The S&P 500 can be danced like a 3-count waltz: 1 (corporate profits), 2 (price of primary energy), and 3 (interest rates).

Last week, we analyzed the market sensitivity to rising interest rates, all other things being equal. However, rarely are all other things equal.

This week, we integrate the three rhythms, with the conclusion being the cost of primary energy is growing too fast.

You can only purchase two things in the markets: a contract (for example a 10-year bond), or a title of property (like a share). I draw this observation from our trusted source, Charles Gave.

However, you cannot value both in the same way, simply because the first has a finite duration (here 10 years), and the second is a perpetual.

The consequence is of upmost importance when rates are very low – as is the case today – and when they begin to rise (for example from 1.5% to 2.5%), which could be the case for the United States in 2022.

In this scenario – all other things being equal – the contract loses less than 9%, but the title deed loses 40%.

Last Friday, the COVID-19 omicron variant from southern Africa awoken loudly under the horns of the media, and European stocks lost nearly 5% in the day. Bad surprise!

The financial market seems to have been invented to surprise managers, more specifically to dispel the surprise, and managers generally do not like this too much.

What are the market consequences of surprises?

La société dite ‘Disciplinaire’, selon le philosophe Gilles Deleuze, s’efforce d’enfermer sa population dans des lieux clos, tels des usines, des écoles, des hôpitaux ou des prisons. Cette société a prévalu en occident de la période post-napoléonienne jusqu’au début de ce siècle.

Depuis quelques années, le monde découvre la ‘Société de Contrôle’ qui simultanément libère ses membres des entraves murées et les contrôle au plus près du quotidien par l’entremise de sociétés privées qui gèrent l’information, telles Google, Apple, Facebook, Amazon et Microsof (les ‘GAFAM’). Les GAFAM, de ce fait, ne peuvent échapper au regard des autorités politiques.

Les deux premières lettres à ce sujet ont été publiées il y a plus d’un an, en juillet 2020. La partie III s’intéresse aujourd’hui à l’excroissance mondiale des GAFAM, à contre-tendance des efforts de démondialisation des activités plus traditionnelles. Un effet qui n’est pas sans conséquence dans la gestion de portefeuille.

The “Disciplinary Society” according to the philosopher Gilles Deleuze, strives to lock up its population in enclosed places, such as factories, schools, hospitals, or prisons. This type of society prevailed in the West from the post-Napoleonic period until the beginning of this century.

In more recent years, the world has discovered the “Society of Control,” which simultaneously frees its members from the walled shackles and controls them as close as possible to everyday life through private companies that process information, including Facebook, Amazon, Apple, Microsoft, and Google (aka the ‘FAAMG’). The FAAMG, therefore, cannot escape the gaze of the political authorities.

The first two letters on this subject were published more than a year ago in July 2020. Part III now focuses on the global outgrowth of the FAAMG, which is at odds with efforts to deglobalize more traditional activities – a situation that is not without consequences in portfolio management.

Sometimes the stock market suffers from a divergent strabismus. Its left eye observes economic activity in the present moment, and its right eye the value of likely cash flows in the next ten years. Today the right eye is pointing to the ground as the resurgence of global inflation weighs heavily on stocks’ multiples. However, and since the end of last month, the left eye has been staring into the sky: our leading indicator of international trade announces a strong rebound in the next two months.

Which is the guiding eye for the global vision?

To hunt game, you must first track it on the trail. The same is true for the offshore dollar.

Since 2014, we lost track of our wild dollar with increasing perplexity. Not by a single dollar, but a trillion dollars. In this letter, we show how wild dollars escaped from the FED trap and are now nesting on the high branches… of the US stock market!

A ‘Giffen good’ is a strangeness. When its price increases, its demand does not fall, it rises. Simply because it is an essential good – not substitutable – which  constitutes a significant part of the buyer’s income.

In times of economic stress, companies that produce Giffen goods are a safe-haven for the stock market investor.

We are now in a time of economic stress; here is an example of the Giffen portfolio, with seven good old essential stocks!

With inflation spreading over the world like hot lava and economic growth (especially from China) beginning to show signs of weakness, a risk much forgotten over half a century is resurfacing and fueling conversations between investors: Stagflation!

For once, let us propose a medium-term economic perspective, an attitude quite contrary to the genes of Gavekal-IS which focus on measuring situations rather than forecasting, but paradoxes have never killed anyone.

Is the shadow of stagflation an optical effect or, on the contrary, can it be projected not over a few months, but several years?

Inflation accelerating? Temporary. Supply chain disruptions? A passing moment. Market nervousness? Transitory.

The US suffered from 30 recessions in the last 150 years, and thus, 30 transitory times between recession and expansion. What can we learn from the past?

 As Usain Bolt once said, “All I have to do is work on transition and technique.”

«Yes, is like credit, no is like cash,» said Cornelius Jacobus Langenhoven a century ago, the writer who composed the South African national anthem.

On one hand, inflation is back this year, globally. That is a fact. Whether it’s temporary or not, no one can say. On the other hand, global liquidity in USD for the first time in eight months is tightening. This is a major macroeconomic event of the month.

A contraction in liquidity in an inflationary context is a harmful configuration for equities, but also for bonds, be they long-term ones with a fixed coupon, or short-term ones with an inflation-indexed coupon.

It is no longer unreasonable to say “no.” And no, is like cash.

Investing in Chinese stocks inexorably provokes a contrasting feeling, a mixture of fascination and anxiety. This is reminiscent of the tempting flowers one wishes to pick at the edge of a cliff, “The Flowers of Evil,” by Charles Baudelaire who revolutionized French poetry at the end of the nineteenth century.

Among the various investment strategies, the one proposed by Gavekal-IS mitigates anxiety. Evergrande does not change the case. The conclusion remains the same on the Shanghai Stock Exchange Composite Index: risk on!

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