July 29, 2015
Category: Monetary Policy
A quick Epsilon Theory email and a quick announcement. Announcement first. I’ll be giving a 1-hour webcast on Risk Premia strategies next Tuesday, August 4th, along with Salient President Jeremy Radcliffe and Salient Portfolio Manager Rob Croce, who knows more about the guts of these strategies than anyone should. The webcast qualifies for CE credit if you care about such things (and who doesn’t!) and is hosted by our friends at RIA Database. The catch … you have to be a professional investor / financial advisor to sign up. Sorry. For more information or to register for the webcast, check out: “Alternative Return Streams in Challenging Markets”
|Dr. Cukrowicz:||Mrs. Venable, loving your niece as you do, you must know there’s great risk in this operation. Whenever you enter the brain with a foreign object …|
|Dr. Cukrowicz:||Even a needle thin knife.|
|Dr. Cukrowicz:||In the hands of the most skilled surgeon …|
|Mrs. Venable:||Yes, yes.|
|Dr. Cukrowicz:||There is a great deal of risk.|
|Mrs. Venable:||But it does pacify them. I’ve read that … it quiets them down. It suddenly makes them peaceful.|
|Dr. Cukrowicz:||Yes, that it does do, but …|
|Mrs. Venable:||But what?|
|Dr. Cukrowicz:||Well, it will be years before we know if the immediate benefits of the operation are lasting or maybe just passing or perhaps … there’s a strong possibility that the patient will always be limited. Relieved of acute anxiety, yes, but limited.|
|Mrs. Venable:||But what a blessing, Doctor, to be just peaceful. To be just suddenly peaceful. After all that horror. After those nightmares. Just to be able to lift up their eyes to a sky not black with savage devouring birds.|
– “Suddenly, Last Summer” (1959)
Here are two Bloomberg charts that show what I mean. On the top is a 5-year chart of DXY – the trade-weighted dollar index. On the bottom is a 5-year chart of WTI crude oil spot prices. Does this look like an accidental relationship to you? Can we just stop with all the hand-wringing about how there’s suddenly too much oil in the world, or how the Saudis are trying to crush US shale production, or any of the other spurious supply-and-demand “explanations” for why oil prices have collapsed? Seriously. Can we just stop?
Monetary policy divergence manifests itself first in currencies, because currencies aren’t an asset class at all, but a political construction that represents and symbolizes monetary policy. Then the divergence manifests itself in those asset classes, like commodities, that have no internal dynamics or cash flows and are thus only slightly removed in their construction and meaning from however they’re priced in this currency or that. From there the divergence spreads like a cancer (or like a cure for cancer, depending on your perspective) into commodity-sensitive real-world companies and national economies. Eventually – and this is the Big Point – the divergence spreads into everything, everywhere. Some things will go up, and some things will go down. But the days of ALL financial assets inflating in lock-step … the days of everything, everywhere going up together … that’s over.
For a lot of active investment managers, this is great news. For a lot of politicians and central bankers – particularly the weaker ones, either in resources or in willpower (yes, I’m looking at you, Alexis Tsipras) – this is terrible news. For investors? Well, it’s a mixed bag. Certainly it’s a more difficult bag, where so many of the learned behaviors of the past five years that worked so well in an environment of monetary policy coordination will fail miserably in an environment of monetary policy competition. But it beats getting a lobotomy. I think. We’ll see.