The latest Stay Vigilant blog

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https://stayvigilant.substack.com/p/looking-at-the-three-body-problem



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Pulling it all together

 The last few weeks I have embarked on showing you the three stages to my investment process - the three body problem - in which I look at the Fundamental and Behavioral drivers of the financial markets and what Catalysts may be out there to change investors minds.  In order to remind you of the summary of the data, let's go quickly back through the data. In the Fundamental section we look at the strength of the economy and the liquidity that is still in the financial system. The economic trend continues to be strong. Yes, everyone expects the US economy to cool off this year. It has been running at historically strong levels. This should be expected. We identified a few potential problems areas, with inventories building and with weaknesses overseas, namely in China. Since we discussed this, we have seen companies such as Lululemon and Peloton both discuss the excess inventory and the steps they needed to take going forward. In fact, the forward outlook from many companies reporti
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Lots of moving parts - pulling it all together

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 There are so many moving parts and these parts are moving quickly rapidly. I endeavor to look at the market through three separate lenses - fundamental, behavioral and catalyst. Each week I look at one category and then pull it together in the last week of the month. However, with the developments in Ukraine (pray4peace) leading to rapid spikes in the commodity complex which affects central bank policy, a lot has happened in the last month.  The biggest deterioration we have seen in our view of the market has been in the Fundamental section. At the start of January, the Fundamentals of the economy and therefore risk assets still looked pretty good. Yes, the economy was set to decline but gradually and from multi-decade highs. Inflation was high but thought to come a bit lower as well so we knew the Fed and other central banks would remove liquidity but there were only about 3 hikes priced in at that time. Everything seemed to be normalizing at a digestible pace. By February, it was cl
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The first of the three bodies - Fundamentals

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 FUNDAMENTALS The first component of the three body problem is the Fundamentals. Rarely will an investment work for anything measured more than in days if there are not good fundamentals. Yes, there are some that have persisted (I am looking at you GameStop), but the first metric that an investor and not just a trader must concern themselves with is the fundamentals. In macro investing, the fundamentals are not just for a single investment but for the market overall, for the risky market overall. I have found that the major drivers of the market can be categorized into four areas: relative valuation (of equities relative to other market beta), the economic trend (primarily in the US but I consider the globe too), the liquidity in the market (has always been important but has become increasingly so after the Great Financial Crisis) and the velocity (there can be tons of money but if no one uses it who cares).  I am a visual person. I like pictures. They tell a big story. As the front pa
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