The U.S. Economic Outlook… Dudley

NY Fed President, William Dudley’s excellent talk on the U.S.economic outlook and monetary policy is here: https://www.newyorkfed.org/newsevents/speeches/2016/dud160731a

Read the whole thing, but I pulled out some comments on asset correlations:

“Correlations across asset classes have also been increasing. For example, consider the set of assets comprised of the 10-year U.S. Treasury, U.S. equities, international equities, oil, the VIX, a trade-weighted dollar index and the BAA credit spread. We can construct a variable—called a common factor—to capture as much of the overall movement and co-movements for the series in this set. The more closely the series’ movements are tied together, the greater the explanatory content of the common factor. Currently, the derived common factor accounts for 50 percent of the variation in these financial variables, up from 30 percent in early 2014.
Oil, in particular, has become more correlated with other assets. Prior to 2008, oil was virtually uncorrelated with equities and Treasuries. Whereas, in 2016, its correlation with these two asset classes has been more than 45 percent.”