Inflation: the bear case
Although everyone and his pet monkey is writing about how inflation is around the corner, we haven’t seen it yet, and most of them have been saying that for years anyway. This article, by Michael Strobaek, global chief investment officer at Credit Suisse, argues that until governments get what he calls “fiscal dominance,” we will not see inflation. The theory is that central banks are cautious and that unless the government is forcing them to monetize treasury financing, they will not let inflation get out of hand. I certainly think that money will have to get into the hands of consumers for countries to experience consumer price inflation (as opposed to into the hands of bankers and industrialists, to experience financial asset price inflation). This is best done via tax cuts or handouts (maybe Universal Basic Income), which can be done only by governments (or central bankers willing to ignore their mandates). I think that inflation may tick up, especially as the Fed seems to set on letting inflation run hot for a bit, after seeing it run cold for decades, but I am far from sure we’ll see the sort of runaway inflation that Peter Schiff talks about. The market seems to agree, as precious metals are marooned at current price levels, and certainly not pricing in roaring inflation.
I don’t know what’s going to happen to inflation. If I did I’d be too rich to bother typing this post. However, the market is not quite aligned in its view with Mr Strobaek. The ten-year breakeven is now 1.6%, and the five-year, five-year forward expectation rate is similar and both are risking quite strongly.
Morning Notes
Definitely risk off. VIX down to 24 (which means that realized inflation might be in the low teens). The usual pattern of other price moves: equities up, metals down, DX up (pausing a bit this morning), sovereign bonds down. Gilts look weak and heading lower.
It’s no use shorting $BA. Boeing is going to be propped up by the taxpayer no matter how much its market has evaporated.
It might be worth going long IAG. They’re heading for a position of total market dominance in domestic flights in Spain.
Active is Dead
Long Ponzi, Short Value
Kuppy nails it again. Basically, as a fund manager, you can’t afford not to be long fraud. The odd one (Wirecard, Luckin Coffee, NMC Health) get caught out, but loads of frauds and near frauds, at least to the extent of making undeliverable promises to shareholders, live on. As Kuppy says,
In the twenty years I’ve been reading investor letters, I have never once seen someone boast that they’ve invested in a terrible business, with corrupt and incompetent management. Oddly, those tend to be the sorts of stocks that have the best upside as minor improvements can dramatically impact the future value. I’m not arguing that you should go look for D companies that could become Cs (though I do my fair share of that). Rather, I would argue strongly that the valuation gap between A and B companies has never been wider during my career. B’s are still genuinely good businesses—just maybe not software good.
And, of course, the most A of A companies is $AAPL. Faultless in its execution, but maybe, just maybe, it’s excellence could now finally be fully in the price.
Closing Bell
Metals hit the headlines tonight. Silver, in particular, was down 15%, and gold not far behind. Bonds got a few headlines: 3-year Treasury auction was oversubscribed at (I think) 0.18%. Tesla was hit by a counter-claim from a former employee called Martin Tripp. Reddit sub on Tesla. The dollar was pretty flat. Australia issued a 100-year bond at an Kamala Harris chosen as VP to Biden. Russia announces it has a vaccine for Covid-19. California says that Uber must treat its drivers as employees.
Why The Gold & Bitcoin Surge Is Just Starting: “Real Yields Will Be Negative Until The Financial System Collapses”. Bad timing, but it might just pan out.
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