More Dunks Than Dwight Howard

Everyone continues to be bearish and the markets continue to go up...

I wrote a piece on Friday that was a bit more philosophical in nature. It wasn’t very well received, but I hope you guys took the message as it was intended.

Lately, we have been doing well while I repeatedly watch the sharpest guys around me out-trade themselves with hedges and puts etc. Eventually, these guys are going to be right with the hedges, and unless we get on the same side of the trade we will have a drawdown while they celebrate.

That’s one of the funny things about the markets.

Jared Dillian

put this very eloquently, but everyone gets a chance to be right.

I think, right now, there are a lot of reasons to think that stocks shouldn’t go up, and that’s why all these smart guys I read are getting tricked. VIX is low even though there are multiple wars in the world, P/E ratios are at insane levels, indexes are at or near all time highs, etc.

On some level I agree with them, hedges are attractive right now. But you have to keep in mind the backdrop we are trading in. We are in a world of rising deficits, a world where cash is trash. And simultaneously, as unappealing as it is to have USD, we are in a world of American Exceptionalism. There is no capital market in the world that compares to the USA’s today.

(Quick aside here, the internationally inclined among you might note that both India and Argentina have performed quite well this year. India’s returns have been competitive with the USA indexes while Argentina’s have surpassed them. That’s true, and they are appealing places to put capital for a lot of reasons, but the risks as well as difficulties of capital movement associated with them hold them back.)

Because of all of this, I think it’s pretty clear that we need to remain cautiously long US equities, until we are given a good reason not to be.

This stands in contrast to 2021 where the right move was to be leveraged long beta wherever you could find it, and it stands in contrast to 2022 when you wanted to be in cash because we were experiencing a historic tightening cycle.

Make your portfolio fit the environment.

Are Real Rates Negative?

This has been a favored conspiracy theory of the ZeroHedge crowd for a while now, but with the PA in metals and bonds this year we have to start wondering.

The government has immense and nuanced control over how CPI is calculated. They have a vested interest in reporting low CPI numbers, both because they need to protect their currency and because inflation fears are self-reinforcing.

I think anyone reading this who has any experience with projections/estimates/etc. has personally had the moment of “hmm that didn’t come out right, maybe i’ll just change this one assumption slightly.”

Substitutions are one of the easiest ways to do that.

I found this chart on twitter. I wonder what a more modern version of this chart would look like?

The reality is, we certainly know inflation isn’t lower than CPI. I tend to believe the government is attempting to be an honest broker with their data, but that doesn’t mean they are succeeding. Anyone who has ever done an estimate knows it’s impossible to do it 100% objectively.

This is just something to keep in mind, not necessarily a big revelation we want to trade on. You want to be exposed to this idea by owning hard assets, in case it becomes a more mainstream belief or it’s what metals markets have been telling us.

Takeaways from today

Today was a bit of a strange day in markets. NVDA absolutely mashed again today, buoying the indexes, while most other things struggled or eeked out small gains.

Energy and metals were the big exceptions, both up significantly. This is generally bearish, as we don’t want to see the fundamental inputs of the economy get more expensive because that contributes to inflation.

Generally bearish treasury auctions today sent the 10Y back above 4.5%.

Overall, you'd have to consider this a bearish day, and yet all the smart guys got caught buying index puts that are currently worthless.

I don’t want to keep dunking on them, but my general thinking right now is… when these guys start doubting themselves and changing their minds it’ll be right around the time their hedges start working.