Who We Are
We are a Creative-Driven Consulting Firm. We link World-Macro conditions to company level strategy. Our models and methods focus on macro. We provide high-level insights to World-Markets via our coherent unconventional approach. Our main focus covers three areas: Systemic Risks & World-Macro Conditions, Modeling, and Hedging.
Every asset bubble ends in a financial crisis. We look at risk and opportunity as they change and mutate in all of their aspects. Risks evolve while markets most often tend to ignore what they do not understand. Markets only cover between 70% and 80% of risk. The market will not protect your portfolio or your balance sheet. Understanding what is happening is a must. Today, the three most important concepts are Systemic Risk, Liquidity, and Fiduciary Duty.
Fiduciary Duty is core to our approach. Companies have to do the best for their Shareholders and Investors. For us, this means relentless and coherent risk management. We do not take anything for granted. It is possible to escape loss allocation. You have to be ready.
In our view, most financial models are incomplete. In reality, all aspects of risk count, not just those which are currently modeled or priced by the market. Balance sheets need to be protected from Groupthink, especially given that markets are not infallible. We provide high-level insight to enable better decision making. We look at what is happening at system level and turn it into modeling, investment opportunities, and insights.
Our Mission & Values
Our Mission is to help Clients and People understand World-Macro dynamics with high-level coherent insights to World Markets, both in terms of risk and opportunity.
Our Values are based on robust work ethics, high standards with quality deliveries, coherence, accountability, trust, freedom of speech, business acumen based on world-class relevant knowledge, teamwork, and integrity.
What is This All About?
We understand risk and World-Macro issues. We understand risks and opportunities. We understand the silent buildup of risk, also called Systemic Risk, which is below the radar and colorless. It operates while you are asleep. It also operates while you are awake. Systemic Risk is relentless. Systemic Risk is not about what happened yesterday or what will happen tomorrow. It operates over a longer time frame. Systemic Risk brings the past into the present. A key element of systemic risk is asset mispricing which can persist for years. Systemic risk drives instability. Systemic Risk is the last Volatility factor and the real fear factor.
Why do We See Things this Way?
In a nutshell, liquidity is the ability to sell your asset quickly in the quantities you want at the price you want. When Systemic Risk turns up, liquidity dries up. Poor liquidity means that you cannot sell your asset in the quantities you want at the price you want. Liquidity is the vector of loss allocation, but now under the rules of a different system, the system of Systemic Risk.
Groupthink is the language of market herds and heavily influenced by group psychology. Groupthink is simple. Forward, backwards, central bank put. Groupthink allows markets to run smoothly and follow momentum sequences. The herd does not think about Systemic Risk. Belief in the power of Central Banks to keep things stable is a type of bias inside Groupthink. Groupthink is also the “logic of the office”: “Stick to what you know. Do not ask questions”. Groupthink does not work when Systemic Risk arrives. Panic takes over, except for a few Market Participants, such as Hedge Funds (and similar) to date.
Markets are not rational. They are emotional. Sharp spikes in volatility are in play, especially in 2018. Markets operate via greed and fear. Markets cannot price Tail Risk. Markets operate in herds who run Groupthink. Markets follow trends even if they are not logical (e.g., the so called “the shoulder-to-shoulder peer effect”). Markets are supposed to set prices correctly, but herds cannot always do this. We cannot confirm that all Market Participants understand what is really going on.
What Exactly is The Problem?
Ultra-low interest rates are treacherous. They push companies into dangerous assets, such as corporate bonds, which have very poor liquidity in a crisis. There is no upside with ultra-low interest rates. There is only downside. With ultra-low interest rates, the bond market is classified in bubble territory and is a coiled spring. When Systemic Risk arrives, interest rates are re-valued. Interest rate revaluation leads to huge losses. During a crisis these huge losses are re-allocated. The concepts of “Lender of Last Resort” and “Fiduciary Duty” due to insolvency issues start to feature.
When interest rate curves in most markets begin to flatten out, markets project this far into the future. Bonds are unfortunately not priced for credit risk or tail risk. The market assumes that this is acceptable; however, Systemic Risk starts building up in silence. Debt continues to be pumped into the economy. This is Systemic Risk. The overall impact concerning Fiduciary Duty is a type of “volcano effect”: it is always active. Anyone who signs off liabilities must be aware of all the risks that threaten the numbers.
What are the Main Groupthink Effects?
Everybody loves asset bubbles. They generate a “feel-good” factor. This time is always different. It is easy to confuse asset bubbles with permanently high prices. Alongside the “feel-good” factor, there is the build-up of systemic risk. Asset bubbles come with imbalances in the form of large capital inflows and credit bubbles. Every asset bubble eventually crashes. Only the timing is uncertain. After the crash the imbalances have to be unwound. Asset bubbles are followed by systemic banking crises. Groupthink offers no protection. Fiduciary duty is most at risk when the asset bubble crashes.
Are You Ready for the Next Crash?
… Are You Ready for the Allocation of Losses?
We ask simple questions:
- Did you know that liquidity dries up in a financial crisis or large shift? This means that your assets may be very hard to sell at the price you want.
- Did you know that profits fall by 15-20% following a financial crisis?
- Did you know that corporate bonds have very poor liquidity after a crash?
- Did you know that a crisis is not a moment, but rather a time period, and that poor decision making leads companies into places where they are extremely vulnerable?
- Did you know that Central Banks may have no choice other than inflation the next time the world economy crashes?
Are You Ready for Another Asset Bubble Collapse given the Typical Effects outlined below?
- A disorganized mass bankruptcy tips the economy into a depression.
- An organized mass bankruptcy involves debt-for-equity swaps and allocates losses to asset holders rather than taxpayers.
- A situation where debt can be maintained at high levels, but with a reduced cost of debt servicing.
- A replacement of private debt with public debt.
- An inflationary environment, which reduces the real value of debt, but in a fiat money system, it may be the trigger that collapses faith and credibility in fiat money.
How can You Overcome these Blind Spots?
Financial Modeling is increasingly complex, but a large portion of it is psychological. Estimates and forecasts are heavily influenced by Groupthink. Most models are linear and do not include systemic risk. This means that these models are incomplete. Therefore, Decision Makers are typically advised based on incomplete information.
The economic world is not linear. Neither is it rational. In time of crisis, risk becomes asymmetric. During and after a crisis, C-Suites and Board Members are the primary carriers of responsibility. It is imperative for them to start reviewing the models in use in the company and their weaknesses, given that public hearings are on the rise. The ins and outs need to be mastered in full.
Copyright © 2017-2018 Directional Alpha, LLC. All rights reserved.