Market Thinking

making sense of the narrative

Bloomberg TV

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Nice to be back in the studio with David and Vanessa this morning- so much better than the Zoom calls! Nice of Bloomberg to send a link through as well.

For interest, I have added the notes we put together in advance, with my replies. So much to say, so little time (as always).

  • Thoughts on this bear market. When will market pain end?
    The market has got the message that the Fed is no longer selling puts to keep the market up, it is selling calls to keep it down. So people are selling rallies and not buying dips (my definition of a bear market). It stops when either the Fed stops or the selling dries up. Don’t expect traders to put on leveraged ‘risk on bets’ while everyone is deleveraging. Most likely cause of buying will be rotation out of sectors and markets into other markets.
  • What are you seeing investors/markets are missing? Any view that stands out?
    Value is going to become momentum. The momentum baskets are being rebalanced which will add fuel to the cyclical areas of the market$ strength is a short squeeze, there is massive deleveraging going on everywhere. The damage from Covid was actually the damage from lockdown policies. The damage from inflation is going to be the damage from monetary policies. The damage to eating and heating is actually the damage from environmental policies. Politicised policy making is the biggest risk to investors.
  • 3 conviction calls; where are the opportunities; what are you cautious on1) See comments on the $. This is the biggest change to world markets since $ came off gold in 1971 2) The magical thinking behind a lot of tech company non GAAP earnings is coming unstuck. Buying sales through stock based M&A and not depreciating goodwill, or paying staff with stock and not adjusting for stock based compensation. Watch out for large receivables, vendor financing (remember Ericcsson?) etc 3) The magical creatures called Unicorns are going to be radically repriced or disappear. There will be aftershocks as there were in 2000 as we realise that a lot of earnings were brought forward due to lockdown (everyone needed a laptop to WFH) like Y2K and also that a lot of sales were to Unicorns splashing out their new cash injections.
  • Has your market outlook/strategy changed recently?
    Our models have been heavily skewed to cash all year. We started dipping back in in April, but pulled back. Right now we are in the middle of the Buffet Cliche as the liquidity tide goes out
  • Fed policy/will they be able to deal with inflation without causing a recession?
    The Fed policy of zero rates focussing on wealth effects was misguided and their deliberate attempts to crash the markets on the same basis offer the serious prospect of stagflation
  • Are recession risks priced in?
    The market doesn’t believe the official data on how ‘strong’ the economy is and neither does the Fed. They are only focussed on killing inflation at the moment. On the other hand, operational leverage is rarely priced into earnings forecasts, so not really. – Dollar:
  • Can the Dollar Last as King of Currencies?
    No. The sharp squeeze in the DXY was more to do with deleveraging short $ positions and is now rolling over. The unprecedented move by the Biden administration to confiscate hundreds of billions of $ without due process is going to have a long term negative effect on the $ and the whole $ ecosystem. Rotation away from heavy US bias to EM and lack of flows the other way suggests weakness in medium term as does relative inflation prospects.
  • China: Should investors still stay away from Chinese stocks or China will outperform its global peers?
    China internal politics will likely remain tense until November, but unlike the west they have all the levers left to pull. The decision on Zero Covid stands out, but that is theirs to change. When they do, expect a lot of focus to shift to Asia. They didn’t have ZIRP and QE so they can ease monetary conditions,. Also they have been deleveraging for over a year. They didn’t have Zero Carbon, so they can keep their lights on – they are building Nuclear, using coal sensibly and now with Power of Siberia pipeline can get all the gas they need from Russia. Moreover, they can pay in Yuan now so even if there wasn’t a risk of expropriation, they don’t need to earn $ to buy fuel. China is actually ‘having a very good war’
  • We have Alibaba earnings – How Far Will This Tech Stocks Slump Go?
    The Chinese ADRs have been in a bear market since last year and ‘Common Prosperity’ and the recognition that the magical thinking (another lot) behind ADRs being simultaneously 100% Chinese owned and 100% foreign owned was no longer viable. This is not about earnings, it is about the transfer from weak hands to strong hands. DOn’t know if we are there yet. Also remember the point of common prosperity is that you can become rich, but not too rich and certainly you can not become political to further a monopolist position. Given that this is the default for western companies, expectations need to adjust for Chinese ones.
  • Anything else to add? What are people missing
    1) China needs to shift away from the $. The SDR is a good alternative (basket just been reweighted, Rmb 12%). Could easily wake up and find HK$ pegged to SDR! China could also shift its holdings of treasuries into domestic stock market 2) The Davos crowd hyping up the Food crisis is fake news. Russia is having a record harvest, the US turns millions of tonnes of grain into ethanol every year and the wheat is being exported from Ukraine – just it is being blocked (by Ukraine) from getting out of Odessa. Investors need to recognise that there is propaganda on both sides and that the ‘news’ we are hearing has other agendas behind it and will not necessarily be a good guide to what is really happening.3) Ukraine is sitting on huge gas reserves. When the hostilities are over, these can be exploited relatively quickly which will undo a huge amount of the energy related damage being done in western Europe right now.
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