Part-II

Financial assets are fundamentally priced relative to real interest rates. But we don’t confuse that with investors ignoring such a framework. Often. And with cyclically rhythm always during turning points in cycles. This behavioural volatility is one way in how we as active investors create and protect wealth.

The financial behaviour of recency bias, spurred on by too many government handouts and central bank actions, inactions and aquiescence, has indoctrinated (and fooled) a generation that the cost of money is cheap.

But as we noted in Part-I, if nothing can go on forever, it will stop!

This Part-II of my holiday happiness notes drills deeper into what matters most for investors currently. The extreme disconnect between price and intrinsic value in the face of what we described (in Part-I) as happening in the macro conditions under-the-hood (beneath headline data). This extreme mismatch in price and cashflow intrinsic value is the largest disconnect in financial markets I have experienced in my 30+ years of professional investing.

This note highlights the following key market signposts to that disconnection with cascading macro indicators.

(a) Interest rate reconciliation;

(b) Equity Concentration signals;

(c) Long term valuation signals; and

(d) Earnings, investor expectations and sentiment

Finally, this note outlines four (4) interrelated financial market risks that we are keenly focused on from a macro versus market perspective in order to keep perspective of the forest for the trees.