Most fund managers are told to never take on risk in August. At first it may sound strange, but when one nurses the day-to-day mark-to-market P&L following the irrational and illogical moves, one is painfully aware how tough it is to be logical in a quiet summer month. This year is no exception. The market is up 10% since the lows in mid-July and technology stocks are up more than that, yet one wonders what really has changed in the investment world when the outlook commentary and earnings numbers have highlighted nothing but more downgrades to come?
Economists and analysts debate whether we are due to start a recession in 2023 or 2024. What is not discussed is that we are already in one. The textbook definition of a recession is two consecutive quarterly declines of GDP, which we have seen in first quarter and second quarter, yet the Fed and White House are taking all measures to "redefine" recession to the public to not alarm them.
During the Covid-induced stimulus of the past two years the market surged in multiples only to falter now with nothing to show for it, except that we have trillions more in debt and assets that were inflated are now getting deflated. This experiment has been going on for decades and one wonders when does the lab blow up -- i.e., a global reset. Only time will tell when this experiment eventually does fail as each central banker kicks the can further down the road.
Markets are about fundamentals as much as they are about extreme positioning. We have seen this occur all year when everyone gets extremely bullish only to see prices collapse and vice versa. Such is herd mentality.
A classic example was Bitcoin and non-fungible tokens (NFTs) last year and oil this year. On both occasions, it was presumed that we were running out of Bitcoin for lack of any fiat currency replacement, only to see it collapse by 80%, proving that Bitcoin was nothing other than a levered play on the Fed liquidity. Screams of oil going to $150 or even $200 a barrel were heard across all trading floors in April as the world "was running out of oil" as Russian oil would be lost forever. Of course, such euphoric calls only saw prices fall 40% in a matter of months as the bulls still keep quoting supply problems.
It is never just about supply; it is also about demand, the one side that is the hardest to forecast, though many just assume it stays constant forever. The important point is that when everyone is positioned one way, a small change can cause a massive move in the opposite direction as everyone heads for the exits.
Such are bear markets. They have nasty falls and even nastier squeezes as they tend to trap fear of missing out investors on the way up and on the way down.
The macroeconomic data are printing weaker and weaker yet the markets keep rallying. Such are the wonders of August when, due to a lack of liquidity, a small move is exaggerated, which becomes self-fulfilling as the day traders run over themselves trying to call the bottom.
A lot of hope is pinned on the Fed supposedly cutting rates sooner than later, as it seems this generation of traders knows only that. They can be forgiven as the Fed has done that each time the market or the economy wobbles; they are conditioned. This all sounds like deja vu, as we know what happened in March and June this year. Just because the Nasdaq is down more than 20% this year does not mean the Fed will be willing to cut rates so soon. Inflation is still close to averaging 6% year over year and the Fed has its hands tied until that number comes down to the 2% to 3% range it has gotten used to over the past decade. Until then, the market will keep moving from one extreme to the other, sucking both sides in.
