Posts by Niels Kaastrup-Larsen

We are currently in a Fourth turning and fourth turnings is when we suddenly realize that that kind of world is not meant for survival and that we suddenly need order. We want direction, we need authority and we are usually shocked into that realization by a catalyst that suddenly plunges the world into a very negative mood. Suddenly big institutions particularly individualistic market institutions no longer seem to work anymore.

After a nail biting month of March, April was full of surprises…and of course a “never before in history” event, when we saw Oil prices go Negative. And that is actually the point I want to emphasize this month. How many times in the past 6 weeks have we heard the words “first time in history that this has happened”? Quite a few.

In my February update, I wrote about the three things that is usually present for a Crisis to happen (Excessive Valuations, a Trigger & Change in Investor Sentiment/Human Behaviour), but little did I know that this would be evident just 31 days later.
Last night the S&P 500 wrapped up a 12.5% drop for the month of March and 20% first-quarter tumble for the broad index…

Last Sunday as I was sitting on a train headed for Geneva to attend a few meetings, many global equity markets had just finished the week at or close to new highs. After a day in Geneva, and a quick return to see the family, my plan was to jump on another train to Milan for another two days of meetings. BUT Sunday night I spoke to a friend of mine who said, “Have you seen what is going on in Northern Italy, with the coronavirus?”

I could hardly believe my eyes when I sat down to write this update, only to find that despite geopolitical tensions following the killing of a top Iranian General and the outbreak of the Coronavirus, the Trend Barometer had not changed from December 31 to January 31.

A lot of critics have labeled the last 10 years as the “lost” decade for CTAs and trend followers. And sure, with just 19.25% to it’s name in the last 10 years, the Soc Gen Trend Index, admittedly did not knock it out of the park during the 2010’s.

But this is still better than the -9% return that the S&P TR index saw during the previous decade (2000 to 2010)…oh and with a 51% drawdown along the way.

There was Black Friday in 1869, when the gold and stock markets collapsed after being driven to record highs by speculators trying to corner the gold market. And Black Tuesday and Black Thursday of 1929 probably need no introduction…Then there was Black Monday in 1987, when the Dow Jones Industrial Average dropped 22.6%, the largest one-day percentage loss in history.

These days we have Black Friday every year…but with a different meaning of course…but from a trend following/CTA perspective, this year coincided with the end of November…which looks like finishing in the Black for all the usual CTA indices.

Each year lots of pundits like to remind/scare investors about the historic negative events that sometimes occur during the month of October…especially the 1987 crash. And like all humans, investors fear the risk of loss much greater then then joy of gain…so this narrative always seem to do the trick.

But it strikes me that things have changed this year, as I see more and more commentators and non trend following managers play this card on a regular basis.

“Trend Followers have failed on their mandate to deliver Crisis Alpha…”

is what I’m hearing (followed by a marketing statement about a strategy being offered that is able to make money in periods like February and Q4 2018).

hmmm…

I wonder why they say this…I’m sure I don’t need to spell this out to you!

But here is the deal. Trend Followers do not design their strategies with “a mandate to deliver Crisis Alpha” in mind…but rather to deliver strong long-term absolute returns.

So needless to say, it was a challenging month for trend followers.

But lets just be clear about one thing…those shorter-term strategies that claim that trend following is too crowded and too slow and does not deliver enough convexity…did not do much better than their trend following cousins…and have certainly not delivered nearly the same return so far this year.

While Hurricane Dorian was building up to severe intensity before making landfall in the Bahamas…August also turned out to be a Category 4 or 5 when it comes to the intensity of strong trends and performance for the CTA industry.

Having gathered strength in the first 7th month of 2019, the momentum in many markets was further unleashed during the late summer month, a month that historically has proven to be full of surprises for the markets.