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As with opportunities in equities, industrial commodities, or currencies, our objectives are to anticipate (when possible) major trend changes. Often this has been with enough
advance for CIOs and portfolio managers to determine policy. As the target time approaches, the ChartWorks, using reliable technical analysis, pinpoints the
reversal and, once the change is starting, provides initial price targets. The approach is impartial, with turns to the upside given equal emphasis as turns to the downside.
Our work is used by trading desks so the comments, obviously, are more frequent than this sector can accommodate. Instead, this page will review some key studies on the excesses that go with a world of remarkable financial
volatility. In so many words, it places the convictions of the day in perspective. The first essay "Real Men Trade The Long Bond" is self-explanatory. It also
notes that we have been long the long bond since June, 2004. We didn't find the "conundrum" of short rates rising as long rates declined perplexing. The next change will be to falling short rates and increasing long rates, which may eventually
be described as "Conundrum Two". The second essay "Discount Rate Follies" reviewed all of the changes in administered rates through all five previous great
financial booms as they occurred in the world's financial capital. Prior to the Federal Reserve System, the senior central bank was the Bank of England. When the central bank was permitted to change administered rates, policymakers lagged the
critical changes in short-dated market rates of interest by many months. The conventional wisdom, after the event, insists that the plunge in Fed funds from 6˝% in 2000 to 1% in June, 2003 was deliberate, sort of an "emergency" move.
"Discount Rate Follies" was written in late 2001 and explains that such rapid plunges have only occurred with the initial collapse of a financial mania.
Although equities get the most press, every great financial boom has included extreme action in credit spreads. This history has always been fascinating and "Sovereign Debt Follies" concisely says it all, or
at least enough to foster skepticism. A similar review of the naturally recurring extremes in the yield curve will be posted.
The PDF files below will open in new windows.
Real Men Trade The Long Bond MAY-12-05 Discount Rate Follies SEP-11-01 Sovereign Debt Follies DEC-2001
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