Wait, has it peaked 🏔😎
Inflation, stocks surge, the bond drought, opportunities, how to argue and second order thinking
Almost time to leave you for a late summer break but before I do, hold the front page because there’s news … we need to talk inflation, stocks, bonds, arguing well (NO WE DON’T) and to cap it all some of my longtime fave podcasts have dropped some great episodes.
Plus I finish with a chart that’ll make you feel … weird.
The economic bit…
Well it’s about-damn-time …The latest inflation data in the US shows that inflation mayyyyybe has peaked while stocks are up on all that midsummer energy having surged 10% or more since the end of June. The labour market over there in the US is also pre-tttty strong, unemployment is down to all-time low levels. Did someone say, recession?
Yes, but … Central banks are still on the hike-rates-like-mad program and inflation is still well, well out of control. There’s an energy crisis, a cost-of-living crisis and a prolonged, awful war dragging out in Ukraine. Yes, we are still in 2022.
For the details, John Authers is here for us as always. His take? This inflation number is more to do with some of the “silly” components (used cars) not being so silly anymore rather than actual falls in basic, core goods which is more what the Fed cares about. Bond markets, and particularly inflation expectations have not really budged that much suggesting markets don’t see this as a game changer for the Fed, although markets haven’t exactly been great at forecasting all this so far this year. Read John’s column here.
Here’s where things stand year to date in the major stock and bond markets. The S&P 500 has recouped half its falls, and a global equity portfolio in GBP is now only 4% down from the start of the year.
Maybe not surprisingly the rally has been led by growthy/tech stocks with Amazon up 40% from its lows and Netflix up 50%.
It’s the rorsach test. Pick your view and you’ll find great evidence to support it (isn’t confirmation bias a wonderful thing): the consumer segment of the US economy is strong: people have money, labour markets are strong: lots of people have jobs, corporate earnings aren’t too bad: people still buying stuff and companies still selling it to them … and maybe inflation actually is on the way down.
Yes but … On the other hand recession still looms large: maybe people will stop buying stuff and companies will sell less stuff and employ less people. And even more so in Europe where there’s the prospect of an extremely nasty energy crisis. Markets have switched from the glass half empty stance of late June to the glass half full stance of early August, but the world has’t changed that radically.
The paradigm of the moment could be summarised as: Things are clear as mud and anything could happen and probably will. Or, as market strategists would put it: clients ought to be congisant of both upside and downside risks.
But here’s your periodic public service reminder: investors don’t need to predict the future. Be skeptical of anyone pounding the table right now and stick to the portfolio basics.
3 things I’m reading
The drought extends to the bond markets. they’ve hit snooze pretty hard as new issuance has almost totally dried up (per Axios - chart below) and recently the european syndicated debt market went a record 32 days without a single deal taking place (per Bloomberg).
Yes, but also …
2. Bonds are BACK. One of the investment opportunities for asset owners right now does revolve around bond markets, where future returns and risk premia have jumped higher. Schroders’ credit lens is one of the better cross-market publications to help you get a handle on the extent of the opportunity across markets - with data to 30 June. And the Jp Morgan guide to the markets updates some of it to 31 July.
The picture is clear: we’re back to yield levels at pretty much the best we’ve seen for a decade. You can get about 4% a year in high quality bonds, and up to 9% in lower quality.
3. How to Argue Better - Adam Grant. A great reminder of the skill of disagreeing well (hint - it’s not all about you and it’s not about being right). This seems like … well … quite an important skill in today’s world. Don’t be a preacher, prosecutor or politician. He also did a podcast with the Economist on the same theme if you prefer that (web | apple)
Two things I’m listening to.
Shane Parrish’s interview with Marshall Goldsmith (web | apple)
This is Shane at his absolute best, get this on your playlist to hear all about thoughts on what makes a meaningful life (purpose, things to do and enjoying the journey), the concept of treating each breath as a new version of you (“I’m sorry about that - a previous version of me did it”) and some super insights from some of the big-time CEO's that Marshall has worked with and ideas on what leadership today means. A hard recommend.
Howard Marks behind the memo - I beg to differ (web | apple). Marks’ infrequent memos are usually excellent, and this interview format really gets into the key points here around second-level thinking, what it means in practice and why it matters so much for (active) investors.
Grab bag -
My thoughts on the portfolio of the future.
For laughs, Jack has all of us who over promised on deliverables today covered …
I saw this and found it well … somehow kind of melancholy and sad. I spent quite a long time staring at it. It’s a chart of who the average American spends their time with at different points in their life from Our World in Data and well … a lot of those peaks (time spent with family, friends, children) look awfully fleeting and early.
And maybe that is the right time to say - make sure you get out and enjoy that summer. See you all when normal programming resumes in a few weeks time. Bonjour! Bellisimo!