The magnificent Viktor Schvets at Macquarie with the note:
UK, Taiwan & Australia highlight fragility of normalization narrative
•Black Swan is supposed to be something that is unique, unexpected and has a major impact. As Taleb noted, we invariably attempt to rationalize such events and make them more predictable, even though they have retrospective (not prospective) attributes. While pandemics are statistically predictable, our abilityto assess the likely responses and their success rates is grossly deficient.
There are 1092 words left in this subscriber-only article.
Start your free 14-day trial today!
•Given proliferation of new variances (and sub-variances) and what appears to be a limited ability to stay ahead of them and the societal predilection for hard lockdowns (Taiwan to Australia, UK to India), we might justifiably ask whether investors should questionthe consensus of a return to anything that resembles pre-COVID normality, or at the very least, whether we might need to endure rolling and haphazard restrictions that will last for years, as virus mutates down the Greek alphabet (epsilon, omega etc). What will the investment climate look like if a Black Swan outcome is the right answer over the next 12-18 months?
•1. This will unquestionably lead to a much greater volatility in both demand and capacity outcomes than what CBs and politics assume, with rapid demand recoveries replaced by equally rapid declines and major supply bottlenecks replaced by oversupply-even zero oil prices might be once again possible.
2.The degree of ‘tissue scarring’ is likely to be much deeper, significantly altering consumer and business behaviour. GDP measures current output but it has nothing to say about assets, wealth or even efficacy of policies, and it certainly does not measure ‘tissue scarring’. This outcome will most certainly imply that the much hoped for excess savings (globally~US$5trn) will prove to beillusory.
3.The swings in demand and supply will leave policy makers with the conundrum–how to judge the right mix of fiscal and monetary supports, and when such policies become obsolete or even dangerous. One could easily envisage the same red states that are currently withdrawing unemployment benefits being forced to put them back on, only to withdraw them once again months later. CBs will face similar challenges, with hyperinflation rhetoric being quickly replaced by deflation, leaving limited room for adjustments.
4.Investment strategies will whipsaw around an inflation-disinflation pendulum, which will swing more vigorously vs normalization consensus. Steepening curves and rising break-even rates would be replaced by flattening & reversal.
•While the probability of a Black Swan event is not high, it is no longer zero, and as variances proliferate, the Black Swan might actually emerge the most likely outcome.
What should investors do?
1.Protect yourself-during placid periods, accumulate volatility (VIX, MOVE etc).
2.Adopt a bar-bell approach, mixing staples, quality and QSG as well as Thematic strategies.
3.Be careful of value rallies but be prepared to trade whenever public sector is willing to massively increase commitments.
4.Trade bonds as rates gyrate in a~1% to~2% corridor or between two deflationary outcomes–an actual disinflation or expectation that rising rates would cause an economic collapse.
5.Persistent disruption is likely to further turbocharge new Digital assets.Essentially one should be ready for high volatility of outcomes, as churning within and between asset classes and styles increases, even if headline indices remain flattish.
Precisely the strategies currently deployed at MB Fund.