Disclaimer: The views expressed represent Giancarlo Lamourtte’s opinions. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment.
Stocks: Ice Ice Baby
The markets are hanging on every word of the Fed and each monthly CPI (inflation) print. Past stimulus encouraged risk-taking as cash was flowing through the system. Now as the Fed tightens, we watch the mass exodus from risk assets. Marco investor, Alfonso Peccatiello put it simply:
Once you get off the sugar you start slimming down, hittin’ the weights, and by the time you know it you’re a 10/10. We’re in the slimming down stage, which involves ridding the market of speculators, who are more akin to gamblers than investors. A few data points are showing this.
The red line in the chart below shows the ratio between purchases of leveraged long ETFs (bet the market goes up) over short ETFs (bet the market goes down). Bullish sentiment has been crushed and bears are picking up the scraps:
Call options are contracts that give you the right to purchase a specific stock at a specified price, a prized tool of the departed speculator. The following chart shows trading activity from small options traders:
An Initial Public Offering (”IPO”) is when a company goes public and its stock begins trading openly on the market. Typically, IPOs are at their hottest when the market is peaking. When they plummet, it can indicate a market bottom:
This data depicts the intense mania of 2020 - 2021, and although these may be signs of relief, the S&P 500 is still ~15% higher than pre-COIVD valuations:
It’s possible the market still has more to give, especially as the Fed walks down the murky path of QT and inflation has yet to peak, giving them more ammunition to tighten the economy. Fortunately, supply chains are slowly creeping their way back which will eventually ease rising prices.
Supply Chains: Deal with the Devil
On Thursday Shanghai went back into lockdown, although, it’s expected to be brief as the populous undergoes COVID testing. Regardless, China has continued to loosen its restrictions allowing freight operations to ramp up to full capacity at regional factories and ports. U.S. congestion is also slowly improving, and there are signs things are getting back to normal. Three key products at the center of the supply chain crisis have seen price stabilization: semiconductors, shipping containers, and North American fertilizer.
The true star of the show is oil and gas, the key ingredients to our global infrastructure. There are glimmers of hope of easing price pressure with OPEC+ — an oil alliance led by Saudi Arabia — stating they will increase production by 648,000 barrels per day in July and August. President Biden has previously promised to make Saudi Arabia a “pariah” state but now plans to meet Prince MBS this summer to convince him to pump more Saudi oil. It’s a difficult situation when it seems every oil-rich country is governed by an authoritarian regime, but in politics, you must be tactful and keep your cards close to your chest. The state of the world is too unpredictable, and now we must crawl back to MBS and ask for help.
In the last post, I wrote a bit about the changing world order. Our new stance toward Saudi Arabia gives us a sneak peek of what the future looks like, and we see the change continuing to express itself through the oil and gas markets. India continues to shore up their energy supply by purchasing liquified natural gas (”LNG”) and stockpiling for the winter, Japan and Korea will likely follow suit. The UK also permitted new drilling for gas in the countryside south of London, and Europe has toppled Asia as the largest consumer of U.S. LNG, sending nearly 75% of U.S. supply to Europe. Everyone is scrambling to fit into this new world order, and while these are the correct moves to position oneself in the long-term, there is still short-term pain to be expected with the continued rising price of oil and gas.
Economy: Hold Up, Wait a Minute
Inflation continues to be top of mind regarding economic concerns. May’s inflation print on Friday was hotter than expected coming in at 8.6% year over year:
Mohamed El-Erian was one of the few mainstream economists who correctly forecasted inflation would be persistent. He expects the June CPI print to come in even higher. He may be right, as we can expect oil and gas prices to continue increasing through the end of the year. However, some trends are pointing us in the right direction for future relief.
Last year, retailers concerned over supply chain constraints went on a purchasing frenzy to stockpile goods. The result is too much stuff! Ironically, this may help put pressure on inflation as these retailers have to rid their shelves of excess inventory. Expect discounts on sweaters, winter boots, and pillows.
Used cars were a huge driving factor of inflation a few months ago when prices increased in January by 45% year over year. Now we’re finally seeing this trend stabilize:
The housing market continues to slow down as mortgage demand falls to its lowest level in 22 years and declined by 6% last week:
Housing inventory also went up 3.1% last week and came in at an increase of 13.9% from last year. Hang tight Gen Z, we may finally be able to afford shelter!
The Fed has a dual mandate to maintain price stability (inflation/deflation) and low unemployment, and the two have a loose relationship. Typically, in times of high inflation like today, companies’ budgets get tighter and employees are laid off. The most vulnerable are startups, and they’ve been severely impacted. The total layoff for tech startups in May was up 350% from the month prior. Even larger firms like Coinbase have gone as far as pulling job offers from incoming employees:
A lot has changed over the last two years. An urge to go back to normal distorts people’s expectations. Reverting to the norm takes time. Those who keep an ear to the streets will react quickly and change with the shifting tide.