Nightmare on Downing Street: Marketplace Uncertainty and the Investor

by Plotinus

The recent political turmoil in the UK has been quite simply a horror show in terms of the damage to its international reputation as a stable reliable partner, particularly in relation to its financial system.

It is hard to imagine the ignominy for Kwasi Kwarteng, the now former Chancellor of the Exchequer, attending the IMF finance ministers meeting in Washington. He had to face up to the disrepute of shredding the UK’s economic standing—a situation which economist Mohamed A. El Erian scathingly referred to as being what would be expected from a developing economy, not a G7 one—before suddenly being called home early in order to be summarily fired by a Prime Minister who herself wouldn’t even last a further week before having to resign to avoid the inevitable mutiny that was afoot within her own Conservative party.

The situation has been “resolved” with the undemocratic anointing of Rishi Sunak as Prime Minister, with the thought that he will navigate the country out of the shambles it has become. Though the hope is, of course, that some calm will be restored, smooth sailing is unlikely. The economic crisis is expected to lead to increasing numbers of Britons descending below the poverty line and looming industrial action across many sectors of the economy.

From an information standpoint how do we as money managers classify what we have watched unfold in the UK? Is it an anomaly, a statistical outlier? Or is it the commencement of a phasal change, a new norm if you will? These are questions that can only be answered retrospectively, new and unusual data points belong in the tails of a distribution until overtime, if they become the norm, they will shift the center of gravity of the distribution. This type of scenario is the investment marketplace modeler’s nemesis. All the stress testing in the world appears not to have given British pension funds the mechanism to save themselves from catastrophe without being effectively bailed out by the Bank of England. On the other hand, a cynic might respond to that situation by saying that by simply being too big to fail, the pension funds already didn’t need to be overly concerned about tail events as they could count on them being covered for them by the Bank of England.

How Does the UK Market’s Nightmare on Downing Street Relate to the US Stock Market Investor?

Their stock market issues are relevant to ourselves as investment managers who are developers of AI trade decision-making strategies, and to our US stock market exposure strategy in particular. How can an AI system deal with a reality of the world—that we should expect the unexpected—when we cannot foresee what the next particular “unexpected” event may be? The investor will want to have a system that has an awareness of its areas of uncertainty and to avoid the very real potential problem of compounding decisions made on an incorrect pretext.

In our view, this challenge for the investor is best tackled by the use of derived data, with an emphasis on the refinement of data and an understanding of why it is being used. We believe that selective use of derived data, rather than the “more data the merrier” approach that some AI-based investing strategies follow, has the potential to provide more statistically relevant information upon which to take investment positions and trade. Our goal at Plotinus is to wade through the complexity of data to arrive at a simplicity. We believe that this derived data approach that we take finds resonance with investors seeking to understand the “Whys?” of investment decision-making without having to deal with the complex technicalities that lie behind the process to arrive at that decision.

Allocators recognize that uncertainty has not been dampened with the recent October rally in the main US markets, and with the forthcoming mid-terms contributing a little US political flavor to an already tumultuous mix. Adding to a total investment portfolio an AI trade decision-making strategy as an alternative approach, that can provide a better risk-adjusted return than a conventional US equity allocation is pertinent choice for the savvy asset allocator to consider.

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