My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

I'm just not feeling it.....

For equities and bonds, whether we go up or down from here is not known, but one thing that is certain is that volatility and sentiment shifts are occurring with increasing frequency. I continue to bet on the downside from here because of the weight of negative indicators vis-à-vis positive, high valuations and the gradual disappearance of those investors that “buy the dip.” Is it just me, or do the cards increasingly feel as if they’re stacked against those playing the long side? I have felt this for some time and have been too defensive because equities (and bonds), time and time again, manage to quickly find supporting bids every time there is a downdraft. It doesn’t matter if the fleeting downturn is caused by a bit of bad economic news, “challenging” earnings guidance from companies, the ongoing pandemic (and variants), increasing inflation concerns, higher bond yields, or anything else. It hasn’t seemed to matter up to now. However, the cracks have become more visible during September, accelerating as we near month-end. On that cherry note, I have watched equities move all over the place the last two weeks, whilst government bonds (globally) have sold off and oil has continued its ascendency. The S&P 500 is 3.9% off its early September highs, the 10y UST yield (1.52%) is at its highest level since late June, WTI crude ($75.01/bbl) has reached levels not seen since early June, and the US Dollar is at its highest level since mid-June 2020. Perhaps the good news is that the pandemic and variant effects seem to be moving ever so slowly off the front page as the world learns to live with it. Pandemic concerns have been replaced by other concerns including:

  • The mega $3.5 billion Biden-sponsored social plan being debated in Congress (and “attached” infrastructure plan), which is struggling for support even within the sponsoring Democratic party.

  • The looming debt ceiling impasse in the US, tied to the first point.

  • Elizabeth Warren labelling President of the Fed Jerome Powell “a dangerous man” as he is up for re-election, very much making her……er…. Elizabeth Warren. This is occurring just as conflicts of interest have forced two prominent (and more hawkish) members of the Fed into early retirement.

  • Potential collateral damage as the Evergrande saga continues.

Of course, these concerns continue to be offset globally by the incredibly accommodative policies of global central banks. Central bank tapering is coming, and this is well advertised. The Bank of England will be the first to become hawkish, already suggesting rate rises as soon as early 2022 to stamp out inflation. However, both the Fed and ECB increasingly go out of their way time and time again to stress that the overnight borrowing rate will not be increased until well after tapering is completed. This is a dovish approach that favours on-going economic growth and the achievement of full employment at the expense of inflation, which continues to lurk and is always a threat to spiral out of control if not nipped in the bud. The bottom line is that the Fed and some other central banks have the back of investors, who will continue to hope and pray that the incredibly accommodative rate environment will carry on for many months or years. In summary, central banks face a serious dilemma in which “too tight too fast” will tank the economy, and “too loose too long” just makes the eventual “normalisation” of monetary policy more and more painful as bubbles grow. Maybe it’s just one of those days, as I write this – I’m just not feeling it. I wrote a few months ago about what to do when equities seem expensive. Let me revisit this in a different way. If you are concerned about the future of stocks, do you bail out of equities? And if so, what do you do? Do you go to:

  • Cash earning zero (or less in some countries).

  • USTs / government bonds yielding less than inflation, and in some places (e.g. Eurozone) with negative nominal coupons. (And aside from the yield, government bonds will tank if yields increase which is exactly what has been happening the last few weeks.)

  • Gold which is drifting lower, or moving sideways at best, and offers no current return.

  • Corporate bonds, not a bad alternative still as a “placeholder” as corporate bonds at least offer some current return (although keep in mind we are at record low spreads and yields, and rising government bond yields will eventually cause corporate bond prices to fall).

  • Real estate, a broad category that is not my area of expertise and is very location- and property-type specific (and relatively illiquid).

  • Alternative assets like cryptocurrencies, wine, art, vintage cars, hedge funds, private equity, etc.

None are obvious conviction trades that really get my juices flowing. In fact, it’s increasingly hard to shift money out of equities because of the lack of alternatives and the fear of missing out (FOMO) on the (potential) ongoing upwards trajectory of equities supported by never-ending (or so it seems) accommodative fiscal and monetary policies. In light of these dynamics, my strategy has been to reallocate within my equity portfolio to more defensive names (consumer, pharma, oil, etc) that offer a respectable dividend (current return plus some downside protection), whilst reducing (but certainly not eliminating) large tech exposure. These are subtle, gradual changes, not abrupt and emotional, effectively reducing the Beta of my portfolio. Time will tell how this works out because history shows that when sentiment turns abruptly, the proverbial “baby gets thrown out with the bathwater” and there will be nowhere to hide as far as equities. I have managed my personal equity portfolio over decades now through ups and downs, only taking money out of equities if i) I need liquidity, ii) there is a change in company circumstances, or iii) rebalancing my portfolio so no single exposure is more than 7-8% of my equity portfolio. Watching your portfolio decline in value in downcycles (think tech bubble, GFC or early pandemic days) can be very unpleasant. However, moving to cash can have severe opportunity costs if you miss the bottom, and no investors have perfect timing in this respect because it is very difficult to make decisions without emotion.


Invest for the long term, which has not been fashionable since the pandemic because stocks have risen across the board with little focus on price-to-value. High-flyers have dominated the news, many of which are unprofitable (and might never be), meme stocks have caught investors’ attention, and Twitter and Reddit threads have become the most important “in the moment” news. This will not continue. Even so, my suggestion (not an investment recommendation) is that you hold your nerve and make only minor adjustments in your equity portfolio and across other asset classes so that you can sleep at night. Staying invested will pay off so long as you are in well managed, solid companies with a history of delivering the goods, and your perspective is long-term, meaning over years or decades, not days, weeks or months.


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