Leg 2, Diversified Beta, now carries more risk than you suggest, because it is driven by growing passive and systematic flows, and massive global imbalances, and massive domestic deficits and debt, that have accumulated over 40 years. The boat is leaning extremely to one side. Leg 1 and Leg 3 are not really adequate hedges for Leg 2. Leg 2 Exposure has to be hedged directly, or reduced.
The passive and systematic flows arguably are across all time horizons.
i.e. short term: systematic vol selling, vol targeting, stock buybacks,
medium term: portfolio rebalancing of target date funds to maintain 60:40 portfolios. the increasing private market share
long term: the passive bid for assets, buying indices, which decreases market elasticity as passive becomes the dominant share of the market.
The financial markets now determine the state of the real economy, rather than the real economy determining the state of the financial markets, so diversified beta has become a problematic position to hold at the same size when the real economy determined the financial market outcomes.
Otherwise, this three part series the Stoic Macro framework was exceptional.
I love this series a lot so I'm going to be f*n annoying and say that this part didn't feel like a direct conclusion/progression from the prior parts. This portfolio approach makes sense in general, but how does it build on the prior parts? where is the pain and reflection maximization?
Now maybe I just had too much to drink at brunch but would love the logical flow sharpened/clarified
Thanks for the feedback! I kinda agree. I'll try to fill it in more in the coming weeks to turn it into an actual portfolio. There are various reason's I cannot at the moment I can't go into now.
The pain and the reflection comes in to your building, and I'll lay out the ways I've felt pain and my reflections on it more going forward.
Thank you so much! Love your writing and the fact you are sharing your thinking is seriously a gift. So I do appreciate you taking my pesky comment seriously. :)
What are your thoughts on the hyper conservative hyper aggressive approach advocated by Taleb in the barbell portfolio? 80 to 90 percent safe government bonds and the remaining 10 to 20% hit the VC funds, bio tech, and the option markets. Cheers.
Taleb's barbell here is kind of like what we have here if you think of bonds as a way to combine 1&2. Though lately as you move out the curve to capture yield, you lose the protection convexity in the pursuit of premium.
Also I think the more abstract 'build' is a natural complement to this.
Leg 2, Diversified Beta, now carries more risk than you suggest, because it is driven by growing passive and systematic flows, and massive global imbalances, and massive domestic deficits and debt, that have accumulated over 40 years. The boat is leaning extremely to one side. Leg 1 and Leg 3 are not really adequate hedges for Leg 2. Leg 2 Exposure has to be hedged directly, or reduced.
The passive and systematic flows arguably are across all time horizons.
i.e. short term: systematic vol selling, vol targeting, stock buybacks,
medium term: portfolio rebalancing of target date funds to maintain 60:40 portfolios. the increasing private market share
long term: the passive bid for assets, buying indices, which decreases market elasticity as passive becomes the dominant share of the market.
The financial markets now determine the state of the real economy, rather than the real economy determining the state of the financial markets, so diversified beta has become a problematic position to hold at the same size when the real economy determined the financial market outcomes.
Otherwise, this three part series the Stoic Macro framework was exceptional.
great thoughts!
I used Perplexity to help me frame this concept about the heightened risk in Diversified Beta more coherently.
https://substack.com/@gerald542189/note/c-146454089?utm_source=notes-share-action&r=8op63
I love this series a lot so I'm going to be f*n annoying and say that this part didn't feel like a direct conclusion/progression from the prior parts. This portfolio approach makes sense in general, but how does it build on the prior parts? where is the pain and reflection maximization?
Now maybe I just had too much to drink at brunch but would love the logical flow sharpened/clarified
Thanks for the feedback! I kinda agree. I'll try to fill it in more in the coming weeks to turn it into an actual portfolio. There are various reason's I cannot at the moment I can't go into now.
The pain and the reflection comes in to your building, and I'll lay out the ways I've felt pain and my reflections on it more going forward.
Thank you so much! Love your writing and the fact you are sharing your thinking is seriously a gift. So I do appreciate you taking my pesky comment seriously. :)
What are your thoughts on the hyper conservative hyper aggressive approach advocated by Taleb in the barbell portfolio? 80 to 90 percent safe government bonds and the remaining 10 to 20% hit the VC funds, bio tech, and the option markets. Cheers.
Taleb's barbell here is kind of like what we have here if you think of bonds as a way to combine 1&2. Though lately as you move out the curve to capture yield, you lose the protection convexity in the pursuit of premium.
Also I think the more abstract 'build' is a natural complement to this.