Buckle up!

Buckle up!


Dear Clients, Partners and Friends,

On June 30, we held our annual investor event in Herzliya Pituach. The meeting was well attended and included two parts. One was an interview of two highly successful Israeli biotech entrepreneurs who presented the cutting-edge technologies their companies are developing. The other part was a presentation, entitled Significant Events in the History of Finance, that drew important general lessons from financial history as well as parallels from the past to the current market situation.

Summarized here succinctly, our conclusion was that the current market situation showed several similarities to the stagflation of the 1970s and to the internet crisis of 2000 (the presentation is available on request, including the video). 

Similarly to the 1970s, the economy at the beginning of the year was starting to experience high inflation following over a decade of low interest rates that led to irrational exuberance in the pricing of most asset classes, to use Alan Greenspan’s term that is highly appropriate in the current case.

The “dotcom crisis” of 2000 was driven by the high-tech sector. Following a five-fold increase in five years, the Nasdaq index fell 80% from its peak in 2000 to its trough in 2002, erasing basically all the gains. The high-tech sector has also been the hardest-hit sector of the current crisis. For good reason, because the valuation excesses of some companies last year left nothing to be desired to the 2000 bubble. The valuation of Zoom, down almost 90% from its peak, is a good example of a company that reached an excessive valuation based on market euphoria about the company’s ability to benefit from the pandemic.

In June, during the meeting, we took a bearish stand with respect to market expectations. After a short-lived summer rally driven by market enthusiasm due in our view to a misunderstanding about Fed Chief’s Jerome Powell’s declarations, we are back to where we started. While we would like to be proven wrong this time, we fear that our expectations will again prove correct, like our market concerns one year ago did.

In our view we continue to face an adverse constellation of several elements. The high inflation is here, and the question is for how long. Historic precedents suggest that it is sticky and that it takes time until it dampens. Due to inflation, interest rates, after years of financial repression, are elevated, at least in nominal terms. This is likely to impact corporate investments but, more significantly, reduces the relative attractiveness of higher-risk asset classes such as stocks and high-yield bonds. Ray Dalio of Bridgewater, the largest hedge fund, recently took the exceptional step to publish on his Linkedin the detailed calculations suggesting that markets are still overly valued. 

In addition to those issues, the zero-covid policy in China and the well-known strategic issues in Russia and in other places continue to represent significant risks. In summary, investors should buckle up and be ready for further turbulences.

A market correction could happen in two ways. One is a fall in asset prices. The other is through markets trading sideways within a trading range for an extended period implying a drop in value in real terms due to inflation. On September 16, Fedex, a bellwether of the global economy whose results are often a lead-indicator of upcoming economic developments, reported disappointing results. Its shares immediately dropped 21%. This is probably a good illustration of the current market’s complacency and failure to fully realize yet the potential impact of the current economic situation. 

In consequence, at this stage we advise investors to proceed with caution and to refrain from increasing risk. The corollary of the current situation is that some sectors are becoming significantly more interesting. This is particularly the case for the fixed-income space, both in terms of listed bonds and of direct credit. Macro managers and those following arbitrage strategies should generally be able to capitalize on the increased market volatility.

Preparing as always for adverse scenarii while hoping for the best, we send our clients, partners and friends our wishes for a healthy, prosperous and happy New Year.

Orit Raviv Swery Ilan Weil

Founder & CEO Chief Investment Officer