Better Than Advertised

The BLS Quarterly Census of Employment and Wages, collected from unemployment claims data, provides the Labor Department with a comprehensive view of the jobs and earnings market for the U.S. economy.  The first quarter 2015 survey covered over 9 million establishments employing a total of over 135 million employees—around 98% of the total population of individuals on company payrolls. In contrast the non-farm payroll series surveys a small sample, 143,000, of the population of 9 million establishments.

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Retail Prices and China

Regarding the price of retail products. Where are most of them made? China.
Import prices from China FELL 0.3% month over month and are down 1.3% YOY.
See below:

This speaks to the failure of the Philips curve framework to explain U.S. inflation swings. Inflation rose, 2010, with unemployment at 9%, as the China infrastructure boost lifted Chinese activity. Inflation is now quiescent with 5.5% unemployment, as China is in a bust.

A Note on Risk

mousetrapI heard a quote from Howard Marks at Oaktree, who was explaining that managing risk should not be left to designated risk managers: “The bottom line for me is that risk management should be the responsibility of every participant in the investment process, applying experience, judgment and knowledge of the underlying investments.” We love our risk guy – he is a critical part of our team, but I like to think that this diverse approach applies to our firm as well. Everyone in the firm, and clients who want to, have access to our risk analytics. We are all thinking about the elements of the portfolio, how they interact and the relationships we may have overlooked. We also look for trends about how others think about risk. What follows are a few observations:

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Convergence of Consensus

potd-horses_3003379kSince we have been in the business, and well before, sentiment measures have been used to gauge the popularity of trades –everyone of age remembers the MarketVane sheets. It is our sense that there is a more rapid convergence to consensus than ever before – that is, investors, in response to changing data, coalesce around a forward view very quickly. We hope to add some statistical meat to this idea over the next few months, but for the time being let’s begin with an anecdotal example. Continue reading

Know Your Roll – Commodity ETF Edition

The biggest macro-economic event in the past year has been the collapse in crude oil prices.  Since mid-July, WTI crude oil spot prices are down over 50%.


Source: Bloomberg

Crude is the most liquid (no pun intended) and most analyzed commodity on the planet.  Its covered exhaustively by a wide array of shareholders and stakeholders; public and private oil producers and consumers, physical traders, banks, and geopolitical think tanks just to name a few.  This is why the most interesting aspect about this huge move in crude is that no one foresaw the magnitude or velocity of this decline.  Bloomberg had an article back in December on the hedging strategy of some U.S. shale drillers which showed that those companies certainly did not anticipate a decline in crude prices like what we’ve seen.

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The U.S. as a Small Open Economy?

Back in the day, macroeconomists used one of two models to think about how central banks steer economies. For a big economy, with modest international trade and capital flows, the model ignored the rest of the world. The central bank, by changing liquidity conditions, raised and lowered interest rates. Changing interest rate levels drove interest sensitive sectors up and down, thereby tightening or loosening slack in the economy. Inflation rose or fell, depending upon the tightness or slack in domestic markets. For a small economy, with large international trade and capital flows, the model highlighted rest of the world dynamics. In this model, global capital markets set the interest rate. The central bank, by changing liquidity conditions, raised or lowered the value of the currency. A rising currency would restrain growth and weigh on inflation. A currency in retreat would do the opposite. The U.S. was the poster child for the large closed economy. Canada was the prototypical small open economy. Continue reading

Everyone is in a lather about…

…the disconnect between retail sales and jobs.  But check out this chart:

retail sales

The same thing happened in the mid 90’s, an absolute boom period.  What was going on….? Gas prices collapsed, just like now. Gas as a percentage of total sales has dropped by a third. Even stripping out gasoline isn’t totally clean either – the likes of Costco, Walmart and WaWa all sell gas as well.

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Where has all the alpha gone?

Where has all the alpha gone (to paraphrase a 60’s protest song)? Roughly, alpha is the ability to consistently outperform a well-defined benchmark. Alpha is notoriously hard to measure as most managers do not have records long enough to establish “consistently.” That matter aside, there are at least three forces compressing our notion of alpha – better benchmarks, better information and better liquidity. The traditional long only investing world has been wrestling with this issue for years, but the notion is now moving to the alternative space.

In the 60’s and 70’s, academic research on mutual fund results indicated that a better benchmark definition (compare a manager to a small cap index if she owns small cap stocks) diminished the perceived value added in fund results. Over the last 20 years or so, there has been an unknown quantity of permutations of alternative beta, hedge fund replication, liquid alts, and other repackaged versions of the same theme – to figure out if there is beta in the macho alpha alternative space. Continue reading