7 Predictions (plus 1) for 2024

Market predictions may appear foolish, a truth we have long acknowledged. However, dismissing them as utterly devoid of value would be an oversimplification. Though forecasts tend to err more often than not, they possess the capacity to entertain and enlighten. Musing, and writing, about the future is a way to challenge myself.

Such is the sole purpose of this article – to amuse (you) and inform (me). It is an exercise in thinking outside the box and evaluating what can go wrong, both in the world and in my process. It goes without saying, yet I must emphasize, that none of the content presented here should be construed as investment advice. I, the author, do not make any investment decisions based on these predictions, and neither should you. What I am trying to depict here are possible developments in certain areas, whereas we all know that what is relevant in investing is, at least, second-order thinking.

Cash is dead, long live cash!

I do not think Central Banks will cut rates as aggressively as implied by the market today. Still, I am pretty sure investors who hoarded in Money Market Funds will regret their decision…if they are not already doing it now. 4% or 5%, depending on where you live, sounds juicy until you see stocks climbing 20%. Even bond performance was good this year (looking at $BND).

For completeness, I am not referring to investors who allocate cash as part of their strategic asset allocation; I am thinking of those who made a tactical decision.

The issue is that (I think) investors did not make a plan on when to reverse/change their tactical decision. This leads to three possible scenarios:

• they forget about their cash allocation and funds stay invested even when rates are lower.
• Central Banks cut rates and the World is fine: investors switch back to stocks at higher valuations (and prices) compared to when they left to buy MMFs. Some indices are already printing new All all-time highs.
• Central Banks cut rates and the World is not fine: investors have the opportunity to buy low…but they do not do it because they are scared. They will not feel bad in 2024 and might laugh at me…while I will simply roll this prediction over to 2025 😉

The ideal moment to unwind the cash allocation was 2023, if not October 2022. Easy for me to say it now? Well, I did not decide to time the market, you did.

Cheap(er) AI chips

Nvidia’s market capitalization has soared above $1.1 trillion, surpassing its closest competitor by more than double. Furthermore, its valuation has skyrocketed to extremely high levels.

I know nothing about chips, AI and LLM. We have a corporate version of ChatGPT and I use it quite often. Like me, half of my teammates used it to do their and our boss’s year performance valuation. Stuff like this: we are not designing the next nuclear reactor, only gaining some hours (?) of productivity here and there. I understand that ChatGPT 3.5 is way worse than 4…and yet it is fine for what we do.

It reminds me of when 10 years ago I had to change my personal laptop and then I had to find a “free” version of Office. I never paid for Office in my life and I doubt I’ll do in the future. Why? Because now I do not even have to lurk in the dark web, I can use Google sheets&co. Excel suffices for the tasks I perform for my boss, and he will bear the cost. In my leisure time, I can work with a less powerful version, and the same applies to you.

If running GPT4 necessitates the spice provided by Nvidia, perhaps a new AMD, Qualcomm, or Intel could suffice for running GPT3.5. Although I’m uncertain which company will emerge as the leader, history has shown that a company will step up. However, it may not happen until 2025 or later.

The Line Goes Up (again) and plenty of folks go mad (again)

Hello guys, do you remember me?

Who would have thought that crypto would rise again the same year SBF got sent to jail? What does not kill you makes you stronger; the faith is powerful in Bitcoin (don’t ask me why) and every time this thing survives, chances of seeing new ATH improve. Trend is your friend, innit?

I guess this is the beauty of having a strategic asset allocation: I did not sell my (few) coins and now they are in the green again. But I can already hear all the screams of lads who thought this disease was finally eradicated when it came back like a nonsense Hollywood franchise. Are you ready for all the related scams? That’s the most likely silver lining for the crypto-haters: new grifters will offer new opportunities for things to be mad at (and in some cases, to monetize).

Can we say the previous cycle was about Solana? Or was it Bored Apes? What will be the new new new thing this time? Will we (finally) get something with an actual use? I have a colleague who is trying to sell his Lambo, maybe he will get bailed out by the new frenzy. Maybe this cycle car will be the CyberTruck…cannot wait…

0DTE options go BOOM

I mean, the market goes BOOM because of the options; the options themselves went boom for a while, as you can see from the image above.

Now, the most interesting aspect is that the stock market might BOOM up AND/OR down. The main reason (according to someone who’s really ignorant, me) is this:

We have retail investors selling and market makers + their counterparties buying. Given that the options expire on the same day, there is no oversight on how much risk each MM is taking over: the whole system is designed to check these things the day(s) after, not in real-time. If you consider the pristine track record financial institutions have in being responsible for risk management (especially when leverage is involved) plus the great alignment between private gains and public losses…maybe something can happen?

A greedy MM that decides to be involved in too many trades, a faulty risk management system: this will lead to another classic, a contagion panic, sell first and ask questions later. BOOM down, nothing new.

What’s more interesting is the melt-up scenario. The success of products like $JEPI and its clones means that there is a constant flow of volatility selling, often even irrespective of the price at which they are selling. This phenomenon contributes to keeping volatility AND the market capped: the MM who buys the call must sell the underlying instrument to keep their book hedged. Until the call remains Out of The Money, the MM acts counter-trend: if price goes up, they sell and if price goes down, they buy.

But as soon as the market goes above the call option strike+premium, the MM has no risk and has to therefore unwind it short-hedge. In other words, the MM becomes pro-trend: the more the market goes up, the more they buy. This is what might cause the melt-up situation (without considering that $JEPI investors might start to throw in the towel and decide they want to participate in the rally as well).

Another interesting aspect of this scenario is that the typical inverse relationship between stocks and VIX would break: we will experience a stock up / vol up situation.

We just need a catalyst; considering the snow-balling effect, this catalyst doesn’t even necessarily be huge news, something small but at the right inflexion point can do it.

ESG fades away

In my past life, I was involved in implementing ESG principles within an investment strategy. (Un)fortunately, I am familiar with the pros and cons of ESG; if you do not, BankerOnWheels prepared a great guide.

I agree with Matt Levine when he says that nowadays everything is financial fraud, which is basically a clever way to recognize that somehow we decided to solve every problem with financial regulations instead of proper laws. Climate change (and the “S” and the “G”) is a political issue but in order to avoid the political debate, we tried to sneak in reforms through financial markets…only to make them political again. It is amazing how BlackRock attracted protests from climate activists AND conservatives. I left London slaloming between a street protest and a climate march every other day in the City without experiencing a single disruption in front of 10, Downing Street. Ah well, once I was almost home I had to face the other crazy face of the coin complaining against ULEZ, 30km/hour zones and other car limitations. FU all.

As with everything else in life, ESG is great until it touches your pocket. The most absurd aspect of it was hearing money managers saying that their ESG strategy will increase returns (sorry, I will not spend a sec explaining why that’s fundamentally impossible). The only lads ready to make any personal sacrifice for the greater good are those happy to regress to a Medieval society, which is a signal of their willingness to endure suffering as long as others are suffering more.

The solution has to come from Governments and Taxes and if I was you, I would not hold my breath for it. Germany has the Green Party in the driving seat and they are burning more coal than ever before while shutting DOWN the solution, nuclear. ESG funds will linger around but I do not expect to see ESG front and centre in any marketing material as it was in the past. Also, sustainability jobs will be the new HR when a company would have to “restructure”, i.e. the easy cut.

I have 2 kids and I love snowboarding, it is a real pity that we ended up where we are. We have to do something but the reason why ESG was so palatable at the beginning was because everyone thought the onus would have been on someone else (those greedy bastards working in finance and lazy CEOs). If your bar is as low as “I will not reduce my meat consumption because I AM A MAN AND I DO WHAT I WANT!” even when it is universally recognised that this choice would be good not only for the climate but for you personally, then you understand why I am not so optimistic.

It is the same issue we see with inflation: everyone complains about prices, yet no one is reducing their discretionary consumption. “This restaurant’s prices are outrageous” said the guy ready to order at that same restaurant.

Cannabis stocks go high

Meb Faber has this quantitative theory that says investors should keep an eye on sectors/industries/themes that are down for a number of consecutive years. Its infamous example is the KOL ETF, an instrument that was investing in the coal industry before closing after six consecutive years of losses. Needless to say, coal stocks had a wonderful year just after that ETF was closed (and despite ESG).

Cannabis stocks have been down almost 5 consecutive years:

This is definitely NOT INVESTMENT ADVICE but I would not be surprised if 2024 turns out to be a great year for pot stocks. I mean, crypto and all the rest of the crazy stuff are rallying already…

(Meb Faber has also a pot ETF, $TOKE, if you want to pay him back for the “tip”)

Unrest in Argentina

Argentina has been an economic basket case since…forever; I am not sure how and why but every company I worked for had some business there, which is not great when you are in charge of managing financial risks (or maybe it is, since I can justify my role).

Argentina is in a desperate situation that requires drastic measures. I would not list “give a guy that goes around with a chainsaw the key of the Presidential palace” among them but…what credentials do I have?

It is the climate issue all over again. Part of the blokes that voted for Milei are in such a desperate situation that would be happy to simply see everyone else dragged down with them; the rest still believe in a magical solution that would be paid for by someone else: the elite, the Central Bank, politicians, you name it.

What Milei has done so far is less chainsaw-y and more traditional: he hired Wall Street guys to run the economy, devalued 54% the pesos and allowed a further 2% monthly weakening going forward, introduced austerity measures including halving the number of ministries, cutting transfers to provinces, suspending public works and reducing subsidies.

Will people accept that? The biggest chunk of the austerity plan just moved the problem from the federal to the regional budget, a cheap trick to deflect the eventual blame to someone else. Sooner rather than later, Argentinians will realise that the victims of this chainsaw massacre are still themselves. When the mob turn against Milei, I bet such a mannered and measured man would not react in a sensible way.

Income investors wake up and smell the coffee

AHAHAHAHAHAHAH

No sorry, that will never happen.

Here I am being generous by comparing the covered call strategy on the S&P against World indexes…

What I am reading now:

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