Quarterly Newsletter – Q3 2024
Fri Aug 16 2024
Dear Investors, Friends, Supporters,
Q3 2024 started with a bang with many markets hitting a new high and the JPY hitting a 38-year low.
Like all spectacular rises, the overextended positioning caught the attention of many. Some chose to chase the rally, while the sober ones stayed on the sideline continuing to park their cash in yield-based products, and the experienced hedge fund managers took advantage of the craze to bet against the carry trades.
Many began to point fingers at the BOJ for a hawkish stance that drove up the value of JPY and caused the crash. My view is, had it not been BOJ, other trigger(s) would have happened to flip the fragile positioning, where JPY is being used to finance almost every trade, from Taiwan equities to AI to crypto.
As this newsletter is being written, the market has recouped much of the heavy losses and many hedge funds have reignited the carry trades.
On many investors’ top of mind now: is the carry trade over, is the unwinding of the carry trade over, is the calm after the storm a good time to buy?
The bad news:
The current summer scare is built on two fundamental concerns:
- The positioning of the JPY carry trade that drove up valuations of many to unsustainable levels
- Is the US economy’s recent consumer weakness a warning sign of a coming recession?
Why these 2 concerns? Because (1) is so extended, if (2) is true, the unwinding will be so ugly that the 5th Aug crash will look like a rehearsal. If the US does go into recession, the Fed will cut rates more aggressively and JPY will spike and lead to a disorderly unwinding of many assets. In such instances, the correlation of all asset classes will spike and lead to massive liquidation and market crashes.
More bad news:
Corporate profits are already very high and growth that are priced in are not likely to be achievable in a recessionary environment and expect US equity to go through a big leg down. At the same time, many corporates are already suffering from the high interest expenses in this current rate environment.
The good news?
Cash positioning of many corporates is high. A recessionary earnings downdraft is different from a balance sheet crisis and the correction will lead to a lower equilibrium level for asset prices to rise again. A lower rate will also allow many corporates to issue new debts to refinance their loans and avoid the build-up of balance sheet crisis.
In simple summary, correction from such high levels is inevitable. A meaningful correction is a good chance to rebuild portfolio after massive correction that are not balance sheet driven, especially when there is no debt crisis. The caveat to this view is that no systematically big fund goes down due to an overexposed trading position in the crash and no isolated financial institutions are heavily exposed, for example to the carry trade.
What to do in such scenarios:
A low co-relation portfolio with cash, treasuries and private markets products are important at this stage of the equity and economic cycle. I foresee income earners to continue to stay on the sidelines to wait for the correction to be over. Although the risk is always sitting out for too long. One can consider building position through ETFs over 6 months on each significant draw down.
Recent conversations with proactive investors center on shortlisting hedge funds with various strategies over 3 months while buying into structured products with healthy safety margins when volatility spikes up. We don’t advise buying single stocks because of the disproportionate risks and the asymmetric information.
Chairman