T-Leaf Reading - Summary (updated)

T-Leaf Reading to Understand Beta and Create Systematic Alpha

Introducing a modern toolkit for Recession and Inflation Anticipation, Identification of Black Swans, Avoiding Drawdowns, Modernizing Macro Economics, and more

Summary

I recently (2/26/2019) shared T-Leaf Reading on LinkedIn, in addition to posting it on MBS Mantra's website. Thanks to comments, I have updated it, and re-linked the new version (3/12/2019). This is a summary of the 38 page paper.

Summary

·        We present a new toolkit that adds Macro Economics, Money Supply, Foreign Central Bank activity, Currencies, Equity markets, Swaps, and Inter-Market concepts to the traditional Yield curve and TIPS-based measures for anticipating inflation, recessions and understanding asset pricing and Beta

·        We share the MBS Mantra Market-Macro Framework and explain why current asset pricing theory is incomplete, and needs to incorporate the actions of Central Banks

·        We demonstrate usage of this toolkit and framework by explaining recent “Black Swan” events, and show where we anticipated them using our framework

·        We show our model for market Beta based on Macro elements in the toolkit – what we call Injected Capital – and describe how Modern Macro Economics works

·        We provide links for more detailed understanding

This toolkit and framework can help CIOs and portfolio managers:

·        Avoid drawdown events, allowing returns to continue compounding

·        Create Alternative Alpha

·        Make Alpha Capture Systematic

·        Understand and anticipate almost all asset price movements in the modern era (since ~1990), from yield curve flattenings and swap spread movements, to significant events such as LTCM and the Global Financial Crisis

·        Identify false positives (selloffs in asset prices that are temporary), allowing one to buy dips, or avoid selling

·        Make markets rational

We show how to use the toolkit (shared below) to:

• Read the shape of the Yield Curve
• Read Inflation expectations

We then use this toolkit to identify the connections between almost every event in US financial history since 1990, including many that were called Black Swans. We show how almost all of these sequentially occuring events were interconnected, and were understandable and predictable. We demonstrate this through links to my publications over the past 30 years that used this toolkit. I had predicted many of the linkages and in some case the events, but only those that were my clients got to benefit from my warnings.

The events analyzed include:

• Long Term Capital Management failure, Russian Default, Asian Flu
• Unexpected recovery after 9/11 between 2002 to 2004 that is attributed to Greenspan
• The build up to the Global Financial Crisis (GFC) in 2007. The GFC itself is only discussed briefly, as I have previously analyzed it exhaustively in my 'Crisis Notes' (that predicted it) and 'The Failure of MacroEconomics' (that explained it). (MBS and Lehman were not the cause of the Crisis, in case you were wondering, but merely casualties).

I show how 2 specific events in 1994 and 1996 (and you will have not heard of these events before) led to the Global Financial Crisis in 2007 and how one of them caused LTCM to fail. I show the linkage between the GFC and LTCM, the interconnectedness of the Japanese and the United States economies, and how both these critical events had their roots in banking Crises from the 1980s in each country.

I also explain the MBS Mantra Market-Macro Framework (shared below), and show how the toolkit allows one to understand Modern Macro Economics (Injected Capital drives Asset Prices), and show some data from our Beta model that uses the Injected Capital framework.

Conclusion

Understanding the activities of foreign central banks, global connectivity, and using a broader tool kit, is crucial, with the understanding that there is usually an identifiable Rational or Non-rational event that determines outcomes.

Modern Macro Economics is understanding the balancing act between Carry and QE, between Hot Money and Cold Money, between Systematic and Unsystematic risk.

The world hangs in balance.

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Thanks for reading this. I hope this analysis can help you navigate markets better. I would love to hear your comments.

Samir B. Shah, CIO & CEO

MBS Mantra, LLC

[email protected]

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