Land of Fat Tails

Unpredictability and Uncertainty...compounded by higher probability of extreme events.

We think usually of bell shaped distribution where average outcomes are clustered around the average, with an extremely low probability of extreme events. We are moving towards a bi-modal distribution that has implications for how to invest (not what you invest in).

Europe - Europe can no longer kick the can. They go one of two ways...fragmentation, deflation, etc...or strengthen the Euro zone and change its construct.

This applies to risk and opportunity.

Underlying characteristics are changing - consider that interest rate risk is changing into credit risk.

The FED's tools are not sufficient to stimulate growth or improve employment. Now, the Fed is using communication to push investors to take more risk. The problem is the disagreement amongst FED members and second their are real costs associated with the strategy of encouraging risk. The FED alone cannot solve this - the FED is at best acting as a bridge (with the bridge not functioning properly either).

The FED cannot produce the desired outcomes - with signficant risk that the FED can produce un-desired outcomes.

Key Euro Issues:
1. "Re-Founding" Eurozone by Germany and France
2. Counter fragility of banks
3. Mix debt containment with growth
4. Burden sharing of insolvent debtor sovereigns

Key US Issues
1. Can the US withstand economic weakness in Europe and European financial pressure. There is a very low probability that the US totally withstands Euro weakness

Big macro themes tend to be indiscriminate - they affect things universally - so macro uncertainty leads to paralysis - which creates opportunity to be offensive.