Sunday, January 13, 2013

2013 - Back to The Future

Ok, at 30+ posts in 3-ish weeks, the consensus is that we have now made the point we wished to, which is that following Mr Turner's macro advice in any way over the years was at best a 50/50 proposition, and (on closer inspection) more usually approaching a 100% loss rate

Of course it would be possible to continue digging and find more of the same, but we believe that most  important aspects of his predictive record over the years have now been covered, and so will now switch attention to the present day and "what's hot" in a modern day "balanced portfolio" moving forwards. 

A Balanced Portfolio is apparently achieved using "Modern Portfolio "Theory" (Wiki)
MPT was developed in the 1950s through the early 1970s and was considered an important advance in the mathematical modeling of finance. 
Since then, many theoretical and practical criticisms have been leveled against it. These include the fact that financial returns do not follow a Gaussian distribution or indeed any symmetric distribution, and that correlations between asset classes are not fixed but can vary depending on external events (especially in crises). 
Further, there is growing evidence that investors are not rational and markets are not efficient.[4][5]  
Finally, the low volatility anomaly conflicts with CAPM's trade-off assumption of higher risk for higher return. It states that a portfolio consisting of low volatility equities (like blue chip stocks) reaps higher risk-adjusted returns than a portfolio with high volatility equities (like illiquid penny stocks). A study conducted by Myron Scholes, Michael Jenson, and Fischer Black in 1972 suggests that the relationship between return and beta might be flat or even negatively correlated.
In 2013, supposedly the smart contrarian investor is putting their money into a bunch of different financial instruments, denominated in digital 1s and 0's stored on computer servers, run by a bankrupt and slow-motion trainwreck that is the imploding banking and shadow banking system

These (long-only?) heavily counterparty-risk laden instruments (see Rehypothocation 101) are managed by using a suspicious-at-best financial theory, and all rise and fall in value continually, with "rebalancing" along the way, and you just basically hope the markets, computers or your broker never individually (or all together) meltdown, on your behalf? 

Cool. How do we short that?  that is the question. (Answer is the same as it has been for the last 12 years)

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