The Grateful Dead and Noise Pollution

We started this business in 1992. Back then it was known as Bayfield Financial, then we took on some partners and changed the name to Irvin/Letterio Portfolio Management.   After that, we took on more partners and became Peregrine Advisers, subsequently sold the company to private equity, did a public offering, followed by a management buyback, ultimately becoming Altair Management Partners.

Over those years, we enjoyed the 1990’s tech bull market, endured the tech bubble popping, coasted along with the housing bull market, navigated the Great Recession, and marveled at the subsequent Fed-induced bull market.   We look back grateful that our flagship investment strategy never suffered a decline greater than single digits.

What a long, strange trip it’s been.

In a way, our longevity was helped along by doing our own research, having a distinctively contrarian viewpoint, and (most importantly) being able to glean causality from the events unfolding before us.

Which is what brings me to write this post.

For most of 2014, I’ve been witnessing things to which I cannot confidently attribute causation.   To wit, implied volatility (VIX) sits at 11.65; a full 19%+ below its level just one year ago.   At the same time, the S&P 500 melts upward to low volume all-time-highs.   All of this while the yield on the 10-year Treasury fall to 2.44% (a 15.6% decline in yields since the beginning of the year), and the yield curve continues to flatten.

So, bonds are rallying, stocks are rallying, volatility is practically non-existent, the yield curve is flattening and the Federal Reserve is backing out of bond purchases.   Strange bed-fellows.

I’ve picked my brain for the past few weeks trying to find a similar set of historical circumstances from which to glean some insight.   I’ve also been looking at foreign bond prices and currency pairs to assess the possible impact of the carry trade (which looks pretty possible).   I’ve dug through economic releases looking for inflation, stagflation, deflation, or disinflation (mixed bag, at best).   I’ve read bullish narratives (which sound like talking points), bearish narratives (which always sound too smart by half, which makes me dubious), and conspiracy narratives (for entertainment after reading all the dry material).

The takeaway for me is that I simply cannot explain the coincident movements in these indicators.   They seem counter-intuitive.   On a certain level they seem irrational.   They come across to me as so much noise.

When I say “noise, ” I mean a very specific kind of noise.   Let me give an example.   In instances where we employ third party managers, the dominant reason we terminate them tends to be noise.   It’s that unexplainable change in the way the manager is communicating, researching, staffing, or responding to inquiries.   It’s subtle, it’s often gradual, and it’s far more noticeable through intuition than through dogmatic questionnaires.   It’s one of those things you can’t quite put your finger on, but your intuition hears it.   It’s noise.

Over the past 22 years, we’ve had some luck factor into our achievements; but analysis would show that the single-most important factor was avoiding two major bear markets by our willingness to walk away when we heard the noise.    Simply put, if we can’t understand what we’re hearing we won’t invest in it.

Now, I wish I could provide some awesome technical and fundamental analysis for the reason we’re beginning to flatten out our exposures.   But as I said earlier, I can’t.   I can’t, because I can’t hear very well.   There is just too much noise. – LL