The Arbidyne Absolute Return Fund implements a long/short investment process which aims to produce consistently positive returns in multiple market cycles. Our primary focus is Australian and US equities; and complement this strategy with global index futures, currencies and government bonds when opportunities present.
Net performance in November was-7.63%
Net performance since fund inception is -7.31%
Commentary
We spend a lot of time discussing Inflation. Historically, when inflation rises, interest rates have to rise. Interest rates affect the price of money, and the price of money affects everything. This is why it is so important, especially now when inflation is rising rapidly.
At the start of the year we moved into the ‘Inflation is going much higher’ camp, which was not a consensus view at the time and certainly against the views of the central banks.
The US just saw CPI hit 6.8%, the highest level since 1982
Fed’s Jay Powell just admitted he was wrong on inflation, saying the word ‘transitory’ was no longer applicable.
The ECB, however, is still holding firm, with President Christine Legarde saying that the inflation they are seeing is just a hump and will return to normal low levels. We believe the data would suggest otherwise.
In Germany, selling prices in wholesale trade rose by 16.6% in November YoY, the highest since the beginning of calculation of wholesale price statistics in 1962.
In Europe, the cost increases are so unprecedented that companies won’t be able to fully pass them to customers. In late november we saw Spain’s PPI hit 31.9%
Unfortunately for Europe, German power prices have jumped to over 200/MWh for the first time ever due to the gas crisis. This is right before the start of winter. Let’s not overcomplicate things, higher power prices drive higher inflation and these price rises are unprecedented.
The “Taylor Rule” forecast now exceeds the fed funds rate by the most in four decades. This shows how far the current Fed approach has moved out of sync with prior policy and demonstrates how much potential catch-up tightening is needed.
Last time US CPI inflation was this high, the 10y Treasury yield was above 14% (now 1.4%). If the bonds do start moving, they could move a long way.
The ECB has a big inflation call to make this week. In September, the ECB forecast inflation – currently at a record 4.9%, slowing to 1.5% in 2023. Its new forecasts will go out to 2024 for the first time. We will be watching closely.
The Fed is also meeting this week. Are we about to see a major policy shift from these central banks?
If the Fed and other central banks are finally starting to acknowledge inflation and admitting their policy mistakes, we expect nominal interest rates will have to rise more than what the market is currently pricing. Real interest rates (nominal – inflation) may still remain low and accommodative for equities. Equities are at risk if the Fed decides to increase their pace of tapering.
In summary, our calls on higher inflation have been correct, but there is no victory lap to be had as our view on rising interest rates have not come to fruition.
However, we believe the central banks will start to act in the coming months to try and regain control of the inflation narrative, and perhaps more importantly, to regain their credibility. Otherwise inflation expectations can become unanchored that can feed onto themselves.
Our aim is to grow your wealth whilst managing risk. Investing is a marathon, not a sprint and new opportunities in the market are always going to present themselves. Our aim is to find trades where the upside outweighs the downside, and then diligently execute our trade plans; profitable trades then tend to be a byproduct of this process.
If you have any questions or comments, please drop us a line at info@arbidyne.com
For new clients:
Since we are running individually managed accounts, new clients will not always have the same positions as our master tracking account when they first join, and as a result may not see the same monthly performance. This is because we cannot always buy new accounts into the same positions that were entered into before they joined the fund. We consider this on a case-by-case basis and evaluate whether it is in the individual client’s best interests to enter into existing positions. New accounts should see their accounts begin to track our performance benchmark approximately 3 months after joining.
DISCLAIMER: This information has been prepared by Arbidyne Pty Ltd.. This information is general in nature and nothing in this letter should be considered investment advice. The commentary reflects Arbidyne’s views and beliefs at the time of preparation, which are subject to change without notice. No representations or warranties are made by Arbidyne as to their accuracy or reliability. To the extent permitted by law, no liability is accepted by Arbidyne for any loss or damage as a result of any reliance on this information.
