Quarterly Market & Strategy Update - April 2026

I can see it.

Fantastic. Before we go on to the next slide, actually, I just wanted to comment on SECCOM, which was initiated as a reverse inquiry from a client, but is an area that candidly plays into some of the national security stuff that I'm involved with. One of the key advantages there is that it is adding effectively Western demand or Western pricing to Chinese commodities that have historically been able to be controlled in a non-market fashion. This actually provides tremendous diversification. It also really creates an interesting opportunity to try to inject some market pricing into those commodities, potentially facilitating regrowth of US resources in those same components. So it is both a hedge and it also plays into some of the national security components that we've talked about in the past. It's a product I'm actually really excited about and incredibly excited that the Altus team was able to make it happen for us. Okay, so let's jump into what happened in the quarter. The first thing I would just highlight is just going from Q4, where basically the question was, does gold represent safety? Do equities represent safety? You know, do international stocks represent diversification? The quick answer to all of that was no. At the end of the day, they're risk assets. Most of them are financed in one way, shape, or form. And so when you experience the type of disruption that we saw in the first quarter of this year with the US-Iran conflict and the subsequent closing of the Straits of Hormuz, we basically saw all of them sell off. It's just a really important reminder that, you know, there is no such thing as a quote-unquote safe asset in an environment in which there's significant disruption. The first quarter was a nice reminder of that. Candidly, a little bit welcome. Now, of course, we're seeing the other side of that as risk-on across the globe is sending almost everything higher in defiance, by the way, of many of the macro indicators, particularly EM stocks, which are being powered by technology in Korea in particular, are one of those areas you just kind of have to shake your head at at this point. The, you know, the EIA and the IMF have both come out and said that the hit to many emerging markets at this point looks like it's on the magnitude of 2 to 3% of GDP, which is an astonishing event. You've got fuel riots in the Philippines. Ireland is currently shut down in a general strike around some of the same issues. This is turning into something quite substantial. But as we have seen over and over again over the past several years, markets are largely shaking it off. I continue to argue that that is a combination of a market that is increasingly inelastic to flows. And so when those flows come in, prices move higher. Equity markets have managed to lead most of this move so far. And as we've all seen, the S&P has hit a new all-time high. When we talk about oil, let's go to the next slide.

Well, it's certainly going to be the case. I mean, that unfortunately has been part of my thesis, is that it really doesn't reflect the underlying fundamentals. It more reflects the flows, and there's two factors that play through in that. One is just the general increasing inelasticity of the market, meaning the market is becoming more and more like a commodity, like gasoline. If you want to show up and buy, you got to find somebody to sell it to you. And that's harder and harder to do with a larger fraction of the market held passively. That resilience, of course, then feeds through to everything else, right? If equities are going higher, then, well, it must be debasement, therefore the gold market should move higher, etc. We're broadly seeing that sort of behavior, unfortunately, and I would suggest that it is one of those weird things that will keep going until it stops.

Yeah. And that's going to be the interesting question, right? And we saw elements of this in 2022. The natural impulse for people was to buy the first dip and then buy the second dip, and by the time we got to the fourth dip, people seemed exhausted, and then of course we took off, as everybody remembers. So, you know, this continues to be, in my opinion, a story of the way that we choose to invest rather than the actual fundamentals behind it. You know, we can point to some areas like small caps and the expectations for earnings growth that are embedded there. Those seem very much at odds with what we are likely to deliver. But, you know, that's my narrative, and it's worth exactly zero in terms of market behavior. So I think it's really important to recognize that this is a largely mechanical feature that is, you know, we see the evidence of it in the behavior of markets. The unwinds have really hammered the most short stocks. We've seen kind of crazy stuff. I'm sure you caught Allbirds up 900% on pivoting from being a shoe company to an AI company.

You can always reinvent yourself. I'm hoping to come back as a blonde. The long and short of it, though, is that, you know, we are seeing a lot of evidence basically that people cannot stand in front of that. You can't maintain short positions. The violence of these moves and the realized levels of volatility are pretty extreme. On the flip side of it, you know, as many people heard me talk about in the first quarter, like we were pricing an extraordinary VIX level, maintaining that against realized volatility that remained relatively low is just incredibly expensive. And so the market was pricing in an extraordinary skew. There was a lot of protection against a crash. And, you know, most typically, a watched pot never boils. You just don't see it actually play out in the way that people anticipate. We'll see whether that continues to be the case. There's a very, very short list of events in which the S&P has moved from, you know, a near 10% drawdown to an all-time high. We can point to any number of those. Other areas that are catching my attention: there's just been an absolute collapse in the relative beta of low volatility strategies versus the S&P. The only prior precedent to that is the lead-up into March of 2000. So there, you know, there are signs that this is getting long in the tooth and that there are challenges, but this is a different market than we've ever experienced before.

Yeah, when I start hearing things about, you know, 13 standard deviation moves, etc., I immediately jump back to the reality that we assume a distribution. We don't actually know the distribution. The net impact of that is that when you hear somebody say this is a 13 standard deviation event or even a five standard deviation event, the reality is that it's the standard deviation metric that is wrong, not the move.

Speaking of large standard deviation moves, what's going on in the oil markets is not unprecedented, but it is unusual. The really defining characteristic that I would emphasize has been the relative lack of shift along the curve. So, this is currently being treated very much as a short-term disruption to prices. The move that we've seen in oil prices has translated across the globe into somewhere in the neighborhood of a 30 to 40% increase in gasoline prices using EIA or IMF figures. That would suggest that if sustained, we're looking at a hit to global GDP of around a half percent. The vast majority of that would actually, on a percentage basis, be felt by developed markets in dollar terms. But as a percentage of economies, you know, importing countries like Zimbabwe is just an obvious example, are really facing a significant hit. There's been a big divergence effectively between country responses. Places like the UK have tried to keep prices stable by subsidizing the consumption that is largely a byproduct of the stress that they're already experiencing in terms of loss of purchasing power and general decline in standard of living in places like the UK. They're trying to offset that as much as they possibly can. The long-term implication of that, though, unfortunately, is it's just another aspect that is contributing to a significant surge in indebtedness from countries that are effectively trying to subsidize. The United States has not done that. Singapore is in the news for its gasoline prices being up basically 100%. They have not chosen to do that. The question is always one of unrest on the short term versus the longer-term implications of it. The really critical part, though, that I would emphasize in terms of what we're seeing in oil is the relatively limited pass-through on the inflation component. And so there's multiple ways of thinking about inflation, but one of the most useful tools is to actually disaggregate what is happening in inflation swaps on the immediate period versus what's happening in the forward space. So the second chart is actually showing you the overlay of the one-year inflation swap. This is over the next 12 months. That's expressed in blue, and the one-year one-year inflation swap, which is what we anticipate happening in the next year. And part of what's so interesting about this is how well the markets reacted to the tariff tantrum. Basically, a one-off increase in prices. You can actually see that at the tail end of the chart. That first jump, that's all the tariff tantrum associated tariff pass-through. That is now anniversary. It's one of the reasons I'm quite sanguine on inflation this year is that we are not getting another pass-through. We saw that in December. For the past four years, we've seen significant seasonal price increases in December. That did not happen this year largely because companies had pushed through price increases on tariffs, were not able to push them through. We're now seeing that further amplified, by the way, in the spread between the PPI and the ability to push through prices. I believe it was just the Philadelphia Fed, it may have been the Empire now that I'm thinking about it. The divergence between the prices paid, which is effectively for a PPI, things like crude and raw materials, versus the prices that they were able to pass through, hit one of the highest spreads in history. Consumers seem to be very tapped out. The willingness to absorb higher prices is very much in question. And again, we see that in the forward inflation swaps, which remain very contained. To me, this is an indication that the Federal Reserve actually continues to have credibility where it really matters. We obviously know that the general public's sentiment on the Federal Reserve's ability to control inflation is limited, but we're not really seeing evidence of that in financial markets. And so, you know, my view very straightforward is that if anything, the Fed should be cutting in response to the US-Iran war. But it's going to take them some time. They, you know, they very much are data dependent in this process. But the overall story here is that the actual inflation pass-through appears extremely muted. And I would point to, you know, faster-moving measures of inflation than the BLS uses. True Inflation. Penn State has another one that substitutes in current real estate prices. These all suggest that inflation is going to be much more muted for all the wrong reasons. Let's go ahead to the next slide.

You know, one of the things that's also happening is that private credit has finally made its way into the headlines. The first quarter saw extraordinary attempts at redemptions and gating coming from private credit. You know, we are not seeing this pass through in credit spreads or other measures of risk, even as we are very clearly seeing a significant rise in what are called liability management exercises. That's just a concealed default. You basically say, we know you're not going to be able to pay this, so let's modify the terms before we get there. That has really dominated the actual payment default levels. We're now seeing those LMEs decrease at the same time that we're actually starting to see defaults begin to pick up. Similarly, on the household side, the reintroduction of student loan debt repayment has had a catastrophic impact on the younger generation. Those in the 18 to 29 category in particular are seeing an extraordinary increase in their default rates and their delinquency rates. This is going to translate and manifest itself as reduced credit availability for a cohort that is already suffering from relatively high unemployment, failure to place after college graduation, etc. And now they're of course finding out that their access to buy now, pay later burritos is very much in question. I think it was actually cheese you were talking about before.