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Economics

How to Build Effective Economic Models – Translate to a Narrative and have Examples

a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics; and I went more and more on the rules

Decision-Making

The Importance of Precision in Language: Lessons from Sherman Kent

I have written about Sherman Kent for years as someone who grappled with uncertainty and the language we use to discuss it. There is imprecision in the words we use such a “likely” and “probable”. Sherman Kent was a professor at Yale University who was called in to co-head the CIA’s National Office of Estimates and improve their forecasting skill. Getting the chance of a bad event wrong has real effects. During his tenure, Kent wrote an important piece on the use of ambiguous words to describe our probable estimates. He worked to end squishy vague language that provided political cover for assessment authors.

Commodities

The Relationship between Financial and Real Assets is at Extremes – It Can Be Exploited

                  Correlation is not causality. Blending two variables on the same graph does not make a relationship, but there is a core link with the relationship between real and financial assets.  Financial assets are related to the future ability of issuers to generate cash flows for dividends […]

Uncategorized

Fisher on Debt – It is a Cycle and When Optimism Falls, So Will Financial Assets

…the public psychology of going into debt for gain passes through several more or less distinct phases:
(a) the lure of big prospective dividends or gains in income in the remote future;
(b) the hope of selling at a profit, and realizing a capital gain in the immediate future;
(c) the vogue of reckless promotions, taking advantage of the habituation of the public to create expectations;
(d) the development of downright fraud, imposing on a public which has grown credulous and gullible.
“The Debt-Deflation Theory of Great Depressions” Irving Fisher

Uncategorized

Things That Make Me Stay Up At Night This Weekend – From Music to Ambiguity

I have fewer concerns this week; however, there is significant risk with inflation. Inflation is growing around the world. We are pass 2% in the US by any number of measures. Let the overshoot begin. There is little reason so see the Fed changing their behavior and there is a stronger case for further money reduction around the world. The trade rhetoric is still high and there is general agreement that further trade action will slow growth, yet we continue to move down this path.

Commodities

The Relationship Between Financial or Real Assets is at Extremes – It Can Be Exploited

Correlation is not causality. Blending two variables on the same graph does not make a relationship, but there is a core link with the relationship between real and financial assets. Financial assets are related to the future ability of issuers to generate cash flows for dividends or for paying down debt. Growth in real assets are linked to the demand for resources to sustain current and future consumption.

Uncategorized

Technical and Practical Knowledge – You Need Both for Asset Management

Can anyone who has technical knowledge become a good money manager? This is a fundamental question for the quant revolution.

Uncategorized

Manage Investments Like Leonardo da Vinci – Think Out of the Box, Be Curious

I have just finished reading the insightful biography of Leonard da Vinci by Walter Isaacson. Isaacson makes da Vinci accessible as a person. HIs description really struck me. Da V+inci should not be placed on a pedestal of genius. He had a humble beginning. He did not have the schooling that others received during the period. What he did have was relentless curiosity. If you look at his notebooks or his art you will see his incredible power of observation and a mind that was not limited by conventionality.

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Bear Markets Are Unavoidable – So What Are You Going To Do About It?

How often should you expect equity bear markets? Using the global diversified MSCI EAFA index, we calculated the number of bear markets, moves down greater than 20%, and corrections, move down greater than 10%, since 1970 by decade.  (Hat tip to Ben Carlson of “A wealth of Common Sense” for providing the raw data for developing these charts.) The numbers suggest that you will get 2-3 bear markets per decade. The number of corrections or bear markets total 4 to 7. The average decline of the bear markets is variable. The 2000s decade was horrible with two bear markets more than 50%.

Uncategorized

Alternative Risk Premia Showed Varied Performance Over The Last Year

The new HFR bank systematic risk premia indices provide a wealth of information on this growing and important investment area. All alternatives risk premia are not created equal. A review of the return performance over the last year shows that there were clear winners and losers.

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2/20 Fees – DOA, Dead on Arrival – The Changing Market Structure for Hedge Funds

The film noir, “DOA”, had a great premise – a man staggers into a police station and wants to report a murder – his own. He was poisoned and had a limited time to find his killer and why. The hedge fund industry 2/20 fee schedule is dead. Some managers may not know it yet, some are in denial, but it happened and now it is just a matter of sifting through the suspects to find the killer.

Uncategorized

If You Need Something To Give You Financial Worries This Weekend, This List Will Do It.

The employment report for June was positive with both job creation strong and the participation rate higher. This is reflected in the stock market, but there are still growing clouds of economic and financial concern.

Investments

Alternative Risk Premium Indices – Providing insight on what is possible in the ARP space

HFR, the hedge fund index provider, announced a new set of indices based on alternative risk premium strategies generated from banks. This is a major advancement in transparency for investors and shows the strength in this growing sector of investing.

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