Attack the Week (ATW)
Monday Thoughts
For the last 16 years, I have been playing Fantasy Football, more precisely, Fantasy Premier League. The game is simple; you have 100 mio to buy 15 players for your team. You can have three players from the same team. You can usually trade a player in every game week (38 game weeks) for free, with every additional trade costing you points. It’s fun, and I used to spend quite a bit of time trying to optimise the team for the best outcomes. I am part of a league with old colleagues, and we contribute a bit of money at the start of each season, with the top 3 taking in the rewards (60/25/15). I won the league once, don’t remember what year it was, but I failed to put money into the pot, so while I won, I didn’t see any cash, which was very frustrating.
As in any good portfolio, you want to have good attackers paired up with solid defenders to reap the best rewards. An attacker not conceding goals is the same as an attacker scoring. This year, the most expensive player was Erling Haaland, who scored 36 goals in 35 appearances. He costs 14 mio and is held by 90% of all roughly 8.5 mio fantasy teams. Like trying to beat an index, do you take the decision to go for cheaper and possibly similarly performing players, or do you effectively buy the index? Unsurprisingly, he scored 2 goals in his first game, so not having him in the squad is already proving to be a costly decision.
The game clearly has parallels to investing. Do you swap an underperforming player for one that is seemingly in form (losing vs. performing trades)? Is it worth getting penalty points and transferring more than one player (over-trading)? Shall I pay up for better defenders from more solid teams (insurance premium)? Who should I captain this week, as it gives me double points (scaling up your winners)?
Equally, some of the same frustrations come to mind. I often just bought a player just for him to start underperforming. I get injuries, and some players are suddenly left out of the squad (thank you, Pep, for leaving out Grealish and Stones). Every week, I scan the transfer market for the most initiated transfers. Unsurprisingly, you will find the majority of managers going for players who scored the most points in the previous week; there is a clear FOMO effect visible, which speaks volumes as to the human precondition. I had an ok start but will need to think about transfers for next week (demand also drives prices up). Wish me luck!
Much attention has been given to the Fed’s neutral rate and, therefore, the current appropriateness of monetary policy.
With US growth proving resilient despite over 500 bps of rate hikes, discussion around the neutral rate - the level the Fed can hold rates without needing to tap the gas or brake - has been picking up.
A reminder that Jackson Hole this year is on the topic “Structural Shifts in the Global Economy,” which opens the door for Powell to discuss the potential for a higher neutral real rate. While his speech has not yet been confirmed, it could raise the possibility for him to open the door by talking about a somewhat higher r* although this has not featured in any recent discussion recently.
On a different note, Liberty Street Economics blog post on Thursday captured some market attention, stating how short-run R* (neutral grade) has increased notably over the past year, according to their model, outpacing rate hikes to some extent.
NY Fed President Williams said recently the neutral real rate of interest had not risen from before the pandemic and may be "about half a per cent" in Q1 2023 (or 2-2.5% nominal, assuming CPI settles back at target).
It’s all stirring up as to the question of potentially higher neutral rates is concerned. It is natural as rates sell-off and curves steepen. Narratives usually change after prices have already manifested such a view. So let’s watch this one carefully as it unfolds over the coming weeks.
As for now, let’s jump in into the rest of ATW.