George Maris: Let me share a couple, if I can, just a couple of observations, and some of the behavioral dynamics or anomalies that may be at play that maybe not ought to be, or that create opportunities. One is, we can see what the incredible volatility we’ve had in markets exemplified by the, you know, the pandemic – March and April of 2020, where we had historical highs in the VIX [the Chicago Board Options Exchange’s Volatility Index]. And then, we’ve continued to have, basically, beginning in November [2021] with the Fed’s [Federal Reserve’s] pivot towards higher rates and quantitative tightening in response to inflation, just a world of volatility. What we’re seeing is, you know, what is anchoring? The market doesn’t know what the paradigm is to invest anymore. Equity risk premia, risk premia spreads across the world, they’re all up in play, and so that’s created a lot of uncertainty in the markets.

Julian McManus: As George referenced, we’re now in a new world where central banks may no longer be able to control where rates go or may no longer want to control where rates go. And events are out of their control, to some extent, because of what happens on the supply side with inflation. So, markets are struggling with that, and time will tell as to where we land in terms of levels of inflation and rates. But those have to be market-determined from here on. And amongst the potential for markets to get things really wrong globally, I would highlight what’s happening in Japan right now, where the central bank is one of the last to give up control of interest rates in the bond market globally, and yet inflation is starting to make an appearance there. And the pressure is being released through the currency. So, as a result, we’re seeing a vastly weaker yen versus the [U.S.] dollar, and this stores up all sorts of pressures and problems for the future. Right now, you have, you know, capital going overseas to seek higher returns. But when inflation becomes unbearably high in Japan and the central bank has to let market forces dictate interest rates there as well, we could have, you know, significant dislocations in terms of capital flows. A lot of capital could flow back to Japan and have lateral impacts on where rates go in the U.S. and Europe and so on.

Maris: I think there’s been a significant amount of loss aversion and risk aversion in markets. We’re seeing investment time horizons truncate dramatically. I think when Julian and I started off investing, long-term investing was at least five years, probably more like 10. Today, it feels like long-term investing is, I don’t know, 10 months. Maybe 10 hours on some days, right? But the truncation of time horizons is partly due to, you know, the worry about loss in terms of, let’s get in and out quickly and what will move. And also, there’s an element of herd mentality. We don’t know what’s going on anymore, so we’re just going to move with the crowd, and the crowd’s got a shorter time horizon and, you know, so we’re going to have a lot more momentum orientation than we’ve had in the past.

And then lastly is loss aversion. People are afraid. They don’t know what’s going on, the anchoring has gotten destabilized, and in that backdrop, you’re starting to see that behavioral de-linkage. I don’t want to lose, I don’t care about making money, I just don’t want to lose. And I will stay with the crowd because that’s the safest place to be. And to us, those are a lot of what’s happening in markets now that we’re seeking to identify and potentially take advantage of.

Definitions

VIX: Chicago Board Options Exchange Volatility Index.
Fed: Federal Reserve: the “Fed” is the central banking system of the US.
Equity Risk Premia: is the excess return that investing in the stock market provides over a risk free rate.