Global Economy — Alpha.Sources

In the Pipe, Five-by-Five

I recently said that markets were cruising for a bruising. For now, they’re just cruising, mirroring the path set by Corporal Ferro as she guides her drop ship to a perfect landing on LV-426 in James Cameron’s Aliens.

There is still little stopping risk assets, short vol is paying steady premiums for those picking up dimes in front of the proverbial steamroller, and risk-free instruments still offer 4-to-5% for anyone who feels like temporarily getting off the train. In other words, it’s very pleasant indeed for investors. From the perspective of the macro data, that’s easy to explain. Markets are still being fed information that the (global) economy is doing ok, inflation is falling and while interest rates are set to stay high, they’re also about to come down, by 50-to-100bp. Does this story still check out? Just about.

Cruising for a Bruising

Financial market pundits are a bit like dogs chasing cars; they wouldn’t know what to do if they caught one. And so it is that after trying to figure out whether the economy and markets would achieve a soft landing in the wake of the post-Covid tightening cycle, no one quite knows what to think now that the soft landing appears to have arrived.

Let’s list the key requirements for a soft landing.

The BIS gets it wrong on AI/LLM and feminism & reproduction

The BIS has a Bulletin out on the usefulness of AI and large language models. They’re not terribly impressed.

When posed with a logical puzzle that demands reasoning about the knowledge of others and about counterfactuals, large language models (LLMs) display a distinctive and revealing pattern of failure. 
The LLM performs flawlessly when presented with the original wording of the puzzle available on the internet but performs poorly when incidental details are changed, suggestive of a lack of true understanding of the underlying logic. 
Our findings do not detract from the considerable progress in central bank applications of machine learning to data management, macro analysis and regulation/supervision. They do, however, suggest that caution should be exercised in deploying LLMs in contexts that demand rigorous reasoning in economic analysis.

Demographics, Global Economy, Politics and societyclaus vistesenJanuary 14, 2024feminism, AI, BIS, ChatGPT, OpenAI, the Nation, Moira Donegan

What to do with high-flying tech at the start of 2024?

I am coming into 2024 in a decent position. My MinVar equity portfolio, designed to extract the best from both worlds in the perennial battle between growth and value, has done largely what it is supposed to do. It has offered positive, but below-beta, returns with below-beta volatility, the latter which means that your humble blogging investment analyst has been able to sleep calmly at night. In bonds, I moved my exposure onto the front early in 2023 in line with the yield curve inversion. At this point I see no reason to change that strategy. Why buy negative carry in duration when you don’t have to? There will be a time to take a strong bet on duration, but I can’t really see that point until either the front-end has collapsed under the weight of global central bank easing, or unless the curve rinses everyone by bear-steepening sufficiently to restore a positive roll and carry in the long bond. In other words, I don’t see any reason to buy duration as long as the curve is still deeply inverted.

02

Alpha Sources Blog