I manage two portfolios, my dad’s and my own. I have moved both portfolios to above 50% cash. Neither portfolio accounts for 2022 IRA additions (Roth and SEP) and my portfolio’s cash percentage doesn’t reflect excess savings or my internship salary. Why leave so much money in cash, especially when I’ve written so many bulled up posts about different themes over the past year?
We may soon enter a period of market capitulation – a point where investors start giving up. There will be true fear and correlations will go to 1 – there will be nowhere to hide and no asset class will be safe. This will be a period of tremendous opportunity and there will be 10-baggers and 100-baggers in plain-sight. But right now, we are far from this bottom.
Equities have had massive inflows YTD and are barely seeing any outflows. Ark Invest, specifically, has yet to see any serious outflows. Private market markdowns are inevitable but have not yet begun. Hedge fund redemptions at a large scale are coming, especially for crossover funds like Tiger. Downwards earnings revisions are yet to start.
Tether hasn’t been exposed as a fraud. I see crypto broker ads every time I turn on my TV. NFT NYC is in full swing even though we are in a “crypto winter.”
We are approaching a full-blown, global energy crisis (not just in Europe). Energy supply is not coming back online because of Biden and ESG. No CAPEX wave has come to save us. Energy is an input cost for all commodities.
Commodity supply deficits are driving inflation. The fed has no control over this. If they keep raising rates, they will drive us into a recession. If they stop raising rates and pivot, they will tell the market they don’t know how to stop inflation.
I believe there’s a high likelihood of recession (if we aren’t already in one), and it’s hard to see a bull case for equities over the next couple of years.
The bearish headwinds are so strong right now, I don’t think my investment theses will overcome them. Nobody cares about cash flow from coal mines or oil services recovery or uranium supply when there’s blood on the streets and everyone is selling everything. Nothing will be safe.
Druckenmiller recently said this is one of the hardest markets he’s seen. Porter Collins and Vincent Daniel from the Big Short said their market view has moved from bearish to scared, and that they recommend not buying, not selling, just “training” (these guys understand the financial system as good as anyone…). The legendary Shrub is ultra-bearish and recommends taking a vacation. Even Kuppy is raising cash.
This is not a time to overthink and overtrade. This is not the time to start deploying cash. This is the time to sit on the sidelines and be patient.
Burry started shorting subprime in 2006, as did many other smart funds. But the thesis came to fruition in late 2007. It will take time for equities to roll over and this bear market could last longer than past, especially since we have a decade of misallocation to unravel. Things will get ugly but I don’t know when and for how long.
It seems like the past two years have been “easy money” in commodities. Sadly, I didn’t get to participate in that. But that doesn’t change the fact that markets are getting hard now.
Ideally, investors should be using this time to get prepared. Start researching new themes and companies they’d love to own at lower prices. I want to do that too – continue building out my investment platform (I’ll write another post about that) and put together a solid, well-researched watchlist. But we’ll see if that happens. I have other things to focus on like SWE recruiting, and focusing on too many goals at once is a recipe for disaster.
A lot of investors, retail and institutional, get sucked into the game. They become overwhelmed with so much noise – technicals, headlines, fed meetings – that they miss the bigger picture: the markets are screwed. There’s skill in knowing when to step away and watch from the sidelines.
FAQ:
Why not be 100% in cash? Because I can’t time the market. We may have epic moves in energy before capitulation. There’s too much opportunity cost to not owning stuff like WHC, UAN, VAL, and SRUUF.
What about a scenario in which we rotate from tech to real assets, instead of everything selling off? Lots of smart people have been talking about the “great rotation.” We could see a fed pivot catalyze a rotation once the market realizes inflation is out of the fed’s control. If this helps trigger a supply response, I think energy outperforms while everything else – markets, economy, etc. collapses. This seems to be the single path to absolute performance, and another reason why you can’t risk 100% cash.