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Risk Update: February 2022 – The Road to Serfdom & Pascal’s Wager.

“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…

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Risk Update: January 2022 – Sharpe…not so much.

Back in our May 2021 Update, 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…

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Risk Update: December 2021 – Arthur Burns mea culpa.

“An ounce of prevention is worth a pound of cure.” Benjamin Franklin, circa 1736. For those in the more advanced metric world, there are 16 ounces in a pound, or adjusted that would be “28.35 grams of prevention is worth 453.59 grams of cure.” Turns out the esteemed Mr. Franklin, like ourselves, was an advocate of convexity and compounding. His math may not be exact but, to put it in our F1 Race Car terms, he is trying to measure the contribution of the brakes. Sadly, there has been scarce advancement on this quantification over time. As Nassim Taleb puts…


Risk Update: November 2021 – Grey Swans.

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 we said “ The Fed and their mouthpieces…

crop chemist pouring clear liquid into fragile glassware in science center

Risk Update: October 2021 – “We really looked and deeply tested our analysis.”

Our June 2021 Update 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…

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Risk Update: September 2021 – The Challenge of Measurement.

“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….

gray concrete building near body of water

Risk Update: August 2021 – Self-Organised Criticality.

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. 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…

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Risk Update: July 2021 – Transitory gets the Orwell treatment.

“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…

scenic view at the banff national park

Risk Update: June 2021 – “Perhaps the real framework is anything that justifies not tightening?”

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. The esteemed Mr White, no doubt, recognizes what central bankers likely know in their gut, it is a debt…

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Risk Update: May 2021 – This time is different.

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 ( , 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:…