Impressive, makes sense... actually your explanation clarifies why MARKETS MAKE NO SENSE ANYMORE...LOL... Loading up the truck on LONG DATED PUTS OF LEVERAGED ETFs Now... Lets rock this boat
I would be careful - today is a good example of bailout capitalism at work. LME looked to be in trouble, and they managed to get the nickel price down. China looked in trouble, and government has stepped in. Both had leverage that was about to zero financial players - and got bailed out. My biggest surprise is how little central banks care about food inflation - a huge tax on the lowest earners. Be careful out there.
Hi Russell. Just wanted to say thank you for this. I'm a retail investor (without a finance background!) and I have been struggling to understand many aspects of the market but especially the comparative lack of stress in equity indices and credit spreads having regard to the macro environment. Things seem narrative driven at the moment and it's very confusing. The 'why' has been a nagging question for me.
Most managers have struggled with markets I suspect. How long can bond yields stay below inflation? How long can governments keep expanding their reach? How much further can income inequality rise? The best performing managers ignore these questions - but I can't shake the feeling we are at some turning point, where these questions do become important again. But full disclosure - I have been wrong before, and will likely be right again. Good luck out there. Russell
Thanks for sharing! It is a very interesting way of looking at things. Do you see the "flaws" in the clearing house model applying fairly equally across equities and credit? The Russian/Mexican cds case seems like a great example of markets failing to discount any event risk before hand, but I wonder about the SoftBank vs Nasdaq example and the lessons to be drawn. Post February 2021, a lot of the speculative darlings had a rough go of it (e.g. SaaS, SPACs, Goldman's index of unprofitable tech). If memory serves, about 40% of Nasdaq components were down 50%+ from 52 week highs at the beginning of January 2022, which is roughly in line with Softbank in terms of timing and scale. So in this case, is it fair to say that market risk was being more consistently reflected at the individual stock level but perhaps not the index level, which isn't necessarily a result of the clearing house approach to pricing risk?
In some ways we are talking about the same thing. Smaller tech names were pointing to weakness in tech well in advance of the weakness in Nasdaq. You could have looked at Chinese tech as well. The point for me is that you should not expect everything to reprice instantaneously anymore. One area can move independently of others. This has been a feature since 2016 in my view. Now I understand why... i think this is true in credit and equities
HY market has a lot of exposure to energy stack that would actually benefit from high oil prices. These companies were starved of capital but are printing FCF now. ESG means they will starve from capital in the future too. So debt payments should not only be manageable but perhaps a good add to a HY fund now. Are you suggesting going short credit or equity here?
I am not sure how much is still energy in HY. Looking at HYG, I only see 12% total exposure to energy. The way I look at it, buybacks have made credit and equity the same trade.
I see similar numbers in cash and CDX (14%). and they contribute about 50bps to the 5Y spread levels. My point is, the rest of the index might be a good candidate for your macro argument, but commodities and especially energy being front and center now, it is hard to see energy spreads widening more. My guess is they actually will be a drag and tighten to some extent.
Fantastic presentation, Russell -- I can see the excitement in your demeanor come through. Agree with your points. Keep it up -- many of us will pay for this content!
Impressive, makes sense... actually your explanation clarifies why MARKETS MAKE NO SENSE ANYMORE...LOL... Loading up the truck on LONG DATED PUTS OF LEVERAGED ETFs Now... Lets rock this boat
I would be careful - today is a good example of bailout capitalism at work. LME looked to be in trouble, and they managed to get the nickel price down. China looked in trouble, and government has stepped in. Both had leverage that was about to zero financial players - and got bailed out. My biggest surprise is how little central banks care about food inflation - a huge tax on the lowest earners. Be careful out there.
Excellent observation.
excellent as always Russell
Hi Russell. Just wanted to say thank you for this. I'm a retail investor (without a finance background!) and I have been struggling to understand many aspects of the market but especially the comparative lack of stress in equity indices and credit spreads having regard to the macro environment. Things seem narrative driven at the moment and it's very confusing. The 'why' has been a nagging question for me.
Most managers have struggled with markets I suspect. How long can bond yields stay below inflation? How long can governments keep expanding their reach? How much further can income inequality rise? The best performing managers ignore these questions - but I can't shake the feeling we are at some turning point, where these questions do become important again. But full disclosure - I have been wrong before, and will likely be right again. Good luck out there. Russell
Thanks for sharing! It is a very interesting way of looking at things. Do you see the "flaws" in the clearing house model applying fairly equally across equities and credit? The Russian/Mexican cds case seems like a great example of markets failing to discount any event risk before hand, but I wonder about the SoftBank vs Nasdaq example and the lessons to be drawn. Post February 2021, a lot of the speculative darlings had a rough go of it (e.g. SaaS, SPACs, Goldman's index of unprofitable tech). If memory serves, about 40% of Nasdaq components were down 50%+ from 52 week highs at the beginning of January 2022, which is roughly in line with Softbank in terms of timing and scale. So in this case, is it fair to say that market risk was being more consistently reflected at the individual stock level but perhaps not the index level, which isn't necessarily a result of the clearing house approach to pricing risk?
In some ways we are talking about the same thing. Smaller tech names were pointing to weakness in tech well in advance of the weakness in Nasdaq. You could have looked at Chinese tech as well. The point for me is that you should not expect everything to reprice instantaneously anymore. One area can move independently of others. This has been a feature since 2016 in my view. Now I understand why... i think this is true in credit and equities
HY market has a lot of exposure to energy stack that would actually benefit from high oil prices. These companies were starved of capital but are printing FCF now. ESG means they will starve from capital in the future too. So debt payments should not only be manageable but perhaps a good add to a HY fund now. Are you suggesting going short credit or equity here?
I am not sure how much is still energy in HY. Looking at HYG, I only see 12% total exposure to energy. The way I look at it, buybacks have made credit and equity the same trade.
I see similar numbers in cash and CDX (14%). and they contribute about 50bps to the 5Y spread levels. My point is, the rest of the index might be a good candidate for your macro argument, but commodities and especially energy being front and center now, it is hard to see energy spreads widening more. My guess is they actually will be a drag and tighten to some extent.
Fantastic presentation, Russell -- I can see the excitement in your demeanor come through. Agree with your points. Keep it up -- many of us will pay for this content!