2023-01-27

Unemployment and inflation

I wanted to write about the Phillips Curve, and put together this chart to illustrate it. The post will have to wait, but I’ll leave the chart. It might not display properly: I don’t normally embed scripts into posts.

Weekly wrap

USD up against almost everything, except AUD.

Equities

Equities were up on the week, with the exception of a few defensive sectors, especially healthcare. The standout performance was $TSLA, up 33% on the week, but after a long downtrend. Semiconductors were up, except $INTC, which everyone seems to have lost faith in.

IT generally was up, except $ACN (Accenture, which I don’t even think belongs in the sector) and $IBM (which nobody has liked for a couple of decades).

Energy stocks were not very lively, even $CVX showed a small loss on the week, in spite of good results.

Bond and Fixed Interest

Yields were up across the board, almost, reversing recent performance. Supposedly, this means that the chances of recession(s) are decreasing, which is consistent with equity results, but I feel this may be a false dawn. The UK was an outlier, with yields down, in the slightly odd club of developed countries, which include Romania and Poland in Europe and a few more outside of Europe, including Zambia, whose yield has come down by 34bp, but only to 30.2%. Let’s hope that UK gilt yields are not heading to those elevated heights.

FX Markets

Generally, the dollar continues to sag. Apart from a few basket-case countries (such as Pakistan), the milkshake has curdled badly. This is all of a piece with equities and bonds: the narrative is that the Fed will start to ‘normalize.’ The curve is still inverted, and increasingly so, both 2/10s and over the first two years of the eurodollar markets.

Commodities

Generally, equity and precious metal commodities had a soggy week, in spite of the weakening dollar. Energy wobbled around $80/bbl (WTI futures), really not much higher than it was towards the end of 2018. The pundits keep predicting that the ‘reflation’/’reopening’ trade will turbocharge oil, but if markets are forward looking, and discount all available information, then something is amiss. Maybe the fabled ‘soft landing’ will turn out to be bone-crushing.

Something is amiss with the price of ‘EV minerals too.’ As this post points out, the quantity of ore, and overburden, required to be dug to make a modern EV is extraordinary. The pro-EV crowd always argue that ‘over time technologies get better and more efficient.’ Well, this is true, but in a century and a half of oil extraction, the cost of a barrel hasn’t dropped dramatically. It’s one thing for microprocessors to get better, it’s quite another for physical commodities to suddenly fall in price. No technological breakthrough is going to revolutionize the extraction of cobalt, nickel, graphite, lithium and copper. It’s going to be a long, hard grind (in a giant ball mill).

I want to get away from whether this mining is a good thing or a bad thing. I want to know if it’s going to happen or not. At the moment it looks like a standoff between the irresistible force of political consensus against the immovable object of unaffordable economics. I am a betting man, but I don’t think I have any edge in forecasting the winner of this epic struggle. The economist in me wants to predict that the hopes of a green revolution will be dashed on the rocks of bad economics, but governments increasingly specialize in passing laws which make us poorer. It’s not clear that this case will be any different.