10 November 2021

Inflation

DO NOT FEAR: “Yellen…said the high inflation that persisted through parts of the 1970s and 1980s occurred ‘because people thought that policy makers wouldn’t bring it to an end, and inflation expectations became embedded in the American psyche.  That isn’t happening now and the Federal Reserve wouldn’t permit that to happen.” (BBG)  That’s expressing a lot of faith in the institution of the Fed when we don’t even know who the Chairman will be next year.  In the previous period it was the towering Volcker, who crushed inflation expectations with sky-high funding rates of 20% in 1981.  The current FF rate is zero to 0.25%, and the Fed is promising to keep it there until unemployment reaches around 3.8% according to Clarida.  But the Fed won’t allow inflation expectations to become embedded.  Just keep telling yourself that Janet. Oh, and China’s factory gate inflation in October rose to 13.5% in October, fastest in 26 years.

From today’s Chartpoint.

Buyers of TIPS (inflation protected securities) are not wholly convinced:

$EPSN

Epsilon Energy is a relatively ungeared play on shale gas in the Permian Basin, and around. Details are here. DYOR but this is a teeny market cap stock that big investors will not even look at. Like many shale gas producers, it has been furiously redeeming debt in the last year or so. Will it start to borrow again, once prices go up sufficiently for the bankers’ offers become too tempting? Who knows, but maybe this time it really is different and the frackers will increase margins and not debt.

Cash flow has been weak, but last year Epsilon redeemed $9 MM of debt, so it should be good for a few years. Will gas prices continue to rise, when everyone drives a Tesla driven by wind power? Maybe, maybe not. We are in strange times.

Zemmour

Nordea thinks that Zemmour might be a thing. A French friend of mine poo-pooed the chances of Zemmour getting through to the final round of voting. Nordea is less sanguine. They discuss the markets’ likely reaction: a jump in French Treasury yields (OATs), reasoning by analogy with what happened when Trump won in 2016. My feeling is that Zemmour is very unlike Trump in many ways, but it’s worth a look. It’s a long shot, but some people might trade on the expectation of this happening, however remote, dragging down the bonds.

Fashion

Chamath is out of fashion. He’s like bell bottom trousers. You wonder why he was ever in fashion. This is what happens to a stock when it falls out of fashion:

Chamath is probably rich enough to be buying OTM calls on this right now, so beware the short squeeze.