Post on 24-May-2015
transcript
Etienne Hannart - Nicolas Paris
“Minsky phases” a Tactical Asset Allocation model
Financial crises are not a succession of booms and bust in a straight line but are occurring following a
loop pattern.
Essential Minsky idea
1. Debt markets are smarter than equity markets2. Momentum Works3. Economic data matters : it has a predictive power
Other main assumptions
The Minsky Phases or the loop process
Comfort Phase
Speculative Phase
Ponzi Phase
CRASH
Comfort Phase
Minsky Moment
Looking for safe and reasonnable yieldsFinancial Innovation vs new regulations
Seeking AlphaCredit expansion
Beta huntingAsset boomInflation
Identifying the ‘Minsky Moment’
I) Spotting potential ‘Minsky Moments’
II) If one is seen coming :A) First, get out of Risk AssetsB) Then, assess the magnitude of the coming crash –
Should we short or not ?
III) If short Risk Assets, need to find the best point to cover shorts and go long
Model Logic
Indicatorsdetailed
Indicatorsdetailed
Model Logic
I) Recession Warning
II) Short or Not ?
III) Recovery Indicator
1. RationaleAn Inverted Yield Curve is a bad omen Lenders are showing that they have no
confidence in borrowers Minsky « Ponzi Phase » approaching
2. Our Approach Follow the spread of 10y US T-Bonds and 3m
US T-Bills
I. Recession Warning 1 : Credit Spread
I. Recession Warning 1 : Credit Spread
I. Recession Warning 2 : Monetary Growth
1. RationaleMoney Supply growth acts as a proxy of money
availability Second component of « Minksy moment »
Money must be expensive AND scarceNegative monetary growth shows credit
destruction
2. Our ApproachWe wait for a negative CPI adjusted monetary
growth
I. Recession Warning 2 : Monetary Growth
I. Recession Warning : Combined signals
If the two indicators give signals on the same month, we get a «Recession Warning».
As we have simultaneous signals, we consider the recession warning received to be strong, so we extend it over the following 2 quarters.
Recession Warning Sell Equities, Buy T-Bills
I. Recession Warning
Sell Equities, Buy T-Bills
No false positives, no recessions missed after 1962.00’s one is spotted a tad too late
Model Logic
I) Recession Warning
II) Short or Not ?
III) Recovery Indicator
II. Short the Recession ?
1. Rationale For precise timing, listen to markets Debt markets are smarter than Equity markets Momentum has a predictive power
2. Our Approach We compare the momentum of
S&P-500 US T – 10y
II. Relative Strength - Results
Bond relative strength Sell Short Equities, Hold T-Bills
Interpreting the indicator is very simple : if it shows that bonds are stronger than equities during a recession warning, then the model sells short the S&P-500. All other signals are ignored.
II. Relative Strength - Results
Final ProjectIE Business School December 9, 2010 – xx/yy
Many false positives, all filtered by the recession warnings.
Mild recessions do not trigger shorts
Model Logic
I) Recession Warning
II) Short or Not ?
III) Recovery Indicator
III. Unemployment Growth
1. RationaleUnemployment is the most important
macroeconomic data for the marketsTight relationship between recession through
and peak in new claims for unemployment insurance (Robert Gordon)
2. Our Approach Use the smoothed slope of unemployment,
pinpointing its reversal
III. Unemployment Growth
The slope reversal always happens between the middle and the end of the recession
III. Industrial Supply Management (ISM)
1. Rationale Encompasses most of the real economy
(employment, inventories, new orders) Widely followed Serves as a confirmation of the employment signal
2. Our approach The ISM gives a very noisy signal, so we use a simple
system based on two tresholds : One far below (“So bad that it has to get better”) One above (“Already recovering”)
III. Combined signals
When both the unemployment rate and the ISM index are providing a positive signal, we go long equities again.
Recovery Indicator Signal Cover Shorts / Long Equities
III. Combined signals
All short positions profitable, except the first one (1970)
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Short S&P 500 periods
System is Short
SP-500
Performance Review
Decision ProcessAlgorithm
10y/3m spread
Credit Growth
YES
YES
SELL EquitiesBUY T-Bills
Algorithm – a Loop process (1)
Recession Warning
This month & next 6 months
10y/3m spread
Credit Growth
YES
YES
SELL EquitiesBUY T-Bills
Algorithm – a Loop process (2)
Relative Strength
Recession Warning
NO
YES
HOLD T-BillsSELL Equities ShortBUY Equities
Recession Warning
This month & next 6 months
SELL T-Bills
10y/3m spread
Credit Growth
YES
YES
SELL EquitiesBUY T-Bills
Algorithm – a Loop process (3)
Relative Strength
Recession Warning
NO
YES
HOLD T-BillsSELL Equities Short
UnemploymentGrowth
ISM
BUY EquitiesYES
YES
Recession Warning
This month & next 6 months
SELL T-Bills
Performance ReviewLeverage
Leverage (1/2)
• Leverage is dangerous because it makes a portfolio vulnerable to quick drop in equities prices.
• However the main purpose of our model is to limit exposure towards this type of events.
• And it does avoid most recessions • Therefore it is adapted to leverage
Leverage (2/2)
• Use of leverage when E(Rm) > cost of funding• E(Rm) defined by CAGR of S&P 500 from 1950
to current month.• Cost of funding = Risk free rate + 100 bps• Used both when long and short• We use a conservative level of leverage of
1.3:1 (The fact that the model has predicted past recession succesfully is not a guarantee..)
Performance Review
Performance Review
Performance
Decisions & Performance
Closer look at main recessions
LimitsLimits
• Traps of backtesting– Threshold dependancy– Use of monthly returns
• Our approach– A rationale for each indicator– A rationale for each threshold number– Using round numbers– Rules can be explained in plain english
• Objective– Give to potential users the confidence to follow the
system’s recommendations
Guidelines / Methodology
• Recession Warnings– Intrisicaly robust, as it does – Weak to one parameter : number of months of ‘pushing
forward’ the recession warning.• Reducing it punishes the results (quite logically)• Increasing it too (less acceptable)
– Many solutions available, but still wondering over the most intellectually satisfying (rather than the most profitable)
• Short or not– Parameters changes : robust– Weakness : Interaction with Recession Warnings
• Recovery indicator– Parameters changes : very robust– No changes needed
Robustness / Treshold dependancy