Former trader Richard Breslow is out with his daily missive and I dare say Thursday’s note is his best effort ever. If it’s not, then it surely belongs in the Breslow hall of fame.
There’s nothing “new” (per se) in what you’ll read below, but when it comes to driving home a point in terms that suggest the person writing the note has no regard for your delicate sensibilities, Breslow is in a league of his own (well, Nassim Taleb also has a knack for not suffering fools gladly, but the only problem with Nassim is that most of the time, he’s the fool).
As we and plenty of other cynical commentators have been keen on pointing out, retail investors didn’t suddenly become geniuses in 2009. It is not a coincidence that active managers suddenly stopped performing at the exact moment when the global accommodation regime was instituted:
The post-crisis regime has been defined by central banks herding investors of all stripes (so not just the Joe E*Traders) into risk assets, pushing everyone further down the quality ladder in search of yield until folks who used to own Treasurys look up and find themselves the “proud” owners of a bunch of HYG and JNK.
And this is a mindless exercise. ETFs have funneled all of this money indiscriminately. It is, as Howard Marks recently put it, a “perpetual motion machine” – especially as regards the “super stocks” that, until this month anyway, were fueling the rally.
Worse, this mindless quest for yield supercharged by the proliferation of ETFs has helped investors gorge themselves on shares/units of vehicles that represent underlying pools of assets that are inherently illiquid (think: the HY and EM debt bonds that lie slumbering below junk and emerging market bond ETFs). It’s not so much that the exits will be blocked when someone yells “fire” in this increasingly crowded theatre, it’s more that there was never an exit there at all. The bonds aren’t liquid.
So, that brings us to Breslow, who thinks that this entire set up has created a situation where everyone is “pig.” More below…
It’s one of those aphorisms that we take for granted and no longer even think much about. Every junior trader hears it. “Bulls make money. Bears make money. And pigs get slaughtered.” I can picture everyone nodding their heads. For the vast majority it’s an approach that used to save them time and time again. In reality though, some of the best investors don’t heed this advice. But you have to have their set of skills to pull it off. Unfortunately, policies relentlessly pursued post the financial crisis have turned everyone into pigs.
- In a financial world characterized by central bank front running and put issuing, being a swine has been acceptable behavior. You can play the part and not get slapped. However, as we start to seriously contemplate tapering or, dare I say it, normalizing, the risk becomes that the great passel of hogs does meet their prophesized fate and gets butchered
- What does it take to be a successful pig? And is it likely that the holders of the vast positions that have been accumulated have these attributes? Let’s take them out of order because we are where we are
- You should never enter a position without a clear exit strategy. That doesn’t mean dance until the band stops playing, nor always being prepared to average down. Those are strategies destined to fail once the casinos send in the coolers. Central bankers are trying to send out the warning that the deal is about to change, but the response has been, “so what are we supposed to do about it?” The markets’ calm response isn’t comfort, it’s deer in the headlights
- Real exit strategies are fact-based and do indeed include consideration of whose money you are playing with. Earning the right to trade size is an important concept that all great traders employ before they press their bets to the max. It’s ironic that the best investors look like cowboys to the outside world, but are actually the most disciplined players out there
- It’s hard to credit the belief that all of these enormous positions, in every market, regardless of liquidity, that have been built on the endless quest for yield, have an exit strategy associated with them. You can accept my word that great traders never let themselves get so deep into a trade that they simply can’t afford to get out of
- Successful pigs spend an enormous amount of time analyzing entry levels. The ideal entry point is where you can scratch the trade or control losses even if you’re wrong. It’s hard to imagine that after a decade of mindless investing there are many portfolios with “location.” That’s why tapering risks student body left on a grand scale
- The last attribute that is needed is the ability to find, and patience to wait for, the great opportunities when they periodically appear. Staying in the game and waiting on your home run pitch is the key. Not swinging at anything coming your way. But how many great new ideas are being identified when there’s been only one game in town?
- Much is being made of the latest moves in fixed income. They are in fact tiny. Credit spreads continue to be as tight as a sot on a bender. Equities remain blissfully at ease. Investors should remember that if you want to be a pig, you have to learn how real pigs actually behave