Tag: finance

Presented with no comment…

 

Source: Townhall.com

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As JPM writes in its intraday update, the “Trump/Ryan enthusiasm is starting to quietly fade as investors appreciate the enormous logistical and mathematical hurdles associated w/realization of their agenda. The nature of the Trump White House is such that investors should get used to avalanches of headlines, tweets, etc. on a daily basis but very little of this stream of consciousness barrage is likely to be incremental – platitudinous promises about slashing taxes “massively” or cutting regulations “by 75% or more” are increasingly being ignored as markets wait for specifics on the “Big 3” (tax reform, deregulation, and infrastructure spending). Tax reform continues to account for the bulk of the Trump/Ryan enthusiasm but enormous uncertainty exists around this issue (timing, revenue offsets, forced vs. optional repatriation, 35% vs. 20 or 15% when the average cash/effective rate is already ~23-25%, etc.).”

Yet while investors are becoming somewhat disenchanted with the tax reform and infrastructure spending aspects of the Trump agenda, little has so far been said about the deregulation aspect of Trump’s proposals, and it is here that another potential source of upside, especially to small US businesses – the primary source of job creation – resides.

As JPM’s Michael Cembalest reminds us in his latest note “The Rules of the Game: on regulation and deregulation”, the updated WhiteHouse.gov website states the following: “the President has proposed a moratorium on new federal regulations and is ordering the heads of federal agencies and departments to identify job-killing regulations that should be repealed.”

According to Cemablest, this initiative would be welcomed by small businesses which have expressed rising concerns about regulation since 2009. Similarly, in a 2014 survey by the National Association of Manufacturers, 88% of respondents felt that regulations were affecting their business, by far the #1 concern in the survey. Why might this be the case? While most administrations add to new regulations, the regulatory pace of the last 8 years substantially exceeds its two predecessors.

Cemablest further notes that while it is hard to measure the cost of regulations, in part due to their magnitude and complexity, some agencies try: according to the US Office of Management and Budget, the cost of new regulations passed since 1980 are around $250 billion per year. Other estimates are substantially higher: the latest review from the Competitive Enterprise Institute (the most detailed report I have seen on the subject) cites annual regulatory compliance and economic impact costs of $1.8 trillion, which is roughly equal to all personal and corporate income tax collections.

One direct implication from these soaring compliance costs and the heightened pace of government regulation, is that the US has become, in relative terms, a harder place to start a new business., which may also explain why the bulkof , if not all, job additions under Obama was in minimum-wage, part-time and other low-paid service jobs, leading to a record number of multiple jobholders in recent months.

The next chart shows World Bank data on starting a business that compares the US to the world, and to countries in the OECD. As another indicator of the complexity that US businesses face, consider the inexorable rise in the length of US tax regulations, and in the number of pages in the Code of Federal Regulations (second chart). The US Office of Management and Budget estimated that it took 9.8 billion man-hours for businesses to complete Federally required paperwork in 2015, up from 7.4 billion man-hours in the year 2000.

Making matter worse, according to the JPM strategist, regulatory expansion is augmented by the fact that it is driven by agencies that do not answer to voters. There are roughly 25-30 rules issued by agencies for every law passed by Congress (“regulation without representation”). Related compliance costs from rules and regulations fall disproportionately on smaller and medium sized firms, which account for 50% of total employment.

It brings to mind the 1992 article written by George McGovern, one of the most progressive politicians of the 20th century, on his experience owning a small business after leaving the Senate and dealing with regulation: “A Politician’s Dream is a Businessman’s Nightmare”. You would think that there would be a substantial amount of effort by government agencies to try and understand the costs and benefits of regulation, given its impact on the economy, which as the chart bottom right shows that while regulatory costs amount to $20,000 for all US firms on average, they crush small business by about $30,000 per worker, making new business creation, and employee retention, virtually impossible.

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Submitted by Lance Roberts via RealInvestmentAdvice.com,

There is little argument that Exchange Traded Funds, more commonly referred to as “ETF’s” have and will continue to change the landscape of investing. As my colleague Cullen Roche penned:

“The rise of low-cost indexing is one of the most transformational trends in modern investing…The rise of low-cost diversified index funds has changed the meaning of an important debate in finance – the active vs passive debate.“

Currently, the debate over “Active vs. Passive” is raging as article after article is penned discussing the money flows into ETF’s.

For example, the Wall Street Journal published an article entitled  “The Dying Business of Picking Stocks” stating:

“Over the three years ended Aug. 31, investors added nearly $1.3 trillion to passive mutual funds and their brethren—passive exchange-traded funds—while draining more than a quarter trillion from active funds, according to Morningstar Inc.”

CNBC also jumped on the bandwagon with “Peak Passive? Money Is Gushing Out Of Actively Managed Funds.” To wit:

“Investors bailed on actively managed funds in record numbers during 2016, preferring the reliability and low costs of index funds over taking a chance on finding a stock picker who could beat the market.”

It would certainly seem to be the case given the flow of funds over the last couple of years in particular as noted by ICI and shown in the chart below.

The exodus from actively managed mutual funds is occurring for four primary reasons.

1. Expenses: The management fees on passive funds are extremely low as the funds do not require investment analysis. In fact, an excel spreadsheet with a few lines of macro coding can replace a traditional portfolio manager. The WSJ article found that fees are almost eight times higher for active funds than passive ones (.77% vs. .10%).
2. Relative Performance: Not surprisingly, in a market that has been fueled by massive Central Bank interventions, passive funds have outperformed actively managed funds. In the aforementioned article, the WSJ found that over the last five years a meager 11.2% of U.S. large-company mutual funds (actively managed) outperformed the Vanguard 500 passive index fund. Of course, this is due to expense difference as noted above.
3. Technology Shifts: The advancement for algorithmic and computerized trading is leading to a migration of assets into ETF’s which are ideal for computer-driven allocation models.
4. Media: One of the biggest reasons for the flows from actively managed mutual funds into ETF’s has been the increased press and media attention on ETF’s. As the markets have pushed higher, and the performance and expense differential exposed, the media has berated investors for not being invested regardless of the risk. Therefore, investors have been “psychologically pushed” to buy ETF’s as the “fear of missing out” has accelerated.

Yes, the world of investing has once again changed, and evolved, just as it has throughout history.

• 1960-70’s it was the “Nifty Fifty”
• 1980’s was the rise of the mutual fund industry and “portfolio insurance” as financial deregulation spread.
• 1990’s the evolution of “online trading” brought individuals into the Wall Street “Casino”
• 2000’s brought about the “real estate” investing boom.
• 2010’s Fed-driven liquidity boom and technology blend to create the “passive revolution?”

Of course, I probably don’t need to remind how each of those periods ended in 1974, 1987, 2000 and 2007. Importantly, each time was believed to “be different.”

The current rise of indexed based ETF investing, however, is not a sign of “passive” indexing.

The Myth Of Passive

There are many reasons why individuals SHOULD choose to use ETF’s versus either mutual funds OR individual equities.

• Costs related to the internal operating fees of mutual funds
• Trading costs for purchasing individual equities
• Turnover related to managing an individual equity portfolio
• Volatility risks
• Asset selection risks
• Allocation risks, and most importantly;
• Behavioral and psychological risks.

With ETF’s many of these problems can be avoided entirely or substantially reduced. Today, more than ever, advisors are actively migrating portfolio management to the use of ETF’s for either some, if not all, of the asset allocation equation. However, they are NOT doing it “passively.” 

For example, in our own portfolio management practice, we offer an entirely ETF driven asset allocation model which is actively managed against the variety of “risks” that arise from asset rotation to inflation, interest rate risks, momentum shifts and inter-market analysis.

We also run a model that is a blend between individual equities, individual bonds (which provide principal protection and income) and ETF’s for both asset allocation diversification and hedging.

However, we are not unique within the overall industry of providing lower cost solutions for clients as the industry continues to press annual management fees below 1% and bring a much-needed focus on fiduciary responsibility.

But, this does NOT MEAN investors, or advisors, have opted to be “passive” investors. They have simply changed the instruments by which they are engaging in “active” trading. This can be seen in the changes of flows between equities and bonds as shown below.

As Cullen noted:

“The rise of index funds has turned us all into ‘asset pickers’ instead of stock pickers. The reality is that we are all discretionary decision makers in our portfolios. Even the choice to do nothing is a discretionary decision. Therefore, all indexing approaches aren’t all that ‘passive’. They’re just different forms of active management that have been sold to investors using clever marketing terminology like ‘factor investing’ and ‘smart beta’ in order to differentiate the brands.”

He is correct. “Active” investing is quite alive and well and being facilitated by the variety of online “apps” and platforms which allow for trading ETF’s with the click of a button. A recent email noted an important point about this shift.

“My whole office uses it [the app], and we are always talking about how our investments are performing. It’s created a social element to investing.”

What the email highlights is the “gambler effect.”  When we gamble, and the reason we become addicted to it, is the “winning” causes our brain to release “dopamine.” As humans, that release makes us feel good and the “social element” created from the approval of others, and the competition bred by it, feeds into our addictive natures.

Therein Lies “The Trap”

The idea of “passive” investing is “romantic” in nature. It’s a world where everyone just invests some money, the markets rise 7% annually and everyone one’s a winner. 

Unfortunately, the markets simply don’t function that way.

Just as the initial speculators via online trading learned heading into 2000, or the real estate speculators learned heading into 2008, there is no “guaranteed winner.”

Today, Millennials who watched their parents get decimated twice by the financial markets have unwittingly been lured back into the casino through apps, Robo-advisors, and platforms with the promise of long-term success through “passive approaches” to investing.

Again, the markets simply don’t function that way.

To quote Jesse Felder of the Felder Report:

‘Embracing passive investing is exactly this sort of ‘cover your eyes and buy’ sort of attitude. Would you embrace the very same price-insensitive approach in buying a car? A house? Your groceries? Your clothes? Of course not. We are all very price-sensitive when it comes to these things. So why should investing be any different?'”

While the idea of passive indexing works while all prices are rising, the reverse is also true. The problem is that once prices begin to fall the previously “passive indexer” becomes an “active panic seller.” With the flood of money into “passive index” and “yield funds,” the tables are once again set for a dramatic and damaging ending.

It is only near peaks in extended bull markets that logic is dismissed for the seemingly easiest trend to make money. Today is no different as the chart below shows the odds are stacked against substantial market gains from current levels.

As my partner, Michael Lebowitz, noted in a recent posting:

“Nobody is going to ring a bell at the top of a market, but there are plenty of warped investment strategies and narratives from history that serve the same purpose — remember internet companies with no earnings and sub-prime CDOs to name two.”

Investors need to be cognizant of, and understand why, the chorus of arguments in favor of short-sighted and flawed strategies are so prevalent. The meteoric rise in passive investing is one such “strategy” sending an important and timely warning.

Just remember, everyone is “passive” until the selling begins.

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By EconMatters

We discuss two videos in one here, the first is some mentoring advice to struggling traders, and the last half is some specific market education that will help struggling traders develop some of the fundamentals needed to properly analyze daily price action in financial markets related to tracking the fund flows. Most people at Investment Banks are just faking it, because they will never make it on their own with a profitable Fund independent of Investment Bank Resource advantages.

© EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle   

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One week after RBC’s Charlie McElligott pointed out that the “someone is going to get hurt badly” in the upcoming clash between leveraged and real money investors in 5Y bonds, whose divergent opinions on the future of interest rates, and thus inflation, has reached record levels…

… and was was picked up overnight by Bloomberg, today the cross-asset strategist focuses on something broader, namely the creeping rotation out of consensus reflation trades, driven by “concerns surrounding Trump’s ability/willingness to implement a “border-adjusted tax” system” which was at the core of much of the USD appreciation.

So is it time to finally “sell the inauguration”?

Below we lay out McElligott’s latest thoughts with the rotation picking up steam, as the USD weakens further:

* * *

Today shows continued paring-back of “consensual reflation” trades that dominated performance tables in 4Q16, with the Bloomberg USD Index being the largest z-score mover in all global Forex markets today (-1.25 z vs 90 day return).   The ongoing concerns surrounding Trump’s ability / willingness to implement a “border-adjusted tax” system” is at the core of this, because it was at the core of much of the USD appreciation thesis.  In turn, as highlighted a week and half ago, we’re seeing popular ‘reflation’ trades under pressure.  Posit my “crowded trade” and “risk thermometer” monitors, each sorted by the prior 3m return (and the opposite intra-day performance):

STILL GOING:

ONGOING WONKINESS WITH POPULAR TRADES: Certainly more of a mixed-bag on the ‘short’ side…but no doubt seeing PNL whipsaws over the past week +.

Since I highlighted the US Dollar as “the single-largest macro input risk to the buyside” in the “Big Picture” morning note Jan 11th, the two most-common trade-weighted USD indices are both down ~1.7%.  Over that same period of time, so too are the many popular thematic “reflation” trade expressions (many of the same trades as highlighted above): ‘small cap’ equities, ‘high beta’ equities, ‘early cycle’ stocks, equities ‘value’ factor, ‘cyclical beta,’ ‘cyclical vs defensive’ pairs are all LOWER in concert. 

(The same too can be said of popular macro trades built-around the same “long Dollar / long reflation” framework, where we also see similar reversals off the back of the USD-unwind since the highs on Jan 11th: for example, consensual macro shorts in Euro, Yen, EMFX, EM equities, Gold and VIX are all higher over this period.)

This said, the USD’s pullback has not stopped leveraged funds from pressing their “reflation shorts” in USTs over the past few weeks, as we’ve seen yields turn modestly higher again off continued strong data YTD.  Essentially, the US Dollar and Rates have diverged recently, which will need to be reconciled sooner than later.  It is now clear that some of the tactical spec short was covered last week, certainly with regards to the much publicized leveraged fund short in 5Y futs, where RBC’s Kristen Arey points out that $4.2mm dv01 was covered last week.

With the rally in USTs this morning (2.47 to 2.41), there is clear evidence that HFs are continuing to take the scale of the ‘short’ position down in the futures complex (ED$ of course as well).

Turning back to stocks, more equity generalists noting discomfort with being ‘too exposed’ to “Reflation” (Cyclicals, Value factor) and / or “Trump” thematic trades (e.g. domestic USD-revenue plays like ‘US Small Caps’ or ‘High Tax / Low Tax’ reform arbitrage) after the incredible run in 4Q16.  Instead, we have seen a shift into ‘Secular Growers’ YTD, which would theoretically insulate portfolios from Trump policy disappointments and ‘reflation’ positioning-excess. 

‘Secular Growers’ of course are largely concentrated in the Tech and Consumer Discretionary sectors, which just so happen to be the S&P 500’s best performing sectors YTD (+3.5% and +3.1% pre-today’s trade, respectively)…as well as obvious ‘growth’ sub-sector darlings Software (+8.0% YTD), Internet (+6.6%) and Biotech (+6.4% YTD).

‘Defensives’ / ‘Low Vol’ not surprisingly also a beneficiary of the year-to-date mean reversions and rotation out of “high beta cyclicals.”  In the micro of today, we see “anti-beta market neutral” strategies (long low beta / short high beta) as the best-performing factor mkt neutral strategies I follow, after being the worst-performing factor market neutral strategy of the past 3 months:

EQUITY THEMATIC ROTATION:

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Submitted by Sal Arnuk and Joe Saluzzi via Themis Trading blog,

This is really the best paragraph I have read so far in 2017:

The world is awash in bullshit. Politicians are unconstrained by facts. Science is conducted by press release. So-called higher education often rewards bullshit over analytic thought. Startup culture has elevated bullshit to high art. Advertisers wink conspiratorially and invite us to join them in seeing through all the bullshit, then take advantage of our lowered guard to bombard us with second-order bullshit. The majority of administrative activity, whether in private business or the public sphere, often seems to be little more than a sophisticated exercise in the combinatorial reassembly of bullshit.

It’s from The Bull$hit Syllabus, which was created by University of Washington Professors Carl Bergstrom and Jevin West, who are trying to combat The Bull$hit. The syllabus includes questions and standards for data scientists to think about and use.

They believe that with the advent of “Big Data” and tools to deal with it, the amount of BS in the world has really risen too much. It has become too easy for BS to be taken out of context, and to be spread and made to go “viral.”  Big Data has given us ginormous datasets to study and manipulate. While we might not be quick to draw conclusions from a smaller data set, we have become very comfortable putting credence to implications and patterns in big data sets. Bergstrom explains:

Before big data became a primary research tool, testing a nonsensical hypothesis with a small dataset wouldn’t necessarily lead you anywhere. But with an enormous dataset, he says, there will always be some kind of pattern.

 

“It’s much easier for people to accidentally or deliberately dredge pattern out of all the data,” he says. “I think that’s a bit of a new risk.”

He is also skeptical of machine learning algorithms. They often give very strong results, but the data they analyze and draw from is not questioned often enough:

Can an algorithm really look at a person’s facial features and determine their preponderance for criminality? Yeah, maybe not. But that was the argument of a paper actually published just a few months ago (Automated Inference on Criminality Using Facial Images)

 

“If you look deeper, you find some spurious things driven mostly by how that person was dressed, if they’re frowning or not,” West says. “There’s manipulation of the way the results are reported.” Not to mention that human bias and existing structural inequalities can make algorithms just as flawed as the humans that make them.

Feel free to read this article called Data Can Lie – A Guide to Calling Out Bull$hit., and feel free to look at the actual Bull$hit Syllabus linked to atop this note.

While this topic may not specifically appear to be trading related, in my opinion it really is relevant. Algorithms are constantly tested, and in place in the markets. Development of machine -learning trading algos are on the rise. They all use Big Data. Your data. Collected by stock exchanges and sold.

The guys who collect it and sell it want you to use the heck out of it, become addicted to it, and keep increasing the price of it.

But maybe a lot of the Big Data is really bull$hit. And maybe all that data can cause more harm than good.

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Via The Daily Bell

 

While Trump fans are happy to see the antagonism, others worry about Trump’s long-term damage … Donald Trump’s “running war” on the media is continuing into his presidency, with statements over the weekend calling into question the extent to which information from the White House can be trusted.  White House press secretary Sean Spicer on Monday will hold his first daily press briefing, at which he could face questions about a statement Saturday night that included demonstrably false assertions about the crowd size at Trump’s inauguration and a promise by the new administration that “we’re going to hold the press accountable.” – Salon

Trump’s recent briefing by Sean Spicer focused almost entirely on rebutting news media figures regarding the amount of people present at his swearing in. He said through Spicer that there were more people at his swearing in than for any other, though these statements were contested by the media which called them false.

The largest issue is whether the relationship between Trump and the media can continue this way and for how long. An article at State of the Nation maintains that the mainstream media must be shut down because it is not going to change:

Truly, if ever there was a treasonous and deadly enemy of the American people, it is the entire Mainstream Media (MSM).  …  The writing is now on the wall:  The current corporate Mainstream Media cannot peacefully coexist with the American Republic.

 

The Mainstream Media has proven itself determined to subvert democratic institutions wherever they can cynically manipulate them for the benefit of the ruling elites.  The Mainstream Media has committed numerous acts of high treason, abetted the genocide and forced displacement of indigenous peoples around the world, and employed yellow journalism to explicitly goad the American people into unprovoked wars of aggression.

 

The Mainstream Media has demonstrated repeatedly that it does not act in the best interest of the American people, and often acts to their great detriment.

The article goes over a number of different topics and discusses ways the mainstream media may not be telling the truth about any of them. It says for instance that chemtrails haven’t been properly reported on and that the reports that have been made don’t tell the truth.

It calls 9/11 the “greatest coverup in history” but then quickly moves on to various assassinations that it also believe have not been properly reported including that of President John F. Kennedy, Robert F. Kennedy, Martin Luther King, Jr., Malcolm X, John Lennon, Marilyn Monroe, and many others.

There’s more. “The Mainstream Media, at the very least, has covered up the true facts surrounding the Oklahoma City Bombing, the Virginia Tech massacre, the Sandy Hook Elementary School mass shooting, the San Bernardino shootings, among numerous other government-sponsored false flag terrorist attacks and black operations.”

The article stated that it is not the mainstream media that alone is in charge of the larger propaganda effort. Instead, interlocking directorships create a monolithic global complex that is inextricably interconnected to the World Shadow Government.”

The main point of the article is that the media ought to be shut down entirely – the mainstream media not the alternative media.

How this is suppose to be done is not clear however and to take down the mainstream media you would also have to take down such related elements as Google and Facebook.

An alternative way to deal with this problem is to remove the advantages held by the mainstream media. You would do this by removing the corporate advantages given to it by the federal court.

We’ve mentioned them in the past. They have to do with corporate personhood, intellectual property rights, central banking and corporate regulation, among other issues.

Without these props, none of which were available for any length of time before the Civil War, the corporate media would collapse along with its parent companies. The artificial, fascist bigness of corporate America would be done away with.

In its place there would rise up once more a plethora of smaller entities, many with a libertarian bent. The situation would be somewhat analogous to the way the alternative press is structured today.

Admittedly, nothing like this is being contemplated at the moment but if things get bad enough … who knows.

Even a quick review of front page Google headlines presents the problem clearly:

Trump leaves world diplomats down and out – CNN-3 hours ago

Women’s March on Washington overshadows Trump’s first full day – The Guardian-Jan 21, 2017

Trump’s motorcade surrounded by screaming protesters – Daily Mail-Jan 21, 2017

Violence flares in Washington during Trump inauguration – International-Reuters-Jan 20, 2017

Trump’s Attack on the Press Shows Why Protests Are Necessary – Opinion-The New Yorker-Jan 22, 2017

Trump rejects new lawsuit over foreign payments to his firms – Reuters-16 minutes ago

Lawsuit to call for ban on payments to Trump firms from foreign powers – The Guardian-9 hours ago

Foreign Payments to Trump Firms Violate Constitution, Suit Will Claim – Highly Cited-New York Times-17 hours ago

Ethics Experts File Lawsuit Saying Trump’s Overseas Interests – International-NPR-3 hours ago

Conclusion: The point here is that the alternative press does not have a chance to reach Google’s front page, while the mainstream media is almost uniformly critical. Unless the mainstream press is somehow blunted, Trump will not have an easy time with this sort of coordinated negativity.

Other stories:

 

 

Bank of England’s Andrew Haldane Admits Economic Forecasting Errors

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By definition, pricing in a 'black swan' is impossible, but while VIX slumbers along near record lows, options professionals appear to be extremely worried about the potential for a huge downside tail-risk event.

As CBOE explains, SKEW, is calculated from the prices of S&P 500 out-of-the-money options. SKEW typically ranges from 100 to 150. A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of outlier returns is therefore negligible. As SKEW rises above 100, the left tail of the S&P 500 distribution acquires more weight, and the probabilities of outlier returns become more significant. One can estimate these probabilities from the value of SKEW. Since an increase in perceived tail risk increases the relative demand for low strike puts, increases in SKEW also correspond to an overall steepening of the curve of implied volatilities, familiar to option traders as the "skew".

With SKEW at over 146, markets have only been more fearful of a collapse twice in its 27 year history…

 

Of course, each of those two events saw a market plunge… immediately followed by a miraculous melt-up from coordinated global central bankers. With Trump in command, will those central bankers, led by The Fed, be quite so accomodating this time around?

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Separate comments last week from European Central Bank President Mario Draghi and Federal Reserve Chair Janet Yellen confirmed an ongoing change in the policy configuration facing their two systemically important central banks: The recognition of a transition in both economic conditions and prospects, along with questions about robustness and durability.

For now, Mohamed El-Erian notes, their response is to maintain a stimulative direction to their policies, and to use verbal guidance that avoids rocking the boat. Although it's consistent with investor expectations, the forward-looking policy path may not be as secure and smooth as market pricing would suggest, however.

As we noted previously, if the past 20 years of global historical data is anything to go by, that 'awakening' of economic policy uncertainty is very bad news…

 

And now, it appears Mohamed El-Erian agrees that markets and market participants are missing this uncertain picture…

Facing an unusually timid cyclical response and a challenged structural one, central banks have again demonstrated that they would rather err on the side of too much stimulus rather than too little, despite the risks entailed for future financial stability and the efficient allocation of resources. And that is what traders and investors have gotten to expect after observing and internalizing central banks' preferences over the last few years. Indeed, in the case of the U.S., market pricing related to the policy rate still suggests less tightening in 2017 than the three hikes indicated by the Fed at its most recent policy meeting and reiterated in subsequent statements by individual Fed officials. These more subdued interest-rate expectations also extend beyond 2017, to the medium-term path of policy rates, again notwithstanding what Fed officials have signaled about that.

 

But the more central banks persist with this approach amid changing economic and fiscal conditions, the greater the potential need for a sudden shift in monetary policy that, while economically warranted, could be quite jarring for markets. And it is a possibility that investors may be underestimating as judged by market metrics, including measures of implied volatility.

 

 

While the upward movement in yields further out the curve for U.S. government bonds would likely be contained by arbitrage flows from Europe and Japan, the foreign exchange market does not benefit from such a moderating influence. As such, the dollar  could be being set up for some consequential volatility.

In formulating policies — especially in an unusually fluid global economy — El-Erian warns central banks must consider not just what can go well but also the mistakes they could end up making, albeit inadvertently. This entails an effort to limit possible known mistakes to those they can afford to make and undo relatively easily over time.

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