Long time since I last contributed to this blog. With more time for mediation and reading, I feel the need to write as I m developing (again!) an investment thesis that seems not to be aligned with most investors - (probably the lockdown is indeed driving me insane ;)


My main objective is to safeguard my mind against any bias (typically coming from my current PnL  and positioning, quite long risk since mid March) and stay fully objective. Festinger used to say " people coginze and interpret information to fit what they already believe". Meditation and writing down thoughts as you know, helps to keep the mind centred and independent.

I continue to send out to 1-2 times a year a macro slide deck focused on inflection points when I potentially see them. As usual, I focus on divergences between rate of change in macro data (eco growth/liquidity) and investors' positioning (cross assets, cross strategies) which, in my opinion, lead to the largest and most asymmetric moves.

The last macro slide deck I shared with my colleagues was in early January when global growth was decelerating while positioning in risk assets was significantly uber-long. Conclusion was that any negative news breaking out could trigger large liquidations.

I've positioned portfolios more defensively around mid January. Frustrating at first, but this ended up helping me to capitalize on recent market volatility with full objectivity and dry powder. Let's be clear, I did not expect the extent of the sell of nor anticipated the virus outbreak.

I m copy/pasting below the slides of a short macro deck I sent out toward the end of March. It is a bit of a particular one as the attractive inflection point was much more asymmetric 10 days ago. Nevertheless, positioning is still quite defensive or short across hedge funds, systematics funds and across assets (vol, FX).

Economic macro momentum data are pointing to continued deterioration, but the negative rate of change is fading (bit like the "second derivative" growth story of late 2008), liquidity is surging like never before with phenomenal rates of changes. MMT which i so much wrote about in my early posts will finally be adopted….

But more importantly, COVID-lockdown shock is transitory by nature. This is not a classic recession! the macro here is much simpler than in a normal recession: Simply put, economies in lockdown: GDP down big, economies not in lockdown: GDP rebound big! 

As the lockdown stops, the global economy will rebound as fast as it came down. Moreover, despite the fact that we are experiencing a "technical" lockdown led recession - Central banks response has been a. coordinated, b. much faster than in previous crisis/recession and c. substantially larger in size - stimulus size never seen before

Finaly the private sector in G7 is not leveraged like it is always in recessions. This means that the private sector does not have to restructure its balance sheet to spend again. Watch out for a big rebound in private sector spending as the commodity shock and fiscal stimulus add further fuel!

So here the inflection point is optimal for long term investors. I see a potential sea change in investors appreciation for risk assets vs defensive assets as liquidity injection will most probably be way above what would have been required...

I let you take a look at few of these simple slides, but in a nutshell the message is : investors should expect financial markets to disconnect from economic growth data and be influenced mainly by liquidity.  It will be a very challenging environment for fundamental investors as they can not properly modelise future potential earnings stream as macro data goes down and stay extremely volatile. Investors will most probably continue to model the current "technical" recession in perspective with typical recession- again this is not the case!

It will contibute further to upside price inertia as investors go back long risk only step by step as they try to rationalize the up move. We could see risk assets at much higher level at year end while economic growth will be subdued at best. Most investors are not positioned yet for such a scenario.

Good luck trading