Category: Uncategorized
Where are institutional investors going to put their money? Not what you think
It was a tough year for money managers. All asset classes underperformed cash and most were negative for the year. Equities were a return disaster for December. Hedge funds did not do well for the year. So what will investors do?
What are shadow interest rates telling us?
We cannot forget that the zero bound on interest rates caused distortions in market price signals. Now in the US rates are above the zero bound so it seems like the concept of a shadow rate is not important; however, it is still relevant for many other central banks and it provides a good measure of where we have come over the last few years. Using the shadow rate as a historic measure of relative tightening, we can say that the Fed has actually been on a tightening policy since the end of quantitative easing.
Just as important as Powell Put – China monetary action; PBOC on the move
One of our major themes for 2019 is that investors should more closely track monetary policy developments in China. The reasons are simple: the economy is big, its trade impact is global, and the PBOC at times has followed a monetary policy at odds with the Fed and ECB.
Facts and Stats – Some facts are interesting but not useful
The end of the year is usually filled with reviews and facts about what happened and speculation on what may happen in the future, yet investors can be cluttered with too many facts. Some facts can be very interesting and great for conversations, but that does not mean they are useful for plotting a course for 2019.
Powell Put in place after AEA comments
Every Fed Chairman has their own variation on the market put strategy; Greenspan, Bernanke, Yellen and now Powell. We can call this new one the “everything on the table” put strategy where the guidance of yesterday tells us nothing of what might happen tomorrow. This may be a reluctant put. Powell may have tried to stay the course for tightening, but a bear market can change the mind of many a well-intentioned central banker.
Strong trends across most market sectors
December was a great trend environment for those focused on intermediate to long-term timeframes. There were profitable opportunities in both equity indices and global bonds. Equity index trends flipped early in December and have accelerated albeit with greater intraday volatility. Bond trends continue on slower macroeconomic growth numbers and the perception of a more dovish Fed. Strong signals exist for short, intermediate and long-term timeframes.
If it keeps on rainin’ levee’s goin’ to break
The levee broke in December with heavy selling of equities. Long duration Treasury bonds offered protection through its negative correlation with stock but there was little to make investors happy for the year. In some cases, the entire year’s return was swiped out in one month. Some analysts have suggested that this is the first time where almost all asset sectors and categories generated negative returns.
Time Varying Alternative Risk Premia – Do You Want To Be Active Or Passive?
A big issue with building an alternative risk premia portfolio is whether you believe that it should be actively managed or whether it should just be a passive diversified portfolio. This is a variation of the old issue of whether there is investment skill with predicting returns. Investment skill is not just isolated to security selection but also can be applied to style rotation just like asset allocation decisions.
Yield Curve Inversion Hysteria – Give It a Rest
Everything you have heard about yield curve inversion is true; nevertheless, everything that is true may not harm your investments. Yield curve inversion is a good predictor of recession, and there is a link between this inversion, recession prediction, and equity declines. However, being the first to react to flattening or inversion may not win you portfolio success.
Are Risk Factors and Risk Premia the Same Thing?
There is a difference between risk factors and risk premia. This may be viewed as a subtle distinction, but it is important to think about the differences. Factors explain the return attributes of an asset. Those attributes may be either style or macroeconomic factors. Factors provide a description of what drives returns. A risk premium is what an investor receives for taking-on the risk associated with a factor. A risk premium is compensation for non-diversified risk which can come in the form of a style or a macro factor. A factor is a measurement of a characteristic. A premium is compensation for holding a characteristic. Investors want to be paid a premium for a persistent repeatable factor.
Yield Curve Impact on Asset Prices – Evidence Does Not Provide Simple Answers
Let’s just make things clear. There have not been many yield curve inversions, so analysts who want to study the behavior of asset prices during inversions have limited data. Yield curves may signal recessions which may also signal a decline in equities associated with slower growth, but the timing links are highly variable. The risk differs depending on how the question is asked.
Central Bankers as a Tribe of Technocrats – Outside the Mainstream?
Are you a technocrats or a politician? If you listen to central banks, they will say they are just technocrats or experts who do not engage in politics. To discuss political implications of policy or have politicians involved in the discussion is an infringement on a central banker’s cherished independence. Only through independence and limited oversight can central banks do their sacred technical work.
French Political Uncertainty Not Priced Effectively
The cost of being wrong with political uncertainty is significant and the impact will be felt across many markets. The yellow jacket “uprising” has already shifted French economic policy and will also affect the direction of government. We may not be extremists but the fundamental pact between the governed and government is broken which is not good for any investments.