This isn’t intended as a rant against the practice of diversification – nothing could be further from the truth. But, like all popular investment tools, there’s a mythology that’s been created around modern portfolio theory to suggest a panacea to cure all ills. It’s peddled as a fairy tale that ends with investor & portfolio happily ever after – together on a horse, riding off into the sunset. My argument is that the benefits of diversification depend on having appropriately calibrated priors. And when those priors are dramatically altered, it’s time to reassess – not double-down.
The Fed now spends over 1/3 of its time talking about financial markets in the minutes. That’s more than trade, monetary policy & employment combined. This unhealthy obsession is a distraction – and it’s guiding the market in a dangerous direction.
A 4-sigma event would be expected to happen once or twice in a trading lifetime – according to the most popular VaR-based risk models. We’ve seen 10 of those this month in Treasuries. What we should have learned from the GFC has been all but forgotten. What the market had considered to be impossibilities (or at least highly unlikely…) is quickly becoming the norm.
From what’s priced in to curve inversion to term premium. Here are the 5 things every trader needs to know about the rates market…
There’s a pattern & predictability to tides that make them easy to forecast. But, on very long timescales, that doesn’t mean they are constant by any measure. At a celestial level, the amount of force produced depends on the mass of the objects involved, the distance, the eccentricity of the orbits, and the radius of the bodies – for starters. The push & pull that’s observed in financial markets is analogous: different assets exhibit similar ebb & flow as correlations oscillate.
I mentioned this morning that the options market was beginning to make some pretty exceptional progress on the way to pricing in 50bps+ at the September meeting. What’s even more significant, in my mind, is what the market has done to the odds of additional easing in 2019. We’re now 1 in 5 odds that the Fed delivers an additional 100bps by year-end.