behind the headlines one sadly cannot conclude anything other than that Biden is either economically illiterate or a brazen liar for other than the headline there was little which would excite even a high school student taking economics as an elective.
There are plenty of moving parts in the release but one which is hard to overlook is that when adjusted for inflation, the economy has gone nowhere over the past twelve months. And how could Biden have missed that minor detail that investment in residential housing has plunged by no less that 26% in response to the highest mortgage rates in as long as most potential buyers could remember. Although consumer spending was also weak, it was still positive albeit at a level which economists would normally expect to see during a recession. To call the US economy a dead man walking might be a bit drastic, but it is quite clearly gently trunbdling into a recession. How deep and how protracted that recession might become is impossible to tell and anybody who suggests that it might be a short and shallow one, a medium one or a deep and protracted one is most probably talking their book.
Wisdom is that the shape of the yield curve is the most reliable predictor of recession. That would be true although the extraordinary activity which the Federal Reserve has been involved in over the past decade has surely distorted the curve to such an extent that what we see might not quite be what we get. Since the inception of non-standard policy measures – that’s quantitative easing to you and me - the principal objective has been to manipulate the shape of the curve or more simply put to keep medium term and long rates as low as could be. By mid-April of 2022 the Fed’s balance sheet had expanded to its peak of US$ 8.955 trn which equates to about 30% of the total national debt of US$ 31 trn.
Enter, stage left, QT or quantitative tightening, which describes the process of balance sheet reduction. Part of the result was or is to have been the release of long-term rates back into the hands of demand and supply, of the markets. As of October 10th, the most recently reported date, that had declined to US$ 8,744 trn or just over US$200 bn. Thus, the Fed still has the US Treasury bond market by the gonads, and it is therefore anybody’s guess what the market would look like, were it not still substantially under the control of the central bank.
In the eurozone things are even more complicated. The ECB did its bit yesterday as it raised the key rates by 75 bps to which took the marginal lending rate to 2.25%, the refi rate to 2% and the deposit rate to 1.5%. The ECB has been well behind its peers in tightening monetary conditions and with inflation at or around 10% in both Germany and France the adjustment could not have been any timelier. Mary Poppins sang “Just a spoon full of sugar helps the medicine go down” so, donning her frilly blouse and apron, ECB President Christine Lagarde pointed out that there is recessionary risk afoot which sort of not so subtly indicated that this aggressive looking monetary policy might be of limited duration. Yesterday’s will not have been the last move and there will be more to come at the next ECB Central Council meeting but after that interest rate policy be on a meeting-by-meeting basis and made up on the fly.
In a most outstanding piece for Bloomberg, my fellow Teenage Scribbler Marcus Ashworth dug a little deeper and highlighted that raising rates and promising to persist with the QT plans is the easy bit. Since the GFC, the eurozone crisis and the pandemic, the ECB has instituted more financial market support tools than one can shake a stick at. In the same way in which the Fed is uniquely creative in coming up with slogans such as "tapering" or "pivoting" and so on, so the ECB has more acronyms for its market support measures than there are letters in the alphabet. Ashworth points out that the mesh of the ECB’s emergency lending programmes is now so complex that it must be doubly careful of triggering unintended consequences. One of the most evident issues it to be found in TLTRTO – Targeted Longer-Term Refinancing Operations – which was aimed at encouraging banks to maintain the flow of credit to businesses and to the economy. Much of this went out at 1% and now the ECB’s deposit rate is 1.5%. So, banks which have borrowed from the ECB at 1% can, in theory at least, now lend that money straight back to them at 1.5%. Oops!
Former ECB President Mario Draghi’s “…whatever it takes…” policy is not exactly unravelling although it is presenting his successor as well as markets with some serious headaches. Having just alluded to the Fed and its balance sheet, one should not underestimate what the ECB has done in terms of bond buying. But whereas the Fed has been out there doing what it did in support of one large economy, the ECB has been burdened with the overtly political task of preventing the weakest in the herd of being isolated and brought down. Greece and Italy are the two which immediately spring to mind. Political correctness, and a jolly good kick in the shins by the ECB, has supressed the use by research teams of once common sobriquets such as “the Garlic Belt” or the “PIGS” – Portugal, Italy, Greece and Spain – so that in a strange way public discourse has been manipulated away from those members.
Another great ECB acronym is PEPP the Pandemic Emergency Purchase Programme, which was added to the APP, the Asset Purchase Programme. Between the two of them and added to the regular ECB balance sheet, they have mopped up well over € 8 ½ trn in eurozone securities. Formerly immutable rules had to be re-written so that the debt of non-investment grade sovereigns could be booked and although it is never spoken about at official level, it is evident that without significant ECB support some of the weakest members of the eurozone would have long gone to the wall. How to reverse QE without letting the air out of the life raft? A curious side-effect of the support programmes is that there is now so little collateral in free float that long end rates which should be rising in line with the front end are not doing so. More buyers at supposedly more attractive rates that stock available.
Elsewhere, the rout of the once unimpeachable Masters of the Universe rolls on with Amazon Inc yesterday falling under the steam roller. It’s easy play around with stock price declines, whether annual, year to date, monthly or in this case of just overnight where the share price has taken a near 13% bath. It opened yesterday morning at US$ 115.66. It’s not been a good time for the big techies so by the close and before it released it Q3 numbers it was already down by US$ 4.70 or 4.06% at US$ 110.96. By the time the aftermarket had absorbed the disappointing results, it had shed a further US$ 14.12 or 12.73%. That Amazon after the pandemic was going to be different than Amazon during the pandemic should not have been hard to fathom but management yesterday in the results call warned of further impairments to the business model which a recession-related slowing in consumer activity would inevitably bring with it. Repositioning Amazon in a post-pandemic world is one thing, repricing the stock which along with the other FAANGS had been buoyed by a stampede of leveraged retail investors is another.
There is little by way of the survivors and thrivers from the original dot.com bubble, above all Amazon and Meta, which have not been caught in the downdraught and all this just when the word is doing the rounds that the end of the Fed’s tightening cycle might be in sight and that this is the time when investors should be preparing to once again strap on risk assets. As far as the routed Big Techs are concerned, does the problem lie with the companies or with the shareholders? Petty retail loves a quick and easy story, and the history of asset markets is littered with burst bubbles. Most of these occur because investors, many of whom are really nothing more that punters in pursuit of a quick buck, forget that all businesses are subject to economic cycles and that it is therefore fatuous to extrapolate growth curves which just keep on rising exponentially into infinity.
Amazon might have overexpanded; it would of course have been subject to all manner of criticism if had done too little on that front. But it can trim itself back to fighting fitness without causing existential risk. It will remain the market leader and seeing as that there is no such thing as a bad asset, merely a wrong price, it must not be dismissed as a busted flush. Meta might be a different story as might Netflix and those are probably stocks to be avoided. But a beaten-up Microsoft or Apple or Alphabet should at some point represent decent value. That said, the cost-of-living crisis, which is hitting the USA, albeit to a lesser extent than Europe, will most probably reduce petty retail’s risk appetite and risk tolerance so we might see these names drift lower yet. Remember that the quantity of rubber which makes up a balloon is always the same; the difference in its size is merely a function of how much air it contains.
Elsewhere and in a more fundamental shift, ESG is now under regulatory fire. Much to the chagrin of the institutional investment industry, the SEC is proposing to tighten rules on how funds sell themselves. It has long defined what constitutes a bond fund or an equity fund and has monitored how much of the asset mix can come from asset classes not in the title. But as more and more asset classes, think private equity or private debt, are becoming available to end users, so the SEC believes it must expand its brief. And one of the descriptions which it wants to take a much closer look at is ESG. Greenwashing companies is one thing – the Australian authorises have just handed down their first fine against a business for doing just that – but greenwashing publicly distributed funds is another. How many of the total assets need to be ESG compliant for the product to be marketed as ESG? If a fund calls itself ESG but is allowed to hold a proportion of non-ESG assets, can any of these, nevertheless, be oil or defence?
Many of the people I speak to in the industry very quietly admit that ESG was a great plaything in a bull market but that when their clients have existential issues to cope with – it’s not how much you make that counts and it’s not how much you spend that counts; it’s entirely on how the two relate to one another – the focus very quickly shifts back to good old basics. The numbers we were being swamped with a couple of years ago which supposedly showed that ESG focussed portfolios generated equal or higher returns than non-ESG ones quickly proved to be fantasy.
Climate is this morning back in the headlines as the UN yesterday released a document assuring that if we keep on going the way we’re going we’re all doomed. The 1.5 degrees Celsius Paris Agreement target will not be reached. In that context, may I commend the work of Goldman Sachs’ Jeff Currie, Global Head of Commodities Research, in which he notes that after US$ 3.8 trn of investment in renewables, the overall proportion of fossil fuels in global energy consumption has over ten years fallen from 82% to 81%. That’s right; from 82% to 81%. Based on the UN’s own figures, the global population has over the same 10 years has risen from 7.16 bn to 7.97 bn or by over 10%. Could it be that the advances made in the industrialised West are being lost again in elsewhere? Could it be that the much-vaunted exponential growth in the sales of EVs in China and India is being met by electricity generated in coal fired power stations? Perish the thought! If we really are all doomed, don’t you wonder whether the UN’s climate gurus will think it to be worth saving for a retirement pension?
Alas, it’s that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. I always try to end the week on a lighter note which of late has not been a walk in the park. And then I come across a commercial on one of the financial news channels which is put up by a bunch calling themselves capital.com which I guess is some kind of online trading platform but is most certainly not related to the mighty and highly respected US money management firm Capital Group. Anyhow, the commercial opened with the words “As financial trading has evolved, so has society….” Over the years I’ve read in astonishment some of the often fanciful but always imaginative financial product advertisements, but does this not absolutely take the biscuit? By the way, looking out of the window I’d suggest that we will be generating no solar power here today but wind power in abundance.
There are plenty of moving parts in the release but one which is hard to overlook is that when adjusted for inflation, the economy has gone nowhere over the past twelve months. And how could Biden have missed that minor detail that investment in residential housing has plunged by no less that 26% in response to the highest mortgage rates in as long as most potential buyers could remember. Although consumer spending was also weak, it was still positive albeit at a level which economists would normally expect to see during a recession. To call the US economy a dead man walking might be a bit drastic, but it is quite clearly gently trunbdling into a recession. How deep and how protracted that recession might become is impossible to tell and anybody who suggests that it might be a short and shallow one, a medium one or a deep and protracted one is most probably talking their book.
Wisdom is that the shape of the yield curve is the most reliable predictor of recession. That would be true although the extraordinary activity which the Federal Reserve has been involved in over the past decade has surely distorted the curve to such an extent that what we see might not quite be what we get. Since the inception of non-standard policy measures – that’s quantitative easing to you and me - the principal objective has been to manipulate the shape of the curve or more simply put to keep medium term and long rates as low as could be. By mid-April of 2022 the Fed’s balance sheet had expanded to its peak of US$ 8.955 trn which equates to about 30% of the total national debt of US$ 31 trn.
Enter, stage left, QT or quantitative tightening, which describes the process of balance sheet reduction. Part of the result was or is to have been the release of long-term rates back into the hands of demand and supply, of the markets. As of October 10th, the most recently reported date, that had declined to US$ 8,744 trn or just over US$200 bn. Thus, the Fed still has the US Treasury bond market by the gonads, and it is therefore anybody’s guess what the market would look like, were it not still substantially under the control of the central bank.
In the eurozone things are even more complicated. The ECB did its bit yesterday as it raised the key rates by 75 bps to which took the marginal lending rate to 2.25%, the refi rate to 2% and the deposit rate to 1.5%. The ECB has been well behind its peers in tightening monetary conditions and with inflation at or around 10% in both Germany and France the adjustment could not have been any timelier. Mary Poppins sang “Just a spoon full of sugar helps the medicine go down” so, donning her frilly blouse and apron, ECB President Christine Lagarde pointed out that there is recessionary risk afoot which sort of not so subtly indicated that this aggressive looking monetary policy might be of limited duration. Yesterday’s will not have been the last move and there will be more to come at the next ECB Central Council meeting but after that interest rate policy be on a meeting-by-meeting basis and made up on the fly.
In a most outstanding piece for Bloomberg, my fellow Teenage Scribbler Marcus Ashworth dug a little deeper and highlighted that raising rates and promising to persist with the QT plans is the easy bit. Since the GFC, the eurozone crisis and the pandemic, the ECB has instituted more financial market support tools than one can shake a stick at. In the same way in which the Fed is uniquely creative in coming up with slogans such as "tapering" or "pivoting" and so on, so the ECB has more acronyms for its market support measures than there are letters in the alphabet. Ashworth points out that the mesh of the ECB’s emergency lending programmes is now so complex that it must be doubly careful of triggering unintended consequences. One of the most evident issues it to be found in TLTRTO – Targeted Longer-Term Refinancing Operations – which was aimed at encouraging banks to maintain the flow of credit to businesses and to the economy. Much of this went out at 1% and now the ECB’s deposit rate is 1.5%. So, banks which have borrowed from the ECB at 1% can, in theory at least, now lend that money straight back to them at 1.5%. Oops!
Former ECB President Mario Draghi’s “…whatever it takes…” policy is not exactly unravelling although it is presenting his successor as well as markets with some serious headaches. Having just alluded to the Fed and its balance sheet, one should not underestimate what the ECB has done in terms of bond buying. But whereas the Fed has been out there doing what it did in support of one large economy, the ECB has been burdened with the overtly political task of preventing the weakest in the herd of being isolated and brought down. Greece and Italy are the two which immediately spring to mind. Political correctness, and a jolly good kick in the shins by the ECB, has supressed the use by research teams of once common sobriquets such as “the Garlic Belt” or the “PIGS” – Portugal, Italy, Greece and Spain – so that in a strange way public discourse has been manipulated away from those members.
Another great ECB acronym is PEPP the Pandemic Emergency Purchase Programme, which was added to the APP, the Asset Purchase Programme. Between the two of them and added to the regular ECB balance sheet, they have mopped up well over € 8 ½ trn in eurozone securities. Formerly immutable rules had to be re-written so that the debt of non-investment grade sovereigns could be booked and although it is never spoken about at official level, it is evident that without significant ECB support some of the weakest members of the eurozone would have long gone to the wall. How to reverse QE without letting the air out of the life raft? A curious side-effect of the support programmes is that there is now so little collateral in free float that long end rates which should be rising in line with the front end are not doing so. More buyers at supposedly more attractive rates that stock available.
Elsewhere, the rout of the once unimpeachable Masters of the Universe rolls on with Amazon Inc yesterday falling under the steam roller. It’s easy play around with stock price declines, whether annual, year to date, monthly or in this case of just overnight where the share price has taken a near 13% bath. It opened yesterday morning at US$ 115.66. It’s not been a good time for the big techies so by the close and before it released it Q3 numbers it was already down by US$ 4.70 or 4.06% at US$ 110.96. By the time the aftermarket had absorbed the disappointing results, it had shed a further US$ 14.12 or 12.73%. That Amazon after the pandemic was going to be different than Amazon during the pandemic should not have been hard to fathom but management yesterday in the results call warned of further impairments to the business model which a recession-related slowing in consumer activity would inevitably bring with it. Repositioning Amazon in a post-pandemic world is one thing, repricing the stock which along with the other FAANGS had been buoyed by a stampede of leveraged retail investors is another.
There is little by way of the survivors and thrivers from the original dot.com bubble, above all Amazon and Meta, which have not been caught in the downdraught and all this just when the word is doing the rounds that the end of the Fed’s tightening cycle might be in sight and that this is the time when investors should be preparing to once again strap on risk assets. As far as the routed Big Techs are concerned, does the problem lie with the companies or with the shareholders? Petty retail loves a quick and easy story, and the history of asset markets is littered with burst bubbles. Most of these occur because investors, many of whom are really nothing more that punters in pursuit of a quick buck, forget that all businesses are subject to economic cycles and that it is therefore fatuous to extrapolate growth curves which just keep on rising exponentially into infinity.
Amazon might have overexpanded; it would of course have been subject to all manner of criticism if had done too little on that front. But it can trim itself back to fighting fitness without causing existential risk. It will remain the market leader and seeing as that there is no such thing as a bad asset, merely a wrong price, it must not be dismissed as a busted flush. Meta might be a different story as might Netflix and those are probably stocks to be avoided. But a beaten-up Microsoft or Apple or Alphabet should at some point represent decent value. That said, the cost-of-living crisis, which is hitting the USA, albeit to a lesser extent than Europe, will most probably reduce petty retail’s risk appetite and risk tolerance so we might see these names drift lower yet. Remember that the quantity of rubber which makes up a balloon is always the same; the difference in its size is merely a function of how much air it contains.
Elsewhere and in a more fundamental shift, ESG is now under regulatory fire. Much to the chagrin of the institutional investment industry, the SEC is proposing to tighten rules on how funds sell themselves. It has long defined what constitutes a bond fund or an equity fund and has monitored how much of the asset mix can come from asset classes not in the title. But as more and more asset classes, think private equity or private debt, are becoming available to end users, so the SEC believes it must expand its brief. And one of the descriptions which it wants to take a much closer look at is ESG. Greenwashing companies is one thing – the Australian authorises have just handed down their first fine against a business for doing just that – but greenwashing publicly distributed funds is another. How many of the total assets need to be ESG compliant for the product to be marketed as ESG? If a fund calls itself ESG but is allowed to hold a proportion of non-ESG assets, can any of these, nevertheless, be oil or defence?
Many of the people I speak to in the industry very quietly admit that ESG was a great plaything in a bull market but that when their clients have existential issues to cope with – it’s not how much you make that counts and it’s not how much you spend that counts; it’s entirely on how the two relate to one another – the focus very quickly shifts back to good old basics. The numbers we were being swamped with a couple of years ago which supposedly showed that ESG focussed portfolios generated equal or higher returns than non-ESG ones quickly proved to be fantasy.
Climate is this morning back in the headlines as the UN yesterday released a document assuring that if we keep on going the way we’re going we’re all doomed. The 1.5 degrees Celsius Paris Agreement target will not be reached. In that context, may I commend the work of Goldman Sachs’ Jeff Currie, Global Head of Commodities Research, in which he notes that after US$ 3.8 trn of investment in renewables, the overall proportion of fossil fuels in global energy consumption has over ten years fallen from 82% to 81%. That’s right; from 82% to 81%. Based on the UN’s own figures, the global population has over the same 10 years has risen from 7.16 bn to 7.97 bn or by over 10%. Could it be that the advances made in the industrialised West are being lost again in elsewhere? Could it be that the much-vaunted exponential growth in the sales of EVs in China and India is being met by electricity generated in coal fired power stations? Perish the thought! If we really are all doomed, don’t you wonder whether the UN’s climate gurus will think it to be worth saving for a retirement pension?
Alas, it’s that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. I always try to end the week on a lighter note which of late has not been a walk in the park. And then I come across a commercial on one of the financial news channels which is put up by a bunch calling themselves capital.com which I guess is some kind of online trading platform but is most certainly not related to the mighty and highly respected US money management firm Capital Group. Anyhow, the commercial opened with the words “As financial trading has evolved, so has society….” Over the years I’ve read in astonishment some of the often fanciful but always imaginative financial product advertisements, but does this not absolutely take the biscuit? By the way, looking out of the window I’d suggest that we will be generating no solar power here today but wind power in abundance.