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I& #39;m fed up with w/ the intellectually dishonest "Fed liquidity" nonsense being propagated across Fin-Twit & the buyside. It& #39;s the kind of analytically lazy risk management framework that represents a source of grave DANGER for the average investor. Per my friend @BuddyCA64525731:
It& #39;s shocking to me that across the hundreds of institutional investors I speak with and thousands of individual investors I interact with on Fin-Twit that I have not seen ONE quantitative analysis of what "Fed liquidity" actually means for markets. Just a lot of conjecture...
Well, today is your lucky day b/c I spent all day yesterday adding some @Hedgeye-style DATA SCIENCE to the LIQUIDITY vs. FUNDAMENTALS debate.
Not surprisingly, the #math leaves much to be desired in support of anchoring on "Fed liquidity" as a primary risk management framework.
Not surprisingly, the #math leaves much to be desired in support of anchoring on "Fed liquidity" as a primary risk management framework.
In short, "Fed liquidity" simply does not backtest well as a REPEATABLE & ROBUST Macro Risk Management framework. If you& #39;re myopically focused on either the 2nd or 3rd derivatives of the Fed& #39;s balance sheet, you& #39;ll fail to capture a SIGNIFICANT PORTION of the upside in the $SPY.
Additionally, anchoring on "Fed liquidity" through the lens of 2nd and 3rd derivative changes to the Fed& #39;s balance sheet does not backtest well in the direction of generating CLEAR & CONCISE BUY/SELL SIGNALS. Moreover, which Fed head are you supposed to anchor on? Lots of NOISE!
I don& #39;t want this thread to come off as suggestive of the view that "Fed liquidity" doesn& #39;t matter. It obviously does. The DATA I& #39;m highlighting here simply implies anchoring on FUNDAMENTALS provides investors w/ far better upside/downside capture %& #39;s than anchoring on LIQUIDITY.
