Friday Thoughts
A Week for the Memories / 2022 Redux? / Where are the Opportunities?
Only a week ago, we were contemplating the dangers and benefits of AI to companies, the labour market and the economy. Today, those thoughts have vanished. It’s funny, as I’m awaiting final details to publish a new post, reviewing the latest arguments while trying to answer the question whether the physical world actually imposes hard constraints on how quickly this disruption can happen, and what the true economics of AI deployment look like once you strip away the venture-subsidised consumer pricing. Anyway, this will have to wait while we are dealing with the effects of a war in the Middle East.
I shall not bore you with the current context, which I am sure you are following from wherever you are. The fact, for now, however, is that we have moved beyond what I’m sure the US thought would be a retaliatory scenario. Equity markets behave as if the “Taco” is close by, while bond markets, especially the front ends, are getting sold hard.
Every day without a resolution, risk assets will be punished further. Who knows where we are a week from now, but I think if no off-ramp or more positive news emerges, risk assets will be down much more, while oil is likely to trade closer to 100.
Once again, I shall defer publishing the Chart Book for the weekend. There is simply too much volatility, and given what is transpiring, we have to ask ourselves broader questions around risk scenarios that we were not even imagining a few days ago. More on that behind the paywall below.
Mid-week, I put together some charts (see below) and looked at what has moved and how a more adverse risk scenario could look like. The ECB is now priced in for a decent probability of a hike later this year. As I showed in the chart on previous occasions, European policymakers have a rather flaky record when it comes to hiking in the most ridiculous circumstances.
Keep in mind that the ECB only hiked rates from -0.50% (!) back in 2022, at the onset of the Russian/Ukrainian war, when inflation was double what it is now.
Much of the sell-off is due to positioning being wiped out, as particularly sexy trades involved selling the fund hike optionality on the downside. It’s funny, while I was away last week, I received several broker messages selling me these structures. I thought it was odd as it was done in a rather aggressive way. I have the feeling that one or two larger funds wanted to take the other side and order their minion brokers to find willing buyers. I have a suspicion who the funds in question are.
Talking of options, check out my free educational piece, disentangling one of the hedge fund world’s most favourite option expressions, the famous one-by-two.
Behind the paywall, I dig deeper into the 2022 vs now comparison and test some possible scenarios versus what is now likely priced in.
During the week, we published the second instalment, analysing the appointment of Warsh as the new Fed chair. We examine the operational blueprint of a possible Warsh–Bessent–Trump triumvirate, the geopolitical currency axis forming around USD/JPY, and the structural pressures building beneath the surface of the global reserve system.
As for the buy-and-hold portfolio, the last few days also left a negative mark, despite some hedges in place. It is down “only” around 1% in March so far, while still close to up 9% YTD.
Let’s now dig deeper into the question of whether we are seeing a repeat of the fallout of the 2022 Russia/Ukraine crisis in financial markets before we get Macro D’s latest thought on the world from his perch.
The easy take is that we have seen this film before. A geopolitical shock. An energy price spike. An ECB caught flat-footed. Inflation is re-igniting just as markets thought the job was done.
The easy take is likely wrong — but it is wrong in ways that make the current situation more dangerous, not less.
Have a wonderful and peaceful weekend
