Comment of the Day
Video commentary for March 22nd 2022
A link to today's video commentary is posted in the Subscriber's Area.
Now That Powell's Convinced Markets He Means It
This article from John Authers at Bloomberg may be of interest to subscribers. Here is a section:
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:
My view - 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.
Half-hearted sanctions against Russia have already failed
This article by Ambrose Evans Pritchard for the Telegraph may be of interest to subscribers. Here is a section:
Goldman’s deep-dive into the effect of sanctions ought to end all wishful thinking. The US investment bank forecasts that the Russian economy will contract by 10pc this year, a bad recession but not an economic breakdown.
Growth will then recover to 2.4pc next year and 3.4pc in 2024 as the country adjusts. Exports will be back to 98pc of prior levels by early next year. If so, Putin is not going to lose sleep over this.
Russia’s trade will mostly be diverted rather than destroyed. There may even be some short-term growth stimulus as Russia replaces western goods with home-made manufactures. Putin has been building a fortress economy ever since the annexation of Crimea. Net foreign funding is negligible. Total public debt is 18pc of GDP, one of the lowest ratios in the world.
Over four-fifths of GDP come from sectors that import just 15pc or less of their inputs, falling to 7pc in the mining industry. This is a radically different economic structure from western states such as Poland.
“If Russia were fully integrated into global supply chains, restrictions on imports and exports would be immediately destructive. However, Russia largely exports goods that are almost fully produced locally,” said Mr Grafe.
Iran endured tougher sanctions without buckling. Cornell professor Nick Mulder, author of The Economic Weapon, said the country settled into a new equilibrium within a couple of months. “If Iran’s experience is any guide, Russia will survive and return to lacklustre growth,” he said.
“Historically, sanctions have hardly ever been successful in stopping wars,” he said. A rare exception was the Balkan ‘war of the stray dog’ in 1925. Needless to say, Putin’s war on Ukraine is not a border skirmish. It is a long-planned attempt to overturn the post-Cold War settlement and alter the world’s balance of power.
European ministers once again grappled with a hydrocarbon embargo – the fifth package of sanctions – at an EU meeting on Monday. Once again the proposals ran into resistance from Germany, with Italy and others happy to tuck in behind.
My view - Russia continues to make coupon payments. That indicates it has the capital available to do so and avenues are open. Without cutting Russia off from the financial system and banning energy purchases, the country can continue to operate effectively. Due to its size and dominance of several key commodity markets, Russia has ample scope to cause mischief on a grand scale.
Ray Dalio's Bridgewater reportedly backing a crypto fund means the world's largest hedge fund and one of Bitcoin's former skeptics is taking it seriously
This article from Fortune.com may be of interest. Here is a section:
“It has been an amazing accomplishment for Bitcoin to have achieved what it has done, not being hacked, having it work and having it adopted the way it has been,” he told MarketWatch in December.
“I believe in the blockchain technology. … It has earned credibility.”
My view - This might be a case of “if you can’t beat um, join um”. The reality is as bond prices decline, money is pulling out and is looking for a home where its value will hold versus the declining purchasing power of fiat currencies.
The Chart Seminar June 6th & 7th in London
Now in its 53rd year, the first venue for The Chart Seminar in the post pandemic era will be in London on June 6th and 7th at the Army & Navy Club.
To reserve your place please contact Sarah@fullertreacymoney.com.
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Fuller Treacy Money Subscriber rate: £850
Prices exclude VAT where applicable
Eoin's personal portfolio: equity index long closed at a small loss March 1st
One of the questions subscribers as most often is how to find details of my open trades. To make it easier I will simply repost the latest summary daily until there is a change.