Compensation & Incentives

“Incentive structures work, so you have to be very careful about what you incent people to do because various incentive structures create all sorts of consequences which you can’t anticipate.”

This note is about the role of compensation & incentives. Specifically, those structured by the Federal Reserve & how they seem to be veering far from the mark.

Punishing the Herd

Friday’s position shift across the front-end of the interest rates curve was the single largest swing in the last 6 months by a multiple of 2.5x, bearing tell-tale signs of new shorts. As the prospect of a trade truce drove giddy selling at the lows – with most of the volume going thru prior to the Fed’s midday announcement – there was ample room for a counter-trend move, a staple of the 2019 trading diet. The subsequent reaction in the afternoon & again this morning (the latter being triggered by the inevitable negative trade headline we all have come to expect as the new normal) is nothing more than a brutal punishment of that behavioral bias most innate in all of us.