"Disciplined Systematic Global Macro Views" focuses on current economic and finance issues, changes in market structure and the hedge fund industry as well as how to be a better decision-maker in the global macro investment space.
A recent paper tries to develop a unified theory of trend-following by classifying trend-following into three groups; see “The science and practice of trend-following systems”. The authors break trend-following into three types: European, American, and Time Series Momentum. European trend-following is based on continuous weights using an EWMA filter. In this system, position sizes are proportional…
Inflation numbers were within expectations, yet this is not something to celebrate. Core inflation is still above the 2% target, and headline inflation is still above 3%. Has the Fed been successful with its policy? The answer is no. However, the current inflation numbers suggest that no action will be taken at the September FOMC meeting. Policy changes are unlikely before an election, and that…
It is not just nominal yields that are moving higher. Real yields have also been on a steep ascent, with levels at the highest in ten years. In fact, to get to these real yields, investors will have to look at data prior to the GFC. We are in a strong situation where real yields are telling investors that we have tight monetary conditions, yet inflation and nominal yields suggest that concerns…
Always bet against intervention if there is no change in policy. Now, this does not mean you should fight a central bank in the short-term. It does mean that intervention has to continue if it is to work. Central banks are much savvier with their intervention. It will occur when there is limited liquidity. It may come through markets not expected, like EUR/JPY instead of USD/JPY. It will be…
Booms or bubbles are often associated with excessive investments. The euphoria associated with a new technology or meme leads to significant money flows. But there is a marginal return on the capital that falls as more investment dollars flow into the theme. The excess investment leads to a large capital stock in the new technology that may have significant positives for an economy, yet that does…
University of Michigan Consumer Sentiment is now at the lowest level in 40 years. I could go back further. It is the lowest level ever recorded, as listed in the FRED database. Worse than the Volcker recession and the double-digit recession. Sentiment has fallen since the pandemic. The consumer confidence survey data, which goes back even further to 1959, shows the same pattern. There is a…
The coordinated Yen intervention continues as we see the currency has continued to improve. Short-term intervention can reduce volatility, but this is not a volatility problem. This is a policy problem, and nothing has changed in policy. The Bank of Japan has moved its target rate to 1% and has provided forward guidance that it expects rates will continue to move higher. If this is the policy,…
The markets are connected, and the message is not good: 1. The Korean tech bubble is bursting, and some return to normality; however, it is not done yet. US retail investors are net sellers. We just saw a US fund blow-up with Situational Awareness. It is a one-off, but investors need to realize that investor euphoria led to the excessive money flows. 2. Coordinated intervention in the yen market…
A very interesting position paper worth a read for any follower of AI: “ LLMs Can't Jump: Why the Abductive Leap is the Final Frontier of AI Discovery.” The thought is simple. AI may be good at some forms of inference, like deduction and induction, but it is not able to do the third type: abduction. “ While AI can compress data (Induction) and prove theorems (Deduction), it cannot yet recreate the…
The bubble in Korea has been viewed by some as an isolated event. There is no question that Korean-specific regulation and behavior were a strong contributor to this bubble, yet we should look at what is happening in the US. One, the semiconductor sector is showing strong declines. Not like Korea, but the pattern is similar. Two, the move in the AI and IT sectors has been driven by retail, and…
Since the pandemic, 10- and 30-year Treasury yields have been on a steady march higher. We have seen continued inflation above target, continued budget deficits, the shock of pandemic QE, and no strong policy moves to stop the ascent. We are now seeing rates that will take us back up to pre-GFC levels. Could this be considered normalization of rates? This is hard to argue when you look at the…
Using the v-Lab data, we are seeing that correlations across sectors in the US are falling and showing more dispersion. If the stock market, like all markets, can be viewed as a network, we are seeing the network expanding after a period of strong connection in the first quarter of 2025. We are seeing a disconnect in the IT sector but also across real market sectors. This can be viewed as a market…
At some point, the fiat money producers will believe that fiat money is losing its value. There will not be an announcement, but there will be a slow adjustment. Look at the reserve assets held. Central banks are expected to reduce their exposure in dollars. They have already seen an increase in gold holdings. Now you have to be careful when looking at gold, because a large percentage of the…
Everyone in the bond markets has been talking about Fed Chair Warsh and his changing views on forward guidance. His policy stance is clear. He does not want to give forward guidance. He will reduce guidance to the minimum. Markets have reacted to this with much wailing, yet we need to focus on the actual impact on markets. One way to look at this is through market-based measures of monetary policy…
Sometimes the bubble burst will sneak up on you even if it is in plain sight. The Korean KOSPI index is down over 44% in approximately 40 days, with over 300,000 individual leveraged accounts liquidated and over 1.2 million accounts receiving margin calls this month. The index was about 45-50 percent information technology, with the largest exposure in Samsung and SK Hynix. The problem for the US…
Gold has had a complete turnaround after reaching highs well above $5,000 an ounce. So, what was going on? One clear indicator is that central banks have cut their gold purchases. Central banks have not been viewed as profit maximizers, but the high prices in the first quarter may have been too much, and they took a step back from the market. The other profit-maximizers may have had the same view,…
Analysts are calling it a failure of the Fed's new forward guidance policy. The policy, of course, is no forward guidance. Given Fed Chairman Warsh is not going to tell the market much about the intention of Fed policy other than "it will not waver" from trying to fight inflation, the market will have to decide on the efficacy of current policy. The Fed, instead of driving policy, can now learn…
The paper by Ilija I. Zovko, "Realtime price impact detection" provides an interesting solution to the slippage monitoring problem. Traditional methods for managing market impact typically rely on monitoring post-fill price slippage. This approach fails in real-time environments for two key reasons: Statistically Slow - Estimating price slippage requires hundreds of fills before the signal can be…
The paper “Network Momentum across Asset Classes ” introduces a multi-asset quantitative trading strategy based on network momentum —a trading signal derived from momentum spillover across different asset classes. Momentum spillover occurs when past performance in one asset predicts future returns in linked assets. While traditionally studied in pairwise connections (e.g., stock-bond pairs or…
The convenience yield associated with Treasury securities is dynamic, meaning the price of safety associated with this safe asset is constantly changing with the macro environment. This important paper, "Inflation and Treasury Convenience,” on the macro dynamics of the convenience yield finds that inflationary supply shocks raise the opportunity cost of holding money and money-like assets,…
What causes momentum, or what is associated with momentum? A new paper suggests that there is a strong link between liquidity and momentum, and that changes in liquidity precede momentum gains. The paper, titled “Momentum Returns and the Role of Liquidity Improvements” by Jeppe Bro, demonstrates that the traditional stock market momentum anomaly is actually driven by cross-sectional liquidity…
A paper that has not received much attention focuses on measures of systemic risk in "Systemic Risk Measures: From the Panics of 1907 to the Banking Stress of 2023" . Much of the data from this paper is available from V-lab. The work suggests that there have been more stress periods recently, but their duration has been shorter. There has not been a stress period since the banking crisis of 2023.…
There is concern about the risk in the current markets given the high valuations. In a perfect world, investors would like early warnings of market stress as an indicator that it is time to rebalance portfolios. Identifying different stress indicators will allow investors to triangulate on the true market environment. One that I have been recently focused on is SRISK from the website V-Lab. SRISK…
The private equity markets have been a darling for many pensions and endowments because of their strong long-term returns. Of course, investors should expect a premium over public markets because money is locked up for a long period of time. The problem is that many funds are nearing the end of their lives, yet many of the underlying investments have not been sold to other firms or IPOed. The…
One of the key signs of a stock bubble is the issuance of new stock. Simply put, when the stock market is overvalued, smart firms will issue new stock to take advantage of these high values. The increase in supply will flood the market and generate downward pressure on stocks. We are seeing more issuance in the market this year, but it is not at extreme levels. The large increases in 2020-2021…