Wednesday's Market Minute: Cashing Out My Chips

Professional poker strategy today stems from two main styles of play: GTO and exploitative. GTO (short for game theory optimal) is a rules-based approach rooted in probability and logic for people who play on a big scale. Exploitative poker is more your old-school Doc Holliday approach: respect the numbers, but play your opponent. Most of what happens in markets can be similarly siloed into categories of math and emotion – it’s why the efficient market hypothesis only gets you so far. A company that’s a complete fraud and makes zero money will eventually go to zero, but it could take a very long time for that truth to be realized because of the emotional nature of humans (i.e., “the market can stay irrational longer than you can stay solvent.”)

Yesterday on the network we had Mark Dow of Behavioral Macro, who's been right on bonds and the Central Bank for as long as I've followed. He made the case that attributing equity weakness to higher rates is conflating causation with correlation. Yes, the Nasdaq’s highs and lows have almost perfectly aligned with ups and downs in real yields lately – but as we know, just because something is happening, doesn’t mean it reflects some underlying truth.

While Dow acknowledges the interplay between low rates in a slow economy and the tendency for investors to seek out growth stocks, his view is that the incoming growth post-stimulus will outweigh whatever discount rate fundamental investors may need to adjust to higher yields. That may sound surprising to viewers of my shows, as I’ve been pounding the table on equity risk tied to a spike in yields. But actually, our views work quite well in concert. My job is not to ascertain the truth in markets. I am not an economist or fundamental analyst; I have no CFA. I’m a storyteller. My goal is to understand investors' logic with more accuracy than anyone else on TV so that I can point out to my viewers when their story makes the most or least sense.

Over the last few months, the reasons that people were giving for buying the Nasdaq and remaining complacent on bonds just wasn't adding up. We warned appropriately, and were proven right. But to Mark’s point, just because those things happened doesn’t mean they reflect some inherent truth or mathematically sound economics. It was just the logic of investors in that moment that broke down and caused them to panic – time will tell if it was rational. My game is about reading the players at the table; Mark’s is GTO. GTO makes money at scale, is reliable, and doesn’t need luck to work – i.e., you should probably listen to what he says. As for me, I’m cashing out my chips for now and will see what the market does next. I think the 10-year yield can still be destructive in this moment, but it ain’t based on any math.

Photo by Amanda Jones on Unsplash