The Commodity Head Fake

Prediction is very difficult, especially if it’s about the future. Niels Bohr In the annals of modern portfolio theory, commodities deserve an award for the biggest diversification head fake of all time. By 2006, commodities looked like the ideal diversifier.  Academic studies demonstrated that commodities had consistently generated equity-like returns over decades, but with basically no correlation to other asset classes.  Performance over the preceding decade supported this, and allocators extrapolated these return characteristics out into the future.  Mean variance optimizers loved it as the new efficient frontier jumped to the upper left. Now fast forward to early 2016.  Over …

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An Excerpt from the Mid-Month Update

Given the market volatility, we provided a mid-month update to our investors.  The following is a brief commentary on the markets: For purposes of this update, we’ll highlight some ways in which the situation today is very different from 2008: On the positive side, while the Great Financial Crisis nearly pulled down the US financial system, which choked off the real economy, today US banks are less leveraged and have double ($1 trillion) the capital base relative to 2007.  US household leverage is lower as well. Likewise, there likely isn’t systemic risk from trouble in the high yield market, where …

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