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Michael Gayed on Insanity: STOP IT NOW!

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It was only a matter of time before risk mattered again.

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"Insanity: doing the same thing over and over again and expecting different results."
- Albert Einstein

About that rising rate thing...

Last week, markets served investors a humbling reminder of something we continuously stress -- magnitude of being right matters far more than frequency of being right. 

Seemingly out of nowhere, a severe decline took place in a matter of days. 

"Markets in Turmoil!" 

Suddenly, many appear to be scrambling to manage risk, when in reality, risk must always be managed beforehand, not afterwards. 

Charlie Bilello, our Director of Research, wrote a great piece about risk and reward, available by clicking here. I highly recommend you tune in to CNBC this Monday at 11:30 AM EST, when he'll be interviewed live

This is not because of China (FXI). 

If it were, the S&P 500 (SPY) would have been underperforming the small-cap Russell 2000 (IWM) in advance of the sudden move. 

Nor is this about the Fed and when rates will rise. I have noted continuously both here and on Marketwatch that the yield curve has been sending a clear message that something remains ridiculously wrong as inflation expectations collapse globally. 

Why it comes as a surprise that stocks fell with such ferocity is beyond all logic given how disconnected they have been from all the negativity surrounding them. 

The Fed conditioned people into thinking that the volatility of stocks in the last few years is normal, and that everything else is "too volatile" by comparison. 

Expectations simply need to be reset. 

Normalization means a market which cares about risk. 

It was only a matter of time for that to happen. The very nature of corrections is that they tend to occur when you least expect them, unless you follow tried and true leading indicators such as those outlined in our award winning papers (click here to download).

Now, after the greatest 5-day advance in history for the VIX (VXX), there is a growing chorus that the Fed needs to bail the market out yet again and delay rate hikes, using the 1937 analogy whereby early tightening resulted in a recession and massive decline in the Dow Jones Industrial Average.

This is complete and utter insanity. If all it takes is three days of stock market declines to cause everyone to flip their opinion on Fed policy direction, then we are in a shockingly fragile environment.

Furthermore, if you think the worst is over, spend time looking at the behavior of commodities, emerging markets, and junk debt as of late. The risk is no longer heightened in those areas of the investable landscape. The risk is in US stocks, which completely defied historical co-movement as traders disregarded risk management entirely.

Our equity and alternative investment strategies, which build upon our proven leading indicators of volatility and which tend to thrive amid stock volatility, remain in defense mode. 

Stocks could certainly rebound here short-term, but if they do so without yield curve steepening and cyclical leadership, then things might end up getting a lot worse before they get better. 

There are a lot of very weak hands to shake out given how "the world changed in three days," which is a completely ridiculous way of looking at investing. 

If indeed this is how the vast majority view the world of stocks, then it's likely that more declines need to occur to break the risk-free return mentality that exists in equity markets.

Managing Risk Pre Not Post,

Michael A. Gayed, CFA

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Editor's Note: T3 Live cordially invites you to our first annual Finance Festival, scheduled for November 6-8 in sunny Miami, Florida.

Michael Gayed will hold a special breakout session on Inflation Expectations for 2016, and he'll appear on a panel covering investment strategy for 2016. He'll be joined by a truly impressive team of Wall Street experts, including Barry Ritholz, Nicole Sherrod, Evan Lazarus, Doug Robertson, Josh Brown, JC Parets, and many more.


Read about the event here.
 
Twitter: @pensionpartners
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No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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