Mark Melin, writing for ValueWalk, picked out some of the points in our Altegris Perspectives piece, “What to Expect in 2015…”. Mark asked some questions expanding on topics scattered throughout the piece, specifically relating to Managed Futures and the persistence of dispersion; Quantitative Easing (QE) and the lack of continuing discussion about it; and Volatility and its impact on relative values. The ValueWalk article includes a summary of my responses. For those with the time and tolerance, the expanded thoughts below are important considerations as one looks at investing in 2015 (and beyond):
Managed Futures
A lot of what I wrote in the “What to Expect…” piece relates to the dispersed performance around the world–economically, geopolitically and in the markets. This is already getting expressed in currencies and commodities and to some extent in equities and fixed income. One can see a role for Managed Futures as it relates to almost every prediction.
The markets do a pretty good job of signaling early what are, ultimately, the persistent trends. But, it takes a while for the standard technical work, and ultimately, the fundamental work to “verify” these subtle trends. It is all about Pattern Recognition, and which investors recognize the patterns the earliest from the mosaic of information available. In all my research management positions that is what we always asked our analysts to find. If you want to have some fun with this, read William Gibson’s book by the same name, “Pattern Recognition.” I also suggest you go back and read what our own “cool hunter,” Matt Osborne, wrote last summer, “Three Reasons for Managed Futures and Macro…Now.”
The best Managed Futures managers are the “cool hunters” who have the systems—the antennae—that catch these patterns early, and they play both sides of the markets. And, if there is diversity among the trends, the best managers catch that diversity. I think we already are seeing the results of this most clearly in currencies and commodities. Accidents and accelerated moves are yet to occur, but the subtle trends are already in play. This is also a subtle point, but having participated in the markets for 45+ years, to me, the markets–which reflect different types of investors making decisions at different times–do a pretty good job of picking up early on tail risks and systemic shifts. Managed Futures managers have benefited greatly from Moore’s Law and Big Data, and the best managers—really the ones who spend their money on research—are continually perfecting the models that stay ahead of general markets and pick up on these trends early. With commodities, currencies, and, ultimately, interest rates likely to show divergent trends, Managed Futures may turn out to be the best way to benefit in this post US QE environment.
Quantitative Easing
Regarding QE itself, with the US economy taking on the possibility of being self-sustaining, QE has done its job. It is now part of the language, but won’t come back into play here unless the economy rolls over and other tools, e.g., fiscal stimulus, are not available. The US QE may have just caught the timing right. It was combined with TARP, some specific stimulus, and a dynamic and very quick corporate response. It remains to be seen if the QE we are already observing in Japan—and more some expect in Europe–is accompanied by other elements that produce the same kind of recovery we have seen here. I doubt it. When it comes to financial policy–and investing–, timing is everything. With a bit of luck, a flexible financial system and a willingness to act quickly, it worked for the US. I’m not sure it will all come together elsewhere in the way it did here. And, it still took a long time for it to work here.
Volatility
Our view that managed futures, and active management in general, will do well in the markets ahead is based in large part on the reappearance of Volatility. QE led to very low Volatility across markets. When Volatility is low it is hard to separate signal from noise. One has to know how to identify a signal, but it becomes much more difficult when volatility stays consistently low. When Volatility spikes, even briefly, there is a signal in there somewhere. It may sound a bit like the old joke, “there’s a pony in there somewhere.” But, there is a pony when Volatility enters the market. Picking up the signals is what it is all about. Sometimes they are technical, sometimes they are speculative and sometimes they are fundamental. What I hope to do in the “What to Expect…” pieces is to get folks looking for the signals. My real advice is Pay Attention and Seek Professional Help. That is what we do.
© Altegris
