12 June 2018

Mutual fund managers are "preparing for a downturn"

I am by nature cautious re investments, and my party-pooper attitude about apparently ever-rising markets has not served me well in the past year or two, as the markets have continued to soar in the face of geopolitical turmoil and an impending trade war.  I can at least take some solace in hearing that at least some fund managers are becoming similarly disillusioned:
The signs are starting to add up that the United States is at the top of the economic cycle, and therefore headed down, likely into a bear market and recession, an increasing number of economists and money managers say. The main culprit for the looming downturn, they say, is the Federal Reserve, which is expected to again raise U.S. overnight interest rates on Wednesday...

When the music stops I do think it’s going to be pretty ugly,” said Jonathan Beinner, chief investment officer of global fixed income at Goldman Sachs Asset Management.

Beinner highlights the increase of global debt, now upwards of $237 trillion and the way the debt has been dispersed as risks to the economy. Rather than banks holding most of the debt as it happened in the financial crisis, this time it’s hedge funds, private equity and investment managers holding most of it. Also worrisome, he says, ratings agencies are again being overly generous with their appraisals allowing for companies with very high debt levels to gain investment-grade ratings.

“We’ve sown the seeds for the next downturn and there’s a lot of similarities,” Beinner said, comparing today’s climate to what existed ahead of the global financial crisis in 2008.

After ’08 everyone was like, ‘I can’t believe we did all those very stupid things.’ But we’re doing them all over again,” he said during a presentation at the Bloomberg Invest summit in New York last week.
More at this link.  For those reluctant to sell profitable positions, one way to cushion the downside is with out-of-the-money index puts.


  1. "More at the link" -- but I don't see a link. Am I overlooking it?

    1. Nope. I forgot to put it in. Fixed. Tx for the heads-up.

  2. You are not wrong to sense the tension in the market conditions. What you can't know is the timing. If market timing were a thing everyone would take advantage of it. We'd have no more down turns either. But it's not. The forces of negativity are strong. And it's also going to get more paradoxical. The large tax code changes are bringing a wave of repatriated funds. Companies are buying their own stocks. So there's a big uppward push for some stock-- not all but overall net positive for the market in the short run. Meanwhile the debt must be unwound. The short term tax revenue increases from the repatriation will dry up and after a short positive spell of net revenues we will have even lower tax revenues and higher spending. Social security outflow will increase. With obama care dead, the cost structure of medicare will be more fragile. So there's going to be a collapse. But when? before the collapse the forces are actually going to make the market rise-- you will feel like a fool for a while. And if inflation grows as it is starting too then it's better to be in stocks than bonds. So really were kinda wedged. out is bad in the short term. in could be catastrophic if you are entering retirement right at the moment you need to draw down your capital. We just can't know when the tension breaks the knot. Trade war? maybe but likely averted. but it will be something. it just might be 6 years from now or 2. six is a long time to sit out when the market is likely going up 10% per year. 2 is not a long time. The best bet it is to diversify and put some into a different pot than stocks. Annuities or real estate or asian markets. will be contrary to stocks. So you reduce your return but lower the risk. But no matter which way it goes, up or down you will regret it. Just remember safety in hedging means less than perfect returns. You have to pay for safe investing.

    1. Thanks, charlie. I quite agree with everything you've said. Since I'm 72 yrs old with no significant earning power, I'm personally quite content to settle for modest submaximal returns and to pay for my expired option hedges. I certainly don't recommend a similar strategy for everyone - just wanted to share the analysts' viewpoint since the rosy scenarios and optimistic predictions tend to dominate the business news.

  3. Crashes often happen when rosy scenarios and optimism are dominant. Hence Warren Buffet's credo "I am greedy when others are fearful, and fearful when others are greedy." But I am sure he keeps his impulses to himself and does not broadcast them.

    A vice-president of Vanguard Mutual Funds--a company I admire and with which I have done good business--told me last October that he had sold all of his stocks and was heavy in cash. I am now in the same boat. I would buy stocks only when the P/E ratios revert to the historic average or below. Everything seems overpriced to me.

    What worries me most is what happens if we do indeed have a "hard landing" and there is no relief for the average man and woman. On the last go-round, the Federal government did a good job of insuring banks and other financial institutions from harm, but help for the little guy was not as forthcoming and was resented in some quarters. We are not very far away from the torches, pitchforks, and tumbrils.


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