Gold, Lead, and Collateral

By | 2017-12-12T06:19:55+00:00 December 12th, 2017|Global Market Update|

Collateral dominates structure. Page from Alchemy treatise, c. 1300. Source: Wikipedia That’s an investor’s way of saying that you can’t turn lead into gold. It’s been an investment theme of mine for as long as I’ve been managing money. I started my investment career trading bonds in the mid-‘80s. Mortgage-Backed Securities were a new thing. Investors were starting to learn about prepayment risk, as interest rates fell and borrowers refinanced their double-digit mortgages. All those full-faith-and-credit Ginnie Maes were paying off early, and investors [...]

Looking for Risk in All the Wrong Places

By | 2017-11-15T07:11:22+00:00 November 15th, 2017|Global Market Update|

Can Artificial Intelligence really manage risk? Source: Wikipedia There’s a new application for Artificial Intelligence. It’s called regulatory technology, or “regtech.” It takes the rulebook of a supervisory agency, like the FDIC, and translates it into a computerized logic engine. The regulators evaluate the logical consistency of their rules, and the banks structure and label their data to be queried. This allows the regulator to look for broad patterns in the data that might not be immediately apparent. AI can identify deep, dynamic structures [...]

Risk, Reward, and Valuations

By | 2017-07-17T12:21:18+00:00 May 22nd, 2017|Global Market Update|

Risks, Rewards, and Valuation Is the stock market risky? Photo Rhett Sutphin. Source: Wikipedia Of course it is. Anyone who went through the Financial Crisis or dot-com crash or Long Term Capital crisis or ’87 crash has experienced the gut-wrenching feeling of having significanlty less in savings than they had just a few months before. Nobody likes that feeling. And the longer you hold onto stocks, the more likely you are to experience a bear market. These can be caused by wars, recessions, panics, [...]

Make Banks Safe Again

By | 2017-07-17T12:21:22+00:00 April 12th, 2017|Global Market Update|

Are the big banks finally safe? Picture: New York Fed The Financial Crisis put bank safety and soundness fully in view. The serial bailouts or failures of Bear Stearns, AIG, Fannie and Freddie, Lehman, Merrill, and Washington Mutual put the global economy at risk. The problem was systemic: all the big banks were affected, because investors weren’t certain where their money would be safe. Bank stocks fell about 70%, and yields on their bonds rose about 4%. When this happens, banks cut back on [...]

French Lessons

By | 2017-07-17T12:21:28+00:00 March 1st, 2017|Global Market Update|

And people thought our Presidential election was wild. Source: Marine 2017 Election season in France has generated one surprise after another. The first round in their Presidential race occurs April 23rd. Currently, there are 10 contenders. Marine Le Pen – the French Nationalist candidate – is leading in the polls with 27% of the vote. If no candidate wins a majority in the first round, as seems likely, there will be a run-off vote between the two leading vote-getters on May 7th. Parliamentary elections [...]

Investments, Risk, and Return

By | 2017-07-17T12:21:42+00:00 September 27th, 2016|Global Market Update|

What is risk? Base jumpers. Photo: Christophe Michot. Souce: Wikipedia In 1952 Harry Markowitz changed the world. By combining different assets he proved that a diversified portfolio would have a lower variance. His mathematical formula used the variance of asset prices around an average as a proxy for risk. It made sense at the time: the more asset prices jump around, the more nervous people get. Markowitz’s work was ground-breaking. Never before had risk been so clearly linked to return, nor had its reduction [...]

Risk, Return, and Investment Fads

By | 2017-07-17T12:21:46+00:00 August 22nd, 2016|Global Market Update|

Do low-risk stocks have higher returns? Photo: Chamomile. Source: Morguefile That’s what a lot of people are thinking. It’s kind of counter-intuitive. After all, it’s always been taught that in order to get returns, you have to take some risk. Bonds are more risky than bank deposits, but they pay more. Long-term bonds are more risky than short-term bonds. Stocks are more risky than bonds—their prices are more volatile, and if a company goes bust, stock investors usually don’t get anything back. For example, [...]

Certain About Uncertainty

By | 2017-07-17T12:21:58+00:00 May 5th, 2016|Global Market Update|

How is investing like backgammon? Photo: Katana. Source: Morguefile Both involve uncertainty. Both are highly quantitative. And both combine skill, strategy, and a bit of luck. I loved backgammon growing up. I could play for hours with family and friends. I read books and studied different board combinations. I even organized a couple of tournaments in college. I loved the fast pace and exciting finishes, and learned a lot. I think the most important skills I gained were knowing how to work with uncertainty [...]

Values and Valuation

By | 2017-07-17T12:22:12+00:00 January 7th, 2016|Global Market Update|

Does valuation matter? Photo: Carspotter. Source: Car Pictures Many analysts consider the stock market expensive right now. They look at high-flyers, like Facebook, Netflix, and Tesla—with their eye-popping PE ratios, and conclude that the market has gone crazy. Other folks note that these companies are new, and that they’re priced for significant future growth. If you look at the rest of the market—with pedestrian names like Exxon, Apple, and Caterpillar—valuations are far more reasonable. Which is it? The market has always been an amalgamation—some [...]

Nature’s Diversity and Portfolio Diversification

By | 2017-07-17T12:22:19+00:00 December 10th, 2015|Global Market Update|

Nature is diverse. Source: NOAA Whether down in the depths of the sea or soaring in the Himalaya Mountains or out on the African veldt, we find a broad array of plants, animals, fungi, and microorganisms. Wherever there’s a source of energy, there’s something out there that uses that energy to grow, reproduce, and spread. That’s why the discovery of deep sea geothermal vents by the crew of the Alvin in 1977 was so revolutionary. They found a whole community of tube worms, clams, [...]