At Rain we talk a lot about what we call ‘information days,’ brief periods of time that are extremely rich with information. We find that evaluating narrow time periods of isolated stress (or euphoria) can be just as informative about manager positioning and underlying risks as longer-term statistics, if not more.

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From a diversification standpoint, understanding how a hypothetical pair walking down the middle of a street together might be related (or integrated) is enormous; is it a man and his dog tethered by a leash, a husband and wife, two neighbors going to the same yard sale around the corner, or complete strangers?

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After evaluating a great deal of data, a statistician finds that as ice cream sales increase, the rate of drowning deaths increases sharply. Based on this strong correlation, the scientist concludes ice cream consumption causes drowning.

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As the data tells us today, interest rate risk has bled across asset classes in a way that resembles how credit began to dominate asset prices in 2007.  The biggest

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The first half of 2013 was a startling reminder of how poorly traditional asset allocation diversifies actual investment risk. For most, it proved to be an extremely difficult period to make money using the traditional approach because a single risk factor – interest rates – largely drove returns across asset classes.

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A quick look at the July employment report seems to reinforce the importance of participation rates in the path to the 6.5% unemployment threshold Fed Chairman Bernanke laid out last December. As we’ve speculated, meager gains in employment can have a material impact on the unemployment rate because so many people are leaving the workforce due to demographic changes.

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Those of you who have followed our thoughts about evolving Federal Reserve policy here and here and here will appreciate a forthcoming paper by economists at the Federal Reserve Bank of Chicago which concludes that changing demographics have dramatically lowered the number of jobs it will take to impact the unemployment rate in the future.

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There may be more to unemployment numbers than meets the eye. Conventional wisdom has it that as the economy rebounds and jobs are created, people begin to reenter the labor force, making the unemployment rate a particularly stubborn number on the way down.

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The job of the Federal Reserve is ‘to take away the punch bowl just as the party gets going’ as one Fed Chairman once said. Typically the process has started with a hike in short-term interest rates, a step toward the exit with the punch bowl in hand indicating the economic party was getting raucous.

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