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…

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…

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…

“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….

“….I think we now understand better how little we understand about inflation.”  Jerome Powell. 29 June 2022 https://www.bloomberg.com/news/articles/2022-06-29/new-inflation-era-leaves-powell-and-lagarde-seeking-answers?sref=lXZ7PX1a “The longer that monetary easing continues, the bigger the side effects are, with the resulting low growth making the exit of monetary easing more difficult. The result is a vicious cycle.” “…. central banks have more or less built in the cause of the deep-seated problem.” Masaaki Shirakawa. 7 July 2022 https://asia.nikkei.com/Opinion/My-wish-list-for-monetary-policymakers-to-reflect-on It was an eventful month in the domain of monetary policy. The table below gives a quick recap across some of the major developed market central banks. As we had…

Why wait? That’s the question we keep asking our central banking friends, most particularly the laggard of laggards, the ECB. Amazingly, it almost seems as if ECB President, Christine Lagarde, heard us and hid some nuggets of such newly discovered recognition inside an otherwise long-winded mea culpa on the need to pivot away from their monetary extremism. https://www.ecb.europa.eu/press/blog/date/2022/html/ecb.blog220523~1f44a9e916.en.html ”…. it is appropriate for policy to return to more normal settings rather than those aimed at raising inflation from very low levels.” Christine Lagarde, 23 May 2022. So, finally, they admit that their policies are currently at a setting aimed at…

In her novel “The March of Folly”, historian Barbara Tuchman attributes as a quote in reference to Philip II of Spain this absolute gem – “no experience of the failure of his policy could shake his belief in its essential excellence.” It is hard to imagine a more appropriate tagline for today’s central bankers and their mad clinging to their extraordinary monetary easing largesse. We could lay the above quote clearly on each and every modern-day central banker, but none more so than Bank of Japan’s (BOJ) Governor Haruhiko Kuroda. We discussed in last month’s Update https://convex-strategies.com/2022/04/26/risk-update-march-2022/ the unique and…

When thinking about real world “tail risks” few are more frightening than food shortages and famine. Aside from the obvious direct implications, they tend to be the catalysts behind most socio-political uprisings throughout history. It is not oversimplifying to state that “price stability” or “inflation targeting”, as the core premise of central banking, boils down to this basic issue. If only they could keep that in their sights. Figure 1: UN Food and Agriculture World Price Index Source: Bloomberg The implications of the long manipulation of the global economic sandpile and its inevitable transition towards its critical state, could rightly…

“We are ready to accept almost any explanation of the present crisis of our civilization except one: that the present state of the world may be the result of genuine error on our own part and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected.”                       Friedrich A. von Hayek, “The Road to Serfdom” We have used the above quote previously to describe the behaviour and rhetoric of central bankers. For any that have read Hayek’s magnum opus, you will know that he was using it much more broadly to…

Back in our May 2021 Update https://convex-strategies.com/2021/06/17/risk-update-may-2021/, we noted that past historical spikes in CPI, similar to what we were seeing then, had indeed all generally been transitory in nature. They had also all aligned with Federal Reserve tightening regimes and subsequent equity/asset market sell-offs. We went out on a limb and opined “that ‘tightening’ is, as of now, not currently a factor, in fact quite the opposite and particularly if one includes the Fed’s balance sheet in the analysis; still growing at $120bn per month. Far be it from us to use the old catch phrase that maybe ‘this…