Path of maximum pain, searching for the stop loss
"Since I wrote this, the US cut rates by 50bps straight off the bat as their first rate cut which was absolutely wild for a country with little unemployment and strong growth. Cynically I can't help but think that the US Fed cut rates just in time as these hedges rolled off"
I am a perennial market bull as being bearish does not pay. But I do like exploring what might go wrong in the future.
A gut feeling of mine has been we are sort of dawdling along in equities markets because in certain areas of the market that have issues due to leverage (real estate, corporate zombies, etc) don't need to reset their debt structures quite yet.
Sometimes you find out the king was stark naked very quickly. But sometimes the king does trick you with his pretending I'm wearing clothes act. The lack of primary market activity means that true price discovery hasn't quite happened yet.
For example, the reality is for many REITS and unlisted property trusts is that hedges and time hides many of the flaws as debt has not matured and remained fixed at low rates, or redemptions are being paid out over a long duration of time. Things need to play out though and back to my point, until this theme of maturing debt plays out, I have a bad feeling that markets just continue to dally along in their current states.
You can't help but ask yourself, where would the market be if those hedges didn't exist, or you had to clear a transaction out at the market rate right now today? Valuations of large parts of the market would look very differently today if that were the case.
Lenin — 'You probe with bayonets: if you find mush, you push. If you find steel, you withdraw'
Markets and investors are still steely today, hedges and time protects. If rates stay elevated, things might get mushy. And I am becoming more determined to believe rates will remain elevated until we get to that point. But until we arrive at that point, the music keeps playing and we must keep dancing.