Wednesday, September 14, 2016

Who controls time?

Zero Hedge

In a repeat of what we said in our market wrap this morning, namely that the market's attention is transfixed on two things: long bond-yields (specifically if curve steepening will continue), and what the BOJ may or may not do, the WSJ writes that "speculation continued around the Bank of Japan, following a Nikkei report that the Japanese central bank will consider cutting interest rates further into negative territory."
The WSJ then writes that despite the recent spike in long-dated yield, "some investors expect government bond yields to resume their downward trend as the European Central Bank and Bank of Japan remain on an easing path. “Without growth or inflation, the gravitational pull is lower in yields and tighter in spreads,” said Bob Michele, global head of fixed income at J.P. Morgan Asset Management."

Cutting to the chase.  If you look back a fixed period of time then your look back window is fixed in time, hence your precision is variable.  Time, the X axis on the yield curve gets warped because the curve shoves left or right.

Be combinatorial. Investors always want to look back at a sufficient number of events such that your portfolio maintains a fixed level of precision.  Variable window, fixed precision. Look back, compress the events into a typical set, match that to your portfolio.

When investors look back the fixed period, everything seems smooth noise. Implicitly, they make the market generate mild noise with  fewer bits of precision when it used to need four or five.  Funds tend to agglomerate to reduce redundant trades.  This is the self-adapting part.

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