Inflation
Globally $30T of QE; in 2021 $18T in negative yielding debt (even though inflation was coming)
Probabilities of soft landing remote; historically once inflation got above 5% it has never come down until Fed Funds rate got above CPI (unlikely we’ll get there this time given scale of asset bubble); has never been tamed without a recession
Many bankruptcies have been buried by QE
$1.5 - $2T in excess savings, but size of asset bubble, Ukraine, China Zero Covid…assuming recession in 2023
Predictors
Does not use top down / macro stats (e.g. employment), rather
- Stocks lead economy by 6-12 months
- Leading industries: Housing e.g. home builders (-50% from high). Trucking (-40% from high). Retail…less early…and currently tainted due to Covid shifts in spending.
- Lagging industries: consumer etc.
- Also: bond market, but past decade had not signal due to central bank interference. Historically 10 year treasury the most important macro variable.
New Tools
Historically in bear markets exited equities and bought bonds, but now 8% inflation, weakening economy and bond yields at 3%…an analogue with no historical precedent
Currently “very challenged”…past 6 months made money via short fixed income, short stocks, long oil and copper. Things are harder now. Not willing to own or short bonds, and in some cases stocks (beware rallies). Waiting for a fat pitch. Anticipating short equities, or sidestepping decline. Staying out of fixed income market. Currencies interesting, but likely to short the USD since $14T new dollars and US was earliest to tighten.
Crypto
Can’t go over $2T, then down $1T and not affect other asset classes
Strong correlation between crypto and Nasdaq
Sympathetic to Bill Miller and Charlie Munger perspectives; expects disruption
Current assumption based on observation and thinking about type of investor: if you want to hedge against irresponsible monetary policy, in bull phase own Bitcoin, in bear phase own Gold.
Conviction
Diversification <> safety
Biggest risk is stale longs or shorts
Concentration draws focus
Learned from Soros: sizing is 70-80% of equation. How much you make/lose when you’re right/wrong.
Believes in streaks. When hot, turn dial up. When cold, dial down.
PM job is to size up/down hot/cold streaks.
You don’t have time anymore to wait to do deep dive analysis…if it resonates, begin entry concurrently with doing the analysis.
Back to Macro
Oil up, interest rates up, and dollar up is always bad for corporate earnings (2000, but also now…historically that setup is -35%ish for corporate earnings)
Getting to higher conviction: 6 month bear markets don’t exist, so will fade strong rallies
Advice to Young Investors
Only do this if you love it
Next 4-5 years will be macro chaos…favor multi-asset class skillset and nimbleness
For tech investors: blockchain & associated disruption
…fundamentals are fundamentals
Focus on what moves the stock price.
MAIN ADVICE: DO NOT INVEST IN THE PRESENT.
The present does not move stock prices.
Change moves stock prices.
Understand how people will think differently in 18-24 months and where securities will trade then.
We saw this at speed during Covid. Lots of obvious shorts (e.g. brick and mortar retailers that never grow…then 4x)
Market
Biggest money made in equities has been made in growth stocks over the years.
Too bearish on the world to go into big tech…but no longer willing to short. Past 18 months it was easy to pick off over-earnings stocks. Much harder now.
Harder to find unique theses right now.
Looking for demand destruction in energy but so far don’t see it.
Pain Scale and Possible Scenarios
1 (good) to 10 (bad)
Max. humility on views going forward.
What central banks have done last 20 years leaves him open minded to something really bad.
Other perspective: this is a story we’ve never seen before so be open minded to possible outcomes.
In 2006 — wrong for six months on shorts, but analysis was correct, stuck with prediction and paid out.
Closing
Macro makes all their money in bear markets historically…hence macro pessimism
“Any great short will tell you they made 90% of their money on the long side…the math is with you.”
We are not being imaginative about the things that can go wrong.