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Brainstorms: A Seat At The Table
I remember a while ago, a good friend said to me, “Being exceptional and smart only gets you a seat at the table.” Don’t think because you are incredibly talented and smart that you will automatically be successful. It’s helpful to remember that you aren’t competing against average people in the market. You are competing against incredibly smart and experienced individuals.
It is so easy for people to assume they are smarter than the person they are trading against. It is human nature to automatically assume you’ll be successful because of who you are. At the end of the day, you need to develop your edge and just never quit. It is not just about getting into the chair but being able to stay in the chair.
The fascinating thing about markets is that they always seem to confound the smartest people out there. I know a lot of really smart people in markets and they still get humbled the same as everyone else.
The interesting thing about this period of time in markets is that volatility is incredibly low across all major assets. I noted this in the macro report:
When volatility is low, you can be humbled just as much as when volatility is high. Here is the chart I shared in the report:
Volatility is compressing right now.
It would be easy for me to say that another spike in volatility is coming. Anyone can say that though.
WHEN and WHY is it coming? This is the million-dollar question. If you don’t have a reasonable idea of the WHEN and WHY, you can’t monetize the WHAT (in this case that there will eventually be another spike in volatility).
When I look out on the horizon of the global economy, I see a lot of risks and potential scenarios that can play out. Many people think about the future as a single outcome that we inevitably move toward. In practice, it is much more complex and looks more like this:
When I think about managing capital through various macro regimes, it is not only about quantifying growth, inflation and liquidity but also quantifying HOW returns are taking place. The TYPE of price action in terms of volatility is just as important as the direction of an asset.
Here are some of the risks I am thinking through right now:
Will a recession take place? How will it have continuity and discontinuity between past recessions?
In the absence of a recession, will inflation reaccelerate or could it continue to fall?
Is inflation more dangerous to markets than a deflationary recession?
How will additional exogenous shocks transmit through the supply chain to cause inflation to rise or fall?
How is indexation concentration in a few stocks positive or negative for financial markets as a whole?
Can gold stay in a range for the next 3 years and only provide benefits through rebalancing as opposed to trending?
Can the 10-year get above 5% by the end of the year without causing credit spreads to blow out?
What will cause the next dollar shortage?
Why do perma bears have such a difficult time understanding inflation?
I literally have lists of questions I ask myself because I don’t want to get caught offside because of my lack of imagination.
Let me tell you this, most of the scenario planning and strategy I conduct on a weekly basis would be horrible for a marketing campaign. There is a reason financial media grabs your attention with sensational headlines and click-bate phrases. They make money by getting your attention!
In the real world, you need to have meticulous planning, strategy, and execution to make money. This applies to markets or any business you might be running.
I will end with this, you want to consistently use your imagination to envision all of the absurd things that could take place. It is your preparation that allows you to adapt correctly and keep your seat at the table.
Have a good weekend and thanks for reading!