Bending Bents

So, let’s put today in perspective.

As for markets, suffice to say that today’s rally across global equities (but not all sectors) and precious metals to no small degree represented a panicky unwind of crowded hedges heading into the much-anticipated mid-term election.

Of course we can get into chapter and verse on how outcomes such as yesterday’s have historically been nothing but bullish on a 6-12 month horizon, but we’ll leave that to others, or to your own queries with the likes of ChatGPT.

As for the potentially consequential matters at hand, yes, the political calculus will be different going forward. 

Quote of the Day (and our bottom line)

The following quote also rings true when it comes to investing:

"...in wars and policy making, generals and policy makers fight the last war, not the war of the future."

--Dirk Willer, Alex Saunders; Trading Global Macro Markets

It's been my experience over these past 4+ decades that investors and money managers in general tend to presume that the past is always prologue.

Now, that said, I do appreciate the Santayana quote “if you don’t remember the past you’re bound to repeat it.” However, more than just understanding what happened in the past, we have to understand the context, the macro environment, the policy incentives and constraints, etc., under which a given event(s) occurred to have any chance of placing legitimate odds on present day outcomes.

On that note, as I keep stressing, the present and go-forward macro regime is vastly different than the one that has occurred over the past four decades... Which, indeed, demands that we (PWA) forever identify where we are in the business and capital cycles, as well as in the slower moving macro and policy regimes that meander through time.

While our core allocation -- remaining notably diversified -- effectively captures our long-term thesis, we nevertheless expect quite the bumpy ride heading into 2027.

Bottom line:  Our patience (remaining non-reactive to short-term swings), while painstakingly assessing, and reflecting, long-term conditions and setups, is essential to our clients' long-term investment success.

Your Weekly Update, Dialing Down Risk A Bit, And Let's Talk Some More About Gold

In this weekend's video update I talk about dialing back risk a bit, opportunity at the margin, why gold's been a real drag of late and why the long-term setup remains constructive. 

Morning Note

As I've expressed on recent video commentaries and in client meetings, the core adjustments we've made over the past several weeks have been primarily focused on adding to our defensive sector exposure (read consumer staples), raising our cash level and increasing the support mechanism expressed by our use of SP500 options... I.e., dialing back the portfolio's volatility a bit for what should be obvious reasons.

Now, you wouldn't necessarily know it by today's action. 

Although, that said, as I type we're capturing just over half of the SP500's decline, and only 31% of the Nasdaq's hit... Thing is, those two indices are down 1.87% and 3.70% respectively.. So, yes, we're definitely feeling it today.

The relief we're getting is coming from our increased cash level, healthcare, staples and of course our SP500 put options... But, oddly enough, gold is not providing the support one might anticipate given the action we're seeing across all asset classes; which has been largely the case the past several weeks.

I believe the following does a good job capturing what underlies these short-term dynamics, while putting it all in its proper long-term context: 

Quick Note on The Fed

There'll be no rate hike announced after today's Fed meeting, so it's all about the statement and the press conference.

As I've expressed herein of late, while the Fed has to sound tough on inflation, the short-term nature of the problem is largely (there are other factors) about passing-through-higher-prices-to-the-consumer due to a supply shock (read oil), or perhaps the risk of a further supply shock that's presently priced into everything petrol.

So, at first blush, one would think that a hawkish Warsh would be bullish for the dollar, net-bearish for equities, as well as precious metals and other commodities.

Notice I didn't say net-bearish for bonds... Not that it won't be, likely may, but, frankly, it perhaps shouldn't be... Meaning, an aggressive Fed looking to tighten financial conditions into a supply shock is uber-dangerous from a broader economic perspective... Which, all else equal, could very well have investors bidding up (yields down) the long-end of the yield curve out of fear that the Fed will live up to its historical rep as the ultimate expansion killer.

Now, that said, our longer-term position remains that -- while indeed there may be yet another hike or two on the near-term horizon -- the structural playbook is to suppress at least the short-end of the curve (where the treasury will be doing the bulk of its borrowing) and to inflate the economy's way out of the daunting headline debt/GDP ratio over multiple years going forward.

Let's face it, fiscal restraint is in no way whatsoever on the cards, whoever wins in 2028!

As for next week’s midterms, a split Washington is the likeliest outcome, and gridlock cuts both ways: no new stimulus, but no austerity either... The deficit is on autopilot (entitlements plus a rising interest bill), so nothing coming out of Congress changes the math... Expect debt-ceiling and funding brinkmanship in 2027 instead.

The Setups That Matter, Long-Term -- And Your Weekly Macro Roundup

This weekend's video commentary will take more than one NFL halftime, start to finish, but, clients, this is absolutely one you'll want to take in (start to finish).

Quick Note

One more quick commentary before this weekend's macro assessment.

Suffice to say that markets (from bonds to precious metals) are reflecting notable uncertainty... My reference yesterday to the economically-defensives (staples, healthcare, long-term treasuries) rallying against very negative action in virtually all other corners, has flipped on its head... I.e., yesterday's winners are -- along with virtually everything save for the energy-related space and, ironically, tech [flat after yesterday's drubbing] -- today's losers... Gold glimmered a bit at the open, but even it has rolled over (down 1%) as I type.

Of course, any or all of the above, given the present environment, may have reversed by the time you receive this.

So how to think about all this on an October Friday? As I chatted to our team this morning, I am macro-ambiguous in the very short-term... Meaning, there are sufficient macro and market cross-currents -- which I know I don't need to list for you right here -- to make the short-term trader (that's not us, btw) utterly dizzy, I'm certain.

But, like I said yesterday:

"...while we forever assess short-term dynamics (separating signal from noise) as we test our theses (and as we determine whether any tactical and/or additional hedging action makes sense), make no mistake, our strategy will always reflect our longer-term structural view on global macro realities."

Stay tuned….