Goldman Trader: “If Nothing Else, 2022 Has Taught Me I Know Nothing”

By Bobby Molavi, Goldman managing director and macro trader

An explosive week on so many levels. Let’s start closest to home. The UK experiencing it’s emerging/submerging market moment. The mini budget delivering a fiscal boost with the goal of delivering growth at a time of high inflation and weakening consumer. The reaction was swift and substantial. As has been well documented the UK pension market experiencing some form of liquidity ‘event’ culminating in first heavy gilt supply, followed by gilts hitting 5% before the BOE stepping back in to provide an effective backstop. More on that later. Last week a perfect microcosm for the complexity of the current market. Inflation necessitating rate rises but a financial system that is very very used to cheap capital. When you see rate moves adjust this quickly there is bound to be pain – whether it be in the form of leverage finance and private equity debt mark downs, in the form of mortgage repayments as a % of earnings or in terms of variation margin and collateral requirements for the LDI community.

The signals about the consumer are getting pretty clear. We had our summer…it was lovely…and now let’s get real. It arguably started with Fedex substantial warning and hasn’t stopped since. To paraphrase a colleague: “Micron have too many chips, Nike have too many trainers, Walmart have too many toasters, retail/e-comm have too many clothes…well…increasingly it seems like most people have just too much.” If we just take Nike starting to discount trainers….as someone who has grown up on airmax, airjordan and airdunk…that is not something you see often. We have seen shipping and freight rates collapse. We have seen retail starting to aggressively discount. Put another way…deflation is starting to be seen and in size in certain segments of the market. Not when it comes to travel, oil, power, electricity and food but where the consumer has been shocked and has some ‘discretion’ on where and how much they spend…in those areas we’re seeing adjustments. The reality is that we are seeing material cuts to EPS estimates for Q3 across the board. In Q2 we feared the worst and got better than expected and so estimates didn’t move. In Q3 we ‘know’ it is going to be bad and so cuts are big…which does give one glimmer of hope…if it is known to be bad, and we are cutting ahead…could we see relief when if it is only as bad as we expect and not worse?

Positioning…US mutual fund cash levels hit 2.5% of total assets in august…the highest level since 2020. We have seen net selling from Long onlies in 8 of the last 10 sessions. We have seen nets for hedge fund community hitting relative lows and gross only increasing as they increase shorts. In terms of Long community cash levels I imagine those cash levels have only increased since that august print and have heard some mentioning numbers closer to 5%. In relation to asset allocations and equities are moving from a world of TINA (there is no alternative) to TARA (there are real alternatives), and in a world of high vol, low conviction and much uncertainty then cash may not be king…but it has been upgraded from pauper to prince. Stealing from a colleague……”Positioning is very consensually bearish across the HF community (L/S ratio 5y lows, Gross leverage 95th 5y%ile), CTAs are short $52bn of global stocks, close to historical max but still sellers (-$36bn on flat tape), GS positioning indicator reached -1.5 entering buy signal territory, put call ratio at 2y highs also signaling a local bottom driven by technicals and flow dynamics could be near.” Reflexivity a topic for many at the moment. The SPX has been down -12.5% in a month 25 times in the past 25 years, which was followed by a 6.5% retracement in the following week on average – adding credence to the squeeze arguments in the short term. Month end dynamics and blackout periods could mitigate this picture a bit – with c. 70% of SPX mkt cap to be in blackout by end of next week (vs 25% currently). October marks the year’s largest active mutual fund fiscal year-end month, reaching nearly 24% of total assets under active management, followed by December (~20% of total). This could adversely affect (or already be affecting) price action in popular mutual fund overweights, with potential tax-loss selling of ytd underperformers and trimming/profit taking in ytd outperformers.

Sentiment…so so bearish. Nor really surprising when lack of positioning seems to be the most bullish argument put forward. Ironically, there is also a lot of game theory being debated. In 2022 every time investors get constructive with hope of soft landing we sell off…whenever we get gospel around the market being on the verge of a breakdown we have seen a short squeeze. Now I am hearing that the market has evolved and that the hope trade is a myth and that pressing the bear case is the way forward. If nothing else…2022 has taught me I know nothing. Worth looking at facts at times like these….and a typical cyclical bear market last 26 months and falls on avg 30% from peak to trough…we are 9 months into a ‘bear market’ and we’ve fallen 23% in the US and Stoxx600 down 21%. For now, it does seem consensus we are on the verge of the latest of a series of mini squeezes after a dreadful Sept. Sentiment also continues to deteriorate with risk appetite GSRAII falling to -0.52, VIX now above 30 and AAII bull bear spread close to 08 levels – suggesting we are getting closer to fear territory where the asymmetry to the upside improves.

Tech creation through destruction….We have seen the power of company creation in previous times of distress. The last 5 years…and especially 20/21 saw the dramatic power of abundant capital, cheap rates and focus on growth. There were more unicorns created last year than the previous 5 years combined. Unicorn deal value more than tripled between 2020 and 2021 with over $75bn deployed across 340 unicorns….in fact there was circa 1 unicorn created everyday of 2021. This journey started in 2014 with $49bn put to work in venture, before a material jump to $145bn in 2018 and finally culminating with the epic $341bn deployed in 2021. The world may be scary but the power of innovation remains and the growth eco-system is better prepared for some of the challenges ahead. Current VC dry powder is 3x the levels seen in ‘99/’00. At of the end of Q2 2022 and the aggregate value of all US unicorns was ~$2.3 trillion based on last private-round valuation. Put another way, the wall of capital on the side-lines to support these companies is material and the maturity, size and scale of these companies is unlike anything we’ve seen in history. The median unicorn today has $108M in annual revenue compared to just $18M for IPOs during the dot-com bubble. VC-backed unicorns now make up 13% of companies valued over $1bn, only 10 yrs ago this figure was 1%. “From a standing start 20 years ago, 7% of global market cap and 13% of all companies are private VC-backed unicorns. Over 80% of this market share gain by VC-backed unicorns has occurred in the last four years.” Elsewhere the private for longer theme continues to take hold…. “Since 1990, the average age of companies at IPO has doubled from 6 to 12-years old.” Now we wait and watch.