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"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
"Minsky Phases" Asset Allocation
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"Minsky Phases" Asset Allocation

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  • Based on Hyman Minsky’s research : Financial crises are not a succession of booms and bust in a straight line but are occurring following a loop pattern. Consequence : crisis and expansions are both expected and unavoidable, being the consequence of each other
  • Employment is typically the most important macroeconomic data for the markets because it is released with a short lag and is full of important new information on the broad economy as well as individual sectors.
  • Employment is typically the most important macroeconomic data for the markets because it is released with a short lag and is full of important new information on the broad economy as well as individual sectors.
  • Employment is typically the most important macroeconomic data for the markets because it is released with a short lag and is full of important new information on the broad economy as well as individual sectors.
  • Employment is typically the most important macroeconomic data for the markets because it is released with a short lag and is full of important new information on the broad economy as well as individual sectors.
  • Employment is typically the most important macroeconomic data for the markets because it is released with a short lag and is full of important new information on the broad economy as well as individual sectors.
  • Transcript

    • 1. Etienne Hannart - Nicolas Paris<br />“Minsky phases” <br />a Tactical Asset Allocation model<br />
    • 2. Essential Minskyidea<br />Financial crises are not a succession of booms and bust in a straight line but are occurring following a loop pattern.<br />
    • 3. Debt markets are smarter than equity markets<br />Momentum Works<br />Economic data matters : it has a predictive power<br />Other main assumptions<br />
    • 4. The Minsky Phases or the loopprocess<br />Beta hunting<br />Asset boom<br />Inflation<br />Minsky Moment<br />Ponzi Phase<br />Speculative Phase<br />Seeking Alpha<br />Creditexpansion<br />CRASH<br />Comfort Phase<br />Comfort Phase<br />Looking for safe and reasonnableyields<br />Financial Innovation vs new regulations<br />
    • 5. Identifying the ‘Minsky Moment’<br />
    • 6.
    • 7. Model Logic<br />Spottingpotential ‘Minsky Moments’<br />II) If one isseencoming :<br />A) First, getout of RiskAssets<br />B) Then, assessthe magnitude of the coming crash – Shouldwe short or not ?<br />III) If short RiskAssets, need to find the best point to cover shorts and go long<br />
    • 8. Indicators<br />detailed<br />Indicators<br />detailed<br />
    • 9. Model Logic<br />Recession Warning<br />II) Short or Not ?<br />III) RecoveryIndicator<br />
    • 10. I. Recession Warning 1 : CreditSpread<br />Rationale<br /><ul><li>An InvertedYieldCurveis a badomen
    • 11. Lendersare showingthatthey have no confidence in borrowers
    • 12. Minsky« Ponzi Phase » approaching</li></ul>Our Approach<br /><ul><li>Follow the spreadof 10y US T-Bonds and 3m US T-Bills</li></li></ul><li>I. Recession Warning 1 : CreditSpread<br />
    • 13. I. Recession Warning 2 : MonetaryGrowth<br />Rationale<br /><ul><li>Money Supplygrowthacts as a proxy of money availability
    • 14. Second component of « Minksy moment »
    • 15. Money must beexpensive AND scarce
    • 16. Negativemonetarygrowth shows credit destruction</li></ul>Our Approach<br /><ul><li>Wewait for a negative CPI adjustedmonetarygrowth</li></li></ul><li>I. Recession Warning 2 : MonetaryGrowth<br />
    • 17. I. Recession Warning : Combinedsignals<br />If the twoindicatorsgivesignals on the samemonth, weget a «Recession Warning».<br />As we have simultaneoussignals, weconsider the recession warning received to bestrong, soweextendit over the following2 quarters.<br />Recession Warning  SellEquities, Buy T-Bills<br />
    • 18. I. RecessionWarning<br />No false positives, no recessionsmissedafter 1962.<br />00’s one isspotted a tadtoolate<br />SellEquities, Buy T-Bills<br />
    • 19. Model Logic<br />Recession Warning<br />II) Short or Not ?<br />III) RecoveryIndicator<br />
    • 20. II. Short the Recession ?<br />Rationale<br /><ul><li>For precise timing, listen to markets
    • 21. Debtmarkets are smarterthanEquitymarkets
    • 22. Momentum has a predictivepower</li></ul>Our Approach<br /><ul><li>We compare the momentum of
    • 23. S&amp;P-500
    • 24. US T – 10y</li></li></ul><li>II. Relative Strength - Results<br />Interpreting the indicatorisvery simple : if it shows that bonds are strongerthanequitiesduring a recession warning, then the model sells short the S&amp;P-500. <br />All othersignals are ignored.<br />Bond relative strength <br />Sell Short Equities, Hold T-Bills<br />
    • 25. II. Relative Strength - Results<br />Many false positives, all filtered by the recession warnings.<br />Mildrecessions do not trigger shorts<br />Final Project<br />IE Business School<br />December 9, 2010 – xx/yy<br />
    • 26. Model Logic<br />Recession Warning<br />II) Short or Not ?<br />III) RecoveryIndicator<br />
    • 27. III. UnemploymentGrowth<br />Rationale<br /><ul><li>Unemploymentis the most important macroeconomic data for the markets
    • 28. Tightrelationshipbetweenrecessionthrough and peak in new claims for unemploymentinsurance (Robert Gordon)</li></ul>Our Approach<br /><ul><li>Use the smoothedslope of unemployment, pinpointingits reversal</li></li></ul><li>III. UnemploymentGrowth<br />The slope reversal alwayshappensbetween the middle and the end of the recession<br />
    • 29. III. IndustrialSupply Management (ISM)<br />Rationale<br /><ul><li>Encompassesmost of the real economy (employment, inventories, new orders)
    • 30. Widelyfollowed
    • 31. Serves as a confirmation of theemploymentsignal</li></ul>2. Ourapproach<br /><ul><li>The ISM gives a verynoisysignal, so we use a simple systembasedontwotresholds :
    • 32. Onefarbelow (“So badthatit has togetbetter”)
    • 33. Oneabove (“Alreadyrecovering”)</li></li></ul><li>III. Combinedsignals<br />Whenboththeunemploymentrate and the ISM index are providing a positive signal, wegolongequitiesagain.<br />RecoveryIndicator Signal  <br />Cover Shorts / Long Equities<br />
    • 34. III. Combinedsignals<br />All short positions profitable, exceptthefirstone (1970)<br />
    • 35. Performance Review<br />DecisionProcess<br />Algorithm<br />
    • 36. Algorithm – a Loopprocess (1)<br />10y/3m spread<br />YES<br />Recession Warning<br />SELL Equities<br />BUY T-Bills<br />CreditGrowth<br />YES<br />This month &amp; next 6 months<br />
    • 37. Algorithm – a Loopprocess (2)<br />10y/3m spread<br />YES<br />Recession Warning<br />SELL Equities<br />BUY T-Bills<br />CreditGrowth<br />YES<br />This month &amp; next 6 months<br />Relative Strength<br />Recession Warning<br />SELL T-Bills<br />NO<br />YES<br />HOLD T-Bills<br />SELL Equities Short<br />BUY Equities<br />
    • 38. Algorithm – a Loopprocess (3)<br />10y/3m spread<br />YES<br />Recession Warning<br />SELL Equities<br />BUY T-Bills<br />CreditGrowth<br />YES<br />This month &amp; next 6 months<br />Relative Strength<br />Recession Warning<br />SELL T-Bills<br />NO<br />YES<br />Unemployment<br />Growth<br />YES<br />HOLD T-Bills<br />SELL Equities Short<br />BUY Equities<br />ISM<br />YES<br />
    • 39. Performance Review<br />Leverage<br />
    • 40. Leverage (1/2)<br />Leverageisdangerousbecauseitmakes a portfoliovulnerable to quick drop in equitiesprices.<br />However the main purpose of our model is to limitexposuretowardsthis type of events.<br />And itdoesavoidmostrecessions<br />Thereforeitisadapted to leverage<br />
    • 41. Leverage (2/2)<br />Use of leveragewhen E(Rm) &gt; cost of funding<br />E(Rm) defined by CAGR of S&amp;P 500 from 1950 to currentmonth.<br />Cost of funding = Risk free rate + 100 bps<br />Usedbothwhen long and short<br />Weuse a conservative level of leverage of 1.3:1 (The factthat the model has predictedpastrecessionsuccesfullyis not a guarantee..)<br />
    • 42. Performance Review<br />Performance <br />Review<br />
    • 43. Performance<br />
    • 44. Decisions&amp; Performance<br />
    • 45. Closer look at main recessions<br />
    • 46. Limits<br />Limits<br />
    • 47. Guidelines / Methodology<br />Traps of backtesting<br />Thresholddependancy<br />Use of monthlyreturns<br />Our approach<br />A rationale for eachindicator<br />A rationale for eachthresholdnumber<br />Using round numbers<br />Rulescanbeexplained in plain english<br />Objective<br />Give to potentialusers the confidence to follow the system’srecommendations<br />
    • 48. Robustness / Tresholddependancy<br />Recession Warnings<br />Intrisicalyrobust, as itdoes<br />Weak to one parameter : number of months of ‘pushingforward’ the recession warning.<br />Reducingitpunishes the results (quitelogically)<br />Increasingittoo (less acceptable)<br />Many solutions available, but stillwondering over the mostintellectuallysatisfying (ratherthan the most profitable)<br />Short or not<br />Parameters changes : robust<br />Weakness : Interaction withRecession Warnings<br />Recoveryindicator<br />Parameters changes : veryrobust<br />No changes needed<br />

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