So just what is a “Tonga Year”? Well it’s the start of a year that just seems to have caught everyone by surprise and disrupted (or, let’s be real, blew up) some huge hopes and dreams. OK, why Tonga? You might remember only a week or so ago the South Pacific island nation of Tonga was blissfully minding its own business being idyllic and happy with warm calm waters surrounding it. Then, from out of nowhere, a massive undersea volcano erupted causing a tsunami and showering the islands with volcanic ash, basically wiping out the inhabitants’ daily life. Bummer. Sound eerily familiar?
Now, rather than hanging out in the warm South Seas considering what kind of fish to have for dinner, investors (and some REALLY big ones) were calmly debating just how much of a positive rate of return they WOULD (not MAY) get this year. What could possibly happen? Oh sure, the Tonga islanders felt some earthquakes every so often, saw some palm trees shake a bit and even a few ‘mini’ waves ruffled the beaches. Yeah so? Same for some very large ‘professional’ money managers (and meme stock traders too) here and around the globe. Inflation? Higher interest rates? Pandemic? Shortages? Just little tremors, nothing to be concerned about. And then………..BOOM!
So 2022 has begun like an erupting volcano, except rather than ash falling everywhere asset sectors like equities, bonds, cryptocurrencies, etc. have been falling everywhere. Guess all those ‘minor’ quakes and tremors were warning signs. Yup, its the Tonga effect. But after one of those pesky ‘unforeseen’ volcanoes erupts good things can happen. Surely the tsunami warning alerts saved lives and new awareness of potential other undersea volcanoes will be explored.
How about in the financial markets? Who may have learned from getting “Tonga’d?” Certainly Cathie Wood, CEO and CIO of Ark Invest, learned (after losing 60% in her flagship ETF) that there is such a thing as GRAVITY. Innovation inflates, gravity takes. Or, how about Fed. Chairman J. Powell? He sure got “Tonga’d.” He learned that if you constantly print money to try and increase inflation, it will NOT be transitory. Again, volcanoes and inflation do erupt suddenly. How about Bitcoin (crypto) bulls and HODL’s? The Tonga “surprise” pointed out that there was (is?) a correlation (risk on) with tech stocks. Store of value, yes? Gold replacement, yes? Risk off and correlated with tech? Yup, who knew. I got “Tonga’d” too.
Just like the vast South Pacific ocean which, by the way, is totally unexplored and surely harbors many more undersea volcanoes, there will be more Tonga events. Financial markets are very similar. “Un-explored” strategies, correlations, links and even quant strategies are lurking undetected and very likely sitting on “a ring of fire” just like Pacific nations (like, New Zealand). So when you feel tremors, sense a few ripples in the water, pay attention. Don’t get “Tonga’d.” Be very cognizant that 2022 may very well be a “Tonga Year.”
FYI…..the proper name is the Hunga Tonga-Hunga Ha’api volcano. Just in case you get called on it.
