Traditional 'Safe-Havens' Are Failing: Goldman Hedge Fund Honcho On What To Do "In The Face Of So Much Bad News"

We’re currently witnessing the largest oil supply shock in history.

We find the spread between the peak hit to supply (blue bar) and the corresponding price move (red bar) in the current episode to be notable when compared to the five other episodes.

With that established, Goldman Sachs head of hedge fund coverage, Tony Pasquariello, says: consider the fact that S&P has sold off just 4% since this all began (and 1-month realized volatility is just 13%).

What’s the signal if a good asset doesn’t go down much in the face of bad news? 

Perhaps the stock market is complacent about what’s taking shape in the energy markets...

...or maybe it’s saying this conflict won’t last all that long...

...or maybe it’s saying the US economy can tolerate oil trading over $100...

...or maybe it’s saying the world is a better place in the absence of structural, state-sponsored terrorism. 

I don’t know what the answer is - on geopolitical matters, I’m not sure anyone does - but I’d argue a few points:

i. the primary bull trend remains intact. 

ii. with each passing day, however, the ante is upped.  it’s a simple sequence: the longer energy supply is constrained, the worse the growth/inflation tradeoff gets.

iii. if that’s correct, it’s a challenge for the US, but it’s a bigger challenge for most every other DM economy and their central banks (there are a few exceptions). 

iv. superficially, there’s not that much risk premium in the market right now. 

To say it again, each of the prior six years saw forward VIX contracts mark higher than they are today.

For as strange as things feel, the equity momentum factor has held up pretty well of late. 

If you asked me why gross exposure has been remained so high, I suspect this stability has something to do with it.

v. although selling picked up noticeably yesterday, judging from our broader franchise activity, the professional investor class hasn’t capitulated yet.  hedged?  yes.  panicked?  no. 

Regarding the levered community, we’ve seen lots of hedging, but not full-bore capitulation; while macro shorts have been dialed up, single stocks have been net bought this month, and exposures are higher today than they were following Liberation Day.

Regarding the long only community, yesterday -- for the first time in this sequence -- brought very significant supply across sectors;

...stay tuned on this front.

vi. many traditional safe havens -- gold, front ends, defensive stocks -- are still failing to provide ballast for risky assets. 

This is a basket of US E&P stocks with leverage to crude oil... it’s the best chart that I can find within global equities right now...

I’m always drawn to trends that don’t quit when the world changes.

A basket of AI leaders - expressed as a ratio vs S&P 500 ex-AI stocks - is making a higher high...

Finally, Pasquariello offers some client wisdom. 

Two observations stuck out to me this week:

(1) working out of a physical problem is different from working out of a financial problem;

(2) in the context of a portfolio mosaic, whatever you do, don’t lose your grip on long-dated oil.

Conclusion: there are times to go for the gas, and there are times to go for the brake; my instinct is to simplify your risk taking and live a bit cleaner-than-normal. 

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