Holy Wars...The Punishment Due
It was a difficult week to follow markets. The increasing escalation of the conflict in the Middle East were weighing on risk assets and adding to negative sentiment for the near term. While this region has always been volatile, as Cem Karsan will talk more about later, there seems to be a reason for other troublemakers to incentivize the more aggressive parties to act. My heart breaks for the normal people in the region, who just want to live their lives. The title was all I could think about through the week. This Megadeth song is one of the greatest heavy metal songs and was written with the Middle East and Northern Ireland in mind. I hope we in the West can find a way to help bring this version of the conflict to an end soon.
We also had yet another massive storm damage the entire southeast region of the US. Areas that you'd never think could, were impacted by a hurricane. There's also another one coming in right behind it. There were many lives lost and billions of Dollars of damage. Please consider donating to a charity to help get them resources. Below is a picture of Ashville North Carolina which is 2,000 ft plus above sea level and more than 250 miles from the beach.
Equities were mostly in what I'd call the flat territory, with the exception of Developed Europe, which was down about 3.6%, and the Hang Seng, which was up 10%. That makes a three week stretch of +5%, +13% & +10% for that index. Crude and Gasoline were up solidly in Commodities on expected disruptions to supply. Currency returns were a lot more volatile and variable that equities. Led on the downside by Bitcoin. Bonds mostly sold off with the exception of Asia High Yield. Much of this had to do with strong than expected job numbers in the US on Friday, a three day strike of dockworkers, and the Middle East fighting mentioned above.
If we zoom out a bit and take a look at these same assets for Q3 and the YTD numbers, we can see things are going quite well for equities. What a rebound for China! Crude added to its weakness in Q3, but metals had a strong quarter. Bitcoin has been volatile, but up 50% for the year. Bonds are mostly up on the major indices being led by Asian High Yield.
One last thing, let's take a look at US equities for the year via industry groups. I wanted to see the wider US market and go a level deeper than the sectors. Construction & Materials is the number one, which was a little surprising. Auto & Parts is the only negative Industry group.
Best of the Week
This was a wonderful piece. Graham Duncan lays out the game of investing quite well. He breaks it down into five levels. Level 1 is the Apprentice, who is learning the game. In level 2, they become an expert, mastering the game they've been taught. Level 3 is where a professional takes the game they were taught and fit to their own strengths and weaknesses. Graham notes that the biggest challenge here to leveling up is exposure to those one level up. I loved and have experienced the analogy he mentions from competitive swimming. I changed programs two times from ages 13 to 15 going from an above average program swimmer to Senior National qualifier. I got exposure to better coaching and better teammates. I bet it's rare for investors to get better without exposure to higher level masters. The article spends a lot of time on the Master, who is that next level up. They change the game they play as part of their own self-expression and operating at scale. This level of investor defines "success in terms of what they believe they can achieve over decades, not relative to what others are achieving at a given moment." The big point made for this level of investors is that they see the entire game and understand the participants wants and needs. Graham shared a Paul Tudor Jones story around investing in Japan. I also thought about how some of the NFL's great QBs understand the mindset of the defenders and what they're expecting. Masters also aren't locked in shorter term expectations, and can be patient enough to wait for the best opportunities. The level 4 Master also has a similar relationship with risk. The final level is the Steward, which is where they become part of the playing field itself and mentor the next generation. Graham references Warren Buffett here.
Best of the Rest
A lot of popular topics covered with Cem Karsan . It opens with Cem views on the Middle East, where he states that China, Russia, and Iran are trying to counter the power of the US. They've tried to separate Saudi Arabia and Turkey, the most eastern member of NATO, from the west. He thinks that there's a greater than 50% chance that China moves on Taiwan and that there will be dramatic consequences. Any conversation with Cem is going to include options talk. He tells us that some of the moves around COVID were exacerbated by options positioning causing more convex returns. He also closes the interview with a big statement that options are not the tail wagging the dog. They are the dog. My favorite of the whole hour plus was the Seasonality part. He gives some stats around the year end and how much flow is required to move US markets. He estimates that there are $250T in equity linked assets and that it takes $100-125B to move markets on a normal day. However, during the period between Thanksgiving and MLK day, there are so many holidays that this number goes down to about $75B. He also walks through some history for election years and the regimes around them. Essentially, election years are good for equities. One of the final points he makes is on AI. He's bullish on AI, but thinks it's going to take longer than people think, there will be some bumps along the way, and it's hard to say who the winners will be. Watch time: 70 minutes
领英推荐
Shout out to my colleague, Peter Smith for sharing this one. This article, which includes the chart below, covers the increase in probability that traders are pricing in a decrease in equities markets. Goldman's Christian Mueller-Glissmann notes that risk of an "imminent bear market is low," because the Fed put has reduced that risk, but that any correction can likely be bought. He does not, however, feel the same about credit.
Loved this trip down memory lane from Wesley Bray . I enjoyed this one because it walks through many of the changes in the interaction of institutional traders. Things are much different from when I left in 2011. Even though things were electronic then, there's much more data derived decision making today. The way traders source liquidity differs and that looks like it will change even more as AI evolves. The articles mentions that the buyside isn't really coming to the sellside for help sourcing liquidity, but more for access and consultation. Technology has become more and more important over the years and today traders are looking for it to help in the new issue area. The biggest negative of the transformation has been the deterioration of relationships.
This is something positive. This article highlights a report from Fidelity that shows more women are investing outside their employee retirement accounts. Their study surveyed over 1,500 women in July of this year. It found that 71% of women are investing in stocks, up from 60% last year. This was higher with the youngest age group, Gen Z, where 77% invested. The younger group was also slightly more aggressive with 62% thinking of their approach as moderate versus just 46% for all women. One stat that didn't surprise me was that 46% of Gen Z women got their ideas from social media. There's a lot more data on personal investing in this report.
One for the Road
This week's Brain Food from Farnam Street was a really good one. I highly recommend subscribing to this. The 'Tiny Thoughts' section was great.
There will likely be no post next week as I'm going to visit family.
Thanks for reading,