16 Dec 2021

“It ain’t easy” when it comes to making risk adjusted returns, but who cares about risks when you have created a system where you know big daddy has your back.

I got shaken from my short on the SP500 which I had mentioned was a glory trade for me as I had a strong feeling that we would be retesting the ATH before long. The seasonals are incredibly strong at the moment and for me the selloff that started on the 22 Nov has just not seen the follow through you would expect. For now I am anticipating a new high but I have no strong conviction whether its just a peak above or we actually get some proper lift.

Of course the news is all about the Fed and their hawkish statements about 3 interest rate hikes next year and the accelerated tapering of their bond purchase. In short the news was worse than expected but that hasn’t stopped the eMini futures rallying 1.6% and the Nasdaq futures climbing more than 2%.

As I discussed with my brother in law this morning we are witnessing the classic affects of moral hazard. The fact that the Fed got its inflation forecasts wrong and is now trying to fix the mess it created feeds to the misplaced trust all and sundry have placed in the ability of the Fed to ensure assets only go up.

Christine Lagarde another lawyer central banker, the head of the ECB says she see’s inflation as a passing “hump” and a 2022 rate rise “very unlikely”. She makes dovish look whiter than her hair. Then again maybe she knows something that we are not seeing in the numbers, just look at how Gold and Silver and Bitcoin for that matter are trading so meekly when all the rage is “inflation”.

Irrespective of where the FOMC or the Market is pricing in Future Fed Funds rates, it is clear we will be in a more normal interest rate environment in 2023,24,25….. can you picture a world with the Fed Funds rate at 1.5%. I am always too quick to make long term projections, frankly we will just have to wait and see how the economy behaves as we see interest rate climb. I think the safest thing one can say is that equity markets will deliver below average 10yr returns from here due to the current lofty valuations and the debt overhang that will need to be serviced in a higher interest rate environment.

I have been a persistent voice on the worry of what a cooling Chinese economy will have on the west and our respective economies. The talk is China is engineering a 5% GDP rate for 2022. Since when can big government engineer anything close to something so precise. I guess the answer is easy when you control the media you can say the number is whatever you want it to be. In the meantime property in China is not looking too hot.

Finally Omicron, I have been so oblivious to Covid-19 the last few weeks and got a sudden jolt of reality on Tuesday when I went for a covid test because of a sore throat. I thankfully failed yet another test but I started listening a bit to the experts on the BBC and the CEO of Moderna and I once again wonder if the market and society at large has been a little too cavalier with the potentially devastating prospects. I think at this stage one can only expect surprises to the downside for the markets as we are not pricing in any risk of note.

I have to add just one more final comment that I had to chuckle the ECB headquarters is in Germany and Lagarde is maintaining inflation is not a concern and at the same time German minimum wage for government officials was raised this week due to union pressure by 25% – gulp.

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