On Time to Take some Chips off the Table?; Low Fat versus Low Carb Diets for Weight Loss!

From: aditya rana
Date: Sat, Sep 12, 2015 at 2:07 PM
Subject: On Time to Take some Chips off the Table?; Low Fat versus Low Carb Diets for Weight Loss!
To:

Hi!,

The extreme levels of volatility experienced by global risk assets in August extended into early September, and while markets have bounced back somewhat since then, the key question remains – is this a passing phase (as has been the case during prior such periods) and are markets likely to settle down and continue their uptrend in place since the lows of early 2009? To analyse this issue further I have summarized commentary from Gavyn Davies (Chairman, Fulcrum Asset Management, ex-chief economist of Goldman writing in his FT blog) and David Tepper (Founder of the hedge fund Appaloosa, speaking in a CNBC interview).

Gavyn Davies:

The extreme turbulence in markets has led to a sharp spike in the volatility of the US stock market (the VIX index) to amongst the highest levels since its peak in 2008-2009 (see graph below).

-While the China factor played a role in the market turmoil, its economy has been slowing down for a while and seems to have stabilized somewhat in recent months. Additionally, research shows that the impact of a China demand shock has a limited impact on the economies of the developed world (though it has a larger impact on the developing world in general via a decline in commodity prices)

-New research by Fulcrum shows that market expectations of a negative monetary shock (i.e. a Fed rate hike) is likely to have been the main reason behind the market volatility. Looking at the four possible shocks to financial markets – monetary policy, aggregate demand, aggregate supply and risk aversion, and their cumulative impact on US equities relative to trend since the collapse in oil prices (mid-2014) and the acceleration of the China slowdown (spring 2015) we can draw some interesting conclusions (see graphs below) :

-Since mid-2014 US equities have been negatively impacted by a fall in aggregate demand (global economic slowdown) and monetary policy (Fed approaching lift-off for rates), while being supported by aggregate supply (drop in oil prices) and a fall in risk aversion (with the ECB QE averting a Euro crisis).

-The shocks had largely cancelled each other out until May 2015, subsequent to which the negative shocks have outweighed the positive shocks. Since June 2015, the fall in US equities has largely been driven by the negative monetary shock which was partially offset by the fall in prices, but with oil prices rebounding in the last few weeks this partial offset was removed. The negative monetary shock has recently reversed to some extent following conciliatory speeches by some Fed officials.

-The above analysis is corroborated by a tightening in the overall financial conditions index (see graph below) to the highest levels since 2008, which when combined with a rise in real bond yields and a decline in break-even inflation rates, clearly point to an adverse monetary shock as being the main cause. Furthermore, with the markets gyrating in recent weeks following conflicting comments from key Fed officials like William Dudley, Stanley Fischer and John Williams, bolsters the evidence.

-It seems that the market has reacted adversely to a Fed maintaining its tightening stance, despite deflationary risks increasing, particularly with the Chinese devaluation of the renminbi which typically would have prompted the Fed to ease policy. It is likely that the Fed will pay heed to these developments and not raise rates in September, or risk renewed volatility in markets.

David Tepper:

-G​lobal liquidity flows which have been supportive of markets since 2000 (initially the global build-up of reserves and post 2009 the QE policies) are now partially reversing and it’s not clear yet which flows will dominate – i.e. the Fed tightening and international reserves declining (see chart below) versus the ECB​ and the BOJ​ continuing with QE. The ECB’s recent addition to its QE program will be constrained by the 33% limit on individual country bond purchases, forcing them to buy bonds from weaker countries and creating tensions with Germany.

-H​edge funds and mutual funds are still significantly overweight risk assets, not when compared to the last 2 years but over the previous 5 years. For example, hedge funds have had a net long position in the range of 62% to 72% over the last 2 years (they are currently at 64%). However, over the previous 5 years they were in a range of 23%-62% (42% to 62% excluding 2009).

-US earnings are likely to disappoint due to a ​stronger dollar and slowing global growth, with 30% of US company revenues being exposed to EM economies (and 50% international). The US economy and the US stock market are therefore not the same thing and many US companies with international exposure are still at elevated P/Es, while the earnings estimates for the whole market next year are too high as margins could contract due to wage pressures.

​-A​ll this make the US market (and global markets) very vulnerable going forward, not necessarily a crash (as central banks will have to step-in to support the markets) but a 10-15-20% correction in the US like we used to have quite regularly in the 80’s and 90’s. If the market falls 20% they are likely to be a buyer.

-S​o if the Fed doesn’t tighten next week and the market rallies – it should be a rally to sell into and raise some cash.

-If the net global liquidity flows actually begin to reverse course, and longer term UST yields start to rise more significantly, the Fed could do a new QE next year to offset the global tightening and bring longer term rates down.

-Insightful analyses which highlight the increased risks of a more serious correction in the US (and global markets) going forward. While central bankers are very likely to support markets if we do get a more serious correction, the higher volatility (see comments below from MIT professor and quant guru Andrew Lo to Bloomberg) does require a more dynamic approach to investment in the coming years – i.e. take some risk off the table during market rallies and add risk back when we get a downdraft. This is a theme I have reiterated over the last year or so, but it has become even more critical in the current turbulent environment.

-Andrew Lo: "algorithmic trading is speeding up the reaction times of these participants, so that’s the choppiness of the market. Everybody can move to the left side of the boat and the right side of the boat now within minutes as opposed to hours or days. Crowded trades have got to the point of alpha becoming beta," warning that volatility-targeting strategies (such as Risk-Parity) are not only "exaggerating the moves," but he cautions omniously reminiscent of the August 2007 quant crash, "I think they are creating volatility of volatility (which recently exceeded even the 2008 highs)."

-In terms of specific markets, if we do get a sharp correction in the US market most global risk assets (equities, currencies and bonds) will be even more adversely affected. The only major market which might withstand the turbulence is the Chinese stock and bond market given its minuscule (less than 3%) exposure to foreign investors and the continued government support for the market. So while it’s important to maintain a core long position in assets which are undervalued and provide higher expectations for returns over the longer haul (like EM assets), paring down overall risk and increasing cash would be a prudent strategy given the current environment. There will a time to add back the exposures – to quote Tepper again “There is a time to make money, and there is a time not to loose money”.

Low fat versus low carb diet for weight loss?

The current craze for low carb diets to achieve sustainable weight loss is found not be as effective as a low fat diet by two leading authorizes in this area – as noted by Dr. David Katz from Yale University.

Huff Post, August 18., 2015.

David Katz, Director, Yale University Prevention Research Center.

-Among my numerous colleagues, friends, and correspondents are more than a few who circulate every abstract, however obscure the source, suggesting that saturated fat has been fully exonerated, or that everything we ever thought we knew about dietary fat, health, and weight has been utterly renounced.

-I confess that to some degree, I engage in counter-measures, circulating studies that show rather the contrary. Generally, my interest is balance and the weight of evidence, so I will circulate any study I consider important, whatever the conclusions. Rather, as I have indicated before, I have little tolerance for the Newtonian nonsense of New-Age nutritionism: for every dietary trend, fad, or fashion- an equal, opposing, reactionary trend, fad, or fashion.

-This, then, is the prelude to brief remarks about two recent studies that rebut many of the currently fashionable rebuttals about dietary fat.

-The first was a brief, metabolic ward study by perhaps the world’s leading authority on energy balance, Dr. Kevin Hall at the National Institutes of Health. Dr. Hall has developed sophisticated, and influential energy balance equations that elaborate often-neglected nuances, such as the fact that the calories required to maintain weight decline as weight declines. This, by the way, accounts for the notorious "weight loss plateau" on which so many dieters land, even as they profess their on-going adherence to the program.

-Their claims are legitimate, and Dr. Hall’s equations validate them. Dr. Hall’s study was both small, and of short duration, but rigorously controlled. It compared isocaloric reductions in dietary fat versus dietary carbohydrate, and showed that body fat content declined significantly more with restriction of dietary fat. This seems a quaint throwback to what we thought we knew before we learned that everything we thought we knew was a big fat lie, or a big fat surprise– but it’s not. It’s entirely current, meticulous research.

-The second paper is one of those systematic reviews and meta-analyses we can’t seem to get enough of these days, and of which we arguably get too many to propagate anything other than perennial confusion. In any event, this review, by the widely respected Cochrane Collaboration, concluded that reductions in the percentage of total calories from fat lead consistently to reductions in body fat and body weight, too. This also seems to fly in the face of what we now prefer to think about what we once thought we knew.

-I note these two publications partly because they are, indeed, both noteworthy. But I note them in particular in the service of balance, and better hopes for nutritional science than a never-ending sequence of misguided action followed by errant reaction.

-Science is a method for answering questions; it is, in essence, a tool. A tool is never much better than the service to which it is called. A hammer, for example, is a perfectly good tool, but a dubious choice for opening windows- although it would do the job. You might use a microscope for diagnosis the next time your toaster won’t work, and you may even notice formerly undetected flaws in its façade. You are unlikely, however, to discern at high magnification the fact that it isn’t plugged in.

In the real world, health, weight control, and lifelong vitality are achieved on diets that vary considerably in macronutrient composition, but that all adhere to the same basic theme: wholesome foods, in sensible combinations, plant foods predominating. A vast array of research evidence from diverse sources, including randomized controlled trials, attests to the same. Alas, it just does not seem to satisfy our Newtonian impulses, or penchant for vituperations, religiosity, and procrastination.

Here’s to eating a diet with the simple mantra “balanced whole foods, in moderation, mostly plants” !

Regards,

Aditya

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