It’s Broken. All Of It.
It's broken.
After a decade (or more, depending on what manifestation of the same general theme you prefer to cite) of market participants large and small crowding into somer version of a "duration infatuation" trade predicated on the deeply entrenched "slow-flation" macro zeitgeist, it's all unwinding in 2022.
A simple 60/40 portfolio is down double-digits so far, putting this year on track to be the worst annual stretch since the financial crisis for a strategy that came to be viewed as the
“The death blow for anyone seeking diversification or shelter from the storm: The pullback in commodities.”
What’s next? The pullback in cash?
IIRC, cash was deemed the worst asset class at the start of the year. Now, probably not so much. -8% real return might look pretty good by the end of the year, as nothing has broken. Yet.
This has been my fear for awile. I ran my client portfolios through my risk system, and when you model a moderate increase in rates combined with a moderate stock selloff (10-20%) you get risk numbers going up 25% at precisely the wrong time (in a down market). Historically UST bond prices are inversely correlated with stocks most of the time- but not always. As your article spells out, this is happening now. Rates are a causal factor in the stock selloff – that usually means inflation. A modest inflation can be good for stocks- especially value, but when you start accelerating beyond 4-6% that has historically gotten stock markets into trouble (central bank reaction function of tighening). The last two days I have watched as US bonds, stocks and the US$ have been weakening or gaining together. This is more typical of EM markets and are troubling to say the least. If the situation in Ukraine improves and war winds down, we could see a nice bounce. But this shock has made a recession far more likely next year, even if it is eventually settled.
Interested in hearing more about the risk modeling, if you’re willing to share.
I don’t see, and haven’t seen, many places to hide. Lots of cash & equivs, trying to avoid the worst places, and nibbling on the most washed-out names is about it. Even then, the feels are not good. Over the past several months, I’ve had higher cash, lower vol, lower beta, lower rate sensitivity, least index-like positioning, etc in portfolios than I’ve ever had in my career – and still the happy days are few.
A bear market is like slowly tumbling down a flight of stairs, each shove sending the market down a few more treads. The market is still clawing to banisters and trying to catch itself. The market needs to give up and finish the Humpty Dumpty.
Everything is broken, I think that’s a Bob Dylan song
The recession stagflation predictions may be premature, but the future looks problematic. There’s many nested layers inside a matryosgka doll, but I feel a post pandemic mindset will play a role in future efficiency and productivity.
One nested layer that seems broken in a weird way, is the crackdown on crypto in China last Fall and then the fairly recent Russian focus:
” January 20, as Bitcoin hovered around $43,000, Russia’s equivalent of the U.S. Fed issued a “Consultation Paper” advocating that the government ban all cryptocurrency production, trading, and investing by its citizens and banks within its borders.”
That strikes me as a weird coincidence preceeding the Ukraine invasion, especially if one ponders in retrospect that Russia and China would have anticipated economic sanctions for this pending invasion.
It may not be coordinated or conspiratorial but it’s an odd puzzle piece that seems out of place. Then again, the American government is also concerned by crypto with IRS being a little more active, so maybe it’s just crypto fallout apart, versus anything related to global currency stuff?
Maybe Crypto is too hard for the Russian and Chinese Governments to control…and they sure like to control everything.
Crypto can be used to exchange Rubles or Yuans for Dollars. Both nations have reasons to have capital outflow controls.
H-Man, so when there is a bad storm, you take the boat to a safe harbor and ride it out. The last thing you do is sail into the storm.
Agreed- however, the problem is when you listen to the weatherman…..it seems like every storm heading towards me will be catastrophic.