The stock-bond correlation is historically unstable, flipping signs 29 times over 80 years, ranging from -80 to +80.
Tom
The key to understanding correlation is whether we face a growth shock or an inflation shock. If inflation volatility dominates, both stocks and bonds can go down together, as seen in 2022 and the 1970s.
Tom
Looking out 6 to 12 months, inflation volatility is going to dominate.
Tom
Sébastien Page
You should diversify your hedges, not just use Treasuries.
Private assets and alternative products are equity equivalents in a broad sense, valued by discounting cash flows with rates influenced by risk, liquidity, and market conditions.
Tom
Private assets are not free lunches; better to build risk models with synthetic mark-to-market assumptions for thoughtful portfolio construction.
Tom
Asks Sébastien about credit risk in a world with Black Swan events, cross-currents, and geopolitical risk.
Tom
Sébastien Page
We're slightly long credit. Yesterday's relief rally was clearly risk-on: high yield spreads tightened, VIX down, 5% pops in stock prices, European stocks, emerging markets, and small caps all outperformed.
Sébastien Page
We need to accept there's remaining inflation pressure. Damage has been done. Oil prices stabilized 50% higher than 12 months ago.
Sébastien Page
We don't expect a recession. The underlying economy is good: Bloomberg economic surprise index at highest in 2.5 years, tax refunds running 14% higher than last year. The economy is humming, if not accelerating.
Sébastien Page
We're short duration because we're worried about inflation risk, but we're slightly long credit.
Asks what Sébastien expects the Fed to do, noting the market isn't looking for cuts or hikes.
Tom
Sébastien Page
Nothing (no Fed action) is the base case. The skew is that the probability of an upside inflation surprise is greater than a downside surprise.
Look at where oil prices are stabilizing. It's nowhere near where it was.