I've just finished reading Eric Beinhocker's The Origin of Wealth (now available in paperback) and it is a remarkable tour de force - I'm not sure whether I like it as much as The Blank Slate, but it isn't far off. It is broadly about "complexity" in economics and covers a multitude of areas: evolutionary biology, cellular automata, non-linear systems etc etc, amongst which there is a lot of overlap.
- Ultimately surviving as an investor is what evolutionary biologists would call a "Red Queen" race. On the margin, trading is a zero sum game and the costs of adaptation or entry barriers are relatively low, as a result, what makes you a successful gene is remarkably similar to what makes for a long lasting asset manager: flexibility, the ability to evolve, and having at any one time a few different approaches to feel out the market and then ride the winners. How many funds or even PMs are genuinely capable of enacting a Plan B or C, and, more importantly, when circumstances change, how many would actually do so? There is a reason why one of the attributes that are allegedly common amongst a Paul Tudor-Jones or a Soros is the ability change one's mind quickly.
- Any given strategy that becomes successful for long enough is doomed to become crowded and cease to be so, often via a sudden collapse in returns. This is a little like cutting one's losses quickly but on a strategic level.
- Ideas or content driven businesses should be relatively small and flat in their hierarchical structure whereas process driven ones with a large number of interdependent parts need more hierarchy and explicit organization. Hands up who has seen a bloated liquid markets hedge fund with way too much head count where hardly anyone talks to one another which soon is wiped out by massive losses in one part of the business that could have been forseen? Too many examples to mention here.
a. The curve is going to stay steep since as the economy recovers the marginal buyers of the long end disappear, this could adversely affect equity markets and lead to corporations borrowing short more often in turn leading to greater volatility in recessions (ie, refi risk is high when you have to roll a lot of your debt annually).
b. As a response, US bond issuance is going to be much heavier in lower duration (ie, t bills etc). Is it possible that over time this could lead to more severe currency and short rate volatility in the US?