Thread by @shortl2021

1/21.

Just came off @gnoble79's Twitter space & the interesting exchange he had with @agnostoxxx over whether they could come up with any scenarios where the equity market wouldn't get spanked.

2/21.

Shrub facetiously mentioned options expiry ST, but neither of them could come up with a serious counter narrative to their bearish view. OK, despite viewing myself as King of the Bears (although those 2 run me pretty close), I'm going to come up with two.

3/21.

This is a really, really important exercise; if you can't argue against your own high conviction trades then I don't think you will ever make it in the markets. So here goes:

4/21.

a) As along as employment remains high, the passive bid remains relentless. This is moronic mindless money, which is being taken out of the pay packets of the employed & invested in the stock market regardless of inflation, the Fed, the dollar or anything else.

5/21.

Passive doesn't do macro; indeed, it doesn't give a sh*t what the Fed does. So for the passive bid to be overwhelmed one of 2 things must happen:

6/21.

It gets overwhelmed by active or the employment situation deteriorates to a point that those pension inflows start to dry up and the unemployed start raiding their pensions pots.

7/21.

As regards active versus passive shares, there are lots of conflicting opinions out there. I recently tweeted one house's take:

https://twitter.com/MikeZaccardi/status/1534909751741620226?s=20&t=zxrGE_GX9S-W7SqIXHwixA

8/21.

Mike Green @profplum99 & @VincentDeluard have talked about much higher levels than this.

9/21.

As my counter to my counter argument, I wonder how much of passive is actually actively managed passive. So, for example, all those 401K whose basic building blocks are S&P index funds.

10/21.

But does the owner of the 401k go "oh sh*t" when he sees his next 401k statement & bail from those funds? I don't know. But if passive holds firm it is a huge support for the market.

11/21.

As for people being forced out of their 401k passive holdings as opposed to choosing to rotate out of those holdings, that would require a really big, fat juicy recession and a huge jump in unemployment.

12/21.

And the inflation #s would have to remain really, really sh*tty for the Fed not to pivot over that!

13/21.

b) Instead of a horrible bear market we get @hussmanjp alternative to his trap door scenario; that is his "long road to nowhere".

14/21.

We keep score with bear markets in nominal not inflation-adjusted terms. So let's add our existing near 20% decline in the S&P & throw in 10% inflation for this year and, say, 5% inflation for the 2 years after that.

15/21.

So we get a 40% plus decline in the S&P in real terms but the index meanders along flat for the next 24 months.

16/21.

Further, most large cap names, led by magnificent 7 tech giants are oligopolies (or indeed monopolies), so they can have pricing power. Further, in a world of QE and stimmie checks they never had to care about cost cutting. Perhaps there is a lot of fat?

17/21.

So perhaps the 10% 2022 EPS earnings growth projection doesn't looks so stupid after all as it is in fact flat in real, inflation-adjusted terms.

18/21.

My counter to my counter would be that the empirical evidence shows no evidence of stock prices holding up in the face of inflation.

19/21.

My counter to my counter, counter would be that the nature of the firm has changed. We are in a new, asset lite world where all the value of a firm rests in brands and IP. So perhaps this new breed of firm will behave differently in inflationary times?

20/21.

My counter, counter, counter, counter would be that this firm structure will count for naught if the end consumer sees their purchasing power trashed by inflation. No new iPhone for me if I need the money to eat, drive & heat my home.

21/21.

Ok, I've given the non market slump thesis my best shot. Anyone out there also prepared to argue the bull case with a coherent thesis? (Not a sort of religious belief like Mr Melt-up Man 🙂)