Surprise!
Posted on Sunday, February 7th, 2021
The dawn of 2021 was like a starters pistol went off and we were off to the races. It seems like there was a bit more normalcy this week as I actually managed to get out and play golf. It was 50 and sunny so I took the opportunity to play with some friends. I will happily take it especially with what mom and friends have been dealing with in NJ. Two feet of snow!!?? Bluette – I hope you are not out shoveling snow. I exchanged emails with a friend this week. He is unbelievably brilliant and perhaps I tried too hard to impress but he had a question about the markets and I, in my usually long winded way, gave him some thoughts to ponder. (I actually edited it down a bit for brevity.) His question was about Yield Curve Control. Just know – that is how the Federal Reserve will keep rates lower for longer. Inflation for you and me will be the problem.
I think Yield Curve Control (YCC) is a given and I think it will work – for the government. If they cap rates on the 10-year inflation can run unchecked. It is the governments’ only way out of its debt mess. Inflate or default. Inflate is just a slow-motion default. That means, as investors, we need to prepare for the return of inflation. It is no coincidence that Mario Draghi, another former central banker, is being tapped to run the Italian government. It’s all about the debt now.
Historically, in the US, we are in the highest quartile of valuations. From that we can surmise that investors can expect lower returns with higher-than-normal volatility. In the coming decade it will be important to sidestep major draw downs.
In an era of distorted market signals, I believe that the clues to navigating these markets will come from the volatility market. All of our recent major market moving events have been due to a lack of liquidity. These events emanate from a landscape of complacency and a lack of respect for risk. Investors take hedges off and add leverage. We can see the potential for a market moving event when we see complacency in the volatility markets as vol is sold indiscriminately in order to pick of pennies in front of an oncoming steam roller. By closely monitoring the volatility markets we can determine if the potential exists for a major event. Our returns from US stocks in the next decade may be more reliant on a dynamic asset allocation that relies less on passive investments and more on signals generated from the volatility market.
At the current moment, I see our markets in the midst of a Crash Up. In Austrian economics it is called a Crack Up Boom. Too much money is being thrown into the system. We are giving another $1400 away in March. Romney is talking about giving even more money away aster that check arrives. We are only steps away from a Universal Basic Income(UBI). (That would be a check coming every week from the government.) No politician will have the moral fortitude to step in front of this freight train. We have crossed the Rubicon. We will need to own assets – the right assets and hedge accordingly. It is interesting to me in this era of rampant moral hazard and looming inflation that the conservative investor – the person, who saves, has low debt levels and takes caution in asset markets may end up as the big loser.
What is clear is that a financial bubble is being inflated, and there is risk on both sides of the distribution. Ordinarily the bloviating pundits advise one to sell assets, or perhaps execute some sort of hedge such as buying puts or selling covered calls. They are looking in the wrong direction. While I am not a stomping bull, the approaching monetary hurricane could well make the “surprise” a further rally in equities. – Chris Cole Artemis Capital
The CNN Fear and Greed Index has swung back to Greed from Fear this week. We still don’t see the type of complacency that we would see at a longer term top. We would love to see a correction of 10 -15% which would act as a relief valve to the speculative pressure building from the bulls.
Enjoy the game!
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.