John Chisholm

"Conditional Betas": "Changing firm attributes and economic conditions lead to time-variation in betas... We compare several econometric or machine-learning methods...The 'individual LASSO'' method performs [best]." https://lnkd.in/erGHdbbM

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=> The U.S. labor market report produced a knee-jerk reaction among major FX – but MXN, COP, BRL, and ZAR are bucking the trend => MXN clearly likes the idea of a stronger growth in the U.S. Further, President Sheinbaum continues to send orthodox policy signals (including the post-election fiscal adjustment), and there is now a possibility that parts of controversial judicial reform might be revised => BRL/COP/ZAR’s outperformance is even more interesting – Domestic factors still getting noticed? (chart’s source - Bloomberg LP)

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“Political parties of all stripes are pushing for higher government spending” - according to a new thought-provoking paper on fiscal discourse from the IMF. In the U.S., support for fiscal expansion among Democrats is close to historic highs (the data series goes back to the 1920s) – something to think about in the run up to the elections and against the backdrop of the already wide general government deficit (which is expected to remain wide for years to come – check the latest CBO projections if you like a good horror story). The paper makes it clear that fiscal expansion discourse is a global trend, but EM look marginally better on this metric right now. And in our opinion, improving checks and balances in EM – including independent central banks which do not hesitate to tighten in order to send warning shots to the government (like this week’s expected rate hike in Brazil) – can improve fiscal outcomes. The market reaction to EM fiscal transgressions and rating agencies’ wrath are great disciplining tools as well (both are sadly absent in advanced economies most of the time). Mexico’s president-elect Sheinbaum was well aware of this fact when she re-appointed Minister of Finance Ramirez de la O, sending a message of fiscal consolidation hours after her victory. Indonesia adjusted its pro-growth aspirations to target a smaller budget deficit in 2025. India tightened its 2025 deficit target after the inclusion in the EM local bond index, because this is what Fixed Income investors care about. And the opposite is true as well - South Africa’s “fiscal sleeper” story contributed to a major post-election bond rally, and sovereign bonds in Argentina and El Salvador gave a round of applauds to 2025 draft budgets.

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You should listen to Nathan Geraci and I leverage VettaFi sentiment data to talk #ETFs for ‘25. But it’s ok to read the recap Nicholas Wodeshick from the show too. . - Use case for defined outcome, structured protection, and covered calls from NEOS Investments Calamos Investments Innovator ETFs® - Growing interest in CLOs and bank loan #ETFs from Janus Henderson Investors Invesco US Panagram BondBloxx - #Dividend strategies from SS&C Technologies and ProShares - Plus Ben Johnson, CFA commentary Zachary Csillag Troy Cates Tim Urbanowicz, CFA Andrew Nelson, CFA Matt Kaufman, CETF® Frank J. Tirado, MS Jessica Fernandez Michelle DeWitt, CIMA® Rob Stewart Danielle Gilbert Christopher Murphy Paul Baiocchi, CFA Steve Munroe JoAnne Bianco, CFA Joanna Gallegos Colleen Kapoor Cole Feinberg

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Check out my macro notes just released:) Some interesting insights from the Snb and Norges decisions today along with thoughts on the S&P 500's outperformance in the last month against global asset classes. Enjoy:) https://lnkd.in/gcaEFYje

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Is the U.S. Economy Stronger Than We Think? At Yale's recent CEO Caucus, 84% of top CEOs expressed optimism, predicting a "soft landing" for the U.S. economy. Surprisingly, 81% were taken aback by the economy’s resilience, despite widespread pessimism in public polls. With inflation dropping and unemployment at historic lows, real wages are growing, and GDP surpassed expectations. CEOs agree: the economy is outperforming the gloomy forecasts. What’s your take on that? Source: https://bit.ly/47Sds0i

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Speaking to The Express Tribune, Waqas Ghani Kukaswadia, the Deputy Research Head of JS Global, corroborated the base effect impact, estimating inflation at 3.4% contingent on the coming weeks' Sensitive Price Index (SPI) numbers. Kukaswadia shared that they expect CPI to clock in at 6.5%/7.7% for FY25/CY25, incorporating stable global oil prices and gradual PKR depreciation. Since the transportation and food segment (dependent on transportation) is around 36% of CPI, any favourable oil price adjustment will be an upside to their base case estimates. On the other hand, any sharp PKR depreciation is a key risk to the projections, he added. On the other hand, the real interest rate is projected to reach 9.98% in January 2025, well above its historical average of 2.5%. With the policy rate historically averaging at ~2% over the last nine years spread over core inflation, analysts anticipate the SBP will cut the policy rate by 100 basis points to 12% in its January 2025 meeting. https://lnkd.in/dkVukRbj

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Bravo, Corey Hoffstein and Steven Braun of Newfound Research for writing an excellent paper on replication of #cta #hedgefund returns. The big conclusions that build on our research: - Manager skill in managed futures exists but is evenly distributed and lacks persistence; hence, diversify. - Top down replication works as a repeatable, adaptable investment process to capture the drivers of returns of bona fide #hedgefunds. - Fee #alpha is real. Or in hedge fund language, “give me a 400 bps head start and I win 80% of the time.” The paper spends a good deal of time on tracking error. Tracking error to an uninvestable hedge fund index may not be the right question. Isn’t the right question, shouldn’t there be a practical, actionable, investable index that approximates the returns of the space? If only….

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Genuine question for fellow QT nerds / financial plumbing experts. The BoE MPC voted to keep the pace of Quantitative Tightening unchanged at £100bn for the next 12 months, c. 90% of which will come through a passive run-off of existing holdings, and c. 10% from active sales. Bank reserves are currently upwards of £700bn, well above the BoE’s own estimate of even the £490bn upper bound of the Preferred Minimum Range of Reserves (which should delineate between what central bankers have started calling “abundant” and “ample” reserves). In other words, by the Bank’s own reckoning, it should have lots of room to shrink its balance sheet before bank reserves start to become scarce. Fine. However, this is happening against the backdrop of exponentially growth in banks drawing on the Bank’s Short Term Repo (STR) facility – not something you would expect in an environment where every bank has “abundant” reserves. If you were sitting on the MPC, would this give you pause? Are there any risks associated with moving out of "abundant" territory too quickly, or are gilt-backed reserves just going to seamlessly get replaced with repo-backed reserves?

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Zoom in on "repeatable #alpha" and it often looks less impressive up close. An analogy: Roger Federer gave a hell of a commencement address at Dartmouth College several months ago in which he walked through his career #statistics. In sum, he won - 82% of matches, but only - 76% of sets yet only - 58% of games and, shockingly, only - 54% of points. The idea that long term outperformance often is driven by a surprisingly modest positive win-loss ratio is not new. Traders with 55% win rates are heroes. Poker players with 55% win rates are banned from casinos. #quantitative #finance relies on small average wins. Even #fundamental investors get it. A journalist once asked #valueinvesting legend Howard Marks why all his funds were in the top quartile, and he reportedly replied "because we never leave the second quartile." #Replication of pre-fee #hedgefund returns is built on this same principal. Create a #statistical tailwind and watch it play out over time. Reach out if you want to discuss stats. 😎 https://lnkd.in/e3Z45Dnv

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Adam Berger and Wellington Management, thank you for this analysis on how understanding market conditions is important to understanding long-term asset class performance - hedge funds in this case.   We at Mill Hill Capital, LLC applaud your conclusion: "If our longer-term macro view is correct, then we may not see a repeat of the 2010s “Goldilocks” period any time soon. Investors could find the market backdrop more challenging in some respects, but hedge fund managers may find more ways to generate alpha and their clients should benefit. To prepare for this potential shift, investors should review the size and composition of their hedge fund portfolios. Hedge fund exposure should be large enough to make a meaningful contribution to their objectives — and to be able to dampen total portfolio volatility in turbulent markets."

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AI isn't magic—it's advanced statistical analysis. Joe Lonsdale, at SIC 2024, reminded us that models like ChatGPT predict words and actions based on vast data sets, making them seem intelligent. It's a powerful reminder of the technology's roots and potential. #AI #MachineLearning #Technology If you are interested in these topics, I invite you to read my letters and join the conversation. You can subscribe to my free weekly newsletter, Thoughts from the Frontline. https://lnkd.in/ecpVCyuN

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"However, the use of FDPR has two major drawbacks: bad politics and loopholes.  First, the assertion of extraterritorial control is particularly unpopular with U.S. allies and serves to hurt the U.S. in the international political arena. While FDPR is a short-term fix to a lack of multilateral support, it damages the United States in the long term by weakening its alliances. Second, FDPR is not a silver bullet. While the regulations give Washington vast authority over the export of chipmaking tools around the world, they cannot cover everything. In fact, opportunistic multinational companies seeking to continue selling to China can re-tool their supply chains to rid them of U.S. inputs, freeing them from Washington’s oversight." Der Fred. It pisses off allies no end until they decide to no longer be allies. This does not happen all at once. It happens with one citizen after another, in an actual democracy, those with justice and the rule of law, stiffing their middle finger to the arrogant foreign autocracy in #FoggyBottom. Happy to be counted among such defenders of democracy.

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Geopolitical Capitalism/Market Socialism. New post out! https://bit.ly/3WVtAuI During the Cold War, the U.S. and the USSR played a 1 v. 1 great power game. In 1991, the USSR collapsed and the U.S. was left as the hegemon. The game changed to 1 v. None. That lasted until around 2008. Now the U.S. is in a multipolar world with an aggressive near-peer in China. But the game is not back to 1 v. 1. It’s more like 80 v. 80. Geopolitical Socialism → Market Capitalism During the U.S. hegemony, there was no one to challenge U.S. military or political might. While many countries chaffed under this order, the U.S. was a benevolent dictator and everyone who wanted to play by the rules benefited mightily. This top-down control of the geopolitical order is what I am calling “Geopolitical Socialism”. Critically, this allowed for what was as close as we will ever get to “free market capitalism”. You want to shut down your Milwaukee metal bending operation and send it to Mexico China India Bangladesh Indonesia Vietnam? Go for it. You want to manufacture $1,200 iPhones with hundreds of components made overseas? That works. Capital moved freely to wherever it was treated best and the Washington Consensus was gospel. The whole global capitalist system rested on there being no real risks to global supply chains or other forms of disruption. The low-cost provider won in a world of frictionless production. Piracy was so rare they made a Tom Hanks movie about a ship that got boarded. Geopolitical Capitalism → Market Socialism Literally everything has changed 180 degrees. In the multipolar world, we have Geopolitical Capitalism, where global states are in a free market economy, competing or cooperating with each other in highly transactional ways. A country will sign a trade deal with another on Monday and on Tuesday refuse to sign onto a climate agreement with the same counterparty. Everything is about internal political expediency and calming the mobs. Since states are now in the capitalist mode with other states, they are pumping up their own industries and national champions through subsidies, loans, and other means, as well as protecting domestic producers with tariffs and import bans. This is the market socialism part. Countries are negotiating between themselves but companies within each country are supported. Capital doesn’t move as freely now (and it never did out of China) and no one trusts the global supply chain. We skipped the piracy phase and went straight to container ships being shot out of the water by gangs/state-sponsored terrorists/rogue nations. Now the U.S. is overmatched in a 1 v. World game of trying (virtually) single-handedly to secure all global shipping lanes. This is raising costs on everyone and making domestic production very appealing. I discuss the market implications on the full post. Just click on the link!

𝗕𝗿𝗶𝗱𝗴𝗲𝘄𝗮𝘁𝗲𝗿 𝗼𝗽𝗲𝗻𝘀 𝘀𝘁𝗿𝗮𝘁𝗲𝗴𝘆 𝘁𝗼 𝗿𝗲𝘁𝗮𝗶𝗹 𝗶𝗻𝘃𝗲𝘀𝘁𝗼𝗿𝘀 𝘁𝗵𝗿𝗼𝘂𝗴𝗵 𝗦𝘁𝗮𝘁𝗲 𝗦𝘁𝗿𝗲𝗲𝘁 𝗘𝗧𝗙 https://lnkd.in/dCYdE-zK   Risk parity funds for retail investors have not worked well over the past decade or so (and Bridgewater’s All-Weather strategy has also underperformed for some time): the pioneer in the industry (Wealthfront Risk Parity Fund with $1.3bn in AUMs) is going to be liquidated in January https://lnkd.in/dya2H6SZ , and other products have also failed to beat a simpler 60/40 strategy.   This despite the carnage in bond markets in 2022 and the elevated asset correlations (or, more likely, because of…).   I guess it all boils down to the specific strategy used: this product will also use leverage in an ETF, so it will be interesting to see how it plays out. 

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Saw this on Bloomberg: "Publicly traded companies’ profits fell along with interest rates over the last four decades, while profit rates for privately-held firms climbed “substantially,” according to researchers for the Federal Reserve Bank of San Francisco. Private returns began to rise relative to public corporations in the late 1970s and are now more than 50% higher, the authors found. “This shift is substantial, with private company returns surpassing public corporation returns by over 10 percentage points after 2000.” When I read this, I am reminded of a paper by Michael Jensen entitled "The Eclipse of the Public Corporation" published in 1989 (yeah, I've been around a while) which stated: "Despite the protests, this organizational innovation should be encouraged. By resolving the central weakness of the public corporation—the conflict between owners and managers over the control and use of corporate resources—these new organizations are making remarkable gains in operating efficiency, employee productivity, and shareholder value. Over the long term, they will enhance U.S. economic performance relative to our most formidable international competitor, Japan, whose companies are moving in the opposite direction." https://lnkd.in/exR7-afv Private companies are not focused on the quarter, they are focused on creating value, longer-term value. Public companies, if they miss expectations by a penny, get punished severely lately - the focus on the quarter. Admittedly, if they are owned by GPs/funds, they can be used inappropriately to create payouts to LPs (see yesterday's post), buy generally, it is a better form of company. Thoughts?

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"Asset Pricing with Cognitive Biases and Deep Learning": "Biased expectations can explain two central puzzles in the asset pricing literature: the equity premium puzzle and the excess volatility puzzle." https://lnkd.in/euFNTFM7

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Paul Katzeff just published “6 Dos and 6 Don’ts for Your Portfolio Ahead of #Trump's Proposed Tariffs” for Investopedia and cited us. Also quoted were Paul Schatz, president of Heritage Capital and treasurer of the National Association of Active Investment Managers (NAAIM) and Said Israilov, CFP® at Israilov Financial. QUOTED EXCERPT Chartered financial analyst Michael Ashley Schulman, CFA, partner and chief investment officer of Running Point Capital Advisors, did not tell us his outright recommendations, but he said certain securities “could be affected” by #tariffs, and #investors should decide for themselves how to proceed. He pointed out the following #ETFs linked to countries facing tariffs. ~~ Running Point, “we are your family office”™️ #taxplanning #estateplanning #assetmanagement #future #investing #taxes #wealthmanagement #economy ~~ Disclosure: The opinions expressed are those of Running Point Capital Advisors, LLC (Running Point) and are subject to change without notice. This is not investment advice and this is not a recommendation to buy or sell a security. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Past performance is not indicative of future results. Forward-looking statements cannot be guaranteed. Running Point is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Running Point’s investment advisory services and fees can be found in its Form ADV Part 2, which is available upon request. RP-24-209

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