The Equity Event Horizon: Aka The Point Of No Return – Brandywine

Brandywine Asset Management’s commentary for the month ended May 2021, discussing the equity event horizon.

Get The Full Henry Singleton Series in PDF

Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q1 2021 hedge fund letters, conferences and more

"Now You Got Me Wantin' More And More... I'm At The Point Of No Return"

You can feel the increasing exhilaration as we are pulled faster and faster toward ever-higher prices across a broad range of markets; stocks, crypto, real estate.... People are becoming more and more excited and less and less cautious as the gravitational pull from Modern Monetary Theory (“MMT”) takes hold. We are riding our portfolios like astronauts in a spaceship, accelerating to speeds never seen before.

While this may continue for some time, there is an increasing concern that the U.S. Federal Reserve and numerous other central banks, together with the help of out-of-control political spending, have created not just a bubble, but the first true black hole in financial history.

“Point of No Return” was written by Nu Shooz as a love song, but its lyrics are applicable to today’s markets. Investors are “in love” with MMT, the devil be damned as more helicopter money means higher prices for financial assets. Is it possible to reach a point of no return where government spending and the monetization of debt has created a debt bubble so large that nothing can escape from it? That’s a fair question as we accelerate towards the event horizon of this monetary and fiscal black hole.

A warning signal is flashing on our control panel and is illustrated in the chart here. While the official CPI numbers show a slight uptick in inflation, “real world” inflation numbers are much higher. Over the past year, actual inflation, the inflation we all live with, has been over 10%. The rational short-term reaction to this is a rush out of cash and into tangible assets. Where the ‘float’ is small, i.e. dogecoin, GameStop and AMC, these flows result in moves of thousands of percent.

Chart Courtesy of ShadowStats.com

While chasing huge returns has produced generational wealth for some, we know from history that this mania will almost certainly end badly for the majority, as trillions of dollars in perceived wealth disappears into the black hole.

There are ways to benefit from the speculation yet still be protected from the black hole, as long as you do so before we hit the event horizon.

Avoiding the Black Hole

The event horizon is where an object approaching a black hole can no longer turn back. It’s fate is determined. The object will collapse into the black hole and disappear forever.

Could there be a similar point in the current financial markets? Could the monetary and fiscal excess that we’re seeing today - supported by Modern Monetary Theory - lead to a cycle of currency debasement, rising interest rates, increased inflation...then a repeat and acceleration of the cycle? Once a threshold of monetization is reached, is there no turning back?

We have certainly seen financial bubbles and dislocations disrupt numerous other financial markets throughout world history, but what is happening now could be orders of magnitude worse. We don’t pretend to know, other than that it is a possibility.

What if there was a way to protect against that risk, yet profit from the financial bull market while it continues? Brandywine Protected Funds were developed to do just that. While past performance is not necessarily indicative of future performance, the math underlying our innovation of “Risk Replacement” provides the opportunity to not only protect against substantial losses, but match or even exceed market performance on the upside.

This positive skew - downside protection combined with the potential to capture upside performance - is displayed in the chart to the top right.

We encourage you to contact us to learn how we can apply this innovation to benefit you and your clients. It is Brandywine’s mission to protect investors from taking unnecessary risks. With Brandywine Protected Funds there is no need to market time. There is no need to ride bear markets to the bottom.

Protect your and your clients’ portfolios today.