While the issuance halt initially triggered outsize moves for VXX -- including a 45% jump then reversal in a single session -- the ETN has been calmer as volatility across U.S. stocks retreated, helping prevent a potentially vicious short squeeze in the product. 

All the same, since new cash can’t be added to either note the distortions can be significant. VXX closed at a record 24% premium on Friday, according to data compiled by Bloomberg. OIL has swung between a premium and discount amid major moves in the crude market in the past two weeks. It closed Friday at a 1.1% discount to assets.  

VXX gained 2.4% in early trading as of 9:02 a.m. in New York. OIL was 3.2% lower.

“This is a rare case of an exchange-traded product issuer dropping the ball and mismanaging their products,” said Todd Rosenbluth, head of research at ETF Trends. “Although it is no more likely to occur again this is another red flag for trading ETNs and not ETFs.”

ETNs were created to offer exposure to portions of the market that are difficult for ETFs to access. This comes with additional counterparty risk. The times when ETN products go awry is generally when there is significant credit market volatility like we have seen recently.

The near-term forward spread measures the difference between bets on where the three-month rate will be in 18 months’ time and that same rate today. That curve, along with the more traditional three-month, 10-year spread, has steepened to multi-year highs, spurred by expectations that a hawkish Fed may frontload interest-rate increases, taking the federal funds rate to about 2.8% at the end of 2023. 

A 2018 Fed research paper highlighted that the shorter-term yield curve eliminates complicating factors like the so-called term premium, and thus gives a cleaner read on market expectations for future monetary policy. In effect, the gauge would only invert when a large cohort of investors expected rate cuts on the basis of slowing growth. Previous Fed research has found it has a better predictive power than other parts of the curve -- a conclusion the chair endorsed Monday. 

History has shown that when the force of a Fed tightening cycle causes a yield-curve inversion, it foreshadows a pending recession as consumer spending and business activity increasingly buckles under the weight of policy tightening.

Campbell Harvey was one of the first to historically show the link, with his work on the three-month, 10-year spread -- which has inverted before each of the past eight U.S. recessions. These days, the professor at Duke University’s Fuqua School of Business is concerned about growing threats to the U.S. recovery, even though his beloved spread is not yet flashing “code red.”

High inflation and “geopolitical risk -- which we haven’t even felt the economic outcome of yet, besides at the gas pump -- is all acting like a tax,” Harvey said. “It all indicates slower economic growth.”

Cherry picking the one part of the yield curve that is not at danger of inverting seems to be intellectually dishonest to this observer. Instead, we should be attempting to answer the question why 3-month yields are so depressed.

Market-based expectations for how the Fed moves its target fed funds rate have also broken out. The shift in expectations has come with breathtaking swiftness. The following chart shows implicit expectations for rates after each of the next seven meetings as they stood on Dec. 31, where they had moved by the day the tanks entered Ukraine, and where they are now:

Bear in mind that as the year began, CPI had already topped 7% for the first time in four decades. It’s remarkable both how long it took for investors to come around to expecting a sharp monetary tightening, and how swiftly that realization has now taken root.

What does this imply for asset allocation? Higher bond yields tend to be bad news for stocks if they are part of a Fed tightening, and make high stock valuations harder to justify. However, expectations of a more aggressive Fed are even worse for bonds. The mathematics of the bond market on this point is
inexorable. If rates and yields are going up, then bond prices have to come down.

And, indeed, just as those who’ve been saying There Is No Alternative (to stocks) would have predicted, this news has been far worse for bonds than stocks, meaning that the returns for those who are long in stocks relative to bonds have surged to yet another new high:
 

There is a significant anomaly developing in the bond markets. 2-year and 10-year yields are ramping higher on the expectation of future inflation and much higher rates. 3-month bills are also rising but at a much more sedate pace. The rate is currently at 0.5% which approximates the Fed Funds rate. That’s an oddity because investors are increasingly convinced a 50-basis point in May is a certainty.

From CNBC: Oil giant BP reports highest profit in 8 years on soaring commodity prices

From Reuters: Cereal maker Kellogg Co. forecast full-year profit growth above market expectations on Thursday, riding on higher product prices that helped overcome labor strike disruptions and soaring input costs in the fourth quarter.

From The New York Times: Procter & Gamble’s sales jump as consumers brush off rising prices.

From The Ticker: McDonald’s to raise prices despite record revenue

From Yahoo Finance: Amazon stock soars 15% after earnings, will hike Prime membership fee

US Senator Elizabeth Warren put the pieces together when Fed chair Jerome Powell appeared last month before the Senate Banking, Housing, and Urban Affairs Committee. Offering a lesson in what she referred to as “Econ 101,” the senator from Massachusetts led Powell through a series of questions related to inflation.

Bond prices continue to accelerate lower with 10-year Treasury yields jumping nearly 15 basis points today. Stock markets remain reasonably steady in what is a clear role reversal. Usually, bonds do well in times of economic stress and the stocks decline. Right now, inflationary pressures are weighing heavily on bonds, but stocks are steadier because companies have successfully raised prices.

“The American economy is very strong and well positioned to handle tighter monetary policy,” Powell told a press conference Wednesday following a meeting of the Federal Open Market Committee. “We are attentive to the risks of further upward pressure on inflation and inflation expectations.” He also said that officials could move faster on policy tightening if needed.

The hike is likely the first of several to come this year, as the Fed said it “anticipates that ongoing increases in the target range will be appropriate,” and Powell repeated his pledge to be “nimble.”

“I saw a committee that is acutely aware of the need to return the economy to price stability,” he told reporters, characterizing the mood around the table as policy makers debated the outlook. “It is determined to use its tools to do so.”

In the Fed’s so-called dot plot, officials’ median projection was for the benchmark rate to end 2022 at about 1.9% -- in line with traders’ bets but higher than previously anticipated -- and then rise to about 2.8% in 2023. They estimated a 2.8% rate in 2024, the final year of the forecasts, which are subject to even more uncertainty than usual given Russia’s invasion of Ukraine and new Covid-19 lockdowns in China are buffeting the global economy.

The market took the first hike in this cycle in its stride and not least because it has been fully priced in over the last four months. Remaining nimble is going to be essential. Uncertainties abound, not the least of which is China’s problem with containing the omicron variant is only just beginning. Predicting 1.9% by the end of the year implies at least a 25-basis point hike at every meeting. That seems ambitious in the extreme. 

I and probably many others will be intrigued in your contrarian view that the Fed will hike once and be "done". Whereas as per enclose Bloomberg article others expect seven rate hikes this year.

If only one rate hike does that mean USA stock markets will revert to their bull run?

12-month yields are at 1.19% and climbing. That implies four hikes within the year. The Fed will hike this week, so that implies three additional hikes. I have been of the opinion the Fed will have an extraordinarily difficult time raising rates. If the Fed raises 7 times a recession is inevitable. With three more hikes the chances of a recession are better than even. One and done sounds about right to me. 
 

But for some investors, “it’s opportunistic investing,” said Chris Gaffney, president of world markets at TIAA Bank. “Maybe it’s an opportunity to rebalance and buy some of these big-name, good companies that have been in this correction and the prices are cheaper.”

The S&P 500 is on pace to notch its second consecutive week lower, but retail traders haven’t been deterred by the volatility. They’ve become a reliable support pillar for the market, plowing cash toward stocks for nine straight weeks.

Partly, it’s a habit developed during the Covid-19 crash -- and one that’s proving stickier than many expected. Back then, buying during the March lows proved very profitable, including
for ARKK enthusiasts. 

Gaffney says there’s a swath of investors who are wary of missing out on any other potential big run-ups in prices. “You always get some people who feel like, ‘I missed out on the last big run, and I’m not going to miss that again, so I’m going to get in now when prices are cheap.’”
 

In a secular bull market buying the dip always works. It becomes engrained as the go-to strategy for investors to get a position at a discount. As interest returns, the assets leading the secular trend break higher, the decision is vindicated and buying the next dip becomes an even easier decision. One way to know that a bull market is over, is the buy-the-dip trade fails.

Explore a U.S. Central Bank Digital Currency (CBDC) by placing urgency on research and development of a potential United States CBDC, should issuance be deemed in the national interest. The Order directs the U.S. Government to assess the technological infrastructure and capacity needs for a potential U.S. CBDC in a manner that protects Americans’ interests. The Order also encourages the Federal Reserve to continue its research, development, and assessment efforts for a U.S. CBDC, including development of a plan for broader U.S. Government action in support of their work. This effort prioritizes U.S. participation in multi-country experimentation, and ensures U.S. leadership internationally to promote CBDC development that is consistent with U.S. priorities and democratic values.

This announcement does not propose anything new. The Federal Reserve has been investigating the merit of a central bank digital currency for years already. The reason the crypto sector responded favourably to this announcement is because of its enthusiasm about the future of digital assets. 

In 2020 I began a series of reviews of longer-term themes which will be updated going forward on the first Friday of every month. These reviews can be found via the search bar using the term “Secular Themes Review”.

When Wall Street indices were breaking out to new highs in 2012/13 the world looked to be on the cusp of a golden era of globalisation, co-operation, and the inevitable rise of the middle class. Higher living standards would breed a more tolerant society with greater respect for the environment and for our fellow global citizens.

In predicting a secular bull market, we were correct about the market call. Wall Street and the FANGMANT stocks have outperformed global indices by a wide margin over the last decade. It was also correct to expect oil to underperform because of the bounty arising from shale oil and gas. Predicting a decade ago that the USA would become energy independent was seen as maverick. Today it’s a fact.

The social upheaval that began with the monetary and regulatory response to the credit crisis represents a significant threat to the utopian ideal of the everyman. Exporting job security in return for cheap products has hollowed out the middle class in most developed countries. The evolution of the subscription business model has also reduced individuals to cash flows; where ownership of hard assets is marketed as an outdated concept. This has contributed to significant social upheaval and the response to the coronavirus pandemic amplified it.  

At the same time, the trend of geopolitical tension continues to rise. The concentration of wealth in the hands of a small number of people, companies and countries is creating greater competition. China is much more active in staking its claim to global trade than in the past and Russia’s current invasion of Ukraine is reflective of a desperate need for both security and relevance in a world that is actively working to use less of its primary export; oil.

Russia said it would press forward with its invasion of Ukraine until its goals are met, as troops were seen moving in a large convoy toward the capital, Kyiv. In the country’s second-largest city, Kharkiv, the mayor said residential areas were being bombed in what he called “a war to destroy the Ukrainian people.”

Hitting the TV tower is aimed at attempting to put Ukraine’s ability to appeal directly to Russia’s population out of commission. The impassioned broadcasts from Ukraine’s president must be particularly annoying for the Russian aggressors. Unfortunately, the success of the initial resistance means Russia is doubling down on the bombardment.

Leveraged funds’ net short positioning in the yen has increased in seven out of the last nine weeks and sits at its most bearish since November, according to Commodity Futures Trading Commission data released Friday. Net positioning in the Swiss franc, another preferred haven asset for currency traders, has been short since September, though it did grow less bearish in last week’s CFTC data. 

The pullback from havens was evident in the spot market on Tuesday, when the Japanese and Swiss currencies retreated while other major counterparts gained against the U.S. dollar. The moves signal that the market is comfortable with where the Russia situation is going, Brad Bechtel, a strategist at Jefferies LLC in New York, said in a Tuesday note. 

“No real downside momentum in the JPY crosses on any of these recent Russia headlines the past few weeks,” he wrote. 

“Even now, as we are on the brink of the conflict, we still do not see JPY perform. Same with the USD and CHF,” he wrote, referring to the Swiss franc.

The news flow from Ukraine is exciting but the trajectory of interest rates is much more important for markets. The defining characteristic of this earnings season was companies reporting better than expected figures for Q4 but disappointing on guidance. Home Depot was the latest example today. Markets are looking at slower growth and higher rates first and the wider geopolitical tension is a secondary concern.

External financing is increasingly intermediated outside traditional channels. Banks and other institutions active in public capital markets, such as equity and corporate bond mutual funds, remain key financing sources for large and mature corporates. That said, “alternative asset managers” (AAMs) have become pivotal for smaller firms globally, including in emerging market economies (EMEs). Many AAMs were established as private equity firms that later expanded into credit, thus turning themselves into one-stop capital providers for firms less able or willing to access traditional sources.

Private markets have three features that distinguish them from public markets. First, there is limited liquidity transformation because investors commit capital for extended periods. Second, these investors tend to be large and sophisticated entities such as pension funds, whose focus on long-term returns enables target companies to confront significant earnings volatility. Third, the regulation of private market investment vehicles is relatively light, partly reflecting the lesser degree of liquidity mismatches and also the limited presence of retail investors.

The lack of regulation in the private markets is seen by many investors as a positive aspect. The challenge for the future is large pension funds are highly active in the sector. They might have long-term liabilities but they also have a long-term need for yield. The private sector has been particularly attractive because they have gained both portfolio diversification and higher returns. 

Mounting inflationary pressures are likely to make central banks more sensitive about weakness in their currencies, which could add fuel to the global tightening cycle, Goldman Sachs strategists George Cole and Michael Cahill wrote in a client note Monday.

This scenario is a regime shift from the competitive depreciation seen over the past decade as central banks acted to protect the appeal of their export markets
To offset a single percentage point weakening in the currency, G-10 policy rates would need to rise 10bps on average, Goldman analysis using a financial-conditions framework showed

Implication is higher G-10 policy rates as each central bank pressures the others, as well as “higher rate volatility relative to FX volatility”

NOTE: Rates volatility reflected in the ICE BofA MOVE Index is the highest since March 2020, while currency vol on JPMorgan’s benchmark index is the highest since late December

Japan’s policy “bears watching” as the central bank’s tolerance of yen weakness has been a key anchor for global yields, Goldman said

Amid rising energy and commodity prices, a weak currency becomes a liability for importers. One of the few tools they have is to allow their currencies to appreciate versus the Dollar.

The Dollar Index is currently appreciating because the general consensus is the Fed will raise rates quicker than either the ECB or BoJ. Since both of those central banks experienced a great deal of difficulty in getting off the zero bound ahead of the pandemic, they are likely to have similar difficulty now. That’s true even if Germany is experienced surging inflation.

Heading into the credit crisis, the TED spread and the OIS spread took on almost legendary status as predictors of future troubles in the financial sector.

The Ted spread is the difference between 3-month LIBOR and 3-month Treasury yields. Since LIBOR is a measure of what rate banks are willing to lend to one another, when the spread widens it is viewed as a measure of perceived risk in the sector.

The LIBOR-OIS spread is the difference between 3-month LIBOR and 3-month Overnight Index Swap. It’s another measure of health in the financial system.

Both spreads jumped higher in 2007 and spiked in 2008. Two things are worthy of consideration at present.

“We’re seeing right now the highest death rates we’ve ever seen in the history of this business,” said Scott Davison, the CEO of OneAmerica, a $100 billion life insurance and retirement company headquartered in Indianapolis.

“The data is consistent across every player in the business.”

Davison said death rates among working age people – those 18 to 64-years-old – are up 40 percent in the third and fourth quarter of 2021 over pre-pandemic levels.

“Just to give you an idea of how bad that is, a three sigma or 200-year catastrophe would be a 10 percent increase over pre-pandemic levels,” Davison said. “So, 40 percent is just unheard of.”

He said the data shows COVID deaths are greatly understated among working age Americans.

Davison says OneAmerica expects to pay out more than $100 million in short- and long-term disability claims due to the pandemic.

“Whether it’s long COVID or whether it’s because people haven’t been able to get the health care they need because the hospitals are overrun, we’re seeing those claims start to tick up as well,” he said.

Because of this, insurance companies are beginning to add premium increases on employers in counties with low vaccination rates to cover the benefit payouts.

Middle aged people have been dying at an increasing rate in the USA over the last decade. Poor lifestyle habits, suicide, and an opioid epidemic contributed to that condition. Now the pandemic has resulted in an acceleration of the trend.

The data reinforce the Fed’s intentions to begin raising rates next month to combat broad-based inflationary pressures and could lead markets to expect even more aggressive action from the central bank. The steady run-up in prices has eroded recent wage gains and diminished American families’ purchasing power, sucking much of the air out of what has been an exceptional bounceback in the U.S. economy.

Leading up to the Fed’s March 15-16 meeting, policy makers will also have the February CPI and employment reports in hand.

Investors boosted their expectations for a a half-point increase in the federal funds target rate in March following the report. While most economists expect a more gradual approach to liftoff -- as has been telegraphed by several Fed officials -- the acceleration of inflation on the heels of rapid wage gains will keep the possibility of a half-point hike on the table.

The Federal Reserve has already signalled what their plans are. They aim to end purchases next month and simultaneously begin to raise rates. The market is well on its way to pricing in a 50-basis point hike. Reducing the size of the balance sheet is expected to begin sometime later this year. That’s where the big differences between this tightening cycle and last begin.

The process of running off debt is expected to take a different trajectory from the last time around. Jay Powell signalled they will be focusing on reducing mortgage debt holdings. The Fed is probably worried about the spiralling cost of shelter. By reducing their holdings of mortgage bonds, they are potentially aiming at property prices.

You have put a chart of the TGA balance and projections in the comment of the day. I am sure I am not alone in wondering where this information comes from. Is it speculation by the Daily Shot or has the Treasury announced that this is their intention? How certain can we be that the projection is reasonably accurate? Have such projections been made before and, if so, have they held true? I am confused as I have never heard of such projections before. Best regards and keep up the good work.

Thank you for this question which may be of interest to the Collective. The Treasury General Account (TGA) at the Federal Reserve was irrelevant until before the global financial crisis. Since then, it has been growing as the role of government spending in the economy increases.

A bad back currently prevents me golfing, walking the dog, or driving the car and, in my opinion justifiably, I am feeling a grumpy.

So here are a few gripes for you:

First gold:
For several years you taught us that the gold price follows an approximate 35-year cycle between highs, although the gold price could outpace stock indexes for short periods in between those highs. We’ve not heard too much about the 35-year cycle for a while, the message now being that it is not unusual for gold to trade in a boring range for up to 18 months or so before breaking out conclusively up or down. You believe it will break to the upside taking out previous highs (which runs contrary to your 35-year cycle theory). I hold a fair chunk of gold and silver miners in ETFs but regard the holding as a hedge rather than representing a belief that gold will imminently break to the upside. It might and it would be nice if it did but I doubt it. As David said, investment options are similar to a beauty parade and for the foreseeable future, many options are likely to look superior to gold.

Second India v China:
You are very hard on China and its political system. Having lived most of my life in Asia I take a less severe view. Like most observers I was disappointed to see that XI, the reformer, had no intention of political reform but on reflection, I think he’s probably right to opt for political stability at a time when China is still struggling to bring modernity to all its people and regions; when lightening-speed technological change is taking place across the globe and when it finds itself in an inevitable struggle to assert what it regards as its rightful influence on global institutions and practices. On a smaller scale in Singapore Lee Kuan Yew did much the same thing and while there is now a little more political tolerance in Singapore than there was, the Government – and most of its people – believe that full-throated democracy would lead to economic and societal break-down. That would be Xi’s worst nightmare.

My grouse is not so much with your view on China but with your uncritical view of India. I agree with you that India should do well given its demographic advantage and talents of its people. However, I think the Modi government is quite repugnant in its covert – and not so covert – support of extremist Hindu nationalism represented by terrorisation of the Muslim and Christian communities, and by its appalling failure to do much about the abuse of women, also fuelled by Hindu extremists. In the medium term, I fear this, together with over-dependence on coal, will limit India’s investment appeal and therefore its economic potential.

To declare my investment positions, I have reduced my exposure to India and wait for an opportunity to reinvest in China. My favourite Asian market currently is Vietnam.

Third, the purpose of your ‘service’:
Under David’s direction, Fuller Money provided objective macro oversights together with some trading suggestions/recommendations and some investment suggestions/recommendations. He often put his money where his mouth was and invested in his recommendations. Towards the end of his career, he stopped publishing his investment portfolio which I regarded as a pity. Under your direction, Fuller-Treacy Money continues to provide objective (if sometimes convoluted and long-winded) macro oversights, but I find it difficult to work out whether beyond that you are offering trading hints or investment hints. I use the word ‘hints’ rather than ‘suggestions’ because in this aspect you are far more non-committal on specifics than was David. The details you provide of your own investment activities suggest that you are a trader with long(ish) term investments in gold bullion, gold miners and Rolls Royce. I made several profitable purchases based on David’s recommendations but so far have identified none under your watch.

Fourth Daily Audio and Video:
From emails you have referred to from other subscribers, I am confident that I am not alone in being irritated by several of your constant refrains. Three which particularly annoy me are ‘The big question is ….’ (to which we never get an answer); ‘[Gold (for example) has a lot of work to do’ (which is a nonsense, better to identify factors which might influence buying/selling decisions) and; ‘I can’t talk and chew gum at the same time’ (which sounds quite catchy heard for the first time, but grates increasingly after many repetitions).

So, getting that off my chest makes me feel slightly less out of sorts. I shall be renewing my subscription in March. It’s been part of my routine for too long.

Thank you for this detailed email, your long-term support and I hope you back feels better soon. If it is muscular, rather than a herniation, I strongly recommend Yunnan Baiyao. I’ve pulled muscles in my lower back on several occasions either playing tennis or lifting. If it is taken quickly after injury, it provides a powerful, quick solution with no side effects I have experienced. 

I began questioning the wisdom of relying on the Dow/Gold ratio during the early stages of the pandemic. Here is a link to Comment of the Day on April 24th 2020. It includes a large number of long-term ratios and concluded that the Dow Jones Industrials Average is no longer the best way to look at the long-term ratio, confirmed concentration of attention in the growth sector, predicted the recovery in oil prices, higher wages, and the return of inflation.

In 2020 I began a series of reviews of longer-term themes which will be updated going forward on the first Friday of every month. These reviews can be found via the search bar using the term “Secular Themes Review”.

The biggest trend in the world isn’t bitcoin or the FANGMAN stocks. It’s bonds. Yields peaked in 1980 and the cost of borrowing has done nothing but decline since.

That’s enabled the steady rise of leverage, debt accumulation, asset price appreciation, speculation in all manner of public and private assets and every other bull market too.

The exact mix of where the debts have accumulated most is different in each country. For the USA, fiscal excess and unfunded liabilities are the biggest debt issue. The large number of companies surviving with no profits is the second biggest debt issue.

In Australia, Canada and the UK, consumer debt ratios, household debt and property debt are the pain points. The Reserve Bank of Australia’s reluctance to raise rates, despite inflation, is a symptom of the economy’s reliance on property prices.

For China, the accumulation of debt in the property sector has been epic. The sector represents 30% of GDP. At least in Japan, the massive quantity of debt is held domestically but it is a significant hurdle to raising rates.

European Central Bank policy makers can envisage recalibrating their outlined policy path in March, according to officials familiar with their thinking.

The Governing Council agreed on Thursday that it’s sensible not to exclude the possibility of an interest-rate hike this year, said the people, who asked not to be identified because their discussions are private. 

An end of bond-buying under the ECB’s regular program, the APP, is possible as early as the third quarter, the officials said. No decisions have been taken. 

An ECB spokesman declined to comment. ECB President Christine Lagarde refused to repeat at her press conference that a rate increase was very unlikely this year, highlighting more persistent-than-expected inflation pressures in the 19-nation bloc. Investors brought forward bets on a liftoff while she spoke.

This graphic from the Nordea highlights the fact that European inflation is all about energy. Raising interest rates doesn’t do much more to curtail demand than high prices are doing already so the ECB is understandably reluctant to rush into action.

Alphabet Inc.’s brisk rally on Wall Street on Wednesday is giving a boost to the Nasdaq 100 Index, still reeling from last month’s selloff in tech stocks. Shares in the Google parent are surging after it announced a stock split and posted quarterly sales and profit that topped analysts’ projections, signaling the resilience of its advertising business. The gains in Alphabet shares -- the third biggest stock on the Nasdaq 100 with a weighting of 7.4% -- account for most of the rise on the index on the day.

Apple warned about its ability to fulfill orders before Christmas and subsequently was able to beat that projection. The share jumped on the news but guidance was for slower growth in Q2.

Euro-area inflation unexpectedly accelerated to a record, overshooting expectations by the most in at least two decades and heaping pressure on the European Central Bank to pare back pandemic stimulus more quickly, like its counterparts in the U.S. and the U.K.

Consumer prices jumped 5.1% from a year ago in January, up from 5% in December. The median estimate in a Bloomberg poll of 44 economists saw a reading of only 4.4% and none predicted inflation gaining pace.

The euro climbed 0.3% against the dollar to $1.1305 while German bonds pared gains to leave the 10-year yield one basis point lower at 0.03%.

While slowing in Germany and France, the euro zone’s two biggest economies, the spike in energy costs pulled price growth higher across the 19-member currency bloc as a whole. It was more than a percentage point higher than analysts predicted in Italy, where it accelerated to 5.3%.

Stripping out energy and other volatile components like food, core inflation was 2.3%, down from last month’s 2.6% reading.

Energy prices are a multiple of where they were a year ago. That’s hitting everyone’s wallet. The issue is particularly worrisome in Europe where natural gas inventories are extremely low and consumption taxes are high. An even bigger crisis has been avoided only by virtue of winter weather being relatively warm of late.

Thanks for the great service pulling the noise out of market trends for us. We especially enjoy what my wife affectionately calls the “Big Picture Long-Winded” Friday recordings. Regarding the possible rotation into the renewable/green economy do you have any ideas on Industries/companies that could benefit from the build out? Or would the safer play be directly in the commodities needed for the grid, vehicles, batteries, and such? Hoping to get to another Chart Seminar before too long.

Thank you for your kind words. A former delegate at The Chart Seminar once described my sense of humour as “impish” and I can’t argue with that. Your better half’s turn of phrase certainly tickled me. The Friday broadcasts are often a delicate balance between trying to be pithy and attempting to cover the relevant arguments. I’m looking at a late May/early June date for a London seminar and I hope to see you there.

The question of the future of the zero carbon/green revolution/energy transition is a big one. On one hand we have high minded projections of a utopian future where the air is pristine and no economy is dependent on carbon emissions for growth. Promises of hundreds of trillions being spent to achieve that goal were a major feature of international conferences in 2021.

“The Fed’s latest update is net negative for risk assets, as it seems to show that the Fed has a lower strike put than we thought - in other words Powell would be comfortable to allow further market weakness and volatility without intervening,” said Altaf Kassam, EMEA head of investment strategy and research at State Street Global Advisors.

“Investors should continue to avoid developed markets government bonds as there is only downside there. We are rotating into defensive equities, long-dated U.S. Treasuries, commodities and VIX futures - Volatility will be here for a while.”

The Fed is talking about raising rates faster than any other developed market central bank. That represents a strong tailwind for the Dollar Index and it broke upwards to new recovery highs today. This has been a consistent rebound from the lower side of the range and nothing has yet happened to question potential for a run back towards the psychological 100 level.

Most global finance firms are planning to establish or expand operations in the U.K. in 2022, according to a survey of 40 key decision-makers in the industry.

Around 87% of global financial services investors expect to invest in the U.K. next year, EY’s latest poll found. That’s the highest since the professional services firm started tracking sentiment toward the country in 2016, the year of the Brexit vote, and compares to 50% in early 2021 and a low of 11% in 2019. 

The data is a boost for the City of London, whose credentials as an international finance center are being questioned since the U.K. left the European Union. Meanwhile, 90% of respondents said the U.K. offers the right conditions to invest in assets with environmental, social and governance attributes.

“This is testament to the stability and resilience of the mature U.K. market which continues to ably withstand the material challenges and uncertainty of both the pandemic and Brexit,” said Anna Anthony, EY’s financial services managing partner for the U.K.

There was a lot of fear that Brexit would result in London being denuded of financial firms. The reality is the Eurozone represents only a portion of the business done in one of the world’s great financial centres.

Billionaire investor Mike Novogratz has said cryptocurrencies will struggle to pull out of their sell-off if stocks keep falling, as he urged investors not to buy the dip.

Prices for bitcoin, ether and other digital currencies have fallen sharply across the board as they track Wall Street's rout in tech stocks, driven by pressure from rising bond yields.

"Crypto will have a hard time rallying until stocks find a base," Novogratz, CEO of investment company Galaxy Digital, tweeted late Thursday.

Novogratz pointed to the sharp fall in the Russell index, which is down almost 10% year to date, saying there are 1.2 trillion bad equity longs above the market.

"This is now a bear market," he said, adding: "Sell rallies.  Don't buy dips."

Doubts about whether bitcoin is a risk asset or a safe haven have been dispelled over night as bitcoin followed the stock market to new lows. That’s an important distinction because the primary comparison between bitcoin and gold over the last couple of years is they are both long-term stores of value. Recent action suggests that belief is wrong.

The swift run-up in government bond yields is curtailing risk appetite. More importantly it reintroduces the discount rate in the calculation of fundamental value. When money is both free and available in vast quantities, the discount rate on future cashflows goes to infinity. At that point, the most fanciful valuations are accepted as realisable because the time allowed to fulfill the goal is infinite. Higher rates reintroduce a time value of money argument and forces valuations down. That has resulted in a significant correct for many liquidity-dependent sectors.  

Many people have remarked on the wonders of compounding. For example, Albert Einstein reportedly called compound interest “the eighth wonder of the world.” If $1 could be invested today at the historic compound return of 10.5% per year, it would grow to $147 in 50 years. One might argue that economic growth will be slower in the years ahead than it was in the past, or that bargain stocks were easier to find in previous periods than they are today. Nevertheless, even if it compounds at just 7%, $1 invested today will grow to over $29 in 50 years. Thus, someone entering adulthood today is practically guaranteed to be well fixed by the time they retire if they merely start investing promptly and avoid tampering with the process by trading.

I like the way Bill Miller, one of the great investors of our time, put it in his 3Q 2021 Market Letter:

In the post-war period the US stock market has gone up in around 70% of the years . . . Odds much less favorable than that have made casino owners very rich, yet most investors try to guess the 30% of the time stocks decline, or even worse spend time trying to surf, to no avail, the quarterly up and down waves in the market. Most of the returns in stocks are concentrated in sharp bursts beginning in periods of great pessimism or fear, as we saw most recently in the 2020 pandemic decline. We believe time, not timing, is the key to building wealth in the stock market. (October 18, 2021. Emphasis added)

What are the “sharp bursts” Miller talks about? On April 11, 2019, The Motley Fool cited data from JP Morgan Asset Management’s 2019 Retirement Guide showing that in the 20-year period between 1999 and 2018, the annual return on the S&P 500 was 5.6%, but your return would only have been 2.0% if you had sat out the 10 best days (or roughly 0.4% of the trading days), and you wouldn’t have made any money at all if you had missed the 20 best days. In the past, returns have often been similarly concentrated in a small number of days. Nevertheless, overactive investors continue to jump in and out of the market, incurring transactions costs and capital gains taxes and running the risk of missing those “sharp bursts.”

As mentioned earlier, investors often engage in selling because they believe a decline is imminent and they have the ability to avoid it. The truth, however, is that buying or holding – even at elevated prices – and experiencing a decline is in itself far from fatal. Usually, every market high is followed by a higher one and, after all, only the long-term return matters. Reducing market exposure through ill-conceived selling – and thus failing to participate fully in the markets’ positive long-term trend – is a cardinal sin in investing. That’s even more true of selling without reason things that have fallen, turning negative fluctuations into permanent losses and missing out on the miracle of long-term compounding.

The arguments against selling become progressively more compelling the longer prices move up and to the right. It would have been a mistake to sell everything in January 2020 when news of the coronavirus was breaking unless you were equally committed to buying it all back at the first sign of bottoming in March. That visceral experience has acted as a learning experience for many investors who will have resolved never to sell. That is most particularly evident in the crypto markets where faith in the bullish hypothesis has been rewarded time and again.

“Consumption remains the weakest link in China’s growth story at the moment and that will by and large continue for much of this year,” said Louis Kuijs, head of Asia economics at Oxford Economics. “We think Beijing has a bottom line of around 5%. As is the case at the moment, if growth is weaker than that, they’d feel strongly motivated to pursue more policy easing.”

Economists expect more policy action from the PBOC in coming months. Goldman Sachs Group Inc. said there’s a possibility the central bank will allow banks to lower the five-year loan prime rate, a reference for mortgages, on Thursday. The one-year rate was already cut in December. Economists at Australia & New Zealand Banking Group and BNP Paribas see the likelihood of further reductions in the reserve requirement ratio for banks.   

The big question for liquidity dependent stocks is where the next big source of liquidity is going to come from. The US government is struggling to get additional spending measures passed. The Fed expects to be done with QE tapering in a couple of months and both Europe and Japan are not significantly increasing their programs. The potential for China to do more to support flagging growth is one of the few realistic possibilities for ample additional liquidity in the near term.

Why such angst? There’s a lot in the minutes, with much useful information for students of the economy and monetary policy. You can find the full version here. For those less interested in such studies, the passage of three sentences that accounted for more or less all of the market reaction read as follows:

it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated. Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate. Some participants judged that a less accommodative future stance of policy would likely be warranted and that the Committee should convey a strong commitment to address elevated inflation pressures.

This commits the central bank to nothing, but the notion that there were hawks on the committee who thought that the Fed should reduce the size of its balance sheet (in other words, start to sell off its huge bond holdings in a move that, all else being equal, should raise yields) came as an unpleasant surprise. Those words are there for a reason. The Fed thought it a good idea to plant a reminder of hawkish intent just as markets were ramping up again after the New Year break, and it seems to have worked.

The Fed Minutes were the catalyst for the sell-off in bonds yesterday which contributed to the weakness in the growth sector. I suspect talk of being more aggressive in quantitative tightening than the 2018/19 period was the primary reason investors took fright.

Treasury yields rose a second day, with five-year rates hitting the highest since before the pandemic took hold in the U.S., amid increasing conviction that the Federal Reserve will raise rates at least three times beginning in May.

The five-year Treasury note’s yield climbed as much as 3.8 basis points to 1.392%, the highest since Feb. 20, 2020, while 30-year yields bumped up toward their 200-day moving average.

Yields across the curve are rising for a second straight day, after Monday’s selloff lifted the 10-year note’s yield by nearly 12 basis points in its worst start to a year since 2009. The two-year yield topped 0.80% for the first time since March 2020.

That move rippled through markets from Australia to the U.K., where bond trading resumed after a holiday on Monday. Australian 10-year yields jumped as much as 15 basis points to 1.82%, the highest since Nov. 26. Yields on the same U.K. tenor surged as much as 10 basis points to 1.07%, the highest since Nov. 3.

At 1.38% the 5-year yield has fully unwound the pandemic panic compression of early 2020.  In that time total debt outstanding has increased by $5.7 trillion or 24.6%. That’s an eyewatering figure.  Why the market did not flip out about it is a question which flummoxed investors in 2021.

Equity team co-heads Atul Narayan and Erin Miles on other equity markets catching up with the US: Looking ahead, it feels that things are primed for the equity markets that have lagged the US (China, Japan, the UK, Europe, etc.) to catch up. There are several factors at play. First, COVID has been a material relative support to US equities from all channels—favorable sector tilt, less virus economic impact, more support from falling rates (versus, say, Japan, where yields are pegged), and compressing risk premiums, given safe-haven appeal for US equities, especially the FAANMGs. We would expect the COVID impact to gradually fade in the coming year and this to be a relative support for the markets outside the US.

Second, China is showing early signs of moving toward easing after a year when the structural goals (deleveraging, rebalancing, common prosperity, etc.) were prioritized. This again will be a bigger relative support for economies like Japan, Europe, and EMs that are a lot more exposed to China. Finally, if you look back over the last 100 years, it’s almost always been the case that the winners of a given decade end up being laggards in the next one because of the degree of exuberance (and pessimism) that gets priced in following the winning (and losing) stretch. Given how stretched the relative positioning and pricing is today (for logical reasons), we expect the US versus rest of world diff to finally start to revert after a decade-long off-the-charts performance. The main things we are watching closely are the evolution of COVID globally, China’s policy stance, and the retail flows in the US, which were the biggest support for US equities over the past year and a half.  

Based on valuations alone, there is a strong risk-adjusted argument for favouring ex-US assets. I also find the argument that a recovery for China’s economy would have a more positive effect on the Ex-US basket to be reasonable. However, momentum remains a tailwind for Wall Street which has been supported by the relative strength of the Dollar all year.

So far, 23 members of the House Democratic Caucus have announced they will not seek reelection. While it is common for the party in control to see a series of high-profile retirements ahead of a difficult midterm cycle, the sentiment inside the caucus is that even more departures are likely. A combination of political winds tilting toward Republicans, redistricting boxing some members out of easier races and an overall low morale among House members could lead to even more retirements in the coming months.

"We have got a problem here," retiring Rep. Cheri Bustos said of the general morale inside the House. "There are way too many people serving as members of Congress right now who I not only don't look up to, I have zero respect for. And I'm saddened to have to say that."

Bustos, who was first elected in 2012 and represents western Illinois, announced she was retiring earlier in the year and told CNN that she was looking for "a new chapter in her life." But it's clear that the current standing of Congress loomed over the decision. Bustos said that while she believes some Democrats aren't "team players" -- she did not name names -- the bulk of her concerns are with Republicans, and the prospect of turning over power to the GOP in 2022 is disturbing for all Democrats in Congress.

"When you've only got a three- or four-vote majority and you see people who are in tough districts announcing that they're not running for reelection, yeah, everybody worries about what's ahead," said Bustos, the former chair of House Democrats' campaign arm.

If the party in power can’t get key pieces of legislation across the line, it creates the perception of ineptitude. With mid-term elections less than a year away, the Democratic administration should begin to feel some urgency in January with a view to passing at least part of their ambitious goals.

Turkey halted trades on all listed stocks after sharp declines triggered a market-wide circuit breaker,
with the lira extending declines to a record low.

Trading of equities, equity derivatives and debt repo transactions were automatically halted twice within an hour after the Borsa Istanbul 100 index fell as much as 7%. The index was earlier up more than 5.6% before sinking as a central bank intervention on the currency market failed to stem the lira’s decline. The currency has come under pressure after the central bank cut its benchmark repo rate by a percentage point to 14% on Thursday, despite inflation accelerating to over 21%.

The central bank’s easing cycle since September saw the key rate fall by 5 percentage points, prompting a rush to buy dollars among corporates and retail investors.  President Recep Tayyip Erdogan has advocated for cuts in borrowing costs, arguing that lower rates will eventually free Turkey’s economy from a reliance on short-term foreign inflows. The policy pivot and the ensuing market turmoil prompted complaints from industrialists, who say the current volatility is hurting companies. 

Less than two weeks ago the central bank intervened to support the currency. In normal circumstances that would begin to re-instill confidence. By cutting rates and bowing to political will, the central bank today demonstrated it is not able to do what is necessary to avoid a currency and debt crisis.

“Anytime there’s a risk of easy money being taken away, that will result in some of these very expensive areas of the market to pull back,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors.

“The pressure on the Fed to pick up the pace of tightening is only mounting. With higher prices permeating the marketplace, we could see a snowball effect when it comes to inflation challenges as more suppliers justify higher prices and more consumers begin to close their wallets,” said Mike Loewengart, managing director of investment strategy at E*Trade Financial.

“The inflation trajectory remains worrisome. While we believe that price pressures will abate next year, the Fed is doing the prudent thing by tapering faster, so that it is well-positioned to hike rates if needed,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.

Liquidity is the only game in town. With a looming threat that the USA is about to close the momentary spigot, a distinct air of risk-off trading is increasingly evident. That suggests, the risk of a lengthier and deeper process of consolidation is rising.

Tapering is tightening for markets, if not the economy. Due to the much greater than expected rise in inflation, the Fed is pivoting to a more aggressive removal of monetary accommodation. We believe this is warranted and supported by an administration that appears less focused on the stock market as a barometer of its success. Furthermore, tapering is different than in 2014 for 3 reasons: 1) the Fed is exiting QE twice as fast this time,2) asset prices are much richer today and 3) growth is decelerating rather than accelerating. This could be important for the economy, too, given how levered consumers are to stock prices today.

The uptrend over the last 13 years has been liquidity fuelled. That’s been the abiding factor behind every correction and every recovery since the initial lows in late 2008. It is reasonable to expect the end of the latest quantitative easing program will have a similar effect on market prices as every other one.

Gundlach, 62, said the reason why Fed Chair Jerome Powell characterizes the economy as strong, but not strong enough to allow for a rate hike at this point, is that the underlying condition is in fact weak -- artificially propped up by an unprecedented degree of stimulus.

Here are some other takeaways from Gundlach’s remarks:
He focused heavily on inflation, saying the annual pace of gains in the consumer price index could hit 7% in the next month or two. He ran through numerous inflation measures and pointed out that shelter costs have climbed significantly. He also said it’s possible that the CPI inflation gauge won’t drop below 4% throughout 2022.

Markets could face more volatility now that the Fed has said it might quicken its tapering program.

Gundlach reiterated that he bought European stocks for the first time in 12 years, which he disclosed a few months ago. He still owns some of those and they’ve done just OK until recently. He didn’t own emerging-markets equities, though he envisioned a scenario when they might outperform U.S. firms. “We’re looking for major opportunities” and emerging markets could be one over the next few years, he said.

The dollar has been in structural decline since 1985, he said, reiterating that the twin-deficit problem (that’s the current-account gap and the federal budget deficit) will cause the greenback to fall over time, which bodes well for emerging markets.

I’ve been saying for most of this year that the Dollar is the lynchpin for a migration away from US Dollar assets. Wall Street has outperformed by a wide margin from the perspective of international investors since 2008.

While “not that concerned about omicron as a major risk factor for equities,” the strategists led by Michael Wilson see headwinds building elsewhere, after Federal Reserve Chairman Jerome Powell signaled the possible accelerated tapering of asset purchases. “Tapering is tightening for the markets and it will lead to lower valuations like it always does at this stage of any recovery,” the strategists wrote in a note to clients.

Brian Nick of Nuveen, the investment arm of TIAA, with $1.3 trillion in assets under management, also said Monday that “the major risk to our outlook remains a sudden tightening of financial conditions if central banks are forced to respond to inflation driven by an overly tight labor market.” In contrast, most of the economic and market risks associated with the virus “are behind,” according to Nuveen’s outlook for 2022.

Other strategists, including those at JPMorgan Chase & Co., have also singled out a hawkish turn by central banks, and not Covid-19, as the main risk to their outlook for stocks. But while JPMorgan reiterated on Monday that its base-case scenario is for the equities rally to continue into next year, Morgan Stanley sees the S&P 500 trending lower, and valuations declining.

There is rising enthusiasm that the omicron variant is more transmissible, but less deadly than its predecessors. That lends further credence to the view the COVID virus is following the established pattern of becoming less deadly over time. From an evolutionary perspective, transmissibility is preferrable to killing the host, so this progression makes sense.

That suggests the end point of the pandemic is in sight. In just the same way we have vaccines and early treatment options for the flu, we will have the same for COVID possibly as soon as the next few months. The “bad flu” conclusion will be vindicated even if it depends on evolution to get there. That’s also the view of a group of doctors I had brunch with yesterday morning.

A year ago, I began a series of reviews of longer-term themes which will be updated going forward on the first Monday every month. The last was on October 1st. These reviews can be found via the search bar using the term “Secular Themes Review”.

One of the most basic truisms in the financial markets is it is easier to make money in a bull market. The bull market that began in late 2008 and early 2009 has been liquidity fuelled. That was not obvious to everyone a decade ago but now everyone gets the message. Money printing inflates asset prices. As long as central banks are printing, we will have bull markets and the most speculative assets will perform best.

In today’s Audio you stated that there was an increasing risk of deflation. This is unsurprising because the capitalist system rewards the production of cheaper and better goods, while the continuing industrialization of the under-developed countries maintains downward pressure on wages. Throw in the emergence of crypto currencies and one must ask if gold will ever regain its former status in the economic system. Your views would be appreciated.

Thank you for this question which is particularly topical as we look to the year ahead. This year has been notable for a significant uptick in inflationary pressures. The extraordinarily low base level of 2021 contributed enormously to the year over year change while the tsunami of liquidity ensured readings were above even the most ambitious forecasts. This has resulted in economic statistics hitting headlines for most of the year even though most of what has happened is a product of base effects and liquidity.

Anticipating a spike in inflation this month, ECB officials have redoubled efforts in recent days to reassure citizens that they are facing a once-in-a-generation cost-of-living squeeze that won’t endure, driven by energy and a series of one-time factors.

While President Christine Lagarde is sticking to that script, some colleagues are warning that price pressures might take longer to subside, stoking speculation about the future course of monetary policy. 

At a Dec. 16 gathering, the Governing Council is set to announce the end of its pandemic bond-buying plan and outline how regular purchases and interest rates will develop as the economy continues its recovery.

“While energy costs and statistical effects can explain the bulk of this month’s jump, today’s reading also revealed some stronger than anticipated underlying pressure. That will add to concern over upside risks to the outlook, but the ECB is still likely to see inflation falling below 2% by the end of next year.” - Maeva Cousin, senior euro-area economist. 

The spike in Eurozone inflation was expected even if the headline number was higher than estimates. The ECB believes inflation will drop back towards 2% once the pandemic subsides. At least they are dearly hoping that will be the case.

South Africa announced the identification of a new variant on Nov. 25, saying a few cases had first been identified in neighboring Botswana and then others had followed in Tshwane, the municipal area in which Pretoria is located. The announcement caused a global panic, roiling markets and resulting in travel bans on southern African nations.

Scientists advising South Africa’s government told a media briefing on Monday that while omicron appeared to be more transmissible, cases appeared to be very mild.

Coetzee’s patients have been relatively young. A vaccinated 66-year-old patient did return a positive test on Monday but was only mildly ill, she said.

Everything we have been led to believe over the last couple of years is that cold and flu viruses mostly evolve to be more transmissible because that furthers the urge to replicate all organisms share. Becoming less deadly is often a part of that because it aids in replication. That part of the argument is complicated by the fact that COVID does not kill before it is has ample time to replicate and disperse.

Global central bank interventions at the onset of the pandemic are still flooding the system with reserves while removing collateral from the market. 

In the U.S., much of the excess cash is currently being mopped up by the Fed facility, but that doesn’t solve everything and the government’s attempts to stay under its legislated borrowing cap by reducing bill issuance at the moment are exacerbating imbalances.

In Europe, meanwhile, governments simply haven’t got enough bills on issue, there isn’t a real equivalent to the Fed RRP facility, and the market mismatch has become clearer as banks rush to shrink their balance sheets ahead of year-end.

If the channels in Europe become clogged, then the “collateral shortage spills over into the FX swap market as euro depositors swap into dollars to park their cash in a deeper, more flexible collateral market,” Credit Suisse strategist Zoltan Pozsar wrote in a note to clients last week. 

The remedy, in Pozsar’s view, is for Europe to create its own mechanism that helps convert cash into collateral without using dealers’ balance sheets. That could be a Fed-like overnight RRP facility from the ECB and/or an injection of bills by the central bank, he said.

Absent that kind of fix, though, the risk is that pressures will continue flowing across the Atlantic for now.

Amid all the talk of inflation and the trend towards monetary tapering, it is also worth reminding ourselves that the world is awash in liquidity looking for a home. 3-month European yields are close to -1%. That’s a powerful incentive to find anything else to invest in. With the ECB signalling they have no intention of raising rates or abandoning monetary accommodation anytime soon.

6. How worrisome is this variant?
It’s too early to say. The World Health Organization said there are fewer than 100 whole genomic sequences of the new strain available, which could add to the time it takes to study how it compares to previous strains and its impact on Covid therapies and vaccines. Viruses mutate all the time, with the
changes sometimes making the virus weaker or sometimes making it more adept at evading antibodies and infecting humans. Covid vaccines have shown they are effective against previous variants and pills being developed by Merck & Co. and Pfizer Inc. may also provide new treatments. 

7. What should we look out for next?
In the U.S., which recently lifted a year-long ban on tourism from much of the world, top medical adviser Anthony Fauci said he wants to see more data. The European Centre for Disease Prevention and Control assigned the variant -- first detected in South Africa and Botswana -- the category “Variant of Concern.” BioNTech expects the first data from laboratory tests about how it interacts with its vaccine within two weeks.

This is the most important chart from the above article. It highlights how transmissible this variant it. From the available data, it is much more transmissible than the Delta or Beta variants and is already approaching dominance of South Africa cases. That implies it will spread around the world rapidly and within a month or at most two will be the dominant global strain.

The result is likely to boost the Reserve Bank of Australia’s confidence in the economy’s prospects as the board prepares to review the A$4 billion weekly pace of its bond-buying program in February. Su-Lin Ong at Royal Bank of Canada put the odds of quantitative easing ending at that meeting at 30%.

The capex data is “likely to see markets continue to price in multiple hikes over the year ahead,” said Ong, head of Australian economic and fixed-income strategy at RBC. Money markets are wagering the RBA will start its policy tightening cycle with a 15 basis point hike to 0.25% by May 2022.

Today’s report showed the Covid lockdowns weighed on outlays, with total capital expenditure slipping 2.2% in the three months through September from the prior quarter. Spending on equipment, plant and machinery fell 4.1%, suggesting it will detract from economic growth in the period. 

Australian firms are looking around the world and see massive monetary and fiscal stimulus. Much of that spending will be focused on infrastructure and they are in line to benefit from outsized demand for resources. This is the time to invest in new supply before everyone else does.

“The Communist Party is celebrating its 100th year — so is JPMorgan,” the bank’s chief executive officer, Jamie Dimon, said Tuesday at a panel discussion at the Boston College Chief Executives Club. “I’d make a bet we last longer,” reported Bloomberg News. 

And

In China, business dealings often come down to narrative. One day, a foreign bank is welcome, and its presence is seen as helping China improve its financial industry. The next day, the same enterprise could be painted as a predatory vulture. Words matter, and harmless intent or humor can be misconstrued in translation. Jamie Dimon has every right to tell a joke, but it always helps to know your audience.

The longevity and persistence of the Party are not topics of conversation in China. Jamie Dimon may as well have been using cartoons of the Prophet Mohammed in his PowerPoint. That’s the closest parallel for the gaffe committed yesterday. It is reasonable to expect JPMorgan’s prospective Chinese private banking clients to think twice before the starting a relationship. Retribution may not happen immediately but it will come.

Rates shock” in 2022 to follow “inflation shock” of 2021 and “growth shock” of 2020

Financial conditions set to tighten, short rates to rise, QE to end, inverted yield curve a threat, and EPS growth to slow sharply; GDP growth to remain robust with China as outlier

Base case for strategists is low or negative and volatile asset returns in 2022, after “18 months of fat (latterly frothy) returns in crypto, credit and U.S. equities”
2021-2022 investment backdrop is similar to early stagflation of late-60s

Stock market upside could continue if it becomes clear in 1H that Fed is determined to keep real rates deeply negative, “the-mother-of-all bubbles in crypto & tech remains a fat tail”

Biggest downside risk is Fed staying hawkish even if Wall Street corrects, because fears of wage-price spiral grow; more extreme downside risks include a crypto-derivatives crash, geopolitical events related to China and Taiwan, and that a receding liquidity wave exposes credit-events to the detriment of a private or public equity

I have seen a noticeable uptick in talk of a crash over the last couple of weeks. It might be early to think about this is as a consensus view, but it certainly suggests some investors are wary of chasing successive new highs in steep uptrends.

The world’s fish population is in a dire state, with about half of assessed stocks being overfished,
according to a study backed by Australian billionaire Andrew Forrest. 

The rate of depletion is worse than previous estimates of just over a third, Forrest’s Minderoo Foundation said in a report Sunday. A tenth of fish stocks worldwide is now on the brink of collapse, reduced to 10% of their original size, the study shows.

The findings are based on 48% of the total global catch for which there’s sufficient data, according to the report. The other half lacks information to say if they are sustainable or not. More than 1,400 stocks were assessed from 142 countries.

The journey to replenishing fish numbers isn’t easy. The report noted that it could take between three and 30 years for stocks to recover, and in many places that would require a major overhaul. The foundation recommended increased intervention and investment from governments, as well as better auditing and management practices from businesses.

Two important characteristics to the global fishery are worth considering. The first is overfishing which is a current problem and will likely get worse. The second is cyclicality. We have enough back data to conclude the Pacific goes through long warming and cooling cycles. Together with intense fishing, the current time is when we would expect to have lower catches of small pelagics like sardines and anchovy.

Let’s start with a proposition that one can prove with simple (if tedious) arithmetic: every deficit of government (spending in excess of revenue) is matched by a surplus across other sectors – households, corporations, and foreign countries – where their income will exceed their consumption and net investment. The chart below shows what this looks like. I’ve excluded some very small payment items for simplicity, but the basic upshot is simple: every time the government runs a deficit, you’ll see it directly reflected in the sum of three surpluses: personal savings, retained corporate profits, and trade deficits (a surplus from the perspective of foreigners).

Think of it this way. What a government deficit does is to direct goods and services produced by other sectors of the economy toward consumption and investment (including transfer payments to individuals, subsidies to companies, and public infrastructure) that has been approved by Congress. In return, the sectors that produced those goods and services receive income for output that they did not consume. This private surplus takes the form of securities, and in equilibrium, those securities are exactly the same ones (Treasury debt and base money) that the government issued in order to finance the deficit.

The red line in the chart below is essentially the federal deficit as a share of GDP (including amounts spent on transfers to other sectors). The blue line is the sum of personal, corporate, and foreign surpluses. The two lines are mirror images of each other because this sort of equilibrium is just arithmetic.

Already, investors may feel a bit sick here. See, the deficit that the U.S. government ran during the pandemic amounted to nearly 19% of GDP, and that – in equilibrium – is exactly why corporate earnings, personal savings, and trade deficits enjoyed a record surge in recent quarters. Meanwhile, the spending bills currently on the table ($1 trillion for infrastructure and $1.8 trillion for social and climate spending) are 8-10 year spending proposals, partially offset by revenue measures. There’s nothing in current legislation that’s going to replicate the breathtaking federal deficits we’ve seen in the past 18 months. That means – purely by the force of arithmetic – that the sum of those other three surpluses must shrink. The only question is which of the three will take that hit.

The hard fundamentals point to a sharply overvalued market, but bull markets don’t die of old age. They are most often assassinated by central banks. The next most significant cause of recessions is surging oil prices. The reality is bull markets thrive on liquidity and as long as the liquidity keeps flowing, valuations will continue to expand. 

DAOs are not a new idea. Vitalik Buterin, Ethereum’s co-founder and unwitting figurehead, contemplated Decentralized Autonomous Organizations in the original Ethereum Whitepaper in 2013. The DAO, a doomed decentralized venture fund, launched and folded in 2016. DAOs have been on fire this year within the web3 community; becoming a DAO is the de facto long-term fate of any sufficiently serious protocol. 

In October, a16z led a $10 million round in the popular DAO Friends with Benefits. A couple weeks ago, PleasrDAO bought a 1/1 Wu-Tang album for $4 million. Last week, the Ethereum Name Service (ENS) became a DAO and airdropped $2 billion worth of ENS tokens on anyone who’d bought a .eth domain over the past few years. Many people received $10s of thousands just for being an early adopter. 

But despite the early bright spots, most people have never heard of a DAO or bought into web3 yet -- it’s still very early. There’s still a struggle going on between web3’s fans and its skeptics, including many members of the US government. That’s not how it should be. America should be the home of web3, as @punk6529 eloquently laid out here: 

I’m sure those of us with a few grey hairs remember 2008 when securitization was a dirty word that was blamed for crashing the global financial system. The reason it created such a problem was it took groups of cashflows, treated them as a whole, they spliced them up into income streams with varying degrees of risk. Then smart people took that structure, leveraged it, and kept on leveraging it until it broke. Banks went bust all over the world and regulators swore it would never happen again. That’s why banks are less than eager to participate in these new ventures.

Kashkari said the move was “appropriate” and stressed that moving too quickly to remove the Fed’s support could end up hurting the economy more than it helps on the inflation front.

“When we adjust monetary policy it acts with a lag,” he said. “So if we overreact to a short-term price increase, that can set the economy back over the long term.”

Kashkari, who doesn’t vote this year on the policy making Federal Open Market Committee, said he expects heightened demand connected to previous fiscal stimulus and supply constraints caused by the pandemic to slowly ease. 

Asked about President Joe Biden’s pending decision whether to reappoint Fed Chair Jerome Powell to another four-year term, or perhaps choose Fed Governor Lael Brainard to succeed him, Kashkari said both are capable and would be likely to pursue similar monetary policies.

“Both of them have been instrumental in the new framework that we’ve adopted in terms of not shortcutting the recovery, and I’m confident that either of them as chair would continue to see that through,” he said.

Kashkari is one of the biggest doves at the Fed but he is not short of company considering the trajectory of policy. Regardless of who is in charge, the set of challenges that need to be addressed will not change. The economic recovery is uneven with labour force participation declining while the number of job opens is climbing. That’s not going to be fixed by monetary policy.

Second point I would make is that the usage of fiscal and monetary policy to bridge to the other side of this epidemic has been pretty extraordinary and beyond anything I’ve ever seen, certainly, in the investment universe. I would say generally well-designed, flexible, more than adequate, in order to minimize social and economic disruption. And you think about the backdrop of when you pull monetary and fiscal together, not just in the US, but globally—I mean, you pressed into the system immense amounts of liquidity. But just to put a couple of these numbers in the backdrop into perspective, today versus 20 years ago—20 years ago there was less than $3 trillion of liquidity in the system—in dollar equivalents, 6% of GDP. It’s now $40 trillion or just under 50% of GDP.

So, first thing, from an investment point of view, that liquidity is completely different. And then, how do you invest? And now, you think about you’re probably on the back side of that. And then finally, to wrap up, I’ll pass it to Ray for his better, bigger-picture thoughts than mine, I would throw out: how do you think about global and political tensions on the back side of what I just described? Supply-chain breakages, the dynamics around how do you think about your domestic trade, how do you think about your domestic ecosystem, which I think you’ll see some stress based on, you know, how have you operated internationally over the last few decades? So, big consideration, I think, is going to be how do you think about political tension, and how do you think about sovereign or regional dynamics? Maybe a bit more profound and different than we’ve seen over the last couple of decades. So, with that, I’ll pass it to Ray for his big-picture thoughts on these things.

Capital is both global and mobile, so it flows to the most attractive assets wherever they may reside. With liquidity representing 50% of global GDP there is a clear incentive to invest in capital intensive industries that will bear fruit long into the future.

“We haven’t seen, I’ll say, any more resistance to our price increases than we’ve seen historically.” -- McDonald’s Corp. CFO Kevin Ozan, Oct. 27 earnings call

“Looking at Q4, we expect our selling price actions to continue to gain traction, as we work to mitigate the raw material and logistics inflationary pressures we have experienced throughout the year.” -- 3M Co. CFO Monish Patolawala, Oct. 26 earnings call

“We feel very comfortable that any inflation that is affecting our margin today, we have the ability to offset it.” - Chipotle Mexican Grill Inc. CFO John Hartung, Oct. 21 earnings
call

“We have now announced pricing in nine out of ten categories, so very broad based.” -- Procter & Gamble Co. CFO Andre Schulten, Oct. 19 earnings call

While most CPI categories rose, the cost of airfares declined for a fourth month and apparel prices were unchanged. Wages have strengthened markedly in recent months -- with some measures rising by the most on record -- but higher consumer prices are eroding Americans’ buying power. 

Inflation-adjusted average hourly earnings fell 1.2% in October from a year earlier, separate data showed Wednesday.
 

The ability of companies to pass on inflation is a good reason why the stock market generally does well in the early portion of an inflationary cycle. The big question therefore is not whether they can successfully pass on one price increase but whether they can continue to pass on price increases should inflationary pressures trend higher.

But the White House has raised the possibility with some Senate Banking Committee members that Powell might not be reappointed, according to two people familiar with the matter. Discussing the chairmanship with Brainard could signify that the Biden team is weighing how a break with Powell might
help advance their goals for the central bank. Brainard and Powell work closely together on multiple issues and are viewed as holding similar views on monetary policy, but she’s favored a tougher stance on big banks.

If he chose Brainard, Biden would be nominating someone who would excite Democrats in Congress but put Republicans and large banks on edge -- setting up a tougher confirmation battle in the Senate, where Democrats command only 50 of the 100 seats. Still, Vice President Kamala Harris would be able to cast a tie-breaking vote.

The progressive wing of the Democratic Party was intent on forcing the infrastructure and big social spending bill to be passed together. By breaking from that policy, the Biden administration successfully passed the infrastructure bill over the weekend, but will also have angered the progressives. Courting Lael Brainard for the position of Fed chair and the potential to appoint progressive-friendly people to the Fed board will likely be used as a way of keeping that wing of the party on side.

Gains in Treasuries may be partly driven by short-covering, which appears to have contributed to Thursday’s U.K.-led rally. CME Group Inc.’s preliminary open-interest data for Treasury futures show steep declines, in particular for the two-year note contract. Open interest in two-year note futures fell 2.3%, its biggest drop in three weeks.

Fed officials continue to emphasize that inflation is too high even as they hope to foster labor-market recovery by keeping interest rates low.

Federal Reserve Bank of Kansas City President Esther George Friday said “the risk of a prolonged period of elevated inflation has increased,” and “the argument for patience in the face of these inflation pressures has diminished.”

The declines in 10- and 30-year yields -- which fell as much as 6.5 basis points to 1.899%, the lowest since Sept. 23 -- come despite next week’s auctions of those tenors. The auctions, whose sizes were announced on Nov. 3, are smaller than the previous new-issue auctions in August, however. The reductions were the first since 2016.

The longer-term inflationary trend is being driven by wage demand growth and the upward pressure on the cost of housing and rents. However, it does not all happen at once, and some of the supply inelasticity factors that contributed to inflation over the last year are easing.

For Opendoor, Zillow’s departure represents an opportunity, CEO Eric Wu said in an interview. He expects his company, which pioneered the iBuying model, to be the market leader now that the best-known brand is out.

“We’re going to lead the charge in this transition from offline to online,” he said in an interview.

Wu said Opendoor has invested heavily to build expertise in home pricing and getting renovations done in a timely, cost-efficient manner. Those challenges contributed to Zillow’s iBuying demise.  

On Oct. 17, Bloomberg reported that the Seattle-based company would stop pursuing new acquisitions for its iBuying business, citing shortages of workers and supplies it needed to fix up homes. But Zillow also struggled to get pricing right. The company bought many homes for more than it could sell them for, forcing it to take writedowns of more than $500 million on property inventory. 

Those results convinced Zillow CEO Rich Barton that the iBuying model was too risky for his company.

“Fundamentally, we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in,” Barton said on the company’s earnings call this week.

Anyone using Zillow’s app to look at houses over the last year will quickly have realised how inaccurate the “Zestimate” score is for gauging a home’s value. It was in no way reflective of the market condition because it was not adjusting quickly to new selling prices for homes. That resulted in differences of over 20% when we were housing hunting in the spring. That would also have forced Zillow’s algorithm to be manually adjusted to cope with the lag of data which obviously created issues.

Frankfurt, Toronto, and Hong Kong top this year’s UBS Global Real Estate Bubble Index, with the three cities warranting the most pronounced bubble risk assessments in housing markets among those analyzed. Risk is also elevated in Munich and Zurich; Vancouver and Stockholm both reentered the bubble risk zone. Amsterdam and Paris round out the cities with bubble risk. All US cities evaluated— Miami (replacing Chicago in the index this year), Los Angeles, San Francisco, Boston, and New York— are in overvalued territory. Housing market imbalances are also high in Tokyo, Sydney, Geneva, London, Moscow, Tel Aviv, and Singapore, while Madrid, Milan, and Warsaw remain fairly valued. Dubai is the only undervalued market and the only one to be classified in a lower category than last year. On average, bubble risk has increased during the last year, as has the potential severity of a price correction in many cities tracked by the index.

Hot but likely short-lived fireworks
House price growth in the cities analyzed accelerated to 6% in inflation-adjusted terms from mid2020 to mid-2021, the highest increase since 2014. All but four cities—Milan, Paris, New York, and San Francisco—saw their house prices increase. And double-digit growth was even recorded in five cities: Moscow; Stockholm; and the cities around the Pacific, Sydney, Tokyo, and Vancouver.

The methodology of taking the price of an apartment in the downtown area of a city is certainly convenient. However, for markets like Los Angeles, it does not fully reflect the dynamics of the market. There is no doubt that the price of apartments has risen significantly in the last decade, it is also true that some of the city’s cheapest pieces of real estate lie within a couple of miles of downtown. In fact, the further one gets from downtown the higher the price per square foot gets.

Australia’s sovereign bond yields surged Thursday after the central bank chose not to defend its yield target, raising speculation that it could adjust its policy guidance next week. 

The rate on the April 2024 note more than doubled, jumping as much as 30 basis points to 0.51%. That took the gap to the Reserve Bank of Australia’s 0.1% target to the widest since yield control was introduced in March 2020.

Governor Philip Lowe and his peers are being challenged by market expectations that they’ll need to tighten policy more rapidly than previously thought. Data Wednesday showing Australia’s core consumer prices rose at the fastest pace in six years helped spark a flattening in global sovereign yield curves, with Bank of Canada adding to the impetus by signaling a rate hike as early as April.

“I think if the RBA doesn’t step in to buy the April 2024 bonds tomorrow, then the risks are certainly increased that the RBA will announce a change to its forward guidance next week,” said Hayden Dimes, an economist at ANZ Banking Group “Not buying bonds tomorrow will fuel the markets expectation that next week Governor Lowe will move away from his guidance of no rate hikes till 2024.”

Yield curve control didn’t last very long in Australia. Today’s upward dynamic in short-dated yields suggests the RBA is abandoning the policy and preparing the market for interest rate hikes.

“We need to strengthen our public finances so that when the next crisis comes, we have the fiscal space to act,” Sunak said. He also said the country hasn’t yet turned the corner on infections, warning of “challenging months ahead.”

The chancellor signaled the need to repair the country’s finances after racking up hundreds of billions of extra debt to protect workers and businesses through the pandemic. Unveiling new fiscal rules that will guide his approach to rebuilding the economy from its worst recession in a century, he vowed that in “normal times,” the government would only borrow to invest and that underlying public sector net debt must be falling as a percentage of output.

With inflation already well above the Bank of England’s 2% target and forecast to rise to at least double that, it’s already raising the cost of repaying the country’s debt, a quarter of which is linked to inflation indexes. Sunak also faces the prospect of an interest-rate hike that would add to borrowing costs: For every percentage point that interest rates go up, the Treasury estimates it would cost an extra 23 billion pounds a year.

“The House will recognize the challenging backdrop of rising inflation,” the chancellor said. “Our public finances are twice as sensitive to changes in interest rates as they were before the pandemic and six times as sensitive as they were before the financial crisis.”

And

Sunak’s firepower was boosted by a significantly improved outlook for the British economy from the Office for Budget Responsibility, the government’s independent fiscal watchdog. It revised upwards its forecast for growth this year to 6.5% from 4%, and downwards its forecast for the long-term economic scarring caused by the pandemic to 2% of output from 3%.

With growth filling the government coffers, the OBR’s borrowing forecast for the next five years was lowered by 154 billion pounds, while planned debt sales for this fiscal year were cut by a fifth.

The UK is boosting spending which is a crowd pleaser. That’s possible because the economy is rebounding from the pandemic nadir and the outsized growth is benefitting from the base effect of last year’s decline. Sustaining that momentum will be a key challenge, so supporting workers with higher wages and businesses with lower taxes is a necessary move but it also delays balancing the budget which will exacerbate the fiscal drag.

Wednesday’s $61b Treasury 5-year auction was among the strongest on record gauging by its yield relative to where it was trading at the bidding deadline. The auction yield of 1.157% was 2.5bp lower than the approximate pre-auction level of 1.182%, a sign that dealers underestimated investor demand for the notes. Consistent with that, the share awarded to primary dealers was among the lowest on record.

While the difference between an auction yield and the pre-auction level is always an estimate, as dealers may quote the issue differently, the last time a 5-year note auction stopped short by more than that was in November 2009; a $42 billion auction that month was awarded at 2.175%, 3.6bp below where it had been quoted moments before

Wednesday’s 17.9% primary dealer award was the third lowest on record in data since 2004, reflecting above-average shares for indirect and direct bidders

Longer-dated bonds rallied in a number of countries today. That suggests investors are still willing to give the benefit of the doubt to the view that inflationary pressures are going to moderate or at the very least that yields have run away from the publicly stated intentions of central banks.  

The S&P 500 has advanced 5% since JPMorgan Chase & Co. kicked off the earnings season nine days ago, in the best start to a reporting cycle since the dot-com mayhem 88 quarters ago. Along the way, the index slipped only once, with a 0.1% drop on Friday doing little to derail the benchmark from its best month since the election.

Now institutional investors with large stock and bond holdings will need to balance out their positions, buying dips on losers and taking profits on winners. How big will the impact be? A regression analysis done by strategists at BNP Paribas SA shows that the outflow needed to compensate for a divergence between this month’s drop in the bond market and rally in stocks could translate into a 2.6% decline in the S&P 500 when the rebalancing takes place.

End of month reweighting of portfolios is a predictable event and represents a solid rationale for the recent bounce in Treasury futures. It’s unlikely to contribute to more than temporary strength because none of the underlying factors have changed.

“Gold and silver’s recent strong run of gains received a temporary setback on Friday in response to a sudden bout of taper tantrum following comments by Fed Chair Powell,” Ole Hansen, head of commodity strategy at Saxo Bank A/S, said in a note. “At the same time, however, he talked down the risk of raising interest rates while also expressing concern over persistently elevated inflation.” 

Around the world, central banks are raising interest rates in response to inflationary pressures that are both more persistent and intense than many anticipated. Some countries will benefit from this turn of events. They have positive balance of payments, booming exports and their currencies are appreciating. That group is concentrated among the commodity exporters.

One of the corollaries between cryptocurrencies and gold is that, as forms of money, they’re both grounded in the same decentralized concepts that make them useful alternatives to fiat. Gold has obvious impediments to its monetary utility in a modern economy – mainly the fact that it’s difficult to transport. Bitcoin and crypto fixes that. Personally, I find the long-term inflation hedging benefits of crypto to be somewhat less beneficial than many proponents believe. After all, all crypto is endogenous in the sense that it is literally created from nothing and can be borrowed into existence in exactly the same way that modern banks create synthetic “dollars” from nothing when they make loans. A “fractionally reserved” Bitcoin system with endogenous lending could be every bit as inflationary as the current fiat system with the main difference being that there isn’t a government there to pump trillions into the system on a whim. And that’s where the last 18 months and this “faith put” in gold is pretty interesting….

A strange thing happened during COVID. The US government spent $6T to fight off the pandemic. As expected, the huge fiscal stimulus led to a somewhat uncomfortable level of inflation. But here’s where things get interesting – since the start of the pandemic in March 2020 the price of gold is up 6.5%. The price of Bitcoin, on the other hand, is up almost 10X. It’s not just a small difference. It’s an astounding difference. It’s the kind of difference that makes you wonder if people even believe that gold is an inflation hedge.

The Permanent Portfolio with 25% in stocks, 25% in bonds, 25% in cash and 25% in gold has stood the test of time. It is logical to question whether the introduction of new assets should alter the composition of the portfolio. What I find particularly interesting today is there is a simultaneous questioning of the merits of the 60/40 portfolio which is much more popular than the permanent portfolio.  Meanwhile Paul Tudor Jones is touting bitcoin’s status as an inflation hedge. 

Zou also said:

China’s government has insisted that property not be used as a short-term stimulus for the economy
Cities have seen an excessive surge in property prices, which mortgage restrictions helped to curtail
Property investment has slumped recently after some developers faced credit problems, but this is a normal market phenomenon
Some banks have misunderstood macroprudential policies regarding the property sector.

“This is the strongest signal yet that authorities won’t come to the rescue of creditors of Evergrande and other developers,” said Travis Lundy, a special situations analyst who publishes on Smartkarma. They are sticking to the stance that there won’t be any property-boosting measures, aside from small steps such as faster home-loan processing and efforts to alleviate mortgage limits at banks, he added. 

Financial regulators have told some major banks to accelerate approval of mortgages in the last quarter, Bloomberg reported earlier Friday. Lenders were also permitted to apply to sell securities backed by residential mortgages to free up loan quotas, easing a ban imposed early this year, according to people familiar with the matter.

It’s ironic that when China talks about market principles it means they are no longer willing to bailout failed ventures but are more than willing to curtail growth in successful ones; that do not gel with policy. The number of defaults has been trending higher since they were allowed a few years ago, and will surge this year.

“Many participants pointed out that the owners’ equivalent rent component of price indexes should be monitored carefully, as rising home prices could lead to upward pressure on rents,” minutes from the Fed’s September meeting, released Wednesday, said.

Rent is less critical to the Fed’s preferred inflation gauge, the one it officially targets when it shoots for 2 percent annual inflation on average, than it is to the C.P.I. But it is a big part of people’s experience with prices, so it could help shape their expectations about future cost increases.

Those expectations matter a lot to the Fed. If consumers come to anticipate faster inflation, they may begin to demand higher wages to cover their rising expenses. As businesses lift prices to cover rising costs, they could set off an upward spiral. Already, some key measures of inflation outlooks — notably the New York Fed’s Survey of Consumer Expectations — have jumped higher.

The Fed is already preparing to start slowing the large bond purchases it has been making during the pandemic to keep longer-term interest rates low and money flowing around the economy. If inflation stays high, the Fed may also come under pressure to raise its policy interest rate, its more traditional and more powerful tool. That might slow mortgage lending, cool the housing market and weigh down inflation.

But doing that would come at a big cost, slowing the labor market when there are 5 million fewer jobs than before the pandemic. So for now, Fed officials are getting themselves into a position where they can be nimble without signaling that they’re poised to raise rates.

David Ricardo’s Iron Law of Wages dictates that the prevailing base rate will be enough for people to scrape by.  Since the cost of everyday items people spend money on to survive keeps rising, there is only one way for wages to go.

The crypto-currency market is double the size of the sub-prime debt in the U.S. on the eve of the financial crisis and poses a threat unless urgently regulated, the Bank of England said.

Crypto assets are now worth $2.3 trillion, about 200% more than at the start of the year. While that’s still a small part of the $250 trillion global financial system, it’s about twice the size of the $1.2 trillion sub-prime real estate debt market in 2008.

“You don’t have to account for a large proportion of the financial sector to trigger financial stability problems,” BOE Deputy Governor Jon Cunliffe said in a speech on Wednesday.

“When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice.”

And

About 2.3 million adults in the U.K. alone hold crypto assets, a survey by the Financial Conduct Authority showed. Cunliffe said more people see those assets as an alternative to mainstream investments instead of a gamble, and about half intend to invest more. 

The vast majority of crypto wallets are open for investment/ trading purposes. Buying one crypto to enable trading in others does not contribute to the proliferation of real-world applications. Volume based on that activity is largely irrelevant to the wider world. On the other hand, borrowing against crypto holdings, leveraging up on investments based off crypto holdings and securitising physical assets using cryptos do have real-world applications.

“Differentiating between transitory and persistent shifts in the growth rate of wages” will play an important role in assessing the progress of underlying inflation, he said at a conference on Monday. Single shifts in the level of wages do “not imply a trend shift in the path of underlying inflation.” 

Lane’s remarks suggest he will advocate for patience as the ECB waits for signs of persistently higher inflation to materialize. Price growth in the euro area is running at the fastest pace since 2008, propelled by energy and a number of statistical effects related to the pandemic that should fade next year. 

Still, persistent supply bottlenecks have fueled concerns that price pressures could remain elevated for some time. At a separate event on Monday, Lane’s Dutch Governing Council colleague Klaas Knot struck a more cautious tone when he warned against underestimating inflation risks that could force the institution to tighten monetary policy.

“There is more in the inflation process we don’t understand than we do understand,” Knot said, adding that price pressures may turn out to be stronger than currently projected.

The central bank is preparing to unwind emergency monetary stimulus as economies in the 19-nation euro area turn a page on the coronavirus crisis. Most ECB officials have pointed to missing wage pressures when arguing that the current inflation spike is largely transitory.

The big bet central banks are making is today’s inflation is similar to the spike that accompanied the rebound from the financial crisis. In the two years following the stock market low in March 2009, commodity prices surged to new all-time highs; fuelled by a near 50% increase in money supply. As that flood of new money subsided and governments began to run fiscal austerity, inflation subsided while growth remained positive but modest.The big bet central banks are making is today’s inflation is similar to the spike that accompanied the rebound from the financial crisis. In the two years following the stock market low in March 2009, commodity prices surged to new all-time highs; fuelled by a near 50% increase in money supply. As that flood of new money subsided and governments began to run fiscal austerity, inflation subsided while growth remained positive but modest.

Key Points:
• We are now calling for Fire AND Ice. We have been calling for a mid-cycle correction to happen one of two ways:
• Fire: tightening financial conditions as the Fed signals tapering is coming
• Ice: growth disappointment particularly on the earnings side
• We think it’s increasingly likely these scenarios happen together and we get a >10% correction. The Fed will likely announce its taper plans at its next FOMC meeting just as we expect a disappointment in earnings to materialize.

• Earnings Trouble Ahead. A number of companies have flagged serious supply chain issues in off-cycle earnings reports over the past month. Both forward earnings estimates and price de-rated after many of these reports. We think this will be a pervasive dynamic during 3Q reporting season and expect it to trigger downside in earnings revisions at the index level- a headwind for price. Beyond 3Q, we think the earnings risk comes more from (1) the inability of companies to pass on pricing (2) margin risk related more to higher wages and (3) a reversion (lower) in goods consumption

A link to the full report is posted in the Subscriber's Area.

I don’t mind admitting I have been perplexed by the relative strength of Wall Street against a background of rising bond yields. The 5-year is trading above 1%, the 10-year hit 1.6% today and the 30-year is also running ahead. Meanwhile CPI at 5.2% is back at levels not seen since 2007.

The plan reached between Senate Majority Leader Chuck Schumerand GOP counterpart Mitch McConnell would raise the statutory debt ceiling by $480 billion, according to a Senate aide. The amount would allow the Treasury to meet obligations through Dec. 3, the same day that the current short term government spending bill runs out.

“We’ve reached agreement to extend the debt ceiling through early December,” Schumer announced on the Senate floor Thursday morning.

The news added fuel to a rally in stocks. The S&P 500 Index headed for its biggest three-day advance since April as the risk of an economically devastating tightening in fiscal policy receded for now.

I’m not sold on the idea that investors were waiting with bated breath on the outcome of political negotiations to lift the debt ceiling. The initial furore about debt ceilings was a decade ago. Everyone now understands, it is mostly about political theatre. There is no realistic outcome where the US will renege on its debt obligations.

While Tony the Tiger thinks Frosted Flakes are “grrr-eat,” hundreds of Kellogg’s factory workers think the company is “grrr-eedy”—and they’re using Tony to drive their point home.

On Oct. 5, when about 1,400 Kellogg’s workers across four US plants went on strike over payments and benefits, a poster featuring the iconic tiger appeared along the picket line in Battle Creek, Michigan. In front of Tony were the words “I’m greedy.” A digital poster by the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union also features an angry Tony holding a”Kellogg’s on Strrr-ike” sign.

Many workers feel like they did everything right during the pandemic and came out worse off than they went in. That belief was reinforced by millions of people making more on welfare and stimulus payments than from working. We are now seeing the results of those policies. Worker activism is trending higher.

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”

Supply Inelasticity Meets Rising Demand was the phrase David coined to explain the last commodity-led bull market. After decades of underinvestment in commodity supply infrastructure, the market was not prepared for the massive swell of new demand from China; as it leaped from economic obscurity into one of the largest economies in the world. A decade of investment in new production was needed to supply China and that crested ahead of the credit crisis in 2008.

Today, we also have extreme example of supply inelasticity, and demand is breaking records for all manner of goods and services. The factors contributing to these trends are quite different from a decade though. Some will be resolved relatively quickly. Others will take years.

Dollar Tree said it plans to begin adding new price points above $1 across all Dollar Tree Plus stores.

To test additional price points above $1 in selected legacy Dollar Tree stores
On track in 2021 to have 500 Dollar Tree Plus stores by fiscal year-end
Another 1,500 stores are planned for fiscal 2022; at least 5,000 Dollar Tree Plus stores are expected by the end of fiscal 2024
Currently has 105 Combo Stores; expects to add 400 Combo Stores in fiscal 2022
Sees potential for up to 3,000 Combo Stores over the next several years

Rising shipping costs, power cuts in major manufacturing centres and rising commodity prices all point towards margin compression for the sellers of low-priced items. They have no choice than to pass that inflation along to customers. The temporary shutting down of port facilities outside Shanghai will also have had the knock-on effect of putting upward pressure on prices because so much manufacturing capacity of low-cost items comes from Zhejiang.

“Moral hazard and a ‘can’t-lose’ attitude from investors only raise the risk of a larger fragility shock before year end,” the strategists wrote in a client note Tuesday. “Adding further uncertainty to the outlook is the looming Fed taper and general hawkish turn away from the measures prompted by the Covid shock.”

The strategists joined their counterparts at Morgan Stanley in urging investors to remain vigilant after last week, when the S&P 500 reversed losses to snap two weeks of declines.  

Stocks are down for a second day Tuesday, with tech shares leading the decline amid a spike in Treasury yields. The S&P 500 has lost 3.7% in September, putting it on course for its worst month in exactly a year. 

On Friday I discussed the overly comfortable view that potential problems are so large that outsized liquidity injections are inevitable, so there is no need to sell. Inflation and rising yields punctured that fallacy today. The 5-year yield broke about the psychological 1% level and reintroduced the prospect of debt servicing costs and stagflation to the financial community.

Greetings, this has been our understanding as far as I can remember. The Fed has stated unequivocally that he intends to accelerate the date for the taper. The Fed mandate is employment and bring back inflation, both seem to be happening. Still Mr. mkt did not react, or did it? in some segments.

Maybe other will wonder as well, can you comment pls

Thank you for this question. I agree, David often said “the Fed has killed off more bull markets than all other factors combined”. Therefore, we need to pay attention to what the Fed is saying in terms of their willingness to introduce a quick pace of tapering and to begin a new interest rate hiking cycle.  

“My concern is that we are in a debt trap,” Roubini, chairman and chief executive officer of Roubini Macro Associates, said in an exclusive interview on Bloomberg TV at the Greenwich Economic Forum in Connecticut. “When central banks are going to want to essentially phase out unconventional monetary policy, given the debt ratios, there is the risk of a crash in the bond market, in the credit market, in the stock market, in the economy and therefore they’ll be in that debt trap and unable to normalize policy rates.”

When the Covid-19 pandemic started to strangle the global economy, easy monetary policies and stimulative fiscal policies were seen as necessary to “backstop the financial system,” Roubini said. But the results have been extreme.

“We are in a debt super cycle,” he said. “And eventually, central banks are in a trap. People said they are going to normalize policy rates, but with these levels of private and public debt, if they were trying to do that, there will be a market crash, an economic crash, and therefore, I think the path of least resistance is going to be to wipe out the real value of nominal debt at fixed-interest rates with higher inflation.”

The recipe for success in 2020 was a willingness to accept problems and look through them to the inevitable solutions. The magnitude of the challenge the pandemic presented was so large that only a massive monetary and fiscal response would suffice to blunt its impact. With that conclusion in hand asset prices rebounded impressively.
 

Thank you for another very well video today. I noted your comment about bonds of some Chinese construction companies with attractive yields. Would you consider to share the names of some of the "better" Chinese companies with attractive yields for an international investor? As always thanks a lot for the excellent service you continue to provide.

Thank you for question which may be of interest to other subscribers. I posted a number of charts of Chinese property developer bonds in Comment of the Day on September 21st. 

The U.K. central bank is trying to tame inflation that accelerated well beyond its forecasts over the summer, reaching 3.2% last month. Its new focus is enabled by stronger-than-expected jobs data that show unemployment will peak well below worst-case scenarios predicted at the onset of the pandemic.

While the BOE targets inflation of 2%, the rate may temporarily exceed double that level in the final three months of the year, slightly more than predicted in August, officials said. Spiking gas costs that have caused turmoil in U.K. energy markets “could represent a significant upside risk,” and also mean that consumer-price increases remain above 4% until the second quarter of 2022, the MPC added. 

“The looming end of furlough is a major source of uncertainty facing the economy, but for now the bank appears relatively confident that the economy can deal with this shock without a large increase in unemployment,” according to Luke Bartholomew, economist at Aberdeen Standard Investments.

There has been a confluence of negative surprises that are affecting the UK economy at present. Some are related to pandemic supply chain issues, others are due to a lack of qualified drivers and others because the wind stopped blowing. (I can’t be the only one marvelling at how ridiculous that latter point sounds).

If progress toward the Fed’s employment and inflation goals “continues broadly as expected, the committee judges that a moderation in the pace of asset purchases may soon be warranted,” the U.S. central bank’s policy-setting Federal Open Market Committee said Wednesday in a statement following a two-day meeting.   

The Fed also published updated quarterly projections which showed officials are now evenly split on whether or not it will be appropriate to begin raising the federal funds rate as soon as next year, according to the median estimate of FOMC participants. In June, the median projection indicated no rate increases until 2023.
And 

Projections for 2024 were also published for the first time, with the median suggesting a federal funds rate of 1.8% by the end of that year. The median for 2023 rose to 1%, from 0.6% in the June projection.  

 

Here is a link to the side by side comparison of today’s statement with the July one. Central banks feel the need to act to normalise policy because they are worried their actions are fuelling speculative activity. Yet, many of the countries that have begun to taper have soon found their initial estimates of the pace at which that can take place were overly ambitious.

China’s central bank boosted its gross injection of short-term cash into the financial system after concern over a debt crisis at China Evergrande Group roiled global markets. 

The People’s Bank of China pumped 120 billion yuan ($18.6 billion) into the banking system through reverse repurchase agreements, resulting in a net injection of 90 billion yuan. That matches the amount seen on Friday, and was just below that of Saturday. Sentiment was also boosted after Evergrande’s onshore property unit said it plans to repay interest due Thursday on its local bonds. 

“The PBOC’s net injection is probably aimed at soothing nerves as the market worries about Evergrande,” said Eugene Leow, a senior rates strategist at DBS Bank Ltd. in Singapore. “While the aim may be to instill discipline, there is also a need to prevent contagion into the real economy or to other sectors.”

The need to calm market jitters is pressing amid losses in China-related equities worldwide over recent days amid concern over Evergrande’s debt woes. The benchmark CSI 300 Index fell as much as 1.9% Wednesday after the Hang Seng China Enterprises Index -- a gauge of Chinese shares traded in Hong Kong -- slid the most in two months on Monday. Losses came even as Wall Street analysts sought to reassure investors that Evergrande won’t lead to a Lehman moment.

Any way we look at it, China will need to print more money. If the Evergrande issue is resolved through restructuring in a timely manner it will be less. If the issue is fudged and the hit to the economy is deep, it will be more. Following the announcement that a domestic bond coupon will be paid, there is only one question. What about international investors?

SEC Chair Gary Gensler drew first blood last week. On Friday, Coinbase quietly abandoned the lending product, announcing the move in a short update to a months-old blog post.

“Crypto lending might be the easiest way for the SEC to get its hooks into the industry, but it’s very clear they’re looking at cryptocurrencies themselves,” said Tyler Gellasch, a former counsel at the SEC who heads the Healthy Markets Association, whose members include large asset managers. If many cryptocurrencies are deemed securities, exchanges such as Coinbase and the rest of the crypto industry “will not be able to make money the way they do today.”

Crypto lending incumbents, such as BlockFi Inc. and Celsius Network Inc., have already garnered more than $35 billion in deposits of traditional cryptocurrencies such as Bitcoin, as well as stablecoins, whose values are pegged at $1 and are considered a replacement for fiat money.

Crypto industry executives have said they suspect rival firms in the traditional finance industry, such as large banks, are responsible for pushing regulators.

In a September “Ask Me Anything” event with customers, Celsius Network Chief Executive Officer Alex Mashinsky said he believed bank executives had called the SEC and state regulators to complain about crypto lending firms.

“We have to work twice as hard because these guys have the largest lobbyists working for them at both at the state and the federal level,” Mashinsky said. “We’ll prevail. The fight is over all the money in the world, right?”

When the chairman of the SEC talks about the cryptocurrencies in the same terms as the myriad number of competing currencies in the USA ahead of the Civil War, that’s not good news for the sector. It suggests the freewheeling days of launching a token for any purpose one can dream of are numbered. 

would be interested in your views of Microsoft's price chart at present. I know you have been cautious over the past few years, and have even questioned the presence of a catalyst as a reason to expect limited upside going forward. Yet, a reasonably consistent upward pattern continues to play out. As always, your insights and perspectives are genuinely appreciated.

Thank you for this question which may be of interest to subscribers. I was indeed cautious about the prospects for mega-caps in 2019 because we had an inverted yield curve, tightening liquidity and it was not apparent where the next big growth bump would come from.

Hope you are well in Dallas.

I have a question: why do you often mention that we have MMT in action right now?

MMT is not a policy adopted by government or central banks. They don’t “do mmt”

MMT is a theoretical framework that tries to explain how the monetary system works in a freely convertible and fiat currency system in which we have been living for 50 years now (and it explains it correctly to a large part in my opinion). it’s not the “policy ode making debt”. Isn’t it?

When you mention “MMT in action” you likely refer to the government demand for goods, services and the grant of subsidies / social securities payment / medicare /unemployment benefit to people etc. along with the debt issuance “to pay for” this spending. Finally the FED buying the government debt to “ease” the monetary conditions (the QE vs tapering).

But this is not “MMT”. Government spending has always existed and it is the second largest component of a country GDP (after “C” , private consumption). Look at the development of the US federal debt since the early 80es to the almost USD 28tn in 2021 / today. It does not matter who administered the country (super conservative or super liberal), they have all managed to expand the debt. And the market has always absorbed the “debt”. Have they been “doing MMT” for 40 years?

Thank you for your regular market updates... always appreciated

Thank you for this email which I believe will be of interest to the Collective. I agree there is nothing “modern” about MMT. Governments have a natural proclivity to spend and the freedom of fiat currencies inevitably leads to high debt loads. In that regard, the sustainability of debt regimes has been on a downward trajectory for a long time and people have been worrying about it for just as long. The bigger question is whether anything has really changed? 

For the third month in a row, wages for the low-skilled have risen faster than for the high-skilled. In the previous history of the survey, which now goes back almost 25 years, this had only ever happened in two months, in early 2010. Wage growth for the low-skilled is also exceeding that for the high-skilled by the most on record. 

In terms of the momentous macroeconomic issues of the moment, this is good for growth, as poorer people are more likely to spend their pay rises than richer people. It’s also potentially bad for inflation. Wage growth for the lowest skilled is the fastest since August 2008 (not coincidentally, the month before the Lehman bankruptcy), and that could easily lead to higher prices. 

More interestingly still, it does suggest a shift in the balance of power between labor and capital. This isn’t as yet a deep-seated or well-established trend, of course. But if it continues it could rattle a lot of assumptions, and alleviate a lot of social tension.

There has been a great deal of talk about the increasing shift between labour and capital or, perhaps more prosaically, power of the people relative to capitalists. The role of technology and globalisation in suppressing wages is much less discussed because it is does not fit with the inconvenient narrative of the oppressed masses.

Argument 3: Today’s business models have rendered most accounting data irrelevant, so isn’t investing on the basis of obsolete measures like P/E or price/book a fool’s errand?

Answer: Here at GMO we’ve got a good deal more sympathy for this argument than the first two. The fact that GAAP accounting hasn’t kept up with business models that are more dependent on intellectual property than tangible assets is unquestionably true. While it is worth remembering that book value was a highly imperfect guide to “true” economic capital even in the pre internet (and pre stock buyback) days, it is certainly more flawed now. We think the right response to the problem is not to give up on value as a style but to build better value models. GMO’s Global Equity team spent 4 years painstakingly rebuilding the balance sheets and income statements of over 10,000 companies going back over 40 years, capitalizing expenditures that we believe should have been considered investments and undoing the distortions created by decades of stock buybacks. This has not only given us improved versions of accounting-based valuation models that we believe are far closer to economic reality than what is embodied in the measures used to build style indexes, but we’ve taken advantage of that economically relevant data to build a forward-looking dividend discount model that we believe can also differentiate between companies where it is worth paying up for their future growth potential from those that are merely overvalued.

It is honourable for a captain to go down with the ship but it’s not a great personal decision. Faced with decades of unrelenting underperformance of traditional value stocks GMO decided to evolve their definition of what a value company is. It turns out value looks a lot like growth after all. Isn’t that convenient?

“This is not a tapering decision, as ECB President Lagarde stressed,” Elga Bartsch, head of macro research at the BlackRock Investment Institute, said in an emailed comment. “Asset purchases look here to stay as the new policy framework paves the way for looser for longer monetary policy in the euro area.”

Mark Dowding, who oversees $70 billion at BlueBay Asset Management LLP, was less convinced by Lagarde’s protestations. 

“To me it is just semantics,” he said. “It is a choice of words. It looks like a taper and smells like a taper, so markets will view it as the start of the taper process.”

With supply-chain disruptions and resurgent virus infections threatening to undermine the recovery and medium-term price pressures likely to remain well below its goal, officials have insisted in recent weeks that the euro-area economy is in a different state than the U.S. and remains reliant on ECB support.

Yet some governors have started to warn publicly that maintaining an ultra-accommodative stance for too long also carries risks. Austria’s Robert Holzmann and Klaas Knot of the Netherlands both told Bloomberg in separate interviews last week that emergency asset purchases should end in March, hinting at heated discussions about the policy path in the months ahead.

The most likely scenario is a long slow taper; potentially beginning in December. That appears to be the plan being laid out by central bankers everywhere with a similar statement released about Australia’s ongoing taper earlier this week.

They don’t have much choice. We are 18 months on from the pandemic nadir in markets and economies are well on the road to a full recovery. As economies recover, they have to think about tailoring their assistance. However, we are still a long way from the first interest rate hikes.

Johnson made a statement to a hushed House of Commons on Tuesday, ahead of a joint press conference with Chancellor of the Exchequer Rishi Sunak and Health Secretary Sajid Javid.

As he begins his third year in office, 57-year-old Johnson is looking to move beyond the Covid-19 pandemic by delivering on a policy promise that he set out in his first speech as prime minister to “fix the crisis in social care once and for all” -- as well as ensure the NHS can keep functioning under extreme
pressure.

But by attempting to meet this pledge, he is tearing up another one: the Conservatives vowed in their manifesto not to raise income tax, national insurance or VAT. He’s gambling that voters will reward him for finding a solution to social care, a problem that eluded his predecessors.        

The government broke another pledge on Tuesday, saying it will scrap its “triple lock” commitment to pensioners, albeit for one year only. Pensions will now rise by the greater of inflation or 2.5%, Work and Pensions Secretary Therese Coffey said. Suspended is an average earnings component after distortions caused by the pandemic caused wages to soar almost 9% over the past year.
 

The UK has been among the most forthright in speaking about the budgetary problems the pandemic has delivered. The fact this new set of spending plans will be budget neutral is to be welcomed and suggests the UK is less likely to be a leading proponent of modern monetary theory. Nevertheless, the big question remains how the existing deficit will be tackled over the next couple of years.

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”.

If it walks like a duck and quacks like a duck, it must be a duck. Wall Street is behaving like it is in a bubble. The most important thing is the bubble is still inflating.

But other troubling signs have emerged in ways that threaten the administration’s political agenda. The price of gasoline rose by 2.5% in June and 2.4% in July — a rate which, if consistent over the course of the year, would amount to a more than 20% annual increase. Gas prices have risen above $3 and are at their highest level since 2014 as part of a broader increase in prices that the administration is eager to reverse. Prices could increase further as Hurricane Ida slams into Louisiana, a key hub for refineries, although that uptick will likely prove temporary.

Food price hikes also strained family budgets, rising by roughly 3.4% from last year. The Agriculture Department saw faster than expected jumps between June and July in the price of 11 different food categories — including beef and veal; seafood; fish; and dairy products — with pork and chicken prices increasing by about 2% in just one month. USDA projected jumps in poultry prices of as high as 6% over 2021.

The big question for investors is how serious are politicians about interfering to control commodity prices? There are certainly measures which can be implemented to address anti-competitive behaviour, but the reality is that many of the supply bottlenecks have arisen as a result of direct government policies.

Investors took the news of the coming taper in their stride -- avoiding any hint of the so-called 2013 “tantrum” when the Fed surprised markets by unexpectedly announcing it would start to pare back asset purchases. The S&P 500 rose during the much-anticipated address to stand more than 0.6% higher from opening levels. Ten-year Treasury yields nudged slightly lower to around 1.33% and the dollar fell.

“Chair Powell stuck to the script in his Jackson Hole speech; anyone hoping for a steer on the timing of the taper will have been disappointed, but it was never likely,” said Ian Shepherdson, the chief economist at Pantheon Macroeconomics.

At the July Federal Open Market Committee meeting, most Fed officials agreed it would probably be appropriate to begin tapering the central bank’s $120-billion-a-month bond-buying program before the end of the year, according to a record of the gathering. Some are pushing for a move as soon as next month.

Monetary policy makers would like to conclude the purchases before they begin raising interest rates, and several in June saw a possible need for rate increases as early as 2022 amid inflation that is running above the central bank’s 2% target. The Fed cut its benchmark rate to nearly zero and relaunched the crisis-era purchase program last year at the onset of the pandemic.

No surprises and the promise of a potentially lengthy interval between the end of quantitative easing and tightening was greeted with enthusiasm by investors. It ensures the Fed will remain a significant force in the Treasury market for a while longer.

Demand for physical bullion in Germany, traditionally the biggest coin and bar buyer in Europe, was the highest since at least 2009 in the first half, World Gold Council data show.

While purchases in other Western markets have also been strong, Germans in particular are pouring into the metal as a hedge against rising inflation -- and dealers say business remains good.

“We have a long history of inflation fear in our DNA. Now the inflation risk is picking up,” said Raphael Scherer, a managing director at metals dealer Philoro Edelmetalle GmbH, whose gold sales are up 25% on what was already a strong 2020.

“The outlook for precious metals is very positive.” Germany’s love of gold has its origins in the hyperinflation seen under the Weimar Republic a century ago, which saw consumers’ buying power collapse. Last month, the reopening of the economy helped German inflation jump to the highest in more than a decade. Negative interest rates in Europe are also making non-yielding assets like gold more attractive, Scherer said.

First-half demand for bar and coins in Germany increased by 35% from the previous six months, compared with 20% in the rest of the world, WGC data show.

I just realised this is the third day in a row I have featured an article relating to Germany. Imported inflation is running at a record rate and there is no sign it is abating just yet. Taiwan Semiconductor raising prices by 20% yesterday, rising shipping rates and higher commodity prices are all conspiring to raise prices for just about everything; everywhere. Meanwhile Euro weakness is a tailwind for inflationary pressures.  

“If rates go up, they will underperform,” Aash Shah, senior portfolio manager with Summit Global Investments, said of the biggest tech stocks. “That’s nothing against their business, just a reality of discounted cash flow.”

The interplay between technology stocks and Treasury rates is nothing new, of course; the rise in yields over 2018 contributed to an outsize rout in the Nasdaq 100 Index late that year, for example. And other forces, like last year’s shift away from companies hard hit by lockdowns, have also played a major role in driving tech stocks. 

Chris Murphy, co-head of derivatives strategy at Susquehanna International, said a rise in yields doesn’t necessarily pose a risk to tech stocks if economic growth stays strong. But that could be eclipsed if investors grow fearful about the expected pullback in the Federal Reserve’s bond buying program.

“If economic growth holds up, 10-year yields and the Nasdaq can rally together,” he said. “If the focus switches to the Fed tapering, then that’ll be bad for the Nasdaq and the relationship starts to become more negative.”

The thing I was most worried by, at the end of the 1st quarter, was the surge in the yield curve spread. The worst selling pressure in a bear market usually occurs when the spread is surging higher following an inversion. That is usually when trouble in the economy is obvious and central banks belatedly try to play catch up. On this occasion, central banks acted with alacrity and forestalled a much deeper decline by flooding the market with liquidity. The significant rally in government bond prices, from the April low reduced funding pressure for the growth sector and marked a significant peak for the yield curve spread.

Iron ore’s revival came after it lost about a quarter of its value in the past month, as China’s push to curb steel production hammered demand. But steel and other industrial commodities have rebounded this week, after China’s count of daily Covid cases fell back to zero and central bankers vowed to step up support for the real economy. Coking coal in China hit a record on Tuesday, while copper has also recovered amid signs that Chinese consumers are on a buying spree. 

“Iron ore just cannot be the only one lagging while everything else in steel space is massively bid,” Xiaoyu Zhu, a metals trader at StoneX Financial Inc., said by email. “After the price spike in coal products in the last two days, it’s hard for iron ore to stay quiet.”
 

Steel is as essential to economic development as it has ever been and that makes it a important component of global economic revival. The challenge for China is they have vast oversupply of manufacturing capacity for the alloy and rationalising it is an erstwhile priority.

In the end, it will come down to what Powell considers the bigger longer-term risk for the U.S.: Become trapped in a disinflationary spiral like that experienced by Japan as the forces of technological advances and globalization continue to press down on prices, or enter an inflationary zone of escalating cost pressures akin to what the U.S. suffered a half century ago.

Right now, he’s betting that the former is the bigger long-run danger, and holding off from tightening credit.

“The new framework is not so much about what kind of monetary policy you would expect right now, but what you might expect over the next year or perhaps longer as this recovery continues,” Wendy Edelberg, director of The Hamilton Project at the Brookings Institution, says. “They have made a pretty convincing argument they are going to keep monetary policy accommodative for longer than they would have under a different policy rule.”

But the path ahead will be far from easy as the Fed seeks to softly land the economy in the neighborhood of on-target inflation and maximum employment.

“It’s going to very difficult,” says Blinder, who was at the Fed when it achieved what many economists consider its only perfect landing for the economy, in the mid 1990s. “If they can achieve that, they deserve more than a pat on the back.” 

The US economic expansion is slowing down. The end of stimulus coupled with the rising perception of risk from the delta variant are conspiring to restrict economic activity. That’s not the kind of environment a central bank is likely to tighten into. In fact, these conditions are only likely to confirm the Fed’s conclusion that inflationary pressures are going to be transitory.

For example, Collins found that, according to 19 survey respondents so far, Facebook is offering an average annual salary of $109,526 with a massive signing bonus of $79,737 for employees in technical roles like iOS or full stack developer, or software or network engineer.

By comparison, according to 31 survey respondents, Google is paying recent graduates in tech roles an average of $107,000 annualized salary with an average signing bonus of $27,327.

And Microsoft was offering new grads a $107,455 annualized salary with a $26,591 signing bonus, according to 22 respondents.

Looking at the self-reported salary and bonus data by job title, Collins found that software engineers and developers are out-earning their peers in user experience design and sales engineering by tens of thousands, annually.

And even though government salaries are presumed to be much lower than those in the private sector, working in tech in a government office will score entry-level engineers and developers a slightly better salary, on average, than working for a seed- or Series A-stage startup, the survey suggests.

There has been a great deal of commentary in the media about the starting salaries of graduates in the financial sector.

In some respects, it is a matter of supply and demand. The financial sector is now competing for the same graduates as tech companies and are being forced to pay up.

Expectations are mounting for a September announcement of tapering plans by the Federal Reserve (Fed), prompted by the strength of the economy and comments from more hawkish members of the FOMC, particularly Boston Fed President Eric Rosengren.

We don’t see that happening. The Delta variant is throwing a wrench into the forward progress of the economy. Although Fed Chair Powell believes that “it’s not yet clear whether the Delta strain will have important effects on the economy,” our read of the latest data suggests that it is already having a negative impact on consumer behavior.

After a large downside miss to July retail sales, spending on COVID sensitive activities such as restaurants, air travel, and hotels has weakened further in August. High frequency indicators of broader consumer activity such as daily credit card spending also show softening over the past few weeks.

This sounds like a common-sense conclusion. Everywhere I look around I see evidence of changed plans and lower economic activity. It seems obvious that will feed through into a weaker set of statistics by the time the 3rd quarter ends.

The disruptions started in the second half of last year after demand for goods sank when the pandemic struck and carriers cut sailings, but locked-down consumers then ordered products online at an unprecedented rate.

Shipping companies’ efforts to catch up have been set back by the Suez Canal blockage in March and the Yantian terminal closure, as well as border restrictions and port worker absences.

An indefinite partial shutdown at Ningbo-Zhoushan is the latest problem that could deepen the strain on global logistics. Shipping lines have already started to omit calling at the Chinese port near Shanghai.

About 350 containerships capable of carrying almost 2.4m 20ft boxes are waiting off ports globally, according to VesselsValue. The congestion has been getting worse with idle capacity reaching 4.6 per cent of the global fleet, up from 3.5 per cent last month, data from Clarksons Platou Securities shows.

Lars Mikael Jensen, head of global ocean network at Maersk, the world’s largest container shipping group, agreed that the situation had shown no signs of improvement since the Delta variant of Covid emerged.

“It’s not getting any better on aggregate,” he said, adding that maritime transport networks are “still super stretched — it only takes a small thing then you’re back to square one or square one minus”.

The influence of the pandemic has resulted in sustained pressure on global supply chains. The primary difficulty for ports is ships have been one of the primary vectors through which the virus has spread internationally and many ports are having difficulty maintaining staffing levels because of infections among workers.  

By global standards, the U.S. has bounced back fast. But as data on the recovery continue to pour in, there’s plenty to support the suspicion that the glass is still half-empty.

Consumer sentiment fell in early August to the lowest level in nearly a decade by one measure and U.S. retail sales fell in July by more than forecast.

The following charts help explain why Americans still aren’t clear how impressed they should be.

I was at a wholesale furniture warehouse this morning that does not deal with retail customers. The two things that employees related to me were that business was booming in the 1st and 2nd quarters, but over the last two months sales have been way down. The second was there was a big whiteboard on the wall with their monthly minimum sales target of $950,000. As of this morning they were at $431,000.

Nair was referring to massive delays at Shenzhen's Yantian port in May and June. Weeks of containment efforts following outbreaks of Covid-19 among dockworkers in China's Pearl River Delta caused global shipping delays, supply-chain disruptions and surging freight costs. The problems have not been fully resolved.

Lars Jensen, CEO of liner consultancy Vespucci Maritime, also said the Meishan terminal closure could have a similar impact on the Ningbo-Zhoushan Port that Yantian experienced when it was closed for more than three weeks.

"Significant problems, both for export cargo as well as for the movement of empty containers into the region, would then ensue," he wrote in a LinkedIn post on Wednesday.

With its zero-tolerance approach to the coronavirus, China is currently carrying out mass testing to contain the spread of the highly infectious Delta variant, which Ningbo authorities said the Meishan worker tested positive for.

However, the deputy director of the Ningbo Centre for Disease Control and Prevention, Yi Bo, said the worker may have contracted the virus from his interactions with foreign crewmembers of cargo freighters that he had boarded at the port. Video surveillance showed he had close contact with crews.

Meishan is one of the busiest terminals at the Ningbo-Zhoushan Port, servicing main trade destinations in North America and Europe. In 2020, it handled 5,440,400 TEUs of container throughput, or around 20 per cent of the total container throughput at the Ningbo-Zhoushan Port, according to official statistics.

Shipping rates from China to the USA and Europe are up 400% in the last year. A good part of the reason for that jump is because ports are having difficulty managing the volume of traffic. That’s both a function of outsized demand during the pandemic and the infection rates among dock workers.

In this article, we document that two derived US inflation variables—inflation cycles and inflation surprises—have been robust predictors of US equity returns. We demonstrate that this predictability translates into new sources of alpha that investors can seek to harvest. In particular, we highlight the signals’ ability to perform during the worst times in the stock market without missing upside opportunities.

The tail-hedging properties derived from inflation signals are particularly desirable. Hedging positive inflation shocks can be costly when inflation is low.9 For example, strategic allocations to alternative assets, such as commodities, or absolute return strategies as a way to protect against inflation have not all fared well in recent years, with commodity indices down more than 30% versus their 2011 levels. As a result, many asset owners may not be able to stay the course if inflation fails to materialize in the medium term. We find that inflation signals can provide a new tool for investors who wish to hedge their portfolios against inflationary and deflationary risks.

“The tail-hedging properties derived from inflation signals are particularly desirable.”

For forty years inflation is the dog that refused to bite. There have been several occasions when it looked inevitable profligate spending, overly generous social programs, supply disruptions, commodity and property booms and busts would break the trend of disinflation but they never did.

Humanity will have about a 50% chance of staying below the 1.5°C threshold called for by the Paris Agreement if CO₂ emissions from 2020 onwards remain below 500 billion tons. At the current rate of emissions, that carbon budget would be used up in about 13 years. If the rate doesn’t come down, the planet will warm more than 1.5°C.

“Our opportunity to avoid even more catastrophic impacts has an expiration date,” said Helen Mountford, vice president of climate and economics at the World Resources Institute. “The report implies that this decade is truly our last chance to take the actions necessary to limit temperature rise to 1.5°C. If we collectively fail to rapidly curb greenhouse gas emissions in the 2020s, that goal will slip out of reach.”

The new publication lands in the middle of the ramp-up to COP26, to be held in Glasgow in November. A global deal to pursue faster emission cuts would depend on poor countries securing $100 billion a year in climate finance from rich countries, something envisioned in previous climate agreements
but not yet achieved. National governments would also need to agree to rules governing the trading of emissions permits, to ensure those moving faster towards cuts are rewarded for doing
so.

The amplification of worries about the trajectory of the “climate emergency” has been building well in advance of the publication of this report. There is a clear set of policies being adopted to ensure much of the existing industrial base is going to have to fund the construction of alternative infrastructure.