Date: 2020-05-22
Investment commentary
It has been an extremely stimulating first half. I just write some stuff here to remember this memorable period.
Current strategy: Market neutral. Complete focus on alpha. Focus on tangible assets. Some contrarian swing trades.
(O: Observations; ASnI: Arguments, Scenarios, and Implications)
O1: Enormous retail participation in all segments of financial markets
ASnI1: Many of these newly participating retails are inexperienced and are most likely to fail to execute prudently. At best, returns of these participants are likely to be short-lived/unsustainable. Market inefficiencies/dislocations are going to be here for a while more. ETFs and algos don’t help. Focus on alpha is likely to be more rewarding than usual. Structured, frequent, and insignificant contrarian swing trades in both long and short are likely to yield superb risk adjusted returns over time, due to various short squeezes, margin calls, jump to defaults, et cetera. Interestingly, I too am a retail, haha.
O2: High uncertainties around the vaccine developments
ASnI2: Maybe miraculously vaccine will be out in no time (winter 2020?). Then, long-only retails get a lucky break. This would be great for most people. Prudent investors would be unfairly trolled, but that’s okay; Or, maybe vaccine will be out within 2-3 years. Then retails are likely to be burnt by their long biases… or not? Who knows. Over-reliance on history shall be avoided, and in the same vein cautions shall be taken against high convictions; OR, perhaps it will take forever for the vaccine to be out. This would be dire for almost everybody. In any case, it is better to be market neutral. High portfolio beta shall be viewed as a sign of hubris.
O3: Central banks and governments’ cash supports for the system
ASnI3: Many small street shop owners and good number of those in real need received much of the help in forms of lower-interest loans and extensions of those loans (so a large scale refinancing occurred), without great prospect/visibility of where to find their next vehicle for the cash generation. To begin with, systemic leverage has been high in most developed nations, so there is no surprise when pains are observed. Policy makers shall pray for not-too-long deflationary period, since large volume of small and big bankruptcies (which is quite inevitable when high leverage meets deflation) are socially destructive. Eventually, some form of debt forgiveness is most likely to occur, unless inflation really picks up in not too distant future – although this is socially destructive as well, which leads to the next topic.
O4: Consensus expectation of sustained low rate environment
ASnI4: One of most interesting and actionable contrarian trade is probably financial services longs. It is still way too early, but when inflation eventually picks up, there is a good chance (many would call this a certainty rather than ‘good chance,’ yet even among those who recognize this as a certainty, most still expect sustained low rates ‘long term,’ which is very odd to me – hence an interesting contrarian trade) rates are raised. A ‘heroic’ figure like Volcker is most likely to emerge, at some point. Then with some sort of updated policies/features on the currencies, financials (although we can’t be sure how industry will evolve) will start to seem attractive. As pessimistic as this hyper inflationary scenario sounds, irony is that this is an optimistic scenario; I view deflationary scenario as the pessimistic one.
O5: Large scale failure of the businesses
ASnI5: We shall expect large players in various (global/niche/local) markets to further consolidate their respective markets, and this is a major source of political/social tensions. Different countries will need to funnel the wealth either via family/friend channels or social welfare system, and if a country lacks neither of these two social networks, I would expect more serious pain and instability there than otherwise. Universal income approach may be (is?) adopted by some countries, and there will be unhappiness among haves and have-nots as the gap further widens, but these countries ironically may navigate relatively well, as long as the public narrative is supportive of such approach. I view this as an unintended positive side effect of populism. However, people tend to feel more dignified and purposeful when they feel that their lives are more on the producing side of the economy rather than just on the consuming side, so I would view their insecurity at the individual level as destructive to the system. When economic actors lose economic sense (=moral hazard), it becomes systemic vulnerability. Education on emotional maturity of all segments of population would be very helpful for the social stability, and ‘good’ governments shall use their propaganda expertise to help the public on this topic, since it benefits everybody, including governments themselves.
O6: How the crisis unfolded and the way it was handled
ASnI6: The whole process has been pretty demoralizing. I was surprised at the level of incompetency of major institutions and degree of complacency of individuals. Corruptions at the top seemed to have been rampant throughout the process; this really peaked when highly leveraged Citadel was saved without any penalty yet again (probably?) with Bernanke’s help and when large US private equities were saved by Powell. Perhaps it is the incentive structure that has gone wrong, but that certainly couldn't just be it, when one camp’s desparate need or good intension is viewed as vulnerability by the other. It is what it is.