Clearly I've been wrong about the market recovery since Aug. The questions here are (1) what are the key drivers for forward returns over the next 3-6M, (2) what are priced in, (3) where will surprises come from, (4) the general conditions (trend/vol) & potential changes? Summary of current conditions: 1) The Fed is firmly hawkish and will keep raising rates until there are clear evidence of inflation returning to its 2% target. One piece of lagging evidence is that core PCE grew 0.2% m/m over a few months, as per Brainard (h/t @aRishisays).
1/n

So a month has gone by, and the consensus view appears to have shifted significantly from "we're in a recession" or "hard landing" to that of a softer landing. Macro data has shown that we are not currently in a recession, and the July CPI shows that inflation has slowed. 1/n US equities have been rallying and volatility declining. There were numerous data points (CPI, NFP, Fed official pushback, etc.) that could have soured the market sentiment, but dips have been bought and stocks have continued higher with broadening participation. 2/n

Fed officials pushing back on pivot expectations after the CPI print. Permabears counting on high inflation and tighter policy conditions to be right.

So it feels like the current consensus view is that we will have a recession based on equity drawdowns, credit spreads, STIR futures, etc. However, US econ data remains robust except for the housing & the tech sectors. Inflation is going to slow with lower commodity prices. 1/n US growth is going to slow no doubt. The question is whether we are going into a recession/stagflation that will have significant negative implications for corporate profits and defaults, or is it going to be a sharp slowdown in activities or a shallow recession?
2/n

I have been asked what reading materials that would prepare students for a meaningful internship. Here is a list of books, primers, and websites that should get you started. This is not an exhaustive list and I very well miss a lot of good ones. Fixed Income

Salomon Brothers Understanding Yield Curve – Ilmanen
sites.fas.harvard.edu/~css318a/hando…

Handbook of Fixed Income Securities – Fabozzi
You should be able to find an older edition online.

Follow @EffMktHype for his Bond Basics.

https://twitter.com/EffMktHype/status/1412356603374804994?s=20

Dealers said the brave ones were those fading the USD/CLP topside.

The BBB Series – Topic 3: Yield Curve

Inspired by @EffMktHype, I will be laying down the basics of the yield curve. We often hear people talk about the curve, especially when it is inverted. But why is it important? What does a normal curve look like? What drives its shape? Simple, a yield curve is a line showing the yields of bonds of different maturities. The bonds used to construct the yield curve have the similar credit equality (e.g., BBB curve) or come from the same issuer (e.g., US Treasury).

Primarily El Salvador, its banks, and their creditors.

https://twitter.com/business/status/1403001064752705536

The IMF statement is fairly typical. If a country adopts a new type of currency that is extremely volatile and lacks fundamental backing (anchor) of its value, the IMF will have to perform very careful and thorough analyses on the adoption. That is a part of its jobs.

There are a couple lessons here. The first one is risk management, and the second is the setting yourself up to adapt quickly and pivot.

US hedge funds Melvin Capital and Light Street suffer further losses via @FT
on.ft.com/3iuvVsb When a position goes against you, especially one with the potential of unlimited loss, you need to quickly identify the driver of the adverse movement, and strategize your exit or next step. My bias is that if you can't control the risk, better to exit than torture yourself.

One thing I keep thinking about is that as consensus sees wider deployment of vaccines as the only path to normalcy (sometimes next year), what would happen if we return to "normal" with only better hygiene, test/trace, treatments, and the sheer desire/will for community? What would happen to the risky assets in this case? How would different asset classes perform? How would sectors within an asset class perform relative to each other? How would you isolate and validate this thesis?

House hunting and home renovation shows set unrealistic expectations and insidiously alter viewers' priorities in life. Having a "perfect" home =/= happiness.

I avoid them. Same way I throw away my Bloomberg Pursuits.

Equity investing:
As I continue to improve on my selection & shift my focus on names that have potential to surprise to their upward fundamentals, the discipline of selling & trimming winning positions (on valuation, sizing, lack of catalysts) keeps making me feel like an idiot. It was "easier" when I covered cyclical sectors or traded turnaround names or companies going through changes (industry, company specific). More predictable, or said differently, less room for imagination about these companies.