IIn this week’s episode of opto sessions, Toroso Asset Management investment manager Michael Gayed returns to the show to discuss the “bizarre” market dynamics occurring between asset classes during this year’s downturn. From the volatility in forex to the escalating risks in treasures, he gives his expert opinion on how he deals with these market anomalies.
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“You can’t thrive unless you survive first,” Michael A. Gayed, portfolio manager at Toroso Asset Management and author of the critically acclaimed research publication That Lead lag report with more than 15 years of experience, recently told opto sessions.
The investment manager echoed this lesson from his eponymous father — Michael ES Gayed — who worked with legendary investor Bob Farrell at Merrill Lynch in the late 1980s before starting his own hedge fund, of which Stanley Druckenmiller was a client.
“The one lesson I learned from him, not only to invest in life but also in life itself, is that persistence is the key to any successful endeavor. In the context of markets, the only thing you need to worry about is staying power when you need to survive. In other words, when you’re in a drawdown, a time of losses,” he explains.
“Perseverance is the key to any successful endeavor. In the context of markets, the only thing you have to worry about is persistence when you have to survive” – Michael Gayed
“Bizarre” market behavior
The year 2022 was characterized by an uncertain market environment for many investors. The sell-off in equities has impacted other areas of global markets as macro headwinds such as rising interest rates, recession fears and geopolitical tensions take their toll.
Adding downward pressure on stocks is a strong dollar, which has made the asset the “king of inflation hedges” for the past year and a half. “I find [this] should give everyone food for thought and make people realize how much of an anomaly this was,” Gayed said, adding that recent volatility in the FX market could be a harbinger of a sovereign debt crisis.
Another “quirky” market dynamic that has emerged in this year’s market landscape is that government bonds have been riskier than equities. “Typically Treasuries are the safe haven when the dollar is strong and you’re in what are called the risk-averse periods of high volatility for stocks,” he recalled.
“This isn’t a situation where just looking at an S&P chart and you’re like, ‘Well, that’s a standard type of bear or correction.’ When you start looking at the interplay of different asset classes, the dollar in particular gets put into perspective [other asset classes]it is very clear that what we live in is historical.”
An inflationary bear market
One of the biggest debates that has defined markets in 2022 has been whether or not the US economy is in recession. A typical measure of recessions is when there have been two consecutive quarters of negative GDP growth, and while this was the case in the second quarter, many have described market conditions as an “inflationary bear market”.
“There is a correlation between market movements and economic cycles. But the problem is that in a recession — even in the 1970s, which has been a bear market for stocks and a bear market for bonds throughout the cycle — government bonds still act as a safe haven in this type of market dynamic. I don’t know if we’re in a recession,” Gayed said.
He believes that “the problem with these definitions around the recession is that there’s a very precise assumption that it probably isn’t.” Gayed explained that when inflation is high, the variables get bigger.
“I don’t know if we’re in a recession” – Michael Gayed
“All I know is that recessions usually lead to disinflationary pressures. We haven’t seen that yet.”
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