“Quantum mechanics is a whole new way of thinking – it says that the world is all by itself as a wave function of the universe, but you can never observe that. You can never observe a wave function directly. There is a complex relationship between what the world is and what you see when you look at it, and that relationship involves the idea that you can never predict precisely what you will see, but you can simply say the probability of what you will see.”
– Prof. Sean Carrol, Theoretical Physicist, California Institute of Technology Department of Physics.
The current lockdown is perfectly suited to dust off unfinished books and brush up on long-lost worldly concepts. Why not start by understanding the universe? Quantum Physics might not seem the most obvious area of one’s spare time reading but it opens profound questions, especially around the subject of reality. It would appear that, according to quantum theory, reality is merely a subjective notion and that several, if not infinite, realities exist. The notion that whenever a nucleus (central region of an atom) decays, or when you measure the span of a particle, the whole universe branches into multiple copies is just, for simple finance professionals like us, mind-boggling. Heisenberg (the physicist not the TV character) interpreted the underlying mathematics to mean that reality doesn’t exist until it’s observed.
Reflecting on this truly astonishing theory, we can draw certain parallels to the current pandemic-induced reality we all find ourselves in. Talking to our friends and families finds a large variety of perceived realities dependent on each individual’s circumstance, location and economic implications following the lockdown. Similarly, on an aggregate level, the economic reality seems to be at odds with what financial markets are currently discounting.
Being confined mostly to our homes, assessing the economic outlook by purely looking at asset market performance would indeed warp reality, when observing a mostly-shuttered economy outside our windows. Utilising a pinch of quantum physics’ uncertainty principle, which states that the position and the velocity of an object cannot both be measured exactly at the same time, we concluded back in March that purely observing economic outcomes following peak volatility events will not lead to optimal investment decisions, as we wouldn’t be certain of the magnitude of the economic contraction, but relatively confident of the directionality of a recovering momentum as shutdown restrictions were slowly eased.
The simple phrase of “the pandemic will pass but the liquidity will remain” of our April publication (https://rescoam.com/resco-monthly-issue-15-govt-spending-idle-resources-%e2%89%a0-inflation/) was the purest yet most effective way of tilting our investment focus towards what we thought would be the only relevant and observable influence for our optimistic assessment for risk asset performance for the coming months, namely aggressive central bank action in combination with the casting of a fiscal safety net for those mostly affected by the economic fallout.
Looking at the impressive recovery in global asset prices over the past few months, we note that our investment thesis and targets have now largely played out. What comes next?
The vast liquidity provisioning for financial markets provides a floor for valuations but our forward-looking return metrics from current financial market realities offer less appealing entry points. As such, we no longer see value in corporate credit beta and have reduced our target exposure markedly in the past weeks. Meanwhile, we have tactically reduced our yield curve steepening trade, which has also benefited from the reflation theme. Similarly, we have closed our outright short interest rate risk position and moved marginally long, especially in the US bond market. A tentative global reflation impulse coupled with the easing of USD funding pressures saw global liquidity conditions ease markedly, which benefited our short USD theme versus relatively cheap currencies such as NOK, SEK and MXN, which have all hit their respective targets. We are now tactically positioning ourselves for a stronger USD, predominantly versus the AUD and EUR.
We simply don’t know what the future reality holds; this is probably truer now than ever, as many of the world’s underlying economic & social fragilities are exposed. Comparing the social science of economics to the universality and precision of physics offers, despite glaring differences, some insight into dealing with uncertainty and probabilities around what constitutes reality. Reflexive dynamics stipulate how economic realities can be shaped by investors’ perceptions. We are currently experiencing a positive feedback process that by definition cannot go on forever. Eventually investors’ views become so far removed from objective reality that a reassessment inevitably occurs. We are hopeful that the ongoing economic improvement continues and ultimately creates the reality risk markets are currently pricing.
Thank you for reading and don’t forget to comment, share and contact us for questions – the Resco Team
A Word on Resco: Resco Asset Management Limited is a 30+ year project that aims to join other like-minded firms in lifting the perception of the investment management industry, while maintaining a laser-sharp focus on net returns by charging sensible fees and limiting fund expenses. Keen for their friends and family to see the virtues in solving investors’ problems and to be looked upon just as favourably as any other corporate innovator, its three co-founders focus on aspects and values that can drive healthier relationships between them and their community of investors and observers.
Resco’s first product, the Resco Macro Credit Fund, is a global absolute return unconstrained fixed income product that aims to capture performance from global macro themes and corporate bonds to deliver positive total returns to investors throughout market cycles, leveraging its portfolio managers’ existing 10-year+ track records.
The three co-founders own 100% of the business and mandate a majority future executive ownership, thus remain focused on the long-term goal of building a trusted reputation upon a culture of investment excellence, without applying conventional short-term incentive structures that can tempt individuals to overrepresent their particular field of expertise during various cycles. This promotes a meritocracy while allowing senior managers to assume accountability, by focusing on process before individuals.
Its vision to ‘Create a more prosperous world’ signals Resco’s commitment to contribute to a rising tide of prosperity at all levels, through investment management, corporate transparency, community involvement and philanthropy. Resco is a signatory to the UN Principles for Responsible Investment.
All content included in this presentation is for information purposes only and neither constitutes investment advice nor an offer to to issue, solicit or sell any investment.
Resco makes no undertaking, warranty, guarantee or representations as to the reliability, accuracy or completeness of any information contained in this document, which contains opinions of the manager. This document is confidential and must not be distributed or disclosed to those other than to whom it is addressed without the explicit prior written consent of Resco Asset Management Limited.
Resco Asset Management Limited, 71 Central Street, London EC1V 8AB. Resco is a registered trademark of Resco Asset Management Limited. Resco Asset Management Limited (814308) is authorised and regulated by the Financial Conduct Authority.