Keeping Our WITs About Us
The Credit Strategist April 2022
One of the consequences of the changing nature of money is that investors have to think and act in multiple dimensions. Dr. Spock’s three-dimensional chess board is insufficient; we are working in far more than three dimensions today. The best investors think in multiple dimensions by, for example, structuring trades in different fiat currencies to maximize returns. A trade that generates a small return in one currency can generate a much larger return in a different currency based on currency moves without respect to moves in the underlying asset (it can also work in reverse if the currency moves in the opposite direction of course, which is why such trades must be carefully hedged). This approach needs to be more widely applied to asset classes as well. The necessity to track the value of assets not merely in multiple fiat currencies but in multiple asset classes is more imperative than ever. Investors owning large portfolios must track the value of their assets in commodities, gold (which is a currency) and perhaps even in Bitcoin today and be versed in trading all of these asset classes and converting their holdings from one asset class into another. Even illiquid assets like real estate can be held in forms that can be converted into other forms of liquid ownership in a world where the blockchain and other forms of derivative ownership exist. ETFs, which have their flaws, can help smaller investors accomplish this type of investing as well among different asset classes (within limits). These are not our grandfather’s markets anymore; they are not even our father’s markets anymore. These are now our children’s markets and the adults are running to catch up and understand them.
Market snapshots are often misleading especially in volatile environments. I believe the recent bear market rally (it is not the beginning of a new bull market despite what some are suggesting) is an especially good example of why short-term moves are often deceiving and dangerous. One-in-five Nasdaq stocks are down 75% from their all-time highs but after a 13% rally from its March low the Nasdaq is only down 11.3% from its all-time high. But this rally occurred during a sharp bond market sell-off which is unlikely to reverse with the Fed just beginning its tightening cycle. And NASDAQ stocks are particularly vulnerable to higher rates with a high concentration of infinite duration stocks (stocks that are very far away from profitability).