Bear Porn…

Let’s turn to the markets.  Since early summer, KEDM went into full “harvest mode,” cleaving off the chaff and moved to center book. We weren’t outright bearish but envisioned volatility coming into play over summer and into the elections.  While that didn’t serve us well in the short-term (looking at you offshore…) we’d rather err on the side of caution and raise liquidity when we can, not when we have too. Fastforward to today, that cautious/neutral stance is swaying to an outright bearish view. Maybe its because I am a boomer, or maybe its because I am anchored in a cognitive bias having navigated the post-2000 bubble and ’08 GFC bust, or maybe it’s because I am a History major with a fascination with market history/cycles, but either way Chuck Prince is replaying in my ear:

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” -CEO of Citi circa 2007, marking the all-time high in C

The market is still dancing and liquidity is plentiful.  And scrolling through the charts, its hard to be bearish. But when the last remaining bear throws in the towel and thinks this tech/AI inflection could be a “new era” with a fundy reversal “several years away” alarms start going off.  Mind you we have been in the markets for 25 years and David has always been a bear…

I do hate to ever use the term “new era” or “it’s different this time,” but we do not have a large sample size of data points historically on such major inflection points on the technology curve. But when they do occur, what you do find is what we have on our hands today, which, once again, is an investment community lengthening their investment horizons and rendering classic valuation metrics obsolete (at least for the environment we find ourselves in currently). That’s the major point. Once (if?) we ever do revert to a backdrop where investors shorten their timelines to what has been the norm of the past, which will mark the end of this technology super-cycle, the gig will be up. Remember what happened in 2022, just before this AI craze took hold — it was not exactly a pretty picture. The business cycle and market cycle have not been repealed, but I am definitely now keeping a more open mind that we could end up seeing Bob Farrell’s Rule #4 in that this bull market continues to go further than anyone thinks. The latter part of that rule on not correcting by going sideways is still relevant, but as we saw in the 1995-2000 Internet era, that fundamental reversal could still be several years away.

 – David Rosenberg (full post here)

We’ve all seen the bear porn out there – yes, sentiment is stretched, retail is “all-in”, concentration is hovering at Great Depression levels, and fake sh*tcoins are all the rage (again). 

But we’ve been flowing in and out of these conditions for years (e.g. 2022), so what triggers a real “flip”? 

Hell if I know!! …The “why” typically comes after price moves 25% and all the “experts” hindsight trade and agree on the reason.  Maybe it’s galloping towards the debt wall and refi schedule in ‘25/26 that triggers a liquidity/credit event, maybe its Trump/Bessent/Elon throwing grenades and shaking things up, or maybe its something as simple as MSTR/NVDA reversing under their own weight and dragging down this entire ponzi/reflexive market.

To be honest does it really matter??!  What we see is VIX ticking 12 again and junk spreads at lows. At this point, the why doesn’t matter if the market is giving us cheap protection which seems mispriced against all the possible “whys” heading into a chaotic Trump administration…

Its worth noting, that while our bearishness towards the US markets picks up, our bullishness for EMs continues to ramp.  We continue to believe that if global flows flip from US tech and repatriated and the USD pulls back, the world re-rates and weightings shift…. and even if it doesn’t? Well we are buying great businesses with dominate market share at a mere fraction of US valuations…

https://x.com/Crescat_Capital

Charlie Bilello pointed out that “US stocks have been outperforming international stocks for 16 years running… and by a huge margin. The result: we’re now more than 3 standard deviations above the mean in terms of historical US outperformance”

We aren’t calling an end to US dominance, especially as Trump and Co. seem positioned to fix a ton of lingering issues.  Nor are we selling fear and calling for a historic top.  But what we do see are mispriced securities (via protection and EMs).  We are entering uncharted territory with DOGE on the loose and tariff man in control, the next 4 years are gonna be interesting and we are positioning accordingly.