“When you are too confident, that’s when you hurt yourself.”
-Candide Thovex
Candide Thovex is widely considered one of the best freeskiers in the history of the sport. The man known as “the flying Frenchman” has won multiple gold medals in the X-Games and in 2001 he shocked the skiing world with “the jump heard around the world”, which was a 110-foot cork 540 tail grab in Mammoth, California. I would be lying if I knew what that actually was, but anyone that gets 110 feet of air on their skis has my respect!
In his prime, Thovex was one of the most aggressive and boundary pushing skiers on the planet. This fact makes his quote at the outset of the note that much more noteworthy. While he did get hurt a number of times during his career, he was well aware that overconfidence was a path to more injuries.
Personally, I liked Thovex’s quote because it was a reminder to me about overconfidence in investing. I’m sure many of you, like me, have experienced this hubris. You feel like you can do no wrong with your investing decisions or in your portfolio. So perhaps begin by incrementally taking more risk. At the point of overconfidence, that's when Mr. Market humbles you.
The overconfidence bias in investing can be described in three main categories: miscalibration, better than average effect, and illusion of control.
- Miscalibration is a situation in which investors receive information and misinterpret the information and/or overly assume the information is material, which can lead to taking excessive action.
- The better than average effect is straight forward, it is a situation in which investors assume they have “better than average” ability. Along these lines, a 2016 study by Schroders found that only 13% of investors globally admitted “to having a less than average understanding of investment.” The remaining 87% were presumably above average.
- The illusion of control bias is the tendency of investors to believe that they can control or, to some extent, influence a future outcome. In the real world, this is often manifested by a tendency of investors to avoid international investments because they “feel” they have more control over investments in their own country.
Now, I’m not saying we should invest without confidence and take no risk, but when you ARE taking risk just be aware of your cognitive biases. These biases can be managed through a disciplined approach to positioning sizing, stop losses, and some level of diversification.
Back to the Global Macro Grind…
As we turn the chapter on 2022, it will be one that probably many long only, fully invested investors want to forget. Consider the returns of some of the largest ETFs / asset classes:
- SPY -20%
- BND (Vanguard Total Bond Market Fund) -14%
- QQQ -33%
- VWO (Vanguard Emerging Markets) -22%
- IWM -23%
- GLD -1%
- Bitcoin -65%
- UUP (U.S. Dollar) +8.5%
- CRB Commodity Index +14%
Absent being long the U.S. dollar, commodities, or having the ability to short . . . it was a challenging year. That said, as we look towards 2023, let’s make sure we don’t develop any overconfidence based on those trailing twelve-month returns!
In terms of the set up in our GIP Model, this is what the next three quarters look like at the moment:
- Q1 2023 -> Highest probability outcome is #Quad4 at 61.6%
- Q2 2023 -> Highest probability outcome is #Quad4 at 62.5%
- Q3 2023 -> Highest probability outcome is #Quad1 at 41.8%
Obviously, those of you have been following our work for a while know that #Quad4 occurs when the rate of change of growth and inflation are decelerating at the same time. Typically in a #Quad4 environment, the top performing equity style factors are low beta, dividend yield, quality, defensive, and value. Conversely, typically the worst equity style factors in #Quad4 are high beta, momentum, leverage, secular growth, and cyclical growth.
Heading into 2023 our positioning is best reflected in our Top Ranked Macro ETFs (updated and sent every morning to Macro Pro subscribers), which as of Friday were:
- UUP, GLD, GDX, BTAL, ITA, PPLT, XLU, SLV, SIL, GDXJ, SILJ, XLP, SPLV, XLV, ENZL, KRBN, IIGD, TUR, PINK, SQQQ
As you can see, this generally reflects the style factors and sector exposures that would come in a typical #Quad4. Normally bonds, especially the long bond, also do well in this environment. Additionally, both energy and commodities typically underperform.
Whenever I lay out our views on the economy and our current positioning, I am reminded of the famous John Maynard Keynes quote:
“When the facts change, I change my mind - what do you do, sir?”
There is actually some debate as to whether Keynes ever said this, but we will leave that debate to the side for now. The point is we are likely to have another year in which it is important not to be overly confident and shift our positioning as the facts change.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.42-3.89% (bullish)
UST 10yr Yield 3.38-3.81% (bullish)
UST 2yr Yield 4.15-4.39% (bullish)
SPX 3 (bearish)
NASDAQ 10,201-10,905 (bearish)
RUT 1 (bearish)
Tech (XLK) 120-129 (bearish)
Consumer Staples (XLP) 73.55-76.38 (bullish)
Shanghai Comp 3001-3138 (bearish)
Nikkei 25,561-27,374 (bearish)
DAX 13,603-14,443 (bearish)
VIX 20.05-25.29 (bullish)
USD 103.35-107.22 (bullish)
EUR/USD 1.029-1.068 (bearish)
Oil (WTI) 71.95-80.72 (bearish)
Gold 1 (bullish)
Silver 22.77-24.96 (bullish)
TSLA 115-154 (bearish)
Bitcoin 16,117-17,431 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
