Comment of the Day
Video commentary for April 8th 2022
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics covered include: $95 billion a month in QT spooks markets, oil backwardation contracts, gold steady, stock markets weak, bitcoin eases back, Australia and Canada susceptible to additional weakness too.
If Stocks Don't Fall, the Fed Needs to Force Them
This article by Bill Dudley may be of interest to subscribers. Here is a section:
So far, the Fed’s removal of stimulus hasn’t had much effect on financial conditions. The S&P 500 index is down only about 4% from its peak in early January, and still up a lot from its pre-pandemic level. Similarly, the yield on the 10-year Treasury note stands at 2.5%, up just 0.75 percentage point from a year ago and still way below the inflation rate. This is happening because market participants expect higher short-term rates to undermine economic growth and force the Fed to reverse course in 2024 and 2025 — but these very expectations are preventing the tightening of financial conditions that would make such an outcome more likely.
Investors should pay closer attention to what Powell has said: Financial conditions need to tighten. If this doesn’t happen on its own (which seems unlikely), the Fed will have to shock markets to achieve the desired response. This would mean hiking the federal funds rate considerably higher than currently anticipated. One way or another, to get inflation under control, the Fed will need to push bond yields higher and stock prices lower.
My view - Fed and ex-Fed officials appear to have all been given the same talking points. They are willing to break something if that is what is required to bring inflation down. Reactions of 20% have historically been enough to create deflationary growth fears and for the Fed to relent.
Copper: Supply meets demand concerns
Thanks to a subscriber for this report from UBS which may be of interest. Here is a section:
My view - A link to the full report is posted in the Subscriber's Area.
Ranging prices contribute to analysts hedging their bets of which direction prices are likely to breakout and how much they are likely to move. Nevertheless, by suggesting a strike on put options of $9750, which coincides with the trend mean, they are effectively saying give the benefit of the doubt to the upside provided it continues to hold that level.
How Did That Happen?
Thanks to a subscriber for this report by Bill Spitz for Diversified Trust which may be of interest. Here is a section:
As shown, the working age population in the U.S. is expected to be relatively flat whereas both Europe and China will likely experience a significant decline. The key point is that economic growth is equal to the sum of growth in the working age population and productivity growth. Therefore, unless China can stimulate significant productivity growth, it can expect a significant slowdown in economic growth. While not top of mind for most Americans, this likely slowdown has important implications for the U.S. First, slower economic growth may cause socio-political issues for the Chinese government which may further complicate already tense international relations. Second, a shrinking workforce in China will likely result in higher wages which may import inflation to the U.S. given our dependency on China for the manufacturing and assembly of so many types of goods. Third, recent supply constraints in the U.S. will likely continue on a sporadic basis. Finally, a maturing population in China will consume internally more of what it produces. This example is so fascinating because the unintended consequences of a forty year old policy decision are currently impacting the entire globe.
My view - A link to the full report is posted in the Subscriber's Area.
This chart included with this report highlighting the reversal of working age population growth in China, Europe and the USA is particularly relevant. It suggests a migration of manufacturing and labour-intensive activity to lower median age countries is inevitable over the coming decade.
Eoin's personal portfolio: stock market short initiated March 31st 2022
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.
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