1/ - 🧵- Cutting out the "noise": Systematic hedging strategy

Nobody can consistently predict what the stock market will do but trend following allows one to exploit the trends in the markets.

Buy & hold works over long periods of time but this approach comes with... 2/ ...anxiety, gut-wrenching volatility, large drawdowns and secular bear-markets which can last for 10-14 years.

Fortunately, one can reduce the drawdowns and volatility of a long-term investment portfolio by utilising trend following which does not require any forecasts...

1/9) -- Setting the record straight ---

Lately, numerous trolls are incorrectly claiming I've been wrong about everything all year long, so this thread will set the record straight.

Yes, it is true that I've been discussing the prospects of a recession since late 2022... 2/9) ... and my expectation was that a downturn would start in 2023 and in this department, I have been proven wrong.

However, up until recently, I haven't traded off my macro views and have only recently liquidated my growth stock portfolio and started protecting my...

The post-COVID bull market was the first cycle when stocks peaked several months *before* the end of QE.

Between '09 and '20, stocks peaked after the end of QE, but in '21 the speculative stuff peaked in Feb, junior growth stocks peaked in Aug/Sep, tech peaked in Nov... ...and $SPX peaked in Jan '22 whereas QE ended in Mar '22!

Interesting to note that the growth stocks ETF $IWO bottomed in Jun '22 (four months before lows in $NDX and $SPX) and many growth names bottomed between May and July.

At the end of the last bull-market in '21...

Up until 11 March, the Fed was reducing the size of its balance-sheet and draining excess "liquidity" from the system. On 12 March, it suddenly decided to inject new "liquidity" into the banking system...an abrupt U-Turn.

Over the following two weeks, Fed's balance-sheet... ...expanded by ~$400 billion and this undid 8-months of liquidity drainage via QT!!!

Since the Fed's intervention, the financial markets have rallied sharply...bitcoin, silver, gold, tech stocks - the usual suspects have all benefited from the Fed's balance-sheet expansion...

Labour cycle and $SPX -- 🧵--

Many are convinced $SPX bottomed last October and we are now in a new bull-market. If this is a labour cycle and unemployment rate is set to rise, then history shows the bear-market low lies ahead...

1/ $SPX during 1969 and 1973/74 cycles - 2/ $SPX during 1980 and 1981/82 cycles -

$SPX declined when unemployment rate rose and only bottomed after rate cut(s) by the Fed (just before the peak in the unemployment rate)

1/ Fed's balance-sheet expansion - 🧵

Over the past 2 weeks, the Fed has created $400b out of thin air and injected this new liquidity into the banking system...via loans.

These newly created dollars are neutralising the natural deflationary forces (preventing liquidation)... 2/...within the banking system and economy, therefore these operations are inflationary.

Granted, this new liquidity has not seeped into real spending yet (via loan creation by banks) but its affects are already showing up in the financial markets!...

History suggests this bear-market will end several months after the onset of recession and not before the initial rate cut...

Even after initial rate cut, real risk of additional declines at the index level. Given timing of recession, low likely in autumn or early next year. This was the 4th major asset bubble in ~100 years...

1974, 2000, 2008 and 2021

During the prior three post-bubble contractions, $SPX declined a minimum of 30% *after* initial rate cut.

Lots of confusion about the Fed's new BTFP/Discount Window operations and what that means for the financial markets and the economy.

I recently spoke with Dr. Lacy Hunt (who is an expert in this field + used to work for the Federal Reserve) and he sent me the below via email... "They have created new liquidity but it will be contained within the financial markets. It will not directly enter the spending although some limited seepage is possible. This bears no resemblance to the Pandemic Operations....

Dow Jones Industrial Average, NASDAQ Composite, NASDAQ100, Russell 2000 and S&P500 have now closed below their 200-day moving averages.

"No landing", "soft landing" is a pipe dream...after creating an epic boom, the Fed is now driving the economy into the ground. SIVB is likely to be just the appetiser, the main course to follow...data suggests that later this year, the default rate of the lower-tier corporate bonds will spike to ~8%, there will be stress in the credit markets are millions of Americans will lose their jobs....

The following growth stocks hit their lows last spring/summer and have been building a STAGE 1 base for several months -

$ADYEY $NET $CFLT $GTLB $NU $SNOW

These appear to have cleared their STAGE 1 base -

$GLBE $MBLY $MELI $ONON $TOST

*I own shares, do your own homework/DD Noteworthy that when $NDX $SPX declined to new bear-market lows in Oct, the above stocks didn't crack below their lows from spring/summer.

Growth stocks peaked months before the indices, therefore possible that some may have also bottomed before the market. Time will tell.

This cycle is quite similar to the 2000-2002 TMT bust...

Lots of sharp bear market rallies, tech underperformance and similar to the TMT bust, very high odds that recession will land about a year after the start of the bear market in stocks.

Earnings declines are not priced in! To make matters worse, during the TMT bust, at this point of the macro cycle the Fed was already aggressively easing...

This time around, it is still hiking rates and doing QT!

Recession seems inevitable and highly likely the stock market is about to get a wake up call.

RECESSION WATCH -- A short 🧵--

1) 10Yr/2Yr UST spread been inverted since 7 July '22 -

Persistent inversion has always led to recession... 2) 40% of US banks have tightened lending standards -

This has always been followed by recession and current reading implies 7%+ corporate high yield default rate by year-end...

US Nov. core PCE price index ⬆️ 4.7% YoY (est. 4.6%)

No chance Fed will pivot, 25bps hike likely on 1 Feb '23

Fed's hands are tied, stock market will get memo soon. Pundits keep saying stock market has already discounted the looming recession...

This doesn't seem to be correct as 2023 EPS estimate is still ~$220 (flat YoY). Recession/earnings declines haven't been priced in yet.

$TSLA stock is declining not because of @elonmusk 's selling or $TWTR involvement but due to the fact that the risk free rate has spiked over the past year and the economy is headed towards recession.

This is what stocks (especially auto OEMs) do during this phase of the cycle. Nauseating to see the media and $TSLA fan boys blame @elonmusk for this decline!

Seems like these people haven't really seen the carnage (80-90% declines) in other growth stocks.

During a post bubble contraction, all stocks decline by varying degrees.

1/ An important thread 🧵 -

With the deepest inversion of the yield curve in 40 years, many are wondering how severe the coming recession will be?

Lets explore this objectively...

A few years ago, The Federal Reserve Bank of St. Louis did some research on yield curve... 2/ inversions and it examined both the depth of the inversions as well as the real (inflation adjusted) 10-Year US Treasury Yield at the time of inversion.

The researchers concluded that the length and severity of the ensuing recession was *inversely* correlated...

- A thread 🧵 -

$SPX bottoms during recessionary bear-markets -

Over past 50+ years, a recessionary bear market in $SPX has NEVER bottomed before initial rate cut by the Fed...In all instances (except '80), $SPX kept declining even after the initial rate cut!

Keep reading... A) 1970 and 1974 recessionary bear market -

In both instances, $SPX declined after initial rate cut...

- Fed Funds Rate (bottom panel)
- Initial rate cut shown by blue vertical line

US Housing Bubble - PART II

- This parabolic rise > advance leading up to 07-08 bust!
- Dallas Fed forecasting 20% decline in US home prices

20% decline in housing + bear market in stocks + job losses in '23....hard to see how this can end well!?

Chart from @ycharts US existing home sales down ~30% over the past year*!

*This is the largest YoY decline since February 2008.

This is the same script as previous housing bubble -

1) Severe unaffordability (all-time high!)
2) Home sales tank
3) Prices decline on nationwide basis

Buckle up!

$SPX scenarios (recession vs. soft landing) -

Even if US avoids recession, $SPX is overvalued...

Chart from @LanceRoberts Conference Board's LEI indicator flashing recession -

Morgan Stanley forecasting ~20% $SPX EPS decline in 2023 ($175 EPS vs. $220 in 2022)

The 10-Year + 30-Year UST yield tanked after Jay Powell's presser as bond traders price in recession.

Bond market positioning itself correctly, but stock market is smoking #hopium

When there is a discrepancy between the bond and stock market, usually pays to bet on the former. When recession lands in a few months, short-term rates will decline significantly and that is why bond traders are taking duration risk and buying lower yielding long-term bonds.

When recession lands, earnings will also decline meaningfully and $SPX should discount this in Q1.

BCA Research - Special Report (5 December '22)

A short thread🧵

1/ #recession in '23 , $SPX to decline to 3,000-3,200 2/ $SPX bottoms ~4 months before #recession end -

$SPX will hit its bear-market low in H1 2023...

1/3) Since mid-October (when 10Yr/2Yr yc became inverted for 90 consecutive days), I've been posting macro related stuff not because I am "biased" but due to the fact that I'm genuinely concerned about the looming recession.

I run this a/c to share my thoughts... 2/3) and research, in the hope this might help some followers.

I certainly don't post stuff on here to influence the stock market (I'm not that influential!)...

When all data points/ leading indicators are screaming recession, I'm obviously going to call it as I see it...