Displaying items by tag: recession

(New York)

A huge institutional investor is poised to make a fortune if markets plunge. The biggest hedge fund in the world—Ray Dalio’s Bridgewater—has reportedly placed a $1 bn+ bet that stocks will tumble. Using Goldman Sachs and Morgan Stanley, the firm has been building up the bearish position for months. The bet wagers that stocks will fall sharply by March and will pay off if either the S&P 500 or the Euro Stoxx 50 moves lower. Bridgewater reportedly paid $1.5 bn for the options contracts, roughly 1% of their AUM.

FINSUM: This is a huge bet. Normally you could argue that this might just be a hedge, but the size of the position makes it seem much more like a gamble than a hedge.

(New York)

The economy has been in a rough patch for about a year, with major economies and emerging markets all slowing. But things may be poised to turn around. Markets have gotten very excited about the prospect for an upturn after the IMF said it expects 2020 to be better than 2019. One economist from Macquarie summarized sentiment this way, saying “As 2019 draws to a close, the market is pricing in economic recovery, with equities in the US hitting new highs and long yields well off the recent lows”. Global trade is now stabilizing, which begs the question as to whether the economy has already weathered the worst of the storm.

FINSUM: When it comes to the economy, things are very hard to forecast, but on balance the situation is looking better than worse.

(New York)

One corner of the bond market, or rather credit market, is having a tough time and it may be a negative sign for the rest of fixed income. CLOs, or collateralized loan obligations, which have been a star for several years, recent tumbled. In aggregate, CLOs dropped 5% in October, and those close to the market see more volatility to come. According to Citigroup “We think there’s more volatility coming … We recommend investors reduce risk and stay with cleaner portfolios and better managers”. CLOs are a key funder of the leveraged loan market, and weak demand there can flow through to boost borrowing costs to all corporates.

FINSUM: This is akin to a warning coming out of the high yield market, as what it reflects is worries about how leveraged companies might handle a downturn.

(Detroit)

The car industry is the epicenter of the current economic slowdown. The car business is both the culprit and a victim of the biggest economic downturn since the Crisis. It is not just in Germany, but also in Asia and Detroit. The industry uses so many raw materials and supplies from many adjacent industries, that the contraction in the auto sector is is dragging the whole global economy down with it. The chief executive of VW says “This trade war is really influencing the mood of the customers, and it has the chance to really disrupt the world economy … Because of the trade war, the car market [in China] is basically in a recession . . . That’s scary for us”.

FINSUM: What is curious about the car downturn is that consumers are very strong. Therefore, from our view, the weakness in the auto sector is more concerning because it could be a leading indicator.

(New York)

There is a lot of investor anxiety about a recession right now. The big economic expansion of the last decade does have the feel of an ending coming, but even if that is true, how should one react? According to Barron’s the answer is to employ a long-term buy and hold strategy. That said, many don’t have the stomach or cash for such a strategy. A better way to think about allocation is to consider the type of recession we might have: will it be driven by a real economic downturn, a policy error, or a crisis—each have highly different return profiles? In this instance, a recession seems more likely to come from a real economic slowdown, which is good news for investors. Such recessions generally have significantly lesser falls in stock prices than the other varieties.

FINSUM: The reality is that we are likely having a “soft landing” type of recession where the economy slows gradually. That means we might not have a bear market at all.