The podcast covers topics such as the bond market, national debt, private-credit, alts, managed futures, the Sam Bankman-Fried trial, market inefficiencies, small-cap stocks, AI and the semiconductor industry, inflation, wage increases, adding 10% to alternatives, the current state of the bond market, credibility of witnesses, impact of cryptocurrency, and courtroom depictions.
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Quick takeaways
Alternative investments may provide a better hedge in the current environment where bonds may no longer provide the same level of diversification.
The federal budget deficit presents a significant risk in the market, with the potential for catastrophic consequences.
Managed futures as an alternative investment faces challenges such as poor performance and difficulty in explaining the strategy to clients.
Deep dives
The Changing Landscape of Stocks and Bonds
The correlation between stocks and bonds has historically been positive, contrary to the negative correlation seen in the 2000s and 2010s. This has implications for portfolio diversification and the traditional 60-40 allocation. Alternative investments may provide a better hedge in the current environment where bonds may no longer provide the same level of diversification.
The Risk of the Federal Budget Deficit
The federal budget deficit presents a significant risk in the market. The unsustainable debt levels could have catastrophic consequences, although the timing and magnitude of such a crisis is difficult to predict. Bonds are generally considered a safe haven, but if the bond market were to collapse due to rising interest rates, it could have a negative impact on both stocks and bonds in a portfolio.
The Challenges of Managed Futures
Managed futures as an alternative investment has its challenges. The performance of many managed futures funds has been disappointing, leading to skepticism and lack of support for the strategy. Additionally, the complexity of the product and difficulty in explaining it to clients pose further obstacles.
The Importance of Communication and Messaging
Financial advisors play a vital role in managing client portfolios and addressing their concerns. Effective communication is essential in helping clients understand the risks and benefits of different investment strategies. Advisors should focus on how alternative investments can provide diversification and potential protection in a changing market environment.
Growing Popularity of Private Credit
Private credit funds, such as hedge funds, have seen a tremendous increase in assets under management in recent years, surpassing high-yield bonds and bank loans. The trend towards alternative credit has been fueled by the collapse of traditional banks like Silicon Valley Bank and the perceived need for credit risk to be away from taxpayers. Private credit funds have taken on a significant role in providing loans to businesses and individuals, with assets under management growing exponentially. While this trend has been seen as positive in terms of providing capital to areas where banks have pulled out, there are concerns regarding the strict covenants and onerous terms of the loans. However, the growth potential for private credit funds remains significant, as there is still a vast amount of bank deposits that could potentially be redirected towards alternative credit.
Challenges and Risks in the Crypto Market
The crypto market, while holding potential for disruption, has seen its fair share of challenges and risks. The market attracted scam artists and Ponzi schemes, with some investors considering cryptocurrencies as a way to challenge the existing financial system. However, the credibility of the market has been questioned due to its association with frauds and its vulnerability to regulatory changes. Additionally, the market experienced shifts in narratives and expectations, leading to changing goals and objectives. The crypto market also faced criticism for its religious-like fervor among participants and the potential financial distress faced by unprofitable companies within the sector. Despite these obstacles, there is still optimism regarding the disruptive potential of cryptocurrencies, particularly on the payment side and the possibility of challenging the current payment system.
On episode 113 of The Compound and Friends, Michael Batnick is joined by Jan van Eck and Andrew Beer to discuss: the bond market, the national debt, private-credit, alts, managed futures, the Sam Bankman-Fried trial, and much more!
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