RE Capital's Visionary Leadership under Newman Leech
"Minsky Phases" Asset Allocation
1. Etienne Hannart - Nicolas Paris “Minsky phases” a Tactical Asset Allocation model
2. Essential Minskyidea Financial crises are not a succession of booms and bust in a straight line but are occurring following a loop pattern.
3. Debt markets are smarter than equity markets Momentum Works Economic data matters : it has a predictive power Other main assumptions
4. The Minsky Phases or the loopprocess Beta hunting Asset boom Inflation Minsky Moment Ponzi Phase Speculative Phase Seeking Alpha Creditexpansion CRASH Comfort Phase Comfort Phase Looking for safe and reasonnableyields Financial Innovation vs new regulations
7. Model Logic Spottingpotential ‘Minsky Moments’ II) If one isseencoming : A) First, getout of RiskAssets B) Then, assessthe magnitude of the coming crash – Shouldwe short or not ? III) If short RiskAssets, need to find the best point to cover shorts and go long
17. I. Recession Warning : Combinedsignals If the twoindicatorsgivesignals on the samemonth, weget a «Recession Warning». As we have simultaneoussignals, weconsider the recession warning received to bestrong, soweextendit over the following2 quarters. Recession Warning SellEquities, Buy T-Bills
18. I. RecessionWarning No false positives, no recessionsmissedafter 1962. 00’s one isspotted a tadtoolate SellEquities, Buy T-Bills
25. II. Relative Strength - Results Many false positives, all filtered by the recession warnings. Mildrecessions do not trigger shorts Final Project IE Business School December 9, 2010 – xx/yy
40. Leverage (1/2) Leverageisdangerousbecauseitmakes a portfoliovulnerable to quick drop in equitiesprices. However the main purpose of our model is to limitexposuretowardsthis type of events. And itdoesavoidmostrecessions Thereforeitisadapted to leverage
41. Leverage (2/2) Use of leveragewhen E(Rm) > cost of funding E(Rm) defined by CAGR of S&P 500 from 1950 to currentmonth. Cost of funding = Risk free rate + 100 bps Usedbothwhen long and short Weuse a conservative level of leverage of 1.3:1 (The factthat the model has predictedpastrecessionsuccesfullyis not a guarantee..)
47. Guidelines / Methodology Traps of backtesting Thresholddependancy Use of monthlyreturns Our approach A rationale for eachindicator A rationale for eachthresholdnumber Using round numbers Rulescanbeexplained in plain english Objective Give to potentialusers the confidence to follow the system’srecommendations
48. Robustness / Tresholddependancy Recession Warnings Intrisicalyrobust, as itdoes Weak to one parameter : number of months of ‘pushingforward’ the recession warning. Reducingitpunishes the results (quitelogically) Increasingittoo (less acceptable) Many solutions available, but stillwondering over the mostintellectuallysatisfying (ratherthan the most profitable) Short or not Parameters changes : robust Weakness : Interaction withRecession Warnings Recoveryindicator Parameters changes : veryrobust No changes needed
Editor's Notes
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.
