Bonds at fair value - perhaps opportunity

We can look at real yields and say that real rates may be high, but there may be a view that real potential GDP is likely to fall and the natural rate of interest is lower.  If we assume growth will be higher, and the natural rate is closer to a longer-term average, we can say real rates have risen sharply, but their current level is not excessive. 

If we think nominal rates may be near fair value, we have to ask what the impact is of a 100 bps increase versus a 100 bps decrease. In that case, the risk-to-reward suggests that bonds may be attractive. If you assume the probabilities are equal, you may want to consider buying bonds. 

 

The bad road of speculation?

 

There seems to always be a moral focus on the speculation. It is evil. It is a temptress. It should be avoided. Less time and effort should go into simple economics. Most people aren’t good at speculation because you need an edge. It could be information, better knowledge or decision assessment, or lower costs. The failure is not in our moral fabric or greed. It is in our limitations.

Regulators can do harm - a rare admit from the Fed

 

It is striking that the Fed admitted it made a mistake. Michelle Bowman gave a speech in London that should raise some eyebrows. Note that the speech was given outside the country. The key findings are listed below, but most surprising is that the review suggests a risk-averse culture among regulators. Better to do nothing than take some action. The bank regulation is done at the regional bank level. For all the speeches and economic research that is done at the regional Fed level, shouldn’t they get this right? It is not clear that centralization would be better, but this is interesting food for thought.

Now, the question is what will Governor Bowman do about this? 

For information edge you need expertise

 

An investor can generate returns based on their knowledge. The knowledge used creates an information edge that may allow you to earn a higher return than the market portfolio. To determine an information edge, ask what your level of knowledge is about a topic or firm. We focus on tacit knowledge, the expertise from practice and experience. There is ubiquitous tacit knowledge available to most, and specialist tacit knowledge focused on a much smaller set of individuals. 

Ubiquitous tacit knowledge exists in a number of degrees. We can start with beer-mat knowledge, which is a simple description. For example, the Fed controls monetary policy. There is popular knowledge, which you may read in a newspaper, and primary-source knowledge that may come from research analysts and academic articles. These are all fine, but they will not create an edge.

Specialist tacit knowledge can come in two forms: interactional expertise, which shows you can critically evaluate information and use it, and contributory knowledge, which shows mastery and the ability to use that knowledge to develop unique thinking.

If you want to know whether you have an edge, then ask what your level of knowledge is. If you don’t have a specialist’s level of knowledge, you are unlikely to have a chance of beating the market.