QExit?

28 Apr

In the spirit of Brexit and Frexit, Central Bankers are now intimating that we may approaching the uncharted waters of QExit. The Fed has begun to make overtures to the markets regarding the normalization of its balance sheet, leaving everyone to speculate as to what a shift in the composition of said balance sheet may look like. Having said that, some at the Federal Reserve are also expressing concern that a re-normalization of the balance sheet might leave it vulnerable to an external global shock. Given that our sitting President is a “low interest guy”, any destabilizing move by the Fed would most likely be met with substantial political fallout, or a series of angry tweets at the very least. In short, while the Fed may allow some recomposition of its balance sheet due to  simple portfolio runoff, don’t expect any major shifts forthcoming.

Navigating A Driverless World

20 Apr

The advent of driverless cars has gotten me thinking about the shifts that have occurred in the investment world over the past 9-10 years. The movement towards alternative forms of Central Bank policy perfectly coincided with the movement towards more and more algorithmically driven capital allocation decision making. The “New Normal” not only involved much lower levels of interest rates and market volatility, but also a de-emphasis on  heretofore tried and true historical investment metrics. The global oil market is a perfect example of one sector of the global capital markets where traditional fundamental analysis has been rendered somewhat moot. Prior to the advent of the financial crisis, one might  attempt to project the future price of oil using global supply and demand per barrel numbers combined with some assumptions about rates and relative exchange rates. An analysis of the oil market today however would involve a much different set of underlying metrics. Today, it might not be much of a stretch to say that the price of a barrel of crude is driven primarily by technology and interest rates/relative exchange rates. Therefore, in some sense the price of crude is being less driven by pure fundamentals and increasingly more by what have traditionally been only ancillary factors. Evidence of this can be seen in a number of spread relationships which currently reside at multiple standard deviations away from their historical average.

Pick Your Donald

6 Apr

During the Iraq war, Secretary of Defense Donald Rumsfeld, in response to a question regarding WMDs remarked” because as we know, there are known knowns; these are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. These are things we don’t know we don’t know.  I’m not sure why, but I love this seemingly nonsensical quote. Perhaps because if you really think about it, there is a tremendous amount of truth behind that statement. Unfortunately in this instance however the statement was being utilized to back up some serious “un-truths”.  Fast forward to 2017 and we still have a Donald (Trump) struggling with knowns and unknowns, primarily within the realm of 140 characters or less. There is no introspection with this Donald however and the only unknown in this Trump reality show is what version of the facts will be on display. While political theatre can be entertaining, our primary goal as an asset allocator is to distill an investable thesis from this sideshow.  Perhaps an analysis of that other institution currently struggling with knowns and unknowns,the Fed, can give us some guidance as to what the immediate future may hold.  The Fed’s( and other Central Bankers) version of reality is similarly skewed in that it doesn’t know what it thinks it knows, does’nt actively seek answers to that which it doesn’t know and is wholly unconcerned with unknown unknowns (black swans).   In light of the populist ground swell in the United States, France, and the U.K., Central Banking is firmly ensconced as the only ” adult in the room”. One might argue however that as the political landscape becomes much less benign, pressure will mount for Central Bankers to address issues involving geo-political friction e.g. Trade. The necessity to address  new problems in an increasingly Balkanized world may require the use of new monetary tools. While we may only speculate on what these new tools may involve, rest assured that further attempts at stability will only lead to further instability across all global financial markets.

Don Yuan

12 Mar

President Xie of China will hit the links with President Trump in April and we would love to be a fly on the wall in those conversations. Our president has not hidden his contempt for alleged unfair trade practices and has also discussed a potential “deal” involving a future haircut on Chinese U.S. debt holdings. President Xie should take some comfort in knowing that he is punching below his weight as the Donald recently called the National Security Advisor at 2 am to question whether we should be pursuing a strong or weak dollar policy ( spoiler alert: the NSA chief commented that he was not the person he should be consulting on economic matters). The bottom line is that with all this rhetoric regarding the imposition of trade tariffs and border taxes, the concept of on-shoring has once again come to the fore. It is interesting that these discussions are taking place at the same time that financial markets are experiencing unprecedented levels of complacency as measured by capital market volatility. Perhaps those in the capital markets should take note that the environment that has produced low levels of volatility( for the most part) was partially predicated on seamless flows of global capital.

Perception Trumps Reality

21 Sep

The ascent of Donald Trump suggests the all is not well with the general electorate. We suspect that his popularity stems from an environment in which all voters have had enough of the status quo. The Donald speaks his “mind”, and this groundswell of populist support is reflected not only in his rise to political power, but also is indicative of what is occurring in the U.K. and elsewhere.  People are fundamentally stating that the political system is flawed, ineffective, and self serving. We would only hope that this attack political correctness would spill over into a real critical analysis of the Fed and its efficacy.

In short, we need a Donald for capital markets. We understand that Fed policy over the past eight years has been an attempt to alter investor perception, but we believe that this monetary science experiment is close to its peak. The experiment will end, not for lack of trying but more specifically because the perception of all central banks will ultimately be permanently damaged. In order to avoid an abrupt dislocation in capital markets, there has to be a disrupter with regards to the omnipotence of the Fed.

Is Anyone Trading Butter

11 May

At the old Chicago Mercantile Exchange, there was a butter contract that was so obscure and thinly traded that they used to make an announcement to gauge whether anyone would like to buy or sell the contract. I thought back on this recently when I read about the explosion of speculative interest in egg futures on the Dalian Futures Exchange. Eggs, Iron Ore, Rebar, and a myriad of other commercial commodities are the newest entrant in the Chinese world of leveraged gambling. We know that the authorities have cracked down on real estate speculation and a few other forms of levered carry, but it would appear that the excess capital sloshing around China (and elsewhere) has found its way into some very unexpected places. The problem with such unfounded speculation in this instance is that the prices determined by said gambling sets prices for a whole host of other ancillary commodities worldwide. One more unintended consequence of the Great Monetary Science Experiment, hereafter known as GMSE.

Catalyst Light

5 May

I just heard an analyst describe the current period for Tesla as being “catalyst light”.  I have never heard this term before, but  I assume it means that one can wait to buy the stock until such time as there is a newsworthy event to get speculators juices , and momentum, flowing. Another sign of the times I guess, but we have always preferred to position ourselves when price is a reflection of catalyst blight. In other words, we look for those opportunities where the price in the marketplace is indicative of a market that places a very low probability on any significant shift in the current environment.