Even for one focused on ‘Covid Speed’ for the past year, the pace of change seems to be accelerating. The Covid speed model has been my go-to: the respective speeds of spread, policy response, market reaction to policy response, science, distribution (admittedly, vaccination rollout has been less than fast – the exception that proves the rule), and Fall (the deaths collapse in the UK and US).
The Covid speed of science model is global intellectual and financial capital focusing on a single issue to achieve unprecedented success: multiple effective vaccines in 10% of the normal time. I have argued this model represents a paradigm shift that will impact other pressing global challenges such as climate, cybersecurity and the melding of traditional banking, fintech, and crypto. Furthermore, I argued that investing thematically using ETFs is the best way to generate alpha given this paradigm shift.
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Summary
- The Covid speed model is a go-to for understanding the accelerating pace of change in markets.
- So far markets have discounted huge unprecedented swings in economic data globally. But there is a risk that not all the moves are transitory.
- Investors should keep in mind speed of process, focus forward and shrink the time between analysis and action.
Even for one focused on ‘Covid Speed’ for the past year, the pace of change seems to be accelerating. The Covid speed model has been my go-to: the respective speeds of spread, policy response, market reaction to policy response, science, distribution (admittedly, vaccination rollout has been less than fast – the exception that proves the rule), and Fall (the deaths collapse in the UK and US).
The Covid speed of science model is global intellectual and financial capital focusing on a single issue to achieve unprecedented success: multiple effective vaccines in 10% of the normal time. I have argued this model represents a paradigm shift that will impact other pressing global challenges such as climate, cybersecurity and the melding of traditional banking, fintech, and crypto. Furthermore, I argued that investing thematically using ETFs is the best way to generate alpha given this paradigm shift.
These global challenges combined with cheap money are spurring governments to act, reinforcing and supporting an environment of rapid change. I have written about regime shifts in virtually every facet of global macro: economics, politics, policy and markets.
Now I want to add speed of process/accelerated discounting to the discussion. Markets have always been forward-looking, discounting machines. But I believe this has sped up of late, leaving even the most seasoned investors gasping to keep up. Covid speed perhaps started the process, fintech, Bitcoin and crypto add to it together with the ubiquity of information and the impact of machine learning on investor decision making.
Exhibit A is the UST rally. After a huge back up in rates, maybe it is unsurprising that investors got caught out – and get caught out they did, with an early April Evercore survey suggesting that only 10% of respondents expected the next 25bp move in the 10-year UST to be down. Guess what? In less than two weeks, it is down close to that number.
But what about President Joe Biden’s American Jobs Plan and its $2.5tn price tag? Or the March jobs number with close to 1mn new jobs? Or the March PPI print over 4%? Or the March Retail Sales number up close to 10% y/y versus 6% consensus… Rally, rally, rally, ending with the biggest one-day UST rally in six months.
Bottom line
The market has already discounted huge, unprecedented economic numbers and not just in the US – China just reported Q1 GDP up 18% YoY. The market yawned in response, telling us that these huge numbers and inflation itself will be transitory, contrary to what the smart money believes – note the huge UST short position. While supply concerns are discussed endlessly, recall that USTs represent 65% of liquid, safe assets – so we have Japan’s latest buying equal to the most in six months.
Consequently, I have refined my testing time thesis. The time to worry will be in a few months – around the June inflation report because those numbers will not be mechanical increases from last year’s collapse but could signal the beginnings of non-transitory inflation. If I am wrong? Look to the Brazilian real as an inflation hedge – if it decisively breaks 5.5, some see a rally to 4.50 and below.
Maybe this year will be a year to sell in May – who knows what level the S&P will be at in 1-2 months. With nominal yields range trading (I continue to expect the 10-year to end 2021 around 2%) and inflation picking up, real yields will fall, supporting commodities and weakening the USD (I continue to like EMLC).
I wrote previously about just such a UST rally with attendant Nasdaq leadership and consequently risk to value-heavy portfolios– check, check and check. I noted the need for a hedge and discussed how the thematic basket embedded in the model could do the job – happy to report it is all good. Adding gold at the last update was also good.
One of the things that got me musing on this accelerated discounting process was the UST move. The second was Everett Randle’s article in Tiger Global and its velocity-focused strategy of better, faster, and cheaper, leading to a new and improved flywheel that is eating the venture capital community. Low cost, low touch allows lean teams to succeed.
What does it mean? Speed of process, focus forward, shrink the time between analysis and action. Have you changed your approach accordingly?
Jay is the founder of TPW Advisory and former top ranked head of asset allocation at Morgan Stanley.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)