Fixed Income Highlights
- The difference between risk and uncertainty. Economist Frank Knight distinguished between risk and uncertainty as the latter being something immeasurable. Unprecedented intervention by global central banks introduces uncertainty, not risk, the latest iteration being that of the ECB, and the prime example the unexpected revaluation of the Swiss franc. Central bank policy distorts financial markets, rendering prices less reflective of fundamental valuations and prone to large moves as distortions are reassessed. That uncertainty is impossible to measure, leaving portfolio risk unquantifiable.
- Grecian Formula.The successful snap election of the left-wing Syriza party to lead Greece's government has resurrected the specter of a "Grexit" in the eurozone. However, at the time of writing, headlines appear suggesting a compromise and solution may be about to be reached. The Greek drama, for whatever its economic merits, now represents essentially a political risk. Political risks render the measurement of financial risk difficult, leaving Knightian uncertainty rather than "risk" for investors. The implication is that risk in other areas of the portfolio end up being reduced, effectively spreading the Greek uncertainty into other financial markets.
- The Wages of Fear. January's payroll figures highlighted continued strength in the labor market, contributing to our expectation of a June hike. An unemployment rate of 5.7% and a three-month increase in nonfarm payrolls of over one million, the largest three-month change in jobs since 1997, make it increasingly difficult for the Fed to justify emergency-era policy. However, for many on the FOMC, the lack of wage inflation in the context of overall inflation far below target remains a reason for delaying hikes, making wage data critical to expectations for Fed policy.