October 5th, 2021
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 September was -2.18%
Net performance since fund inception is -0.13%
Commentary
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” – Sam Ewing
The S&P 500 lost 4.8% in September, which was the worst monthly decline since the Covid pandemic lows made in March 2020. Is the market finally running out of steam?
The Covid 19 pandemic caused a recession in the US which was five times greater than the average recession since WW2, and did it in 25% of the time. Despite over 11 million people losing their jobs, the US saw the largest increase in personal income in 20 years and this was during the economic downturn. The reason for this was due to the US Federal Reserve’s massive policy response and the CARES act adding trillions of dollars of fiscal stimulus.
“In 3 months we increased the deficit more than if you took the last 5 recessions combined and those were big ones… The Fed bought more treasuries in six weeks than they did in 10 years under Benanke and Yellen” – Stanley Druckenmiller.
And this rapid balance sheet expansion and stimulus has not just been a US phenomenon but has been happening in many countries.
All this money tends to flow into financial markets, real estate and commodities and this has caused sharp price rises. We saw the S&P 500 double from the March 2020 lows of 2200 to over 4500 at the start of September 2021. US house prices rose almost 20% YoY in July which was the biggest increase on record, and similar house price increases are occurring in many countries. The CRB Commodity Index ended September at its highest level in over 6 years, up 126% since the 2020 lows.
And these price rises have been spreading. Global shipping rates have gone through the roof increasing the costs of many goods. We are hearing many stories of businesses unable to find enough staff, which has been inevitably leading to an increase in wages as businesses must offer more money to attract people.
Energy costs have been going up, and we’ve seen US oil prices hit the highest level since 2014.
Gas prices have also surged, especially in the UK and Europe, and perhaps more concerningly this is happening before the peak of winter.
All of these price increases are pointing to a spike in inflation, and well above the FED’s target of 2%
If you believe the central banks, this current bout of inflation we are seeing is ‘transitory’ and will subside soon. However, we believe there are real risks that inflation is going to be much higher and more sustained, and thus we need to be prepared for it.
The FED and other central banks are now facing a serious dilemma. If they continue with their emergency stimulus measures they run the risk of inflation taking hold and rising. If they start their taper, they risk the financial markets going into turmoil and unwinding a lot of good done since the start of the pandemic.
And I believe all comes down to a simple premise:
The central banks can control the supply of their money, but they can’t control the value of it.
More money chasing the same amount of goods and services means prices will rise. US Money Supply has increased nearly 40% over the last 2 years, the largest 2-year increase ever.
Why is inflation a problem?
Interest rates will need to rise
Stock valuations don’t make sense on a higher interest rate and will likely adjust down.
House prices don’t make sense on higher interest rates and will likely adjust down.
As an example, “..if you are long something like Apple, a mature stable 2% solid-growth company and US bond yields go from 1 to 2%, to maintain it’s interest rate differential then the yield then has to go from 2 to 3%, then Apple stock doesn’t just have to correct 10%. It has to halve.” – Julian Brigden
The last time the US experienced a serious bout of inflation was the 1970’s.
For the last 40 years, the global trend for interest rates has been down. In many places around the world rates are trading at negative rates, something that was thought impossible until it happened.
If inflation rises, interest rates need to keep pace with inflation or inflation can spiral out of control.
Right now, we believe the Fed and other central banks are behind the curve.
Interest rate sensitivity
Asset prices around the world have never been more sensitive to a rise in interest rates.
If rates go from 2% to 3%, they haven’t gone up 1%, they have gone up 50%.
And since rates have been low for a long time, the amount of debt has exploded. All debts need to be repaid, if not by the borrower, then by the lender.
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.
