All eyes are on the US Federal Reserve.
The Fed's Federal Open Market Committee (FOMC) will meet next week and decide whether to raise rates this month. The New York Times provided an excellent summary of the rate's history since 2008 and why September 2015, December 2015, and now March 2016 are the most likely dates that the Fed will make a move. Deutsche Bank's Joseph LaVorgna cited seven reasons why he doesn't think the Fed will raise rates next week that largely capture the sentiment on the Street at this point.
Investors are used to reading all kinds of forecasts about rate hikes. Still, you know this is a high stakes game now that a former US Treasury secretary also joined the fray and made his own prediction. Larry Summers argued on Wednesday that the Fed must hold off on a rate hike.
As for my own view, I am not in the forecasting business. Looking at the implications of the RMB devaluation a few weeks ago, however, I felt the development would offset much of the pressure for the Fed to raise rates at the upcoming FOMC meeting.
In case you are wondering why everybody cares so much about the rate hike, sufficed to say that there is a lot of money at stake. Case in point, a "black swan" fund claimed to have made $1 billion — most of it in just one day — when the stock market started its recent retreat. And if you are still not convinced, the return of the fund came to 20%!
Although some questioned the authenticity of the numbers, such returns are possible with this type of strategy. In essence, investors are paying for a lot of time decay by betting on a big downside move on (at least) one of these days. So although it is undoubtedly sweet listening to the sound of a cool billion dropping into your coffers on a very special day, you'll more likely watch your money slip through your fingers every other day of the year. But I digress.
Hedging with such a strategy is quite costly. The more mainstream approach to managing downside risk is to dial down the exposures to equities in a multi-asset strategy portfolio. A more advanced game plan is to dial down that exposure at appropriate times, i.e., through a dynamic asset allocation strategy. Nobel laureate Myron Scholes discussed the importance of dynamic asset allocation strategies for long-term investors with me in a recent interview. One way of building a dynamic asset allocation strategy could involve forecasting risk changes. Another Nobel laureate we interviewed, Robert Engel, is the guru of that.
If all this volatility talk is getting you down, check out psychology's latest findings on "the single biggest predictor of human happiness." Have a great weekend and happy reading!
Markets
- "When Will the Fed Raise Rates?" (The New York Times)
- "Seven Reasons the Fed Won't Raise Rates Next Week: Deutsche Bank" (Bloomberg)
- "Why the Fed Must Stand Still on Rates" (Financial Times)
- "Federal Open Market Committee Meeting Calendars, Statemens, and Minutes (2010–2016) (US Federal Reserve)
- "A ‘Black Swan’ Fund Makes $1 Billion" (Wall Street Journal)
- "Did a Black Swan Fund Really Just 'Make a Billion Dollars'?" (The Reformed Broker)
Investing
- If you like big picture stuff, this is the reading for you this weekend. Even completely bottom-up investors may find something interesting here: "Shifting Tides: Global Economic Scenarios for 2015–25" (McKinsey & Company)
- Have you ever wondered why good economic news (sometimes) drives the market down? You are not alone. "Are You Capable of Holding Two Opposing Thoughts in Your Head?" (The Reformed Broker)
- “Should Trump Have Indexed?” Of course not! The one thing he definitely should not model after others is the trademark hairstyle. (Bloomberg)
- “A Dozen Things I've Learned from Charlie Munger about Risk.” I particularly liked the first and last one on the list. Which is your favorite? Feel free to leave a note in the comments section. (25iq)
Emerging Markets
- It's been a tough couple of years for emerging market investors. Will it get better any time soon? "Investing and FX Reserves: The Long-Term Bearish case on Emerging Markets" (The Economist)
- "You Can’t Understand China’s Slowdown Without Understanding Supply Chains." David Simchi-Levi, a supply chain specialist from MIT, offers his perspective on the economic slowdown in China. (Harvard Business Review)
The Soft Side of Business
- “The Powerful Effect of Noticing Good Things at Work” (Harvard Business Review)
- If you have been driven crazy by the passive-aggressive people around you, this article will definitely resonate. If you are not sure, check it out: “Nine Things Only Passive-Aggressive People Do” (Psychology Today)
- "The blessings of a multitasking life are mixed." Does that ring true to you? “Multi-tasking: How to Survive in the 21st Century” (Financial Times)
- “Why Even Smart Advice Is Wrong at Least Half the Time” (Entrepreneur)
And Now for Some Readings Truly for the Weekend . . .
- “A Psychologist Reveals 'The Single Biggest Predictor of Human Happiness'” I know what you are thinking, but the correct answer is not Freudian. (Tech Insider)
- "This Is What 365 Days without a Vacation Does to Your Health.” Take a vacation, especially if you have not already done so this summer. (Quartz)
- “New Research Shows How Music Lessons During Childhood Benefit the Brain for a Lifetime.” "I wish I read this when I was a kid." If that thought crossed your mind too, it's probably not too late to get your kids into some music classes. They may thank you for a lifetime. (Open Culture)
- Your social media posting says a lot about you: "Status Updates Don’t Lie" (Psychology Today)
- "Seven Things You Didn't Know About the Real Colonel Sanders." Hilarious! Lots of interesting tidbits for cocktail parties. (Entrepreneur)
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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