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Transcript of MRA 03/05/2018
Global growth running above trend (both EM and DM)
Markets follow corporate profits (up)
P/E ratio in a low vol, low rate world
Hard versus soft data disconnect continues
Growth/inflation mix nirvana for markets
Fed probabilities in flux off low inflation prints
Financial conditions remain easy (weak USD)
Vol/rate impact of balance sheet unwind?
Draghi confronts FX impact on inflation
Whither the Phillips Curve?
Incredible (unsustainable?) Sharpes for mo, short vol
Stocks & bonds neg correlated, but both rally
Short USD positioning
Nearly unprecedented decline in realized vol
Powerful financial cycle dynamics (low defaults, corporate issuance, private equity dry powder)
Fed leadership transition…what potential for wholesale change in philosophy?
Trump Factor / Tax Reform
China’s 19th Congress – prioritize stability
Central Banks, US corporates and, increasingly, Vanguard are the inverse variants of Amazon’s everything store. These entities don't sell anything, rather, they buy everything
At present, the ECB has a $135bln portfolio of corporates and the BoJ now owns 2/3rds of the Japanese ETF market, having amassed $120bln in equities.
In total, the largest 10 Central Bank balance sheets have expanded by
over the past decade.
Corporate CFOs and, increasingly, index vehicles round out the price agnostic financial market everything store.
Through the lens of reflexivity, market prices are a call to action.
Today’s markets are powered by a feedback loop in which rising asset prices, low volatility and return seeking capital, are enablers of one another.
Expanding asset markets are the result of capital being reinvested into a system in which carry trades have benefited from exceptionally low volatility.
The feedback increases confidence and further promotes risk taking, generating more wealth in the process.
An asset price centric assessment of risk acknowledges that this cycle, benign as it is in the moment, bears important similarity to previous periods during which risk taking itself became a chief accelerant to the inevitable period of disruption that markets face.
The Financial Asset Everything Store Makes the World Go ‘Round.
Cheap by Proxy Is Not Cheap.
Survival Forces Investors to Live in the Moment.
Why Insure Something that Doesn’t Break?
There are No Bad Securities, Only Bad Correlations.
Market Prices Are Both a Result and a Cause.
The Normal Distribution is an Appealing but Dangerous Shorthand.
Vol Is Uniquely Anti-fragile.
Economics and Valuations
Economics and Valuations
US growth ~4%YoY
US CPI ~4% (quickly rising)
Market valuations stretched, rising from very low levels
Bond yields rising, very high real yields
Greenspan new to Fed
US growth ~ 2% YoY
US CPI ~ 2%
Valuations stretched, but stocks viewed as cheap to bonds
Zero to negative real rates
Fed leadership transition
Credit market debt% GDP ~ 275%
Positive correlation between stock and bond prices
Realized vol 15 before crash
VIX average 22 before crash
Portfolio insurance as synthetic put
Credit market debt% GDP ~ 350%
Neg correlation between stock and bond prices
Realized vol 7 in 2017
VIX average 11 in 2017
Vol control as synthetic put
"The VIX Index Turns 25…Reflections on Quiet and Fear Throughout the Years"
Top-Down Core PCE Model
Putting together the highlighted drivers, we can build a model for core PCE.
We treat the model mainly as a directional indicator and focus less on the exact numbers.
The current reading of the model suggests core PCE is somewhat below what the macro drivers would imply.
So we expect a catch up and continuation of the trend higher.
Core PCE Model Drivers
Prime Age Employment to Population Ratio
ISM Manufacturing PMI
Dean Curnutt, CEO
Macro Risk Advisors
“Give, give, give to others; make sure deals are win-win for both sides. Again, it’s not the amount of money involved, it’s maintaining – all day long – a truly generous, creative flowing state of mind that wants to see everybody prosper… a group of people acting in a concerted charitable was create imprints that flower as a shared experience such as a successful company or a more prosperous nation.”
~ The Diamond Cutter