Stillwater - This Week in the Markets - May 13th, 2022
Wowza! Crypto just proved Jaime Dimon and Warren Buffet right. If that doesn't sober up speculation, we don't know what will.
Let’s get this out of the way first, it’s fugly out there. Nerve rattling, white knuckle, hope and pray time in the markets, fugly. The regime changes and market rotation that started at the end of last year is now in full motion. What was once a deep blue aquifer of opportunities is now parched earth, littered with dry branches and bleached bones.
This isn’t the first time we’ve gone through moments like this, and it won’t be the last. But right now, jihad has been declared on risk assets with such vengeance, the innocents are getting taken out as well. Somebody wakeup Hawkeye and Trapper, we’ve got incoming wounded. Editor’s note: for you non-cinephiles, M.A.S.H is a great Robert Altman movie. Underrated, but great.
Like most observers, we too are looking for a reasonable roadmap for the rest of the year. Bank of America’s Michael Hartnett gave us a scenario that sounds better than most in terms of what will likely happen, yet it still has some very harsh predictions for the markets, assuming that a further 25% correction in S&P 500 from here is a ‘harsh prediction’. That would be a full roundtrip of the liquidity driven gains of the Covid 2020-2022 era.
And the carnage underneath the indexes is far worse than these charts show. We aren’t talking about regular losses here. These are complete value destructions of companies once pegged in the billions of dollars each. As they say, ‘easy come, easy go’. But some of this is simply getting out of hand. Does it mean we would be buyers of this junk? No. Just observing that there is blood in the streets.
In a chart filled obituary to Cathie Wood and her ARK Innovation fund, Bloomberg pointed out again that value was getting it’s sweet revenge against growth. And by sweet we are talking about at least a decade of outperformance by growth that just got taken away.
While not perfectly to scale, notice the correlation of this regime change to interest rates. Our only complaint, and it doesn’t mean we made a lot of money off the trade, is that the setup for this was out there starting last summer, for those interested in paying attention and remembering their history. This moment is another lesson that it does indeed repeat itself.
When you get this kind of ramp in the cost of money, specifically to buy a home, it opens all kinds of conversations about housing bubbles. Do we think one exists right now? Yes. But bubbles can be different. This isn’t a sub-prime crisis, it’s one of excessive cheap money. The kicker this time is mass migration the moves out of the office and into the garage have caused. And the cherry on the top? Tax friendly states that begged for California and New York ex-pats…and it worked.
Regular readers know that I am a third or fourth generation ex-pat of the Treasure State of Montana, depending on how you count it. My claim, and we will see if I can hold true to it, once my youngest son graduates high school in Santa Barbara in three years, I’m coming back home. My first book about mid-life crisis management will be called ‘In Search of Redemption; matching the hatch with a hedge fund journeyman.’ Tight lines.
Speaking of hedge funds, it’s time for ‘If you don’t kick a man when he is down, when are you going to kick him’ on Wall Street, as the poster child for the ride up, Chase Coleman, is now up there with Cathie Wood in terms of being the face patsies that stayed in the game too long. But that hasn’t stopped Tiger Global from putting money to work in late-stage venture companies, at least according to TechCrunch. When greedy be afraid, when afraid be greedy.
Investing in Tiger’s venture funds has been a good bet for all involved as their IRR as a group is 27% since inception. These returns are going to look a lot more interesting, and probably a little more sober, after the next round of valuation marks. That’s one of the upsides to private locked up money, you can’t login to your Schwab account and see it price daily.
Tiger also get to invest alongside all the other cool kids…
Last thing we will leave you with in terms of Chase and Tiger is this, say what you will about the big drawdown he is currently facing. But prior to this, he has had a stellar track record and is probably one of the most successful Tiger Cubs of all time. That’s why during moments like this, big money often allocates more. Reversion to the mean is a real thing.
April CPI got reported earlier this week was up big, but no more big than what was anticipated. That in and of itself should say something about the times we are living in. Because if 8.3% year over year increases in price is at all normal, this economy has some big problems.
On the subject of skyrocketing prices, it’s finally become clear to the White House that President Biden has an inflation problem on his hands. But just like George Bush didn’t jam everyone into ‘no-doc’ mortgages, Biden too can only be blamed for so much. Sophisticated people like ourselves know that, but the voting masses are swayed otherwise.
We leave you this week with a little positive news on the economy as Fortune reported teenage unemployment is at an almost 70 year low. Needless to say, that’s music to most parents’ ears. Where I live these days, it seems like the kids have their choice when it comes to where they want to take their indifferent attitudes and bad haircuts to clip a state mandated $15 and hour.
Enjoy the weekend and see you back here on Monday.