Timing & trends

Mixing politics and investing has a very bad reputation

Posted by Joe Weisenthal

on Tuesday, 2 March 2021 8:16

 

Mixing politics and investing has a very bad reputation. Go online and you’ll find dozens and dozens of articles about how when you participate in the market, you should leave your politics at the door, or ignore politics altogether.

But if instead of warning about the mixture of politics and investing, it would be better to warn about mixing partisanship and investing. In other words, not liking Obama would have been a terrible reason to stay out of the market. Same for Trump. Same for Biden. But as we’re already seeing, politics itself is incredibly important.

Here’s a chart of Signature Bank — heavily exposed to the fortunes of NYC — which has been looking for financial support out of Washington D.C. Under Trump that was unlikely to be forthcoming. After Biden won, the stock immediately exploded higher. It then took another big leg higher starting in early January right after Democrats won both of the Georgia runoff elections.

In general, there’s been a big change of stock market leadership since the election. Banks and energy companies have surged with the prospects of more stimulus. Growth companies have flagged. Interest rates have gathered upside steam, especially since the Georgia runoff cleared the way for more spending and faster growth. In a note, Goldman’s top commodity strategist Jeff Currie maintained his bullish call on the asset class, citing environmental policies and increased demand through income redistribution. (Households with lower incomes tend to spend more, therefore income redistribution is growth positive.)

So much of what’s thriving or slumping at any given time is a political choice, including whether we break out of this long, 40-year downtrend in interest rates. So ignore all that stuff about ignoring politics. It’s worth paying attention to. It’s partisanship and preferences that may be detrimental to good analysis.

 

What Are SPACs, the Trend Blowing Up the Finance World?

Posted by Edward Ongweso Jr

on Tuesday, 2 March 2021 8:06

 

Empty-shell companies have raised tens of billions of dollars this year so far, and everyone from Colin Kaepernick to SoftBank is getting in on it.

By now, you may have heard of a new bubble that has taken its place among the pantheon of bubbles we call the global economy: special purpose acquisition companies, also known as SPACs. If you haven’t, well, you should sit down for this: In 2020, SPACs raised $83 billion across the United States. In January 2021, they raised $26 billion.

But what, exactly, is an SPAC? Simply put, an SPAC is an empty shell of a company (often spun up by a larger conglomerate) with the sole purpose of acquiring or merging with an unlisted company to take it public via a shortcut. The result, ideally, is a big payday for everyone involved.

Because of this promise—which experts say often doesn’t pan out—the trend has taken off.

Read More

 

Rabobank: There Are Only Three Ways That This All Ends

Posted by Rabobank

on Tuesday, 2 March 2021 7:58

 

Our problem, in a Canute shell

As posited yesterday morning, Monday indeed proved that Friday’s market price-action had been about end-of-month short covering in bonds, rather than a sudden market recognition that major central banks are ahead of the curve in controlling longer bond yields. Monday was a new day, a new week, a new month, and a new way to show us that inflation is still something bonds are unhappy about.

As such, at time of writing, long bond yields are going up; and so are stocks; and so are commodities. Yet the first and the third trend on that short list risk hitting the second, as we have already seen graphically displayed of late.

To repeat the analogy from yesterday, central banks are going to have to do something other than just expect markets to retreat at their verbal command like King Canute, whom popular British legend says believed the tides would obey him as he sat on his throne on the seashore.

They will certainly need to do more than the ECB did yesterday in sending the signal, genuine or not, that it may be scaling back its QE bond purchases just as at least one governing council member jawboned that it may need to increase it. (Markets, unlike tides, can count.)

They will arguably need to act more like the RBA, which smashed bond bears yesterday with a doubling of its QE purchase at the longer end to AUD4bn. However, it is vitally important that central banks in general, and the RBA in particular, understand that the huge intra-day drop in 10-year bond yields seen in the Aussie market yesterday was the product of follow-through short-covering from the US on Friday (i.e., the tide decided that it wanted to go out) rather than a reflection of shock and awe at the figure of AUD4bn.

The tactical risk for markets is that the conservative RBA, which meets today, sits on its throne with its crown at a jaunty angle, strokes its beard, and proudly announces that it is in full control of the curve. If so it, and then others by extension, are going to get pretty wet, pretty fast.

Yet our good King Canute and the central banks differ: the latter *do* have the ability to control the curve if they really want to; they *can* peg yields wherever they want them to be. Indeed, one can expect the market to start calling for exactly that both in word –and they are, with calls for the Fed to shift to a new Operation Twist focusing QE at the long end of the curve– and in deed, through both higher yields and bear steepening, with every inflation anecdote and data release.

As has been underlined here for years, and many times recently, the only problem with central banks displaying such awesome powers at a time when input prices are soaring is that there is no going back to normal market tides afterwards: no ripples; no waves; and certainly no surfing. The sea will be artificially becalmed – but lots of important things will still drown.

Tactically, let’s see what the Fed’s Brainard and Daly have to say today as they get their latest chance to dip their toes in the water on this key topic. Strategically, however, and given King Canute is NOT applying his powers to the labor market *directly*, where the waters still remain full of sharks and dangerous undercurrents (and no USD15 minimum wage), one has to recognize that there are only three ways that this all ends up: the tide is either coming in or going out, so to speak. Either:

  • Central banks refuse to step in; longer yields rise sharply, and probably overshoot; stocks are dragged down; the US Dollar is pushed up; commodities are dragged down; markets start to panic; governments start to panic; corporations start to panic; and everyone ends up in rags crammed onto the tiny desert island of the short-end of the yield curve under a solitary coconut tree; or
  • Central banks step in; longer yields are crushed, as we saw Monday in Australia; stocks rally further; the US Dollar is pushed down (assuming the Fed is doing this); commodities are pushed up; markets are on fire; governments are free to spend – if they can bothered, which still looks unlikely; corporations are free to build lots of ‘useful’ projects like The World islands in Dubai; and those long assets get to sit on man-made islands drinking cocktails under coconut trees, while those long labour get to swim with the sharks in wave-free seas to serve the drinks to them; or
  • Central banks and governments step in; and they focus on the labour market *directly*, which will have to involve building a whole series of dykes to keep liquidity in and other fishers out, in a proletarian version of The World islands in Dubai where everyone has rolled up trousers and wears a white hankie on their head; and only the rich end up on a desert island, one way or another.

So which of the above is really nautical, and which is nice? That’s our problem in a Canute shell.

 

Housing market boom prompts mea culpa from CMHC head

Posted by Ari Altstedter

on Monday, 1 March 2021 16:49

 

CMHC released forecasts last May saying Canadian home values could plunge between 9 and 18 per cent

The head of Canada’s national housing agency defended his organization’s prediction that the COVID-19 pandemic would cause a sharp decline in the residential real-estate market after it unexpectedly boomed instead.

“I’ve been taken to task for pessimistic housing forecasts last spring,” Evan Siddall, president and chief executive officer of Canada Mortgage and Housing Corp., said Monday in a thread of posts on Twitter. “At the time, I felt responsible to share what my colleagues were predicting. Times were uncertain and I felt that a warning about house prices was responsible. Indeed, I don’t recall anyone predicting accurately what actually transpired.”

CMHC released forecasts last May saying fallout from the pandemic could cause Canadian home values to plunge between 9 per cent and 18 per cent. The market instead powered to a record year for sales and prices.

In his posts, Siddall said the earlier forecasts didn’t anticipate how pandemic-related job losses would be concentrated among low-wage workers more likely to rent their homes than buy. He also said they’d failed to predict the sudden surge in demand for larger properties from more affluent people forced to work from home, and able to avail themselves of record low mortgage rates.

Siddall said policy makers remained concerned about what could happen if some of these trends reverse, particularly when combined with elevated levels of household debt among Canadians and continued economic adjustments to a post-pandemic world.

“We never pretended to have a crystal ball,” Siddall said. “Nor are we all-knowing on housing. We meant to contribute to a discourse, even though it was hard to be precise about future. In hindsight, we could have made that clearer.”

Investors are suddenly obsessed with ‘supercycles’

Posted by Mark Burton, Thomas Biesheuvel, Alex Longley and Bloomberg

on Monday, 1 March 2021 9:31

 

A surge in commodity prices has Wall Street banks gearing up for the arrival of what may be a new—an extended period during which demand drives prices well above their long-run trend. A major impetus is the massive stimulus spending by governments as they juice up their economies following pandemic lockdowns. The evidence includes surging copper and agricultural prices and oil back at pre-COVID-19 levels. One theory is that this could be just the start of a yearslong rally in appetite for raw materials across the board, but the reality is more complicated.

1. What is a supercycle?

A sustained spell of abnormally strong demand growth that producers struggle to match, sparking a rally in prices that can last years or in some cases a decade or more. For some analysts, the current rally is rekindling memories of the supercycle seen during China’s rise to economic heavyweight status beginning in the early 2000s. Commodities have experienced three other comparable cycles since the start of the 20th century. U.S. industrialization sparked the first in the early 1900s, global rearmament fueled another in the 1930s and the reindustrialization and reconstruction of Europe and Japan following the Second World War drove a third during the 1950s and 1960s.

2. What did the last one look like?

From around 2002, China entered a phase of roaring economic growth, fueled by a rollout of modern infrastructure and cities on an unprecedented scale. Suppliers struggled to fulfill surging demand for natural resources. In commodities, there’s often a time lag to get the product where it’s wanted since adding capacity, such as opening a new mine, doesn’t happen overnight. For more than a decade, materials including iron ore were in tight supply. Copper, priced below $2,000 a ton for much of the 1990s, broke $10,000 and oil jumped from $20 a barrel to $140.

3. Who says this is another supercycle?

Among the bulls are analysts at JPMorgan Chase & Co. and Goldman Sachs Group Inc. The commodities rally will be a story of a “roaring 20s” post-pandemic economic recovery as well as ultra-loose monetary and fiscal policies, according to JPMorgan. Commodities may also jump as an unintended consequence of the fight against climate change, which threatens to constrain oil supplies while boosting demand for metals needed to build renewable energy infrastructure and manufacture batteries and electric vehicles, it said. Those include cobalt and lithium. Furthermore, commodities are typically viewed as a hedge against inflation, which has become more of a concern among investors.Play Video

4. Why might this not be one?

Longer-term trends point to a cooling down for some materials. For example, the energy transition that heralds a bright new age for green metals such as copper would be built on the decline of oil. Even producers of iron ore, the biggest market of mined commodities, expect prices to weaken over time as Chinese demand starts to decline and new supply comes online. It’s an even bleaker outlook for coal, with producers looking to exit the market altogether as the world switches away from the heavy-polluting fuel. Iron ore, coal and oil were the chief beneficiaries of China’s industrial expansion. Those markets dwarf copper in scale.

5. What’s been happening with oil?

Prices collapsed in 2020, even turning negative at one point, but have recovered as demand rebounded more strongly than many had expected. Early in 2021, the Organization of the Petroleum Exporting Countries and its allies were holding back crude equivalent to about 10% of current global supply. Market fundamentals have shifted, especially in the U.S. with the emergence of shale oil. Haunting traditional producers is the prospect that a prolonged period of high prices would trigger a new flood of supply beyond OPEC’s control. Even so, some oil bulls aren’t ruling out the eventual return of prices above $100 a barrel.

6. Which other commodities are rising?

Copper was on a tear in early 2021 thanks to rapidly tightening physical markets as governments plow cash into electric-vehicle infrastructure and renewables. Goldman Sachs, BlackRock Inc., Citigroup Inc. and Bank of America Corp. saw the metal moving toward all-time highs. While agricultural commodities have their own particular dynamics, soybeans and corn have rallied to multiyear highs, driven by relentless buying from China as it rebuilds its hog herd following a devastating pig disease. Agricultural prices are more dependent on global economic and population growth, rather than the decarbonization trend underpinning excitement in metal