THEME: Valentine’s Day — Russian Bear Hugs, Box of Chocolates, Less Is More
February 14, 2022
Michael’s CIO (Check It Out) Report on the weeks just past — events, sarcasm, and global macro reflections
THEME: Valentine’s Day — Inflation, Russian bear hugs, less is more
Hope all is well. I took a few weeks off from writing while exploring and working remotely in beautiful Portugal (where the government does not tax Bitcoin or crypto-currency gains).
Below is my CIO (Check It Out) Report on the weeks just past — events, sarcasm, and global macro reflections.
- StayFlation: Supply chain bottlenecks and labor shortages continue to elevate inflation levels. In simple terms, inflation is higher prices; it leads to an erosion of consumer purchasing power and also devalues debt and cash. It is beneficial to people and companies that owe money — As previously stated, inflation is here to stay at higher levels than we saw over the past decade; and unless the Fed triggers a recession (which is possible) higher rates won’t do much to stem inflation
- Why inflation? The pandemic was inflationary (unlike every other crises in the last 4 decades where the economy slowed and inflation sank). Demand increased as supplies decreased. Simultaneously, the Fed (in a poorly timed move) increased its inflation target from just 2% to an average of 2% over time — meaning that the Fed would be okay with inflation temporarily going significantly over 2% — thus allowing (or even encouraging) overshoots😳which is where we are now!
- Relationship change: How will investors and financial markets respond as the Fed reduces easing and reduces its balance sheet (quantitative tightening (QT)), global growth expectations decline, inflation solidifies, and fiscal support fades? — Expect more large day-to-day swings in stock and bond prices
- Rates: Average 30-year home🏡mortgage rates are above 4% and 10-year Treasury yields are above 2%
- Super Bowl: Everyone loves a good game. Crypto, DeFi, NFTs and 5G seem to be the clear winners of the advertising blitz. Meta gets my vote for worst commercial🤦♂️
- Bear hug: Russia still “courts” Ukraine — call it a bear hug. Merely by lining up 100,000 troops along the borders and deploying six missile laden submarines and other naval craft to the Black Sea, NATO ships have disappeared, diplomats have left, trade has decreased, and Ukraine is ringfenced. From speaking with friends abroad, the invasion narrative seems to be more of a Biden call than a European or Ukrainian refrain; we shall see. Nonetheless, a stranglehold on Ukrainian trade and commercial shipping would be economically disastrous☹. Putin is in the driver’s seat to negotiate what he wants; possibly security guarantees along with technological and industrial cooperation with the West — Flipping Russia from the “brink” of war would also be seen as a political victory for Biden😏
- Less is more: The SEC plans to reduce stock trade settlement times by 2024 from two days to just one to address trade settlement risk and net capital concerns raised by the “meme” stock trading bonanza last year — the last time Wall Street had standard one day stock settlement was 1933 — the eventual goal is probably to shorten settlement to same day
- We’ve come SOFaR: As of January 1, U.S. regulated banks are prohibited from using the London Inter-Bank Overnight Rate (LIBOR) as a reference rate in loan contracts; the Secured Overnight Financing Rate (SOFR) is the implied replacement as the short-term or floating-rate benchmark rate for loans and credit lines
- Road rAIge: 50 companies have a permit to test self-driving cars in California with a driver behind the wheel, and 7 are permitted for driverless tests — AI for artificial intelligence, EV for empty vehicle😉
- Up and to the right: Below is a graph of the speed and magnitude of prior Fed tightening (rate rise) cycles since 1988 [source: Michael McDonough]
Happy Valentine’s Day and best wishes for the week ahead😃,
Michael
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Michael Ashley Schulman, CFA
Partner / Chief Investment Officer
“We deliver bespoke investment solutions, innovations, and unique perspectives to you and your family.”
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