Crumbs

Supply and demand for labour is a difficult thing to measure. Unemployment and workforce participation can move in the same direction. There is usually between a third and a half of the workforce of most developed economies which are not in paid employment, which suggests a terrible lack of demand. On the other hand employers constantly complain about the difficulties of recruiting people, especially people to do badly paid jobs like fruit picking. The labour market may be more difficult to quantify than the market for crude oil or copper, but it is probably more important.

Recycling bad news

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More junk

From Grant’s Almost Daily newsletter:

The beat goes on in 2021. Following the record $433 billion of U.S. junk bond issuance last year (up a cool 57% from the prior annum), it’s been a gangbuster start to the year for high-yield, as domestic new supply footed to $37.3 billion in February according to S&P’s LCD unit. That’s within a hair of the all-time February issuance record of $37.5 billion, set in 2012 (when the 10-year note yielded 1.97% and spreads on the ICE BAML High Yield Index stood at 598 basis points, compared to 1.4% and 357 basis points, respectively, this year). In tandem with a monster $51.8 billion January, the two-month issuance total topped last year’s equivalent, pre-pandemic period by 31%.

As companies line up to finance themselves, worrying signs accumulate. The yield-to-worst on the Bloomberg Barclays High Yield Index reached 4.45% yesterday, up from a record low 3.89% three weeks ago. That abrupt shift is spurring some investors to head for the hills. Bloomberg’s Lisa Abramowicz relays that the iShares iBoxx $ High Yield Corporate Bond ETF (HYG on the NYSE Arca), the largest such junk bond fund, suffered a hefty $2 billion outflow over the past week, leaving assets below $21 billion for the first time since last May.

It’s just another drug the US Treasury is on …

https://thesoundingline.com/just-a-reminder-the-fed-needs-to-double-its-qe-program/

Previously, QE was all about shuffling T Bond holdings between commercial banks and the Fed. Unsurprisingly, although because of the technical definition of money, this increased the money supply, it didn’t make much difference to inflation. Now we have a situation where the US Federal Govt. is running large deficits, which need to be financed by someone, and neither the US private investor nor Japan, nor China, nor Europe is willing to step up to the plate. The result will be a huge increase in Fed assets, again, getting on for an additional $3 trillion. The public welcomes this spending with open arms. It is hard to see it being reversed at any time any Democrat federal level politician needs to get elected, which is basically never.

US Healthcare is an object lesson to the world on how not to keep citizens healthy at an affordable price

This story reveals that an extremely marginal differential diagnosis of Covid-19 was the only thing between a guy being bankrupted and having his treatment free. Only the providers of healthcare can possibly benefit from such a dysfunctional system. But they are extremely powerful, politically. And that’s all that matters.

Thoughts

John Authers, whom I read much less often now he’s defected to Bloomberg, wrote a fairly long piece about bond yields, inflation, etc. I seem to recall that it made all the standard points. One thing it did discuss was the 10Y Treasury yield going above the SPX dividend yield. A lot of commentators attributed the drop in long duration stocks (NDX) to the higher discount rate on dividends/cashflows this implied. I just find it hard to believe that this could even be estimated, let alone have such a consensus that it moved the market. Authers made the point that this means that funding an SPX position with 10Y Treasuries now has a positive carrying cost. I’m pretty sure that the marginal buyer is a hedge fund and so is leveraged, so this makes sense. Whether 10Y is the right metric is another matter. LIBOR is still a lot lower. But the insight that leverage is a big factor, and that this is the mechanism through which risk free rates impact equity prices is a very sound one, I think. It certainly implies why a dealer would be more comfortable holding an XOM position, with a dividend yield of 8% vs a TSLA one with a yield (dividend, free cashflow, EBITDA, earnings: you name it) of zero.

Dividend yields are only one side of the story. Many companies choose to spend more money on share buybacks, to offset the dilution created by equity-based compensation to the CEO and his board, but these are more variable, and so maybe it’s legitimate to give them less weight than dividend yield in estimating carry costs.

One effect that we will soon start to see in official stats is the huge drop in some prices dropping out of the computation of year-on-year changes. This is probably going to give headline inflation rates which are scary. In theory, nothing in this should surprise markets, but if labour unions start to fight for wage increases in the same order of magnitude, something which is a statistical artifact may leak into a real economic event.

Energy has done extremely well over the last six months, vastly outperforming tech, but over the last five years it has done very badly. It’s not clear if the fact that ESG-sensitive fund managers moving savings away from fossil fuels will result in a drop of returns for investors. Arguably, once the change of investing strategy is in the price, the returns on oil company shares will have to be higher to draw funds from the now-depleted pool of savings. One way to do this might be via going long the Russian Ruble. Oil stocks can be pumped and dumped, but it’s difficult to do this with a currency, and the Russian central bank is widely acknowledged to be very well run.

Wrap

Trump had trade deals with China. Biden has passing of the stimulus bill. Today was Biden actually signing a bit of paper. How that changes anything in the real economy is beyond me, but that’s what makes a market. Several items of positive international news.

• US equities strongly up,
• US govt. bond yields fairly flat,
• non-precious metal commodities up (not nat. gas),
• DXY down 0.5%, but still 91.4.

While passive fund flows are positive, large cap equities cannot help but go up, because of the passive investment effect.