The CUB and the Hunter

History rhymes, but never quite repeats itself. In my 30+ investing years I have experienced a few crashes. When the 2020 crash came along it showed many of the typical traits of investor psychology. And yet it was most unusual, not so much the fast drop, but the strong recovery. We are now in a “Crack Up Boom” (CUB), with monetary and fiscal stimuli exceeding the loss in GDP growth. So, we thought it would help to give you an update on our activities and insight into how the HanseaticHunter hunts the CUB.

First of all, how is a CUB defined? It generally means disproportionately expansionary policies leading to excessive expectations of inflation, eventually accelerating into a collapse of the monetary system. So far, we have only seen inflation in financial assets such as equities. We can envision three scenarios:

(1) In the classic view, the end result is hyperinflation with ensuing monetary system reset. This was originally formulated by Ludwig von Mises, who foresaw what then, actually happened in Germany in the 1920s. Initial expansionary monetary policy builds up on every dip causing an economic boom which leads to shortages of various commodities and labour. Consumer inflation explodes and the economic boom turns to bust. A deflationary shock, as we just had with the lockdown, can be the trigger. Germany experienced such a shock in 1920 and we all know the resulting hyperinflation of 1923.

(2) Sound reasons support that deflation may stay with us for longer. Due to globalization, we have experienced two decades of “good” deflation with consumer goods becoming more affordable and demand continuously increasing. In recent years, trade policies threatened to reverse some of these gains. The current global recession which initially was a supply shock (lockdown) may lead to more subdued demand lasting longer, i.e. “bad” deflation. In this scenario, the pattern set in 2008/2009 will continue. TINA, buy the dip!

(3) Every crisis opens new opportunities: It looks likely to us that after a phase of political polarization, a new generation of leaders will succeed with a more pragmatic approach about getting on with our lives. E.g. Why does the EU need EUR4 trillion of spending to reduce CO2 emissions when you can get the same result for EUR160bn? Such a proposal already exists. Our history of interventionism and state-run economies is rather dismal. It prevents necessary adjustments and the natural flow of capital to the most efficient production locations. As political and corporate decisions become worse, this could ironically lead to a faster and stronger transformation, i.e. delivering bigger long-term benefits. Our hope is for more government outsourcing to proven experts in their field and creating a fertile ground enabling technological breakthroughs.

We are building and executing investing plans for each of these scenarios. From the same base of equity research and using the same basic approach, we manage three investing activities: 1) Active trading on company news, 2) a long/short portfolio and 3) a long-term investment portfolio. This enables us to cover about 80% of what an average asset manger covers. It may sound audacious, but if you focus on what you are good at and outsource/ETF the rest, you can take on the world and add value as a small team. It is actually quite amazing how low research efficiency can be at large asset managers, or to put it more constructively, moving from 80% towards 100% becomes very costly. Let us briefly expand on these activities:

3) Our long-term investment portfolio is built on three pillars: structural growth stocks, a value turnaround basket and a real asset/crisis basket. The size of each basket varies depending on the scenarios described. Currently, we are NOT adding to the structural growth portion, but rather to the other two. Despite new all-time-highs in some markets, there are still great value opportunities out there.

2) Our long/short portfolio has a more short- to medium-term view. Earnings momentum and shifting investor preferences are key determinants. When you understand the longer-term track record/history of the companies you follow and have a tool set to determine shorter term aberrations, you have a powerful combination to create alpha. The short component is a natural extension of the same bottom-up approach. It enables us to create an asymmetric return profile very similar to good multi asset funds.

1) Lastly, the trading activity is a great diversifier and source of current income. It can perform in (almost) every market environment. Our proprietary stock database is also very useful in ascertaining whether an earnings/news event is properly reflected by the market. If not, we trade (unemotionally) long or short. Being free from institutional constraints, we may actually short a stock that we hold in our long-term portfolio. Having a separate trading account, also lessens the temptation of overreacting/overtrading the investment portfolios. You can monitor our track record in the rolling banner under “Projects”.

Finally, while details will follow another time, a word on our investment approach, Fusion Investing: It is where we combine fundamentals with sentiment. The focus on investor psychology is timeless, as deeply engrained human traits change much slower than smart AI machines.

Happy hunting: let’s tackle that CUB!

The HanseaticHunter

#crackupboom #fusioninvesting #transformation