Fault Lines

Markets exhibited something like relative stability Monday, as investors looked ahead to a week that’ll be dominated by Fedspeak and war headlines. US equities faded after Jerome Powell reiterated a hawkish message, and bonds sold off hard, but stocks weren’t the fireworks show traders have become accustomed to of late.

Boeing was “gathering information” after a 737 crashed in China, possibly killing all 132 people on board. Radar tracking suggested the plane descended “on an almost vertical trajectory,” as Bloomberg put it, noting that China Eastern Airline’s website, mobile app and “some of its social media platforms were turned to black and white in a sign of mourning.”

Xi wants answers “soon.” This is the last thing Boeing needs. The company still hasn’t emerged from the shadow of previous catastrophes, and while it’ll be days (at least) before anything like definitive answers emerge from China, the market might trade Boeing in “guilty until proven innocent” fashion.

Meanwhile, Australia cut alumina exports to Russia, and Baker Hughes is following Schlumberger and Halliburton in curtailing investment and work in the country. “The crisis in Ukraine is of grave concern and we strongly support a diplomatic solution,” Baker Hughes CEO Lorenzo Simonelli said, on the way to “condemn[ing] violence” and extending condolences “to the people and families of those impacted.” A day earlier, Halliburton “immediately suspended future business” in Russia. Schlumberger did the same, citing “immense concern” around the conflict. None of that is deflationary.

Speaking at a conference in Paris Monday, Christine Lagarde said fiscal policy “must” provide support during the war. “Monetary policy can’t do everything,” she said, after meekly suggesting the ECB “does not see elements of stagnation now.” They’re certainly seeing elements of inflation, though, and while there’s legitimate debate about how big (or not) of an impact the conflict will have on the US economy, it’s guaranteed to weigh on growth in Europe. Stagflation there will be, madame. As for the energy transition, Lagarde said “hawks and doves agree that in the first stage it will be rather inflationary.”

Gazprom said Monday that gas transit through Ukraine to Europe is still “proceeding normally.” This whole charade is absurd. Obviously no one wants all-out war, but the juxtaposition between people killing one another with bombs and guns while simultaneously working to ensure that no matter how bad it gets, the gas keeps flowing is ridiculous. It gives it all a contrived feel. If you’re killing my friends, I’m not buying your energy. And if you’re stealing all my hard currency and trying to engineer a depression in my economy, you can freeze for all I care. Apropos, Germany is now sourcing LNG from Qatar, and utility industry association BDEW said late last week that the country could conceivably replace half of Russian gas imports this year in an emergency.

Bottom line: The fault lines are getting wider. “Despite the equity market strength of the past week, it’s hard not to recognize that much has changed in the first three months of 2022,” JonesTrading’s Mike O’Rourke said. “In addition to the war, deglobalization has accelerated, along with inflation.”

A Bloomberg survey of MLIV readers (it’s a blog on the terminal) found that the overwhelming majority see the conflict as the “biggest unpriced risk for asset prices.” The most frequently mentioned words were “War,” “Ukraine,” “China,” “Inflation” and “Recession,” in that order. The same poll found that nearly three quarters believe DM central banks are behind the curve in the inflation fight. Asked to identify the best inflation hedge, only 4% said Bitcoin, where the 30-day correlation to US equities remains disconcertingly high.

Finally, Zhang Hanhui, the Chinese ambassador to Moscow, met recently with Russia’s Deputy Defense Minister Alexander Fomin. “There’s no need to read too much into the meeting,” Foreign Ministry spokesman Wang Wenbin told reporters, at a press briefing on Monday.

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8 thoughts on “Fault Lines

    1. Well, stocks, for one thing. They’re a claim on nominal growth. You just have to accept the risk of near-term volatility in a recessionary environment which, if you were considering crypto, shouldn’t be a problem. Bitcoin is a 60-vol asset which, as Cameron Crise gently noted earlier this month, means a bear market decline would represent just a one standard deviation move in a 40-day window. As for the rest of crypto, I’ve spent three months deploying $15k in play money across DeFi platforms, etc, and I can say, definitively, that the vast majority of it is built on Ponzi dynamics, with the only saving grace being that most of the devs appear to have no idea that’s what they’re doing. Some of them do seem to be aware they’re doing something potentially shady, but it doesn’t seem to occur to them that in at least a few cases, they’re engaged in activities that are the actual textbook definition of securities fraud. You can’t, for example, issue the functional equivalent of stocks and bonds using your unlicensed friends as the underwriters and you can’t just wake up one day, declare yourself a financial institution and start offering term deposits to the public. So, not crypto. Or at least not if you’re over 25 and care anything about your own sanity. If you’ve got a few million in investable assets, I could certainly see scattering $250k across Bitcoin, Ether and a few other coins with utility, but the idea of a real, honest-to-god “Overweight” in crypto is still ludicrous. Could it make you fabulously wealthy? Well, sure. And 10,000% returns (or whatever) are a helluva inflation hedge! But other things that could make you fabulously wealthy include the lottery, prospecting for gold in a jungle or hiring a local militia and opening a gem mine in Africa. The best thing you can do for inflation is diversify across locales, tilt towards value and dividend shares, buy real assets / commodities and have some gold, as much as I hate gold. I mean, there’s a reason why stagflationary periods are problematic: It’s hard to generate real returns. Sometimes, there’s just nothing you can do.

      1. Good advice, H.

        SP500 more than doubled in 1970-1980, in nominal dollars. It returned only about 14% over the decade in real (inflation adjusted) dollars, but that’s still beating inflation. If one side-stepped the 1972-1974 recession, all the better.

        Other asset classes may do as well as equities (RE, cmdty, TIPS, etc) but tough to construct a whole portfolio from just those.

        I wish I knew what the role for fixed income should be in a stagflation scenario. Right now, with every major fixed income class offering negative real returns plus varying degrees of duration and credit risk, I struggle to see a substantial role. At the same time, professional managers face serious risks if they move client portfolios from 60/40 to 90/10. Not just investment risk, but also legal and compliance risk.

      2. “Sometimes, there’s just nothing you can do”, not really. Long before you have your $2000k you’ll have internalized Buffett’s first two rules of investing: 1. Don’t lose principal, 2. See rule 1. This applies 24x7x365. No rest for the wicked little capitalist with a stash of f*ck-you-money if they want to stay ‘free’. “$250k” is not remotely a “play money” allocation I’d consider nor have I heard anyone old enough to actually have opened their Social Security Statements (don’t know what age you have to be before they start showing up in the mail or what age any one individual starts to notice them enough to read before shredding) suggest it would be appropriate for a “few million” USD portfolio. Or maybe it just means I’ve forgotten what it is to be young like you 😉 Truth is, I let my instinctive response, to what I sensed was a ‘lottery ticket’ attitude toward money and investing in your post above, hold the reins of my disapproval long enough to provide the courage needed to dash out a mild reprimand. Obviously, my irritation was some combination of generational, contextual, experiential, philosophical, educational, …, -al x n differences. Of course, I realize after the initial wariness of all things “Ponzi” fades, your words are, by relating lessons learned across a significant span of any man’s years, confirming my pre-subscription negative crypto biases. Thing is, I’ve dabbled and gotten burned or engaged in sundry foolish financial/non-financial practices learning the hard way myself. For me, and I think I can count @oldbird in my camp on this one, all the cryptocoin stuff is “blah, blah, blah”, because it so quickly fails any plausible test of value other than The Greater Fool Theory of Investing. I could rant against most things cryptoish but I’ll leave that for @oldbird since he’s on a tear about it lately. Now it gets weird. One of the reasons I subscribed was to read someone smart cover, in small enough doses that it wouldn’t generate an immune response, various aspects of Cryptolandia that I might “see what they see.” I was hoping to buy Insight into the minds of others. A most desirable experience. Unfortunately, your post has dashed any chance of that occurring! There still is DeFi? The problem with that is I’ve still not gotten past the point where I can yet see why the usual cast of Bank(ster) characters aren’t the surest/safest/simplest way to capture DeFi wealth creation for retail investors, but, I’m formulating a strategy for that.

        Rest assured there are a few other things around here covered by heisenbergreport.com that interest me.

        Anyway, your line, “The best thing you can do for inflation is diversify across locales, tilt towards value and dividend shares, buy real assets / commodities and have some gold, as much as I hate gold.”, is basically ‘good’ old-fashioned financial ‘wisdom’. The sort of stuff Granny and Ma would say wagging a gnarled finger in my general direction (like I had a clue or something what they were talking about). Now I wouldn’t hear phraseology from them like, “I mean, there’s a reason why stagflationary periods are problematic: It’s hard to generate real returns”, but I can recall not dissimilar suggestions. After all they both lived and worked through periods somewhat resembling today. For example, after WW II there was the supply side constraints lasting years while the factories retooled from defense back to consumer durables, plus the exploding demand side of an expanding middle class flush with war time savings (nothing much to buy but staples during the war) looking to buy and kit out limited housing stock for new families … inflation resulted and a quick recession had to be initiated (just with “tools” other than interest rate manipulation is all) ~1949.

        Perhaps the recent post highlighting the opportunity costs various asset classes have imposed upon them by inflation which, incidentally, followed a curious reader’s question about where to ‘park’ his assets in these volatile markets, and now this echo of a recent stagflation post are all signaling a shifting editorial focus in “transitory” times? Guess I’ll have to read and learn.

        Again, all this is just a long winded way of saying you seem wise in ways before your years would suggest, especially as your self-portrait would have us believe you still get carded at liquor counters by curious female cashiers. Don’t let that go to your head though. Soon enough the bonnie lasses will only be carding you so their boyfriend (some Irish guy from Boston probably nicknamed “Whitey”) can clean out your home next time they spy you at the store 😉

  1. I am “tucked in” (for the long haul) to US equities and a few 1200sf condos in great resort locations that I rent out when not there (my cash on cash return is less than 3%- but I also have some depreciation I can deduct).
    I have my eye on one major purchase, but if US equities do not cooperate- I will wait.
    Living below my means for decades was “the key”. I still follow that golden rule.

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