Risk Perspective April/2025: Nash’s Program & the tariff, sanction hegemony
Nash’s program aims at trying to reduce cooperative games to non-cooperative games by means of suitable non-cooperative models of the bargaining process among the players. In short, Leverage!
One of Nash’s papers ([38], p. 295) contains the following interesting passage: “The writer has developed a “dynamical” approach to the study of cooperative games based on reduction to non-cooperative form. One proceeds by constructing a model of the pre-play negotiation so that the steps of [this] negotiation become moves in a larger non-cooperative game…describing the total situation. This larger game is then treated in terms of the theory of this paper…and if values are obtained [then] they are taken as the values of the cooperative game. Thus, the problem of analyzing a cooperative game becomes the problem of obtaining a suitable, and convincing, non-cooperative model for the negotiation.”
Below is a quote from the Brooking’s Institute on the “Status of Frozen Assets assets”
“Falling interest rates would prolong the ERA loan repayment timeline which poses a risk because European leaders may not be able to keep the assets frozen indefinitely, in part because the unanimity of EU member states to maintain sanctions is uncertain. Belgium is considering domestic options if EU sanctions lapse. Political sentiment can shift, and Russia will continue to meddle in European politics, including by exerting pressure on friendly states like Hungary and Slovakia to vote down sanctions. For example, Slovakia is now “last in line” for Russian gas after gas shipments through Ukraine ended and may not be willing to continue voting against Russian interests. This problem is not new, but the more influence Russia has in the EU, the more likely Russia can dislodge the sanctions regime over time.”
On April 14th – S&P ratings has revised Hungary’s sovereign credit outlook from stable to negative, warning that increasing fiscal slippage and persistent inflation could threaten macroeconomic stability ahead of the country’s 2026 parliamentary elections. The rating agency affirmed the country’s long- and short-term foreign and local currency ratings at ‘BBB-/A-3’.
Dislodged politics in the region as Hungary’s opposition blocked main roads in central Budapest in April to protest Prime Minister Viktor Orban’s moves against civil society may aid to a necessary shift..
Does Europe have an incentive to weaken its growth/growth outlook to engage with public markets over its negotiation powers with the ERA? “In conclusion, an extraordinarily high level of uncertainty around economic and trade policy has been acting as a drag on markets and the economy alike. Financial intermediaries need to adapt their risk management tools in the face of new vulnerabilities and scenarios at a time when it is no longer possible to measure likely outcomes and probabilities. This environment calls for heightened vigilance, which is why we are exploring unconventional sources of risk and vulnerability and using a broader range of tools, such as sensitivity and scenario analyses, to assess the resilience, and dependencies of the financial system.
Source: European Central Bank
“First, the policies of the new US Administration. There’s a lot of talk about tariffs, but it’s not just about that. The new Administration has also been quite clear about deregulating banks, non-banks and crypto-assets. And beyond that, they have announced that they want to modify corporate tax, which could affect capital flows across the Atlantic. In general, what we’re seeing is that the new US Administration isn’t very open to continuing with multilateralism, which is about cooperation across jurisdictions and finding common solutions for common problems. This is a very important change, and a big source of uncertainty.” – Interview with Luis de Guindos, Vice-President of the ECB, conducted by Jon Ihle on Marcb 16 2025
Figure 1: EUR 30yr Govt Bond Yield (white) vs EUR 30yr Swap Rate (papaya) and the Spread (lower panel) at 99.62 Percentile. 2013-March 2025
Source: Bloomberg, Bevon Thomas
We could almost make a supposition that there is somehow an emerging limited balance sheet capacity to hold physical cash bonds in Europe. Our stubborn-minded explanation would come back to our Game Theory analogy and conjecture back to Comrade Draghi’s famed report of “The future of European competitiveness”
Our friends at Blackrock came out with this well-presented comment under the worthwhile auspices of what can be done to overcome the shortcomings of bond holdings in the traditional 60/40 bond portfolio. Unfortunately, we would observe that most have played any number of Sharpe World games to then advocate for solutions that do not result in improved risk-adjusted compounded returns.
In terms of monetary policy, this uncertainty means we need to be extremely prudent when determining the appropriate stance. While most indicators point to inflation moving in the right direction, the environment of exceptional uncertainty requires us to stick even more closely to our data-dependent and meeting-by-meeting approach.
The European Union is at a crossroads. Defense policy requires a significant overhaul, as outlined as a line of significance in Mario Draghi’s report, challenges relating to trade and economic competitiveness need to be addressed. “In addition to ramping up defense spending, we’ll need to deepen and strengthen our Economic and Monetary Union with a true single market for goods and services that shores up our structural economic growth prospects, supported by a complete banking union and capital markets union”
We maintain our belief that risk is endogenous; it is the very manipulations by a Sharpe-drive Federal reserve that create the boom-bust cycle central planners often fail to foresee. Our straightforward view of risk is that it’s not shaped by unpredictable, exogenous shocks—rather, it results from the gradual build-up of fragility. Our frequently cited chart of EUR 25-delta FX butterfly costs, highlighting unforeseen exogenous events in red and endogenous risk accumulations with red circles, effectively illustrates this concept.
From a risk and investment management perspective, we will forever harp on about the same thing: build convexity into your portfolio. Improving the geometric compounding path of investments through time is not about predicting the future. It is about building resilience in your portfolio to divergences from expected outcomes. It is about how your portfolio performs when you are wrong, not when you are right, that will make all the difference.
As we often emphasize, the chart above only reflects what did happen. Throughout the entire period, a long Put Protect strategy offered the potential for greater upside participation—if it had unexpectedly come through—and provided protection against severe downturns, in case unforeseen events suddenly arose.
The promotion of short convexity strategies is widespread in finance and the pursuit of Sharpe ratios. But we should ask ourselves: why is that the case? If all major players within the Sharpe-focused world promote abandoning convexity—claiming it’s the most profitable investment approach—what are they doing on the other side of that trade?
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important information
This document does not constitute a communication that is an invitation or inducement to engage in investment activity (or financial promotion). It is intended for viewing by clients of Bevon Thomas that are reasonably believed o be eligible counterparties or professional clients under the Securities Act of 1933, the Securities Act of 1934, the Spanish securities market law or the French monetary and financial code. Persons not falling within the above descriptions must not act upon or rely on the contents of this document. The contents of this document are for informational purposes only and do not constitute investment advice nor an inducement to trade.
Risk Perspective April/2025: Nash’s Program & the tariff, sanction hegemony
Nash’s program aims at trying to reduce cooperative games to non-cooperative games by means of suitable non-cooperative models of the bargaining process among the players. In short, Leverage!
The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1994 – NobelPrize.org
One of Nash’s papers ([38], p. 295) contains the following interesting passage: “The writer has developed a “dynamical” approach to the study of cooperative games based on reduction to non-cooperative form. One proceeds by constructing a model of the pre-play negotiation so that the steps of [this] negotiation become moves in a larger non-cooperative game…describing the total situation. This larger game is then treated in terms of the theory of this paper…and if values are obtained [then] they are taken as the values of the cooperative game. Thus, the problem of analyzing a cooperative game becomes the problem of obtaining a suitable, and convincing, non-cooperative model for the negotiation.”
History of Game Theory
Below is a quote from the Brooking’s Institute on the “Status of Frozen Assets assets”
“Falling interest rates would prolong the ERA loan repayment timeline which poses a risk because European leaders may not be able to keep the assets frozen indefinitely, in part because the unanimity of EU member states to maintain sanctions is uncertain. Belgium is considering domestic options if EU sanctions lapse. Political sentiment can shift, and Russia will continue to meddle in European politics, including by exerting pressure on friendly states like Hungary and Slovakia to vote down sanctions. For example, Slovakia is now “last in line” for Russian gas after gas shipments through Ukraine ended and may not be willing to continue voting against Russian interests. This problem is not new, but the more influence Russia has in the EU, the more likely Russia can dislodge the sanctions regime over time.”
On April 14th – S&P ratings has revised Hungary’s sovereign credit outlook from stable to negative, warning that increasing fiscal slippage and persistent inflation could threaten macroeconomic stability ahead of the country’s 2026 parliamentary elections. The rating agency affirmed the country’s long- and short-term foreign and local currency ratings at ‘BBB-/A-3’.
https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/type/HTML/id/3352216
Dislodged politics in the region as Hungary’s opposition blocked main roads in central Budapest in April to protest Prime Minister Viktor Orban’s moves against civil society may aid to a necessary shift..
Protesters in Hungary block roads, bridges in opposition to new law banning LGBTQ+ Pride events | AP News
Last of poking at Hungary’s political stress – Don’t believe this can cause some discord?
https://www.vg.hu/vilaggazdasag-magyar-gazdasag/2025/03/nagybevasarlas-arrestop-varatlan-bejelentest-tett
Europe’s Moment of Truth on Defending Ukraine—and the Continent | Council on Foreign Relations
Does Europe have an incentive to weaken its growth/growth outlook to engage with public markets over its negotiation powers with the ERA? “In conclusion, an extraordinarily high level of uncertainty around economic and trade policy has been acting as a drag on markets and the economy alike. Financial intermediaries need to adapt their risk management tools in the face of new vulnerabilities and scenarios at a time when it is no longer possible to measure likely outcomes and probabilities. This environment calls for heightened vigilance, which is why we are exploring unconventional sources of risk and vulnerability and using a broader range of tools, such as sensitivity and scenario analyses, to assess the resilience, and dependencies of the financial system.
Source: European Central Bank
“First, the policies of the new US Administration. There’s a lot of talk about tariffs, but it’s not just about that. The new Administration has also been quite clear about deregulating banks, non-banks and crypto-assets. And beyond that, they have announced that they want to modify corporate tax, which could affect capital flows across the Atlantic. In general, what we’re seeing is that the new US Administration isn’t very open to continuing with multilateralism, which is about cooperation across jurisdictions and finding common solutions for common problems. This is a very important change, and a big source of uncertainty.” – Interview with Luis de Guindos, Vice-President of the ECB, conducted by Jon Ihle on Marcb 16 2025
Figure 1: EUR 30yr Govt Bond Yield (white) vs EUR 30yr Swap Rate (papaya) and the Spread (lower panel) at 99.62 Percentile. 2013-March 2025
Source: Bloomberg, Bevon Thomas
We could almost make a supposition that there is somehow an emerging limited balance sheet capacity to hold physical cash bonds in Europe. Our stubborn-minded explanation would come back to our Game Theory analogy and conjecture back to Comrade Draghi’s famed report of “The future of European competitiveness”
https://commission.europa.eu/document/download/97e481fd-2dc3-412d-be4c-f152a8232961_en?filename=The%20future%20of%20European%20competitiveness%20_%20A%20competitiveness%20strategy%20for%20Europe.pdf
Our friends at Blackrock came out with this well-presented comment under the worthwhile auspices of what can be done to overcome the shortcomings of bond holdings in the traditional 60/40 bond portfolio. Unfortunately, we would observe that most have played any number of Sharpe World games to then advocate for solutions that do not result in improved risk-adjusted compounded returns.
https://www.bloomberg.com/news/videos/2025-04-16/rick-rieder-be-tactical-in-jumpy-uncertain-markets-video
In terms of monetary policy, this uncertainty means we need to be extremely prudent when determining the appropriate stance. While most indicators point to inflation moving in the right direction, the environment of exceptional uncertainty requires us to stick even more closely to our data-dependent and meeting-by-meeting approach.
Financial stability in uncertain times
The European Union is at a crossroads. Defense policy requires a significant overhaul, as outlined as a line of significance in Mario Draghi’s report, challenges relating to trade and economic competitiveness need to be addressed. “In addition to ramping up defense spending, we’ll need to deepen and strengthen our Economic and Monetary Union with a true single market for goods and services that shores up our structural economic growth prospects, supported by a complete banking union and capital markets union”
We maintain our belief that risk is endogenous; it is the very manipulations by a Sharpe-drive Federal reserve that create the boom-bust cycle central planners often fail to foresee. Our straightforward view of risk is that it’s not shaped by unpredictable, exogenous shocks—rather, it results from the gradual build-up of fragility. Our frequently cited chart of EUR 25-delta FX butterfly costs, highlighting unforeseen exogenous events in red and endogenous risk accumulations with red circles, effectively illustrates this concept.
Figure 2: EUR FX 9mth 25delta Butterflies. Exogenous Shocks (red letters). Endogenous Risk (red circles). 2008-March2025
Source: Bloomberg, Bevon Thomas
From a risk and investment management perspective, we will forever harp on about the same thing: build convexity into your portfolio. Improving the geometric compounding path of investments through time is not about predicting the future. It is about building resilience in your portfolio to divergences from expected outcomes. It is about how your portfolio performs when you are wrong, not when you are right, that will make all the difference.
As we often emphasize, the chart above only reflects what did happen. Throughout the entire period, a long Put Protect strategy offered the potential for greater upside participation—if it had unexpectedly come through—and provided protection against severe downturns, in case unforeseen events suddenly arose.
The promotion of short convexity strategies is widespread in finance and the pursuit of Sharpe ratios. But we should ask ourselves: why is that the case? If all major players within the Sharpe-focused world promote abandoning convexity—claiming it’s the most profitable investment approach—what are they doing on the other side of that trade?
important information
This document does not constitute a communication that is an invitation or inducement to engage in investment activity (or financial promotion). It is intended for viewing by clients of Bevon Thomas that are reasonably believed o be eligible counterparties or professional clients under the Securities Act of 1933, the Securities Act of 1934, the Spanish securities market law or the French monetary and financial code. Persons not falling within the above descriptions must not act upon or rely on the contents of this document. The contents of this document are for informational purposes only and do not constitute investment advice nor an inducement to trade.