Wanted: Viable Bear Cases
Equity bears are caught in a kind of insanity loop.
Generally speaking, bear cases fall into two categories which can be delineated by way of the (thoroughly exhausted) aviation metaphors macro watchers habitually employ while describing the US economy.
One bear case posits a "hard landing" in which monetary policy's "long and variable lags" finally catch up to the economy, triggering an abrupt slowdown.
Another bear case posits "no landing," in which households and corporates, insulated from
Great write up and synthesis of the situation. Thanks!
You don’t directly mention the possibility of interest rates moving higher as supply increases perhaps with a bit of caution around US political outlook sprinkled in. I wonder how the smartest algos process interest rates in their models. Does their impact change when rate changes move from minor to major?
But that’s not a major concern at the moment. Or “for the moment”?
Cynically, I suspect investors – who, on an AUM-weighted basis are not exactly progressives – consider a Republican Presidency a positive market catalyst at the index level. Those who think on a sector or industry level probably see a mix of +ves and -ves (e.g. -ve for renewables, +ve for oil & gas, etc) but on balance +ve. What care the AUM-weighted average institutional investor for democracy and norms or the fate of our country beyond their investment horizon?
This reminds me of a conversation I had with a close friend right after Trump’s victory in 2016, when we were walking around the block trying to digest what had just happened. He said “I’m scared, I’m shaking, aren’t you scared?” I replied “You’re a gay man and work in progressive non-profit consulting, so you’re scared. I’m straight and work in the stock market, so I’m disgusted, but I’m not scared. It’s probably good for me.” And so, from a purely venal standpoint, it was, for a couple years.
Purely venal + max one-two year investment horizon = AUM-weighted average institutional investor.
Good point, JL. A Pavlovian response. Optimism on more regulatory “relief”. Tax cuts vs caution on even larger deficits to fund.
Mass deportations and cranked up across the-board import taxes (tariffs) are likely inflationary. And a short-term drag on growth.
But as you said, it’s all speculation at this point.
I just filed my taxes Monday, and coupled with this gem of a post once again presenting the ins and outs of what I call the “dark market,” I had a major epiphany. My fifty-five year old doctorate in finance isn’t really worth a whole helluva lot in today’s investment world. What’s going in in the weeds of the huge derivatives and bond markets is far above my paygrade as an aging amateur retail investor. I can’t go where the pros described herein can go and do what they do. Guys like me need a hack. I can’t afford to hedge like the pros do. It’s too expensive and too dangerous, as I found out the hard way 40 years ago. I’ll turn 80 soon, and since my retirement, I’ve morphed into a total income investor. I no longer even look at anything resembling total return. It’s irrelevant. All that counts is line 11 on my 1040, aka AGI. What I learned Monday was that over the last 5 years my AGI has risen 35%, even though I don’t work. (Adding in my unreported tax-exempt income, adds even more to my total income.) My average tax is a stable 11% over those 5 years with COVID. So what did I do to protect my equilibrium? I stopped worrying and learned to love the unrealized. The reason I don’t bother with total returns is that outside of cash distributions, the rest of the returns are in the form of unrealized losses and gains. Since I am roughly 55% in bonds, 30% in various equity assets, and the rest in cash, I have both unrealized losses and gains, with gains about 25% higher than losses. Both of these are rather imaginary. For me these two categories are rather carefully balanced behind a small glass window, available for handy deals when needed. The trick for guys like me is to pick the right goal and exercise strict discipline and restraint. Unrealized capital gains and losses stay unrealized unless the securities are sold. I never panic and I don’t sell, unless it increases my income significantly. Risk-adjusted income growth is my only game and restraint is my hedge. I sit squarely on the efficient frontier and I have my assets stress tested every couple of years (no cost from my private banker).