Introduction: Given the market volatility, we will start posting, on an ad hoc basis, a very short commentary whose purpose would be twofold: First, to cancel out the loud noises in the marketplace – which can only be confusing – by focusing on the most important events; and second, by reminding ourselves through important quotes that we don’t live by bread alone.
Here is then our first in the Series titled: Canceling the Noise; Not by Bread Alone.
The markets YTD (as of mid-afternoon today) are down 8.15% (S&P 500) and 13% (Nasdaq), due to inflationary pressures, rising rates, and geopolitical tensions. On September 1st, 2021, the 2-year Treasury yielded 0.20%. Today, it stands at 1.58%, while on Thursday (Feb. 10) it reached 1.60%. The exponential increase in the short-end of the Treasuries and the flattening of the yield curve (10-year Treasury Note vs. the 2-year Treasury) has been shaking the markets more than the forthcoming 25 or 50 bps Fed-initiated rate increase next month. This exponential increase is a reflection of the price pressures and of a failed monetary policy.
In addition, the geopolitical/Ukraine-related developments may be foretelling of an evolving balance of power play involving two arenas (Eurocentric and Pacific) simultaneously.
The combination of these two developments signifies a fundamental element of the Day After: Market Alpha can be found in the crossroads between geopolitics and geoeconomics.
In our portfolios, we hold a significant amount of cash, and we have also initiated trailing stops. Our view of the current circumstances and our assessment of the outlook is as follows:
We do not believe that Putin will invade Ukraine. If he does, our interpretation is that he has cut a deal with China for a broader war where China invades also Taiwan in order to draw the West into two fronts simultaneously and to change the global balance of power. If that turns out to be the case, then we are facing major trouble, but our initial assessment is that both Russia and China will pay a very heavy price which will take them decades to recover from.
The scenario that we believe will unfold in the near future is that inflation pressures will subside, real rates (after subtracting inflation) will stay negative and close to zero, and the Ukrainian crisis will blow off. So, from that perspective, the markets should be uplifted in the second quarter.
Quote of the Week:
“For every good that you wish to preserve, you will have to sacrifice your comfort and your ease. For there is nothing for nothing any longer.”
-Walter Lippmann, speaking in 1940 to the Harvard class of 1910’s 30th reunion to brace them for the forthcoming storm.
Canceling the Noise; Not by Bread Alone
Author : John E. Charalambakis
Date : February 14, 2022
Introduction: Given the market volatility, we will start posting, on an ad hoc basis, a very short commentary whose purpose would be twofold: First, to cancel out the loud noises in the marketplace – which can only be confusing – by focusing on the most important events; and second, by reminding ourselves through important quotes that we don’t live by bread alone.
Here is then our first in the Series titled: Canceling the Noise; Not by Bread Alone.
The markets YTD (as of mid-afternoon today) are down 8.15% (S&P 500) and 13% (Nasdaq), due to inflationary pressures, rising rates, and geopolitical tensions. On September 1st, 2021, the 2-year Treasury yielded 0.20%. Today, it stands at 1.58%, while on Thursday (Feb. 10) it reached 1.60%. The exponential increase in the short-end of the Treasuries and the flattening of the yield curve (10-year Treasury Note vs. the 2-year Treasury) has been shaking the markets more than the forthcoming 25 or 50 bps Fed-initiated rate increase next month. This exponential increase is a reflection of the price pressures and of a failed monetary policy.
In addition, the geopolitical/Ukraine-related developments may be foretelling of an evolving balance of power play involving two arenas (Eurocentric and Pacific) simultaneously.
The combination of these two developments signifies a fundamental element of the Day After: Market Alpha can be found in the crossroads between geopolitics and geoeconomics.
In our portfolios, we hold a significant amount of cash, and we have also initiated trailing stops. Our view of the current circumstances and our assessment of the outlook is as follows:
We do not believe that Putin will invade Ukraine. If he does, our interpretation is that he has cut a deal with China for a broader war where China invades also Taiwan in order to draw the West into two fronts simultaneously and to change the global balance of power. If that turns out to be the case, then we are facing major trouble, but our initial assessment is that both Russia and China will pay a very heavy price which will take them decades to recover from.
The scenario that we believe will unfold in the near future is that inflation pressures will subside, real rates (after subtracting inflation) will stay negative and close to zero, and the Ukrainian crisis will blow off. So, from that perspective, the markets should be uplifted in the second quarter.
Quote of the Week:
“For every good that you wish to preserve, you will have to sacrifice your comfort and your ease. For there is nothing for nothing any longer.”
-Walter Lippmann, speaking in 1940 to the Harvard class of 1910’s 30th reunion to brace them for the forthcoming storm.