Comment of the Day
Big Picture Long-Term video March 25th 2022
A link to this week's big Picture Long-Term video commentary is posted in the Subscriber's Area.
A Powell-Backed Yield Curve Gives Fed Cover to Go Max Hawkish
This article from Bloomberg may be of interest to subscribers. Here is a section:
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.”
My view - 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.
China's Worsening Virus Threatens Commodities Supply and Demand
This article from Bloomberg may be of interest to subscribers. Here is a section:
Almost 80% of the Chinese economy has been affected in some way by the worst outbreak of Covid-19 in two years, straining the supply of commodities and posing an increasing threat to demand.
China’s restrictions to contain the fast-spreading omicron variant have primarily hit travel over both short and long-distances, which is a direct drag on fuel consumption and a complication for supply chains.
The longer that Beijing persists with its Covid Zero policy, the greater the impact will be on the consumption of commodities as purchases are deferred -- think copper for electronic goods or steel for cars. Production is also at risk as inventories of raw materials dwindle and workers stay at home.
Widespread outages at metals processors, for example, could further lift markets that have already hit record highs in recent weeks because of the war in Ukraine. That would set the inflation-hawks at the central bank and economic planning agency on edge. Still, demand is also likely to shrink at some point, which would leave the net impact on prices uncertain.
My view - The coronavirus might be a medical issue, but pandemics are political. That is truer for China than most countries. They were the first country to experience it and adopted one of the most stringent quarantine regimes. That successfully contained the infection rate. Factories and ports remained open in 2020 because the problem was contained to Wuhan and the surrounding area.
A Revolution in British Meritocracy
This article for Bloomberg may be of interest to subscribers. Here is a section:
Nowadays, Brampton Manor Academy regularly gets as many pupils into Oxbridge as Eton College, the alma mater of Cameron, Johnson and the majority of the privileged faces staring out from the 1987 photograph. It does this by dint of high-expectations and relentless discipline. Pupils arrive early in the morning and stay on into the evening in order to accumulate extracurricular activities. Slacking is not tolerated. Pupils are expected to be smartly dressed and always on the ball. Eton — the quintessential, privately-funded British public school — charges about £50,000 a year and selects from the whole world. Brampton Manor charges nothing and selects from one of the poorest boroughs in London. The majority of pupils are from ethnic minorities and one in five gets free school lunches because of their parents’ low incomes.
My view - Education is a contentious subject for politicians, because everyone wants the best for their children despite the fact levels of academic ability vary widely. That desire to secure the best opportunities for one’s offspring has to be married with society’s need to find and nurture the best brains.
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.
Delegate Rates:
Full fee: £1799
Each additional delegate: £850
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.