Fuller Treacy Money
Comment of the Day
December 17th 2021
Almost Daily Grant's December 15th 2021
Thanks to a subscriber for this edition of Jim Grant’s free letter. Here is a section:
“For somebody who wants to hedge their borrowing costs, it leaves a lot to be desired. It’s a great product as long as credit spreads remain static. The time it really falls apart is in a crisis.”
The problem: Unlike traditional Libor, which is compiled by a survey of unsecured bank borrowing costs and represents embedded credit risk, SOFR is based on the overnight cost of borrowing cash collateralized by Treasury securities and is thus highly influenced by monetary policy. In other words, SOFR can be expected to fall in times of market turbulence, as the Federal Reserve typically reacts to such spasms by reducing the benchmark Fed Funds rate.
Indeed, while Libor raced higher as markets convulsed in the winter of 2020, SOFR declined in tandem with Fed rate cuts in response to the tumult. “When there is stress on the financial system, that’s when it’s going to really fall short,” Wilson cautioned to Bloomberg. “We need to make sure that your hedging products, especially, work during [those] periods.” Despite the decidedly mixed results seen in the March 2020 crucible, regulators have “decided they want everyone to use SOFR,” he marveled. “I can’t explain it.”
My view - We are on a long and winding road towards greater central bank and government control of markets. Substituting a market-based rate for a central bank dictated rate is one more step on the road to outright financial repression, as in the 1930s definition of that term.
Turkey Stock Rout Triggers Circuit Breakers Twice in an Hour
This article for Bloomberg may be of interest. Here is a section:
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.
My view - 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.
Cultivated meat: Out of the lab, into the frying pan
This article from McKinsey may be of interest to subscribers. Here is a section:
Cultivated meat has the potential to not just match but surpass the taste and texture of conventional meat, as well as to introduce novel products. If consumers take to these products, the market for cultivated meat could reach $25 billion by 2030 (Exhibit 3). Currently, the world primarily eats the meat of animals that are the easiest to farm industrially, but cultivated meat won’t face those constraints. Instead, the industry could select cell lines from specific animals with the best traits, such as Wagyu beef or wild salmon, and replicate them at the same cost as, say, beef patties or tilapia.
Cultivated meat can also go one step further and select cell lines from animals that are not widely eaten because of their low meat content, long growing time, or lack of availability. For example, ostrich meat, a product that has challenged many ranchers, could be cultivated and become a trendy low-fat, red-meat alternative. There could even be room for highly creative product innovation: the industry’s imaginative take on dodo poultry could make a better nugget than chicken, or a burger made of what research chefs think mammoth might have tasted like could be a mouthwatering new concept.
While most start-ups are focusing first on more popular species and breeds, Eat Just’s GOOD Meat and the company Orbillion Bio are exploring Wagyu, and the company Vow is working to explore more exotic options, such as kangaroo and alpaca.
In the nearer term, companies may choose to focus on a single area and mix plant protein and other flavors into their products to achieve the desired taste and texture. Eat Just’s chicken product sold in Singapore, for example, is more than 70 percent cultivated cells, with a small amount of plant protein added in for structure, while Future Meat in Israel mixes cultivated fat with plant protein. It’s too early to tell if blended options are merely an interim fix or if they present a sufficiently compelling option for long-term adoption.
My view - At a dinner party a few years ago a successful restauranteur held forth on what was required to be successful in the business. She said one had to realise there are only three products groups; Fat, sugar, and salt. You need the correct blend of each to ensure consumers keep coming back. At the same time, if you want to make money, the food had better be salty because then people drink more alcohol which is where margins are widest. That basic rationale is why fast-food outlets focus on all three groups. They keep people coming back for more.
Weekend Viewing
My view - This interview of Arthur Cashin by Danielle DiMartino Booth may be of interest to subscribers.
The Chart Seminar 2022
My view - With global vaccination rates rising, the prospect of anti-COVID pills on the horizon and the promise of travel restrictions being dropped, it is time to start thinking about venues for The Chart Seminar in 2022. Please drop sarah@fullertreacymoney.com a line if you would be interested in attending an event next year, as well as your preferred location. At present the two locations with greatest demand are London and Dubai.