David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Email of the day on the 60/40 portfolio:

    For some time, the best-looking charts have been the yield charts, almost everywhere but particularly in Europe. They are a pure example of consistency.

    Questions: with the trillions of dollars invested in these securities how are the losses going to be reconciled? My personal belief was that rates could not go to where they seem headed because of the losses it would imply. Is there a lower rate case? How does this logic chain play out? The "prisoners" that own these bonds, who are they and how many of them are there? Is the 60/40 cookie cutter approach to managing portfolios getting crushed? Is income the new oil?

    Sorry for the multiple questions but intellectually the global losses in bonds has to be discussed in my opinion.

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    Email of the day on the Dollar and commodities

    A very well-respected cotton trader in Texas told me many years ago, that amongst all the factors influencing the price of cotton, the value of the dollar is by far number one. I guess this also is true for the price of gold to some extent. I was presently surprised to see how well gold has held inspite of the dollar’s strength. Am I missing something? I would be grateful if you would share your views on gold in the current environment. As always thanks for your very valuable service. 

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    Email of the day on Rolls Royce and selling investments

    Eoin, given how markets have deteriorated of late, could I be so cheeky as to ask why you have not cashed in on Rolls Royce yet? It looked like a great but when it near tripled to 140p, but it’s nearly halved now and you’ve sat tight. Surely there must have been a key technical level between then and now to warn you to sever ties with this one. I ask because I too sit on similar scenarios and I keep asking myself why I don’t cash in a while ago while the going was still good, making it more difficult to let go now, despite prices still sliding, seemingly day by day.

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    Policy Has Tightened a Lot. Is It Enough?

    Thanks to a subscriber for this article by Neel Kashkari for the Minneapolis Fed. Here is a section:

    First, at a minimum, the FOMC must follow through on the forward guidance of federal funds rate increases and balance sheet reduction that we have already signaled in order to validate the repricing that has taken place in financial markets.

    Second, we will need to see whether the supply issues that have contributed to high inflation begin to unwind and/or if the economy is in a higher-pressure equilibrium. I wrote about this possibility seven weeks ago. Unfortunately, the news from the war in Ukraine and the COVID lockdowns in China are likely delaying any normalizing of supply chains. If supply constraints unwind quickly, we might only need to take policy back to neutral or go modestly above it to bring inflation back down. If they don’t unwind quickly or if the economy really is in a higher-pressure equilibrium, then we will likely have to push long-term real rates to a contractionary stance to bring supply and demand into balance. The incoming data over the next several months should provide some clarity on these questions.

    Finally, we will need to continue to assess where neutral is. If the economy is in fact in a higher-pressure equilibrium, that might indicate the neutral long-term real rate has increased, which would then require even higher rates to reach a contractionary stance that would bring the economy into balance.

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    Tesla's Impact Report Hints At The Future Of Battery Recycling And Battery Cost Declines

    This short note from ARK Innovation ETFs may be of interest. Here is a section:

    According to its Impact report for 2021, Tesla can recover raw materials from batteries with ~92% efficiency: for every 1,000 kWh worth of end-of-life batteries, Tesla recovers 921 kWh worth of raw metals to produce new batteries. The importance of recycling already is clear when cells don’t meet quality assurance during the manufacturing process. Tesla believes that “the costs associated with large-scale battery material recovery and recycling will be far lower than purchasing additional raw materials for cell manufacturing,” contributing significantly to continued battery cost declines and amplifying the importance of recycling as more electric vehicles reach end-of-life.

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    China Premier Warns of Grave Jobs Situation as Lockdowns Weigh

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    “Stabilizing employment matters to people’s livelihoods, it is also a key support for the economy to operate within a reasonable range,” Li said, urging businesses to resume production with Covid-fighting measures in place, while reiterating the government’s policy to promote the healthy development of internet platform companies to support employment. 

    The premier’s warning on employment came after the nation’s surveyed jobless rate climbed to 5.8% in March, the highest since May 2020, according to data released by the National Bureau of Statistics in mid-April.

    China’s top leaders last week warned against attempts to question the country’s Covid Zero strategy as newly released data for April showed the lockdown-dependent approach taking a heavy toll on the economy. The rolling out of even more intense restrictions over the weekend in Shanghai and Beijing adds further to the challenges facing policymakers seeking to shore
    up growth.

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    In the Long Run, These Equity Losses Barely Register

    This article from Bloomberg highlights the philosophical attitude being adopted following a couple of days of rather extreme volatility. Here is a section:

    A momentous week has ended with a thud rather than a bang (at least on the data front) as the U.S. employment numbers came out broadly in-line with expectations. To be sure, there were some notable features of the data -- a drop in both household employment and labor participation, though perhaps that was driven by the timing of Good Friday, which fell during the survey week. 

    You can cherry-pick whatever you like from the figures to support your pre-existing view, so at this point it’s hard to say that they change much of anything. For now, the growth picture remains strong enough to support the policy trajectory that’s currently priced into rates markets. That, in turn, should continue to apply pressure to equities, regardless of how “cheap” they may seem.

    From a macro perspective, the issue to focus on has clearly rotated from inflation to growth. Pretty much everyone understands that base effects will drive y/y CPI and PCE figures lower, but the run-rate of inflation will remain high enough for central banks to keep worrying ... and keep (or start) tightening. That policy trajectory will change when the growth outlook deteriorates significantly enough that demand looks more correctly aligned with supply. So that’s what we’ll be watching for.

    While you can point to the 353k drop in household employment as a signal that the economy is weakening, that’s a pretty tenuous hook upon which to hang your hat at this point -- particularly given that household employment growth had comfortably outstripped the establishment survey over the prior six months. Moreover, the drop in the participation rate suggests the household figure may well have been a supply, rather than demand, issue -- which is problematic if the relatively elevated level of wages can still not attract fresh workers.

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