Friday, June 18, 2021
Thursday, June 17, 2021
Global macro trading is not easy, but it can be supported through simple tools that provide some conditional probabilities of success for asset classes and risk premia through measuring partial correlations on a grid between two factors. An investor's forecast skill may not be strong, but tilts can be created to exploit likelihoods for gains. See the older paper, "Mapping Investable Return Sources to Macro Environments" from AQR.
Directional as well as relative value macro trades are based on identifying and measuring the macro regime. Where are we in the business cycle? What is the inflation environment? Returns for asset classes as well as style premia are time varying and conditional on the macro regime. For example, commodities are positively correlated with growth and inflation. At the same time, bonds are negatively correlated to growth and inflation. Asset class tilts are possible to exploit the current regime. Unfortunately, the partial correlations for style premia are more difficult to map because partial correlations are lower with respect to growth and inflation. Nevertheless, momentum and trend are both correlated with growth and inflation.
The 2x2 mapping for global macro can be extended to other macro variables like real yields, volatility, and illiquidity. In these cases, the investor is still burdened with identifying the macro environment. Conditional on the macro assessment, the investor can improve his odds of success through matching macro factor partial correlations with style premia and asset classes.
Wednesday, June 16, 2021
I needed some time to digest Fed Chairman Powell's comments, and it all comes to the same conclusion. The Fed is behind the curve with respect to monetary policy.
1. The dot-plots have moved forward into 2023 with two increases. However, Chairman Powell told us not to look too closely at these numbers and "take them with a grain of salt". The producer of the numbers tells us that they are likely wrong. Ouch. Is this supposed to be forward guidance?
2. The Fed raised reverse repo rate and the rate paid on reserves held at the Fed. These are technical issues, but it tells us that there is just too much money floating around in the system. Without technical support, rates would fall lower.
3. Inflation forecast for 2021 have moved significantly higher relative to March. So much for transitory inflation in 2021. Inflation in 2022 and 2023 are supposed to be tame; however, market expectations are not being well-behaved especially with consumers.
4. The Fed is now talking about tapering not "talking about talking about tapering".
Lookout for Eurodollar curve trading. We will get a wilder market on "go - no-go" trades.