Monday 14, March 2022

Oil and Ukraine

China has been hit by many Omicron outbreaks. It’s lockdown strategy is failing, but the market is assuming that it will shut down its economy again, refusing to consider changing tactics. The war grinds on. Evidence seems to be mounting that the Russians have bitten off more than they can chew. The morale and equipment levels of the Russian armed forces seems to be lower than expected, with widespread problems of troop retention and ability. Tactics seem to have changed, with attempts being made to bed in and bomb and besiege Kyiv into a surrender. Although Zelenskyy is a puppet of a sort, he’s risen in his standing to the point when he could become a genuinely popular leader. Putin seems more and more bunkered, although the picture we are getting now is heavily distorted by the need to support the forces opposed to Russia.

In terms of the market, the slowdown in China is supposedly responsible for another 6% fall in the price of oil. This will provide some relief from stories about runaway inflation, which is now a headline topic in almost the whole planet.

Equity markets fell, alongside bond markets. The narrative is that nominal rates are rising, in a bid to cure inflation. This doesn’t make a lot of sense to me, because real rates are still a long way below where they were a year ago. Oil and many other commodities slumped: coal ($BTU, down 13.5%). Even precious metals are falling, indicating that the Fed’s jawboning and the resurgency of Covid in China will be sufficient to head off inflation.

The NASDAQ 100 is now in bear market territory: down 20% from its high. The consensus seems to be that stocks are going down and I guess it makes sense to go along with it. The Russell 2000 still has a P/E of 60, which gives it a long way to fall, in my view. The stated P/E is itself misleading, because in computing the index’s P/E losses are simply ignored. This, I am assured is in the design of the index, but presumably from a time when it was unusual for stocks in major indices to make losses year after year. The big cloud computing names, lockdown winners and meme stocks must be overdue a correction. Of course, many stocks are down more than 50%, but the big stocks, particularly the FAANG have yet to suffer big falls. Amazon doing a stock split might be the psychological catalyst that tips the index down, rather than the stock up, as presumably hoped for by Jeff Bezos.

Chinese equities are finally coming down to earth. $MCHI is down a lot. $CHIR (Chinese real estate) is down a huge amount. It will be very interesting to find out to what extent China bails out Russia. If it does so, it will face a lost of hostility and potential loss of trade with the west. If it does not do so, Russia will be severely destabilized. If it does do so, it will face a lot of hostility and possible sanctions itself from the West. For my money, China has been a Ponzi scheme for several decades, but nobody every made money by betting against a Ponzi until it enters its death throes.

The big puzzle I have for today is how energy prices are reverting right back to trend, as if inflation has evaporated. I guess the long-dated Treasury market knew that all along.