Interest Rate Volatility Quotes

Money? It’s the oh-so-simple miracle that allows you to take home veal in your shopping bag…’, the Trader-Knights repeat, forgetting that behind the head of veal or the pork cutlet there is a futures market in livestock and pork bellies, and that behind that market looms the futures market of exchange rates, interest rates and so many other levels all the way down to absolute volatility, all utterly inaccessible to those bit-part players in the great comedy of trading, the small individual shareholders.

(BDO) October 22: The Dollar Squeeze A debt is a short cash position—i.e., a commitment to deliver cash that one doesn’t have. Because the dollar is the world’s reserve currency, and because of the dollar surplus recycling that has taken place over the past few years…lots of dollar denominated debt has been built up around the world. So, as dollar liquidity has become tight, there has been a dollar squeeze. This squeeze…is hitting dollar-indebted emerging markets (particularly those of commodity exporters) and is supporting the dollar. When this short squeeze ends, which will happen when either the debtors default or get the liquidity to prevent their default, the US dollar will decline. Until then, we expect to remain long the USD against the euro and emerging market currencies. The actual price of anything is always equal to the amount of spending on the item being exchanged divided by the quantity of the item being sold (i.e., P = $/Q), so a) knowing who is spending and who is selling what quantity (and ideally why) is the ideal way to get at the price at any time, and b) prices don’t always react to changes in fundamentals as they happen in the ways characterized by those who seek to explain price movements in connection with unfolding news. During this period, volatility remained extremely high for reasons that had nothing to do with fundamentals and everything to do with who was getting in and out of positions for various reasons—like being squeezed, no longer being squeezed, rebalancing portfolios, etc. For example, on Tuesday, October 28, the S&P gained more than 10 percent and the next day it fell by 1.1 percent when the Fed cut interest rates by another 50 basis points. Closing the month, the S&P was down 17 percent—the largest single-month drop since October 1987.

A few years ago my friend Jon Brooks supplied this great illustration of skewed interpretation at work. Here’s how investors react to events when they’re feeling good about life (which usually means the market has been rising): Strong data: economy strengthening—stocks rally Weak data: Fed likely to ease—stocks rally Data as expected: low volatility—stocks rally Banks make $4 billion: business conditions favorable—stocks rally Banks lose $4 billion: bad news out of the way—stocks rally Oil spikes: growing global economy contributing to demand—stocks rally Oil drops: more purchasing power for the consumer—stocks rally Dollar plunges: great for exporters—stocks rally Dollar strengthens: great for companies that buy from abroad—stocks rally Inflation spikes: will cause assets to appreciate—stocks rally Inflation drops: improves quality of earnings—stocks rally Of course, the same behavior also applies in the opposite direction. When psychology is negative and markets have been falling for a while, everything is capable of being interpreted negatively. Strong economic data is seen as likely to make the Fed withdraw stimulus by raising interest rates, and weak data is taken to mean companies will have trouble meeting earnings forecasts. In other words, it’s not the data or events; it’s the interpretation. And that fluctuates with swings in psychology.

Blaming wild market volatility on the “animal spirits” of the herd mentality takes the focus off where it belongs: on the actions of the government. Instead of functioning as instruments of information, signaling to entrepreneurs how and when best to serve consumers, interest rates are perpetually manipulated by central bank actions to the point of meaninglessness. Artificial changes in interest rates become a deceptive feint by which entrepreneurs succumb to malinvestment, because they believe there are more resources (i.e., savings) in the system than there really are. Monetary policy insidiously plays with our time preferences and our very ability to engage in economic calculation. The greater the distortion, the greater destruction needed to correct it.

currency peg can mean higher volatility in short-term interest rates, as the central bank seeks to keep the price of its money steady in terms of the peg. It can mean deflation, if the supply of the peg is constrained (as the supply of gold was relative to the demand for it in the 1870s and 1880s).

By the end of the 1970s real GDP growth was around 2 percent, inflation was around 14 percent, short-term interest rates were around 13 percent, and unemployment was around 6 percent. Over the decade, gold surged and commodities kept up with rising inflation, returning around 30 percent and 15 percent on an annualized basis, respectively. But the high rate of inflation wiped out the modest 5 percent annual nominal return for stocks and 4 percent return for treasuries matched to equity volatility.

Understanding Financial Risks and Companies Mitigate them? Financial risks are the possible threats, losses and debts corporations face during setting up policies and seeking new business opportunities. Financial risks lead to negative implications for the corporations that can lead to loss of financial assets, liabilities and capital. Mitigation of risks and their avoidance in the early stages of product deployment, strategy-planning and other vital phases is top-priority for financial advisors and managers. Here's how to mitigate risks in financial corporates:- ● Keeping track of Business Operations Evaluating existing business operations in the corporations will provide a holistic view of the movement of cash-flows, utilisation of financial assets, and avoiding debts and losses. ● Stocking up Emergency Funds Just as families maintain an emergency fund for dealing with uncertainties, the same goes for large corporates. Coping with uncertainty such as the ongoing pandemic is a valuable lesson that has taught businesses to maintain emergency funds to avoid economic lapses. ● Taking Data-Backed Decisions Senior financial advisors and managers must take well-reformed decisions backed by data insights. Data-based technologies such as data analytics, science, and others provide resourceful insights about various economic activities and help single out the anomalies and avoid risks. Enrolling for a course in finance through a reputed university can help young aspiring financial risk advisors understand different ways of mitigating risks and threats. The IIM risk management course provides meaningful insights into the other risks involved in corporations. What are the Financial Risks Involved in Corporations? Amongst the several roles and responsibilities undertaken by the financial management sector, identifying and analysing the volatile financial risks. Financial risk management is the pinnacle of the financial world and incorporates the following risks:- ● Market Risk Market risk refers to the threats that emerge due to corporational work-flows, operational setup and work-systems. Various financial risks include- an economic recession, interest rate fluctuations, natural calamities and others. Market risks are also known as "systematic risk" and need to be dealt with appropriately. When there are significant changes in market rates, these risks emerge and lead to economic losses. ● Credit Risk Credit risk is amongst the common threats that organisations face in the current financial scenarios. This risk emerges when a corporation provides credit to its borrower, and there are lapses while receiving owned principal and interest. Credit risk arises when a borrower falters to make the payment owed to them. ● Liquidity Risk Liquidity risk crops up when investors, business ventures and large organisations cannot meet their debt compulsions in the short run. Liquidity risk emerges when a particular financial asset, security or economic proposition can't be traded in the market. ● Operational Risk Operational risk arises due to financial losses resulting from employee's mistakes, failures in implementing policies, reforms and other procedures. Key Takeaway The various financial risks discussed above help professionals learn the different risks, threats and losses. Enrolling for a course in finance assists learners understand the different risks. Moreover, pursuing the IIM risk management course can expose professionals to the scope of international financial management in India and other key concepts.

Look at stocks as part ownership of a business. 2. Look at Mr. Market—volatile stock price fluctuations—as your friend rather than your enemy. View risk as the possibility of permanent loss of purchasing power, and uncertainty as the unpredictability regarding the degree of variability in the possible range of outcomes. 3. Remember the three most important words in investing: “margin of safety.” 4. Evaluate any news item or event only in terms of its impact on (a) future interest rates and (b) the intrinsic value of the business, which is the discounted value of the cash that can be taken out during its remaining life, adjusted for the uncertainty around receiving those cash flows. 5. Think in terms of opportunity costs when evaluating new ideas and keep a very high hurdle rate for incoming investments. Be unreasonable. When you look at a business and get a strong desire from within saying, “I wish I owned this business,” that is the kind of business in which you should be investing. A great investment idea doesn’t need hours to analyze. More often than not, it is love at first sight. 6. Think probabilistically rather than deterministically, because the future is never certain and it is really a set of branching probability streams. At the same time, avoid the risk of ruin, when making decisions, by focusing on consequences rather than just on raw probabilities in isolation. Some risks are just not worth taking, whatever the potential upside may be. 7. Never underestimate the power of incentives in any given situation. 8. When making decisions, involve both the left side of your brain (logic, analysis, and math) and the right side (intuition, creativity, and emotions). 9. Engage in visual thinking, which helps us to better understand complex information, organize our thoughts, and improve our ability to think and communicate. 10. Invert, always invert. You can avoid a lot of pain by visualizing your life after you have lost a lot of money trading or speculating using derivatives or leverage. If the visuals unnerve you, don’t do anything that could get you remotely close to reaching such a situation. 11. Vicariously learn from others throughout life. Embrace everlasting humility to succeed in this endeavor. 12. Embrace the power of long-term compounding. All the great things in life come from compound interest.

To apply first principles thinking to the field of value investing, consider several fundamental truths. Understand and practice the following if you want to become a good investor: 1. Look at stocks as part ownership of a business. 2. Look at Mr. Market—volatile stock price fluctuations—as your friend rather than your enemy. View risk as the possibility of permanent loss of purchasing power, and uncertainty as the unpredictability regarding the degree of variability in the possible range of outcomes. 3. Remember the three most important words in investing: “margin of safety.” 4. Evaluate any news item or event only in terms of its impact on (a) future interest rates and (b) the intrinsic value of the business, which is the discounted value of the cash that can be taken out during its remaining life, adjusted for the uncertainty around receiving those cash flows. 5. Think in terms of opportunity costs when evaluating new ideas and keep a very high hurdle rate for incoming investments. Be unreasonable. When you look at a business and get a strong desire from within saying, “I wish I owned this business,” that is the kind of business in which you should be investing. A great investment idea doesn’t need hours to analyze. More often than not, it is love at first sight. 6. Think probabilistically rather than deterministically, because the future is never certain and it is really a set of branching probability streams. At the same time, avoid the risk of ruin, when making decisions, by focusing on consequences rather than just on raw probabilities in isolation. Some risks are just not worth taking, whatever the potential upside may be. 7. Never underestimate the power of incentives in any given situation. 8. When making decisions, involve both the left side of your brain (logic, analysis, and math) and the right side (intuition, creativity, and emotions). 9. Engage in visual thinking, which helps us to better understand complex information, organize our thoughts, and improve our ability to think and communicate. 10. Invert, always invert. You can avoid a lot of pain by visualizing your life after you have lost a lot of money trading or speculating using derivatives or leverage. If the visuals unnerve you, don’t do anything that could get you remotely close to reaching such a situation. 11. Vicariously learn from others throughout life. Embrace everlasting humility to succeed in this endeavor. 12. Embrace the power of long-term compounding. All the great things in life come from compound interest.

The credit cycle deserves a very special mention for its inevitability, extreme volatility and ability to create opportunities for investors attuned to it. Of all the cycles, it’s my favorite. The longer I’m involved in investing, the more impressed I am by the power of the credit cycle. It takes only a small fluctuation in the economy to produce a large fluctuation in the availability of credit, with great impact on asset prices and back on the economy itself. The process is simple: • The economy moves into a period of prosperity. • Providers of capital thrive, increasing their capital base. • Because bad news is scarce, the risks entailed in lending and investing seem to have shrunk. • Risk averseness disappears. • Financial institutions move to expand their businesses—that is, to provide more capital. • They compete for market share by lowering demanded returns (e.g., cutting interest rates), lowering credit standards, providing more capital for a given transaction and easing covenants. At the extreme, providers of capital finance borrowers and projects that aren’t worthy of being financed.

To produce even steadier returns, we hedged the overall risk from our entire collection of hedges by neutralizing the impact on our portfolio of shifts in interest rates (across the spectrum of quality and maturity). We also offset the danger to the portfolio from sudden large shifts in overall stock market prices and in the volatility level of the market. From the 1980s on, some of these techniques came into usage by modern investment banks and hedge funds. They also adopted a notion we rejected, called VaR or “value at risk,” where they estimated the damage to their portfolio for, say, the worst events among the most likely 95 percent of future outcomes, neglecting the extreme 5 percent “tails,” then acted to reduce any unacceptably large risks. The defect of VaR alone is that it doesn’t fully account for the worst 5 percent of expected cases.

As the period over which returns are measured is lengthened, the short-term volatility in returns caused by fluctuating changes in the discount rate becomes less and less important and the expected dividend stream or interest payments, which are much more stable, become more and more important.

In these uncertain days, bond funds are an especially important option for investors. Unlike stock funds, they have high predictability in at least these five ways: (1) The current yields (on longer-term issues) are an excellent—if imperfect—predictor of future returns. (2) The range of gross returns earned by bond managers clusters in an inevitably narrow range that is established by the current level of interest rates in each sector of the market. (3) The choices are wide. As the maturity date lengthens, volatility of principal increases, but volatility of income declines. (4) Whether taxable or municipal, bond fund returns are highly correlated with one another. Municipal bond funds are fine choices for investors in high tax brackets, and inflation-protected bond funds are a sound option for those who believe that much higher living costs will result from the huge federal government deficits of this era. (5) The greatest constant of all is that—given equivalent portfolio quality and maturity—lower costs mean higher returns. (Don’t forget that index bond funds—or their equivalent—carry the lowest costs of all.)

With currencies and interest rates far more volatile than the economic activity that they guide, the horizons of investment and commerce had to shrink proportionally with real economic knowledge.

Just before Thanksgiving, I met with Bunker Hunt, then the richest man in the world, at the Petroleum Club in Dallas. Bud Dillard, a Texan friend and client of mine who was big in the oil and cattle businesses, had introduced us a couple of years before, and we regularly talked about the economy and markets, especially inflation. Just a few weeks before our meeting, Iranian militants had stormed the U.S. embassy in Tehran, taking fifty-two Americans hostage. There were long lines to buy gas and extreme market volatility. There was clearly a sense of crisis: The nation was confused, frustrated, and angry. Bunker saw the debt crisis and inflation risks pretty much as I saw them. He’d been wanting to get his wealth out of paper money for the past few years, so he’d been buying commodities, especially silver, which he had started purchasing for about $ 1.29 per ounce, as a hedge against inflation. He kept buying and buying as inflation and the price of silver went up, until he had essentially cornered the silver market. At that point, silver was trading at around $ 10. I told him I thought it might be a good time to get out because the Fed was becoming tight enough to raise short-term interest rates above long-term rates (which was called “inverting the yield curve”). Every time that happened, inflation-hedged assets and the economy went down. But Bunker was in the oil business, and the Middle East oil producers he talked to were still worried about the depreciation of the dollar. They had told him they were also going to buy silver as a hedge against inflation so he held on to it in the expectation that its price would continue to rise. I got out.

IT may seem counterintuitive to use uncertainty to quell volatility. But a small amount of uncertainty surrounding short-term interest rates may act much like a vaccine immunizing the stock market against bubbles. More generally, if we view humans as embodied brains instead of disembodied minds, we can see that the risk-taking pathologies found in traders also lead chief executives, trial lawyers, oil executives and others to swing from excessive and ill-conceived risks to petrified risk aversion. It will also teach us to manage these risk takers, much as sport physiologists manage athletes, to stabilize their risk taking and to lower stress.

If your company has any credible strategy for providing equity-based returns with muted volatility, you have not just a value proposition, but one of the most important value propositions of our time.... What's the concept in an operating real estate REIT? Operating real estate (as distinct from net leases or mortgages, which are other financing concepts) has the potential to produce equity-like long-term returns, but isan extremely powerful diversifier, in that real estate correlates positively with inflation while stocks and bonds correlate negatively with it. Inflation, with it attendant higher interest rates, chokes off new supply of real estate: new expensive to build, to expensive to finance at prevailing market rents. When new supply dwindles, normal growth absorbs the available space and puts upward pressure on rents, increasing cash flows to the owners... until rents get to a point where new construction pencils out again. (Meanwhile, in an inflation/interest rate flareup of any consequence, stocks and bonds are usually getting hit, and sometimes hit hard.) This, to me, is a trifecta of a conceptual value proposition: (a) the potential for the equity-like long-term returns investors need, (b) historically correlated positively with inflation, unlike all financial assets, and (c) just when you think this story can't get better, with 90% of available income paid out currently to income-starved investors.... What's the concept for variable life insurance? It's certainly the least expensive long-term form of life insurance, in that, as the investment portion grows, it extinguishes the insurance company's exposure. (As Ben Baldwin gnomically and brilliantly observes, 'All insurance is term insurance.') It may also be, in a given situation, the cheapest way of funding an estate tax liability, leaving the maximum legacy to one's heirs. And, of course, if the ownership is vested in an insurance trust, one may (under current law at this writing) be bequeathing wealth without income or estate taxation. As long as there is an estate tax - any estate tax - there will be a financial planning issue in the life of every affluent household/family: how do you want the heirs to pay it? And it seems likely that, conceptually, VUL will always be an answer.... Small cap equities? The concept is, clearly, higher returns with - and precisely because of - their higher volatility.

If you can tolerate the inherent volatility of corporate bonds—especially during recessions—you should strongly consider them as a long-term investment option. Investors who concentrate their corporate bond holdings in the BBB and BB ratings universe reap particularly good benefits. These bonds have the potential to reward investors with a 3 percent annualized premium over a government bond of a similar duration.

In the short run, however, stock returns are very volatile, driven by changes in earnings, interest rates, risk, and uncertainty, as well as psychological factors, such as optimism and pessimism as well as fear and greed.

Curbing the financial sector. Since so much of the increase in inequality is associated with the excesses of the financial sector, it is a natural place to begin a reform program. Dodd-Frank is a start, but only a start. Here are six further reforms that are urgent: (a) Curb excessive risk taking and the too-big-to-fail and too-interconnected-to-fail financial institutions; they’re a lethal combination that has led to the repeated bailouts that have marked the last thirty years. Restrictions on leverage and liquidity are key, for the banks somehow believe that they can create resources out of thin air by the magic of leverage. It can’t be done. What they create is risk and volatility.2 (b) Make banks more transparent, especially in their treatment of over-the-counter derivatives, which should be much more tightly restricted and should not be underwritten by government-insured financial institutions. Taxpayers should not be backing up these risky products, no matter whether we think of them as insurance, gambling instruments, or, as Warren Buffett put it, financial weapons of mass destruction.3 (c) Make the banks and credit card companies more competitive and ensure that they act competitively. We have the technology to create an efficient electronics payment mechanism for the twenty-first century, but we have a banking system that is determined to maintain a credit and debit card system that not only exploits consumers but imposes large fees on merchants for every transaction. (d) Make it more difficult for banks to engage in predatory lending and abusive credit card practices, including by putting stricter limits on usury (excessively high interest rates). (e) Curb the bonuses that encourage excessive risk taking and shortsighted behavior. (f) Close down the offshore banking centers (and their onshore counterparts) that have been so successful both at circumventing regulations and at promoting tax evasion and avoidance. There is no good reason that so much finance goes on in the Cayman Islands; there is nothing about it or its climate that makes it so conducive to banking. It exists for one reason only: circumvention. Many

Historically, banks made their money by borrowing and lending, which generated interest income. But events like the savings and loan crisis in the late 1980s and early 1990s, when so many banks failed, illustrated how disastrous that model could be. In order to make banks less vulnerable to volatile interest rates, bank examiners encouraged them to find other ways to make a profit. That’s when banks discovered fees—the fees that anger and frustrate nearly everyone I’ve spoken with.

As I travel around the financial services industry today, the most interesting trend I see is the one toward relationship consolidation. Now that Glass-Steagall has been repealed, and all financial services providers can provide just about all financial services, there's a tendency - particularly as people get older - to want to tie everything up... to develop a plan, which implies having a planner. A planner, not a whole bunch of 'em... You've got basically two options. One is that you can sit here and wait for a major investment firm, which handles your client's investment portfolio while you handle the insurance, to bring their developing financial and estate planning capabilities to your client's door. And to take over the whole relationship. In this case, you have chosen to be the Consolidatee. A better option is for you to be the Consolidator. That is, you go out and consolidate the clients' financial lives pursuant to a really great plan - the kind you pride yourselves on. And of course that would involve your taking over management of the investment portfolio. Let's start with the classic Ibbotson data [Stocks, Bonds, Bills and Inflation Yearbook, Ibbotson Associates]. In the only terms that matter to the long-term investor - the real rate of return - he [the stockholder] got paid more like three times what the bondholder did. Why would an efficient market, over more than three quarters of a centry, pay the holders of one asset class anything like three times what it paid the holders of the other major asset class? Most people would say: risk. Is it really risk that's driving the premium returns, or is it volatility? It's volatility.... I invite you to look carefully at these dirty dozen disasters: the twelve bear markets of roughly 20% or more in the S&P 500 since the end of WWII. For the record, the average decline took about thirteen months from peak to trough, and carried the index down just about 30%. And since there've been twelve of these "disasters" in the roughly sixty years since war's end, we can fairly say that, on average, the stock market in this country has gone down about 30% about one year in five.... So while the market was going up nearly forty times - not counting dividends, remember - what do we feel was the major risk to the long-term investor? Panic. 'The secret to making money in stocks is not getting scared out of them' Peter Lynch.