That’s a wrap! – Dec 31st 23

As we draw the curtain on 2023, I find myself reflecting on the year’s events while perusing various investor letters and year-end reviews at my local coffee shop. The Wall Street orchestra, with its symphony of narratives, seems to have a penchant for verbosity, where the correlation between the length of prose and its accuracy appears to be inversely proportional – the longer, the “wronger” when attempting to encapsulate the intricacies of the past year.

Thankfully, for our clients, the persistent dedication and strategic fortitude throughout the year bore fruit across diverse fronts. The diligent efforts, coupled with strategic capital reallocation earlier in the year, proved instrumental as the final strategic move orchestrated by the Federal Reserve initiated the expected broadening and repricing we had anticipated throughout the year. Looking ahead to 2024, it is not merely the aftermath of recent market dynamics that stirs our anticipation, but the array of new opportunities aligning with the next phase of the economic cycle.

Our multi-strategy portfolio, complemented by timely capital reallocation, furnished us with the requisite tools to deftly navigate the unpredictable market currents. All three strategies not only outperformed most institutional funds but also closely tracked or exceeded their benchmarks. Remarkably, this achievement was realized without recourse to leverage, short positions, or exposure to the enigmatic Mag7. Our hands-on approach, particularly evident in managing our rates portfolio with a duration of 1.8 years, played a pivotal role in steering us through the complexities of the market.

As we turn our gaze to the horizon of 2024, one might wish for the dominant themes of 2023 to gracefully exit, but reality insists otherwise. The trajectory is shaped by the Fed’s manipulation of interest rates and the evolving narrative of softening inflation, while geopolitical shifts, war, immigration, and an unrestrained fiscal spree preceding an election year signify a singular course – more debt and additional financing by the Fed…

The discernible change in tone observed during the December FOMC meeting implies the Fed’s struggle to manage the vast amount of debt required to fund the US Treasury. The escalating cost of financing poses a threat to their ability to uphold the USD, and liquidity concerns persist, evident in the sporadic volatility of the bond market. The Fed finds itself entangled in the delicate dance of financing – a nuanced endeavor to maintain manageable interest rates while contending with escalating levels of US debt issuance.

As we navigate the uncertain terrain of 2024, the mystery lies not in whether, why, or if the Fed will lower rates but in when and by how much. The potential risk of a second wave of creeping CPI looms, potentially forcing the Fed into a prolonged state of inaction, endangering the consumer. Until Powell signals otherwise or inflation nudges closer to the elusive 2%, the path of rates will be a nuanced game of finesse, a delicate adjustment seeking the equilibrium of R* rather than an outright stimulus to the economy.

In the short run, expect ranges to be respected, as it will be an active trader’s market. The longer-term picture paints a rosier scenario – lower rates beckon, prompting a recalibration of portfolios as needed. Navigate the yield curve with care as term premia inserts itself, creating opportune moments for strategic acquisitions. Conflicting forces, in the form of heavy issuance needs, may act as headwinds to higher yields on the curve. Markets, known for their forward pricing prowess, have a history of getting things wrong, it’s corrective speed remains it’s strength, but may run idle or sideways as it awaits direction. The Fed, holding both the ball and the clock, dictates the tempo, and we find ourselves at their mercy, as always. Yet, in the midst of this controlled dance, let’s not forget that every meeting is a live meeting, ready to respond to data or the unforeseen disruptions that may demand swift action. We’ll be ready. Bring on the the New Year!

And to our clients, as always, thank you for your trust in us and all of your support.

Nick Diaz

CIO