Comments from an interview of Mark Spitznagel made the rounds. Here's a version from Bloomberg, Yahoo and Unusual Whales. The Bloomberg version has a short video, it was not the entire interview. Spitznagel runs the Universa Fund which is a tail risk fund. Regardless of whether he's talking his book or genuinely bearish all the time, he usually does a good job framing out the prevailing bear case. There is always a prevailing bear case. This time though, he wasn't that persuasive. It might have just been how the interview went, but he talked about complacency and a little about 2022.
More interesting were comments about diversification being "deworsification," it's a "big lie" that has left people worse off. Ok! We've got something to chew on there. To the extent he meant diversifying with bonds, I can't get to it being a lie but clearly I've felt they no longer are anywhere near as effective as diversifiers. This a theme we've been working on here for many years. Bonds with duration went from insanely risky because of how low the yields were to now being unreliably volatile. Income sectors that avoid interest rate risk still work as far as I can tell.
Spitznagel specifically says that diversification isn't the holy grail it's made out to be. I'm not sure, but that might be a shot at Ray Dalio's idea about having 15-20 uncorrelated return streams as being the holy grail of investing.
I won't entirely rehash the last three years worth of posts to take the other side of his opinion. We've been on the case with negatively correlated return streams since before the Financial Crisis with inverse funds and RYMFX. Of course my understanding as well as the products available have evolved considerably. There is a long list of funds with strategies that offer negatively correlated return streams and uncorrelated return streams to diversify equity volatility. It turns out that a lot of those diversifiers are uncorrelated with each other. We've seen the general effect work in various types of adverse market regimes.
Finding them is easy. They're out there and we've looked at them plenty. Figuring out the sizing is a nuanced process. I've said many times before, you do not want a portfolio of diversifiers hedged with a little bit of equity exposure. Equities are the thing that go up the most, most of the time and unless you're in some variation of game over you want equities to be your largest holding. Hanging on to diversifiers can be challenging too. It is very human to give up on something that seems to not be doing much but there is no way to know when they will be needed to carry the portfolio.
Checking in on the catastrophe bond mutual funds at Wednesday's prices.
Yesterday, I mentioned some quirkiness with mutual fund reporting. EMPIX was up on Tuesday and as you can see up on Wednesday. EMPIX has generally held up better so far but I don't draw any sort of conclusion from that. It doesn't track for me that the bonds are so efficient that we have a good picture of what is really going on days before we have a real handle on the damage. It might be weeks before the market knows. I'm not sure which is why I am tracking this and why I am test driving EMPIX in one of my accounts for possible use in client accounts.
After I wrote the above paragraph I got some more information. One via email confirming what I said about it taking a while to sort out the true extent of the costs. It said weeks or even months. Both the email and this Bloomberg article reports estimates of the costs coming down quite a bit. In one blog post, I said that the dollar threshold for triggering events is usually very high. It is still not known whether there were any triggering events from Milton. It's a good bet there were but that hasn't been reported yet. For whatever reason, Bloomberg has had content about cat bonds every day through this which has helped tremendously.
Time got away from working on this post and so we now have Thursday's prices for the cat bond mutual funds, perhaps reflecting the sentiment of the Bloomberg article about the damage being less than the worst case scenario, dollar-wise.
On a related note, earlier this week I saw that the Brookmont Catastrophic Bond ETF (ROAR) did not issue when expected, It was supposed to hit the market during the summer but hasn't done so. I am not sure if it is merely delayed or not going to happen. It would have been interesting to see ROAR react during the trading days this week. It might have been instructive but as I said before, I don't think cat bonds are easily ETF-able.
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