What Did We Learn This Week?- (06/27/22)—Tim Pierotti, Chief Investment Strategist
Tim Pierotti, Chief Investment Strategist
Confirmation bias is a killer for research analysts, traders and portfolio managers. Humans look for data that confirm what they already believe and tend to dismiss or not even internalize data that contradicts a belief. As a young analyst many years ago, I worked for a brilliant PM who digested my recommendations in the context of what he knew were my biases. If for instance, he knew I was negative on the auto industry and I said something even modestly positive about Ford, he would immediately buy the stock. We also tend to gravitate to the market experts who tend to think like we do and ignore those who do not. Those who are inclined to be bearish gravitate to economists like David Rosenberg or Nouriel Roubini who have been bearish equities for most of the last 25 years. Those inclined to be bullish have always and will always have a wide variety of Wall Street based economists and strategists from which to choose for incessant Pollyanna bromides.
In that vein, I follow a broad mix of economists, academics and portfolio managers willing to share their insights honestly and I am always vigilant to be cognizant of the bias and intellectual baggage that I bring with me. One of the strategists I follow closely is Henry McVey. Henry is the Head of Global Macro, Balance Sheet and Risk and CIO of KKR Balance Sheet. I first met Henry at Morgan Stanley in 1995 when he was a bank analyst, and I was in equity sales. To me, Henry is quintessentially data dependent. He is not always bullish and not typically bearish. He is open minded and willing to change his positioning and admit defeat. Last week, he and his team at KKR penned their Mid-year update and below I have enumerated what I thought were the most interesting takes.
Now I will admit that in this case, I am highlighting his work because it tends to confirm what we at WealthVest have been saying, but I would assert that Henry’s credibility is beyond reproach and frankly, the reason I was so struck by his update is that his view is far more cautious than I can ever remember him being before. I would encourage anyone interested to go to the KKR website and read the piece in its entirety. Here are just a few excerpts that stood out to me:
“We are now firmly of the view that the macroeconomic narrative will soon shift from a singular focus on the impact of inflation on the global capital markets to one where investors are surprised by how unwelcome inflation adversely affects corporate profits.”
“What makes today’s environment so tricky for macro investors and asset allocators is that the traditional relationship between stocks and bonds – where bond prices rise when stock prices fall – has broken down. This development, which we think is more structural in nature, is a big deal, in our view. As a result, many investors will need to consider adding different types of investments to their traditional asset 60/40 allocation mix. Consistent with this view, we believe not only that forward returns are likely to be lower but that Bonds can no longer serve as shock absorbers or diversifiers when paired with Equities.” Henry points out that in the last 7 periods of extended negative equity returns, bonds were positive, but not this time.
“Our base case now envisions growth approaching stall speed in 2023, with GDP falling to just above one percent, and with S&P 500 EPS actually falling. Headwinds to growth are coming from higher energy prices and rising interest rates, which will impact the consumer, housing and exports. Partially offsetting tailwinds include still-favorable credit conditions and strong household and corporate balance sheets”
“We believe the three key structural drivers of elevated inflation center on scarce labor, scarce housing, and scarce commodities: Regarding labor scarcity: Roughly two million workers are ‘missing’ from the labor force due to early retirements and lost immigration during the pandemic.”
Tim Pierotti is WealthVest’s Chief Investment Strategist.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
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