Grey Owl Capital Management

Despite the current rally in risk assets that includes US equities, we believe caution remains warranted.

This is now the third consecutive quarterly letter in which we express a cautious stance toward both the global economy and financial markets. A

Our last two quarterly letters conveyed a cautious attitude regarding both the economy and financial markets. The cautious season persists this quarter.

In the first quarter of 2022, financial markets abruptly reversed course and volatility increased significantly.

After a third quarter where large capitalization US equities were barely up and global equities were down, both came roaring back in the fourth quarter of 2021. 

The yield curve is a powerful indicator. More powerful than many others as May West reminds us. As the greatest reopening momentum now appears behind us, today, our All-Weather portfolio looks more all-weather than it did earlier in the year.

The reflation trade continued in earnest during the first quarter of 2021. Commodities were up another 13.3% from January to March, following a 14.7% move in the fourth quarter of 2020.

The 4th quarter of 2020 began with tremendous anxiety and divisiveness around the Presidential election. Investment markets reflected that anxiety.

2020 has proven a challenging year for numerous businesses and individuals, Grey Owl Capital Management included. While most domestic stock market indices have fully recovered from the February and March Covid sell-off, many of our accounts are still down slightly on a year-to-date basis through the end of September.

There is not much new to say since we last wrote to you on April 30, 2020. This might seem odd given the significant amount of changed patterns and uncertainty in our daily lives.

We are cautious today. This is a unique period of Knightian uncertainty. In a world of unbounded unknowns, protecting capital is paramount. However, the environment is in a state of flux and new information is developing at a rapid pace.

It is probably hard to remember after a week or so of coronavirus fears, but during Q4 2019, “risk” assets once again outperformed “haven” assets. This was after two quarters of “haven” asset outperformance.

During Q3 2019, “haven” assets were strongest among the primary asset classes. This followed a similar pattern from the second quarter.

For the most part, the second quarter saw a continuation of the first quarter’s positive performance across many asset classes. This furthered a reversal of the dismal 2018 when every primary asset class was negative.

What a difference three months make. For the full year 2018, every primary asset class was negative: the S&P 500 lost 4.6%, commodities were down 13.9%, long-dated US Treasury bonds were down 1.6%, and gold gave up 1.9%. Contrast that with the first quarter of 2019 – every one of those assets was up!