Spring sprung ??????

Hi folks, especially all those people off on easter vacations - enjoy!

It's been a cracking week for sunshine here in the UK, amiright? But in my household, it's all about the Easter bunnies and egg-citement over how much chocolate is too much for a toddler. We've been hopping over to the local farm shop for some lambing season action... #cute

And don't even get me started on the Easter egg hunt. I'm under some serious pressure to outdo last year's eggstravaganza, but I fear I may have set the bar too high.

Well today has a whole load of "friday" energy doesn't it so let's get right on with it:

Billions wiped onto stocks is the headline you didn’t see these last couple weeks as we've raced through the end of Q1. Stocks have surged higher as things seem to be turning sunny side up, with the banking system worries ultimately going down like a Cadbury's Creme Egg. Inflation is also on the decline, interest rates are peaking, wage growth falling and even the stubbornly tight US labour market is showing signs of going back to normal. So all in all, things are looking pretty sweet. Even an OPEC production cut over the weekend couldn't scramble the markets too much.

Stocks are up 4-7% YTD, US 10 year rates are on the lows for the year so your bond funds are also up. Q1 numbers look solid despite the rollercoaster.

One snag is that markets are now expecting a quite different path of rates than the Fed is talking about (more cuts), which will need to get resolved somehow, and stock markets are not discounting much of an earnings slowdown this year.

We've got a little hiatus now until the next round of central bank meetings in May at which point folks will start speculating idly and then furiously about rates decisions and wording choices. For now, everyone’s favourite market data viz underlines how those mega-cap tech/comms names have driven the 2023 rally. Hello Meta, hello Tesla, hello Nvidia.

JP Morgan’s Guide to markets is out for end March - here’s the scores on the doors for US stock market earnings in 2022: a 5% fall (revenues up but margins squashed). Expectations are for a quick return to earnings growth in 2023 and beyond.

One dilemma for allocators is the valuation gulf between the US and everywhere else, which seems to be pretty much as large as ever. One neat chart that JP have added to the pack sheds some light on why: earnings per share in the US have grown vastly faster than anywhere else over the last decade. Many other major markets like EM and Europe have gone sideways whereas the US has doubled. So far this year non-US stocks are a little ahead of the US.

Some folks are worrying about commercial real estate as a next leg of a market downturn. And you can see why as data is showing that lower footfall and more WFH is working its way through into lower rents and higher vacancies. Is it already priced though? Real estate had a rough 2022 and hasn’t bounced anywhere near as much as other sectors in 2023. Even private assets have seen decent size mark downs in price.

The conundrum for allocators though is that while expected returns in real assets may have risen, they probably haven’t risen by as much as liquid market stocks and bonds. And maybe there’s more pain ahead.

3 things I'm reading

1. Michael Mauboussin, Morgan Stanley Counterpoint Global Insights - Confidence [link]

Ahem, can we talk confidence?

The bottom line - I think it’s an understudied area, relative to, say, the energy that gets put into estimating things to the decimal place (hello, expected returns). What’s your actual confidence in any of your numbers?

Some managers do do this well, but it’s not universal and often times the problem is over confidence (as overconfidence sells, is more likely to get you an allocation, or to get a decision to fall your way).

Explained - firstly what the authors are doing here is separating the concept of probability from confidence. For example you might say an election outcome is 50/50 either because you have a lot of data that shows the race is neck and neck or because you have no information at all, and those things are not the same.

The authors suggest 3 dimensions to start assessing confidence:

• Availability of data to inform conclusion (facts and opinion are both important, but facts should carry more weight in assessing confidence)
• Range of other reasonable forecasts (might reasonable people give different answers)
• Robustness to change in input parameters (you should be more confident if new evidence is unlikely to change)

A short piece but shining some light on an important area and hopefully more to come.

2. Did social media cause the banking panic? [ The Economist -link].

Or, put another way, do new technologies increase volatility?

The economist looks briefly at technological innovations of previous eras such as the telegraph in the 1870s, tickertape and electronic trading of the 1980’s noting that while folks worried at the time about exacerbating panics they probably made markets more efficient by allowing faster dissemination of information, less discrepancies and may have reduced volatility. Either way, the debate about tech influencing markets is as old as time.

Did social media have a role in the recent bank issues? Almost certainly but another way of looking at it is that bank runs are a social phenomenon as old as banking itself, so in some ways there is nothing new.

Thought bubble - I think it’s always tempting to think that “nowadays things are more volatile”, as volatility always feels worse to live through than see on a chart. But long term datasets don’t really support volatility having risen - eg the Stocks, bonds, bills database shows decade vols really pretty stable over the last half century. And stock market volatility is what it is - it’s what you get paid for.

I do think one interesting area is how social-media driven market dynamics (eg around meme-stocks) are disrupting some of the commonly-held behavioural phenomena/factors such as value investing, where they probably act to exacerbate the anomaly, but paradoxically make it harder to profit from by leading to larger and more extreme swings against the usual anomaly which active investors find it hard to hold onto unless they are carefully calibrated for the new reality.

As Jason Hsu said when we spoke to him - “the underappreciated thing about investing is that markets can stay crazy longer than you can maintain conviction”.

3. Notes from Oaktree newsletters (link)

This little mini-digest is extraordinarily high signal to noise. Takeaways

• Howard Marks emphasises the reward of market calls at extremes. We aren’t at one, so not a time for high conviction
• The Oaktree distressed team note a 10x increase in names in their distressed opportunity set. Higher interest rates are really feeding through to companies. Not specific areas and firms, it’s across the board
• The covid-era opportunity for distressed was very short-lived, this one could be longer
• Emerging markets had a bad year in 2022 but strangely aren’t priced at bear-market spread levels and a lot still needs to go right for them
• High yield at 9% yields means it’s “cheap as normal” rather than a screaming buy
• The way direct lending is re-pricing is making it very attractive, and private equity firms have a lot of borrowing to do

2 things I’m listening to

1. David Einhorn on Invest Like the Best (web | apple) - A great interview with a lot more humility than I was expecting and a really interesting picture on what he sees as the decline of the fundamental analyst
2. Charles Ellis A Losers Game on Rational Reminder (web | apple)

Legendary author and founder of Greenwich Associates. Ellis is famous for describing active management as a “losers game”. Takeaways -

• He thinks money management professionals have gone from 5k worldwide in the ‘60’s to over 2 million today, radically altering markets
• There are still plenty of pitfalls in indexing though: choosing the right index and resisting the urge to constantly change index to chase performance
• It’s common to identify a potential source of return and pay all of those economics back to managers
• Active managers are almost always smart hardworking and well-meaning. Doesn’t mean they will outperform

Bonus content: Brendan Frasier - on asking better questions (web | apple). This (long) episode was a real treat for anyone who has reflected on the art of interviewing and asking questions that get good answers.

Grab bag

Best April fools? This from Gymbox was pretty good ("South West Gains" - actually don't mind the idea?!)

and from Duolingo. Honourable mention to colleague Alex Waite who scored with this one.

Succession is back for season 4 and I’m here for it! Popcorn time as everyone’s favourite most-dislikable family is back.

Bloomberg GPT is now gonna be a thing . Is this the practial future of AI - domain-specific GPT models (actuary-GPT, lawyer-GPT ?).

My longtime podcast co-host Mary was back from her 3 month travels recently (central and south America) so we recorded a quick welcome back episode which ranged from best activities, best food to reflections on journalling, life, purpose and the impact of travel (web | apple).

It’s hello 4-day weeks here in the UK as we’re looking at a run of bank holidays through April and May, which reminds me of that 4-day workweek trial we spoke about a few weeks ago. Got me thinking on whether hours worked correlate with country-level wealth? Here’s stats from Our World in Data, some interesting patterns here.

Have a GREAT easter!