Global macro investing, market structure, and decision-making in speculative markets.
Recent comments from Fed Chairman Warsh suggest that he is not in favor of the current forms of forward guidance. No dot plots, or perhaps not in the current form. The Fed has proven to be a poor forecaster, so the guidance may not be helping the market. It do…
From work done by the ECB, gold has now overtaken US Treasuries as the largest reserve asset for central banks. This is driven by the strong price appreciation of gold over the last year, even with the recent declines. US Treasuries have seen yields rise, redu…
This book, Thinking in Time: The Uses of History for Decision Makers is now 40 years old, yet it provides some good, simple insights on how to make better decisions. You may not be interested in the political stories provided, but they provide context on how b…
The preferred inflation measure for the Fed is core PCE. The idea behind using a core measure is that it filters out extremes that may be driven by supply shocks. Fed Chairman Warsh has a different preferred measure: the trimmed mean, which includes food and e…
The most important political issue for Fed Chairman Warsh is not working with Congress or keeping President Trump happy, but working on the politics within the Fed. While not like the Volcker period, the current problem is the uptick in no (dissents) to yes vo…
There should be an equity risk premium over bonds. Equity is riskier than bonds, yet the current market does not suggest this. The bond market has disconnected from equities. One can always say that bondholders are pessimists relative to equity optimists, yet…
This is an interesting chart on the politics of the Fed. Clearly, Powell is a political animal. There is nothing wrong with being political. It is important to maintain good communication with politicians to ensure they understand the Fed's role and mission. O…
The chart from Nicolas Rabener of Finominal compares the drawdown from bonds versus managed futures. If you ask most investors, they would say that a managed futures fund is riskier, yet when you look at the long history of bonds, it does not look attractive.…
Edmund Phelps died this week. Unfortunately, many may not remember his path-breaking work in macroeconomics, which opened the door to neo-Keynesian models. His most important macro work examined the inflation-growth trade-off through the lens of inflation expe…
In the paper “Large Moves in the Foreign Exchange Market", the researchers show that large currency moves are not random but related to the term structure of option-implied volatility. The difference between short-term and long-term implied volatility is a goo…
We are seeing very strong expectations for AI sales growth. There is no question that new technology will see stronger sales growth than the average firm and that, during the initial growth period, sales may be well above average. The question is, how do you t…
In an earlier post, we discussed the differences in risk regime through decomposing the VIx index. The time series of risk regimes We can also do the same for risk shocks, which are measured by changes in the VIX. We use bin analysis based on quantiles to form…
The VIX index has been used as a fear index, but we believe the best way to view it is to define risk regimes. There are periods of normal, high, and low risk and the behavior of markets during periods of high risk will differ from periods of low risk. Before…
There has been a boom in indices that measure risk by analyzing news story words, yet not all news is created equal. There can be big regional differences, and recent research shows that geopolitical risk measures in one region may not align with or accurately…
Causal inference is one of the most important topics in finance today. There is a difference between what correlates with or is associated with X and Y and saying that X causes Y. We can thank the work of Judea Pearl for truly focusing our attention on causali…
There has been a strong rebound in hedge fund strategy performance in April after poor March returns. All the HedgeIndex Main strategy returns were positive for the month, with especially strong performance in emerging markets, global macro, and long/short equ…
The power of supply shocks and the real economy can be seen when we compare the BCOM with the NASDAQ and SPX. Since the beginning of the year, there has been a strong acceleration of commodity prices. This momentum was even before the Iran conflict. A combinat…
So ends the view that inflation is tamed and rates should fall. The PPI is accelerating and moving back to the type of supply shocks that we saw post-pandemic. The CPI is also heading higher and moving further away from the target with a 3-handle. There is no…
Why Nothing Works: Who Killed Progress and How to Get It Back by Marc Dunkelman is one of the more interesting books on politics that I have read this year. It is thought-provoking and can help explain the problem in getting things done in the US. It may not s…
The Doom Loop: Why the World Economic Order Is Spiraling Into Disorder by Eswar Prasad is a good book for explaining the current trouble with a dollar for anyone who wants a non-technical read on the subject. It focuses on the intersection of economics, financ…
The Iran conflict is not over, yet the markets are optimistic. Perhaps it is because we don’t know what to call this oil crisis. Is it a war? A dispute? A current pause? The SPX was up over 10% for the month. The high beta names were up over 15%. For the secto…
Despite strong performance in equity markets, there is still considerable talk of stagflation. The stagflation story is not just a 70's problem. It can happen in other countries and almost any time. It is more likely that we have a supply shock that can affect…
There is a growing number of risk measurement indices, although the definitions of these risk or uncertainty indices are not always clear. We can start with the VIX index, which is not really an uncertainty or risk index but a proxy for option volatility and i…
When you want to make your model practical, you have to look at signal uncertainty and price impact. If you use any model, your one-step-ahead forecast may have some uncertainty because the average coefficient may not accurately represent the true coefficient…
Machine learning can be used to predict analyst forecast errors. These forecast errors can predict cross-sectional returns and abnormal returns. There is an underreaction to fundamental news, which is amplified by overconfidence, sticky beliefs, and informatio…
One area of increasing research is the attention that is given to a specific market. Investors cannot follow everything, so there are different levels of attention. Given changing attention, there should be different levels of efficiency. What is found in the…
LLM can be used to develop autonomous trading systems. The key is to have agents mimic the workflow within a multi-agent trading framework that divides a trading system’s tasks. When you look at a deep decomposition of the tasks associated with a trading syste…
Portfolio managers can be viewed as economic agents that have regularized behavior. Hence, if we can formulate that agent’s behavior. That is, we can mimic their behavior. If that is the case, we should then be able to generate a portfolio with similar returns…
There has been an increase in research on what happens between the close and the open, and from the open to the close, in asset markets. In the equity market, significant differences have been found between overnight returns and daytime returns. In the paper,…
The foundation of market rational expectations is that a scheduled report cannot affect the firm’s stock price until it is reported. You can’t act on information you do not have. Yet, the paper “How markets forecast and ‘front run’ Information: Bayesian Market…