Philip Taylor, CFA

=> 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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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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"Looking at the historical relationship between the S&P 500 forward P/E ratio and subsequent three-year returns in the benchmark index shows that the current forward P/E ratio at almost 22 implies a 3% annualized return over the coming three years", writes Torsten Slok the Chief Economist at Apollo Global Management via The Daily Spark. A 3% annualized return from the S&P 500 indicates that the go-forward performance of all of the passive and active public equity strategies designed to mimic the returns of the market index will be insufficiently below an asset owner's minimum nominal return threshold (estimated to be 5% plus CPI). Add the well-chronicled backlog of private companies awaiting exits and the resulting illiquidity travails of private equity funds, how and from where will asset owners source suitable investment results to fund their organization's on-going spending and payout needs? Asset owners should now be untethering their public equity exposure from the anemic expected results of the S&P 500 (3% annualized?). Continued fealty to status quo, tracking-error constraints and style-box fidelity will impede an asset owner's ability to earn adequate nominal investment results. Investors should now consider the merits of liquid, publicly-listed equity strategies that pursue satisfactory absolute returns that reliably exceed an asset owner's minimum spending hurdle (estimated to be approximately 7%-8%). See link: https://lnkd.in/eQseqFHi

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Türkiye’s pivot musings: => Türkiye’s manufacturing PMI dropped to the post-pandemic low in September - yet another sign (alongside positive net reserves, improving external balances, lower gold imports and FX-protected deposits) that the policy U-turn is working as intended. => But is it enough for a monetary policy pivot and a rate cut already this year? A lot will depend on the central bank’s ability to meet its year-end inflation target of 38%. Quick calculations show that for this to happen, monthly CPI should average 1.15% or less in September/December. The September print (on Thursday) will show whether this is feasible.

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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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Empirical paper: "The simple difference between the current earnings yield on the S&P500 and the long-term real TIPS yield has significant forecasting power for excess returns." https://lnkd.in/e2k_QHWq

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"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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WHY THE CONSENSUS ON GOVERNMENT BONDS IS WRONG It is very tedious when ( virtually ) every commentator when asked about Goverment Bonds just repeats the same old tired narrative about strong US economy ( debatable & becoming more so ) and "sticky" inflation ( transitory ?) Since hitting it's major low in October 2023 the Ultra Long UK Gilt rose 26% in 9 weeks ( in Elliott Wave parlance a clear impulse wave ).It then embarked on a Elliott secondary reaction which saw it lose about 16% from the December high traced out over 4 months.ie it took twice as long to give up about 2/3 of the gain.This is a strong signal that the primary trend of the market is up.On the assumption that this secondary reaction is now over it will be replaced by another impulse wave ie a sharp upward move on a par with the Oct-Dec 2023 but probably bigger - starting anytime now.So in the real world what is going to cause Gilts & Tbonds to take off given the consensus view referred to above.Well yesterday the US Treasury announced a very interesting programme involving buying back US Tbonds ( despite the record deficit ) with the obvious aim of getting the entire yield curve lower in the run up to the US election.This monkeying around with the market also involves a facility where Banks & the Fed can swap low coupon TBonds for Higher ( current ) coupon Bonds to help stave off any Bank runs by boosting the cash flow from the higher coupon Bonds enabling the Banks to offer higher deposit rates in order to deter withdrawals.None of this is priced into the market and when it is put into practice it's effect on the prices of Bonds ( especially Long Bonds ) will be explosive as the demand for long Bonds will greatly exceed the supply irrespective of whether Inflation is "sticky ". A (the ?) major component of sticky inflation has been higher Oil prices and as Oil has now gone into sharp decline so Inflation will now become less sticky.Throw in a probable recession / sharply slowing economy with the long awaited effect on the Jobs market and all the ingredients are in place. It is a strange phenoneum in markets that when a strong consensus develops it usually turns out to be wrong - This could be a classic textbook example

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Retail investors are piling into leveraged ETFs: always when markets are at all-time highs (and it never ends well...) "Retail investors snap up triple-leveraged US equity ETFs" https://lnkd.in/d5qdVjaj

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Türkiye’s impressive but uneven macroeconomic adjustment - Progress in some areas, challenges in others: => The country’s current account posted a larger than expected surplus in August signaling that earlier improvements are not one-offs => Türkiye’s disinflation progress, however, has been more bumpy - the latest inflation print overshot the consensus and 12-month inflation expectations were largely unchanged at 27.44% => Fast disinflation is Priority #1 for Turkish authorities, and a slower progress can easily delay rate cuts until 2025

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If you think portfolio risk management is just about diversification, think again. This article sheds light on some surprising strategies that challenge common perceptions. Here are some thought-provoking takeaways: - Did you know that reducing the number of investments in a portfolio can sometimes actually decrease risks? It's all about strategic selection. - Contrary to popular belief, actively managing risk doesn't necessarily mean more frequent trading. In fact, a hands-off approach can be a smart move. - One of the key points discussed is the importance of understanding the correlation between investments, a factor often overlooked in risk management strategies. - Asymmetric risk and the role it plays in portfolio management is explored, offering a fresh perspective on balancing risk and return. - Ever considered tail risk hedging? This article dives into this lesser-known strategy that can enhance risk management effectiveness. Share your thoughts and feelings on these unconventional risk management strategies. https://lnkd.in/ecgSpH93

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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The Market Cap Weighted S&P 500 Has Been Dominating Its Equal Weighted Counterpart. Its relative performance has only been higher during the dot com bubble. CK 🔑: That isn’t to say we are currently in a bubble. But it’s clear that the largest of companies have been driving this trend to the upper historical limits. Market Cap Weighted Index: The weighting of each company is directly correlated to its market cap compared to the other companies in the index. If Apple’s market cap is 10% of the index, then when you buy the index, 10% of your investment will be in Apple shares. Equal Weighted Index: All companies are weighted the same. If the index you bought holds 500 companies, then each company will represent .2% of your investment. When the largest companies are doing better (like today) the market cap version should perform better. But you are also more concentrated in a select few companies. If dynamics change, then you’d prefer to be more diversified in the equal weighted version (like after the dot com bubble burst). For investors who believe technology companies will continue to dominate, then the market cap version may be preferred. For investors who want exposure to US stocks but are concerned that tech companies are making the market “too expensive” then perhaps the equal weight version makes more sense. There’s no single way to invest. It’s all about building the right plan for your specific situation. Source: Bespoke.

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A sentence on each of the top 11 MSCI markets based on CY25 USA: Market that offers the highest ROE (19.6%) in the world Japan: Only market that offers single digit ROE (9.1%). Yen has depreciated 13.5% CYTD UK: 15.2% ROE yet trades at a low PE of 11, maybe because the index is commodity heavy. China: Only market that trades at single digit PE of 9.2x. Most attractive PEG of 0.7 Canada: Numbers make this market vulnerable. Very unlikely to outperform in the near term. Doesn't stand out on any parameter. France: Story similar to Canada. Let's hope & pray that macros don't deteriorate post 7th July elections outcome. Switzerland: 18% ROE market. Aggressive rate cuts have impacted the currency.  Taiwan: Highest EPS growth. 2nd lowest PEG of 0.8. Highest (30.2%) returns CYTD. India: Highest PEx. 2nd highest EPS growth. Lowest dividend yield of 1.1%. 2nd best returns CYTD (14.2%) Germany: What a fall from grace! No outstanding parameters but not expensive either. Australia: Nothing is good barring dividend yield of 4%

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What's the best time to extend duration when rates start to come down and curves start to "disinvert"? Should you "T-bill and chill" until the central bank pulls the trigger and starts cutting, or is the juice all squeezed out of longer yields at that point? It’s a relevant question as more and more central banks start cutting rates, particularly for economies such as Iceland where policy rates are probably some distance above neutral. Thankfully, there’s a highly relevant and recent case study. A group of mostly EM economies with a thorny inflation history hiked rates early and fast in 2021, which helped bring inflation under control fairly quickly and allowed for rate cuts as early as last summer. I tried to search for clues based on the experience of these EM early hikers in a note to clients earlier this week (see link for a great summary by the editor of Innherji Hörður Ægisson: https://lnkd.in/ggNiP9sV). The average policy rate in these economies rose by 960bps, but has been cut by 290bps since last summer. During that period, 10Y yields rose on average 630bps, but have since rallied by 210bps. In other words, there is pretty strong transmission up the curve from the policy rate, leaving some interesting ways to play duration… which just leaves the question of timing. Here’s where things get interesting: On average, most of the rally in longer term yields takes place in around 300 trading sessions *before* the first cut. So far, there has been very little tightening of long yields *after* rate cuts commence. In other words, the rally tends to be driven by the end of hiking cycles, more than by the start of cutting cycles – when the cuts finally start, chances are there’s not a whole lot of juice left in longer term yields. Of course there’s no guarantee this pattern will be repeated, but it does support my gut feeling that the way to play policy normalisation is to be fairly discerning about placement on the curve, rather than blindly loading up on duration (even more so in markets where term premia have been eviscerated by QE).

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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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