Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

i wanna invest like 50k so i dont dump it to schnieds and all those other luckboxes. where should i put it?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
If you thought you were the best (pure/skilled/technological/whatever) trader in the world with $10B AUM, but could only trade in one market, what would you trade?

[/ QUOTE ]

It's more a question of what market could you trade as B$10, especially on margin, will take you over the limits for many futures contracts. Even if it didn't, you'd have huge liquidity problems shifting that much in and out of a market.

You'd probably only be able to trade currencies - and only the more liquid markets such as cable or USD/EURO. Currencies are the world's biggest market.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
Barron,

I'm in college and have read that interviews will often ask about particular stocks or how the economy is "doing" in general. The former seems pretty easy to research and understand, but how do you concisely explain the state of the entire economy? Pick a few major recent events and their effects? Talk about market direction and interest rates?

[/ QUOTE ]

Good question. It’s very tough because there is so much to talk about. They want to see how you structure your answer, what you think is important, and how it all links together.

here's how i'd tackle that question given today's economy. EDIT AFTER WRITING: I’ve noticed I drolled on there for a good long time and talked about a ton. This is my complete view of what we see in the mkts today. I’m sure I missed some stuff and maybe concentrated on unimportant things but I laid it out as if I were the interviewee (and I will be while I hunt for a job). Please don’t just take these comments to the interview w/o understanding them as that will hurt you if asked to elaborate on anything.

So, please ask me to elaborate on anything you think I’ve messed up or missed etc. etc.



Interviewer: "so what do you think of the economy today? where is it going in the future? and why?"

Me: "well first off, I’d like to break the “economy” into asset classes and countries.

Taking global equities first, we have seen a sharp run up in stock prices worldwide. Growth has been strong and globally synchronized. For the first time ever, all OECD countries are growing simultaneously. Globalization has appeared to link the economies of the world structurally. Chinese growth has obviously been a massive driver and demand from that country does not appear to be slowing. Even if efforts to slow the economy by the govt pan out, a growth rate of 8% is still likely.

A few things have kept equity prices up. First and foremost is the massive # and amt of deals we’ve seen and continue to see. Leveraged buy outs, share buy backs, mergers, acquisitions, and the like all push ever higher on global equity prices. China may also be moving towards a bubble as the # of new accounts to buy equities has shot up at insane rates. Private equity firms are also flushed with cash. All this cash is tied to the next point, fixed income.

Global rates are very low and credit spreads are squeezed tight as a drum. These low rates, when compared to equity yields, make borrowing to purchase companies via cash & debt very attractive. We see this from corporate bond spreads and the deals being done mentioned above. Global capacity utilization at this point in the cycle would usually be getting strained and margins feeling some compression. The globalization though has flooded the world with cheap labor which has kept margins fat and capacity lower than typical at this point of the business cycle.

Emerging market debt spreads above risk free rates have also come in a great deal. At least part, if not all, of this is legitimate. Developing economies have changed the way they handle a booming commodity mkt (and thus a very large income stream for commodity exporters). Typically, those countries would actually be running current account deficits by importing a ton and financing those imports with money that would love to invest in their country given how it's doing. But this time, we see those countries running a current account surplus. This is because they are growing and using the export money to invest in their own country (and around the world, thus running a capital account deficit). Overall this is great, but spreads can’t get much tighter. Further, some commodity exporters are running CA deficits & borrowing funds from around the world to consume. This is troubling since a shock there, even if triggered by that country’s economic situation alone, would likely reverberate across emerging mkts and widen spreads.

As a result of everything above (high liquidity, high growth, global demand), commodity prices are high as well. China demands a great deal of them as does Japan, the US, & Europe.

Moving on to China. Last week (week of may 14th), they finally acknowledged that good 'ol fashioned central bank tightening is really what is needed to slow the economy down. In order to do that, they have to let their currency appreciate vs. the dollar and uncouple their monetary policy from the US (i.e. while the currency is pegged, they can’t raise rates). Otherwise, domestic inflation will rise making the peg worthless (competitiveness will fall as domestic prices rise regardless of the Yuan's level vs. trading partners). This will also help push global rates up as their massive ($1.2 TRILLION) reserves of US bonds will stop accumulating and the US 10yr rates will start to move up.

This slow loosening of the peg is a step in the right direction, but more is needed. China is accumulating a CA surplus far faster than it is allowing its currency to rise. It will need to purchase ever more US dollars (and thus US bonds) to keep its currency in line. So the Yuan is highly pressured to appreciate vs. the dollar.

In terms of currencies, the Yen is also near record lows (121 as of may 18th). Given the low yields in Japan, this has caused a re-appearance of the carry trade, most notably to the US & Australia. These unhedged flows are self defeating in a way and can cause a global risk aversion shock if/when it finally snaps (self defeating b/c selling yen to buy AUD/USDs assets puts more downward pressure on the Yen which makes investment in Japan even more attractive. Eventually, those fundamental economic flows will dwarf the carry trade flows causing those invested in it to repatriate at ever worse prices).

The dollar is also very weak vs. the Euro and the Pound. This weakness, however, is warranted as the US needs to borrow ever greater amounts in order to keep financing the massive CA deficit. The figures are truly staggering and an even weaker dollar is possible so long as imports remain as high as they have been in the recent past (we’ve had some good news on this front in the past few weeks, but not enough).

In terms of the domestic economy, we saw some weak growth #s in the first quarter and a slight reduction in the inflation rate, which is still outside the fed’s “comfort zone.” The mkts are still pricing in cuts though and given the consumer confidence we’ve seen and the Chinese apparent yielding to US trade concerns (rate hike & peg movement), that/those cut/cuts isn’t looking too likely. A realization of no cuts int eh future may also put a damper on equity prices. The housing issue we have seen hasn’t dampened consumer confidence but has put a dent in growth as we saw from Q1 estimate. Overall though, the economy looks good and inflation is still a touch high. I’d think the next rate move will be a hike, not a cut. Especially since the slack in the global economy felt as a result of global low wages is reducing and wage pressures may rear their ugly head sooner than expected.

Finally, to give us all that warm fuzzy feeling the global economy has exhibited, we have very low mkt volatility. Any one of those de-stabilizing things mentioned above can cause this to spike as it did in February. A rise in risk aversion will hurt global asset prices across the board (save the US treasuries & gold, which has done well due to high liquidity).

So, to wrap up, the major themes we have going on are

1) syncronized global growth as a result of highly correlated business cycles.
2) low rates/high liquidity
3) high commodity prices
4) strong emerging mkt growth that doesn't look panic/currency devaluation prone.
5) a carry trade that has a potential to destabilize the lowly volatile environment.
6) weak and weakening US dollar
7) strong US economy w/ a touch of inflationary pressure
8) unbelievably low volatility

In the future, I'd look for a global pull back in equities and US assets as risk premia adjust from their currently tightly squeezed position as the last leg of the cycle finally starts to come into full swing. I’d be long volatility as we are strained as it is and there are many points from which a scare could emanate.

hope this helps.
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Superb post on where we are today.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
i wanna invest like 50k so i dont dump it to schnieds and all those other luckboxes. where should i put it?

[/ QUOTE ]

in my pocket. transfer to me on stars [img]/images/graemlins/smile.gif[/img] ... i'll dump it to them for you lol.

seriously, id think about whether this is retirement money, active management money (not recommended), or short term savings.

i'd lean towards simply making a nest egg for yourself by adding this to your retirement type account to the extent you could.

i would create an equity heavy passive portfolio for the loonnnnggg term. it would probably come out to:

30% global equities (F*CKING HEDGED)
30% global developed aggregate bonds (also hedged, but for some reason asset managers always hedge bond allocations but not equities)
15% developing world bonds (hedged)
15% global inflation linked bonds (hedged)
5% commodities
5% global real estate (hedged)

this may not look "equity heavy" but in risk space it comes out that way (i.e. equities are the dominant investment in when st.devs and correlations are taken into acct)

also, this is just off the top of my head. it is probably not optimal. but i'd bet it's pretty darn close and way better than what anybody will tell you if you go to any type of typical wealth manager. this is a good way to get a ton of bang for your buck. i'd this portfolio probably has about a .4-.5 sharpe ratio vs. the .3 or so for your typical passive portfolio that is like 60% equities/30%bonds/10% other (comm. real estate etc.).

if you can find funds that are cost effective and leverage the IL bonds & aggregate bonds for you, then you are even better off!! using intelligent leverage to bring everything to the same risk level as equities would probably push the portfolio sharpe ratio up to .6-.7. that is as high as you can likely get by utilizing the vastly underpriced correlations & leverage.

DISCLAIMER: this is just advice from some kid. do not construe this as official investment advice. this disclaimer goes for everything i say in this thread. i am hereby releasing myself of all liabilities should you concentrate on short term results and come to my door demanding me compensate you. sorry, no dice.

i'd want to rebalance that monthly.

OH YEAH FOLKS. i forgot to mention in my portfolio construction posts the importance of rebalancing. gotta do it!!!! otherwise, your most volatile assets may dominate your portfolio at the exact times when you don't want them to while at the same time removing exposure from your diversifying assets. HUGE folks HUGE!

hope this helps,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
Barron,

Where do you feel "knowledge accumulation" is more efficient - entry level at hedge fund or reading everything you can get your hands on at home + occasionally seeking out smart people to discuss / learn? I ask this b.c. I am beginning to see a parallel with the entry level job as a more advanced+focused extension of college, which is a highly inferior learning mechanism b.c. there are too many stupid demands and distractions for optimal learning(i.e. GPA, people who love to contagiously waste time, and classes on English literature).

Assume you have financial flexibility from poker that the pay from any job is irrelevant, as well as enough $$$ to start a small personal fund when the "knowledge accumulation" has hit a desired level -- and then make back any losses through poker. The stop would be pretty tight the first time [img]/images/graemlins/wink.gif[/img]

[/ QUOTE ]

without my former employer's training, i would be light years from where i am today. my love of this stuff wouldn't be where it is and i can't thank them enough. i wish everybody could get the training i got. i am still unbelievably far from where i want to be but this first step has helped a ton.

i would recommend an entry level analyst job wherever you could get one. hedge fund, research shop, bank etc.

steer clear of investment banks that will peg you in a hole and that will be your label for life (this is hearsay from friends in IBDs of bulge brackets and boutique banks).

i vote for job!!! training is invaluable. i could never have gotten this far on my own. the next steps i feel like i can get to as a result of the base i have, but i still need more training and want to get it on my next job.

also, you should be reading everything you can get your hands on anyways. it all links together and is all important. ECONOMIST ECONOMIST ECONOMIST. that magazine is so underpriced it is sick. i want to lock in that rate for the next lifetime.

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
Superb post on where we are today.

[/ QUOTE ]

thanks, i aim to please and the time it took to write it was well worth it. forced me to outline my thoughts.

through this forum's feedback i'd like to improve it though so help me out.

thanks again for your compliment.

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
Superb post on where we are today.

[/ QUOTE ]

thanks, i aim to please and the time it took to write it was well worth it. forced me to outline my thoughts.

through this forum's feedback i'd like to improve it though so help me out.

thanks again for your compliment.

Barron

[/ QUOTE ]

I don't have the data in front of me, but careful on #8 "unbelievably low volatility". I don't think that's actually true if you look further back then the last 10 or 20 years (can't remember which).

Also...are you talking about implied or realized vol?

If I recollect correctly, we are at what was a normal vol for a long time if you go back far enough. Late 90s was abnormal vol.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Superb post on where we are today.

[/ QUOTE ]

thanks, i aim to please and the time it took to write it was well worth it. forced me to outline my thoughts.

through this forum's feedback i'd like to improve it though so help me out.

thanks again for your compliment.

Barron

[/ QUOTE ]

I don't have the data in front of me, but careful on #8 "unbelievably low volatility". I don't think that's actually true if you look further back then the last 10 or 20 years (can't remember which).

Also...are you talking about implied or realized vol?

If I recollect correctly, we are at what was a normal vol for a long time if you go back far enough. Late 90s was abnormal vol.

[/ QUOTE ]

awesome. this is what i need. it is now redded out in the word document.

i meant implied volatility.

i will look this up at bloomberg terminal tomorrow.

more critiques pls!! feedback from you, sniper, pig etc. are appreciated (just as feedback from everyone else is as well, but just to get you guys involved!)

thanks,
Barron

EDIT: PS- do you have data on volatility going back farther than i'd get from bb?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
Barron,

Where do you feel "knowledge accumulation" is more efficient - entry level at hedge fund or reading everything you can get your hands on at home + occasionally seeking out smart people to discuss / learn? I ask this b.c. I am beginning to see a parallel with the entry level job as a more advanced+focused extension of college, which is a highly inferior learning mechanism b.c. there are too many stupid demands and distractions for optimal learning(i.e. GPA, people who love to contagiously waste time, and classes on English literature).

Assume you have financial flexibility from poker that the pay from any job is irrelevant, as well as enough $$$ to start a small personal fund when the "knowledge accumulation" has hit a desired level -- and then make back any losses through poker. The stop would be pretty tight the first time [img]/images/graemlins/wink.gif[/img]

[/ QUOTE ]

without my former employer's training, i would be light years from where i am today. my love of this stuff wouldn't be where it is and i can't thank them enough. i wish everybody could get the training i got. i am still unbelievably far from where i want to be but this first step has helped a ton.

i would recommend an entry level analyst job wherever you could get one. hedge fund, research shop, bank etc.

steer clear of investment banks that will peg you in a hole and that will be your label for life (this is hearsay from friends in IBDs of bulge brackets and boutique banks).

i vote for job!!! training is invaluable. i could never have gotten this far on my own. the next steps i feel like i can get to as a result of the base i have, but i still need more training and want to get it on my next job.

also, you should be reading everything you can get your hands on anyways. it all links together and is all important. ECONOMIST ECONOMIST ECONOMIST. that magazine is so underpriced it is sick. i want to lock in that rate for the next lifetime.

Barron

[/ QUOTE ]

Economist is very much on target, I agree. Once a week + online is not enough for me - luckily there are decades of back issues which I would argue are even more valuable than current ones if your goal is learning as opposed to currently managing money.

Another question: What are some specific things you learned in the training that make you value it so strongly? How does it relate in terms of strength to an analogy of learning poker with or without 2+2 and/or the help an already accomplished player?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Barron,

Where do you feel "knowledge accumulation" is more efficient - entry level at hedge fund or reading everything you can get your hands on at home + occasionally seeking out smart people to discuss / learn? I ask this b.c. I am beginning to see a parallel with the entry level job as a more advanced+focused extension of college, which is a highly inferior learning mechanism b.c. there are too many stupid demands and distractions for optimal learning(i.e. GPA, people who love to contagiously waste time, and classes on English literature).

Assume you have financial flexibility from poker that the pay from any job is irrelevant, as well as enough $$$ to start a small personal fund when the "knowledge accumulation" has hit a desired level -- and then make back any losses through poker. The stop would be pretty tight the first time [img]/images/graemlins/wink.gif[/img]

[/ QUOTE ]

without my former employer's training, i would be light years from where i am today. my love of this stuff wouldn't be where it is and i can't thank them enough. i wish everybody could get the training i got. i am still unbelievably far from where i want to be but this first step has helped a ton.

i would recommend an entry level analyst job wherever you could get one. hedge fund, research shop, bank etc.

steer clear of investment banks that will peg you in a hole and that will be your label for life (this is hearsay from friends in IBDs of bulge brackets and boutique banks).

i vote for job!!! training is invaluable. i could never have gotten this far on my own. the next steps i feel like i can get to as a result of the base i have, but i still need more training and want to get it on my next job.

also, you should be reading everything you can get your hands on anyways. it all links together and is all important. ECONOMIST ECONOMIST ECONOMIST. that magazine is so underpriced it is sick. i want to lock in that rate for the next lifetime.

Barron

[/ QUOTE ]

Economist is very much on target, I agree. Once a week + online is not enough for me - luckily there are decades of back issues which I would argue are even more valuable than current ones if your goal is learning as opposed to currently managing money.

Another question: What are some specific things you learned in the training that make you value it so strongly? How does it relate in terms of strength to an analogy of learning poker with or without 2+2 and/or the help an already accomplished player?

[/ QUOTE ]

things in training were just how to think about financial instruments.

how to evaluate risk premia, expected returns, st.dev, correlations and the like.

final exam questions were like what are the expected MONTHLY correlations of things like "US eurodollar futures & japanese euroyen futures, world stocks & world bonds, nominal bonds & IL bonds"? and what happens if you look at those over rolling longer time periods?

also, valuation of securities overall. how to construct and value different cash flows (even w/ my MBA in mathematical finance i had trouble with this section of the class).

option pricing with discrete dividends etc.

just overall the most solid training i could imagine. i can only hope to do it justice and be ever building on it

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
If you thought you were the best (pure/skilled/technological/whatever) trader in the world with $10B AUM, but could only trade in one market, what would you trade?

[/ QUOTE ]

obviously the market im the best at trading. no "best in the world" trader is best at all markets.

Barron

[/ QUOTE ]

Allow me to rephrase: please name the market in which you think you could develop the biggest edge.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
i'd want to rebalance that monthly.

[/ QUOTE ]

Just for clarification, Barron, you consider monthly rebalancing to be passive?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
i'd want to rebalance that monthly.

[/ QUOTE ]

Just for clarification, Barron, you consider monthly rebalancing to be passive?

[/ QUOTE ]

i do not...but i think it is necessary enough to "mix alpha and beta" in this one instance.

obviously it is a conscious choice that impacts returns so in the simplest sense, it is not a passive, but an active decision.

however, by weighing the consequence of not rebalancing at some interval, or within some range, i think a strong case is clearly in favor of rebalancing.

given the importance of it with respsect to your portfolio, i think some decision about it must be made (i.e you must rebalance vs. not rebalance at all).

given that, at what interval? in what manner? how much transactino cost witll you entail? what will the impact on the portfolio be?

these are all good questions and given some literature i've read on the subject and what i've seen (albeit a small sample, but a good sample...as in a solid sample of funds i would trust), monthly rebalancing seems to be a good option.

if i can flip the question, what would you recommend??

no rebalancing? or a different method (range rebalancing)?

good catch though b/c that is a distinction i failed to make explicit.

thanks,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
If you thought you were the best (pure/skilled/technological/whatever) trader in the world with $10B AUM, but could only trade in one market, what would you trade?

[/ QUOTE ]

obviously the market im the best at trading. no "best in the world" trader is best at all markets.

Barron

[/ QUOTE ]

Allow me to rephrase: please name the market in which you think you could develop the biggest edge.

[/ QUOTE ]

i guess it would have to be either IL Bonds or Currencies... depends.

with currencies, you have the largest # of non-profit seeking participants. and they act with large amounts of money...in many isntances for long periods of time. but when those non-profit seeking participants lose, they lose big.

with IL bonds, not many people truly understand these instruments and in some mkts, they are simply a necessary thing (UK) mandated by law basically. in other mkts, they are vastly underutilized, so there is some great potential for profit for an expert.

overall though i think i'd be a currency trader if i were the best in teh world.

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Great response re: the economy status. I'm going to pick a few of those main ideas to look in to and will let you know if I have any follow up questions.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Barron, im multitabling and cant skim the whole thread, so just tell me if this has been asked and answered. In other threads you have mentioned how you firmly believe that the Chinese will be forced to devalue the yuan in the near future. Can you run the the scenario and mechanisms that you believe will force this change?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Interesting thread.

[ QUOTE ]
i would create an equity heavy passive portfolio for the loonnnnggg term. it would probably come out to:

30% global equities (F*CKING HEDGED)
30% global developed aggregate bonds (also hedged, but for some reason asset managers always hedge bond allocations but not equities)
15% developing world bonds (hedged)
15% global inflation linked bonds (hedged)
5% commodities
5% global real estate (hedged)


[/ QUOTE ]

A long term portfolio with virtually no domestic positions?

Do you currently have a portfolio set up like this?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
Barron, im multitabling and cant skim the whole thread, so just tell me if this has been asked and answered. In other threads you have mentioned how you firmly believe that the Chinese will be forced to devalue the yuan in the near future. Can you run the the scenario and mechanisms that you believe will force this change?

[/ QUOTE ]

UGH. i f*cked up. read the part below "EDIT" first and then read the part directly below. thanks


revalue. appreciate.

and sure. if their economy miraculously slows and inflation concerns subside.

specifically, if the global economy slows simultaneously and a decrease in demand for chinese exports relive the stress that ths huge current account surplus is causing right now.

another one might be a shock, like labor productivity falling off drastically due to some huge problem somewhere in the country. that might make their prices unfavorable enough on a global scale so that the demand for the goods falls off.

basically, the economy needs to slow to head off inflation. inflation needs to not be a worry and then the chinese can maintain their peg without a problem.

just to be clear though, the chinese CAN maintain this peg indefinitely. it's not like many other devaluations that have occurred (US off the gold standard & failure of bretton woods, latin american crises in the 80s, UK in '92, argentina in i think it was '02, thailand and subsequently malaysia & others in the asian crisis in '98). in all those cases, the countries tried to prop up their currency by selling foreign currency reserves & purchasing their currency.

but in order to do that, you have to have foreign currency reserves (or in the US's case in 1971, gold). when you run out, you're done. interest rates then spike etc. etc. as the country has to make a choice between domestic affairs or the peg (typically, the country is entering a recession at the same time as rates rise to attract foreign capital to maintain the peg. this is horrible for domestic economy & eventually the devaluation comes and it is a relief).

china has a similar choice to make, but it can simply print renminbi all day long & sell them & buy US$ (and thus 10yrs). the only reason they don't want to do that is inflation. that increase in money supply is hugely inflationary and will cause domestic prices to rise sharply.

that rise in prices will cause the price of their goods internationally to rise as well. the point of the peg is to keep their goods competitive on the global stage.

once the demand for goods falls off, the CA stops growing at its current pace and the pressure to revalue backs off a bit (both from the US and from economic fundamentals)

like anything in finance, this isn't black and white, the unexpected can happen and the chinese may not need to revalue. but in every other case (where the shocking doesn't happen), the chinese economy needs to slow. interest rates must rise. in order to do that, the yuan must revalue.

hope this helps, as always, let me know if i've missed or confused something as i'm sure has happened and will happen.

EDIT: CRAP!!! i misread your questison. i thought you asked what would cause them to NOT have to revalue.

basically they do have to revalue and the mechanisms are touched on above. i thought you had that part clear and wanted to know the reverse case (as i firmly believe you should always think about so you can see the seeds of it earlier than others when a shock hits etc.)

the case as it is now goes like this:

china wants to run an export led economy. they want their exports to be the cheapest. they have cheap labor and their plan of keeping their goods the cheapest by holding their currency down vs. the dollar has worked wonders.

in fact, it has worked too well. growth has been double digits. since china had so much capacity to utilize before growth became inflationary, the economy COULD grow at that rate...until inflation became (and is) a problem.

inflation raises domestic prices. the rise in domestic prices will make their goods less attractive and thus defeats the point of the peg to keep their prices down. if they let it come to this, the shock will be painful and as history has shown in every single instance (there is not one case i have heard of where the opposite of this happens), a country will ALWAYS choose its citizens and its domestic affairs over its peg.

instead, the chinese economy needs to be slowed down. in order to do that, china has raised reserve requirements for banks, threatened capital gains tax increases (which helped spart the february sell off and 9% loss in shanghai), and done everything conceivable to slow it down and reign in the liquidity...except what it needs to do.

china needs to raise rates to slow the economy & head off inflation.

it cannot raise rates while it is pegged to the dollar. a peg, in effect, ties together the two country's monetary policies. so in order to raise rates, the yuan must be allowed to appreciate.

is this clear? or am i a jumbled meess here??

thanks,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
Interesting thread.

[ QUOTE ]
i would create an equity heavy passive portfolio for the loonnnnggg term. it would probably come out to:

30% global equities (F*CKING HEDGED)
30% global developed aggregate bonds (also hedged, but for some reason asset managers always hedge bond allocations but not equities)
15% developing world bonds (hedged)
15% global inflation linked bonds (hedged)
5% commodities
5% global real estate (hedged)


[/ QUOTE ]

A long term portfolio with virtually no domestic positions?

Do you currently have a portfolio set up like this?

[/ QUOTE ]

domestic exposures are encompased and are in fact the largest exposure in all "global" allocations.

in risk terms above, i bet domestic equities haveprobably a 10-15% weight.

domestic aggregate bonds have maybe a 8-12% weight. these are guesses but the point is that US equities are heavily weighted in a Global Equity allocation (that is not expressly "ex-US")

similarly, global aggreagate bonds give a large weight to the US.

ironcially, no i don't. a ton of my money right now is tied up in real estate and when i eventually sell and get cash i will set up this portfolio.

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

anyone interested on a good summary of the china situation read this:

Bloomberg article that does a good job.

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Superb post on where we are today.

[/ QUOTE ]

thanks, i aim to please and the time it took to write it was well worth it. forced me to outline my thoughts.

through this forum's feedback i'd like to improve it though so help me out.

thanks again for your compliment.

Barron

[/ QUOTE ]

I don't have the data in front of me, but careful on #8 "unbelievably low volatility". I don't think that's actually true if you look further back then the last 10 or 20 years (can't remember which).

Also...are you talking about implied or realized vol?

If I recollect correctly, we are at what was a normal vol for a long time if you go back far enough. Late 90s was abnormal vol.

[/ QUOTE ]

i looked at the implied probability chart for the VIX today (based off S&P equity options). the chart matches what you stated that it got up to 40 in the late 90s.

the all time low was 10.2 (jan. 2007) or so and it is currently trading at 12.5. given that not much has changed since february when it shot up to 18, i'd still say that this is low volatility environment.

i forgot to look up the yen implied vol but i'm sure it shows something pretty similar.

so while you are right that "unbelievably low vol" is a vast overstatement, the relative volatility priced in today i think is too low.

this could easily be the result of low realized volatility in past months/years and an increase in the writing of equity options on the S&P pushing implied volatility down artificially (given that there are many shocks that can happen in the near term that could match or exceed the february spike).

thoughts?

thanks,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

What's the "best business" that you have ever come across?

What do you think makes a perfect business, and can you think of an example?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

easy to answer noob question:

Why is China trying to limit the growth of their economy? To avoid a bubble or something?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

also one more:

why did the dow jones drop over 10% after 9/11 ? Seems quite high a drop

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

Various DCF treatments of the nation's debt and other obligations (future medicare & drug payments, etc.) have indicated a $60-$70 trillion deficit. The country's entire capital stock is only like $45 trillion.

Cutting benefits enough to ever make a dent in this deficit will not be politically feasible anytime soon. Inevitably they'll pay for some of it with tax increases, and the rest through an inflation tax.

Questions:
1) I think a severe economic crisis, including double-digit inflation, is inevitable at some point in the next 10 years. Do you believe this? If not, why not?

2) At what point does the willingness of foreign creditors to hold our debt begin to erode, and the dollar seriously tank?

3) How high does inflation go? How much does the dollar fall relative to major currencies?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
What's the "best business" that you have ever come across?

What do you think makes a perfect business, and can you think of an example?

[/ QUOTE ]

the best business i've ever come accross, ay?

well, i guess that depends on how you choose to rank, "best" and "come accross."

i'll take the latter as "know of" and the former as "most profitable."

i think buffet's company has to be up there. i think my former employer has to be up there. i also think many of the investment banks that came from small boutiques to where they are now have to be up there.

the problem is that some of the best businesses i see today suffer from hugely severe survivorship bias.

if we tweak the definition of "best" a bit to "best a priori" then we don't suffer from looking back. but at the same time, we lack the ability to collect evidence.

what determined the founding of firms like MSFT, the brilliant idea and motivation of their founder? or the time during which they were founded? or is it both?

clearly you ask a good question since there is no clear answer. the thought process involved shows that the choice of definition leads us in different directions.

but i think, through an assumption about the intent of your question, the "best business i've ever come accross" might very well be one that failed. specifically, during my MBA i interned for a man who had a patent on a method for valuing intellectual property assets. his business idea was to purchase those assets from companies that required cash for a large up front payment, and then exclusively lease those assets back to the inventors.

the concept was great and the ancillary benefits of having a pool of intellectual property from which an exponential new amount of patentable ideas (or new uses, customers, or combinations of ideas in the pool) could be generated. ultimately, his mis-management, and the nature of the inventor doomed the business.

i hope this gave you something of an answer [img]/images/graemlins/confused.gif[/img]

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
What's the "best business" that you have ever come across?

What do you think makes a perfect business, and can you think of an example?

[/ QUOTE ]

the best business i've ever come accross, ay?

well, i guess that depends on how you choose to rank, "best" and "come accross."

i'll take the latter as "know of" and the former as "most profitable."

i think buffet's company has to be up there. i think my former employer has to be up there. i also think many of the investment banks that came from small boutiques to where they are now have to be up there.

the problem is that some of the best businesses i see today suffer from hugely severe survivorship bias.

if we tweak the definition of "best" a bit to "best a priori" then we don't suffer from looking back. but at the same time, we lack the ability to collect evidence.

what determined the founding of firms like MSFT, the brilliant idea and motivation of their founder? or the time during which they were founded? or is it both?

clearly you ask a good question since there is no clear answer. the thought process involved shows that the choice of definition leads us in different directions.

but i think, through an assumption about the intent of your question, the "best business i've ever come accross" might very well be one that failed. specifically, during my MBA i interned for a man who had a patent on a method for valuing intellectual property assets. his business idea was to purchase those assets from companies that required cash for a large up front payment, and then exclusively lease those assets back to the inventors.

the concept was great and the ancillary benefits of having a pool of intellectual property from which an exponential new amount of patentable ideas (or new uses, customers, or combinations of ideas in the pool) could be generated. ultimately, his mis-management, and the nature of the inventor doomed the business.

i hope this gave you something of an answer

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
easy to answer noob question:

Why is China trying to limit the growth of their economy? To avoid a bubble or something?

[/ QUOTE ]

basically to avoid many possible outcomes that result from overly fast growth.

internal inflation, the shock of a market that will likely grow far beyond rational (or even irrational) valuation, the possible internal push for things the government is unwilling to currently allow, forced financial market reform etc.

there are many reasons but the most pressing are the ones that are deemed to pose the biggest threat. imo, those are the inflation & asset price bubble factors.

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
also one more:

why did the dow jones drop over 10% after 9/11 ? Seems quite high a drop

[/ QUOTE ]

the dow dropped over 10% because far more people were dying to sell than those that were interested in buying, until the price became attractive.

why there were far more people dying to sell is a question that goes to the heart of stock price prediction. similar instances occur all the time, but to lesser degrees. in this case, i think the sheer uncertainty of what COULD happen caused a great deal of the selling. nobody had ever witnessed a terrorist event exactly like 9/11 and the fact that it took down buildings that housed some of the great financial firms in the world caused some panic that underestimated the ability of those great financial firms to be just that...great. they rebounded and quickly found new headquarters and business proceeded as usual after a period of adjustment.

the horror and increase in risk aversion that followed the event certainly had a hand in the desire to offload risky assets and i'm sure played a part in the closing of the exchange.

there are other reasons i'm sure but i think those listed conveniently above give a general sense of what was going on in the minds of enough of the sellers.

feel free to probe deeper [img]/images/graemlins/smile.gif[/img]

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
Various DCF treatments of the nation's debt and other obligations (future medicare & drug payments, etc.) have indicated a $60-$70 trillion deficit. The country's entire capital stock is only like $45 trillion.

Cutting benefits enough to ever make a dent in this deficit will not be politically feasible anytime soon. Inevitably they'll pay for some of it with tax increases, and the rest through an inflation tax.

Questions:
1) I think a severe economic crisis, including double-digit inflation, is inevitable at some point in the next 10 years. Do you believe this? If not, why not?

[/ QUOTE ]

given what you said, and assuming nothing changes, then yes, that is likely.

however, adaptation is unestimable and you can't capture that in a cash flow model.

people said for decades that we'd run out of oil. no way we can demand as much oil as we are given the current stock and rate of extraction. well, we still have tons of oil, and our extraction methods have improved far more than predicted. further, as the price rises, the demand will fall via substitution & less use. a shock predicted by "peak oil" i think is a similar story to what you're telling here.

the facts as they are laid out now prevent a calm and reasonable outcome. what will most likely occur, is that when politician have to choose between finally NOT turning a blind eye to the facts of the situation vs. risk being booted from their position, they'll deal with the former. i think a combination of tax hikes & benefit cuts will eventually occur.

monetizing that debt would be the last choice since that would severely damage the US's ability to finance future deficeits efficiently in the financial mkt. that would be devastating...more so than tax hikes & benefit cuts.

[ QUOTE ]

2) At what point does the willingness of foreign creditors to hold our debt begin to erode, and the dollar seriously tank?

[/ QUOTE ]

well that depends on a number o fhtings but i can't possibly estimate WHEN that will occur. the easy answer is it will occur when the faith that the us govt won't print money to pay a debt they can otherwise not pay decreases & that decrease in faith will cause selling & increases in rates.

how this will play out i can't say, but it is obviously a major problem.

[ QUOTE ]

3) How high does inflation go? How much does the dollar fall relative to major currencies?

[/ QUOTE ]

inflation will not, in all likelihood, vastly increase. conversely, i think inflation will remain relatively stable but interest rates will be the thing to jump. i don't think we'll get to where we were in the late 70s early 80s though.

the dollar is structurally overvalued as it is right now. the only reason it is where we see it is a result of our ability to efficiently finance our deficit via a disproportional desire to hold US assets (and thus loan us money). when that desire wanes, the dollar will fall.

a good look of how this might possibly play out is via the fall of the bretton woods system.

in 1965, it appeared certain that the US would run out of reserves pumping up the dollar. it was giving out claims on gold it didn't have.

in 1968, france said "no more claims. give us the gold." for years it was clear the US had no ability to pay the claims if asked with the gold it had (and it had like 80% of the world's gold stock).

despite this, the currency system functioned, via a few tinkerings, until 1971. finally, central bankers and politicians got together to argue about small % increases in exchange rates and how they'd be managed, hilariously thinking they could direct the markets. these meetings happened time and again throughout the 70s and 80s.

nobody could have predicted it would play out as it did, and even in a closed solid case that the US could not deliver on the claims on its reserves, the world still functioned and the devaluation of the dollar came not as it was expected.

the difference, is that the US couldn't monetize a gold claim. it CAN monetize the deficit so that problem may cause irrational (or partly rational) panic at some point in the future if we continue as we have.

the thing is, we are very unlikely to continue as we have, nor continue in some fashion as we can predict today with or without models.

good discussion topic though as there is a lot there to think about.

Thanks,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

I'm not sure if this the type of question you were looking to answer, but I'll ask anyways. Could you explain to me how pegging a currency to a different currency works? I have little to no understanding of the currency markets, but this has always kind of made me wonder, because it seems like arbitrage opportunities would open up somewhere or something. Thanks.

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
I'm not sure if this the type of question you were looking to answer, but I'll ask anyways. Could you explain to me how pegging a currency to a different currency works? I have little to no understanding of the currency markets, but this has always kind of made me wonder, because it seems like arbitrage opportunities would open up somewhere or something. Thanks.

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sure thing...i'm no expert here and only have experience analyzing one type of peg (but functionally all pegs are alike). there are a number of possibilities though. the two most common i think are a currency board (like what i think argentina had in 2002), and a managed peg.

in the former, a country basically makes it part of the constitution (like argentina did), or at least irrevolkable, that the central bank/govt will do whatever necessary to fix the value of its currency to that of another country.

typically, this requires a given country with a peg to hold a large # of foreign currency reserves (assets or cash denominated in the currency to which it is pegged). China is an exception since it is trying to hold its currency down rather than propping it up. its reserves are a result of selling its yuan to buy dollars.

this brings us to how a peg actually functions.

lets say that zimbabwe has a Z$ that is at 5:1 to the US$. in order to maintain that exchange rate on a day to day basis, the zimbabwean central bank must either buy or sell Z$ vs. US$ int he open market. if the market forces push the Z$ to depreciate (because zimbabwe is importing far more than it is exporting and the desire to lend to zimbabwe isn't great enough to offset the difference in the balance of payments), the bank must sell US$ and buy Z$ to prop up the price.

obviously, in order to do that, it has to actually HAVE US$ or US$ denominated assets to sell. this is where a peg to prop up the currency has its biggest logistical issue. when a country runs out of reserves, the game is over. so if zimbabwe all of a sudden experiences capital flight, it has to keep propping up its currency by selling US$ (from its stash of reserves) and buying its own currency.

in addition, while this is happening, interest rates in zimbabwe will soar and the zimbabwean economy will be forced into a recession (if they keep the peg). as a result, zimbabwe will abandon the peg in order to gain control of its monetary policy, force a devaluation, increase the money supply, and get its economy back on track.

so that is the basic story. the difference between a currency board and a managed peg is the former is almost irrevolkable and the latter is what china has. the board is usually strict and says that the exchange rate will by X:1 where X is held 100% constant in the open market.

in a managed peg, the X:1 exchange rate is allowed to fluctuate in the market by some (typically very small) amount.

the tradeoff of a currency peg is most easily described the choice between exchange rate stability and monetary policy control (a country with a peg can't change rates while pegged).

hope this helps.

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
from there, you can optimize your portfolio. most people do this with a simple mean-variance optimization (i.e. run the calcs one time). i think this is a big mistake since the optimal allocations are highly sensitive to small changes in correlations & variances. therefore, you'd want to do a 10k run monte carlo with ranges around each of those factors (and since the "expected return" is a function of "expected volatility" that will back itself out). the ranges you can tweak as well to be wider around assumptions you are not as sure about.

[/ QUOTE ]

it's bizarre how closely this resembles my current view of/approach to poker... i guess i'd be better off as a quant...

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]

30% global equities (F*CKING HEDGED)
30% global developed aggregate bonds (also hedged, but for some reason asset managers always hedge bond allocations but not equities)
15% developing world bonds (hedged)
15% global inflation linked bonds (hedged)
5% commodities
5% global real estate (hedged)


[/ QUOTE ]

i kind of asked this in another thread, but how would i go about setting up a portfolio like this and leveraging it without paying ridiculous interest rates?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]

30% global equities (F*CKING HEDGED)
30% global developed aggregate bonds (also hedged, but for some reason asset managers always hedge bond allocations but not equities)
15% developing world bonds (hedged)
15% global inflation linked bonds (hedged)
5% commodities
5% global real estate (hedged)


[/ QUOTE ]

i kind of asked this in another thread, but how would i go about setting up a portfolio like this and leveraging it without paying ridiculous interest rates?

[/ QUOTE ]

sorry, i either missed your other post or read this one first.

there are a few ways. first off, vanguard has some funds that are close to what is above. my former CIO has a presentation where he lists the allocations to various funds that closely mimic the above but is slightly heavier on the equity side (which is fine for people liek us). i'm trying to get that slide.

even without it, Interactive Brokers i think now offers leveraged TIPS and it definitely offers leveraged nominal bonds for fairly small fees. obviously, deleveraging anything is easy (add cash or subtract capital to it or from it). other than that, nothing else i think should need leveraging.

the aggregate global allcoations should be in fund form from vanguard or similar institutions. the overall marginal fee from switching from a traditional portflio to the above should be small. and it is wayy more than made up for in the improvement of risk-adjusted-return you get.

hope this helps,
Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]

30% global equities (F*CKING HEDGED)
30% global developed aggregate bonds (also hedged, but for some reason asset managers always hedge bond allocations but not equities)
15% developing world bonds (hedged)
15% global inflation linked bonds (hedged)
5% commodities
5% global real estate (hedged)


[/ QUOTE ]

i kind of asked this in another thread, but how would i go about setting up a portfolio like this and leveraging it without paying ridiculous interest rates?

[/ QUOTE ]

sorry, i either missed your other post or read this one first.

there are a few ways. first off, vanguard has some funds that are close to what is above. my former CIO has a presentation where he lists the allocations to various funds that closely mimic the above but is slightly heavier on the equity side (which is fine for people liek us). i'm trying to get that slide.

even without it, Interactive Brokers i think now offers leveraged TIPS and it definitely offers leveraged nominal bonds for fairly small fees. obviously, deleveraging anything is easy (add cash or subtract capital to it or from it). other than that, nothing else i think should need leveraging.

the aggregate global allcoations should be in fund form from vanguard or similar institutions. the overall marginal fee from switching from a traditional portflio to the above should be small. and it is wayy more than made up for in the improvement of risk-adjusted-return you get.

hope this helps,
Barron

[/ QUOTE ]

DUH! lol, i forgot the easiest and most cost effective way to get leverage: futures/forward mkts. i jumped to TIPS leverage b/c that is the toughest to get and IB just started offering that recently i think.

so to sum, you can get leverage reasonably priced via:

1) futures market (if it exists, which it doesn't for TIPS)
2) forward market (currencies)
3) repurchase agreements (TIPS and some special issue Govt bonds, which i think is how Interactive Brokers creates the leveraged TIPS security/fund)

4) traditional borrowing (worst option ever for reasons likely known & discussed)

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]

1) futures market (if it exists, which it doesn't for TIPS)


[/ QUOTE ]

i suspected this was the answer but i don't know how it works in practice.

how much work would this require? (the goal is to trade as little as possible, obviously)

can you estimate the effective interest rate i could expect to pay getting leverage in this way?

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]

1) futures market (if it exists, which it doesn't for TIPS)


[/ QUOTE ]

i suspected this was the answer but i don't know how it works in practice.

how much work would this require? (the goal is to trade as little as possible, obviously)

can you estimate the effective interest rate i could expect to pay getting leverage in this way?

[/ QUOTE ]

i don't quite know... depends on what you mean? you have to put up a margin that changes over time, but allows you leeway with the rest of your cash. so are you saying out of $100 what # of $s do you have to put up?

or what is the cost per $100 to execute this?

Barron

Re: ask Dcifrths...well, anything...about finance/mkts/ports that is.
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]

1) futures market (if it exists, which it doesn't for TIPS)


[/ QUOTE ]

i suspected this was the answer but i don't know how it works in practice.

how much work would this require? (the goal is to trade as little as possible, obviously)

can you estimate the effective interest rate i could expect to pay getting leverage in this way?

[/ QUOTE ]

i don't quite know... depends on what you mean? you have to put up a margin that changes over time, but allows you leeway with the rest of your cash. so are you saying out of $100 what # of $s do you have to put up?

or what is the cost per $100 to execute this?

Barron

[/ QUOTE ]

i could get leverage by borrowing money or by trading futures. what interest rate would i have to borrow at to achieve the same (or very similar results) as i can obtain by trading futures (and paying the fees that come along with them)?

i guess it's a fairly complicated question and there probably isn't a simple answer.