Welcome back to our weekend reading.
A lot of commentary throughout the market that we’re seeing “signs of a collapse”.
What’s probably most interesting is what we’re not seeing commentary on; very few articles on NFTs lately, there are relatively few hype articles about cryptocurrency and there hasn’t been a public short squeeze in quite a while.
Either we’ve become desensitised to it, or there may be something stirring in the bowels of the market hivemind.
Let’s look back on the week.
The Bank of Canada (BoC) came out this week, with some of the most hawkish policy measures outlined by a major central bank since the pandemic began.
Governor Tiff Macklem spoke on Wednesday to say that the BoC would be scaling back their purchases of government debt to $3 billion CAD per month (from $4 billion CAD) – and flagged an acceleration to their proposed timeline to raise interest-rates.
This is possibly an unexpected outcome to some observers, given both Canada’s current wave of COVID-19 infections placing a new roadblock in the path of economic recovery, and the Fed’s rampant opposition to any kind of tightening policy. It’s like making sure to save up your spare coins, whilst watching your neighbour install a solid gold hot tub over the fence.
The new timeline implies that rates would be raised some time in the second half of 2022, but re-iterated that it would not be actioning this hike until inflation was sustainably at 2% and the ‘recovery is complete’.
Given our tendency to be closely linked to the monetary policy profile of Canada, this may be a divergence from the RBA’s decision to leave rates unchanged until 2023-24.
Hence, they’ve moved from a calendar based approach to a data based approach, the opposite of what the Fed and RBA are doing.
A World Changing Zoom Call
President Biden has opened the International Climate Change Summit – held virtually – which prevents the usual irony of employing a fleet of private jets to fly to a global warming event.
Officially he has brought the U.S. back into the fray, pledging to halve U.S emissions of greenhouse gases by 2030 (using 2005 as a benchmark) and doubling climate aid to developing nations. This was also seen as a direct ‘encouragement’ towards rapidly industrialising countries like China, India and Brazil.
Developing nations themselves made it plain that they expect money from wealthier nations to fund their efforts to curb global warming, whilst China and India have held firm to their own plans to ‘continue growing their own carbon emissions before making any cuts’.
Debit Suisse Legacy Continues
Credit Suisse will be raising $2 billion USD from investors in light of the fallout from Archegos – as well as cutting the hedge fund unit/team at the centre of the Archegos losses, who no doubt can put a plaque on their wall saying, “almost blew up Credit Suisse”.
CS has exited approximately 97% of its exposure to Archegos and reportedly expects over $650 million UDS losses in Q2 – this brings the total loss to a cool $5.5 billion USD, which does not include the other pinch to the wallet caused by the collapse of Greensill.
The result of this saga: it’s cutting a third of its exposure to prime broking business for hedge fund clients. What’s that story about closing the stable doors after the horses have already bolted?
Harvard – Investor Sentiment and Macro Trends
Jesse sent out a desk note earlier in the week that bears repeating for some of the nuggets of wisdom within – if you didn’t receive or would like to be added to our mailing list, please send us an email.
I attended a call this morning where the keynote speaker was Ken Froot, professor emeritus at Harvard.
He’s written books on interest rates and discounting forward rate curves in 87 and 1995, and is still a great mind on behavioural market theorem and markets discounting of information into prices.
- Everyone assumed that Biden would pick-up where Obama left off
- While he hasn’t, Biden has used the platform that Trump established – where Trump voters wanted a DIFFERENT style of government – to run his own Administration
- Markets have been shocked by forcefulness of policy coming through Biden but also the Fed
- This isn’t happening randomly, it’s policy reinterpretation
- Ken focusing on economic drivers rather than the policy plans of Biden Administration, 4 key drivers that he sees as most important – real interest rates, climate change, supply chain reconstruction and social inequality
- Top left: shows rising average inflation with higher 2021 inflation well above longer-term trend
- Top right: consumer price expectations well above market-based inflation (through 5y5y inflation swap)
- Bottom left: We’re in between inflation regimes, yet to emerge which we move towards, though trending up right now, question is whether this will be sustained
- Bottom right: charting inflation swaps from current (blue), post-George elections in January (orange) and middle Feb (red), see how currently we’re now pricing lower inflation in future years?
*All numbers in USD from BofA Securities
Equities:$14.6bn into equities
Bonds: $13.7bn into bonds
Precious Metals: $0.1bn into gold
Flows to Know
Largest outflow from HY bonds in 6 weeks
Largest outflow from EM equities since Jan 2021 ($1.3bn)
Largest inflow into European equities in 14 weeks ($1.4bn)
Record 9-week inflow into value stocks ($31.8bn)
Global market cap of Bitcoin exceeds 1% of global equities
US house prices gain 17% YoY, the highest ever
Record 9-week inflows into U.S value stocks
There was a lot of content which was interesting but overshadowed by some of major events in markets this week – thank goodness for the Rapid-Fire Round.
- Infamous ponzi-scheme mastermind Bernie Madoff has died in prison; Madoff ran a nearly $65 billion USD scheme in the 2000s, ensnaring some of the largest financial institutions in New York in his machinations. A clearly intelligent and entrepreneurial man, Bernie continued his market insights in prison in the years before his death, reportedly cornering the hot chocolate market amongst other inmates and generating a healthy profit.
- Listed New Jersey deli “Hometown International”, a $100 million USD market-cap company mind you, has only $35,000 USD income in the last two years combined – that is some P/E ratio for you. Would it surprise you that they have been accused of hiding earnings from creditors and fraud?
- ARK Investment’s head magician Cathie Wood has come out and asserted that Bitcoin mining can be good for the planet – “a world with bitcoin is a world that, at equilibrium, generates more electricity from renewable carbon-free sources”. In a grand tradition of selling their own book, ARK have incentive to promote the friendliness of BTC mining considering they just purchased Coinbase holdings recently.
- HSBC executives will have to move to hot desking after the company decided to downgrade and remove the ‘executive floor’ from their London HQ, whilst turning the private offices of its executives into client meeting rooms. The bank expects to shrink its property footprint by 40% in the coming years.
- A Turkish cryptocurrency exchange has imploded and its founder has fled, leaving a few hundred thousand investors in its wake – Turkish authorities are still trying to find the 27-year old founder of Thodex, Faruk Ozer, as potential losses are estimated to be around $2 billion USD.
- China is considering a plan to fund $15 billion USD of asset purchases from China Huarong Asset Management, leveraging PBOC funds to clean up the SOE as it struggles with balance sheet debt. This would allow the company to return its focus on the core business of managing distressed debt.
Our morning calls continue, please do tune in for a daily dose of market insights and access to some leading experts in the funds management field.
Have a safe and enjoyable weekend.
– Max and the Mason Stevens team.
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The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.