I discovered @MacroAlf and his YouTube/podcast only recently. Sunday morning my daughter decided to wake me up at 6.30 am and since it was the first day in almost two months I did not have any NBA game to watch, I decided to give this interview a go while Frozen was playing in the background for the 1000th times. I am still not sure if listening to macro-rants on an early Sunday morning is devotion to the cause or an evident sign of mental illness but…here we are.
Prior to the interview, I had no clue who Hugh was. But I am a sucker for anyone who can go from picture number 1 to picture 2 in his lifetime. That was basically MY plan: come into the financial world with a weird accent and leave on a surfboard.
The interview is instructive on two levels.
Macro Calls
Hugh has interesting insights into what is happening in the economic/financial world. I generally like this type of analysis because it is not something I can do myself, I have learned my understanding goes only up to a certain point. During the years, I developed the tools to at least separate people that provide real value, like Cullen Roche (his explanation of monetary systems is invaluable), from people that just repeat evident stuff like Mohamed El-Erian.
I also love to ‘test’ my knowledge by listening to these experts. During the conversation, there were at least two points that I would not agree with. For example, Hugh says that the Treasury market was normalizing, going back to 3%, prior to the FED signalling its tightening campaign. As you can see from the below graph, the blue and white lines break to the upside at the same time: the move from 2% to 3% in Treasuries was really driven by the FED.
I understand the risk of a recession is quite high at the moment (if we are not in one already) but I do not necessarily share the idea it would be a big one. Hugh’s comments pushed me to revisit some research I received and, on a second look, some indicators are quite grim indeed:
It is important to approach these interviews with an open mind: do not expect to receive the Absolute Truth, challenge the expert, but do not be a Dismissive Populist either. I found some value in ZeroHedge, when they were still on Twitter, as much as sometimes I roll my eyes reading Doomberg. That’s the beauty of the game.
Macro Calls are…useless?
I agree with the fact that if the ‘West’ would punish China for their FX imbalances and the deliberate cap on internal consumption, we would live in a better world. I mean, why do we let the Party use West social networks to push their narrative abroad while they do not allow the same social networks in their country? I can go on with similar examples forever. Point is, none of these ‘scenarios’ is really tradable because they are similar to deep OTM options, tail risks with low probability. I end up spending time thinking about what I and others would do in multiple alternative realities that we would probably never live in anyway. A nice thought exercise, that’s it. Not only I would have to estimate those small probabilities, I have to understand what is already priced in as well: nailing the timing of a breaking point (for example the war in Ukraine happening 8 years after the Crimea annexation) and the correct market reaction is no easy task.
These calls are contingent on a lot of factors that can change at any time. Hugh is not going to ring me when his mind or the underlying hypothesis change. That’s the problem with “Hedge Fund Manager XYZ goes live on Bloomberg saying he is short”: at a certain point, he is going to reverse this position and go long but he is not going to tell me…or maybe he will give another interview when it will be too late to act.
Some months ago I listened to a podcast, cannot recall which one, where the guest explained how China and Saudi Arabia are not hoarding Treasuries like they used to. Checking on Bloomberg, this is indeed the case:
Basically, those countries changed their strategy and are now spending dollars on local projects to improve, for example, their infrastructure.
Is the RMB artificially undervalued as it was 10 years ago? How China will react to the FED ending QE this June? Not sure I can design a trading strategy around these questions.
How a money manager can retire after a couple of years of good performance
Ok, not exactly a couple and not just ‘good’ 😉
After the video, I went to check who this Hugh guy is. I found the following report that covers the whole life of his fund (he was already managing money before opening his shop):
As it happens for a lot of hedge fund managers, Hugh posted his best returns before becoming famous. That +50% in 2003 and an even flashier, if compared to the general market mood, +31% in 2008 propelled him to Master of the Universe status (at least in the UK). But if we calculate the yearly return over the whole 15 years period, Hugh returned a respectable but way less impressive c6.2% per year; for context, the S&P500 in the same period did this:
Hugh did not have a single year with a double-digit loss, unlike the S&P500, and his returns were uncorrelated to the equity index; these two elements are attractive for asset allocators and explain his success in terms of Asset Under Management.
That said, I would not be able to retire after 15 years with the above performances in my portfolio. The 2-and-20 fees on those returns are the highway towards a surfer life. Plus the YouTube fame. He was the winner while the post-2008 investors, the majority of investors in the fund, were the losers. Hugh dropped them after a decade of TV interviews and lousy performances. Melvin Capital anyone?
He made the envious side of me think of those players that have one stellar year while playing for a mediocre team…and then spend the rest of their career cashing checks written on the basis of that year’s memories than actual performances.
His Wikipage is really informative. I wrote multiple times on this blog about the value of trend following and he is the Nth example of it.
“A lot of people define investors as value or growth. We are neither. We are time investors,”
You can be a contrarian, as many defined him, but first you have to respect market momentum.
“Our ideas are harshly disciplined by market trends. You will never see us pursue a homegrown idea when it is to the detriment of the prevailing trend,”
Should I stay or should I go…short?
Talking about Macro Calls.
I am an avid reader of the Greed&Fear research newsletter from Chris Wood, at least when I get access to it via friends or professional contacts (another great change brought to us by MiFiD: research became an ‘unbundled’ product, separate from other brokerage services, and has to be paid). In his latest piece, he included the following as the minimum decline investors should expect:
Chris calls the current scenario “inverse Goldilocks”, high inflation and slow (if not negative) growth. As I (tried to) explain here, the way to trade it is to sell rallies…or to be outright short, obviously. The title of this section is deliberately misleading because I have no intention to go short but there might be merit in stopping DCA or even tactically shifting part of the portfolio from stocks to Govies.
This idea is tempting because Chris is only one of the reputable voices out there describing this scenario. At a certain point, I start to feel stupid when I read that the market will go down and then I see it actually going in that direction. The jumps in the S&P500 that we saw in March and possibly now are bear market rallies, a common phenomenon:
The fact that it feels so easy to stay outside the market might be the main reason why I will not do it.
I have my, not that original, idea that the market will bottom once inflation will be lower and possibly stable. But I have no clue if this is going to happen by the end of this year or after, yet another for my generation, great depression. The biggest risk is that I will stay out and then I will not find any point to get back in, leaving more profits on the table than saved losses.
I am pretty confident we did not see the bottom yet but I hold this notion close to my heart more not to panic than to trade around it. Thanks to the USD strength, I did not lose much anyway so far…I guess that’s the perk of reading a ton of market stuff and not checking my portfolio that often, I worry for other people’s issues and not mine at this point.
Conclusion
While in the past I would have looked for verdicts in an interview like this, Hugh sees a recession so I will take action and trade accordingly, now I realise it should only be the starting point for further considerations. “This concept is interesting, let me dig more into it”.
This morning I listened to Patrick O’Shaughnessy chatting with prof Damodaran. Again, a super interesting conversation…as long as you do not take his opinion on any specific stock as trade advice. Meat is the universal topics, like “At the right price, I would buy any company”. That’s where the real counsel is; and it is crucial to remark that starting from that sentence, different people will go different ways.
Damodaran stresses the importance of a company narrative and its valuation. These concepts may seem well defined but in reality are very broad. Ask 10 smart people about Apple, they will probably tell you 10 different narratives and produce 10 different valuations. And their opinion will change over time, like Damodaran’s stance on Uber and Netflix.
It would be great if someone would start a series of similar conversations and then ask the guest to show his/her portfolio in real-time, something close to what Josh Brown did with his book “How I Invest My Money” 😉
What I am reading now:
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