Comment of the Day
Video commentary for May 9th 2022
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: chicken and egg of higher yields and lower stocks. commodities pull back sharply as Chinese growth disappoints, the renminbi continues to accelerate lower and the dollar is firm, gold at potential support.
Policy Has Tightened a Lot. Is It Enough?
Thanks to a subscriber for this article by Neel Kashkari for the Minneapolis Fed. Here is a section:
First, at a minimum, the FOMC must follow through on the forward guidance of federal funds rate increases and balance sheet reduction that we have already signaled in order to validate the repricing that has taken place in financial markets.
Second, we will need to see whether the supply issues that have contributed to high inflation begin to unwind and/or if the economy is in a higher-pressure equilibrium. I wrote about this possibility seven weeks ago. Unfortunately, the news from the war in Ukraine and the COVID lockdowns in China are likely delaying any normalizing of supply chains. If supply constraints unwind quickly, we might only need to take policy back to neutral or go modestly above it to bring inflation back down. If they don’t unwind quickly or if the economy really is in a higher-pressure equilibrium, then we will likely have to push long-term real rates to a contractionary stance to bring supply and demand into balance. The incoming data over the next several months should provide some clarity on these questions.
Finally, we will need to continue to assess where neutral is. If the economy is in fact in a higher-pressure equilibrium, that might indicate the neutral long-term real rate has increased, which would then require even higher rates to reach a contractionary stance that would bring the economy into balance.
My view - Kashkari is not a voting member this year, so he has some leeway to speak his mind. The big takeaway is he has historically been viewed as a dove, so for him to talk about the need to create a recession to combat demand strength is notable. That is feeding into the current recession scare and financial conditions tighten.
Tesla's Impact Report Hints At The Future Of Battery Recycling And Battery Cost Declines
This short note from ARK Innovation ETFs may be of interest. Here is a section:
According to its Impact report for 2021, Tesla can recover raw materials from batteries with ~92% efficiency: for every 1,000 kWh worth of end-of-life batteries, Tesla recovers 921 kWh worth of raw metals to produce new batteries. The importance of recycling already is clear when cells don’t meet quality assurance during the manufacturing process. Tesla believes that “the costs associated with large-scale battery material recovery and recycling will be far lower than purchasing additional raw materials for cell manufacturing,” contributing significantly to continued battery cost declines and amplifying the importance of recycling as more electric vehicles reach end-of-life.
My view - Here is a link to Tesla’s 2021 Impact report. It clearly states Tesla does practically no recycling at present, because its batteries have not been in the field long enough to provide adequate supply.
China Premier Warns of Grave Jobs Situation as Lockdowns Weigh
This article from Bloomberg may be of interest to subscribers. Here is a section:
“Stabilizing employment matters to people’s livelihoods, it is also a key support for the economy to operate within a reasonable range,” Li said, urging businesses to resume production with Covid-fighting measures in place, while reiterating the government’s policy to promote the healthy development of internet platform companies to support employment.
The premier’s warning on employment came after the nation’s surveyed jobless rate climbed to 5.8% in March, the highest since May 2020, according to data released by the National Bureau of Statistics in mid-April.
China’s top leaders last week warned against attempts to question the country’s Covid Zero strategy as newly released data for April showed the lockdown-dependent approach taking a heavy toll on the economy. The rolling out of even more intense restrictions over the weekend in Shanghai and Beijing adds further to the challenges facing policymakers seeking to shore
up growth.
My view - Li Keqiang is often regarded as a bookish technocrat who thinks more in terms of the health of the economy than politics. Talking about rising unemployment is already sensitive when the question of the merit of the COVID-zero policy is beyond discussion. He is due to retire in a few months, and his successor is likely to be even more loyal to Xi Jinping.
The Chart Seminar June 6th & 7th in London sold out
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.
This event is sold out. A waitlist has now begun.
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: bond long closed at a loss, investment positions sold and stock market short increased. May 5th