Do or die for the Reverse Twist story

Investors are beginning to get seriously interested in the idea that the BOJ and the ECB will change the composition of their bond purchases to steepen the yield curve. In effect, this would be the opposite of the Fed’s Operation Twist, which saw QE purchases concentrated on the long-end, chiefly to lower the yield on mortgage-backed securities. I think this story, at least partly, is to blame for the recent nudge higher in global bond yields. But we will know soon enough. This week's BOJ meeting should give us a hint of whether this narrative has any legs. 

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The Battle for the Soul of Macroeconomics, Part 1 (Wonkish)

Do you remember what you were taught in introductory economics? Do you remember how much math you had to chew through in graduate school? Do you want to relive that? Alternatively, you might just have wondered why macroeconomists write and speak like they do, why they use complex math to explain seemingly simple concepts, and why they don't seem to agree on anything?

In this first part, I pick apart the traditional undergraduate story of macroeconomics, and try to explain why Keynes and Friedman maybe weren't as different as everyone would like you to believe. In doing so, I am setting up the big plunge into why on earth macroeconomics has come to rely on a fusion of math and representative agent models to make theories of the world, a story that I will grapple with in part 2 of this show.

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Keeping the eye on the ball

As I came back from holiday I cast my support, if only temporarily, for the bearish side of the spectrum. I see few opportunities to add to existing investments, or to begin new ones, but plenty of upside in betting on the short side of global equities. So far the market has been undecided on whether my call will prevail. But I am confident that it will be slightly more difficult for the longs in the next few months. I also said, though, that I didn't see any indication that this would be the big kahuna sell-off forcing the S&P 500 to re-tag 666. A cop-out in the eyes of many I am sure. But I really don't think it is wise to spend your time trying to plot a path for the end of the financial world as we know it. Ask bears of the 2011 vintage how they're doing, if you are not sure what I am talking about.

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claus vistesen
The World is Upside Down - When pension funds Sell volatility

Normally put options serve as protection for large, mainly long only, asset managers. Picture an investor committee meeting at a large pension fund in the wake of a equity market drawdown. The core portfolio is down, but the astute and prudent portfolio manager dodged the bullet by buying put options on the market or the funds individual stock holdings. This is the way it would normally work, but there is nothing normal about the current market. 

A WSJ piece by Ben Eisen and Aaron Kuriloff this week alerts us to the topsy-turvy world of financial markets in an environment where the "reach for yield" is the only game in town. In short, in a desperate search for regular income and "yield" some pension funds in the U.S. are turning to the nuclear option of selling put options. I will let Eisen and Kuriloff describe the madness;

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