Retiring Transitory

Published on: December 14th, 2021

And about time too… The Fed got themselves in a pickle of their own making: the “new framework”; Average Inflation Targeting, a.k.a. run-it-hot; the obsessive use of Transitory long after its sell-by date. None have done them any favors. Are they now converted back to a sound money institution (lol)? If they try to be, what unintended consequences are headed our way?


  • CM
    Charl M.
    15 December 2021 @ 00:56
    Hi Julian - I have no investment in ARK, but I don’t think it’s entirely true that ARKK is meant to be “an alpha-enhanced tech play”. That may be the perception, but as far as I know, ARKK does not try to outperform any benchmark (e.g. NDX); instead it targets a return of 10-15% per annum over rolling 5-year periods, by investing in innovation-based themes. This implies high risk (and assumed alpha enhancement), which is why ARKK should be used as a satellite exposure as part of a global equity allocation. Those who decided to be “irresponsibly long” ARKK, did so at their own risk, and paying expensive school fees in 2021. Volatility (good and bad) comes with the territory. ARK clearly states on their factsheet that they aim to have low correlation with traditional growth strategies (hence underperforming NDX this year), and negative correlation to value strategies. Looks like they’re doing exactly that. If I look at ARK’s latest monthly update, I’d say Cathie has done exceptionally well relative to her performance objective. ARKK’s current 5-year return (as at 30 November) is 41% annualised. No doubt boosted by unusually strong performance in 2020, and I’d fully expect this to move back towards the 10-15% annualised return objective over the next few years. This naturally implies a period of underperformance, which is why I’m still an observer on the sidelines. If you look at the pre-covid performance to 31 March 2020, ARKK shows a more "normal" but still very good 5-year return of 17.75% annualised. Obviously recent performance is far more challenging with ARKK’s 1-year return at -4.4%. But isn’t that what any investor should expect after an outsized calendar year (2020) return of 152%? For Cathie to “fail”, you’d probably want to keep an eye on the 5-year annualised return for ARKK and when it starts to miss the 10-15% annualised return objective (or 61-101% total return over 5 years). ARKK’s highest month-end close was $137 at the end of Jan 2021 - if we compound that at 10% annualised over 5 years, this means you want to see ARKK at or above $220 by 31 Jan 2026 in order to meet the performance objective. If it fails to achieve that, then Cathie should be fair game for criticism.
    • HM
      Harry M. | Real Vision
      16 December 2021 @ 11:53
      All fair points. I suppose the concern is with her approach to risk and liquidity management. The funds should probably not offer instant liquidity given the questionable liquidity of a proportion of the portfolio. Critics would argue that combination is inappropriate. Doing so opens the fund up to the risk of liquidity runs which would (probably) increase the concentration in the less liquid names and thus a potential vicious circle. Of course Ms. Wood is not the only manager guilty of hubris in this regard. But we have already seen what happens when managers "lend long and borrow short". Its way to early to criticize her performance. However its worth noting that par venues will be offside. That money might be less sticky than you might otherwise think.
    • ML
      MANUEL L.
      15 December 2021 @ 03:30
      Agree 100%
  • JH
    Joseph H.
    15 December 2021 @ 04:49
    Thanks for all the excellent updates this year Julian. Have a great Christmas.
  • JA
    Joseph A.
    15 December 2021 @ 14:36
    I think the Fed remains flexible on rates. They have time to act as it’s clear they won’t raise until at least tapering ends and in that time there is time to see how markets and economies are. They could easily do a couple of small rate rises and give themselves room to drop them again and still come out saying I told you so with regard to criticism about why they haven’t raised sooner when their concern has always been not about transitory definitions of inflation but rather about average 2% inflation over time and full employment. Those are their stated goals and remain so. Anything that threatens that gives them moral high ground to ease again after whatever tightening occurs be it tapering rate rises or a combination of the two.
    • HM
      Harry M. | Real Vision
      16 December 2021 @ 11:57
      Totally agree. The Fed is flexible on rates. Why would they ever give up any room for maneuver? I think you are absolutely right to think of this less in terms of the economics, and more in terms of the Fed's own political risk and reward. Leaving inflation to let rip, regardless of the perspective longer term inflationary forces only exposes the Fed and its senior officials to political risk. Lucky Lael. Influential, but if everything turns bad they will eject Powell, put Lael in charge and say she had nothing to do with anything.