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The Office of Financial Research (OFR) Financial Stress Index is not showing any signs of a problem in financial markets albeit conditions worsened in February. It is notable that all sectors, credit, equity, funding, safe assets and volatility are closer to post Financial Crisis lows than the spikes in 2011 and 2016. Of course, the construction of the OFR stress index only includes financial spreads or price information and no fundamental information. Prices may lead economic financial stress and can be a cause of stress but it does not tell us about the drivers of financial pricing.

I have been one of those “if you cannot measure it, you cannot manage it” types. Most quants are like this, but there are limits to measurement or trying to fit qualitative characteristics into a measure. Difficulty does not mean that attempts should not be tried. Most will admit that measurement is very useful in some areas of study but have to be more tempered in others. Jerry Muller, in his book The Tyranny of Metrics, explains the potential problems of a culture that focuses too deeply on measurement. This is a good counter to the always measured to manage crowd.

A focus of global macro investing is looking for general factors which can have an impact across markets and countries but are displayed slowly in cross-asset relationships. Macro traders watch closely global and local financial conditions such as monetary liquidity as good indicators for potential switches between risk-on and risk-off environment. They also look for changes in credit conditions as a signal of potential shocks across local financial markets.

How do you classify global macro firms? There are a wide variety of hedge funds that call themselves global macro so a classification scheme may help distinguish possible return patterns.

Most investors cannot clearly articulate why investment management is so hard.  There is the superficial response that it is hard to beat a benchmark, but there is less discussion on why. Of course, costs are very relevant but the difficulty is also associated with the environment faced by investors.

I have been studying the impact of futures on cash markets for decades, so I was very interested in the new short piece of research, “How Futures Trading Changed Bitcoin Prices” FRBSF Economic Letter 2018-12 May 7, 2018 that was published this week.

Simple frameworks are effective with global macro investing. They set the tone for discussion and focus attention on the big issues. Look at the monetary/fiscal policy mix across countries to get a good feel for macro imbalances. These imbalances tell us something about current growth and future policy. Policy gaps are intended to close output gaps.

“Narrativeness” may be defined as the quality that makes narrative not merely present but essential. It comes in degrees, and there are narratives without narrativeness. Since the time of Leibniz, Western thought has favored models in which abstract scientific laws would ideally account for everything in nature and society (the ideal of a social science) and in which narrative would therefore be, at best, merely illustrative. But a number of thinkers have presented forceful arguments that such an ideal of knowledge is a chimera. Darwin, Dostoevsky, Tolstoy, and others have insisted in the ineluctable need for narrative because genuine contingency exists and time is open.

I came across in some old papers the Toyota Industries solution to finding the root cause of problems, the 5 whys. It is a simple and useful tool. Sakichi Toyoda, the father of Toyota Industries, developed this technique to solve manufacturing problems, but it could easily be applied to any investment problem or due diligence issue. Ask why five times.

There could be a desire to look for special patterns within April performance, but the only clear theme is the risk associated with holding bonds during a rising inflation expectation and tightening Fed environment. These issues spill-over to the dollar which affected affects the performance of international stocks.

Most hedge fund strategies were positive for April, but the average return was less than 50 bps. There were two negative outlier strategies with fundamental growth and merger arbitrage. Generally, the higher monthly volatility and dispersion created a mixed environment for return generation. Year to date returns suggest that it has been a difficult four months for most managers with average loses much larger than the average for the winners and only 7/19 strategies producing positive returns.

Our sector trend indicators, a combination of different trend length directions added across markets within a sector, show some significant changes from last month. This represents opportunities for May but also why some managers showed mixed performance for April.

Call it the revenge of the safe asset. Bonds, especially on the long-end, continue to see a sell-off on a surge in inflation and the continued view that the Fed will not change their rate hiking program. This decline has been coupled with generally weaker performance in equities which has led to higher correlation between equity and bonds. The correlation measurement, which is backward-looking, still is negative between stock and bonds but it has risen from previous lows. This increase reduces the “safety” effect associated with bond diversification which has been the “free lunch” for many investors. This will be a growing problem if it continues. Investors will have to make portfolio diversification changes.