November was a month of transition in the financial markets. The main stock indexes showed marginal movements, fixed income showed signs of stabilization, and the underlying message was clear: abundant liquidity continues to support demanding valuations.
S&P 500: +0.13%
Nasdaq: –1.64%
Stoxx Europe: +0.79%
MSCI All Country World Index (EUR): –0.61% (the dollar fell 0.53%, the index in USD rose 0.07%).
Global fixed income index (EUR): –0.32% (the dollar fell 0.53%, so the index in USD rose 0.21%).
Nasdaq: –1,64%
Markets remain extremely sensitive to any signals related to monetary policy. Attention is focused on the Federal Reserve meeting on December 10. According to CME FedWatch, the current probability of a rate cut stands at around 87%, as can be seen in this image created by CME Group[1].
Source: FedWatch (CME Group)
This percentage has been highly volatile: on November 19, it fell to 30% from the previous 75%, only to subsequently recover to levels close to 90%. This fluctuation can be explained by a combination of factors:
Shutdown of the US federal government due to Congress’s failure to approve the budget. It lasted 43 days and affected more than 900,000 federal employees, including statistical offices that stopped publishing key data such as the CPI and employment figures.
Positive surprise in the November 20 employment data, which further reduced expectations of rate cuts.
Mixed messages from Federal Reserve members, some of whom suggested that further cuts might not be necessary in the short term.
In a context so dependent on expectations, the relationship between the probability of cuts and market behavior is immediate: when the probability of a cut falls, the market corrects; when it rebounds, the indices recover. This is what happened after statements by New York Fed President John Williams, who said that the option of cutting rates “remained open,” boosting expectations and stock indices once again.
In the short term, the market is driven by stimuli, as you can see in this chart. The dark blue line is the S&P during November, the light blue line is the Nasdaq (the technology index that includes the magnificent seven, which account for more than 44% of the index), and the beige line is the evolution of the probability of a rate cut (which is why the left axis is negative).
Source: Bloomberg
The market’s strong reaction to small changes in expectations fuels the perception, widespread among non-professional investors… and professionals, that the stock market is like a casino. However, the comparison is flawed.
In a casino, it is impossible to maintain a long-term position, which is precisely where the value of the investment lies. According to the study “The Rate of Return on Everything (1875–2015)” by the National Bureau of Economic Research, equities and housing are the assets with the highest real long-term returns. Housing led the way until 1950, but since then stocks have outperformed real estate (8.3% vs. 7.4%).
Fuente: NBER
This highlights the importance of maintaining diversified portfolios, where each asset serves a different purpose depending on each investor’s situation. It is not a Real Madrid vs. Barcelona rivalry: both assets can coexist in harmony.
Real estate stands out for its low volatility; equities, for their higher returns. And it is precisely this volatility, often misinterpreted as “risk,” that creates exceptional opportunities in quality companies.
Financial Fragility:
This month, I read a report by the BIS (Bank for International Settlements) on the leveraged structures that some hedge funds[2] are implementing based on government bonds. It left me somewhat concerned because it appears to be a structure that Nassim Taleb describes as fragile, with potentially dangerous consequences.
In his book “Antifragile”[3], Nassim Taleb says that a system is fragile when it suffers serious damage from small shocks. According to Taleb, the characteristics of a fragile system are as follows:
It depends on predictability: it needs the world to behave as expected. It does not tolerate surprises.
It is over-optimized: reducing redundancies and safety margins makes it efficient… but very fragile.
It has risk concentration: a single critical source can cause the whole thing to collapse.
It appears stable until it breaks: a facade of calm that hides accumulated vulnerabilities.
Some examples would be the following:
A company balance sheet that is excessively indebted.
A bank that depends on daily market liquidity.
A logistics system without safety stocks.
A country that imports a single essential product.
Investment portfolios positioned for a single scenario.
Why am I saying all this?
The Bank for International Settlements (BIS) recently warned that the global financial system is entering a phase of greater fragility as a result of:
A decade of near-zero interest rates.
An extraordinarily long credit cycle.
High valuations of assets such as housing, shopping centers, and stocks.
Significant accumulation of debt by companies, households, and governments.
The report highlights the growing risk associated with complex and highly leveraged financing structures that are being used by a large number of hedge funds. What are these structures? They tend to be very creative, but they also require a number of conditions to be met for a particular strategy to be profitable.
I will try to explain it as simply as possible. Let’s imagine that the price of a US Treasury bond is trading at 99.80 and the future on that same bond is trading at 100, there is a price difference for the same or a very similar product. What do these funds do? They buy the bond and sell the futures[4], thereby earning the difference. You might say, “Yes, but that difference is very small, and they won’t earn much.” Exactly, so if they want to earn a lot of money, they have to do it many times and with large amounts of money, and for that, they need someone to finance them. They do the following:
They buy $100 million of Treasury bonds at 99.80.
They borrow another $100 million from a bank overnight (repo), leaving the purchased bonds as collateral and thus obtaining liquidity. What they are actually doing is selling the bonds to the bank with a very short-term repurchase agreement.
The bank charges a discount, meaning the fund repurchases the bond from the bank at a slightly higher price (discount). Given that we have been in a period of low interest rates and assets (US Treasury bonds) are very stable, the discount is very close to 0.
The fund repeats this as many times as it can. According to the report, leverage of up to 50 times has been achieved, meaning that $5 billion in bonds has been purchased.
On the other hand, it sells futures of the same bond at 100 for an underlying value of $5 billion. In this way, it offsets this transaction.
The BIS warns that this strategy has grown massively, moving hundreds of billions. The problem is not so much the strategy itself as the extreme leverage, between 20 and 60 times the equity capital.
What is the risk? If the repo becomes more expensive or liquidity dries up, the strategy ceases to be profitable and the position can collapse. Many funds are doing exactly the same thing, which eliminates diversification from the system.
If bond prices fall or repo costs rise, the fund must provide additional collateral. With such high levels of leverage:
a small drop in the bond,
a brief rebound in the repo rate,
or a widening of the basis,
can generate very heavy losses. If repo lenders demand more collateral or withdraw financing, the hedge fund is forced to sell bonds quickly, triggering forced sales. If several funds simultaneously begin to close positions, a flood of sales occurs, causing bond prices to fall even further and amplifying losses.
A significant portion of the demand for Treasury bonds comes from funds that use this strategy. If they disappear due to liquidity problems:
Bond prices would fall.
Yields would rise.
The cost of government financing would increase dramatically.
Interest rates would rise, and so would the cost of financing for the private sector.
Nothing happens until it happens.
History shows that the impact of rate hikes is not immediate:
the Fed began raising rates in 2004, but Lehman Brothers did not go bankrupt until 2008, and the market bottomed out in 2009.
Prolonged periods of abundant liquidity tend to generate collective euphoria. FOMO (Fear of Missing Out) pushes many investors to buy assets whose prices are rising without fully understanding their nature or risk.
Current markets show parallels with historical episodes: high liquidity, demanding valuations, implicit leverage, and very fragile expectations.
However, they also offer opportunities for disciplined, diversified, and long-term investors.
Professional management consists precisely of navigating these cycles, distinguishing noise from signal, and maintaining conviction when the short term, with its volatility, headlines, and fears, attempts to divert investors from their objectives.
[2] Hedge funds that manage different hedges, including taking advantage of market inefficiencies such as the same asset having two prices in different markets.
[4] A futures contract is one in which a buyer and seller agree on the price of a commodity in the future, and the only thing you pay is a deposit. It is a way to leverage because you pay a very small percentage (deposit) of the price of the commodity. In addition, you can sell it to someone else during the life of the contract.
November Market Review
November was a month of transition in the financial markets. The main stock indexes showed marginal movements, fixed income showed signs of stabilization, and the underlying message was clear: abundant liquidity continues to support demanding valuations.
Markets remain extremely sensitive to any signals related to monetary policy. Attention is focused on the Federal Reserve meeting on December 10. According to CME FedWatch, the current probability of a rate cut stands at around 87%, as can be seen in this image created by CME Group[1].
Source: FedWatch (CME Group)
This percentage has been highly volatile: on November 19, it fell to 30% from the previous 75%, only to subsequently recover to levels close to 90%. This fluctuation can be explained by a combination of factors:
Shutdown of the US federal government due to Congress’s failure to approve the budget. It lasted 43 days and affected more than 900,000 federal employees, including statistical offices that stopped publishing key data such as the CPI and employment figures.
In a context so dependent on expectations, the relationship between the probability of cuts and market behavior is immediate: when the probability of a cut falls, the market corrects; when it rebounds, the indices recover. This is what happened after statements by New York Fed President John Williams, who said that the option of cutting rates “remained open,” boosting expectations and stock indices once again.
In the short term, the market is driven by stimuli, as you can see in this chart. The dark blue line is the S&P during November, the light blue line is the Nasdaq (the technology index that includes the magnificent seven, which account for more than 44% of the index), and the beige line is the evolution of the probability of a rate cut (which is why the left axis is negative).
Source: Bloomberg
The market’s strong reaction to small changes in expectations fuels the perception, widespread among non-professional investors… and professionals, that the stock market is like a casino. However, the comparison is flawed.
In a casino, it is impossible to maintain a long-term position, which is precisely where the value of the investment lies. According to the study “The Rate of Return on Everything (1875–2015)” by the National Bureau of Economic Research, equities and housing are the assets with the highest real long-term returns. Housing led the way until 1950, but since then stocks have outperformed real estate (8.3% vs. 7.4%).
Fuente: NBER
This highlights the importance of maintaining diversified portfolios, where each asset serves a different purpose depending on each investor’s situation. It is not a Real Madrid vs. Barcelona rivalry: both assets can coexist in harmony.
Real estate stands out for its low volatility; equities, for their higher returns. And it is precisely this volatility, often misinterpreted as “risk,” that creates exceptional opportunities in quality companies.
Financial Fragility:
This month, I read a report by the BIS (Bank for International Settlements) on the leveraged structures that some hedge funds[2] are implementing based on government bonds. It left me somewhat concerned because it appears to be a structure that Nassim Taleb describes as fragile, with potentially dangerous consequences.
In his book “Antifragile”[3], Nassim Taleb says that a system is fragile when it suffers serious damage from small shocks. According to Taleb, the characteristics of a fragile system are as follows:
Some examples would be the following:
Why am I saying all this?
The Bank for International Settlements (BIS) recently warned that the global financial system is entering a phase of greater fragility as a result of:
The report highlights the growing risk associated with complex and highly leveraged financing structures that are being used by a large number of hedge funds. What are these structures? They tend to be very creative, but they also require a number of conditions to be met for a particular strategy to be profitable.
I will try to explain it as simply as possible. Let’s imagine that the price of a US Treasury bond is trading at 99.80 and the future on that same bond is trading at 100, there is a price difference for the same or a very similar product. What do these funds do? They buy the bond and sell the futures[4], thereby earning the difference. You might say, “Yes, but that difference is very small, and they won’t earn much.” Exactly, so if they want to earn a lot of money, they have to do it many times and with large amounts of money, and for that, they need someone to finance them. They do the following:
The BIS warns that this strategy has grown massively, moving hundreds of billions. The problem is not so much the strategy itself as the extreme leverage, between 20 and 60 times the equity capital.
What is the risk? If the repo becomes more expensive or liquidity dries up, the strategy ceases to be profitable and the position can collapse. Many funds are doing exactly the same thing, which eliminates diversification from the system.
If bond prices fall or repo costs rise, the fund must provide additional collateral. With such high levels of leverage:
can generate very heavy losses. If repo lenders demand more collateral or withdraw financing, the hedge fund is forced to sell bonds quickly, triggering forced sales. If several funds simultaneously begin to close positions, a flood of sales occurs, causing bond prices to fall even further and amplifying losses.
A significant portion of the demand for Treasury bonds comes from funds that use this strategy. If they disappear due to liquidity problems:
Nothing happens until it happens.
History shows that the impact of rate hikes is not immediate:
the Fed began raising rates in 2004, but Lehman Brothers did not go bankrupt until 2008, and the market bottomed out in 2009.
Prolonged periods of abundant liquidity tend to generate collective euphoria. FOMO (Fear of Missing Out) pushes many investors to buy assets whose prices are rising without fully understanding their nature or risk.
Current markets show parallels with historical episodes: high liquidity, demanding valuations, implicit leverage, and very fragile expectations.
However, they also offer opportunities for disciplined, diversified, and long-term investors.
Professional management consists precisely of navigating these cycles, distinguishing noise from signal, and maintaining conviction when the short term, with its volatility, headlines, and fears, attempts to divert investors from their objectives.
For past Market Reviews, click here.
[1] FedWatch – CME Group
[2] Hedge funds that manage different hedges, including taking advantage of market inefficiencies such as the same asset having two prices in different markets.
[3] Antifragile: Things That Gain from Disorder (Contexts): Taleb, Nassim Nicholas, Sánchez Barberán, Genís, Santos Mosquera, Albino: Amazon.es: Books
[4] A futures contract is one in which a buyer and seller agree on the price of a commodity in the future, and the only thing you pay is a deposit. It is a way to leverage because you pay a very small percentage (deposit) of the price of the commodity. In addition, you can sell it to someone else during the life of the contract.
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