Macro Observations

In my opinion, risk mitigation can do more for your portfolio’s performance than return maximization. So when a subscriber recently asked me what I thought about buffer ETFs, the question was right up my alley. The real secret sauce of buffer ETFs: improving risk-adjusted returns.

If you want to boil down my risk rotation strategies down to one key catalyst or driver, it would probably be credit spreads. One of my personal frustrations with credit spreads today is that they don’t appear to be accurately reflecting current conditions. But we may be seeing an early sign that even bond investors have their limits. While credit spreads as a whole have remained relatively flat, one key group has seen their spreads expanding.

For years, traders have borrowed ultra-cheap yen in order to invest the proceeds in higher returning assets, but now the short yen positioning is getting excessive. While I believe this is still the case, I received a message from a follower who wanted to take the other side of this argument. In the spirit of considering all sides to an argument, let’s take a look at each one of the points mentioned to see if its risk is as large as it seems.