Understanding the Changing Macro Landscape with Warren Pies and Fernando Vidal
Nov 9, 2023
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Warren Pies and Fernando Vidal from 314 Research discuss their systematic macro process, treasury issuance, Fed policy, changing correlation between stocks and bonds, drawdown prediction model, and outlook for housing. They also emphasize the importance of commodities in macro research and share insights on the challenges in the housing market and implementing their drawdown risk model.
Analyzing the duration of treasury issuance is crucial in understanding the impact of quantitative tightening (QT) and the macroeconomic environment.
Recent changes in the market have led to a positive correlation between stocks and bonds, which has significant implications for portfolio construction and risk management.
The housing market is currently facing constraints in supply due to extended construction time and limited new construction starts, influenced by factors such as mortgage rates and the control of new houses by national builders.
Deep dives
The importance of duration of treasury issuance in macro analysis
Analyzing the duration of treasury issuance is crucial in understanding the impact of quantitative tightening (QT) and the macroeconomic environment. The Federal Reserve's reduction of quantitative easing (QE) removes duration from the market, while QT introduces duration back into the market. This makes it essential to follow the actions of the Treasury in terms of the type of debt it issues. The Treasury's decisions on duration can blunt or enhance the impact of QT on the market.
The correlation dynamics between stocks and bonds
Historically, stocks and bonds have had a negative correlation. However, recent changes in the market have led to a positive correlation between the two asset classes. This change has significant implications for portfolio construction and risk management. It means that the traditional 60/40 portfolio, consisting of 60% stocks and 40% bonds, may not provide the same risk-reward profile as in the past. Understanding the shift in correlation and its impact on portfolio performance is crucial for investors.
The role of supply and demand in the housing market
The housing market is influenced by various factors, including mortgage rates, supply, and demand dynamics. Currently, the market is experiencing a shortage of supply due to extended time to build a house and limited new construction starts. The control of 50% of new houses by national builders plays a significant role in this supply constraint. Lower mortgage rates enable these builders to buy down rates, making it more affordable for potential buyers. However, if rates rise or supply chain concerns persist, the housing market may face challenges, potentially leading to price corrections.
Understanding drawdown risk
Assessing drawdown risk is crucial for investors in managing their portfolios. By utilizing a drawdown risk model, investors can estimate the probability of a significant decline, typically a 10% or greater drawdown. This model synthesizes various indicators that historically have signaled the likelihood of such drawdowns. Understanding the limitations and context of the model is essential, as it only measures downside risk and should be used in conjunction with each individual's investment mandate and risk tolerance.
Embrace skepticism and master data analysis
For investors, it is essential to cultivate a healthy level of skepticism and develop the skills to critically analyze data. Questioning assumptions, validating hypotheses, and avoiding overconfidence in investment narratives are crucial for making informed decisions. Mastery of data analysis and the ability to replicate and validate research findings help investors navigate through complex and unpredictable financial markets.
In this episode, we speak with 3Fourteen Research founders Warren Pies and Fernando Vidal. We discuss 3Fourteen’s systematic macro process and how they are using it to analyze the current challenging environment. We also cover a wide range of macro topics, including the importance of the duration of treasury issuance, Fed policy, the changing correlation dynamics of stocks and bonds, their unique drawdown prediction model and their outlook for housing.
We hope you enjoy the discussion.
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