Investing in Volatile Markets

Market Outlook and Volatility Drivers

• Volatile market classification: Mike Novogratz characterizes current volatility as "neutral to bullish" rather than crisis-level, noting markets have not seen this level of volatility since 2008.
• Political volatility catalyst: Novogratz predicts significant market volatility within the next eight weeks driven by the potential release of the Robert Mueller report on President Trump.
• Market positioning strategy: Novogratz advises a "buy the dip, sell the rally" approach rather than maintaining a permanently long position due to impending political uncertainty.
• Economic indicators: The U.S. economy is currently supported by an estimated $1 trillion in stock buybacks and a Federal Reserve maintaining a dovish, holding stance.
• Recession risk probabilities: Joshua Harris notes fixed income markets imply a 25% recession risk in 2020, while equity markets price in a slightly higher probability.
• Yield curve signal: The 2.5-year yield curve has inverted slightly; historically, this occurred before every recession in the last nine instances.
• Central bank capability: Panelists agree central banks retain "free lunch" options to mute economic downturns, citing the Federal Reserve's ability to deploy funds similar to the 2008 Lehman Brothers response.
• Credit market valuation: Joshua Harris highlights that excluding FAANG stocks, the S&P 500 has a P/E of 13 with strong earnings growth, suggesting recession pricing is already high.

China, Trade Wars, and Geopolitics

• Trade war resolution: Joshua Harris and Amanda Stavely anticipate a trade deal will likely materialize before the U.S. election, involving the U.S. purchasing Chinese goods to boost the deficit while China lowers barriers to American tech.
• Tech war distinction: Mike Novogratz distinguishes the trade war from a deeper, protracted "tech war" focused on IP theft and national security that will persist regardless of political administrations.
• Chinese economic stance: Novogratz asserts China possesses over $3 trillion in currency reserves and the ability to monetize debt to prevent a Minsky moment, viewing the Chinese economy as a primary driver of global growth.
• Currency dynamics: Amanda Stavely identifies the Renminbi (RMB) as the central prism for understanding trade wars, with London remaining a key hub for RMB trading despite Brexit.
• Market impact of trade war: The trade conflict has caused a ~20% downdraft in Chinese stock markets, creating dislocated assets for investors willing to accept higher risk.

Investment Strategies and Asset Classes

• Alternative asset focus: Amanda Stavely's firm avoids direct competition with major private equity firms in public auctions, targeting non-correlated assets like litigation funding, mining, and commodities.
• Litigation funding returns: Stavely reports Internal Rate of Returns (IRR) of 15–25% in litigation funding, with some specific opportunities yielding 40–60%.
• Long-dated infrastructure: Stavely is investing in UK affordable housing to capture long-dated, inflation-protected cash flows, noting the difficulty of exiting such assets early.
• Secured lending strategy: Todd Boehly emphasizes secured lending and equipment finance as primary vehicles, targeting unlevered returns of 7–8% with predictable cash flows.
• Real estate leasing: Boehly's firm owns EPRT (triple-net real estate), which yields 5.5% in the public market versus an expected 7–7.5% unlevered return upon origination.
• Dislocated equity: Stavely identifies insurance, banking, and natural resources as sectors ripe for acquisition due to regulatory pressures and low commodity prices (e.g., oil at $30).
• Sporting assets: The panel discusses investing in Major League Baseball regional sports networks, noting high valuations for Premier League teams (4–5x revenue) as a barrier to entry.
• Esports viability: Todd Boehly acknowledges esports is a growing sector with massive viewership but warns most leagues are unstructured, losing money, and lack the economic models of traditional sports.
• Gaming and virtual worlds: Mike Novogratz highlights investments in game studios and virtual world platforms (e.g., High Fidelity), noting Netflix considers Fortnite a greater competitive threat than HBO.

Leverage and Credit Markets

• Leverage levels: Credit markets are described as "wildly aggressive," with the average private equity transaction in 2018 hitting 11x EBITDA, the highest on record.
• Adjusted leverage: When adjusted for cost savings and synergies, the effective leverage on these deals is closer to 6.5x EBITDA.
• Leverage types: Boehly distinguishes between "term leverage" (cash-flow based and resilient in downturns) and "mark-to-market leverage" (which can trigger liquidation during price drops).
• Credit pricing: While debt markets have tightened, investors on the credit side are receiving higher compensation for risk compared to pre-Brexit levels (approx. 250–300 basis points).
• Private equity risk: High leverage combined with aggressive pricing and economic uncertainty creates a difficult environment requiring investment in dislocated, complex deals.

Cryptocurrency and Bitcoin

• Institutional adoption: Novogratz predicts major institutional custody solutions (e.g., Fidelity, NYSE) will go live within two months, with pension funds beginning accumulation by June.
• Portfolio allocation: Novogratz recommends allocating 1–5% of portfolios to Bitcoin as a hedge against financial crises and Minsky moments, viewing it as "digital gold."
• Tokenization thesis: Novogratz and Stavely identify asset tokenization (e.g., triple-net lease portfolios) as a primary driver for institutional crypto architecture, potentially expanding the $3 trillion private placement market.
• Market status: Amanda Stavely notes that while institutions are interested, the Bitcoin market is not yet "institutional-grade" due to transparency and security concerns.
• Investor sentiment: Stavely admits personal hesitation regarding Bitcoin due to a lack of understanding, advising clients to "go with professionals" until the market matures.

Future Risks and Entitlements

• U.S. debt concerns: Joshua Harris warns that U.S. entitlements (Social Security, Medicare) effectively represent $60–80 trillion of hidden debt, which the bond market will eventually discipline via rising rates.
• Political timing: The U.S. government historically makes difficult fiscal decisions only when no other options remain, suggesting a potential tipping point years away.
• Cavalry in downturns: In the event of a future recession, panelists agree only sovereign governments (U.S. Treasury, Federal Reserve, ECB) possess the firepower to stabilize markets, though their "arsenal" of rate cuts and QE has been partially depleted.

Regional Focus: UK and Brexit

• Brexit outlook: Stavely anticipates a "hard Brexit" but believes the resulting devaluation of the Pound will offset economic slowdowns, keeping the UK market attractive for investment.
• UK as a hub: Despite Brexit, London is expected to retain its status as a key financial hub, particularly for RMB trading and global capital markets.
• Frontier markets: Private equity investors are increasingly looking to frontier and emerging markets as a means to decouple from Western geopolitical risks and volatility.