The Three-Body Portfolio
December 27, 2017·0 comments·three body alpha
Financial markets stopped working as price-discovery mechanisms. Central banks and governments converted them into utilities designed to keep asset prices rising for political stability. Stock valuations now drift unmoored from the companies themselves, responding instead to narratives and policy signals that have nothing to do with actual business performance.
• Pension funds are trapped in a system with no exit. A state plan that's only 65% funded can't cut benefits or recommend caution without triggering firings. Lower projected returns mean they must increase risk exposure, buying into overvalued assets because it's the only path that leads to adequate funding.
• The market narrative machine has become self-sustaining. Companies add "blockchain" to their names and see stock surges. Earnings reports tell investors nothing about business momentum, but analysts dutifully package heroic stories for consumption. The stories matter more than the fundamentals beneath them.
• Traditional reversal doesn't work the way it used to. Investors comfort themselves that markets will swing back to fundamentals like they did after the Nifty Fifty or 1990s. But those scenarios assumed markets would eventually stop being utilities. They won't, because political systems now depend on rising asset prices to function.
• Predicting outcomes has become mathematically harder, not easier. When three gravitational bodies interact, there's no formula. You can't calculate where they'll be tomorrow. Markets now operate this way, with fundamental data, prices, and sentiment all pulling in different directions with unpredictable force.
• The question becomes: How long can sentiment sustain valuations that bear no relationship to reality? If the answer is "indefinitely" rather than "five to ten years," everything investors believe about mean reversion and eventual rationality collapses.
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This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
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