Commentary

Central Bankers Wandering in the Woods

On the interest rate front, the Federal funds rate is now close to systematic benchmarks that have historically been consistent with prevailing core inflation, nominal GDP growth, and unemployment.

Commentary

Air Pockets, Free Falls, and More Cowbell

There is a particular “setup” that we’ve historically found to be associated with abrupt “air pockets” and “free falls” in the S&P 500. It combines hostile conditions in all three features most central to our investment discipline: rich valuations, unfavorable market internals, and extreme overextension.

Commentary

Grasping at the Suds of Yesterday’s Bubble

Bull markets and bear markets can’t be identified in real-time – only in hindsight. More importantly, the return/risk profile of a “bull market” or a “bear market” can change dramatically depending on whether valuations are consistent with the beginning of a market cycle or the end of one.

Commentary

Money, Banking, and Markets – Connecting the Dots

Most of us spent moments of our childhood, crayon in hand, connecting numbered dots that gradually revealed a picture that we couldn’t deduce simply by looking at the separate dots. With experience, we got better at looking at those isolated dots and mentally connecting them into a coherent “gestalt.”

Commentary

Fabricated Fairy Tales and Section 2A

Amid the overabundance of economic opinion, unexamined clichés, and unverified assertions, and nutrient-free word salad dispensed by talking heads on television, market observers, and even Federal Reserve officials, I often wonder how many of them have ever taken the time to carefully examine historical data.

Commentary

Edge of the Edge

The simplest thing that can be said about current financial market and banking conditions is this: the unwinding of this Fed-induced, yield-seeking speculative bubble is proceeding as one would expect, and it’s not over by a longshot.

Commentary

Headed For The Tail

The extreme “tail” risk ahead may be disorienting.

Commentary

Pushing Your Luck

The problem with speculation is that there’s usually a gap between the underlying risk and the inevitable outcome.

Commentary

Pushing Your Luck

The problem with speculation is that there’s usually a gap between the underlying risk and the inevitable outcome.

Commentary

They’ve Ruled Out Tail Risk

As of Friday, December 16, the S&P 500 Index is down -19.7% from the most speculative level of valuations in U.S. history – exceeding even the 1929 and 2000 extremes, based on the valuation measures we find best-correlated with actual subsequent market returns in cycles across history.

Commentary

December 2022 Portfolio Notes

We continue to believe that a value-conscious, risk-managed, full-cycle discipline, focused on the combination of valuations and market internals, will be essential in navigating market volatility in the years ahead.

Commentary

Weighing Machine, Voting Machine

Two aspects of the financial markets operate simultaneously. Emphatically, they do not operate alternately, but simultaneously. One aspect is driven entirely by arithmetic. Every security is a claim to some long-term stream of cash flows that will be delivered to the holder, or series of holders, over time.

Commentary

Estimating Downside Market Risk

At the beginning of 2022, our most reliable stock market valuation measures stood at record levels, beyond even their 1929 and 2000 extremes. The 10-year Treasury yield was at 1.5%, the 30-year Treasury bond yield was at 1.9%, and Treasury bill yields were just 0.06%. By our estimates, that combination produced the most negative expected return for a conventional passive investment portfolio in U.S. history.

Commentary

Now Comes the Hard Part

Surveying the current condition of the financial markets, we presently observe a combination of still historically-extreme valuations, rising yet still only normalizing interest rates, measurably inadequate risk-premiums in both equities and bonds, and ragged, unfavorable market internals, suggesting continued risk-aversion among investors.

Commentary

The Structural Drivers of Investment Returns

After more than 40 years of work in the financial markets, studying all the data I could get my hands on, I’ve found it to be universally true that those who argue “history doesn’t matter” have never actually studied history.