Category: Managed Futures Education

The McKinsey Global Institute published a new report, Rising Corporate Debt: Peril or Promise?, that is good reading for anyone focused on global debt issues. The charts and tables provide a wealth of data.

Investors do not know the impact of different alternatives in history. In fact, history is subject to discovery and this process of historical discovery is subject to biases as we try to sift through facts.

In the midst of any foggy economic phenomenon, it’s difficult for an industry to really assess how it’s being affected. But with time comes clarity, and it’s now possible to look back on the past eight years of Fed policy and draw broad conclusions about how Quantitative Easing actions created headwinds for investors in the managed futures space. Crucially, these conclusions give us a reason to feel optimistic looking toward 2017 and the return to a world of abundant, varied trading opportunities.

We have been meaning to write an in depth report on central bank policies for some time and the market responses to recent BoJ policy decisions as well as the Fed meeting and press conference this week have nudged us to make a start. Below are some initial thoughts on how good central banks are in their forecasts and where they may take us in the future. We don’t mean this to be a rant, but it’s hard to discuss central banking politely when they have been so ineffective, when they refuse to accept they have been incorrect and they refuse to fully acknowledge the full unintended consequences of their hugely experimental policies.

The most obvious and immediate European problem is the UK’s Brexit vote on 23rd June, and momentum has clearly swung away from the remain camp in the last two weeks. What was seen as only a minor risk for financial markets has quickly become a huge potential risk and prices have begun to adjust. In our opinion, this is not just an issue of migration but a problem of the average man on the street simply does not feel that their lives have improved materially since the Global Financial Crisis. There are a huge number of voters who feel completely disaffected and simply want change. This is not an issue unique to the UK. Huge numbers across Europe and the US are in the same boat and the risk of a series of anti-establishment votes in the next year or so is growing.

After a truly disappointing US employment report, the market has priced out any rate hike in coming months, with only slightly more than a 50% probability of one rate rise by year end. In our opinion, Janet Yellen has always been a lot more dovish than a number of her colleagues and will not want to raise rates now. So, either the Fed ignores the poor US employment report (and the continuing weakness in the manufacturing sector and corporate profitability) and raise rates anyway, thereby risking upsetting the financial markets. Or, they shift back to a more dovish narrative, risking their credibility.

The general rule of thumb in equity investing is that you do not Fight the Fed, and there is a lot to be said for that thesis. Naturally, one has to respect the idea that higher rates provide more competition for equities in the traditional equity/bond portfolio, and vice versa when rates are low. I have actually spent, who knows how many, hours trying to model equities vs interest rates and I learned several lessons in the process. Primarily that rates high and rising are indeed not conducive to higher equity prices. However, rates low and rising are not as reliably equity unfriendly. And one can make a case that rates Low and rising are initially actually very good for equities. My studies suggested a high correlation between equities and rates when rates were high, not as much when rates were low.