Evening Note

As clients and regular readers are fully aware, our present macro thesis dictates that, while we indeed have exposures in a number of areas that are currently “working” in markets, we remain biased toward mitigating the risk of a potentially substantial downside move in equities.

Our core positioning is an ever-evolving product of our assessment of the latest macro data, and, thus, our view of the present risk/reward setup, as well as our experience with, and studies of, market/economic history.

In a RealVision interview released yesterday, Gerald Minack, highly-respected macro consultant to large institutional investors, hedge funds and sovereign wealth funds, agrees that the prevailing risk/reward setup is anything but conducive to chasing the present rally in equities. 

I’ll add, for our purposes; without, that is, hedging against what I believe to be huge downside risk right here:

“…the reality as I see it is that there’s an enormous swathe of risks out there from the second round effects of the virus, from the slow recovery, to rising geopolitical tensions, to the November election in the U.S.. Are the markets taking much account of any of these things? No. That’s the problem we’ve got.”

“…an economy that’s been shut down by government fiat can be reopened by government fiat and I suspect that the initial one or two quarters of recovery will be as rapid as we’ve ever seen. Now, that’s good in a way, but if that gets us back to let’s say 85 or 90% of where we were we all know that an economy that’s operating at 85 or 90% of capacity is still ultimately very dis-inflationary, and a company that’s operating at 85 or 90% of capacity is not making 85 or 90% of normal profits because of operational leverage. 

So, my problem is even if the initial recovery takeoff is quite rapid I can’t see how we possibly get back to where we were pre-covid until 2022.”


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