Undermining the Integrity of Financial Markets

August 29, 2014

2 minute read

Undermining the Integrity of Financial Markets

by Guy Haselmann, Director, Capital Markets Strategy, Scotiabank GBM

Introduction

Financial markets are broken. Fundamental analysis and Modern Portfolio Theory are relics of the past. Investors used to care about maximizing a portfolio’s expected return for a given amount of targeted risk. The goal used to be that prudent diversification through the analysis of security correlations could move the Efficient Frontier Line ‘up and to the left’. In other words, improve returns per unit of risk.

Today, Fed policies have commandeered investor thinking and altered investor behavior. The powerful driver of moral hazard has fueled greed, and imbued more fear of underperforming peers and benchmarks, than fear of downside risks. Some investors are buying the riskiest assets simply because prices have been rising. Some investors say they are buying equities instead of Treasuries because ‘equities have upside, while bonds yields are puny and their prices are capped at par’.

Fed policies have led to (investor) herd behavior that has plunged market volatilities and manipulated asset prices and correlations to lofty levels. The rallying cry has simply become “don’t fight the Fed”. Relative return - without regard for risk - is all that matters. As a result, future return expectations have fallen with ever-rising prices; correspondingly, risk levels have risen in parallel. The allure of the Fed’s magic spell has lapsed investors into a soporific state of cognitive dissonance, with them focusing more on trying to justify valuations, rather than on the Upside Downside Capture Ratio.

Markets have thus mutated into one of two possible combustible states. Either financial assets have all transcended into prodigious bubbles, or stocks and bonds are signifying two completely separate outcomes. Either possibility will have dangerous repercussions for the economy, and for portfolios and investors. At the moment, I believe that the Treasury market has it right, signifying concerns about disinflation and future growth.

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Undermining the Intergrity of Financial Markets

Author

Guy Haselmann

Mr. Haselmann has 30 years of diverse capital markets experience, including 14 years building and managing assets at 2 well-known macro hedge funds. During his career, Mr. Haselmann traded numerous capital market securities. He has developed risk management strategies and trading procedure guidelines.

Previously, Mr Haselmann was Director of Capital Markets strategy, at Scotiabank GBM, where he incorporated a global macro approach. Mr. Haselmann has been published in academic journals, newspapers, and has written countless strategy pieces. He has appeared on various TV and Radio programs, such as BNN Bloomberg and Bloomberg. Mr. Haselmann is a guest lecturer at several universities, including his alma mater the University of Delaware Lerner College of Business and Economics. He is a frequent panelist at industry conferences.

In addition, Mr. Haselmann was a gubernatorial appointee to the NJ State Investment Council and was appointed by the chair to the Investment Policy, Executive, and Nomination subcommittees. Mr. Haselmann is President, and a member of the Board of Governors, of the NY Money Marketeers.

Specialties: Analyzing global macroeconomic policies and capital market interconnections to strengthen investment and strategic decision-making in financial markets. Providing portfolio construction solutions to enhance risk-adjusted returns. Macro trading and strategy. Risk management. Alternatives advisory services. Hedge funds and other alternative investments. Funds of Hedge Funds. Analysis for optimizing position sizes. Capital market products. Options.