If you’ve got a few minutes, it’s worth going back and listening to Dan Loeb’s comments on the Q2 call for Third Point Re.
Needless to say, shorting this market hasn’t been what one might call “easy” of late. The bane of bears’ existence is DM central banks’ seemingly unshakable belief in the by now thoroughly debunked notion that eventually, financial asset price inflation will “trickle down” to the real economy by way of the poorly-defined “wealth effect” that exists only in the minds of people with PhDs in economics.
The first part of the “wealth effect” hypothesis has gone swimmingly. Turns out, buying risk free assets by the trillions does indeed induce an epic hunt for yield that sends investors scrambling down the quality ladder, pouring money into everything from IG, to HY, to equities in the process. And in case that wasn’t enough, the ECB and the BoJ decided to just buy risk assets directly.
So a bet against risk assets is a bet against the people with the printing presses and needless to say, that is one dumb-ass bet to make at the index level.
But there are of course always opportunities at the company level, and Loeb knows just where to look. To wit, from the above-mentioned call:
We have found more opportunities to take short positions and single names in companies that we think are overvalued at this peak markets and in sectors undergoing structural declines.
We wrote about our fracs and that which have gone very well for us. So really what we’re focusing on is, structurally challenged companies that are just going to have a much more — that are having a very difficult time in the current environment. So a lot of these are retail, retailers, consumer brands, I mentioned the energy related companies. And companies — and just some companies we think are have very low quality earnings, who we think might be playing accounting games to achieve their results.
Nothing really profound there, but it underscores the notion that even in a market that is quite literally being levitated by trillions in printing press money, there are certain sectors that are in terminal decline.
More amusing is Loeb’s assessment of exactly why things are going like they’re going:
I think what I said obviously there’s always downside risk to the market at any time for a number of reasons. Outside of our control and also outside of what’s going on economically. So it’s always something we think about. I think, what I was saying was that, we better — I guess in case of better lucky than right. We expected the market to go up but for different reasons. We thought it would be based on generally positive growth oriented policies in acted by the administration, lower taxes, infrastructure spending, healthcare, reform et cetera, none of these things transpired.
But what has transpired has been kind of global synchronized economic growth and a very accommodative global monetary structure.
So, I’m happy with the outcome the reason for it was different from what we anticipated, but we’ll take it.
Basically then, Loeb is no different from the guy on the E*Trade commercial who just bought a yacht on the strength of Janet Yellen, Mario Draghi, and Haruhiko Kuroda – well, with the possible caveat that Loeb already had a yacht.
Nothing panned out like he thought it would with Trump’s agenda, but it didn’t matter because … well … because this:
And in case you need that point driven home any further, we’ll leave you with one last quote from Loeb:
We will be carefully watching central bank activity as we approach year end as we expect this will be the major driver of market sentiment.
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