The Inevitability of It All

Just one more quick note whilst I'm away from the office.

As you've noticed, November has delivered quite the bumpy ride for markets... The mid-term-election-hedging unwind that sent stocks to the moon on Wednesday, the re-hedging of the risk that the AI spending craze may be ending sooner than the spenders themselves anticipate on Thursday, call it a relative breather on Friday, a rip your face off rally yesterday on prospects for a peace agreement with Iran, and a noticeable selloff today on a hot CPI print.

So, yeah, I'm not kidding when I say we should expect a plenty-bumpy ride going forward.

For this morning, let's breathe a bit, then let’s zoom out and think about it all the way we, frankly, should always be thinking about it all:

The thing about investing in financial markets -- well, I should say, the thingS that lead to successful investing in financial markets -- are as follows:

1. Having a time horizon that allows short-term players to do their short-term thing to asset prices, without reacting.

2. Having the perspective that allows you to calmly allow/observe number one... I.e., being comfortable with the inevitability of it all.

3. Having a working thesis for each position you hold.

4. Diversifying your portfolio in a manner that compliments your longer-term global/macro thesis while maintaining positions that don't always agree with one another, even over longer stretches... I.e., suffice to say that having a bunch of positions that all capture the same theme doesn't offer a lick of diversification.

5. Being a passionate student of the longer-term structural societal trends that dictate go-forward regulatory, spending and policy decisions... I.e., those constraints and incentives I keep talking about.

6. Forever maintaining an open/humble mind... I.e., embracing the fact that, as hard as you may study/try, you simply can't know the future... Which of course keeps you humble, and therefore focused on anything/everything that ultimately matters.

It's times like these when I'm compelled to take you above the fray, or, at times, the frenzy, and into the bigger picture thinking that -- over time -- makes all the difference!

I'll be back at it this weekend... So there'll be a deeper macro dive/update hitting your inbox before Monday.

Have a great rest of your week!

Marty

Your Nerves As We Meander Through This "Plenty Bumpy" Stretch

Yesterday I said I'll leave the historical post-mid-term-election equity market performance to others... Today I'm thinking I'll go ahead and offer some of that up, but I'll narrow it to what are the most-relevant analogues... And please know that this is for the sole purpose of maybe calming a nerve or two after today's meltdown in global equities.

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.