Our Opinion on the Recession
Arguments of the bears that we will counter
Last week, we discussed how 'soft landing' was one of the most common searches on Google and a recurring topic on the front pages of international economic newspapers.
As we've previously mentioned, we believe that such bold statements from major central banks typically have the opposite effect. We often use the same example, but it's worth mentioning again: remember 'transitory inflation'? Well, we're still grappling with soaring prices.
As you know, our thesis is bullish, but we anticipate that it won't be for much longer. That change will come when some of the key economic indicators signal it. Until then, we'll continue with our bullish positioning, and likely, with favorable results. As a reminder, those who stayed in cash during 2023 have been proven wrong...
Today, we want to delve into the bearish thesis and explain why we firmly believe it's not yet time for it to manifest in the markets. Following the golden rule of opinions and the wise words of Charlie Munger, 'I never allow myself to have an opinion on anything if I don't know the opposing arguments better than they do.'
One of the primary bearish arguments is that inflation continues to show dismal results. Just last week, we received Consumer Price Index (CPI) data that was much worse than expected. Here, it's clear that the Fed's efforts, including one of the most aggressive interest rate hikes in history, are bearing fruit, as demonstrated.
The consequences have already unfolded, and the year 2022 was brutal for the markets. For instance, a portfolio like Ray Dalio's All Weather Portfolio had one of its worst years, even worse than 2008.
If you recall, in November 2021, we advocated for positioning against most assets: stocks, bonds, cryptocurrencies, except for gold. Since then, we've witnessed market deterioration, a 70% plunge in cryptocurrencies, and unprecedented declines in long-term bonds.
The thesis was clear: interest rates were going up, and the markets would feel the impact. Ultimately, markets always discount what's going to happen, not what's happening now.
Another key bearish thesis revolves around credit, whether it's from companies or individuals. This is closely correlated with the previous point. When interest rates rise, it becomes harder to borrow money, often leading to a recession because people struggle to make ends meet. Let's look at historical data:
Credit has historically been positive, except for two rare occasions. Currently, we're very close to crossing that critical threshold of 50, and we've warned you multiple times when we believe we'll surpass it.
As we've reiterated throughout this article, we believe that in the coming months, we should maintain a bullish stance. However, if indicators evolve faster than expected and signal a different story, we'll change our perspective and keep you informed.
What we do believe is that it's time to position ourselves asymmetrically against the risks on the horizon. Whether it's through cash, out-of-the-money options, or a combination of both, as is our case.
In the end, history will repeat itself, and the same will happen as it always does when the yield curve inverts.
Now, as we do every Sunday, we provide you with a detailed breakdown of our portfolio.