In a stable regime where finance and economy grow in parallel, cash and oil are two forms of free energy which, in theory, should be fungible. Since early 2020, however, the central banks from the US, Europe, and Japan, issued 40% excess cash on average out of the blue to fight the deflationary consequences of the pandemic.

Cash and oil are unlikely to remain fungible: you can print cash, but you can’t print oil.

One year ago, facing the largest bond bubble in history, Gavekal-IS published “Bonds. Which Bonds?” focusing on four investment alternatives to US fixed-rate treasury bonds to protect income portfolios:

The four positions generated more than 20% alpha against US bonds, on average, which now raises the question of a possible over-extension of their outperformance.

Keep? Sell? Who knows?!

Unlike most physicists, value investors should welcome negative mass.

Financial assets carry a mass, just like objects in physics. Some are heavy, others are light, and a few carry a negative mass, a key property for efficient portfolio construction.

Today, the energetic approach tells us more: the expected return of value stock indices outpaces growth indices for the first time in ten years.

« All the things I could do, if I had a little money » chantait ABBA en 1976.

Aujourd’hui, ce n’est plus l’argent qui manque. Les grandes banques centrales des EtatsUnis, de l’Europe et du Japon, en ont imprimé entre 6 et 7 billions de dollar américains depuis le début de l’année 2020. Comment comprendre cette monnaie ? Est-elle surévaluée, sous-évaluée ?

« All the things I could do, if I had a little money » ABBA sang in 1976.

Today, there’s no shortage of money. Since the beginning of 2020, the major central banks of the United States, Europe and Japan have printed between six and seven trillion US dollars combined. How can we approach this currency? Is it overvalued or undervalued?

Previously, Louis outlined the four asset classes that investors appear to regard as anti-fragile, now that US treasuries no longer fit the bill. With each of these four asset classes enjoying a roaring bull-run, today Louis examines the typical life cycle that lifts an asset class from unloved hell to anti-fragile heaven.

Unconventional monetary policy has led to the largest bond bubble in history; some 15 trillion dollars’ worth of debt globally, now providing negative yields. Bond holders from developed economies may have reason to worry about the future of their savings. History tells us, however, that perhaps they should simply put their feet up, and take a look at less crowded bond markets for inspiration.

In our early letters on “Antifragility Revisited”, we demonstrated evidence of a linear relationship between many financial assets’ excess return and their variance at all probability levels. Such a relationship was conspicuously absent from the considerations of Modern Portfolio Theories. This required a transgression to Professor Taleb’s description of fragility and anti-fragility. But where does this relationship come from? This letter uses physics to explain the concepts of fragility and antifragility from a theoretical standpoint. Fragility and antifragility emerge as a natural consequence of market competition;  they provide a financial variable which discriminates winners and losers in various market regimes. A few simple equations can be used to highlight the theory, and demonstrate how one calculates the physical variables, such as fragility. Readers who are not familiar with mathematics need not worry. The equations are even simpler than the ones used in traditional portfolio theories − that is to say, very simple!

Physics would simply not exist without conservation laws. The conservation of energy in a closed system, for instance, is the first principle of thermodynamics and one of the most important concepts in physics.  Does finance follow similar laws? And what would the “energy” of a fragile asset mean?

Are financial markets today made vulnerable by the price of oil reaching new heights? Most severe equity drawdowns in the last fifty years were preceded by an inflationary shock on oil. Turning risk asset positions into cash ahead of extreme events is one of the very few possibilities to safeguard investment values, and to generate substantial alpha on the long run. So, is it time to reduce the sails? TrackMacro’s answer is negative, and for a fundamental reason originating in physics and statistical finance.

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