Research report

Q2 2023 3D Report: Do LEIs lie?

Are leading economic indicators sending false signals? If not, then Houston we have a problem.

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August 2, 2023

“Predicting an event is one thing,
and benefiting from it is another thing.
See, I’m a very bad predictor
—I’m wrong most of the time—
but it doesn’t cost me much to be wrong.
That’s what matters, it’s the payoff,
not the frequency of being correct.”

— Nassim Taleb

Tales or tails…I find myself spending a lot of time on both these days. My formative investment years were 1999–2009. That decade taught me incredibly important lessons in tales and tails, and most of the framework that we utilize at Chiron was developed during this period.

This also happened to coincide with the rise of my favorite financial author, Nassim Taleb. In 2001, he wrote what was the first of a long series of essays and books, entitled “Fooled by Randomness,” followed in 2007 by the bestselling book “Black Swan.” (Although to be fair, it only became a best seller AFTER the crash in 2008).

Taleb taught me to obsess about the tails and that Gaussian bell curves kill Wall Street careers. This has stuck with me and today most of my investing obsession is around the tails, those rare events that shatter the illusion of stability and stationarity.

Our investment process is built on the premise that the tails—both on the left and on the right—are identifiable. Much like Jeremy Grantham, I believe the only things that matter in investing are the creation of behavior bubbles and the bursting of these bubbles, as both create mirror-image tail opportunities.

Increasingly, our work is signaling a tale meeting a tail and, unfortunately, it’s the left one.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Andrew Korz, CFA

Executive Director, Investment Research

Brian Cho, CFA

Managing Director, Head of Quantitative Research, FS Chiron Funds

Ryan Caldwell

Managing Director, FS Investments

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