Inflation expectations are still high

 

Inflation won't be tamed in the near term. First, CPI is staying above 3%, not 2%. Second, the PPI isn't showing support for lower inflation. The PPI is usually volatile, but commodity prices are rising with greater volatility.

While longer-term inflation expectations suggest inflation could get closer to the 2% target, one-year expectations aren't falling toward 2% and are centering around current levels above 3%.

The danger in in the covariance matrix

 

While most investors focus on volatility, the covariance matrix can significantly affect performance and is hard to measure. A large covariance matrix with N assets will have N(N+1)/2 free parameters and T degrees of freedom based on the number of observations. A large portfolio will be hard to calculate and difficult to use out of sample. 

Work has also been done on shrinkage estimates, which suggests that the raw sample covariance should contribute only about 20% to the new covariance matrix. Linear shrinkage does better than nonlinear out-of-sample estimates. Overall, shrinking toward zero correlation will help long-short portfolios because they rely less on extreme values. 

The problem is that, in optimization, weights depend on risk aversion, the inverse of the covariance matrix (the precision matrix), and expected returns. Estimation errors are amplified during inversion. A 10% mistake in the covariance matrix will cause the precision matrix to take much larger values, which can be catastrophic. 

Additionally, illiquidity can distort covariance in hidden ways. Illiquidity creates positive autocorrelation in the return series, so measured volatility is lower than true volatility and measured covariance is lower than true covariance. 

These issues are one reason funds should focus on covariance across the environment and try to adjust for relative volatility and risk contribution. It is not just the overall volatility that is an issue but the link across markets which defines diversification and the risk hidden within portfolios. 

The Almighty Dollar - a deep dive into monetary history

 

The Almighty Dollar: 500 Years of the World’s Most Powerful Money by Brendan Greeley explores how money functions not as a sovereign creation, but as an evolving financial product. Don't think of money as coins or greenbacks, but as a product that facilitates trade and investment. Greeley’s primary argument dismantles the nationalist myth of our almighty currency: the United States did not create the dollar, nor does it fully control it. In Greeley’s framework, money is a private liability or financial instrument that responds to global commercial demand rather than state decree. Sovereigns and central banks frequently adapt to monetary ecosystems created by merchants, private bankers, and international traders rather than originating them. The dollar derives from the German word taler, used to describe silver-coin mints in Bohemia.

The Almighty Dollar offers an interesting narrative history for those who love origin stories, reframing how we understand global currency. By highlighting the historical tension between state control and private market demand, Greeley presents a valuable reassessment of monetary power. It is a little long and feels rushed when it comes to modern monetary history, but money grew not from some grand plan but from many small acts and attempts to ease trade. 

Net interest and entitlement 98.4% of tax receipts

 

This is a crazy number - over 98% of all Federal Government Receipts go to net interest and entitlements. Only 2% of tax receipts cover the other expenses, the real activity of government. Put differently, we pay for all our non-entitlement programs, like the military, by borrowing money. I don’t think the American public knows this. I don’t think they may care. We aren’t even accounting for future commitments we have made that we will not have the money for. 

The only good news is that entitlements and net interest, if held by domestic investors, can be viewed as a large transfer payment with deadweight costs. We borrow from citizens who then pay taxes to meet the interest payment. We tax citizens and then give the money back to other citizens. Significant money moves between taxpayers and entitlement recipients, from one set of consumers who may save more to another set of citizens who spend more. It could be worse, but that doesn’t mean this money is being used productively. It is a great transfer of wealth