A wild night for markets

It was a truly wild night in markets with the higher than expected CPI numbers in the USA initially sending equity markets, bonds and the AUD into a tailspin. It’s difficult to remember a day when negative news initially sends the market down 3% and then finish up 2%.

This reinforces our views that investors are already positioned for very negative news and are dramatically bearish in their views (i.e. sustained higher inflation is already priced into market sentiment).

From Merricks Capital’s perspective, this aligns with our current house view that:

1. Higher inflation will prevail for longer;
2. Un-levered asset prices could fall up to 20% from the peak (equities are leveraged so they could potentially even fall 40%);
3. Inflation and weak economic news is unlikely to cause a financial crisis, but rather a painful unwind of overpriced assets;
4. The market is generally expecting this painful unwind;
5. A dramatic sell-off is likely to require some form of liquidity crisis, which would require an exogenous shock that is not currently expected (for example, war, climate, pandemic); and
6. Valuations / buyers are going to be focused on cash flows which can service debt.

At Merricks Capital we continue to explore opportunities to take advantage of ongoing valuation declines by achieving compelling returns on lower risk loans. Whilst we are focused on sound fiduciary and disciplined investment management, we don’t live in fear of deploying capital and we don’t rely on markets rebounding to bail borrowers out of challenging conditions.