Saturday 25, June 2022

Nobody knows nuffink

“Nobody knows anything” is a quote from William Goldman, “Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one.” The quote is about the motion picture industry, but it applies equally to markets.

I know I sound like Yogi Berra, but the the thing that fewest people know about is prices. Everyone knows that observed market (‘clearing’) prices are the result of an interplay between supply (which generally is higher the higher the price), and demand (which behaves in the opposite fashion). A change in price therefore results from a change in demand, or supply, or possibly both. Supply, for any good that is manufactured, comes with lags, long and variable ones. If demand really is being destroyed, oil could get caught in the crossfire. It responds very rapidly to demand collapse, because once it’s flowing, it’s hard to stop it or store it. Although I have lost the reference, I read someone predicting $30 a barrel. It seems low, but don’t forget that in 2020 it went to minus $30, in response to a demand collapse.

Rudy’s Revelations

Rudy Havenstein has been banished from Twitter (and all his earlier Tweets expunged). He is constantly critical of insiders, like Larry Summers. He has now moved to Substack, this is his latest post. Personally, I feel that depending on Substack being unwilling to censor content seems a trifle naive. Sites like Substack, Tumblr, AngelFire, Tripod, and blogspot come and go. Not holding content in some safe place and not relying on the kindness of commercial ‘free’ web services seems risky, but it clearly is convenient, and gets a bigger reach than self-hosting.

To understand why Havenstein is so opposed to the establishment, read this.

Rudy’s post argues that professional economists always get predictions wrong, especially about inflation. Maybe, also that they misunderstand the distributional consequences of their policies, and are especially blind to the upwards redistribution of wealth and income which comes from over-loose monetary policy. Although it often feels like Rudy is flogging a dead horse, he makes an important point, about which politicians, and the general public seem willfully blind.

Personally, I feel that his contempt for economists is misplaced. Most probably fully understand the implications of policy, but either are two busy earning a living or are unwilling to countermand the policies of legitimately elected politicians, however much they disagree with them.

Elmer Spud and Elon

For years the $TESLAQ crowd have been saying that Elon Musk is a shameless huckster (and much, much worse). But their voice has been joined by the armies of shills paid for by Telsa. Now the mainstream has woken up to the grifting. Matt Levine has written highly critical pieces. One of the long-term Tesla bears is Elmer Spud. He writes about crypto (negatively) and SPACs, and some micro-caps with potential. He’s a good read, and he’s got a new piece out about how capitalism is all about co-opting government. As he says, we should not be surprised about this. Getting government to back your business is just about the best possible business strategy there is. It’s a great deal better than going head-to-head with your competitors to design a better, cheaper product.

That was the week that was

I’ve been on holiday, so I haven’t really been tracking the markets. Looking back a bit, I can dimly make out a few trends which might persist for more than twenty-four hours:

• Japan seems in trouble. After decades of unlimited QE to keep deflation at bay, the yen is under pressure and the yield-curve control that has kept the 10Y JGB yield pinned to 0.2% is possibly in trouble. In particular, the 10Y yield is pushed down relative to the trend line for the whole curve. If BoJ loses credibility, it won’t be long before QE for the other central banks starts to crumble. Maybe.

• The Eurozone seems to be in trouble. OK, just like the BoE, it always seems like the ECB is living on borrowed time, but it just keeps rolling along. The whole business of keeping the spreads between yields on Bunds and BTPs creates great stresses, not just in banking terms, but also in political terms. Nobody is very happy with the monetary union (OK, apart from the 0.1%), and with the strains of galloping inflation triggered by Russian energy price hikes, this might just be the time the wheels come off. Or not. Ultimately, it seems to me that the Euro will sag against the USD. It’s the freshest food from the dumpster, so the USD might strengthen, in spite of massive monetary expansion.

• A lot of commodity prices are weakening: copper is typical. The NOK is weakening, even though Norway has sanctions-free oil. Consumer sentiment surveys are terrible. Oil stocks are down. These all signal demand destruction, which will help to put off rate increases, and maybe restart QE. It seems amazing that signs of an incipient recession is interpreted as positive for equities, but that’s where we are in this mad, mad financialized world.

• The housing market has cracked in the USA. Thirty-year fixed rates have gone up 200bp, which is enough to kill the market, along with large jumps in the price of building materials. From a personal point of view, I’m more interested in the UK market. Housing is not internationally traded, and I feel that the markets are fairly well insulated from one another, but there must be some possibility that UK, and European, housing markets crack too.

• Eurodollar and Fed Funds futures are pricing in rate cutting next year.