Risk Update – September 2020

https://www.institutionalinvestor.com/article/b1nhg4w9k5hjp0/Nassim-Taleb-and-Universa-Versus-the-World Above is a link to an entertaining little note which echoes conversations that we have every single day, including past ones with the very antagonist of the story. Our experience in said discussion would lead us to agree with the comment in the article that “Meng, like many finance professionals, also never understood tail hedging”. We have a certain degree of empathy to the concept of it being us versus the world. We talk about it over and over, it is geometric compounding that matters to the end capital owner. The two relevant ingredients, in a recipe to maximize…

Risk Update – August 2020

“The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.” (bold highlights added by us) https://www.federalreserve.gov/monetarypolicy/files/FOMC_LongerRunGoals.pdf So reads the opening paragraph to the “Statement on Longer-Run Goals and Monetary Policy Strategy”. The original…

Risk Update – July 2020

A Reuters article mid-month titled “Global debt hits record high of 331% of GDP in first quarter: IIF” got us thinking a bit.https://www.reuters.com/article/us-global-debt-iif/global-debt-hits-record-high-of-331-of-gdp-in-first-quarter-iif-idUSKCN24H1V5 In a world with that much debt outstanding, that has just gone through an unprecedented negative GDP shock (Figure 1), what choice do policy makers have other than extreme financial repression? We’ve written a lot about the explosion of Central Bank interventions in markets, and the increased accompaniment of fiscal side stimulus, sort of de facto shifting a significant portion of the world into some form of Modern Monetary Theory (MMT), which as we always point out…

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,…