Week InReview
Friday | Feb 14, 2020
Catastrophes and Correlations

"In 2017 the World Bank issued some pandemic bonds. Investors who bought these bonds got a high interest rate, but they could lose all their money if there was a pandemic. The bonds would “trigger” if a pandemic occurred, and then instead of paying back the bondholders, the money would go to the World Bank to fund relief efforts.  The bonds "were originally conceived as a sort of public-private partnership to get insurance investors to assume some of the risk of the Ebola epidemic.

"One way to read the pandemic bond story is that the risk of an Ebola outbreak spreading from Congo to Rwanda does not seem likely to be highly correlated with global financial markets, but the risk of a deadly coronavirus spreading from China to the rest of the world probably  is  pretty correlated with global financial markets: The actual coronavirus is shutting down factories, disrupting trade, and generally causing large economic impacts even as it is also risking triggering the bonds. People may have bought these bonds with the wrong disease, and the wrong correlation model, in mind."

in case you missed it...
In past recessions, the Fed has played a large role in reviving the economy by sharply cutting interest rates. But Federal Reserve Chair Jerome Powell has been warning lawmakers that the central bank   won’t have much ammunition left   to fight the next downturn because interest rates are so low (the benchmark rate is just below 1.75 percent, far below rates above 5 percent in the past). (The Washington Post | Feb 11)

$414bn is a big number —  even if you’ve got the right to print as many dollars as you like. When repo rates spiked at 10 per cent in mid-September, it shook the Federal Reserve. So much so that the central bank has in the intervening months bloated its balance sheet by more than $414 billion to $4.2 trillion. (Financial Times | Feb 11)

Investors are bailing on hedge funds after their recent   spate of underperformance . But an analysis of hedge funds over the last 30 years by Universa Investments, itself a hedge-fund firm focused on risk mitigation, shows that the vehicles have never really delivered on their promise of protecting investors’ capital. (Institutional Investor | Feb 10)

The SKEW index, a risk gauge also known as the "Black Swan" index, sent jitters throughout Wall Street when it hit a near high in December, but Wharton finance professor Jessica Wachter says it was more likely a sign that the mainstream had become largely bullish on the market. Wachter says as the mainstream becomes more bearish, the SKEW will drop accordingly. (The Wall Street Journal | Feb 9)

Federal Reserve Chair Jerome Powell and his colleagues have long recognized that some of the post-crisis rules that make the banking system safer also could end up making the financial markets more brittle. That’s a risk that was highlighted by last year’s turmoil in the money markets and was flagged as far back as 2014 — at a Fed board meeting that approved tough liquidity requirements to make banks more secure and which Powell attended as a governor. (Bloomberg Law | Feb 7)
the cyber cafe
Hostile spies target U.S. with cyber, encryption, big data
A federal report warned that intelligence threats are becoming more complex as adversaries turn to hybrid techniques combining spying, economic espionage and cyber operations.

$645 billion cyber risk could trigger liquidity crisis, ECB's Lagarde warns
The president of the European Central Bank, Christine Lagarde, warned that a well-organized cyber-attack on a major financial institution could trigger a liquidity crisis. Referring to a European Systemic Risk Board (ESRB) report that estimates the global cost of cyber-attacks at anything up to $654 billion (£507 billion), Lagarde said that "As an operator of critical infrastructures, the ECB obviously takes such threats very seriously."
—  Forbes

97 of the 100 biggest airports fail cybersecurity tests
Ninety-seven of the world's 100 largest airports failed to pass tests of their cybersecurity programs conducted by ImmuniWeb researchers. The security firm studied airport web and mobile apps and found many could be at risk for air-travel-related cyberattacks.
—  Forbes
binge reading disorder
Holy Smokes.
Image: Tony Devencenzi
11 cocktails to make for Valentine's Day
What better way to celebrate Cupid than with a good cocktail or two? Whether you’re toasting with your sweetheart or hosting a get-together with friends, here are 11 cocktails to make on Valentine’s Day.
—  Liquor.com

All the cool things you can do on your phone’s lock screen
Your phone's lock screen is an essential barrier between all your personal information and anyone who happens to pick up your phone. It's designed to keep most of your phone's features and functions hidden away. But you can also take a few shortcuts from the lock screen to access various apps more quickly.
—  PopSci

“Motivated reasoning”. People will believe anything.
Humans are hardwired to dismiss facts that don’t fit their worldview; it's why people believe conspiracy theories.
—  Fast Company
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