might never have escaped the Dark Ages. Mainstream economists, it seems, are happier in the dark than in the light.” Steve Keen article “The fantasy economics of the Nobel Prize”. https://iai.tv/articles/the-fantasy-economics-of-the-nobel-prize-auid-2279?_auid=2020 This is a great little article from heretical economist Steve Keen. He is considered heretical by the consensus, neo-Keynesian, mob because he advocates that the expansion and contraction of credit…

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Risk Update: October 2022 – PIVOT!™

Reminiscent of what we saw from late June through mid-August, over much of October markets had another healthy dose of PIVOT!™ (in honour of our friend Ben Hunt, we borrow his “trademark” indicator of something that has entered the common narrative). PIVOT!™ is the phrase that encapsulates the strongly held market sentiment that central bank interest rate hikes are nearing their end, presumably aligned with inflation measures topping out and commencing their precipitous declines back to target, and that the much hoped for recession is just around the corner. This, of course, will lead to the inevitable PIVOT!™ by the…

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Risk Update: September 2022 – Is “Sharpe World” Closing?

In last month’s Update, we pondered the question “what about the 40?”. This has long been a topic of our own discussions and clearly an issue that rose to the front of many people’s minds in the month of September. In the gigantic world of wealth management, we simplify down to the core premise of 60/40 as a market standard of what we commonly refer to as a “balanced portfolio”, a portfolio of 60% Equity “balanced” with 40% Fixed Income. Of course, it is just a core proxy, a skeleton framework, representing an enormous array of investment strategies that all…

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Risk Update: August 2022 – What About the 40?

One year ago, in our August 2021 Risk Update https://convex-strategies.com/2021/09/22/risk-update-august-2021/, we laid out how we look at the world through the prism of Self-Organized Criticality. That note is undoubtedly one of our most popular Updates and one that we always refer people to when they would like to understand our philosophical mindset. In that Update, which we humbly recommend you read if you have not already, we compared President Biden’s July 2021 speech (https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/07/08/remarks-by-president-biden-on-the-drawdown-of-u-s-forces-in-afghanistan/), regarding the end of the Afghanistan war and pending full withdrawal of military troops, to Fed Chair Powell’s August 2021 Jackson Hole speech (https://www.federalreserve.gov/newsevents/speech/files/powell20210827a.pdf). We said…

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Risk Update: July 2022 – The Pointlessness of Forecasting.

“Pretium iustum mathematicum, licet soli, Deo notum” Sometimes we get accused of being hard on central bankers. It is, however, not central bankers per se, nor any given particular practitioners, that ruffle our feathers. Rather, central planning and economic forecasting in general is where our criticism falls. Central bankers just happen to be the best examples of where the worst practices reside. According to their own website, the Federal Reserve employs in excess of 400 PHD economists. Hard to fathom what great schemes they are formulating. https://www.federalreserve.gov/econres/theeconomists.htm#:~:text=The%20Federal%20Reserve%20Board%20employs,and%20specific%20areas%20of%20expertise. We fall rather squarely into the Hayek and Taleb camps on this topic….