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30 March 2021
Video commentary for March 29th 2021
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: liquidation of hedge fund assets raises single stock volatility but less evidence of contagion, gold weak, stay at home champions under pressure, China tech at support, bond yields continue to trend consistently higher.
A Tiger Cub's Huge Margin Call Means More Pain Ahead
This article by Shuli Ren for Bloomberg may be of interest to subscribers. Here is a section:
A market optimist might brush off Friday’s massive liquidation as a one-off event — a huge stumble by a fabled player now in decline. But this is no time to be optimistic. Hwang is representative of, not distinct from, the rest of the hedge fund crowd. His bets are also their bets. He may have gotten margin calls faster because he was more leveraged. But his positioning is by no means unique — and that commonality is where trouble may lie.
Take the trades involved. Media companies such as ViacomCBS and Discovery have net exposures that are the “highest level we have seen since 2016,” according to a recent note from the prime brokerage unit at Morgan Stanley, which, alongside Goldman, managed some of the block trades on Friday. Last week, when ViacomCBS was using the steep run-up in its stock to sell new shares and bolster its balance sheet, the pressure on leveraged hedge funds must have been intense.
Rising yields and companies selling additional shares at rich valuations puts pressure on leveraged trades. It was inevitable that the rotation out of stay-at-home champions, who saw a one-time boost to business, would see a reality check in 2021. Last week’s block trades were an example of that.
Credit Suisse and Nomura took the brunt of selling pressure in the financial sector because of their net exposure. However, exposure has been limited within the broader sector so far.
The return of the inflation spectre
Thanks to a subscriber for this article by Martin Wolf for the FT. Here is a section:
Manoj Pradhan in The Great Demographic Reversal. The economic regime that began in the 1980s is, they argue, coming to an end, with rising protectionism and rapid ageing in all the important economies, including China.
As labour forces shrink, this book suggests, the number of consumers will rise relative to the number of producers, thereby raising prices. Fiscal pressure will rise inexorably, as the population ages. If governments have to choose between inflation and fiscal tightening, they will choose the former. Finally, if interest rates rise too high for comfort, governments will force central banks to lower them.
Ultimately, then, these pressures would end in another era of high inflation. Some will note, against this view, that this is not how things have ended up in Japan, where decades of easy money has failed to ignite inflation.
Maybe, that will now happen in the world as a whole: we will all end up Japanese. Certainly, history never repeats exactly.
The stagflation of the 1970s, especially the squeeze on profits and stock market collapse, were due to features of the economies of that time, especially the political strength of labour. So, things may play out quite differently this time.
Inflation has not come back. It may never do so. But the political and policy shifts we are seeing today, after Covid, together with the longer-term changes in the world economy, have raised the chances of an inflationary shock of some kind. Investors must take this possibility into account.
No one factor contributes to a new secular inflationary cycle. Many trends need to coincide to shape consumer behaviour so they front load purchases rather than delay in the hope of lower prices later. That only happens when people are forced to act. It doesn’t happen voluntarily.
Disinflation, deregulation and globalisation over the last forty years contributed to the absence of an inflationary trend. Globalisation has peaked as geopolitical tensions rise. That is contributing rising support for national priorities rather than the furthering of the global community ideals.
The Giant Ship Blocking the Suez Canal Is Finally Freed
This article by Jack Wittels and Ann Koh for Bloomberg may be of interest to subscribers. Here is a section:
Egyptian authorities were desperate to get traffic flowing again through the waterway that’s a conduit for about 12% of world trade and about 1 million barrels of oil a day. This has been the canal’s longest closure since it was shut for eight years following the 1967 Six Day War.
Firms including A.P. Moller-Maersk A/S and Hapag-Lloyd AG were forced to reroute their ships via the southern tip of Africa, which can add two weeks on to a journey between Europe
and Asia.
Shipping experts anticipate that the disruption will last for months because of schedules being upturned and the uneven wave of cargo that will hit ports down the line.
While the hit of the canal’s $10-billion-per-day closure will likely be small given that global merchandise trade amounts to $18 trillion a year, the prospect of hundreds of ships being thrown off schedule will ensure cargo delays in the weeks if not months ahead. The dozen or so container carriers that control most of the world’s ocean freight capacity are already charging record-high rates on some routes, and shortages of everything from chemicals and lumber to dockside labor already abound.
It seldom pays to bet against small well-funded teams who are presented with a gargantuan task. The freeing up of the Suez Canal after a week is just such an example, and the snarl in the global supply chain will be smoothed out in a week or so. That’s good news but the whole episode is representative of the stress the global supply chain is under. Everyone is exhausted after a year of strife and disruption and that raises the risk that accidents will happen.
Eoin's personal portfolio: stock market index short closed
One of the most commonly asked questions by subscribers is how to find details of my open traders. To make it easier I will simply repost the latest summary daily until there is a change.
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