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12 Years Ago...

Updated: Jan 29, 2022

BentinPartner Weekly

Dear Reader,

12 Years Ago...

12 years ago, Ken Rogoff and Carmen Reinhart wrote the book “This time is different”, a depository of 800 years of financial crises. History does not repeat itself but it rhythms and the core conclusion of the book was that each crisis witnessed over this 800 years period had one or several of the following root causes; inflation; a bank crisis; a government debt crisis, a loss of confidence in government or a currency crisis.

The particularity of the present situation is that more than one of these root causes are present today.

Inflation is running at 5-7% (already); Western government are drowning in debt with 12% deficits being monetized by central banks with “some” only keeping afloat holding a false and disingenuous narrative of ‘temporary inflation’; currencies are in a fragile equilibrium of terror for the majors (EUR, USD, JPY) only because all three are running the same ZIRP+QE (reckless) monetary policy. Many EM currencies have already fallen sharply and paid the price in terms of runaway inflation.

Finally, the confidence of people in governments around the world is wavering (to say the least).

We could add more forcibly that the day the pandemic ends is the day ZIRP will have lost its last “raison d’être”.

This turf is propitious to the emergence or affirmation of populist characters and to an Orwellian drift of the general way of governance with the freedom of movement and speech being eroded (not to speak about the freedom to dispose of one’s body as we see fit). The way the freedom of speech is being eroded is by considering any thinking going outside the generally accepted wisdom as heretic or demeaned as conspirational. In Western countries, it applies to anyone questioning the efficacy of the latest booster shot vaccination campaign (although the complete failure of it to protect beyond what cannot be proved is now well established and embarrassingly so, which the dismal performance of pharma names only seems to confirm, since it became obvious except in official media that the protection is not only “porous” but that the Omicron virus itself has become innocuous for most. The same applies to anyone defending “officially” (many people will agree in silence) that Russia is not to be blamed for everything happening in Ukraine. This leads to the general acceptance of misleading narratives being put forward in the conduct of international affairs (see sample “evidence”) as well.

What is left unchecked (In the “This time is Different” checklist) are banks which are doing extremely well and paying their CEO’s 35mn a year pay cheques (Morgan Stanley CEO got a 6% increase to cover for inflation as well) and junior bankers 150k because they stand on pool position to ride the all-markets bubbles (affecting bonds +equities +credit+commodities+ private equity+xxxcoins) that have been fuelled by central banks alternatively by will and accident for more than a decade at the same time contributing to build an enormous and potentially socially destabilizing wealth (and generation) gap.

What is left unchecked as well is the existence of credit crises because with nominal rates ranging between - 0.40% to 1.5% and real rates at -5 to-7%, as Western governments know for themselves, it is difficult to go bankrupt and default (somehow Communist China remains the only major economy still applying in some ways this capitalist rule) even if it means accelerating the zombification of the western economy (which is also the reason why China and Russia believe the western world is fast decaying on top of becoming otherwise decadent).

Preserving the status quo in global reserve currency mix (usd/eur/jpy/gbp for the most part) despite this state of affairs (their associated zero rates + soaring debt levels) is ranking fairly high as a reason in trying to keep under water with sanctions and other means China and above all Russia (which has less economic means to defend itself) to prevent them from applying some form of authority on their zone of influence and their (extremely well run) currency.

This acts as a necessary brake to prevent the emergence of a more multipolar global reserve system that would (and likely ultimately will) sanction zero rates’ currencies in relation to those not running such reckless monetary and fiscal policies which is tolerated for no one except a restricted club of overindebted western countries+Japan.

We might have to soon look for emerging (credit) problems to be checked as well soon as there is a big difference between borrowing 0% or 1% and doing so at 2 to 3% which is where markets will try to go.

The same way, for stocks, there is a big difference between valuing the sum of future discounted cash flows at 0.1% …or 1% and then do so, assuming a 2% or 3% to derive a reasonable share price. Tech shares have as such, an imbedded very large duration that will make (and already has made) them behave disproportionally poorly in the first inning of policy normalisation.

The hope could be that we are past that moment and that Fed tightening fears could be behind us because the economy is already faltering (judging from the economic surprise index, soaring credit card data, sagging retail sales and rising jobless claims data of the past 2 weeks) but bearish voices still beg to differ.

Goldman also issued a note this week end saying they expect the Fed to be more hawkish than already priced.

As regards the market action last week, the S&P500 and Nasdaq were clobbered, with the consensus of opinion still expecting multiple rate increases, and the Fed commencing balance sheet contraction, or quantitative tightening. It remains to be seen if markets can take it. The Fed meets this week. At the same time, oil markets got tighter as the latest outlooks from the International Energy Agency and the U.S. Energy Information Administration showed the world will need more oil this year from OPEC members than they did last month. Cryptos followed tech stocks sharply lower. On Friday, Bloomberg reported that “Russia’s central bank proposed a blanket ban on the use and creation of all cryptocurrencies, citing dangers posed to the country’s financial system and environment. It also took aim at mining, which it said hurts the country’s green agenda, jeopardizes Russia’s energy supply and amplifies the negative effects of the spread of cryptocurrencies, creating incentives for circumventing attempts at regulation”. “Advocates of a decentralized future of money based on distributed ledger technology are chasing an illusion, according to BIS General Manager A. Carstens. Their vision, which is to ‘democratize finance’ by cutting out big banks and other middlemen, is ‘not what decentralized finance applications are delivering,’ he said…. ‘There is a large gulf between vision and reality,’ Carstens argued.”

Over the past week, the S&P500 sold off by -5,7% (-7,8% YTD, Z-score -2,7) while the Nasdaq100 sold off by -6,9% (-11,6% YTD, Z-score -2,3). The US small cap index sold off by -8,0% (-11,4% YTD, Z-score -2,4).

Cboe Volatility Index rallied 42,0% (67,5% YTD, Z-score 2,9) to 28,85.

The Eurostoxx50 dropped -1,0% (-1,6%), outperforming the S&P500 by 4,7%.

Diversified EM equities (VWO) dropped -1,8% (0,4%), outperforming the S&P500 by 3,9%.

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,7% (-0,1%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) was unchanged (0,5%).

10Y US Treasuries rallied -2bps (26bps) to 1,77%. 10Y Bunds dropped -2bps (11bps) to -0,07%. 10Y Italian BTPs climbed 2bps (12bps) to 1,29%, underperforming Bunds by 3bps.

US High Yield (HY) Average Spread over Treasuries climbed 19bps (29bps, Z-score 2,3) to 3,12%. US Investment Grade Average OAS climbed 5bps (9bps, Z-score 2,5) to 1,09%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 3bps (9bps) to 0,64%.

Gold gained 0,8% (0,2%) while Silver rallied 5,4% (4,1%). Major Gold Mines (GDX) gained 1,3% (-1,2%).

Goldman Sachs Commodity Index rallied 2,0% (8,7%). WTI Crude rallied 2,5% (14,2%).


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Have a nice week ahead and stay safe!

Marc Bentin, BentinPartner GmbH

Founder, Chief Investment Officer

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