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The modern financial world could not exist without effective central banking. The foundation of this core invention is a trust in banking; a trust that a paper claim can be used as a medium of exchange and a store of value…

What experience and history teaches us is that people and governments have never learned anything from history, or acted on principles deduced from it.- Georg Hegel 1832

This is a quote heard before; however, many have not given it specific operational meaning. This is especially true for financial analysts. What is learned in history can be varied, but what is critical is accepting that what people and governments will do is often mistaken. Current motivations for action will differ from should be done if there is a close reading of history. There is a strong distinction between what people and government “should” do if they internalize history and “will” do.

I finished reading The End of Alchemy: Banking, the Global Economy and the Future of Money and came away with some useful but simple insights on the current state of finance by the author Melvyn King.

Dennis Weatherstone, the former CEO and Chairman of JP Morgan had a special approach for deciding on the riskiness of new products.  He would give the developers three 15 minute slots (45 minutes) to explain the product. His rule for approval would be simple. If the product could not be explained in the allotted time, […]

All hedge fund strategies are not created equal. Correct hedge fund classification is important. Poor classification will generate false conclusions on the skill of the manager and may deliver return streams that are unexpected. Asset allocation becomes more difficult if classification is ineffective.

September came and went with a relative whimper. It was our view that various key macro events scheduled throughout the month coupled with uncertainty over monetary policy, had the potential to produce significant moves across global markets. As it turned out..with the exception of the commodities sector…this was not the case. U.S. equities ended the […]

Risk parity has been one of the most important advancements in portfolio construction over the last decade. It places the focus on equalization of risk and not on comparing expected returns which are notorious for being difficult to forecast. However, there is a problem with risk parity. It will allocate more to low risk asset classes that may be subject to a downturn. There is no opinion on market direction or valuation. It assumes the investor has no information on individual assets or view of factor risks. Outperformance relative to cap weighted portfolio is related to whether low risk assets have returns than higher risk assets.

International finance has been increasingly confusing for academics, policy-makers, and traders. Just when you think currency markets will be well-behaved and follow theory, they will move in ways that are totally unexpected. We have always known that currencies are hard to predict given they are expectational markets. Even with perfect foresight about underlying fundamentals, our ability to explain currency is suspect. The research continues to show that currencies are hard to predict and fundamental models can only explain a small percentage of the price variation. There needs to be a deeper framework for understanding foreign exchange behavior.

Who is looking at the economic data when the US is closing in on one of the most important presidential elections in the last few decades? Of course, what presidential election has not been important? Personality polarization has driven party behavior to extremes with little focus on policy proposals. Constant change to meet the current electoral audience has created uncertainty; however, the written proposals of the candidates provide clear policy differences.

Each month we look at the major trends in market sectors to determine the current macro signals within prices and the effectiveness of trend following. Last month, our view was that monetary policy uncertainty left the markets with few clear trends. October looks like a potentially good market in the fixed income, rates, and commodities. The best market potential for October as of the start of the month is in base metals and the energy complex. Nevertheless, the trend signals in base metals are significantly at odds with bond signals and with the talking head stories that global growth will continue to be modest. Maximum opportunity and risk occur when trends are at odds with general market commentary or conventional wisdom. The energy complex is trending higher on OPEC news, but the ability for these trends to last will be subject to OPEC members holding to some production limits.

Some new research on risk parity makes provocative comments on the risk and potential value of managed futures in a portfolio. In one of our previous posts, we cited this recent work suggesting that accounting for skew can be helpful relative to a risk parity approach focused on volatility. See Messy markets, mixed distributions, and skew – […]

Was investing for the month so simple? The Fed did not take any action, albeit the threat that they are getting close, and the markets rallied for the month. Fade the Fed regardless of their speeches about wanting to move rates higher. We think this strategy may be ending in December, but right now investors were again rewarded for not believing any threats of Fed action.