Markets Thoughts

The Direction of Markets

Earlier today I published a rather long post on Linkedin in which I basically argue that, on close inspection, most investment portfolios are poorly constructed because they are overly reliant on getting the direction of markets right. Also and related to this, most traditional portfolios are not properly risk-diversified or hedged. (This is not just my opinion: It is consistent with quite a lot of academic research and as important, the insights and core principles espoused by the most successful of market veterans.) Just as worrying, the advisors that manage these portfolios are so wired to think about price directionality that they can be easily spooked in a crisis.

I worry that too many feel they have seen this before. Too many have been successful in buying prior dips and have become conditioned to think they do know what will happen: The fed will come in, asset prices will stabilize and run up again. Again, they disrespect the very nature of reality -that the future is always uncertain- especially at critical junctures. They speculate assured they will be right. They might. But they also might not. My point is that risking such binary outcomes with other people’s money is outright irresponsible.

We do not need to be certain about the future to manage an investment process and make decisions. All we need to realize is that there are many ways the future can turn out, think very carefully about the different scenarios, cognizant of the hypothesis and assumptions that drive our approximations and biases. Then follow your discipline calmly, diversify risks-types, size your positions and trades appropriately, and hedge.

In my text this morning I also layout many of my concerns about the current situation: Both the global economy and the financial system (the structure of the system) have been growing very fragile. The “only game in town” as Mohamed El Erian, William White and many many others have been arguing for several years have been Central banks. If this basic market belief is tested and proven illusory, this can get very VERY complicated.

As I write this note (Sunday, March 15th in the evening), the FED announced it is marking down rates basically to zero, announced a massive $700 billion QE, and showed coordination with global central banks regarding support for global dollar liquidity. Yet, US Markets are again trading “limit down.”

Please tread carefully everyone. We might be entering unknown territory.



Best of luck,

Rafael Alcántara-Lansberg
Founder and Chief Strategist
Harbor Ithaka Investment Management