Intelligently Managing Risk of Economic Volatility

First you have to recognize it.

It is difficult to intelligently manage risk if you don’t even know how to measure that risk. What are the units?

The media talks today about “tapering” as if it is going to be news. Yet they fail to report the actual reality of the market consequences of the Fed’s Asset purchases.

First, a graph of the Fed Balance Sheet:

fed balance sheet

One result of this is a Volatility beyond our awareness.

Last week,  the yield on the 10-year Treasury hit 2.855%.

On April 26, the yield was 1.64%.

That is an astounding 74% increase. In Treasury yields.

Pause.

For perspective, if the Dow had gained as much over the same time frame- it would now be  in the  25,551 neighborhood!

The media is missing the story.

We have unprecedented volatility in our financial system today.

So how do we see it as manufacturers?

DGORDER_July 2013

The Commerce Department said on Monday (July) durable goods orders dropped 7.3 percent as demand for goods ranging from aircraft to computers and defense equipment fell. That was the biggest decline since last August and snapped three consecutive months of gains.”- Reuters

Contrast that to the gushing ISM report for July from the Economic Populist blog: “The July ISM Manufacturing Survey shows PMI had a blow out increase of 4.5 percentage points to 55.4%.   Manufacturing has moved into sold growth with new orders increasing by 6.4 percentage points and production roaring in an 11.6 percentage point gain.   Even the employment index increased.”

These are Volatile, Uncertain, Complex and Ambiguous times. We need to look for the story behind the story behind the story.

I am reminded of a classic Richard Pryor/Groucho Marx line  “Are you gonna believe me or your lyin’ eyes!?”

When it comes to economic indicators, It is in our best interest to try to recognize and challenge the underlying assumptions.

How do you intelligently manage risk in the current economy?

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