DOCSLIB.ORG

Regime Change Fieldpoint Private's Investment Philosophy Is Founded

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Regime Change Fieldpoint Private's Investment Philosophy Is Founded THE POINT October 18, 2016 Bill Kennedy, CFA Chief Investment Officer Follow on Twitter: @FP_CIO What’s the Point? Inflation is gaining momentum, but economic growth is slowing Stagflation risks exist, but too much excess slack exists in the economy. A near- term inflation scare will likely be transitory. We expect 2.5% inflation by 1Q17 thanks to China and base effects in oil 10-year bond yields are expected to trade between 1.75% - 2.25% If correct about our call for a U.S. recession in 2017, then it is dangerous to be too bullish on stocks and equally dangerous to be too bearish on bonds Regime change Fieldpoint Private’s investment philosophy is founded on the principal that the best means to compounding wealth – whether over a market cycle or over generations – is to mitigate episodes of large market drawdowns that risk permanent loss of capital. By extension, we consider risk management a critical source of alpha. Our macro research is geared towards understanding the prevailing economic regime and what it means for clients’ asset returns. Large market drawdowns tend to be a function of recessions, inflation/deflation, or both, and over long time horizons the momentum for each may rise or fall many times. Identifying the prevailing economic regime helps investors gauge market risks and how asset classes may respond. For example, stocks and bonds are regime dependent in that they respond to the momentum in real GDP and inflation, while commodities respond to inflation expectations. THE POINT There are four general economic regimes in our macro framework (see table below). Our analysis shows that no single asset class dominates under all economic conditions, but in periods of accelerating economic momentum stocks tend to outperform rates and credit. The opposite is true when economic momentum decelerates. Economic momentum is decelerating. Regime I: Regime II: Accelerating Growth & Inflation Accelerating Growth, Decelerating Inflation # of quarters: 23 # of quarters: 54 Excess Return Rank Excess Return Rank Dollar -3.7% 5 Dollar 2.0% 4 Commodities 9.4% 1 Commodities 1.5% 5 Rates 2.7% 4 Rates 4.9% 3 Credit 3.9% 3 Credit 6.8% 2 Stocks 7.7% 2 Stocks 11.4% 1 Avg return 4.0% Avg return 5.3% Regime III: Regime IV: Decelerating Growth, Accelerating Inflation Decelerating Growth & Inflation # of quarters: 49 # of quarters: 46 Excess Return Rank Excess Return Rank Dollar -0.3% 5 Dollar 0.9% 4 Commodities 14.2% 1 Commodities -0.4% 5 Rates 5.3% 2 Rates 8.8% 2 Credit 4.0% 3 Credit 10.2% 1 Stocks 2.5% 4 Stocks 8.3% 3 Avg return 5.1% Avg return 5.5% Source: Fieldpoint Private. For illustration purposes only. Analysis based on 172 quarters of GDP and CPI (core) data and real returns by asset class. Excess returns shown based on median rolling price returns from Q4 1974 to Q3 2016. Asset class behavior can vary dramatically when economic regimes shift. For example, in 1987 there was a sudden shift in inflation expectations that moved the market from Regime II towards Regime I. Policy response and market uncertainty raised asset volatility, which set the stage for the October 19th “Black Monday,” when the stock market crashed nearly 23%. The U.S. has been in Regime III for over a year. Since 3Q15, GDP momentum has decelerated while inflation has slowly accelerated. This is confirmed by asset class performance. The dollar is generally weaker, bonds have outperformed stocks and stocks have outperformed cash. Regime III is typically the worst environment for stock returns. We expect regime III to persist through the first quarter of 2017. 2016 U.S. real GDP will likely be around 1.7%, followed by a disappointing 2.0% growth rate in 2017. While consumer spending and housing have been relatively robust, housing is starting to lose momentum and a weak manufacturing sector and negative industrial production are dragging economic momentum lower. Page | 2 THE POINT INFLATION SCARE “Consumer price inflation remains below the Fed’s stated objective of 2 percent. The notion that inflation can be too low may sound odd, but over time low inflation means that wages as well as prices will rise by less, and very low inflation can impair the functioning of the economy – for example, by making it more difficult for households and firms to pay off their debts.” – Janet Yellen, The Outlook for the Economy, May 22, 2015 Source: Bloomberg, Fieldpoint Private Source: Bloomberg, Fieldpoint Private China and crude oil are driving inflation expectations higher. China’s inflation picked up in September, with prices rising more than expected for both consumers (CPI) and producers (PPI). CPI rose 1.9% versus September of last year. Producer price deflation had slowed in recent months and September was the first increase in five years, as commodity prices have come off their lows. Oil recently surpassed $51 and the futures market implies a price of $54 next year. Assuming current prices hold into early 2017, the year-over-year increase next January will be ~50%. Rising inflation expectations are evidenced by several market measures of inflation. Our starting point is the Canadian dollar (CAD), which is correlated to changes in the price of oil. The chart (above, right) shows the Loonie and inflation swap rate move in tandem. Next, we look at U.S. breakevens. After bottoming in 2015, 5y and 10y breakevens rallied this spring before taking a pause over the summer. This period coincided with surprisingly little action from monetary authorities. Since September, breakevens are rising again. A sustained break-out above current levels sets up a move to the next major resistance levels of around 2.0%. Achieving that will largely be a function of the price of crude oil. Source: Bloomberg, Fieldpoint Private Page | 3 THE POINT The last part of the curve to react to inflation will be Eurodollars. Eurodollars are foreign dollar deposits outside the U.S. banking system, in European, middle-eastern and Asian banks. When the Fed eases/tightens, traders bid up/down Eurodollars. If inflation expectations rise, the Eurodollar market sells off. If the FOMC actually moves to tighten this December, Eurodollars will sell off even more. The Eurodollar futures curve is a useful tool to track the gyrations of policy expectations. A break above the trend line, similar to that seen by the 5yr breakeven rate, would signal more persistent inflation and potential for more monetary tightening. Source: Bloomberg, Fieldpoint Private Our proprietary inflation model (using 5y breakevens) points to 2.5% inflation by March of next year – well above the Fed’s 2.0% inflation target. Our expectations for higher inflation and decelerating GDP momentum in early 2017 support our view that the U.S economy will remain in Regime III for the foreseeable future. One shifting element worth watching is the strength in the U.S. dollar. There is no regime that combines a stronger dollar and rising inflation momentum. These two conditions are incompatible since a strong dollar is Source: Bloomberg, Fieldpoint Private disinflationary. We expect the dollar to appreciate another 5% from current levels, which suggests that any inflation-scare in early 2017 may be short-lived. Page | 4 THE POINT IS THE U.S. FOLLOWING THE U.K. INTO STAGFLATION? Left unchecked, negative economic momentum and rising inflation could lead to 1970s-style “stagflation.” This is the worst possible outcome. Stagflation is a toxic blend of substandard GDP growth and persistently rising inflation that erodes economic purchasing power, destroys investment values, and depletes real investment returns over time. I can think of several reasons why a 1970s-style stagflation scenario won’t materialize: There is ample economic slack, with manufacturing capacity utilization at only 75%. There is ample employment slack, with the ratio of employment-to-population below 60%. Productivity remains low. Stagflation requires persistent inflation through wage growth. While wages are rising, the number of hours worked is falling. Rents, a major contributor to core inflation, are falling. We place the probability of a recession in 2017 at slightly above 50%, supported by (a) rapid decline in corporate cash flows, and (b) our expectation the Fed will raise interest rates 25 basis points at the December 14 meeting. Tighter monetary policy will choke what little economic growth exists. Stagflation is a shift to the left in the aggregate supply curve. A recession is a shift to the left in the aggregate demand curve. In theory, a recession offsets the supply shock that causes stagflation and inflation pressures are neutralized. YELLEN’S LAST STAND According to Jim Bianco of Bianco Research, “The minute there’s a whiff of inflation, even the slightest whiff, the implication will be that all those bonds are alive, that central banks could start to sell bonds to tighten monetary policy.” At their December 14th meeting, the Fed will be faced with rising inflation juxtaposed with slowing economic growth. How does a bi-polar Fed square rising inflation, mixed U.S. economic data and the prospect that U.S. employment has peaked? If Stanley Fischer gets his way and we see a December hike, we could easily see the curve flatten as the long end’s inflation concerns are doused. It’s worth reminding ourselves of the Vice Chair’s experience as the governor of the central bank of Israel, where a bout of late-cycle inflation in 2011 forced him to hike aggressively, which he now admits killed the economic recovery. If the Fed is to meet its commitment to contain inflation, then they must act. If the Fed wants to hold onto what little credibility it has left, then it must act.
Load more

Recommended publications
  • Of Crashes, Corrections, and the Culture of Financial Information- What They Tell Us About the Need for Federal Securities Regulation
    Missouri Law Review Volume 54 Issue 3 Summer 1989 Article 2 Summer 1989 Of Crashes, Corrections, and the Culture of Financial Information- What They Tell Us about the Need for Federal Securities Regulation C. Edward Fletcher III Follow this and additional works at: https://scholarship.law.missouri.edu/mlr Part of the Law Commons Recommended Citation C. Edward Fletcher III, Of Crashes, Corrections, and the Culture of Financial Information-What They Tell Us about the Need for Federal Securities Regulation, 54 MO. L. REV. (1989) Available at: https://scholarship.law.missouri.edu/mlr/vol54/iss3/2 This Article is brought to you for free and open access by the Law Journals at University of Missouri School of Law Scholarship Repository. It has been accepted for inclusion in Missouri Law Review by an authorized editor of University of Missouri School of Law Scholarship Repository. For more information, please contact [email protected]. Fletcher: Fletcher: Of Crashes, Corrections, and the Culture of Financial Information OF CRASHES, CORRECTIONS, AND THE CULTURE OF FINANCIAL INFORMATION-WHAT THEY TELL US ABOUT THE NEED FOR FEDERAL SECURITIES REGULATION C. Edward Fletcher, III* In this article, the author examines financial data from the 1929 crash and ensuing depression and compares it with financial data from the market decline of 1987 in an attempt to determine why the 1929 crash was followed by a depression but the 1987 decline was not. The author argues that the difference between the two events can be understood best as a difference between the existence of a "culture of financial information" in 1987 and the absence of such a culture in 1929.
    [Show full text]
  • October 19, 1987 – Black Monday, 20 Years Later BACKGROUND
    October 19, 1987 – Black Monday, 20 Years Later BACKGROUND On Oct. 19, 1987, “Black Monday,” the DJIA fell 507.99 (508) points to 1,738.74, a drop of 22.6% or $500 billion dollars of its value-- the largest single-day percentage drop in history. Volume surges to a then record of 604 million shares. Two days later, the DJIA recovered 289 points or 16.6% of its loss. It took two years for the DJIA to fully recover its losses, setting the stage for the longest bull market in U.S. history. Date Close Change Change % 10/19/87 1,738.70 -508.00 -22.6 10/20/87 1,841.00 102.30 5.9 10/21/87 2,027.90 186.90 10.2 Quick Facts on October 11, 1987 • DJIA fell 507.99 points to 1,738.74, a 22.6% drop (DJIA had opened at 2246.74 that day) o Record decline at that time o Friday, Oct. 16, DJIA fell 108 points, completing a 9.5 percent drop for the week o Aug. 1987, DJIA reached 2722.42, an all-time high; up 48% over prior 10 months o Today, DJIA above 14,000 • John Phelan, NYSE Chairman/CEO -- Credited with effective management of the crisis. A 23-year veteran of the trading floor, he became NYSE president in 1980 and chairman and chief executive officer in 1984, serving until 1990 NYSE Statistics (1987, then vs. now) 1987 Today (and current records) ADV - ytd 1987 (thru 10/19): 181.5 mil ADV – 1.76 billion shares (NYSE only) shares 10/19/1987: 604.3 million shares (reference ADV above) 10/20/1987: 608.1* million shares (reference ADV above) Oct.
    [Show full text]
  • Recession Outlook ➢ Impact of Recessions on Investments ➢ Conventional-Wisdom Investments for Recessions
    Chap quoit A Division of Dynamic Portfolios Presentation of Managing the Risk of a Looming U.S. Recession During 2020 May 10, 2020 1 Chap quoit A Division of Dynamic Portfolios Impact of Recessions on Investments Virtually all recessions are accompanied by a large stock market drawdown. 2 Chap quoit A Division of Dynamic Portfolios S&P500 Daily-Close Maximum Drawdowns In Last 10 Recessions: 7 Bear Markets, 3 Corrections Black Monday 1987. Credit Crunch of 66. Computerized selling Long-Term Capital Flash Crash of 62. Liquidity Crisis in dictated by portfolio and Hedge Fund US Steel Price Bond Markets. insurance hedges. Redemptions Surprise. Bear Market Line Correction Line Shading represents US economic recessions as defined by the National Bureau of Economic Research (NBER). Chap quoit A Division of Dynamic Portfolios Managing 2020 Recession Risk Topics For Discussion ➢ Definition of a Recession ➢ Primary Factor for Declaring Dates for a Recession ➢ Historical Causes of Recessions ➢ Indicators to Help Estimate Timing of Recessions ➢ Current Recession Outlook ➢ Impact of Recessions on Investments ➢ Conventional-Wisdom Investments for Recessions 4 Chap quoit A Division of Dynamic Portfolios Definition of a Recession The National Bureau of Economic Research (NBER) Defines a Recession as: “A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Rule of thumb: Real GDP declines in two negative quarters. Official Recession Dates are declared by the NBER Business Cycle Dating Committee. -December 1, 2008, announced its most recent U.S. recession started December 2007, a full year after the recession began.
    [Show full text]
  • Dimensions of Macroeconomic Uncertainty: a Common Factor Analysis
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Henzel, Steffen; Rengel, Malte Working Paper Dimensions of Macroeconomic Uncertainty: A Common Factor Analysis CESifo Working Paper, No. 4991 Provided in Cooperation with: Ifo Institute – Leibniz Institute for Economic Research at the University of Munich Suggested Citation: Henzel, Steffen; Rengel, Malte (2014) : Dimensions of Macroeconomic Uncertainty: A Common Factor Analysis, CESifo Working Paper, No. 4991, Center for Economic Studies and ifo Institute (CESifo), Munich This Version is available at: http://hdl.handle.net/10419/103134 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die
    [Show full text]
  • Investing During Major Depressions, Recessions, and Crashes
    International Journal of Business Management and Commerce Vol. 3 No. 2; April 2018 Investing During Major Depressions, Recessions, and Crashes Stephen Ciccone Associate Professor of Finance University of New Hampshire Peter T. Paul College of Business and Economics 10 Garrison Avenue, Durham, NH 03824 United States of America Abstract This paper explores returns to investing during five of the most famous financial crises in stock market history: the Great Depression, the 1970s Recession, the 1987 Black Monday Crash, the bursting of the Tech Bubble, and the Great Recession. The analysis utilizes both CRSP value- and equal-weighted indexes, the latter providing more exposure to small stocks. The results demonstrate the importance of continuing to invest throughout the crisis event and after. Although the negative returns during the crisis may unnerve investors, recovery returns tend to be abnormally high rewarding those staying in the stock market. The recovery is quicker and stronger for the equal-weighted index, which suggests that during times of crisis, investors may be able to enhance their returns by incorporating small stocks into their portfolio. Keywords: Investing, Great Depression, Recession, Black Monday, Tech Bubble 1. Introduction On Monday, February 5, 2018, the Dow Jones Industrial Average (the Dow) had its largest one-day point drop in history. The decline of 1175.21 points shook world markets with major indexes in Tokyo, London, Hong Kong, and elsewhere suffering sharp declines (Mullen, 2018). The Thursday of the same week, the Dow dropped another 1032.89 points, its second largest one-day point drop in history (Egan, 2018). Although the February 2018 point drops were record setting, they were not close to the record for percent drops.
    [Show full text]
  • Emotional Investor Series the Stock Market Crash of 1987 White Paper
    BULL AND BEAR Emotional Investor Series The Stock Market Crash of 1987 White Paper The Emotional Investor Series explores how current events could lead investors to what we call Emotional Market Timing. The Stock Market Crash of 1987 white paper discusses investor’s reaction to the S&P 500’s drastic drop of 20.47% on “October 19, 1987, commonly known as “Black Monday”. 1 The Stock Market Crash of 1987 Imagine finding out that today, the S&P 500 lost 20.47%. This actually happened on October 19, 1987, when the S&P 500 lost 20.47% in a single day.1 How would you react? Would you hold firm with your investment or would you employ what we callEmotional Market Timing and sell all of your stock investments at a loss? We define Emotional Market Timing as when an investor, nervous about domestic, world or market events, in essence panics and engages in an almost spontaneous act of selling their investments. While every market is different, and past performance is never an indication of future results, in our view, Emotional Market Timing may not be the ideal strategy to use when dealing with stock market fear because it centers on alarm rather than conscious rational action. We believe that the key to grasping the dangers of Emotional Market Timing lies in the understanding that markets will generally rise and fall in cycles, typically moving in large chunks and many times in what we consider to be short time periods. After a major event like the crash of October 19, 1987, an investor employs Emotional Market Timing and panics out of the market, in essence locking in their losses, and may find themselves sitting on the sidelines as the market is moving back up with nothing but their losses and what is left of their investment.
    [Show full text]
  • What Is Past Is Prologue: the History of the Breakdown of Economic Models Before and During the 2008 Financial Crisis
    McCormac 1 What is Past is Prologue: The History of the Breakdown of Economic Models Before and During the 2008 Financial Crisis By: Ethan McCormac Political Science and History Dual Honors Thesis University of Oregon April 25th, 2016 Reader 1: Gerald Berk Reader 2: Daniel Pope Reader 3: George Sheridan McCormac 2 Introduction: The year 2008, like its predecessor 1929, has established itself in history as synonymous with financial crisis. By December 2008 Lehman Brothers had entered bankruptcy, Bear Sterns had been purchased by JP Morgan Chase, AIG had been taken over by the United States government, trillions of dollars in asset wealth had evaporated and Congress had authorized $700 billion in Troubled Asset Relief Program (TARP) funds to bailout different parts of the U.S. financial system.1 A debt-deflationary- derivatives crisis had swept away what had been labeled Alan Greenspan’s “Great Moderation” and exposed the cascading weaknesses of the global financial system. What had caused the miscalculated risk-taking and undercapitalization at the core of the system? Part of the answer lies in the economic models adopted by policy makers and investment bankers and the actions they took licensed by the assumptions of these economic models. The result was a risk heavy, undercapitalized, financial system primed for crisis. The spark that ignited this unstable core lay in the pattern of lending. The amount of credit available to homeowners increased while lending standards were reduced in a myopic and ultimately counterproductive credit extension scheme. The result was a Housing Bubble that quickly turned into a derivatives boom of epic proportions.
    [Show full text]
  • BATTENING DOWN the HATCHES Part 2 2
    September 2019 TINA BYLES WILLIAMS PORTFOLIO MANAGER BATTENING DOWN THE HATCHES CIO & CEO Part 2: How Should Investors Derisk? THOMAS QUINN, CFA DEPUTY CIO In PART 1 of this series, we posited that the next recession could However, because several key variables (such as bond yields, infla- take two possible forms: tion, valuations, monetary policy settings and growth) are very dif- ferent today than at the beginning of these past downturns, we will 1. A traditional cyclical downturn as decelerating industrial pro- also evaluate how asset returns may differ in the next downturn; duction infects the consumer economy whether it takes the form of a traditional cyclical downturn or stag- flation. We therefore close with an analysis of which assumptions 2. Stagflation, caused by a negative supply shock occurring in an need to be revisited and which asset relationships would appear to environment of either weak or negative economic growth be unsustainable. As discussed below, we believe that the most likely scenario would The 3 recent downturns listed below were preceded by rising inter- be a combination of the two; i.e., decelerating industrial production est rates as a result of Fed policy. The 1990s “tight money” reces- infects the consumer economy, with the recession prompted by a sion, could also be considered as a mild supply shock recession in bear market in risk assets, catalyzed by either an inflationary or a that it was also precipitated by the invasion of Kuwait by Iraq. This deflationary shock. In either case, we believe that the next market resulted in a spike in the price of oil in 1990, which caused manufac- decline could be exacerbated by the unwinding of excessive risk turing trade sales to decline.
    [Show full text]
  • The Federal Reserve's Response to the 1987 Market Crash
    PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020 The Federal Reserve’s Response to the 1987 Market Crash Kaleb B Nygaard1 March 20, 2020 Abstract The S&P500 lost 10% the week ending Friday, October 16, 1987 and lost an additional 20% the following Monday, October 19, 1987. The date would be remembered as Black Monday. The Federal Reserve responded to the crash in four distinct ways: (1) issuing a public statement promising to provide liquidity as needed, “to support the economic and financial system,” (2) providing support to the Treasury Securities market by injecting in-high- demand maturities into the market via reverse repurchase agreements, (3) allowing the Federal Funds Rate to fall from 7.5% to 7.0%, and (4) intervening directly to allow the rescue of the largest options clearing firm in Chicago. Keywords: Federal Reserve, stock market crash, 1987, Black Monday, market liquidity 1 Research Associate, New Bagehot Project. Yale Program on Financial Stability. [email protected]. PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020 The Federal Reserve’s Response to the 1987 Market Crash At a Glance Summary of Key Terms The S&P500 lost 10% the week ending Friday, Purpose: The measure had the “aim of ensuring October 16, 1987 and lost an additional 20% the stability in financial markets as well as facilitating following Monday, October 19, 1987. The date would corporate financing by conducting appropriate be remembered as Black Monday. money market operations.” Introduction Date October 19, 1987 The Federal Reserve responded to the crash in four Operational Date Tuesday, October 20, 1987 distinct ways: (1) issuing a public statement promising to provide liquidity as needed, “to support the economic and financial system,” (2) providing support to the Treasury Securities market by injecting in-high-demand maturities into the market via reverse repurchase agreements, (3) allowing the Federal Funds Rate to fall from 7.5% to 7.0%, and (4) intervening directly to allow the rescue of the largest options clearing firm in Chicago.
    [Show full text]
  • Union Power and the Great Crash of 1929
    CEP Discussion Paper No 876 June 2008 Real Origins of the Great Depression: Monopoly Power, Unions and the American Business Cycle in the 1920s Monique Ebell and Albrecht Ritschl Abstract We attempt to explain the severe 1920-21 recession, the roaring 1920s boom, and the slide into the Great Depression after 1929 in a unified framework. The model combines monopolistic product market competition with search frictions in the labor market, allowing for both individual and collective wage bargaining. We attribute the extraordinary macroeconomic and financial volatility of this period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly power in the economy. A shift from individual to collective bargaining presents as a recession, involving declines in output and asset values, and increases in unemployment and real wages. The pro-union provisions of the Clayton Act of 1914 facilitated the rise of collective bargaining after World War I, leading to the asset price crash and recession of 1920-21. A series of tough anti-union Supreme Court decisions in late 1921 induced a shift back to individual bargaining, leading the economy out of the recession. This, coupled with the lax anti-trust enforcement of the Coolidge and Hoover administrations enabled a major rise in corporate profits and stock market valuations throughout the 1920s. Landmark pro-union court decisions in the late 1920s, as well as political pressure on firms to adopt the welfare capitalism model of high wages, led to collapsing profit expectations, contributing substantially to the stock market crash. We model the onset of the Great Depression as an equilibrium switch from individual wage bargaining to (actual or mimicked) collective wage bargaining.
    [Show full text]
  • 2017 Annual Report Washington, D.C
    FINANCIAL STABILITY OVERSIGHT COUNCIL OVERSIGHT STABILITY FINANCIAL 2017 ANNUAL REPORT 2017 ANNUAL REPORT ANNUAL 2017 FINANCIAL STABILITY OVERSIGHT COUNCIL 1500 PENNSYLVANIA AVENUE, NW | WASHINGTON, D.C. 20220 FINANCIAL STABILITY OVERSIGHT COUNCIL Financial Stability Oversight Council The Financial Stability Oversight Council (Council) was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and is charged with three primary purposes: 1. To identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace. 2. To promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure. 3. To respond to emerging threats to the stability of the U.S. financial system. Pursuant to the Dodd-Frank Act, the Council consists of ten voting members and five nonvoting members and brings together the expertise of federal financial regulators, state regulators, and an insurance expert appointed by the President. The voting members are: • the Secretary of the Treasury, who serves as the Chairperson of the Council; • the Chairman of the Board of Governors of the Federal Reserve System; • the Comptroller of the Currency; • the Director of the Bureau of Consumer Financial Protection; • the Chairman of the Securities and Exchange Commission; • the Chairperson of the Federal Deposit Insurance Corporation; • the Chairperson of the Commodity Futures Trading Commission; • the Director of the Federal Housing Finance Agency; • the Chairman of the National Credit Union Administration; and • an independent member having insurance expertise who is appointed by the President and confirmed by the Senate for a six-year term.
    [Show full text]
  • Volatility and the Alchemy of Risk
    Volatility and the Alchemy of Risk Reflexivity in the Shadows of Black Monday 1987 Christopher Cole The Ouroboros, a Greek word meaning ‘tail debt expansion, asset volatility, and financial Artemis Capital Managment devourer’, is the ancient symbol of a snake engineering that allocates risk based on that consuming its own body in perfect symmetry. volatility. In this self-reflexive loop volatility The imagery of the Ouroboros evokes the can reinforce itself both lower and higher. In infinite nature of creation from destruction. The a market where stocks and bonds are both sign appears across cultures and is an important overvalued, financial alchemy is the only way to icon in the esoteric tradition of Alchemy. feed our global hunger for yield, until it kills the Egyptian mystics first derived the symbol very system it is nourishing. from a real phenomenon in nature. In extreme The Global Short Volatility trade now heat a snake, unable to self-regulate its body represents an estimated $2+ trillion in financial temperature, will experience an out-of-control engineering strategies that simultaneously exert spike in its metabolism. In a state of mania, the influence over, and are influenced by, stock snake is unable to differentiate its own tail from market volatility.2 We broadly define the short its prey, and will attack itself, self-cannibalizing volatility trade as any financial strategy that until it perishes. In nature and markets, when relies on the assumption of market stability to randomness self-organizes into too perfect generate returns, while using volatility itself symmetry, order becomes the source of chaos.1 as an input for risk taking.
    [Show full text]