Wednesday, September 28, 2022

Time for a Strategic Retreat


I had a health scare this week. 

After a routine blood test, doctors found that my Lipase level was elevated at 200+. This can be signs of pancreatitis which can be quite painful and requires an IV drip and hospitalisation if symptoms crop up later. Naturally, I carried on googling the symptoms and worse scenarios can occur. I will be doing another blood test tomorrow and already have an appointment with a different specialist.

With medical problems, and an attempt to pivot to part-time legal practice, I have little cognitive bandwidth to entertain a margin call if it happens in the market, so when markets dipped by over 1% on Monday, I told the ERM Community that I'll be getting out of all leveraged positions built by my students, and then I ran a webinar last night to justify my decisions and answer questions in my community. 

The essence is that it's impossible to fight the Fed. 

Repeated 75bps increases to the interest rate will not be remedied even if landlords raise the rent so my fear is that REITs will behave practically like bonds over the short term. If my community were to remain leveraged until 13 October when the US publishes the inflation report, an adverse report will push Singapore stocks lower, even though we are quite insulated and riding on the COVID recovery. 

With yesterday's action, I'm happy to say that we're out with some diminished profits and it's not so much a panicked rout. This is contrasted with my actions on March 2020 where I stubbornly held on until we began suffering losses. It also puts us in a position to leverage again when markets face a recovery, which can be as late as Q3 2023.

In my case, I did not stop at just selling enough to deleverage my portfolio. I sold everything into cash and will be consolidating my holdings over the next few weeks. I will be just 10% cash, but will enjoy my immunity to margin calls. If my calculated gamble that markets will continue to drop, I should be able to do some bottom fishing into the year-end. 

While I do entertain the possibility that I might be wrong to run, this is a whole new era that is similar to the 1970s when Paul Volcker was Fed Chief. To battle inflation, the hawks pushed interest rates all the way to 17+% and triggered a recession in 1981. None of my quantitative models predicts what will happen even if we pick a conservative portfolio of banks, and high-yielding REITs. 

Suppose my factors models outperform the average by 3%, and markets dip by 30%, my community will still be hammered by 40%+ losses on their margin account. I can't have my student's blood on my hands, so my leverage is now about x0.9.

Now we are in a very strong position to watch what happens to the markets here.  

I would caution making any false move until mid-October to see whether inflation can really be tamed. 

Some experts even say that November will see another 75bp rise. 

At this point in time, I will continue to invest funds into student portfolios in my unleveraged CDP account. But this will look more like dollar cost averaging moving forward. 

This is not the time to play hero. 

I hope history will vindicate this move of mine.

[ I put an Advanced Squad Leader graphic because US squads actually have very low morale for a victorious Army. As it turns out they take cover very frequently, but they recover very quickly as well. German forces on the other hand are quite brave but once they rout, it's hard to recover. ]

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