The only certainty is that there is no certainty..
To Warriors,
As we begin to wind up the year 2021, we are being bombarded with economic predictions and market outlook from competent researchers, hedge fund firms and banks alike.
Apart from my role models like Ray Diallo of Bridgewater Associates or Raoul Pal of Global Macro Investor, someone I also admire and seek his knowledge from a distance is the acclaimed “Bond King”, Jeffrey Gundlach, the billionaire chief investment officer and founder of DoubleLine Capital. He recently held his last webcast of 2021 where he touches on numerous market-linked topics.
To summarize his presentation that was titled, “In our time”, it started with a chart showing rising yields commensurate with QE. As we can see that the Jay Powell of the Fed is now talking about tapering (increase in interest rates), which is sending the marketing into a tailspin with players looking concerned and yields falling. So expect more uncertainty and stress in the markets.
The bond king reiterates his view that the Fed’s Quantitative Easing is what’s “driving U.S. markets, not fundamentals" and is “granddaddy” of all factors driving assets including a chart of the Fed balance sheet.
Even though the Fed has conceded that inflation isn't transitory, Gundlach says CPI inflation could hit 7% or higher in the next year, and while it might reduce later, it is likely to remain above 4%.
The bond king also pointed out that many things are resembling the 1970s, including: the inflationary situation, the magnitude of negative inflation-adjusted interest rates, and the magnitude of geopolitical tensions. As evidenced in his chart of real rates appropriately titled, “Real Fed Funds Rate Since 1971.”
With reference to consumer sentiment, he points to the post-covid goods spending comparing it to the post GFC cumulative growth. Highlighting the similar increment but in shorter time during the post covid era which tells us consumers are likely increasing spending for goods probably due to lockdowns and work from home requirements.
There were many nuggets shared in his informative presentation that affirmed the path we are on and gave a boost only to continue the course. This reminds one to be alert of risk, stay alert and be prepared for uncertainty.
You can find his full presentation here.
I never forget obeying the philosophy of risk management and reading the wise words by Robert Rubin, former Secretary of the Treasury:
“First, the only certainty is that there is no certainty. Second, every decision, as a consequence, is a matter of weighing probabilities. Third, despite uncertainty we must decide and we must act. And lastly, we need to judge decisions not only on the results, but on how they were made.
Most people are in denial about uncertainty. They assume they’re lucky, and that the unpredictable can be reliably forecast. This keeps business brisk for palm readers, psychics, and stockbrokers, but it’s a terrible way to deal with uncertainty.
If there are no absolutes, then all decisions become matters of judging the probability of different outcomes, and the costs and benefits of each. Then, on that basis, you can make a good decision.”
See you tomorrow!
- Ope