Investors have rekindled their romance with the “Great Moderation”, and fallen back in love with “goldilocks”.
These two terms are among the most powerful in the markets lexicon. They encourage many investors to stretch and stretch again for extra returns by levering exposures to a broad range of risk factors. Yet what appears both a reasonable and rational strategy at the individual level, given current conditions, threatens a disruptive fallacy of composition at the macro level down the road. Continue reading »