No-one knows

Welcome to the newsletter that’s politics free, but is looking forward to the movie version of 2022: Four Chancellors and a Funeral. Aim is to make this quick enough to read that you can have reasonable confidence we’ll have the same PM in Downing Street by the time you’ve finished.

Quick personal note. We welcomed our son Sacha into the world - and our family - last week, so it’s been a busy little while ?? everyone’s doing well. My wife Jules has been amazing, the NHS have been amazing as always. Fun fact, Sacha was born the day after his older brother’s birthday.

So this newsletter is brought to you with a little less sleep than normal and powered even more than usual by the Baya dark roast blend. I ship that stuff in by the kilo.

The gilts/LDI thing rumbles on, with a bit of the heat taken out of it for now. One observation from me here: I see 2 completely detached narratives in play to describe same events right now -

1. “Pensions caught up in political football between radical chancellor and BoE”

2. “Pensions built bonfire and poured on petrol while regulators watched … “

I think if you find yourself locked into either one of those narratives it might be good to engage with the other perspective a little.

One reason why the gilts thing maybe has global relevance is folks are wondering what it tells us about buyers of government bonds these days and whether governments maybe have a lot less “fiscal headroom” than they thought. I wrote a thing on how I think this has played out in the UK. The phrase “you can’t unburn toast” is doing a lot of work here (we can thank Toby Nangle for that one).

Let’s talk about the year. Stock markets are down, bond markets are down. That’s because inflation is still not yet under control, yet neither are economies looking weak enough that central banks back off interest rate rises. So fair value for stocks and bonds is lower than what it was a year ago. C’est la vie.

The inflation/rates arm wrestle is a dynamic situation subject to change on a monthly basis, at some point there’ll be a turning point, but you’ll only know after. The final key ingredient is harder to pin down - investor sentiment. Tracking peak pessimism is hard, but can be the driver of a turning point as much as hard data.

Yes, 2022 is an outlier

Every investor wants to invest at lower valuations , until it actually happens when they want to go back to the peak of the boom. (Morgan Housel).

Josh Brown says look at the Investor opportunity index - just invert the stockmarket “line go down” chart and call it the Opportunity index, which is now hitting 2-year highs. It’s a fair point , most investors with long time horizons and contributions to invest ought to look at it this way.

Even longtime pessimists GMO are now forecasting solidly positive real returns from stocks (their forecasting track record over the last decade isn’t the best though).

Yes but… **earnings** … **recession** you say? And broadly speaking “yes”: the worry is that company profits start to fall (they haven’t so far - we’re part way through latest reporting) prompting another leg down in stocks. It could sure happen, but as usual there’s a lot of consensus thinking out there kicking around pretending to be useful insight. If it’s consensus, it’s probably in the price. When the economists at Bloomberg increased their recession forecast to 100% , that sounds like bad news. But is it going from a risk to in the price.

Here’s my usual favourite stock and bond market charts.

Quants FTW, for now

As investors review Q3 performance there’s going to be a lot of “line go down” charts kicking around. Are there any of the more common “line go up” charts right now?

Commodities are up, but all of that came in first couple months of the year and funds are generally flat or down since March. Insurance linked securities were having an ok year until Hurricane Ian. A common index tracking the performance of ILS funds is now down -6% for the year.

REITS not so much, they do not love higher rates. Listed infra has held up a touch better than broad stock markets but still down.

Quants are really the one area having a decent time of it. Trend following - has done ok to very good - AQR’s fund is up 40% ytd. Other products are available. Style Premia funds have had a good year - up c18% per AQR (although the 5 year numbers don’t look so hot). So your liquid alts are shaping up pretty well.

3 things I’m reading

1. Kyla Scanlon’s newsletter (link) - go for the colourful metaphors stay for the astute & refreshing macro commentary

The TL;DR of this newsletter is that the Fed is the main gardener of markets and the economy, and they are going to carve faces into the pumpkins at any cost to scare away the ghost of inflation

Liquidity vs price

And also - folks complain about liquidity but do they really mean the price is wrong?

“On Oct 31, the liquidity for pumpkins is very high. But on Nov 1, the market liquidity for pumpkins goes to zero. I'm not going to step in and try to fix the pumpkin market"

2. I DON’T KNOW (and don’t be afraid to say it). Martha lane fox writes in the Times.

Most of the time no-one knows, can we just admit it? Sometimes it’s a lot more authentic and believable just to say it. But even if we rationally know that, how often do we hear respected and otherwise smart people either sidestepping saying it with some blustery quip, or limping through some kind of made up answer (cringe) ? See it all the time.

At times like this, don’t be scared to say ‘I don’t know’

3. Joe Wiggins new book is out soon: The intelligent Fund Investor (order here)

And I have an advance copy, Joe will be appearing on our podcast soon ??

No spoilers here but, you need to get yourself a copy asap.

The first bit of genius here is in the third word of the title - “Fund”.

Yes, and - so much investment gumph still manages to frame investors as stockpickers or market timers, when in reality almost ALL investors, even the largest institutions are FUND PICKERS. I really don’t get why more investing literature doesn’t approach the whole thing more from this perspective. I think it might even be THE biggest misconception about investing. We’re all fund pickers really, and while some of the same principles apply as to picking stocks, a lot don’t. And that’s what Joe’s getting at.

Two things I’m listening to

1. Annie Duke podcast with Meb Faber , she’s talking her new book - QUIT (web | apple)

Quitting has a bad rep, is that unfair? think quit vs grit. Annie asks: should investors actually be great quitters?

Generally we can speed up decision making bcos we can quit, but we then don’t quit , why?

Quitting has a finality to it . Crystallises a loss on paper.

And, an illusion of progress stops us quitting

So, what can we do?

We can think more about opportunity costs - the expected benefit of the route not taken (which you can get back to through quitting current route)

Set “kill criteria” in advance. The reasons you’d stop doing something. VERY relevant to investors, eg stop loss for stocks, criteria for sacking manager (don’t be in it , do whatever you can to get to the outside view )

2. The Economist Asks - Kevin Rudd on where Xi Jingping will take China now . (Web | apple)

there’s momentous political events taking place right now outside the UK too (though I daresay less chance of a change in leadership)- It’s the Chinese Communist party congress.

the Economist has been doing a decent job of covering the build-up to this with an 8-part series on Xi Jingping and a special report on the World China Wants.

And this matters because … I’ve said before I think one of the biggest questions investors face isn’t inflation or the Fed, it’s if and how to invest in China. So i think global investors do need to at least be aware of the context here. We’ve got Jason Hsu, an expert on this, coming on the podcast in not too long to discuss, so keep a eye out for that one.

Herb garden hasn’t been priority for obvious reasons :-) looks like it’s surviving, will post an update soon.

I’ll just leave this one here. A LinkedIn poll I ran at the start of the year on where gilt yields would end 2022 … so how do you feel about forecasts

Lots to ponder this week, I’ll leave you with little Sacha’s thinking face. Now go check who the prime minister is.