One week / one topic: Bulls, bears... and YOLOs

What happened?

Recent data continues to provide something for everybody, so that each faction remains entrenched in their convictions.

• Bulls: “Inflation has abated, growth is settling at lower yet sustainable levels, and balance sheets are fine. What’s not to like? Remain invested across both equities and bonds, and enjoy your summer!”

• Bears: “Unemployment is trickling up and we are approaching a phase change, equities are expensive and the recent rally is very concentrated. It’s payback time for all those excesses… Move to cash before it’s too late!”

• YOLOs: “You guys are so passé. I’m all-in on Nvidia and zero-day options, plus Bitcoin is now 25% cheaper… Early retirement here I come!"

The problem? They all have a good point.

• Bull thesis: The current environment does look a lot like the mythical ‘immaculate disinflation’ that investors were hoping for last year.

• Bear thesis: It’s true – fragility is increasing due to softening employment, slowing economic activity, stretched valuations and narrow market breadth.

• YOLO thesis: Some non-orthodox, very concentrated portfolios have indeed reaped great rewards post-Covid – volatility be damned. Plus, Roaring Kitty is back!

As we look to separate the signal from the noise, what should we focus on?

Our observations

• Fundamentals: Most ‘traditional’ heuristics like yield curve inversion, economic activity indices and valuation signals have not been working in this cycle. Without adopting a lazy ‘anything goes’ mindset, we should nonetheless accept that we are in uncharted territory.

• Price action: If we assume that the 10yr US yield is the price that matters the most across global markets, we are not observing any extremes here – probably a symptom of not much conviction among investors at the moment?

• Investor beliefs: If indeed there is something for everybody, then there is no consensus on what actually matters at the moment… This fluidity can then create opportunities as investors look for a new ‘thing’ to fixate on.

So what?

While no one can predict the future (or the timing of the next recession), spotting the beginning of a phase transition in markets can add immense value.

As we observe the current environment, we need to let go of any recency bias and remind ourselves that this is water.

What’s next then? Ice (recession) or gas (further acceleration)? Or are we are going to remain in this same state for much longer?

At the moment, we don’t have strong conviction either way – and therefore our overall portfolio positioning is broadly constructive, while we focus on more idiosyncratic alpha opportunities like Mexican equities or Turkish bonds.

We should not however underestimate the focus and restraint needed as we aim to be present and prevent our past investing experience from turning into immutable prejudice, as opposed to responding to opportunities as they actually present themselves. (not before, and not after)

Not easy at all, and – if investing is indeed the last liberal art – taking inspiration from other disciplines can be very helpful.

Inevitably then, a great quote from The Last Dance comes to mind about Michael Jordan’s legendary focus – which we can only hope to emulate in our investing lives: