Archives
Gold – The Asset We Often Use To Project Fear and Optimism
Gold is hard to understand as an investment. Sometimes it behaves like an inflation hedge but at other times it does not. Sometimes it responds to the real cost of funds, and sometime it does not. It can serve as a safe asset, yet it has sold-off in a crisis. It can be the uncorrelated asset of frustration, but a longer examination tells us about investment deep investor expectations. Gold, over the last decade, can be viewed through three major themes.
The Two Disconnects of 2018 – Market Behavior Versus Politics and US Versus International Equities
What can be called the twin disconnects of 2018 have continued this summer. There is the disconnect between market and political behavior. If you read the newspaper headlines, you would think there is government confidence crisis in the US, yet if you plot market activity, any investor would suggest the economy is in great shape. There is also the disconnect between US market activity and global market behavior. 2018 is shaping up to be a great year especially for small cap and growth benchmarks that are both up double digits with August again showing strong performance. Global and emerging markets, both equities and bonds, are sickly.
Judgment and Experience – A Recipe for Success for Any Strategy
Each situation requires a balancing derived from judgment and arising from experience, skills acquired by learning from the past and training for the future.
Dollar Doom Loop – Why A Stronger Dollar Today Means More Financial Trouble Tomorrow
The Financial Times suggested that there is a “Dollar Doom Loop” facing the Fed. Perhaps a little dramatic with the “doom loop” analogy, but not as bad as “death spirals” or “Wile E. Coyote moments”, this story sets the tone for what may be one of the biggest problems not being looked at by most investors. Risk is really volatility or price moves times the exposure to the price change. As the dollar denominated global debt exposure increases, there will be more global risk for any change in rates.
The “3 By 5 Card” On What Investors Need To Know About Yield Curve Flattering
There has been a growing focus on the yield curve and the threat of recession. If you don’t believe me, look at the number of web searches. The interest is high, but all that you need to know can be placed on a 3×5 card. Investor interest in the shape of the yield curve should be high, but that does not mean a recession is around the corner.
Economic Data Sausage-Making And Why Prices Are Primal
Most top-down and global macro managers follow all of the macro data announced each day. They will compare data across time and countries to understand relative economic performance, but when they go back to basics to understand how data are constructed, they will usually get a very uneasy feeling. How much noise is in this data?
“Tell Me Why You Lost Money This Quarter?” – Asking Questions Is A Skill
I ran into a good friend who is a hedge fund analyst in the lobby of my building. “Cannot talk, have to run to call some managers and get their updates. Let’s do lunch next week. See you.” Coming from a quant background, I am always interested how other analysts question managers. I get nervous that I am going to fall in love with the manager’s narrative if he is a good talker, that I am not going to ask the right question to extract their secret value, or that I am going to be turned-off by the poor speaker without truly hearing his message.
Charlie Chaplin, Beauty Pageants, and the Consensus
“Charlie Chaplin once entered a Charlie Chaplin look-alike contest in Monte Carlo and came in third; that’s a story.” – Movie line from “Lucky Number Slevin”
This myth has been out in the public since the before the 1920’s. It has never been verified or reported as being true in any Chaplin biography, yet it continues to hold the attention of many when it is heard. It provides a cautionary warning about how we perceive in competitive group dynamics. Call this a variation of the Keynes beauty pageant story.
When Inflation Moves Higher – What To Expect With The Stock-Bond Correlation
The single largest diversification play for investors over the last two decades has been the strong negative correlation between stock and bonds. There are portfolio managers and investment analysts who have spent their entire career under the negative stock-bond correlation advantage, yet times change. Finance’s greatest “free lunch” is not a one-sided bet. Older managers can impress young analysts even in their forties of old tales of “back in the day” when stocks and bonds moved together. Some may argue that elders who talk of this should be retired and just let the new guys run things, but investors should discuss and prepare for alternative equity/bond environments.
Understanding the Role of Inflation Beta in Commodity Investing
There is a correlation between commodity investing and inflation. Commodities do well late in the business cycle when bonds usually underperform, and inflation is heightened. Research work by PIMCO measures the inflation beta for some significant asset classes. Stocks have a negative inflation beta even though earnings should rise with inflation. Bonds as nominal assets […]
New Research On Loss Aversion Is Causing Me To Think Deeper – Worth A Closer Look
I have been a close follower of behavioral economics research. This broad research is insightful and has caused me to think deeper about how to make better decisions. It has certainly reinforced my belief that using algorithms to make decisions is better than discretionary judgment. However, I have read a series of recent papers that have caused me to take a closer look at some of the core behavioral beliefs that have been established in this area. See the work of Dan Gal and Derek Rucker in the Journal of Consumer Psychology and the recent article in the Observation Section of https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3049660
Steve Einhorn’s Checklist For A Bear Market – The Five Things You Need To Review
Recent interviews with Steve Einhorn, the long-time hedge fund manager, provides his checklist for when a bull market may turn into a bear market. It is not supposed to be a definitive forecast, but a good simple indication when conditions are ripe for a change. See Boyer Blog and Barron’s .
BIS Checklist For Financial Downturn – The Four Things That You Need To Watch
Reading the Bank of International Settlements (BIS) annual reports and the speeches of Jaime Caruana, the BIS General Manager, who finished his term at the end of last year, I formed a simple checklist of the recurring themes he has focused on in his work. For the last few years, he has emphasized four factors which he closely watches to determine whether there will be a financial downturn: