Monday Thoughts
So after a weekend of worries and likely follow-through from Friday’s risk-off bonanza, we had Trump ultimately throwing us another Taco episode. As of now, the darkest clouds might have lifted, but I wouldn’t call the tantrum entirely over. Moreover, realised volatility has picked up, which will force some volatility-targeting funds to reduce risk. This creates a natural absence of purchasing power, which should give way to more pronounced two-way action. As of today, I don’t see any need to lift my hedges or engage in chasing the market higher. I wait patiently for better market entry levels to appear.
In volatility events, I often go back to simple first principles. The most important one is that we are ultimately always dealing with uncertainty. That might seem obvious to you, but people often forget it. Let me rephrase it: we are acting in anti-certainty, the opposite of the very thing we often crave. One excellent book is by Peter Atwater, which deals with the very nature of uncertainty and how we as individuals approach it. A normal human trait is to want to engage in the comfort zone, where control and certainty are high.
Investing, however, moves outside the comfort zone, and we often find ourselves in the stress centre, where we lack control. A rigorous investment and risk management process, however, provides us with the tools to avoid losing control while accepting the very uncertainty we constantly deal with. When Friday came, I remained calm, knowing that I had some downside hedges in place and that I sized my positions appropriately.
For more details on Atwater and his excellent book, you can also check out some great podcasts he has been on.
Let’s now read some of Macro D’s thoughts, scan the weekly calendar and look at the latest output of our weekly asset allocation model.
Let’s go!