Fed Chairwoman Janet Yellen joked in her speech today at the Economic Club of New York, “if the economy obediently followed our forecasts, the job of central bankers would be a lot easier and their speeches would be a lot shorter.”

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One perplexed Fed watcher recently observed that “Fed policy. . .is maddeningly disconnected from their [sic] forecasts.” After all, how can the Fed legitimately be concerned about unemployment and low inflation while simultaneously winding down bond purchases?

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We have expressed concern for some time that markets have been too sanguine about the eventual ‘lift off’ from zero rates, ignoring a recurring Fed narrative that has attempted to guide toward an earlier exit should economic progress (as narrowly defined by the unemployment rate and inflation) justify it.

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Unemployment and inflation generally work against each other. The Fed was counting on that relationship holding up when it established a dual threshold based on those indicators in late 2012. The idea was that as the two converged (or diverged), markets would better understand the future direction of monetary policy and adjust accordingly.

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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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