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I'd call the current US equity regime: "slow motion crash." The current environment increasingly looks like "stagflation" - weakening fundamentals coupled with rising inflation. The reason that's so ugly for stocks is that the rising inflation directly hits corporate earnings /1
2/ worsening economic fundamentals with rising inflation is a rough scenario for equities since the inflation forces central banks to keep talking rate hikes (with oil at $120 and rising) instead of support measures.
3/ the closest analogy is likely 1970s stagflation. Under that regime, US equities were roughly flat nominally, but lost big in real terms (inflation adjusted), but were still better than holding cash for the decade.
4/ one way this could play out is with a major downward "repricing" soon, after which equities become an attractive buy - not because they'll produce above average real returns, but because they'll produce positive real returns and beat most other places to put your money.
5/ alternatively, maybe we get choppy sideways/down for a few years rather than a quick repricing. Basically, the harder and faster equities fall, the more I'll like buying them.
6/ the really ugly possible scenario that could cause US equities to produce negative nominal and real returns over a decade? This is extremely rare in history, but possible today I think (although not my base case). Here's how it happens:
7/ Right now the USD is predictably strong (and likely to get stronger), but after ~80 years of a globalizing and increasingly interconnected economy, we may see that trend reverse. Multinational stalwarts like Facebook and Google have already been semi-banned by China.
8/ can we imagine a 'shrinking' world where global multinationals like Microsoft, Tesla, etc have a shrinking customer base as they're closed off from growing number of countries? Maybe the 'addressable' market for Microsoft goes from 'the world' to'the world ex-Russia/China/etc'
9/ not predicting this, but it's possible and could lead to worse than a "lost decade" for largecap US equities. Alternatively, maybe geopolitical conflicts resolve quickly, the economy keeps growing, and inflation forces investors to bid even more aggressively for risk assets.
10/ in that (of growth + inflation) we'd likely get a regime of decent real equity returns and sky high nominal returns. Painful come tax season since you get taxed on nominal, not real returns, (and doubly painful for anyone holding fiat).
11/ I know I covered a lot of scenarios here. How do we "thread the needle"? What's a sensible way to position today? A. you're very unlikely to be happy in fiat over the next decade. You might be very happy in fiat for another month or year, but it's a ticking time bomb.
12/ these kind of turbulent markets reward active traders and asset selectors. For the last decade, it was tough to beat "buy and hold" whether you were holding VC bets or Amazon etc. Unlikely to be true over the next decade. Doesn't mean you need to be a daytrader,
13/ there's a middleground. I'm a very active crypto trader but in everything else, I'm quite passive. In my personal portfolio, I average 1 trade a quarter. I look to position for big sweeping trends.
14/ I've been riding gold and energy equities for a while, and started accumulating USD last April. Now I'm starting to keep an eye on sub-asset classes like various emerging markets looking for ~3+ year contrarian bets. Ex: Maybe eastern european equity in a couple months?
15/ basically, when people are panicking or fomo'ing and bureaucratic and structural forces cause smart people to do dumb things, I explore taking the other side. Have to try to anticipate this a bit-if you only start researching once an asset is down 80%, likely to miss the buy.
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Raoul Pal @RaoulPal
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Mar 7, 2022
Great thread.