It’s easy to confuse forced capitulation with a loss of conviction.

Think of Bill Ackman and Herbalife. Ackman didn’t give up on the view that the business was fundamentally unscrupulous, he gave up on the trade because it wasn’t worth it anymore. That’s an oversimplification of a very long story, but you get the idea. It wasn’t about who was right or wrong. It was about the cost of persisting in an increasingly quixotic fight.

The same is true of bearish equity calls and recession predictions in 2023. There’s nothing wrong with the thesis. In fact, the case is about as strong as I’ve ever seen. The problem is the opportunity cost of waiting around. That’s mitigated by generous yields on sideline cash, but as discussed here on Friday, the persistence of the stock melt-up may soon compel under-positioned discretionary investors to consider the unpalatable prospect that cash yields, high as they are, aren’t sufficient to compensate for the risk of missing the next leg higher in equities.

That’s the lens through which I’d encourage readers to view the suggestion that any extension of the equity “force-in” somehow represents anything other than the perceived necessity of taking a “grin and bear it” approach to markets given how costly quixotic fights can be, particularly when left-tail risk after left-tail risk have come and gone without incident leaving few obvious (i.e., known) catalysts to undercut assets.

There are geopolitical risks aplenty, but waiting around for stocks to acknowledge the burgeoning battle for ideological hegemony and price the myriad ramifications, is a fool’s errand. There’s the liquidity drain narrative, and it’s all too real, but one question is whether any fallout would have time to spill over from bills into the broader rates complex before the Fed intervened, let alone enough time to infect equities. I doubt it, personally.

Sure, a positive global liquidity impulse is bullish for risk assets, and vice versa. And yes, the bill deluge is probably going to put us in vice versa territory. But let’s face it: Nobody bases a decision on whether to pile into Nvidia up 200% in five months on a carefully considered thesis about why $1 trillion in new T-bill supply isn’t likely to result in reserve scarcity. You’re either going to “YOLO” (used here as a verb) or you aren’t, and nobody’s 2019 repo squeeze nightmares are going to convince you otherwise. In fact, if you could find a retail “YOLO”er who knows anything about this, they’d probably tell you the sooner reserves are scarce the better — because that’s when QT will stop.

Anyway, none of the above is to suggest it’s a good idea to chase equities higher from here, it’s just to say that not everyone has the luxury of being obstinate forever. Underperformance risk is real. “Quixotic” isn’t always derogatory, but it’s almost never meant to flatter. There’s a fine line between a “patient bear” and a stubborn one. And “I’m underperforming on principle” doesn’t play well (it doesn’t pay well — without the “l” — either). Have a look at the chart on the left below from Goldman. Nobody is beating the Nasdaq 100. And you can buy the index for next to nothing in fees.

For some, underperformance is unavoidable due to SEC diversification requirements and associated ownership caps, but that doesn’t make it any less vexing — for managers, yes, but particularly for investors eying huge gains in low-cost index funds.

Of course, forced capitulation into a melt-up in the service of acknowledging reality comes with risks of its own. “[The] biggest question we get now is ‘But what will make it go down, there’s no catalyst?’,” BofA’s Michael Hartnett said, in his latest, noting that such questions “often precede an intermediate top.”

“Once consensus gives up on recession, count on it,” he added.