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Despite equity markets climbing up in the past month or so and a rise in long-dated bond yields and steeper yield curves, the overall sentiment in this week’s blogs is negative. Fund managers fear a recession, the credit boom might be a predictor of an equity crash and to top it up, we have the 30 most extreme risks for the year. At least Scott Sumner says bubbles are fiction.
The Bubble in Phony Bubble Calls (EconLib) Scott Sumner claims bubbles don’t exist yet there are constant ungrounded warnings of them across the media. Canada’s housing market never crashed despite years of scary headlines. [Bullish stocks]
Extreme Risks 2019 (Thinking Ahead Institute) Comprehensive report that lists 30 extreme risks ranging from anarchy to hyperinflation to tech singularity. [Bullish volatility]
Year-End Fixed Income Survey 2019 (Russell Investments) Survey of fund managers finds that bond managers expect only one more Fed cut, while credit managers fear a US recession and FX managers are bearish euro [Bullish rates, bearish credit]
The Leverage Factor: Credit Cycles and Asset Returns (Davis, Taylor) Credit boom periods tend to be followed by equity return underperformance in the near future, thus credit growth signals can be useful input in asset allocation. [Bearish equities]
This is another tough week for big name start-ups and their major stakeholders. Are the anticipated bubbles around ‘fake’ tech start-ups finally going to bust? The outlook for the overall market is still heavily affected by uncertainties and a lack of faith, but maybe there’s an unexpected silver lining lying in the increased interest around ESG or green investing.
Exorcising Phantom FDI (VOX EU) This paper proposes a clever technique to identify the true investors behind FDI data. US companies actually account for 10% of FDI into China, rather than the officially reported 1%. Meanwhile, the EU accounts for around 30% of FDI into the UK, rather than the official 40%. [Bullish US large-cap, bullish GBP]
Alternative Proteins and the Future of Meat (McKinsey) Across different economies, health is the common driver of demand for alternative proteins. Alternative protein is a niche market, but McKinsey believes it is sizeable enough to disrupt the food industry in the future. [Bullish alt meat markets]
10 Key Investor Takeaways From the 2019 Annual Meetings of the IMF and World Bank (PIMCO) Geopolitical uncertainties such as the 2020 presidential election and the US-China trade tension were the biggest concerns. Meanwhile, ESG investing has become the trendy topic as a result of increased awareness of climate changes. [Bullish ESG stocks]
Unsurprisingly, this week’s woes around Adam Neumann and his WeWork have been all the hype, raising some worries around a bubble forming. No need to be too concerned, however, as we don’t see a dot-com style crash on the horizon – private markets are learning from their mistakes.
The Not-Com Bubble is Popping (The Atlantic) Sees the recent tech company IPO failures are the exact opposite of the dot-com bubble. Now public investors do the hosing instead of getting hosed. That said, true tech companies, especially software ones, are showing little sign of crisis. Suggests shorting ‘fake’ tech companies and going long ‘true’ tech companies.
Airbnb’s WeWork Problem (Tech Crunch) Wall Street might have greater patience with Airbnb despite its massive Q1 2019 loss. Airbnb has more capital in the bank than it’s raised in the previous 11 years, some “cumulatively” positive free cash flows, and positive EBITDA for two consecutive years. Bullish AirBnB view.
How a Weapons Dollar Could Backfire (Project Syndicate) The dominance of the dollar is at risk. Many countries are looking to non-dollar currencies and alternative payment mechanisms to protect themselves from the Trump administration’s exploitation of the currency’s global supremacy. Bearish dollar argument.
Holding a good old diversified equity and bond portfolio won’t make the cut any longer – at least according to BAML. ETFs are hotter than ever and sweeping away active investing; but watch out for gig economy companies. They are ignoring the law.
A Eulogy for the 60/40 Portfolio (A Wealth of Common Sense) A tongue-in-cheek “obituary” piece to celebrate the life and recent death of the long-standing 60/40 investment strategy, declared obsolete by BAML recently. Despite it’s ever-healthy performance and simplicity, it’s now largely replaced by ETF trackers and rebalancing.
Corporate America’s Second War With the Rule of Law (Wired) In-depth historical perspective on whymore and more gig economy (and other) firms are opting to disobey the rule of law. Think Uber refusing the order to start formerly employing its drivers and Facebook misusing data. Predicts a looming “techlash” by public servants.
Optimists and Pessimists in the Housing Market (New York Fed) Extrapolation of beliefs or i.e. assuming that a rising asset price will continue rising can be a source of market bubbles. Analysis shows that optimists on future house prices extrapolate twice as much as the median household and artificially influence prices.
As we discussed more widely in our latest exclusives letter, politics and markets are becoming more and more interlinked. The impact of the impeachment process, Brexit and global unrest are likely to shake up indexes.
Would the Market Care if the President Was Impeached? (A Wealth of Common Sense) Looks at last two US President Impeachments. For Nixon, markets were already slumping before the proceedings and for Clinton, indexes barely took any notice.
Momentum Under Fire as Confidence Softens (Variant Perception) Momentum in stocks is highly correlated with consumer confidence. The latter is falling, so weakness in the momentum factor.
SP 500 “Earnings Yield” Back to 6% with New Quarter(Trinity Asset Management)Looks at upside surprise factors for the S&P 500 . Growth estimates are very subdued, so the possibility of an upside surprise looms.
Following WeWork’s sky-high valuation and its consequent IPO break-down, the market seems to be waking up to the unjustified unicorn rush. Where will all the free capital pour into now?
IPOs Have Been Crushed in 2019. Why That’s Actually Good News for Stocks.(Barron’s) Amidst the many IPO disappointments recently, investors have become more discriminating, and that’s good for everyone. Most recently, WeWork has caused abrupt sobering up and return to focus on fundamentals and a credible path to profitability. Great piece dissecting all the techy unicorns.
Softbank’s Vision Fund is Just Too Damned Big(Barry Ritholtz) Softbank isn’t about diversification – it’s making a few, big bets, often on more established companies. It’s flooding ventures with capital, but is it paying enough attention to fundamentals? Or simply driving a race to bubble?
Are CLOs the New CDOs? (Conversable Economist) Last week we shed light on Collateralised Loan Obligations, which have very similar structure to CDOs but in this case, the debts are corporate loans rather than subprime mortgages. This is another good analysis on why they have now reached sizes close to those of CDOs in 2008. And why we shouldn’t worry too much yet but keep an eye on the space.
The Great Fee War of the 2010s (A Wealth of Common Sense) Fund fees get lower by the year and access to instruments gets higher for individual investors. Investment firms are going to have difficult business decisions to make in the years ahead as their margins slowly erode and investor behaviour might get more reckless.
Is the US Dollar Fading as the World’s Dominant Currency? (Conversable Economist) Runs through FX reserve, OTC trading and SWIFT data and finds that dollar remains the dominant currency.
Structured Finance Then and Now: A Comparison of CDOs and CLOs (BIS) Just as CDO’s declined after 2008, Collateralised Loan Obligations (CLOs), which are pools of high risk loans, have exploded in popularity. They are less complex and more transparent than CDOs, but could create systemic risk through prime brokerage channels and liquidity risk.
Business Cycles and Currency Returns (Colacito, Riddiough, Sarno) Academic paper finds buying currencies of strong economies and selling currencies of weak economies delivers high investment returns.
Modelling Yields at the Lower Bound Through Regime Shifts (BIS) Authors build an interest rate forecasting model that switches between a “normal” interest rate regime and “lower bound” regime. This better predicts recent rates dynamics and outperforms “shadow rate” models.
Financial Market Risk Perceptions and the Macroeconomy (Harvard) Authors build a risk perceptions measure based on the price of volatile stocks minus the price of low-volatility stocks. When risk perceptions are high then bonds outperform.
Recent market behaviour shows how much we just can’t predict – we have a bunch of articles that play on this theme whether on timing market crashes, day trading or the Fed’s ability to control rates. We also find cracks in some of the darling investment themes of the day – platforms. They’re being disrupted one-by-one.
Yes, the Stock Market is Going to Crash (A Wealth Of Common Sense) We know markets will crash, but the problem is no-one knows when. Metrics like valuations and yield gave poor signals in the 1940s, mid-1970s and early 1980s. Moreover, we could have a long stretch like 1938-1972 without a major crash (as opposed to a 20% correction).
As Long as Trump Tweets His Way Randomly through the Trade War, the Dollar Will Stay Strong (Econbrowser) Trump tweets = more trade uncertainty = dollar rallies on uncertainty
Repo Chaos Tests Wall Street Confidence in NY Fed’s Williams (Reuters) John Williams who runs the NY Fed has lost some key staff recently, which have contributed to this week’s repo debacle. Some are questioning his position.
Day Trading for a Living? (Chague, De Losso, Giovannetti) Academic paper crunch the numbers on day traders in Brazil and finds 97% lost money. They find no evidence that day traders learn with experience.
Platforms vs Verticals and the Next Great Unbundling (Andreessen Horowitz) Excellent piece that argues broad platforms like eBay, LinkedIn and YouTube risk being disrupted by narrow platforms that target narrow verticals like StubHub, Hired, and TikTok.
Explaining the Demise of Value Investing (Lev and Srivastava, academic paper) Clever paper that captures internally-generated intangible asset growth and adds back to book value. This improves the returns of value strategies
More on Low Long-Term Interest Rates (The Grumpy Economist) Argues that stable inflation should lead to an inverted yield curve much like the late 19th century.
Fat Tails, But Which Way? Up or Down? (Mish Talk) Makes the case that we may not see extreme market moves, but rather choppy declines.
A Crash Course On the Euro Crisis (Brunnermeier, Princeton) Excellent educational resources that runs through various factors behind financial crises from capital inflows to shadow banking.
The Best and Worst Case Scenarios for Bonds from Here (A Wealth Of Common Sense) Shows a strong correlation between starting bond yields and subsequent 5y returns and so although bonds have performed well recently – their long-term performance is likely to be poor.
Asset Allocation Outlook Midyear Update – Easing Into Slowing Growth (PIMCO, 9 min read) Equities: overweight US, underweight Europe, neutral the rest. Rates: long US and EM rates and linkers, neutral rest. Credit: long securitised (MBS) and EM, short IG and HY. FX: Short USD and EUR, long JPY and EM.
“Big Short” Investor Michael Burry Explains How Index Funds Will Trigger The Next Crash (Zero Hedge, 5 min read) Argues passive funds are removing price discovery from equity markets and over-promising liquidity. Likes small caps (under-represented in passive funds) and Japan stocks (owned by BoJ)
From FOMO to FONIR (Dr Ed’s Blog, 3 min read) Ed Yardeni reports back from recent client meetings and finds investors are favouring stocks on FONIR (fear of negative interest rates)
A Perspective on Secular Bull and Bear Markets (Jill Mislinkski, 4 min read) Looks at secular bull and bear markets in US equities. Finds that secular bear years make up 40% of years, that current rally looks extended and the ratio of peak earners to elderly population is turning down. Bearish stocks.
Fed Easing Sees Defensive Stocks Come Out on Top (Variant Perception, 1 min read) Over the last five Fed easing cycles consumer staples, healthcare and energy provide the highest average total return above the index one year after the Fed’s first cut (see chart). Financials and utilities the worst.