Too hard, too fast: is it for the bear market rally or is it a new bull? – Jerome Lander
US stocks just saw a 20% two-month rally from their lows, which are very average measures for a bearish rally. Long-lived tech stocks and plenty of old memes and other zero (loss) stocks led the charge, thanks in part to stock buybacks, in a short-term rally that almost no one with a fundamental research outlook can’t. fully participated. are now at a critical point where they are turning around, potentially even testing new lows in the coming months in response to a market or geopolitical crisis, recession, stagflation, Where they continue with a new bull market in response to central banks becoming more dovish and abandoning the fight against inflation.
What is it to be? Let’s continue the discussion…
What will drive a new bull market?
If this is a new bull market, it will likely be due to central bank policy alone. Central banks will move in a more dovish way, aggressive interest rate hikes will stop, and inflation will subside enough for central banks to say their job is done and/or accept a higher inflation target due to growth concerns. Ultimately, inflation needs to be moderately higher to exhaust the debt bubble (absent a well-functioning economy, of which we have seen no evidence in recent years). Therefore, such a change in policy will probably have to happen eventually – it’s just a matter of timing.
The challenge of expecting a new bull market today is its prematurity; contained inflation of 2% (or even
Although in the short term the case for such a fast and aggressive new bull market seems flimsy, at the end of the day, we think it is eminently reasonable to ask whether today’s central banks have the backbone or the credibility to crush inflation adequately by adopting a truly restrictive policy over the medium term. Central banks will again err on the side of easy money and will almost certainly do so in response to financial or economic catastrophe (which they may even demand to pivot accommodatively). The question is on the timing of this policy pivot, with recent market action suggesting that the market expects this to be imminent and will not require a recession or crisis to get there first, but to other significant movements in interest rates will be very likely to cause a recession. or market crash. Being a bull means betting against all the harsh talk from the FED effectively saying they are all talking and unwilling to stop inflation in its tracks today because that means killing demand and poor growth performance . The bulls can be okay in the medium term but are likely to be very destructive of wealth in the short term.
Of course, it’s a bearish rally!
The fundamental outlook suggests that the bear market needs to go deeper, both in time and potentially in degree. A bubble in everything is not just corrected with a simple 20-30% drop and consistent high multiples, but will require a big bear market to really eliminate the excess. Many assets (eg Australian housing) remain hopelessly overvalued, profit margins remain excessive and speculation has yet to be properly extinguished. Many investors foolishly continue to believe in passive investing and the idea that real estate and stocks will always return 10% per year, even if they don’t do it themselves and the outlook is poor! Rarely has the geopolitical world order seemed more problematic – peaceful prosperity is dead – and de-globalization and supply chain resilience and public policies driven by environmental and labor ideology rather than being pro-pro market mean that market participants are likely to demand higher potential returns and therefore lower multiples in the face of ever-higher inflation.
By now, we all know the economy is a basket case and stagflation is already upon us – inflation is high, but real growth is weak and productivity outcomes are dire. Markets can’t be pulled out of real-world wealth creation ad infinitum and float on a debt windfall forever, so they won’t be. Expect years of volatile but dead end markets where only good active management can extract a decent return, but passive investing has been dead for a decade.
It’s hard not to disagree with the bear market’s view that the party isn’t over until we see the lights go out. Put the case for a bull market and a bear market together, and it is reasonable to expect that we will see a half-hearted but still punitive response to the fight against inflation, causing a bear market. prolonged or market crisis before central banks feel compelled to double down and anchor a higher inflation outcome. Nominal growth can then be reasonable even if real growth remains disastrous with uncertain equilibrium valuation levels. In the short term, the market would crash before a new volatile “Ponzi-style fake wealth” bull market begins with economic, market and political outcomes eventually resembling those of an emerging (or submerging) market. .
What three things do we do?
(1) The economic and market outlook suffers from a high degree of uncertainty given their high potential variability, their sensitivity to tail risks and their dependence on political and geopolitical outcomes. As such, it is essential to exercise humility and increase portfolio diversification and resilience, just as it is important for countries to do the same with economic policies – effectively preferring resilience over yield or maximum efficiency. We believe in reducing reliance or belief on bullish market outcomes and having greater exposure to alternatives and active management as these diversify sources of return. As such, we carry significant weightings to alternatives such as long/short, event-driven, market-neutral and convertible bond strategies in our portfolio and do so ahead of simple passive equity and bond exposures (better suited to past times). ). Simply put, we have a lower passive exposure to stocks and bonds to limit our risk of very adverse outcomes.
(2) Given that we are more likely than not to enter a period of higher and more volatile inflation, despite short-term oil-induced flattening in the United States, inflation being more likely to be structural in the 2020s, we are also favoring higher weightings to assets that fare better in an inflationary environment, particularly those that have been and continue to be capital starved or have structural tailwinds. These assets serve the dual purpose of also being favorable should other geopolitical and military conflicts ensue, which is increasingly likely. As such, we invest in real assets, commodities such as energy, uranium and precious metals, and resource stocks instead of financial assets.
(3) In addition to the above, we also appreciate specific themes that offer partial solutions to today’s low productivity growth and technology challenges, including certain technology and healthcare stocks and assets that are structurally favored by public spending in response to populist or political beliefs such as climate change, eg the future of carbon. We are cautious about exposure to Europe and China as geopolitical risks remain elevated.
By having a portfolio very different from the general public, we run the risk and the advantage of having very different performances. In the near term, we believe this is prudent as the economic and geopolitical risk is extreme and the risk of a continued stagflationary bear market is well above historical levels. If a crisis occurs, our approach will also allow us to become more “risky” and increase equity exposure at much lower prices. If not, we expect a portfolio better aligned with stagflation to do relatively well in the years to come – as real growth remains weak due to an aging population and a disastrous productivity growth – and inflation is proving more volatile than merely transitory in response to poor public policy and ongoing geopolitical friction. It is absolutely necessary to act, to reorganize and better align the portfolios with the dominant economic paradigm and we believe that this will prove to be a necessity over time.
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