Macro Volatility: A generation will be left behind
Let's zoom out
There is a constant cycle of excessive focus placed on what is perceived as revolutionary. The problem with pegging your future on a single asset or single outcome is that it has ZERO alignment with how the world works.
How does the world work? It is characterized by these variables I noted in the last article (link).
The economic and financial world is not characterized by a single problem that Bitcoin, AI, blockchain, EV, 3D printing, or any other technology solves. Problems are a constant and there is no such thing as a single technological solution that results in you never having to worry about uncertainty, risk, chaos, or volatility again.
On top of this, our biggest problem in the world today is not connected to a single technology or asset. It is connected to the dollars those are denominated in. Let me explain something very simply: any asset has a value but that value is denominated in the local currency. Asset prices can move all day long as they price in the changes in their respective cash flows that they lay claim to. However, if the actual currency changes in value then EVERYTHING becomes a lot more volatile.
These TYPES of changes are what we call “Macro Volatility.” NVDA stock has soured because its underlying cash flows have increased. (Earnings expectations in orange). However, what happens when the value of the currency and the actual price of money change?
The World Of Macro Vol
Over the last 40 years, everything in macro land was relatively stable. Sure we have some issues here or there but the bond market always remained a bedrock of safety. Even if stocks go down, at least your bonds go up. What are bonds? Bonds and their respective interest rates represent the price of money.
So where are we now with all of these ideas? There are two things you need to remember: 1) Macro volatility is back and you can’t make bets in the world without being aligned with the macro backdrop. 2) There is NOT a single asset or answer that functions as a “liferaft” to safety through macro volatility.
Macro volatility means that even if you pick the right company with a revolutionary technology, it can still go down if we have an inflationary bear market. Macro volatility makes the characteristics below explicit:
So if there isn't a single asset that functions as a liferaft and macro volatility is going to be a large force moving forward, how do you benefit from this volatility instead of getting crushed by it?
The answer: It is very simple (but difficult), to develop the competency of having a clear understanding of the world and constantly adapting accordingly. When there is a greater frequency of volatility, greater adaptivity is required to benefit from it.
The tail risks in today’s world are increasing. From levels of debt to passive ownership in the market, to geopolitical volatility and even the validity of democracy, the necessity of adaptability is fundamental.
Let’s get practical:
Let’s go over a very simple example of this dynamic. During 2022 we saw volatility in bonds move to elevated levels. Even though the stock market wasn’t down as much as it was during previous bear markets, you would have thought the world was falling apart because both the stock AND bond portion of people’s portfolios were going down. Notice in the chart below, that the volatility for bonds has not moved back to pre-2022 levels. This reality of macro volatility is far from over.
The entire sovereign balance sheet is functionally leveraged to this volatility (chart is public debt to GDP ratio). While the government is the issue of the currency, this doesn’t mean it will be a smooth ride.
The earnings yield of the S&P500 is almost back at its lows as the primary driver in markets is leveraged to the liquidity function from the Fed and Treasury.
There has never been so much focus on the Fed and Treasury. People are deciphering every phrase of their speeches and just missing the forest for the trees.
The market as a whole has become so short-term oriented as the active space desperately competes for capital and passive ownership causes greater inelasticity in the overall float.
We are seeing data prints cause sharp moves in markets only to be immediately reversed intraday. The increase in algorithms on an intraday basis completely stacks the edge against short-term traders who don’t have a significant edge.
If all of these tensions weren’t enough, we are moving into an election year where the social tensions are likely to increase. While many people are being blinded by their biases, financial markets will continue to price WHAT IS. If there is any social unrest, gun stocks are likely to catch a significant bid.
Many people will misunderstand these risks and only focus on what is seen. This stance will eventually lead to that individual getting crushed by volatility in markets. The market doesn’t care about who you are or who you vote for. It cares about your ability to adapt. Again, many people can’t accept this and will not be the beneficiary of the macro volatility in the future.
Where Do We Go From Here?
The worst thing you could do after reading this article is thinking the world is going to end. An adaptive trader is always in a constant state of weighing the probabilities on both the left and right tails for all assets. This is why I share this video so often!
“Clear thinker” is a better compliment than smart
-Naval
Being a clear thinker and always orienting oneself to adaptation is the only way.
Came here for trade ideas, fell in love with your philosophy and approach. Cheers, mate 🙏