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In 2006, Meb Faber wrote a highly influential paper on tactical asset allocation and market timing. The strategy was particularly attractive in part because of its simplicity:

  • Buy when monthly price > 10-month SMA
  • Sell and move to cash when monthly price < 10-month SMA


It’s no secret that 2021 has started off well for Bitcoin. Having breached a new all time high of $61,788.45 on March 13th it seems that each passing month brings with it a new milestone, new players, and greater acceptance. Recently, significant news has focused on the pace of institutional adoption. In fact, in a survey of 800 institutional clients, investment giant Fidelity reported that a full 36% of clients across the US and Europe were currently investing in digital assets and 60% reported having interest in adding digital assets to their portfolios. Looking out five years, 91% of respondents…


Much has been written about the Federal Reserve in recent months. Indeed, much of the discourse has focused on expansion of the Fed’s balance sheet and the consequences it has for asset prices, purchasing power and the Dollar. These concerns are not without justification after all, with the Fed’s balance sheet having risen to 42% of GDP and the US budget deficit forecast to hit 18% of GDP this year. We are truly in uncharted waters.

As so many astutely observed, this new era of monetary policy can be elegantly summarized as: “Money printer go: Brrrr!”.

While the above generally…


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Building on the work of Robert Shiller, in recent posts I investigated the use of the CAPE ratio to predict future stock market performance and examine for the structural change in market valuation over time. This work revealed that stock market returns depend significantly on valuation and are surprisingly predictable in the long term based on these simple measures.

While the relationship between valuation and returns is well documented in the finance literature, what is less well understood is the relationship between valuation and return volatility. As we observed in “Stock Market Valuation and the 2020’s in R”, high valuations…


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In “ Stock Market Valuation and the 2020’s in R “ I investigated whether the CAPE ratio could forecast the future trajectory of earnings and/or stock returns over the period 1980–2019. From this study, we made a couple of observations:

  1. The CAPE ratio cannot be used to forecast future earnings growth at a 1- or 5-year horizon
  2. The CAPE ratio only weakly explains stock returns over the next year.
  3. The CAPE does a very good job of forecasting annualized returns over the next 5 years.


I’ve been thinking about valuations a lot lately. If you’ve been following the stock market in recent months, then you will doubtlessly be aware that the past 6-months have witnessed a historic 44% rally across global markets. This rally has drawn particular attention because it has been dominated by tech stocks which deftly shrugged of lockdowns and the ensuing recession. The combination of stretched valuations and tech dominance has compelled some to compare this current era to that of the late 90’s Tech Bubble whose collapse ushered in the Lost Decade and culminated in the 2008 Financial Crisis.

Like any…


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Note from Towards Data Science’s editors: While we allow independent authors to publish articles in accordance with our rules and guidelines, we do not endorse each author’s contribution. You should not rely on an author’s works without seeking professional advice. See our Reader Terms for details.

As the ultimate store of value, gold has appreciated substantially over the past 18 months; rallying from ~$1,300 in March 2019 to $1,954 on September 18 th; an increase of 33.4%. …


Monaco. Location of Monte Carlo Casino. Photo by Mark de Jong on Unsplash

Note from Towards Data Science’s editors: While we allow independent authors to publish articles in accordance with our rules and guidelines, we do not endorse each author’s contribution. You should not rely on an author’s works without seeking professional advice. See our Reader Terms for details.

A common problem when evaluating a portfolio manager is that the history of returns is often so short that estimates of risk and performance measures can be highly unreliable. A similar problem occurs when testing a new trading strategy. Even if you have a fairly long history for the strategy’s performance, often you only…


In recent months the Federal Reserve has unleashed battery of programs designed to support asset markets. To date they have been able to settle markets and the global economy using the same tools from the Financial Crisis, namely: cutting short term interest rates, large scale asset purchases, and reopening funding and liquidity facilities. The goal of these operations has been to stabilize short term funding markets, support the flow of credit to businesses, households, state and local governments and to reinforce expectations that the Fed will do “whatever it takes”.

As the economy moves past the initial meltdown phase and…


An important concept when discussing inflation is that of Potential GDP; also referred to as “trend GDP”. Potential GDP is a measure of the US’s maximum productive capacity. If the economy is at productive capacity, then unemployment is low, capital is highly utilized and people are employed in jobs that best match their skills. Under such conditions we would expect GDP to grow at a fast clip; we’d be making more, better things without increasing inflation. The last statement is critical.

The Relationship Between Output and Inflation

Consider the situation of an economy at its potential. Factories are producing goods as quickly as possible, hiring more…

Aric Light

Investment analyst and expert on portfolio risk management. Passionate about education and building wealth.

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