Comment of the Day
Video commentary for April 13th 2022
A link to today's video commentary is posted in the Subscriber' s Area.
Some of the topics discussed include: Canada raises rates by 50 basis points, Dollar eases, gold, oil and gas firm, Wall Street steadies, Europe at risk from further war escalation commodity currencies firm
The Big $hort
Thanks to a subscriber for this report from Zoltan Pozsar for Credit Suisse. Here is a section from the conclusion:
Paraphrasing Herodotus…
…”circumstances rule central banks; central banks do not rule circumstances”.
Inflation is a complex phenomenon, and it has nothing to do with DSGE models. Free-flowing commodities and commodity traders guarantee price stability, not central banks, and deflationary impulses coming from globalization shouldn’t be mistaken for central banks’ communication skills as anchors of price stability.
Luck is luck. Luck isn’t structural…
Luck is running out; central banks were lucky to have price stability as a tailwind when they had to fight crises of FX pegs, par, repo, and the cash-futures basis. Those were the easy crises. The ones you can print your way out of with QE.
But not this time around…
Inflation borne of shortages (commodities [due to Russian sanctions], goods [due to zero-Covid policies], and labor [due to excessive positive wealth effects]) is a whole different ballgame. You can’t QT or hike your way out of it easily…
…and if you can’t, credibility gets damaged, a decline of the U.S. dollar is inevitable, and shorting U.S. rates, the U.S. dollar, and some FX pegs make logical sense.
My view - There are a lot of moving parts in the markets today. Everyone is eager to come up with a narrative that cuts through the verbiage and illuminates a path to security and stability of mind and purpose. It’s not easy because there are so many conflicting ambitions. Most people can’t shake the feeling momentous events result in momentous, not necessarily fortuitous, outcomes.
Global Energy Upheaval Threatens Years of Natural Gas Shortages
This article from Bloomberg may be of interest to subscribers. Here is a section:
Already, natural gas spot prices are so high that the world’s top buyers in North Asia are choosing not to refill inventories with additional overseas purchases. They’re instead gambling that this summer will be mild, or a peace deal between Russia and Ukraine will result in a price drop, said traders, who requested anonymity to discuss private details.
LNG importers in China and India have drastically cut back spot purchases, and are instead maximizing domestic supply and consuming gas in storage, traders said. This strategy will help to save money, but comes with an enormous risk that allows little room for surprises -- a bet that hasn’t paid off recently.
If there is a sudden spike in demand for gas, or if a contracted shipment isn’t able to be delivered due to a production issue, some of Asia’s top consumers may be short of gas this summer or next winter. They will be forced to go back into the spot market and buy very expensive shipments of the fuel, or curtail gas deliveries to customers at home.
My view - Telling your rival what you are going to do before you do it is not good strategy. Europe has been telling the world it wants to be greener for years. They closed coal fired power stations and nuclear plants while intensifying reliance on imported gas. Russia could decide to curtail shipments to Europe at any time.
Bank of Canada Delivers Jumbo Rate Hike With More to Come
This article from Bloomberg may be of interest to subscribers. Here is a section:
Policymakers led by Governor Tiff Macklem increased the central bank’s overnight benchmark to 1% on Wednesday. Macklem said he expects rates will return to what they consider the “neutral range” of 2% and 3%, with policy makers prepared to move “forcefully” if needed.
The bank also said it will stop purchasing government bonds later this month to start shrinking its balance sheet, another form of stimulus withdrawal.
“The economy can handle higher interest rates, and they are needed,” Macklem said at a news conference in Ottawa.
Short-term bonds fell after the report, pushing Canada’s benchmark two-year yield to as high as 2.346%, before reversing those losses. The loonie strengthened, however, gaining 0.4% to C$1.2593 per U.S. dollar at 12:29 p.m. in Toronto trading.
My view - About a quarter of Canadian mortgages are floating rate. Rising government bond yields and the promise of aggressive rate hikes already bit into housing demand. Getting inflation back under control should be less worrisome for a major commodity exporter like Canada but it isn’t something that can be ignored either.
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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