Over the past 24 months, we monitored the movement of money around the world and ran an experiment based on the principles of fluid dynamics.
During the course of the experiment, our portfolio outperformed the SnP by close to 4x ( 61.3% versus 14.87%) with seemingly lower levels of volatility (a standard deviation of 12.30% versus 14.52%).
We were also able to make some really fascinating observations along the way. The most dramatic by far was during these past 7 days where approximately 10% of all companies listed on NYSE and Nasdaq fell by more than 10% in their share price.
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Below are other note-worthy occurrences at the macro level over the past 6 months.
Increased volume of liquidity within the system
- the White House administration has issued individual income tax cuts (TCJA) in 2017 thereby money supply within US households
- the Federal reserve increases money supply in the system through the repo market and by lowering interest rates
- Central banks around the world lower increase money supply in their systems by lowering interest rates
- the high exchange rate for the US dollar signals that money from around the world is flowing into the US market
High pressure areas
- the price of gold marches steadily upwards hitting all time highs
- the price of US Treasury bonds, signaled by ultra low US Treasury yield, marches steadily upwards hitting all time highs
- the SnP hovers at all time highs
- Companies classified as value stocks are trading at all time high multiples
Low pressure areas
- Companies classified as growth stocks are trading at huge discounts versus all time highs
The investment thesis
Assuming money is water and the markets a reservoir, the vacuum and high pressure points are considered abnormal. This anomaly can be attributed to the psychological impact of news.
Taking hedonic adaption for granted, it is reasonable to assume the psychological impact of news will wear out over time and with it the liquidity imbalance between high pressure and low pressure areas within the system.
Next steps
We will continue studying the behavior of our international monetary system through the lens of fluid dynamics to identify scenarios where our assumptions are invalid as more new stimulus gets introduced.
Related readings
- The Wealth of Nations, Adam Smith
- Das Capital, Karl Marx
- Understanding Big Debt Crisis, Ray Dalio
- The bank credit analysis handbook, Jonathan L. Golin and Philippe Delhaise
- Barbarians at the gate, Bryan Burrough and John Helyar
- When genius failed, Roger Lowenstein
- The Savings and Loan Crisis, Susanne Trimbath, Glenn Yago, James R. Barth
- Invest with the Fed, Robert R Johnson
- The Asian financial crisis, Shalendra Sharma
- Irrational exuberance, Robert Shiller