Comment of the Day
Video commentary for December 15th 2022
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: downside weekly key reversals for Nasdaq and Euro STOXX, dollar and bonds firm, gold weak, oil and copper ease, China COVID headwinds likely to peak in Q1 but will be a problem until then.
Sea Change
Thanks to several subscribers for sending through Howard Marks’ latest memo. Here is a section:
As I’ve written many times about the economy and markets, we never know where we’re going, but we ought to know where we are. The bottom line for me is that, in many ways, conditions at this moment are overwhelmingly different from – and mostly less favorable than – those of the post-GFC climate as described above. These changes may be long-lasting, or they may wear off over time. But in my view, we’re unlikely to quickly see the same optimism and ease that marked the post-GFC period.
We’ve gone from the low-return of 2009-21 to a full-return world, and it may become more so in the near term. Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments to achieve their overall return targets. Lenders and bargain hunters face much better prospects in this changed environment than they did in 2009-21. And importantly, if you grant that the environment is and may continue to be very different from what it was over the last 13 years – and most of the last 40 years – it should follow that the investment strategies that worked best over those periods may not be the ones that outperform in the years ahead.
That’s the sea change I’m talking about.
Eoin Treacy's view - There is really only one big question. Will the Fed relent and revert to the GFC playbook when unemployment rises and economic hardship stokes deflationary fears? 2023 will probably deliver an answer.
BOE Says Inflation May Have Peaked as Rates Hit 14-Year High
This article from Bloomberg may be of interest to subscribers. Here is a section:
The Bank of England said Britain’s inflation rate may already have peaked and that two of its policy makers believe interest rates are already high enough to drain pricing pressure.
The UK central bank lifted its benchmark lending rate a half point to 3.5%, the ninth increase in a year aimed at taming soaring prices and the highest level since the start of the global financial crisis in 2008.
“The majority of the committee judged that, should the economy evolve broadly in line with the November Monetary Policy Report Projections, further increases in bank rate may be required,” Governor Andrew Bailey wrote in a letter to Chancellor of the Exchequer Jeremy Hunt.
Eoin Treacy's view - This verbiage differs significantly from the warnings delivered by the ECB and the Fed over the last few days. Both continue to suggest there is significant need for additional interest rate hikes. At her news conference today Christine Lagarde appeared to be channeling Margaret Thatcher in her statement that today’s decision should in no way be construed as a pivot.
China's Economy Braces for More Turmoil as Covid Wave Spreads
This article from Bloomberg may be of interest to subscribers. Here is a section:
“The November data were way below consensus, pointing to a worsening slowdown” which will continue this month, Lu Ting, chief China economist at Nomura Holdings Inc. wrote in a note. “Surging Covid infections will offset some of the positive impact of the easing in the near term,” he wrote, adding that “the road to a full reopening may still be painful and bumpy.”
The scrapping of many of the Covid rules will allow residents to move about freely and for shops, factories and restaurants to remain open without fear of snap lockdowns. However, with the virus likely to sweep through a country largely unprepared for the mass illness and deaths that could occur, fear of infection will probably keep people confined to their homes and weigh on economic activity.
Eoin Treacy's view - China successfully delayed the spread of COVID for more than two years. By abandoning the testing and quarantine policy they have not chosen to frontload the infection rate. The worst of the economic and healthcare fallout will be in the first quarter of 2023. That’s going to have a knock on effect for demand for all manner of goods globally.
Eoin's personal portfolio: stock market index positions closed at profit and shorts opened December 6th 2022
One of the questions subscribers ask most often is how to find details of my open trades. To make it easier I will simply repost the latest summary on a daily basis until there is a change.