The war in Ukraine will pour more gasoline on the already raging inflationary fire, threatening to send the global economy into stagflation. Stagflation is a slowdown of economic activity caused by inflation.
I spilled a lot of ink warning that a large portion of the market was playing a “bigger fool” game – investors were buying overvalued stocks and otherwise worthless cryptocurrencies and NFTs, hoping to unload them on bigger fools (I wrote about it in January). Over the last six months the market started to run out of fools. Higher interest rates and inflation returned some rationality to the market. There is a saying on Wall Street: Bear markets return money to its rightful owners. This is what we’ve been experiencing lately.
Q1 2022 hedge fund letters, conferences and more
Several clients thanked us for the placidity of their portfolios in otherwise turbulent times and told us we should do a celebratory dance. I’d be lying if I told you that seeing our portfolio remain relatively stable while many “greater fools” stocks decline as much as 80% doesn’t bring us a certain satisfaction.
But I am not doing a celebratory dance, for several reasons:
First, there are real people with shattered hopes and dreams on the losing side of what I call the dotcom 2.0 burst bubble. I sincerely feel bad for them.
Second, the last thing I want to do is to let our relative success go to our head or suggest to us that I have got all of this figured out. I don’t want my teammates at IMA to become less vigilant and lose what one of our IMA clients, who has become a personal friend over the years, calls “Russian Jewish paranoia.” He tells me that he sleeps well at night because his money is run by a “paranoid Russian Jew.” Okay, there is only one “paranoid Russian Jew” on our investment team – yours truly. But this healthy dose of paranoia – looking not just at what is in front of us but thinking about risks lurking around the corner – has deeply embedded itself into IMA’s DNA.
As you’ll see later in the letter, the list of things to be worried (paranoid) about is only growing. In fact, when you are abuzz with feelings of either success or failure is when you want to tighten your process to make sure emotions (and over- or under-confidence) don’t mess with your head and decision making. I am constantly double, triple checking every stock I own to make sure our thesis on each is intact.
And third, the “greater fools” wreckage is likely going to turn a lot of ex-darlings, which investors could not get enough at much higher prices, radioactive. These stocks will have the stink of an un-investable asset class, at least for a while. Just as people confused great companies with great stocks on the way up, they’ll mistake bombed-out stocks for bad companies.
To be fair, some of the stocks that are crashing to mother earth today are bad businesses, while some are mediocre, and some are excellent. A massive change in sentiment usually waters down the distinctions between them and they all are treated equally as radioactive waste. Our job is to carefully go through the wreckage and identify great businesses that are trading at great prices (with a significant margin of safety). This recent pile-up has given us a larger universe of stocks to study – I welcome the opportunity.
Inflation is everywhere
The war in Ukraine will pour more gasoline on the already raging inflationary fire, threatening to send the global economy into stagflation. Stagflation is a slowdown of economic activity caused by inflation.
Before I go into the messy entrails of stagflation, let’s review what is going on in the US and global economies. I discussed some causes of inflation in previous letters, therefore let’s focus on the new culprits.
Read the full article here by Vitaliy Katsenelson, Advisor Perspectives.
