BLOODBATH!

Daniel Shainberg
10/26/18

BLOOODBATH! 

Not from the bomber, but in the market.

Our timing of this bearish newsletter warning of impending recession and subsequent market meltdown was completely random in terms of its inauspicious timing. Global capital markets are down now for 5 weeks in a row with a total loss of nearly $9 trillion of investor’s equity from its peak. This was the most brutal and steepest drop since Lehman.

And as we warned previously, the credit markets will not be a safe haven as they have been during volatility induced equity selloffs over the past decade. Risk parity funds will not work, we warned.

Gundlach similarly warned last week, and today again,  that yields are headed much higher. Such a move would have the effect of crushing the price of bonds as they move inversely to yields. He warned of two key concerns: “First is interest rate risk, which clearly has not been a positive now for a couple of years. You've not made money by price gains, you've actually had price declines. So you want to position yourself so that you're not so exposed to these price declines… Then the other thing you have to worry about is how much credit risk do you want. And I would argue that this is not a time to have a much of that either. So you need to be defensive against credit as well. So you're doubly defensive right now in the bond market.”

When looking at the equity markets, the pain in the indexes is most troublesome when you consider the extremely lofty valuations of the Tech sector and it’s recent pull-down effect on overall valuations. Given the low-rate environment of the past decade, investors have piled into anything that was “moving in the right direction,” namely art, bitcoin, bonds, startup app developers, cannabis and overvalued tech stocks. Now that investors can see the light at the end of the tunnel promising a reasonable yield on their savings, those funds are being rerouted from “hype” to “yield” or sitting on the sidelines until yields rise enough. 

Even Tesla is starting to finally come under scrutiny for their accounting and Twitter shenanigans as the FBI capitulated and decided it’s well overdue for an investigation. Don’t be surprised if they find Enron-esque, WorldCom-esque and Tyco-esque restatements.

There won’t be anywhere to hide this time. Unlike the past cycle that saw financial executives heading to B-schools to ride out the recession, this one could take years to unwind and may feel more like paint slowly cracking. The student loan bubble will pop as interest rates head higher. 

Howard Marks of Oaktree Capital has been famously warning about the bubblish environment for years, along with many other “experts.” Today he warned investors about being too risk averse. Interesting change on just a blip in the markets. Things can get a lot worse. But then again, not all of us have $9 billion of committed capital waiting on the sidelines to buy up distressed assets!

Dan Shainberg

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#RecessionResister
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