Investment Strategy Made Simple – My Worst Investment Ever https://myworstinvestmentever.com Stories of loss to keep you winning Sun, 22 Feb 2026 12:45:18 +0000 en-US hourly 1 https://wordpress.org/?v=5.7.15 https://myworstinvestmentever.com/wp-content/uploads/2019/09/cropped-Podcast-Art-32x32.jpg Investment Strategy Made Simple – My Worst Investment Ever https://myworstinvestmentever.com 32 32 ISMS 33: Fed Success! High LT Rates & Recession Coming https://myworstinvestmentever.com/isms-33-fed-success-high-lt-rates-recession-coming/ https://myworstinvestmentever.com/isms-33-fed-success-high-lt-rates-recession-coming/#respond Wed, 18 Oct 2023 23:00:27 +0000 https://myworstinvestmentever.com/?p=12484 World yield curve inversion is falling because of rising LT rates. Rising LT rates are reducing yield curve inversion fastest in DM Americas and DM Europe. Rates are high across EMs, crushing in FMs, and low in EM Asia. France and Germany ST rates rising; DM countries have past peak yield curve inversion due to rising LT rates. Rates are low in China, which, together with India, never inverted.

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Fed Success! High LT Rates & Recession Coming

  • World yield curve inversion is falling because of rising LT rates
  • Rising LT rates are reducing yield curve inversion fastest in DM Americas and DM Europe
  • Rates are high across EMs, crushing in FMs, and low in EM Asia
  • France and Germany ST rates rising; DM countries have past peak yield curve inversion due to rising LT rates
  • Rates are low in China, which, together with India, never inverted

Rates returning to normal?

Irving Fisher (1867 –1947) – One of the earliest American neoclassical economists

  • Described as “the greatest economist the United States has ever produced”
  • His reputation during his lifetime was irreparably harmed by his public statement, just nine days before the Wall Street Crash of 1929, that the stock market had reached “a permanently high plateau”
  • His 1930 treatise, The Theory of Interest, summed up a lifetime’s research into capital, capital budgeting, credit markets, and the factors (including inflation) that determine interest rates
  • Some core concepts
  • Time Preference – The idea that people generally prefer to have goods and services sooner rather than later
  • Real Interest Rate – The real interest rate adjusts for the effects of inflation, allowing for a more accurate evaluation of the purchasing power of money over time
  • Fisher Equation – Relates nominal interest rates to real interest rates and inflation
  • Expressed as: Nominal Interest Rate = Real Interest Rate + Inflation Rate
  • The Fisher Effect – Suggests that nominal interest rates adjust in response to expected changes in inflation
  • In other words, if people anticipate higher inflation, nominal interest rates will rise to compensate

Jeremy Siegel (born 1945) Professor of finance at the Wharton School of the University of Penn.

  • Comments extensively on the economy and financial markets
  • Wrote two books, but most prominent is
  • Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies

History of the real return on long-term US government bonds

Global Markets

World yield curve inversion is falling because of rising LT rates

Interest rate level – 5.4% world 3m yield, 10yr 4.4%; LT rates much higher in EM

  • World 3m rates were 5.4% in Sept., DM rates were 4.4%, and EM rates were 6.9%, a 2.6ppt premium
  • World 1yr rates were 5.1% in Sept., DM rates were 4.3%, and EM rates were 6.2%, a 1.9ppt premium
  • World 10yr rates were 4.7% in Sept., DM rates were 3.8%, and EM rates were 5.9%, a 2ppt premium

Year-on-year changes – DM 3m yield rose from lower base; fast DM LT rate rise

  • 3m yield had a large 2.2ppt YoY rise to 4.4% in DM; there was a smaller 1.4ppt rise in EM
  • 1yr rates only increased 0.7ppts YoY in EM; but were up a large 1.4ppt YoY in DM
  • 10yr EM rates up only 0.2ppts YoY, DM rates rose by a much higher 0.7ppts

Rate progression – DM tightening has stopped but continues in EM

  • 3m rates were flat MoM in DM and are on the rise in EM
  • A 0.5ppt MoM rise in EM 1yr yield is raising World yields; DM yield was flat
  • Sept 10yr yield rose in both DM and EM, up about 0.4ppts MoM

Yield curve – Rising LT rates pushed world past August peak inversion

  • August looks to have been World peak inversion as LT yields have been rising
  • World 3m rates rose fast, but now LT rates have started to rise
  • May looks to have been DM peak inversion as LT yields start to rise
  • 3m DM rates have flattened, but LT rates have been rising, reducing yield curve inversion
  • August looks to have been EM peak inversion as LT yields have been rising
  • After a year of significant rises in EM ST rates, LT rates have started rising, reducing inversion

Key points and the bottom line

  • 5.4% world 3m yield, 10yr 4.4%; LT rates much higher in EM
  • DM 3m yield rose from lower base; fast DM LT rate rise
  • DM tightening has stopped but continues in EM
  • Rising LT rates pushed world past August peak inversion
  • World yield curve inversion is falling because of rising LT rates

Developed Market Regions

Rising LT rates are reducing yield curve inversion fastest in DM Americas and DM Europe

Interest rate level – High DM Americas rates, EM Europe lower, and DM Pacific much lower

  • DM Americas 3m rates were 5.4% in Sept, DM Europe rates were 4.0%, DM Pacific rates were 1.4%
  • DM Americas 1yr rates were 5.5% in Sept, DM Europe rates were 3.7%, DM Pacific rates were 1.6%
  • DM Americas 10yr rates were 4.5% in Sept, DM Europe rates were 3.6%, DM Pacific rates were 2.1%

Year-on-year changes – ST rates rising in DM Europe, LT rates rising in DM Americas

  • 2.8ppts YoY 3m rate rise in DM Europe, to 4%; up only 0.5ppt to a low 1.4% in DM Pacific
  • DM Americas and Europe had a high 1.5ppt rise in 1yr rate; 0.5ppt in DM Pacific to a low 1.6%
  • DM Americas had the highest rise in 10yr yields, up 0.8ppts, but other regions are rising as well

Rate progression – Rates hardly moved MoM across all DM regions

  • DM Europe central bank tightening drove fast 3m rate YoY rise; rates flat MoM in all DM regions
  • 1yr rate barely moved MoM in all DM regions
  • 10yr yield rising fastest MoM in DM Americas and Europe, slow MoM rise in DM Pacific

Yield curve – Rising LT rates in DM Americas and Europe flattening yield curve; normal in DM Pacific

  • DM Americas inversion peaked in May 2023; LT rate rise reduced inversion by 0.5ppts MoM
  • DM Europe yield curve inversion peaked a bit later, in August, and fell MoM due to LT rate rise
  • DM Pacific yield curve never inverted as it never went through a US Fed-style hiking cycle

Key points and the bottom line

  • High DM Americas rates, EM Europe lower, and DM Pacific much lower
  • ST rates rising in DM Europe, LT rates rising in DM Americas
  • Rates hardly moved MoM across all DM regions
  • Rising LT rates in DM Americas and Europe flattening yield curve; normal in DM Pacific
  • Rising LT rates are reducing yield curve inversion fastest in DM Americas and DM Europe

Emerging Market Regions

Rates are high across EMs, crushing in FMs, and low in EM Asia

Interest rate level – ST EM rates high, ranging from 12% to 35%, but a low 3.2% in EM Asia

  • EM Americas 3m rates were 11.9% in Sept, EM Asia rates were 3.2%, EM Europe rates were 11.6%, EM ME&A rates were 15.7%, Frontier rates were 33.5%
  • EM Americas 1yr rates were 11.3% in Sept, EM Asia rates were 3.1%, EM Europe rates were 15.2%, EM ME&A rates were 25.2%, Frontier rates were 16%
  • EM Americas 10yr rates were 11% in Sept, EM Asia rates were 3.6%, EM Europe rates were 12.5%, EM ME&A rates were 17.5%, Frontier rates were 11%

Year-on-year changes – ST rates in FM and EM ME&A are up, LT rates are rising fast in EM Europe

  • Biggest YoY rise of 3m yields in Frontier markets, up 10.6ppt, and EM ME&A up 4.6ppt
  • 1yr yield rose most YoY in EM ME&A, up 7.4ppt and EM Europe up 5.2ppt
  • 10yr yields flat YoY in EM Americas; 3.2ppt rise in EM Europe and 2.9ppt rise in EM ME&A

Rate progression – FM ST rates up massively, but flat MoM, LT rates rising in EM Europe

  • 3m rates up MoM in EM Europe; down in super high FMs and high EM Americas; flat in EM Asia
  • 1yr yields show significant rise in EM Europe; High in EM ME&A; Low in EM Asia
  • LT rates are up across EMs, rising particularly fast MoM in EM Europe, low and flat in EM Asia

Yield curve – Inversion massive in FM, falling in EM Americas; normal in EM Asia, Europe, and EM ME&A

  • EM Americas yield curve inverted slightly more than World; but peaked in June 2023
  • EM ME&A yield curve never inverted as ST rates have always been high
  • Frontier yield curve inversion peaked in August 2023, but crushing ST rates remain

Key points and the bottom line

  • ST EM rates high, ranging from 12% to 35%, but a low 3.2% in EM Asia
  • ST rates in FM and EM ME&A are up, LT rates are rising fast in EM Europe
  • FM ST rates up massively, but flat MoM, LT rates rising in EM Europe
  • Inversion massive in FM, falling in EM Americas; normal in EM Asia, Europe, and EM ME&A
  • Rates are high across EMs, crushing in FMs, and low in EM Asia

Developed Countries

France and Germany ST rates rising; DM countries have past peak yield curve inversion due to rising LT rates

Interest rate level – US/UK have 5.5% ST and 4.6% LT rates, Germany and France lower at 3.6%

  • US 3m rates were 5.5% in Sept, Japanese rates were 0.2%, German rates were 3.6%, UK rates were 5.4%, French rates were 3.8%
  • US 1yr rates were 5.5% in Sept, Japanese rates were zero, German rates were 3.7%, UK rates were 5.1%, French rates were 3.8%
  • US 10yr rates were 4.6% in Sept, Japanese rates were 0.8%, German rates were 2.8%, UK rates were 4.4%, French rates were 3.4%

Year-on-year changes – ST rates are rising fast in France and Germany, LT rates rising most in the US

  • Fastest YoY 3m yield rise in France and Germany, up about 3ppt; no change in Japan
  • 1yr yield up about 2ppts in France and Germany; Japan flat
  • Biggest 10yr yield rise in the US, followed by France and Germany

Rate progression – MoM LT rates rising in the US, Germany, France, UK and Japan are flat MoM

  • 3m rates rose most in France and Germany; US and UK have steadied; Japan remains flat
  • 1yr rates rose most in France and Germany; US is rising MoM; Japan remains flat
  • LT rates are up half ppt in the US, Germany, and France; even Japan has been rising

Yield curve – Germany, UK, and France passed peak inversion in Aug; US passed in May

  • US yield curve inversion peaked in May 2023; 10yr rates rose by 50bp MoM in Sep 2023
  • Japan had a tiny MoM 0.1ppt increase in both short and long-term rates, never inverted
  • The deepest inversion in Germany was Aug 2023; rising LT rates have reduced inversion
  • The deepest inversion in the UK was Aug 2023; tiny LT rate rise, and tiny ST rate fall MoM
  • The deepest inversion in France was Aug 2023; LT rates up 4bp MoM

Key points and the bottom line

  • US/UK have 5.5% ST and 4.6% LT rates, Germany and France lower at 3.6%
  • ST rates are rising fast YoY in France and Germany, LT rates rising most in the US
  • LT rates rising MoM in the US, Germany, France; UK and Japan are flat MoM
  • Germany, UK, and France just passed peak inversion in Aug; US passed in May
  • France and Germany ST rates rising; DM countries have past peak yield curve inversion due to rising LT rates

Emerging Countries

Rates are low in China, which, together with India, never inverted

Interest rate level – Low 2-4% rates in China and Korea, 7% in India, and 12% in Russia and Brazil

  • Chinese 3m rates were 2.3% in Sept, Indian rates were 6.9%, Korean rates were 3.6%, Russian rates were 12.4%, Brazilian rates were 12.3%
  • Chinese 1yr rates were 2.2% in Sept, Indian rates were 7%, Korean rates were 3.6%, Russian rates were 16.5%, Brazilian rates were 11%
  • Chinese 10yr rates were 2.7% in Sept, Indian rates were 7.2%, Korean rates were 4%, Russian rates were 12.9%, Brazilian rates were 11.7%

Year-on-year changes – ST rates in China, India, and Korea up less than 1ppt, LT rates flat; rates rising in Russia

  • 3m yield up most YoY in India and Korea, followed by China; down in Brazil
  • 1yr yield was up most YoY in Russia, down in Brazil
  • 10yr yield was down a bit YoY in China, India, Korea, and Brazil; up only in Russia

Rate progression – Yields are flat in China, India, and Korea, rising in Russia and falling in Brazil

  • 3m yield flat MoM in India, Korea, and Russia; rising a bit MoM in China, falling in Brazil
  • 1yr yield rising fast in Russia; down MoM in India and Brazil
  • 10yr yield was up YoY only in Russia but up MoM slightly in China, India, Korea, & Brazil

Yield curve – Yield curves never inverted in China and India; Russia’s inversion stopped; Brazil passed inversion peak

  • China never inverted; ST rates were up 30bps MoM, LT rates were up only 10bps
  • India never inverted; nearly flat yield curve has remained unchanged MoM
  • Korea saw a brief and mild inversion in Jan 2023; slight MoM steepening w/ LT rates up
  • Peak Russian inversion Oct 2022; LT rates up nearly 1ppt MoM
  • Peak Brazil yield curve inversion in Jun 2023; nearly equal MoM fall in ST rates and rise in LT

Key points and the bottom line

  • Low 2-4% rates in China and Korea, 7% in India, and 12% in Russia and Brazil
  • ST rates in China, India, and Korea are up less than 1ppt, LT rates flat; rates rising in Russia
  • Yields are flat in China, India, and Korea, rising in Russia and falling in Brazil
  • Yield curves never inverted in China and India; Russia’s inversion stopped; Brazil passed peak
  • Rates are low in China, which, together with India, never inverted

 

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]]> https://myworstinvestmentever.com/isms-33-fed-success-high-lt-rates-recession-coming/feed/ 0 ISMS 32: 5 Signs of Impending Recession https://myworstinvestmentever.com/isms-32-5-signs-of-impending-recession/ https://myworstinvestmentever.com/isms-32-5-signs-of-impending-recession/#respond Sun, 08 Oct 2023 23:00:20 +0000 https://myworstinvestmentever.com/?p=12450 5 Warning signs of impending recession - 1. Inverted yield curve, 2. Peak employment, 3. A slowdown in bank lending, 4. Leading indicators falling & bankruptcies rising, 5. Weakening consumer.

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Warning Sign #1 – Inverted yield curve

  • It’s not the first time the Fed has fought inflation
  • Fed has been fighting inflation with its main tool
  • Steep rate hikes have historically preceded recessions
    • Fed’s tool to fight inflation is raising the federal funds rate
  • This is the fastest and most aggressive rate-hike cycle by the Fed since the 1980s
    • After the 0.25%-hike in Feb 2023, the current rate-hike cycle became the most aggressive since the 1980s
    • The Fed has hiked rates by 5.25% in the current cycle
    • This has resulted in short-term rates becoming higher than long-term (yield-cure inversion)
  • Yield-curve inversion signals 4Q23 US recession
    • All recessions in the US since 1968 were preceded by an inverted yield curve
    • As it turns, recession typically follows
    • Average time from inversion, until the recession started, was about 1 year (so 4Q23)

Warning Sign #2 – Peak employment

  • US is now at peak employment
    • Peak employment precedes recession
    • Unemployment now at 3.8% (same as April 2000)
    • Puts upward pressure on wages, which is inflationary
    • On the flip side, a strong labor market can keep the recession at bay

Warning Sign #3 – Slowdown in bank lending

  • Business lending has slowed; real estate and consumer loans flat
    • Warns about a slowdown in business activity

Warning Sign #4 – Leading indicators falling & bankruptcies rising

  • Composite leading indicators falling but seen a slight rebound recently
    • The indicator looks at factors aimed at providing early signals of turns in the business cycle
    • While the indicator has given false signals before, recessions have typically followed large falls
  • 72 US bankruptcy filings in 1H23, more than the previous two years
    • Private and public companies with over US$100m in assets at the time of bankruptcy filing
  • “Filings in the first seven months of 2023 surpassed total filings for the previous year”
    • S&P Global Market Intelligence recorded 64 corporate bankruptcy filings in July, the largest monthly total since March and more filings than in any single month in 2021 or 2022

Warning Sign #5 – Weakening consumer

  • Retail sales have been slowing, which typically precedes a recession
  • Consumer sentiment has fallen since 2020
  • Credit card debt at US$1trn and growing while past due bills are rising

 

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The post ISMS 32: 5 Signs of Impending Recession appeared first on My Worst Investment Ever.

]]> https://myworstinvestmentever.com/isms-32-5-signs-of-impending-recession/feed/ 0 ISMS 31: Global CPI saw 2nd MoM uptick in August https://myworstinvestmentever.com/isms-31-global-cpi-saw-2nd-mom-uptick-in-august/ https://myworstinvestmentever.com/isms-31-global-cpi-saw-2nd-mom-uptick-in-august/#respond Thu, 05 Oct 2023 23:00:14 +0000 https://myworstinvestmentever.com/?p=12436 Will the global CPI slowdown continue? Or will it rebound?

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Will the global CPI slowdown continue? Or will it rebound?

Global Markets

Global CPI saw 2nd monthly uptick in August, DM remains below Global; DM and EM are now on the rise

  • Economies across the world have a GDP of about US$97trn and an average CPI of 5.1%
  • DM has US$55trn GDP, and CPI was 4.3%
  • EM has US$42trn GDP, and CPI was 6.1%

World CPI was 5.1%, down 3ppts from one year ago; MoM it was up 0.3ppt, a 2nd monthly uptick

  • DM CPI was 4.3%, down 3.3 ppts from one year ago; MoM it was up 0.2ppts
  • It has moved from a 0.5ppts discount to World CPI last year to the current 0.8ppt discount
  • EM CPI was 6.1%, down 2.6 ppts from one year ago; MoM it was up 0.6ppts
  • It has moved from a 0.7ppts premium to World CPI last year to the current 1ppt premium

Developed Regions

DM Americas CPI had 2nd uptick, DM Europe continues its slide, while DM Pacific stays flat at 4%

  • DM Americas is the largest region, with US$28trn of GDP and 3.7% CPI
  • DM Europe has US$15trn GDP and 5.2% CPI
  • DM Pacific has US$8trn GDP and 3.9% CPI

DM Americas CPI had 2nd uptick, DM Europe continues its slide, while DM Pacific stays flat at 4%

  • DM Americas CPI was 3.7%, down 4.4ppts from one year ago; MoM it was up 0.4ppts
  • It has moved from a 0.1ppts premium to World CPI last year to the current 1.4ppt discount
  • DM Europe CPI was 5.2%, down 2.9ppts from one year ago; MoM it was down 0.1ppts
  • It has moved from a 0.1ppts premium to World CPI last year to the current 0.1ppt premium
  • DM Pacific CPI was 3.9%, down 0.3ppts from one year ago; MoM it was down 0.1ppts
  • It has moved from a 3.9ppts discount to World CPI last year to the current 1.2ppt discount

Emerging Regions

CPI in EM Asia and Frontier markets re-igniting, EM Europe continues its rise

  • EM Americas had a small GDP of US$4trn and CPI of 5.4%
  • EM Asia had a massive GDP of US$29trn and 1.4% CPI
  • EM Europe had a small US$4trn GDP and a massive 16.5% CPI
  • Emerging Middle East & Africa had a tiny US$2trn GDP and a high 10.9% CPI
  • Frontier markets had a US$3trn GDP and an extremely high 32.3% CPI

CPI in EM Asia and Frontier markets re-igniting, EM Europe continues its rise

  • EM Americas CPI was 5.4%, down 3.9ppts from one year ago; MoM it was up 0.1ppts
  • It has moved from a 1.3ppts premium to World CPI last year to the current 0.3ppt premium
  • EM Asia CPI was 1.4%, down 2.1ppts from one year ago; MoM it was up 0.3ppts
  • It has moved from a 4.5ppts discount to World CPI last year to the current 3.6ppt discount
  • EM Europe CPI was 16.5%, down 11.8ppts from one year ago; MoM it was up 2.1ppts
  • It has moved from a 20.3ppts premium to World CPI last year to the current 11.4ppt premium
  • EM ME&A CPI was 10.9%, up 3.9ppts from one year ago; MoM it was flat
  • It has moved from a 1ppts discount to World CPI last year to the current 5.8ppt premium
  • Frontier CPI was 32.3%, up 6ppts from one year ago; MoM it was up 2ppts
  • It has moved from a 18.3ppts premium to World CPI last year to the current 27.2ppt premium

Developed Countries

2nd US CPI uptick; strong 1st uptick in France; Japan and UK steady slide; Germany flat

  • Top five DM countries
  • US GDP was US$25trn, CPI of 3.7%
  • Japan US$5trn and 3.1% CPI
  • Germany US$4.3trn and 6.2% CPI
  • UK: US$3.4trn, 6.8%
  • France: US$3trn/4.6%
  • USA CPI was 3.7%, down 4.5ppts from one year ago; MoM it was up 0.4ppts
  • It has moved from a 0.2ppts premium to World CPI last year to the current 1.4ppt discount
  • Japan CPI was 3.1%, up 0.1ppts from one year ago; MoM it was down 0.1ppts
  • It has moved from a 5ppts discount to World CPI last year to the current 2ppt discount
  • Germany CPI was 6.2%, down 0.9ppts from one year ago; MoM it was flat
  • It has moved from a 0.9ppts discount to World CPI last year to the current 1.1ppt premium
  • UK CPI was 6.8%, down 3.2ppts from one year ago; MoM it was down 0.2ppts
  • It has moved from a 1.9ppts premium to World CPI last year to the current 1.7ppt premium
  • France CPI was 4.6%, down 1.2ppts from one year ago; MoM it was up 0.5ppts
  • It has moved from a 2.2ppts discount to World CPI last year to the current 0.5ppt discount

Emerging Countries

China CPI flat after July deflation; India slows; strong rise in Korea; rising in Russia and Brazil

  • China: US$20trn/0.1%
  • India: US$3.5trn/6.8%
  • Korea: US$1.8trn/3.5%
  • Russia: US$1.8trn/5.2%
  • Brazil: US$1.8trn/4.7%
  • China CPI was 0.1%, down 2.3ppts from one year ago; MoM it was up 0.4ppts
  • It has moved from a 5.7ppts discount to World CPI last year to the current 5ppt discount
  • India CPI was 6.8%, down 0.1ppts from one year ago; MoM it was down 0.6ppts
  • It has moved from a 1.1ppts discount to World CPI last year to the current 1.7ppt premium
  • Korea CPI was 3.5%, down 2.2ppts from one year ago; MoM it was up 1.2ppts
  • It has moved from a 2.4ppts discount to World CPI last year to the current 1.6ppt discount
  • Russia CPI was 5.2%, down 9.2ppts from one year ago; MoM it was up 0.9ppts
  • It has moved from a 6.3ppts premium to World CPI last year to the current 0.1ppt premium
  • Brazil CPI was 4.7%, down 4.1ppts from one year ago; MoM it was up 0.6ppts
  • It has moved from a 0.8ppts premium to World CPI last year to the current 0.4ppt discount

Developed Countries

Highest CPI

  • Sweden CPI was 7.6%, down 2.2ppts from one year ago; MoM it was down 1.8ppts
  • It has moved from a 1.7ppts premium to World CPI last year to the current 2.5ppt premium
  • Austria CPI was 7.5%, down 1.8ppts from one year ago; MoM it was up 0.4ppts
  • It has doubled its 1.2ppts premium to World CPI last year to the current 2.4ppt premium
  • UK CPI was 6.8%, down 3.2ppts from one year ago; MoM it was down 0.2ppts
  • It has moved from a 1.9ppts premium to World CPI last year to the current 1.7ppt premium
  • Ireland CPI was 6.4%, down 2.4ppts from one year ago; MoM it was up 0.5ppts
  • It has moved from a 0.7ppts premium to World CPI last year to the current 1.3ppt premium
  • Germany CPI was 6.2%, down 0.9ppts from one year ago; MoM it was flat
  • It has moved from a 0.9ppts discount to World CPI last year to the current 1.1ppt premium

Emerging Countries

Highest CPI

  • Argentina* CPI was 124.4%, up 45.9ppts from one year ago; MoM it was up 11ppts
  • It has moved from a 70.4ppts premium to World CPI last year to the current 119.3ppt premium
  • Turkey CPI was 60.9%, down 19.6ppts from one year ago; MoM it was up 11.3ppts
  • It has moved from a 72.4ppts premium to World CPI last year to the current 55.8ppt premium
  • Egypt CPI was 38.2%, up 23.3ppts from one year ago; MoM it was up 1ppts
  • It has moved from a 6.9ppts premium to World CPI last year to the current 33.2ppt premium
  • Pakistan* CPI was 28%, up 0.8ppts from one year ago; MoM it was down 0.9ppts
  • It has moved from a 19.1ppts premium to World CPI last year to the current 22.9ppt premium
  • Nigeria* CPI was 26.2%, up 5.6ppts from one year ago; MoM it was up 1.7ppts
  • It has moved from a 12.5ppts premium to World CPI last year to the current 21.1ppt premium

*denotes Frontier market

Developed Countries

Lowest CPI

  • Switzerland CPI was 1.6%, down 1.8ppts from one year ago; MoM it was down 0.1ppts
  • It has moved from a 4.6ppts discount to World CPI last year to the current 3.5ppt discount
  • Hong Kong CPI was 1.8%, down 0.2ppts from one year ago; MoM it was down 0.1ppts
  • It has moved from a 6.1ppts discount to World CPI last year to the current 3.3ppt discount
  • Denmark CPI was 2.4%, down 6.5ppts from one year ago; MoM it was down 0.7ppts
  • It has moved from a 0.9ppts premium to World CPI last year to the current 2.6ppt discount
  • Spain CPI was 2.7%, down 7.8ppts from one year ago; MoM it was up 0.3ppts
  • It has moved from a 2.4ppts premium to World CPI last year to the current 2.4ppt discount
  • Netherlands CPI was 3%, down 9.1ppts from one year ago; MoM it was down 1.5ppts
  • It has moved from a 4ppts premium to World CPI last year to the current 2.1ppt discount

Emerging Countries

Lowest CPI

  • China CPI was 0.1%, down 2.3ppts from one year ago; MoM it was up 0.4ppts
  • It has moved from a 5.7ppts discount to World CPI last year to the current 5ppt discount
  • Jordan* CPI was 0.9%, down 4.5ppts from one year ago; MoM it was flat
  • It has moved from a 2.6ppts discount to World CPI last year to the current 4.2ppt discount
  • Thailand CPI was 0.9%, down 6.9ppts from one year ago; MoM it was up 0.5ppts
  • It has moved from a 0.2ppts discount to World CPI last year to the current 4.2ppt discount
  • Saudi Arabia CPI was 2%, down 0.9ppts from one year ago; MoM it was down 0.4ppts
  • It has moved from a 5.2ppts discount to World CPI last year to the current 3.1ppt discount
  • Malaysia CPI was 2.1%, down 2.5ppts from one year ago; MoM it was flat
  • It has moved from a 3.4ppt discount to World CPI last year to the current 3ppt discount

*denotes Frontier market

Developed Countries

Largest rise/Least fall

  • Japan CPI was 3.1%, up 0.1ppts from one year ago; MoM it was down 0.1ppts
  • It has moved from a 5ppt discount to World CPI last year to the current 2ppt discount
  • Hong Kong CPI was 1.8%, down 0.2ppts from one year ago; MoM it was down 0.1ppts
  • It has moved from a 6.1ppt discount to World CPI last year to the current 3.3ppt discount
  • Israel CPI was 4.2%, down 0.4ppts from one year ago; MoM it was up 0.8ppts
  • It has moved from a 3.5ppt discount to World CPI last year to the current 0.9ppt discount
  • Australia CPI was 6.1%, down 0.8ppts from one year ago; MoM it was flat
  • It has moved from a 1.1ppt discount to World CPI last year to the current 1ppt premium
  • Germany CPI was 6.2%, down 0.9ppts from one year ago; MoM it was flat
  • It has moved from a 0.9ppt discount to World CPI last year to the current 1.1ppt premium

Emerging Countries

Largest rise/Least fall

  • Argentina* CPI was 124.4%, up 45.9ppts from one year ago; MoM it was up 11ppts
  • It has moved from a 70.4ppts premium to World CPI last year to the current 119.3ppt premium
  • Egypt CPI was 38.2%, up 23.3ppts from one year ago; MoM it was up 1ppts
  • It has moved from a 6.9ppts premium to World CPI last year to the current 33.2ppt premium
  • Nigeria* CPI was 26.2%, up 5.6ppts from one year ago; MoM it was up 1.7ppts
  • It has moved from a 12.5ppts premium to World CPI last year to the current 21.1ppt premium
  • Hungary CPI was 16.6%, up 1ppts from one year ago; MoM it was down 1.3ppts
  • It has moved from a 7.5ppts premium to World CPI last year to the current 11.5ppt premium
  • Pakistan* CPI was 28%, up 0.8ppts from one year ago; MoM it was down 0.9ppts
  • It has moved from a 19.1ppts premium to World CPI last year to the current 22.9ppt premium

*denotes Frontier market

Developed Countries

Smallest rise/Biggest fall

  • Netherlands CPI was 3%, down 9.1ppts from one year ago; MoM it was down 1.5ppts
  • It has moved from a 4ppts premium to World CPI last year to the current 2.1ppt discount
  • Spain CPI was 2.7%, down 7.8ppts from one year ago; MoM it was up 0.3ppts
  • It has moved from a 2.4ppts premium to World CPI last year to the current 2.4ppt discount
  • Denmark CPI was 2.4%, down 6.5ppts from one year ago; MoM it was down 0.7ppts
  • It has moved from a 0.9ppts premium to World CPI last year to the current 2.6ppt discount
  • Belgium CPI was 4.1%, down 5.9ppts from one year ago; MoM it was flat
  • It has moved from a 1.9ppts premium to World CPI last year to the current 1ppt discount
  • Portugal CPI was 3.8%, down 5.2ppts from one year ago; MoM it was up 0.6ppts
  • It has moved from a 0.9ppts premium to World CPI last year to the current 1.3ppt discount

Emerging Countries

Smallest rise/Biggest fall

  • Sri Lanka* CPI was 4%, down 57.9ppts from one year ago; MoM it was down 2.3ppts
  • It has moved from a 53.8ppts premium to World CPI last year to the current 1.1ppt discount
  • Estonia* CPI was 4.8%, down 19.8ppts from one year ago; MoM it was down 1.8ppts
  • It has moved from a 16.6ppts premium to World CPI last year to the current 0.3ppt discount
  • Turkey CPI was 60.9%, down 19.6ppts from one year ago; MoM it was up 11.3ppts
  • It has moved from a 72.4ppts premium to World CPI last year to the current 55.8ppt premium
  • Lithuania* CPI was 6.3%, down 16ppts from one year ago; MoM it was down 1.3ppts
  • It has moved from a 14.2ppts premium to World CPI last year to the current 1.2ppt premium
  • Bulgaria* CPI was 7.8%, down 9.9ppts from one year ago; MoM it was down 0.8ppts
  • It has moved from a 9.6ppts premium to World CPI last year to the current 2.7ppt premium

*denotes Frontier market

 

Click here to get the PDF with all charts and graphs

 

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]]> https://myworstinvestmentever.com/isms-31-global-cpi-saw-2nd-mom-uptick-in-august/feed/ 0 ISMS 28: Stocks for the Long Run https://myworstinvestmentever.com/isms-28-stocks-for-the-long-run/ https://myworstinvestmentever.com/isms-28-stocks-for-the-long-run/#respond Tue, 01 Aug 2023 23:00:23 +0000 https://myworstinvestmentever.com/?p=12217 Andrew is talking about a book that has landed on his desk; Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies. In his book, Siegel tells us to expect a 5% long-term real US stock market return. One of the first charts that he shares in the book shows the US nominal returns.

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What long-term return do you expect for US stocks?

If you’re investing for decades, not months, one question matters more than almost any other:

What long-term return should you realistically expect from the stock market?

That’s the exact question Andrew explores after reading Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel, one of the most respected books on long-term investment returns and financial market history.

The answer might surprise you.

The big number: a 5% real long-term return

According to Siegel’s research spanning more than two centuries, investors should expect roughly:

5% annual real return from US stocks over the long term.

“Real return” means after inflation. This is the number that truly matters because it reflects your actual increase in purchasing power.

Historically, that number has been remarkably stable across time periods, wars, recessions, and economic transformations.

US nominal vs real returns: why inflation changes everything

One of the most powerful examples in Siegel’s research is simple:

  • Invest $1 in US stocks in 1801
  • Hold it until 2021

The result?

  • Nominal value: $54 million
  • Real (inflation-adjusted) value: $2.3 million

That difference highlights one crucial investing lesson: Inflation quietly erodes wealth over time.

Understanding real returns vs nominal returns is essential for anyone investing for retirement or long-term financial security.

Stocks vs bonds vs gold over 220 years

When comparing long-term asset performance from 1801 to 2021, the differences are striking:

Real Annual Returns:

  • Stocks: 6.9%
  • Long-term government bonds: 3.6%
  • Short-term government bonds: 2.5%
  • Gold: 0.6%

Over two centuries, stocks dramatically outperformed every other asset class, confirming why they remain the cornerstone of long-term portfolios.

To give you an idea of the real return here, if you had invested the $1 in long-term government bonds, you would have ended up with $2,000. If you had invested in US government bills, which are short-term interest-rate instruments, you would have gotten $245. 

If you had invested in gold, you’d have only $4 of real return. Gold, in fact, is not and never has really been a great investment vehicle over the long term, though it helps during periods of shocks.

Over that period, inflation was about 1.4%. Stocks had an average real return of 6.9%, long-term government bonds 3.6%, short-term government bonds 2.5%, and gold 0.6% for 220 years.

What happens over shorter time periods?

Some investors argue that data spanning centuries isn’t relevant today. So what happens when we examine shorter historical periods?

The surprising finding is consistency.

1926 to 2021: Nearly a century of data

During this 95-year period:

  • Inflation averaged 2.9%
  • Real stock returns averaged 7.1%

Even across major events like the Great Depression, World War II, and multiple market crashes, stocks continued to deliver strong long-term performance.

Bonds and gold, however, lagged significantly.

Post-World War II: 1946 to 2021

Looking at the modern economic era:

  • Real stock returns: 7.3%
  • Long-term bond returns: 2%
  • Short-term bond returns: nearly zero
  • Gold returns: 1.6%

Once again, stocks remained the dominant wealth-building asset class in an era when the dollar reigned supreme. Inflation was 3.7%.

The modern era: 2000 to 2021

The past two decades tell a slightly different story.

During this period:

  • Real stock returns fell to about 5.2%
  • Long-term bond returns rose to 4.6%
  • Gold delivered unusually strong returns of 6.3%

Why?

Because interest rates declined dramatically (about 2.3%), which boosted bond prices and temporarily narrowed the gap between stocks and bonds. When interest rates fall, bond prices rise, so you’re outperforming your bond portfolio. 20 years of falling interest rates mean 20 years of solid performance of your bond portfolio, particularly your long-term bond portfolio.

Why stocks win in the long run

Across all periods studied, one conclusion remains clear: Stocks are the only asset class that consistently deliver significant long-term real returns.

This is why Siegel’s book carries the famous title: Stocks for the Long Run

While bonds provide stability and gold offers crisis protection, neither has historically matched the wealth-building power of equities over the long term.

Click here to get the PDF with all charts and graphs

Andrew’s takeaways

History shows that equities consistently outperform other asset classes after inflation. Investors who remain disciplined and patient benefit from compounding returns over time.

High nominal returns can be misleading if inflation is also high. Long-term investors must focus on inflation-adjusted performance to protect purchasing power.

Siegel also notes an important shift:

  • Historically, investors paid about 15× earnings for stocks
  • Today’s higher valuations suggest future real returns may be closer to 5% instead of 6–7%

This reflects a world with lower interest rates, higher asset prices, and slower economic growth.

Why this matters for investors today

Understanding long-term stock market returns helps investors:

  • Set realistic expectations
  • Avoid panic during downturns
  • Build diversified portfolios
  • Focus on decades, not market cycles

Perhaps most importantly, it reinforces one timeless principle: successful investing is a marathon, not a sprint.

 

In Siegel’s Stocks for the Long Run, he tells us to expect a 5% long-term real US stock market return

I became a finance teacher in Thailand in 1992

Then started as a financial analyst in 1993

Siegel’s book came out in 1994 and was one of the best references available at the time

US nominal returns

US real returns

More than 200 years of returns

95 years of returns

  • Higher inflation and higher nominal stock market returns, but only slightly higher real returns
  • Slightly lower real LT bond return, near zero ST bond return

Post WWII/Bretton Woods 75 years of high inflation

  • Real stock returns up slightly
  • Real LT bond returns down
  • Real ST bond returns down to zero
  • Gold outperformed ST bonds

The 21 years after the Dot Com bubble saw an unprecedented level of globalization

  • Inflation was down, and real US stock returns also down
  • Real US LT bond returns up
  • Nominal ST bond collapse, and real returns turn neg.
  • Gold beats all

Siegel’s advice

  • Over the long-term, an investor has paid about 15x PE for about 6-7% after inflation US stock market return
  • In the future, expect to pay about 20x PE for about 5% after inflation return

Click here to get the PDF with all charts and graphs

 

Read full transcript

Andrew Stotz 00:00
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning. In our community. We know that to win an investing, you must take risk but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives. Join me go to my worst investment ever.com Right now, fellow risk takers this is your worst podcast host Andrew Stotz, from a Stotz Academy, and today, I'm talking about a book that has landed on my desk. It's called stocks for the long run by Jeremy Siegel. Before I go into what we can take away from this book, I want to ask you a question. What is the long term return that you are expecting for US stocks? Is it 2%? Is it 20%? Is it 5%? Is it 15? Is it 10? What are you expecting for the long term women taught long term we're talking about 2050 years? Well, think about that. Write that down. If you're not driving, get that number clear in your head before we start, so that you're not overwhelmed by the information here and you are able to compare your estimate. Alright, you've got your estimate. Now let's compare it to what Siegel tells us in his book, Siegel tells us to expect a 5% long term real US stock market return. I'm going to explain that in more detail in just a moment. Now I became a finance teacher in Thailand in 1992. And then I took a job as a financial analyst in 1993, I continued to teach all my career just not full time. Siegel's book came out in 1994. Originally, that was the first edition where he was looking at data going back as long as he could find data, and then up to 1992. Today, what's arrived on my desk is the sixth edition. And I've just really enjoyed going through it. But what I recall when this first came out was that as an analyst in Thailand, there was no internet. And we didn't have libraries or bookstores at that time, particularly English language ones in Bangkok. So it was hard to get books and information about stock market returns. And so I found this book on one of my trips, and I bought it and brought it back to Bangkok and I devoured it. Now I want to start off with a chart. That's one of the first charts that he shows in the book. And it shows the US nominal returns, and I'm going to focus right now on stocks, what he shows is going back to 1801. So just about the time when the US was founded, which I believe was 1778, or 87, I can't remember. But at the end of the 1700s, if you had invested $1. In stock market returns in beneva, to get the stock market return. And you had held that until 2021, that $1 would have been worth $54 million. Now, it gets a little bit tricky there because that is what's called a nominal return. Once we take away the impact of inflation, instead of being an 8.4% return that would grow to $54 million. Once we take away the impact of inflation, which is the real return, it goes down to 6.9%, which means it would have grown to $2.3 million. So which one should we look at 54 million or 2.3, we should look at the 2.3 million and that's the amount that the investment has outpaced inflation. Now, just to give you an idea of on this real return, if you had invested in long term government bonds $1 At that time back in 1801 until 2021, you would have ended up not with $2.3 million, as you did with stocks. But with $2,000. And if you had invested in US government bills, meaning short term interest rates, you were in short term bonds or bills, as we call them, you would have not gotten 2 million from stocks, you would not have gotten 2000 from bonds, but you would have gotten $245. Now, if you had invested in gold at that time, from 1801 until 2021, what would have been your return? What do you think? Higher or lower? Well, in fact, gold would have provided you with only $4 of real return. And gold in fact is not and never has really been a great investment vehicle over the long term. It does help during periods of shocks for sure. Now, you can't see these charts but they're awesome and amazing. And I'm going to have some charts and graphs in this. And all you have to do is just go you can download this chart deck for free by just clicking on get the PDF link at my worst investment ever.com So now, let's look at the first period of time, which is from 1802 to 2021. That's 219 years of information. And from this, what we can see is that over that period of time, inflation was about 1.4%. And stocks had an average annual return of 8.4. So stocks definitely beat inflation. If we take that 8.4. And we subtract the 1.4. And inflation, we're going to get what's called the real stock return. Now, there's some reasons why you can't just subtract the long term inflation rate from the long term stock rate because there's volatility involved in this calculation. But for the simplicity of it, let's just say that 8.4 minus 1.4, so 8.4, US stock market return nominal minus 1.4. Inflation, you get to about 7%, real return was 6.9. So the average annual return was 6.9%. Now let's look at the government bond yield. This is long term government bonds, for 220 years, you would have gotten an average annual return of 5%. But if we back out inflation, it would be down to 3.6. And next, what about short term US government bonds over this period of 220 years, you would have gotten about a 4% average annual return for short term government bonds. If we adjust that for inflation, we see a real US government short term US government bond return of 2.5%. And ultimately, gold has a real positive return of only 0.6%. So now let's focus on those real returns for just a moment. Stocks, 6.9 long term government bonds 3.6, short term government bonds, 2.5, and gold 0.6. These are the average annual returns over the longest period of time that we have. And these are all US returns later, I'm going to come back and look at international returns. But I'm not going to do that in this particular presentation. Now, let's now say okay, come on, Andrew, going back to the 1800s isn't realistic, it was a different world. Okay, let's start after World War One. How about if we start in 1926. And we look at the 95 years from 1926 to 2021. Let's say it's getting close to about 100 year period. What do we see, during this period inflation was 2.9%. And stocks real returns on stocks was 7.1%. So about equal to what it was over the 200 year period. Now, we can look at the US government bonds, and they yielded long term bonds yielded 5.6% nominally. But because inflation was 2.9%, you only got half of that at about 2.6. Real return. And finally, let's look at us short term government bonds. They yielded 3.3% over this 95 year period. But because inflation was high, actually, the real return on US government short term debt was 0.4%, very close to zero. And gold over this period of 95 years from 1926 to 2021, yielded 1.8% average annual return. So let's review this again, if we compare to the 200 year period, inflation was up to 2.9% in the 95 year period from 1926 to 2021. That higher inflation, though, didn't really impact the stock market return because after inflation, stock market return was about 7%. After inflation, long term government bond return was 2.6%. That's a pretty low number. And after inflation, US government short term bonds was 0.4%. Basically, you would have earned almost nothing if you'd bought short term US government bonds. And now, if we look at gold over that period, it returned an average annual return in real return basis of 1.8%. Now, some people say, ah, Andrew, that's too long, 95 years, you're going back to the Great Depression. It's a whole different world these days, and therefore, we should look at the last 75 years, this would be post World War Two. We also know this was the Bretton Woods period of time where the dollar reigned supreme. Okay, let's look at that period. What did we find? We found that from 1946 to 2021, inflation was 3.7%. That's very high inflation during that period. And what was the real stock market return? It was 7.3%. So again, not much change in real stock market returns. What was the real long term government bond returns 2% very low. And what was the real short term government bonds returns 0.2% basically close to zero. Let's look at Gold Gold was 1.6% real return. Alright, so now let's just recap This period post World War Two, that's 75 years from 1946 to 2021. Let's look at the real returns that you would have gotten real return in stocks 7.3% real return and long term government bonds 2% and real return in short term government bonds 0.2% and real return in gold 1.6%. Basically the only asset class of these three, which is stocks, bonds, and gold, the only asset class that produce real significant performance was stocks, stocks, and this is why it's called stocks for the long run, because ultimately, stocks produce way more than bonds and way more than gold. But you now may say, okay, Andrew 75 years is a long period of time, so much has changed over the last couple of decades, that we should only look at the period from 2000 to 2021. Let's call this the post.com. Period, it's the last two decades, let's say 20, some years. So what did we find? Well, first of all, inflation was lower in this past two decades, at about 2.3%. In fact, we know that the Fed was keeping interest rates down to zero for maybe the last 15 years or so. And here, we can see that US stock market returns on a real basis. We're at 5.2%. US long term government return bonds return was at 4.6. So you can see that over the 21 year period stocks and long term government bonds almost had the same real return. How can that be? That's because interest rates were in a long term downtrend. And when interest rates are falling, bond prices rise, and therefore you're outperforming in your bond portfolio. And 20 years of falling interest rates means 20 years of strong performance of your bond portfolio, particularly your long term bond portfolio. The other thing is that because Siegel starting this period of time@the.com bubble, he's also starting at a very high level for the stock market and therefore, we only get about a 5.2% after inflation return. And now let's look at short term government bonds. What happened during that period with interest rates falling? Well, we should have seen outperformance like we saw in US long term government bonds but we didn't see that short term US government bonds had a nominal return of 1.5% and a real return of 0.8%. Negative. So you got negative return on short term government bonds. Why is that? Because the Fed kept the interest rates down so low, that basically they dropped interest rates to zero and they kept it there. And therefore there was only a small period of time where you got outperformance in the short term government bonds, but they quickly repriced, to zero. And, in fact, if you were owning short term government bonds over this period of time, you would have lost money on an average annual return basis. And finally, in the 21 year period, with interest rates going down so low, and we had a lot of stability, it was in fact, an amazing performance for gold up 3.6%. So now, let's recap this post.com period the past 21 years, real returns for stocks 5.2% real return for long term government bonds 4.6% real return for short term government bonds, negative 0.8% and real return for gold 6.3%. And also, let's go back to the 220 year history, because that's where we can really kind of base our thinking. If we look at long term returns over the last 220 years, it's about 6.9% for stocks, 3.6% for long term government bonds, and 2.5% for short term government bonds, and 0.1% for gold. That's a lot of stuff. And remember that you can access this chart deck by just going to my worst investment ever.com And say get the PDF. I just want to wrap up by saying that Seagull ended with some advice and I'm gonna go through some of his recommendations in more detail. But for right now, what I wanted to just do is say, he says over the long term investor has paid about 15 times PE for about six to 7% after inflation stock market return in the future, we should expect to pay about 20 times PE for about 5% After inflation return. That wraps up the first part of this book and I'll be talking more about it but feel free to download the PDF so that you got all the information. Fellow risk takers. I'll see you on the upside.

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]]> https://myworstinvestmentever.com/isms-28-stocks-for-the-long-run/feed/ 0 ISMS 22: Toyota vs. EV Extremists – Who Is Right? https://myworstinvestmentever.com/isms-22-toyota-vs-ev-extremists-who-is-right/ https://myworstinvestmentever.com/isms-22-toyota-vs-ev-extremists-who-is-right/#respond Thu, 27 Apr 2023 23:00:49 +0000 https://myworstinvestmentever.com/?p=11762 What’s interesting about Toyota is that if you buy today, you get its future growth for free.

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Click here to get the PDF with all charts and graphs

What’s interesting about Toyota is that if you buy today, you get its future growth for free

The right time to buy might be now

ICE vehicles are not going away, providing ongoing revenue support

Toyota is the world’s largest car manufacturer, ranked by a composite of market cap, revenue, and employees. The company has been a leader in alternative energy solutions such as hybrids and hydrogen-powered vehicles. The prior president has said that the company will “not simply repeat the approach of other companies” when it comes to electric vehicles (EV). Toyota points out the limited battery range, scarcity of lithium resources, lack of a charging network, and consumer preferences towards internal combustion engines (ICE). And developing markets in South America, Asia, and Africa could be decades away from having the infrastructure to implement a massive EV rollout; Toyota is well positioned to grow with these markets. Over the next five years, we expect Toyota to return to its pre-pandemic average growth level and achieve a CAGR of 6.9%.

Hybrid and Hydrogen leadership and more EVs coming could prove critics wrong

Toyota is a pioneer in the mass production of hybrid technology, having rolled out its hybrid “Prius” model in 1997, since selling more than 5m. Currently, hybrids account for about 27% of total vehicle sales. Toyota is pushing ahead with hydrogen-powered cars, currently selling its “Mirai” model. The beaten-down share price is some evidence that observers expect the company’s hydrogen offerings will eventually fail. But there is promise to the technology, and an investor could consider Toyota’s hydrogen to have an option value. Of course, Toyota has not turned its back on EVs; recently, announcing plans to invest US$70bn in electrifying part of its fleet by 2030. We appreciate Toyota’s diversified approach to transition to more carbon-neutral cars and expect total CAPEX spending of about JPY12trn over the next few years.

Negative sentiment pressuring price; but at 1x PB, it might be the time to BUY

The sector is unfavorable given recession fears, as well, investors doubts Toyota’s unconventional EV policies and its ability to defend its position as the world’s largest carmaker. The company’s price-to-book ratio (PB) dropped below 1x, which is 1x std dev below its long-term average. With an average net margin of 7.8% over the past 5 years, Toyota is among the most profitable automobile companies in the world. We believe negative sentiment has been too punishing, and the stock deserves a re-rating.

FY3Q23 saw strong revenue growth

  • Toyota’s 3Q23 revenue was up an impressive 25% YoY due to strong sales volume.
  • The operating profit also grew by 22%, with the positive effect of higher sales volume more than offsetting soaring material prices.
  • Though, the bottom line is slightly weaker YoY due to FOREX losses.

Revenue structure

  • With 10.5m sold cars in 2022, Toyota remained the largest car manufacturer in the world. Its automotive segment, which accounts for 91% of revenue includes the production of passenger cars, commercial vehicles, and related parts.
  • The company produces vehicles under four brands: Daihatsu, Hino, Lexus, and the namesake Toyota. Accounting for 85% of total automotive sales, Toyota was the best-selling brand.
  • It derives 7% of its revenue from financial services. Compared to other car companies, this contribution is relatively low, meaning that Toyota generates most of its sales from its core segment of car production.
  • Toyota gets its revenues from multiple geographic regions. In 2022, North America was the largest region in terms of revenue as it represented 35% of total revenue. Its domestic market Japan makes up 26%, followed by Asia (18%), and Europe (12%).

A. Stotz Four Elements

  • Overall: Toyota is highly unappealing relative to 2,300 non-financial companies in Japan considering Fundamentals, Valuation, Momentum, and Risk.
  • Fundamentals: Ranked in the bottom 30% in Japan due to low profitability driven by low margin and slow return on assets.
  • Valuation: Neutral as it trades on considerably lower PE, and PB relative to other companies in the Japanese market but on higher EV/EBIT.
  • Momentum: Moderately unattractive as both price and fundamental momentum are inconsistent and have not delivered convincing results.
  • Risk: Toyota has a low current ratio and risky debt status, but consistently high times interest earned. Price risk measured in terms of beta is about the same as the Japanese market.

A. Stotz Profitable Growth

  • Profitable Growth consistently ranked slightly below average among 930 large Consumer Discretionary companies globally. In the past 12 months, the ranking among its peers fell to #7 from #6 in 2022.
  • Profitability shares a similar story, ranking at #6 for more than half the period. Growth has improved slightly since 2019 to #8 from #10 but can also be seen as continually dropping from #5 in 2020.
  • Asset efficiency has ranked #9 since 2019 and constituted a heavy drag on Profitability. However, strong Expense control has been slightly effective in compensating for poor Asset efficiency. It has been the main driver of the overall Profitable Growth rank.
  • Sales growth has ranked below average, however, in the past 12 months, it peaked at #4. Expense direction has been volatile; it dropped to #9 after a strong #2 rank in 2021.

Profit and loss statement

Balance sheet – Assets

Balance sheet – Liabilities and equity

Cash flow statement

Ratios

Consensus estimates

  • Around 2/3 of analysts are bullish on Toyota, and only 1 analyst issued a SELL recommendation.
  • The mean target price shows about a 21% upside.
  • In general, analysts are most bullish on BYD, with 90% of analysts optimistic that the stock will outperform in the future. The average upside is 137%.
  • The German car manufacturer Mercedes-Benz receives a similar positive sentiment, with around 80% of analysts issuing a BUY recommendation. They expect a solid upside of 32%
  • US car giant Ford has the least favorable rating. 25% of analysts say it’s a SELL.

Relative valuation

  • The trailing price-to-book ratio (PB) shows that Toyota is trading 1x std dev below its long-term average of 1.2x. And it has recently fallen below 1.0x.
  • On the forward 2024E PB multiple, Toyota trades at a massive discount to the Consumer Discretionary sector in Japan. The gap between Asia and World is even higher, making Toyota appear cheap.
  • I expect its return on equity (ROE) of 10% to be slightly above Japanese and Asian sector averages, which leads Toyota to trade at a deep discount based on the 2024E PB-to-ROE multiple.
  • If we were to revalue Toyota to the 2024E PB-to-ROE multiple of Japan, the company would deserve to trade at a 2024E PB of 1.4x. This would lead to a value estimate of JPY3147, or 75% higher than the current share price. Based on that, Toyota seems to be massively undervalued.
  • Though, we have chosen to use a DCF-based valuation to value Toyota.

Free cash flow data

Valuation and target price

  • We assume a risk-free rate of 1% and a market equity risk premium for the Japanese market of 10% like its recent past.
  • Toyota has been performing in line with the market; thus, we assume a beta of 1x. We forecast a capital structure with 44.6% debt to total capital, in line with the current level. This results in a WACC and a discount rate of 6.4%. We use a terminal growth rate of 1% and use Free Cash Flow to Firm (FCFF) to value Toyota.
  • Our base case assumes a gross margin of 18.2% p.a. until 2027E, resulting in a value of JPY2,509 per share based on the FCFF methodology. A 40% upside compared to the current market price.
  • In our sensitivity analysis (see next page), our optimistic case assumes a gross margin of 20.2 p.a. until 2027E. If Toyota were to deliver that target, the value derived from FCFF would be JPY2,802. In our pessimistic case, we look at if Toyota’s gross margin were only 16.2% per year. Then the value would be JPY2,214 per share, which still allows for plenty of upside.

Sensitivity analysis

Main risk is the failure to adapt to the industry trends

Failure to adapt to the industry trends

We built our forecast around the fact that Toyota’s decision to delay the full shift to EVs is a wise decision and also around the fact that it would be successful in its endeavors toward hybrids, electric, and hydrogen fuel cars. Any sudden change in consumer preferences would hurt the company’s short-term results. Also, any failure in the production of its new hybrid, electric, or hydrogen fuel cars would hurt the automaker’s long-term results. Toyota recently offered to buy back its new electric SUV (BZ4X) from its owners because of a severe problem: the wheels could fall off while driving even after just a short time on the road! Anything like that would drag down our target price and affect the company’s position in the market.

Soaring raw material prices

Prices of raw materials such as cobalt, lithium, and nickel have surged. In May 2022, lithium prices were over seven times higher than at the start of 2021. Unprecedented battery demand and a lack of structural investment in new supply capacity are key factors. Russia’s invasion of Ukraine has created further pressure since Russia supplies 20% of global high-purity nickel. Also, China produces three-quarters of all lithium-ion batteries and is home to 70% of the production capacity for cathodes and 85% of the production capacity for anodes (both are key components of batteries), so if geopolitical tensions lasted long it would cause huge drops in the company’s margins and disruptions in its supply chain.

Concentration of suppliers

Automakers must rely on suppliers of cheaper raw materials to succeed in the automotive industry. But, Toyota depends on a limited number of suppliers, whose replacement with others may be difficult, exposing the company to a wide range of risks. Any loss of an important supplier or inability to obtain materials in a timely and cost-effective manner could lead to increased costs or delays in Toyota’s production and deliveries, which would hurt the company’s revenues and margins. Nonetheless, Toyota has managed to build great relationships with its suppliers which reduces the risk of losing them.

 

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]]> https://myworstinvestmentever.com/isms-22-toyota-vs-ev-extremists-who-is-right/feed/ 0 ISMS 21: CPI Collapsing Across the Globe https://myworstinvestmentever.com/isms-21-cpi-collapsing-across-the-globe/ https://myworstinvestmentever.com/isms-21-cpi-collapsing-across-the-globe/#respond Sun, 23 Apr 2023 23:15:31 +0000 https://myworstinvestmentever.com/?p=11731 Will the global CPI slowdown continue?

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Will the global CPI slowdown continue?

Global Markets

Global CPI is falling fast in both DM and EMs

  • Economies across the world have a GDP of about US$90trn and an average CPI of 6.2%
  • DM CPI was 5.7%
  • EM CPI was 6.9%

World CPI was 6.2%, down 0.4ppts from one year ago; MoM it was down 0.8ppts

  • DM CPI was 5.7%, down 0.9ppts from one year ago; MoM it was down 0.8ppt
  • It has moved from being in line with World CPI last year; to the current 0.5ppt discount
  • EM CPI was 6.9%, which is about flat vs. one year ago; MoM it was down 0.8ppt
  • It has moved from being in line with the World CPI last year; to the current 0.7ppt premium

Developed Regions

DM Americas CPI is falling fast, DM Europe is sliding, DM Asia is on a steady rise

  • DM Americas is the largest, with US$25trn of GDP and 4.9% CPI
  • DM Europe has US$14.9trn GDP and 7.1% CPI
  • DM Pacific has US$7.6trn GPD and 4.7% CPI

DM Americas CPI is falling fast, DM Europe is sliding, DM Asia is on a steady rise

  • DM Americas CPI was 4.9%, down 3.4ppts from one year ago; MoM it was down 1ppts.
  • It has moved from a 1.7ppts premium to World CPI last year; to the current 1.3ppts discount
  • DM Europe CPI was 7.1%, up 0.9ppts from one year ago; MoM it was down 1.1ppts.
  • It has moved from a 0.5ppts discount to World CPI last year; to the current 0.9ppts premium
  • DM Pacific CPI was 4.7%, up 2.4ppts from one year ago; MoM it was up 0.4ppts.
  • It has moved from a 4.4ppts discount to World CPI last year; to the current 1.5ppts discount

Emerging Regions

EM Europe and Asia CPI falling; Middle East & Africa, and Frontier markets are still on fire

  • EM Americas had a small GDP of US$3.8trn and CPI of 7%
  • EM Asia had a massive GDP of US$25.7trn and 1.9% CPI
  • EM Europe had a small US$3.9trn GDP and a massive 17.7% CPI
  • Emerging Middle East & Africa had a tiny US$1.7trn GDP and a high 11.5% CPI
  • Frontier markets had a US$2.9trn GDP and an extremely high 31.2% CPI

EM Europe and Asia CPI falling; Middle East & Africa, and Frontier markets are still on fire

  • EM Americas CPI was 7%, down 2.4ppts from one year ago; MoM it was down 0.8ppts.
  • It has moved from a 2.6ppts premium to World CPI last year; to the current 0.7ppts premium
  • EM Asia CPI was 1.9%, down 0.6ppts from one year ago; MoM it was down 0.4ppts.
  • It has moved from a 4.1ppts discount to World CPI last year; to the current 4.3ppts discount
  • EM Europe CPI was 17.7%, down 6.1ppts from one year ago; MoM it was down 5ppts.
  • It has moved from a 17.1ppts premium to World CPI last year; to the current 11.4ppts premium
  • EM ME&A CPI was 11.5%, up 6.4ppts from one year ago; MoM it was up 0.4ppts.
  • It has moved from a 1.5ppts discount to World CPI last year; to the current 5.3ppts premium
  • Frontier CPI was 31.2%, up 14.7ppts from 1yr ago; MoM up 0.3ppts
  • It has moved from a 9.9ppts premium to World CPI last year; to the current 25ppts premium. This region was up YoY and MoM

Developed Countries

Only US CPI fell YoY; all top 5 DM countries, except Japan, fell MoM; UK CPI is double the US

  • Top five DM countries
  • US GDP was US$23trn, CPI of 5.0%
  • Japan US$4.9trn and 3.9% CPI
  • Germany US$4.2trn and 7.5% CPI
  • UK: US$3.2trn, 10.2%
  • France: US$2.9trn/5.8%
  • USA CPI was 5%, down 3.5ppts from one year ago; MoM it was down 1ppts.
  • It has moved from a 1.8ppts premium to World CPI last year; to the current 1.2ppts discount
  • Japan CPI was 3.9%, up 2.7ppts from one year ago; MoM it was up 0.6ppts.
  • It has moved from a 5.5ppts discount to World CPI last year; to the current 2.3ppts discount
  • Germany CPI was 7.5%, up 1.9ppts from one year ago; MoM it was down 1.3ppts.
  • It has moved from a 1.1ppts discount to World CPI last year; to the current 1.3ppts premium
  • UK CPI was 10.2%, up 3.1ppts from one year ago; MoM it was down 0.4ppts.
  • It has moved from a 0.4ppts premium to World CPI last year; to the current 4ppts premium
  • France CPI was 5.8%, up 1.3ppts from one year ago; MoM it was down 0.6ppts.
  • It has moved from a 2.1ppts discount to World CPI last year; to the current 0.4ppts discount

Emerging Countries

Big CPI fall in Russia, China, and India; more minor falls in Korea and Brazil

  • China: US$17.5trn/0.6%
  • India: US$3.2trn/5.6%
  • Korea: US$1.8trn/4.3%
  • Russia: US$1.8trn/3.6%
  • Brazil: US$1.6trn/4.7%
  • China CPI was 0.6%, down 0.9ppts from one year ago; MoM it was down 0.3ppts.
  • It has moved from a 5.2ppts discount to World CPI last year; to the current 5.6ppts discount
  • India CPI was 5.6%, down 1.5ppts from one year ago; MoM it was down 0.8ppts.
  • It has moved from a 0.4ppts premium to World CPI last year; to the current 0.6ppts discount
  • Korea CPI was 4.3%, up 0.2ppts from one year ago; MoM it was down 0.6ppts.
  • It has moved from a 2.6ppts discount to World CPI last year; to the current 2ppts discount
  • Russia CPI was 3.6%, down 12.9ppts from one year ago; MoM it was down 7.5ppts.
  • It has moved from a 9.8ppts premium to World CPI last year; to the current 2.7ppts discount
  • Brazil CPI was 4.7%, down 6.5ppts from one year ago; MoM it was down 0.9ppts.
  • It has moved from a 4.5ppts premium to World CPI last year; to the current 1.6ppts discount

 

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]]> https://myworstinvestmentever.com/isms-21-cpi-collapsing-across-the-globe/feed/ 0 ISMS 19: 5% March 2023 CPI Could Fall to 4% By Year-End; If Oil Doesn’t Fly https://myworstinvestmentever.com/isms-19-5-march-2023-cpi-could-fall-to-4-by-year-end-if-oil-doesnt-fly/ https://myworstinvestmentever.com/isms-19-5-march-2023-cpi-could-fall-to-4-by-year-end-if-oil-doesnt-fly/#respond Sun, 16 Apr 2023 23:01:50 +0000 https://myworstinvestmentever.com/?p=11688 An oil price surge would push end-2023 slightly higher than 4%, but only slightly because it takes a few months for an oil price rise to impact CPI. A US recession could quickly bring CPI below 4%.

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Remember that CPI is not inflation

  • Mar 2023 US CPI was 5%, down from 6% in Feb and off its June 2022 peak of 9.1%
  • Mar 2023, the food component was up 8.5% but has come off its Aug 2022 11.4% peak
  • Mar 2023, the energy component was down 6.4, a massive fall from its 41.6% June 2022 peak
  • In Mar 2023, all other items were flat MoM at 5.6%, down from Mar 2022 6.5% high
  • Without a surge in oil US, we forecast CPI could end 2023 at 4%

Two things that could derail YE23 4% …

  • An oil price surge would push end-2023 slightly higher than 4%, but only slightly because it takes a few months for an oil price rise to impact CPI
  • A US recession could quickly bring CPI below 4%

 

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The post ISMS 19: 5% March 2023 CPI Could Fall to 4% By Year-End; If Oil Doesn’t Fly appeared first on My Worst Investment Ever.

]]> https://myworstinvestmentever.com/isms-19-5-march-2023-cpi-could-fall-to-4-by-year-end-if-oil-doesnt-fly/feed/ 0 ISMS 16: Top 5 EM Country Interest Rates – Normal China Yield Curve https://myworstinvestmentever.com/isms-16-top-5-em-country-interest-rates-normal-china-yield-curve/ https://myworstinvestmentever.com/isms-16-top-5-em-country-interest-rates-normal-china-yield-curve/#respond Wed, 05 Apr 2023 23:04:05 +0000 https://myworstinvestmentever.com/?p=11615 Emerging Countries - China and Russia with stable rates, LT rates up only slightly, yield curve inversion less severe except Russia.

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Emerging Countries – China and Russia with stable rates, LT rates up only slightly, yield curve inversion less severe except Russia

Interest rate overview

  • China 3m yield 2.5%, India 7.2%, Korea 3.3%, Russia 22.3%, Brazil 13.6%
  • China 1yr yield 2.2%, India 7.2%, Korea 3.3%, Russia 10.0%, Brazil 13%
  • China 10yr yield 2.9%, India 7.3%, Korea 3.3%, Russia 10.3%, Brazil 13.1%

Year-on-year changes

  • 3m yield went up in most emerging countries
    • China 3m yield was up 0.1ppts, India up 3.4ppts, Korea up 2.1ppts, Russia flat, Brazil up 1.9ppts
  • 1yr yield increases most prominent in India and Korea
    • China 1yr yield was up 0.1ppts, India up 2.9ppts, Korea up 1.6ppts, Russia down 4ppts, Brazil up 0.2ppts
  • 10yr yield curve hasn’t changed significantly among emerging countries
    • China 10yr yield was flat, India up 0.5ppts, Korea up 0.4ppts, Russia down 0.8ppts, Brazil up 1.5ppts

Rate progression

  • 3m yield was quite stable in developing countries
    • Overall, developing countries have been more cautious in adjusted their short-term interest rates
  • 1yr yield was volatile in Russia over the past year; other developing countries remained flat
  • 10yr yield almost stayed constant in all emerging countries

Yield curve

  • China yield curve remained constant over the past 12 months
    • Both short-term and long-term yield haven’t moved much
    • As of March 2023, the 10yr yield remained 0.4ppts higher than the 3m yield
  • India yield curve flattened massively and looks set to invert
    • 3m yield almost reached the same level as 10yr yield recently
    • This is a massive change YoY as the yield curve was pretty steep back in March 2022
  • Korea yield curve inverted slightly in March 2023
  • Russia yield curve stays inverted
    • Both short term yield and long-term yield haven’t moved much
  • Brazil yield curve inversion has widened
    • The inversion accumulated to 0.5 ppts which is a bit higher compared to the previous year

Key points

  • India, Korea, and Brazil raised ST rates significantly; China and Russia were stable
  • LT rates are up slightly in all EM countries but increased less than World
  • Brazil and Korea saw yield curve inversion recently, Russia remains worst

 

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]]> https://myworstinvestmentever.com/isms-16-top-5-em-country-interest-rates-normal-china-yield-curve/feed/ 0 ISMS 15: Top 5 DM Country Interest Rates – Steep US Inversion https://myworstinvestmentever.com/isms-15-top-5-dm-country-interest-rates-steep-us-inversion/ https://myworstinvestmentever.com/isms-15-top-5-dm-country-interest-rates-steep-us-inversion/#respond Wed, 05 Apr 2023 23:03:56 +0000 https://myworstinvestmentever.com/?p=11612 Developed Countries - Vast DM Country increases in ST and LT rates, Japan stays an outlier, US looks worst based on yield curve inversion.

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Developed Countries – Vast DM Country increases in ST and LT rates, Japan stays an outlier, US looks worst based on yield curve inversion

Interest rate overview

  • US 3m yield 4.9%, Japan -0.3%, Germany 2.6%, UK 4.1%, France 2.8%
  • US 1yr yield 4.7%, Japan -0.1%, Germany 2.9%, UK 4.0%, France 3.0%
  • US 10yr yield 3.6%, Japan 0.3%, Germany 2.3%, UK 3.5%, France 2.8%

Year-on-year changes

  • 3m yield in US up the most YoY as it started the interest rate hike
    • USA 3m yield was up 4.4ppts, Japan down 0.2ppts, Germany up 3.2ppts, UK up 3.5ppts, France up 3.4ppts
  • 1yr yield has risen significantly in developed countries; only Japan’s yield didn’t move
    • USA 1yr yield was up 3.1ppts, Japan down 0.1ppts, Germany up 3.3ppts, UK up 2.7ppts, France up 3.5ppts
  • 10yr yield grew in all developed countries YOY, even in Japan
    • USA 10yr yield was up 1.2ppts, Japan up 0.1ppts, Germany up 1.8ppts, UK up 1.9ppts, France up 1.8ppts

Rate progression

  • 3m yield has risen steepest in the US
    • Germany, UK, and France 3m yield follows US, but with a delay
    • Japan remains an outsider and continues with its negative interest rate policy
  • 1yr yield in developed countries moved up aggressively
    • However, in March 2023, US 1yr yield dropped for the first time in 12 months
    • Other developed countries also saw a slight fall recently
  • 10yr yield has risen in all developed countries, but starts to show flattening behavior recently
    • Since October 2022, the 10yr yield among the developed countries hasn’t moved much and stayed flat

Yield curve

  • 3m yield curve inversion in the US widened after the Fed aggressively increased short-term rates
    • In March 2023, the 3m rate was 1.3 ppts higher than the long-term rate
  • 1yr yield curve in Japan steepened over the past 12 months
    • Japan is among the few countries that haven’t seen a yield curve inversion
    • Quite the opposite is true as the differential between 10yr yield and 3m rates doubled over the past 12 months
  • 10yr yield curve in Germany turned into negative territory, but far less severe compared to World
  • 10yr yield curve in the UK also saw a slight widening of its yield curve inversion
  • 10yr yield curve in France flattened massively and seems likely to invert soon

Key points

  • Aggressive ST rate hikes led by the US and followed by European developed countries
  • LT rates seem to have peaked and fell MoM
  • Japan with different policy sees almost no movements in both ST and LT rates
  • US faced steepest inversion among developed countries; Japan maintains positive yield curve

 

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]]> https://myworstinvestmentever.com/isms-15-top-5-dm-country-interest-rates-steep-us-inversion/feed/ 0 ISMS 14: Regional Interest Rates – Low in Asia, Egypt and Frontiers on Fire https://myworstinvestmentever.com/isms-14-regional-interest-rates-low-in-asia-egypt-and-frontiers-on-fire/ https://myworstinvestmentever.com/isms-14-regional-interest-rates-low-in-asia-egypt-and-frontiers-on-fire/#respond Wed, 05 Apr 2023 23:02:09 +0000 https://myworstinvestmentever.com/?p=11608 Developed Market Regions - ST rates about to peak, LT rates are falling, inverted yield curve in DM Americas and Europe widened. Emerging Market Regions - Massive ST rate hikes in ME&A and Frontier, LT rates more stable, no yield curve inversion in Asia.

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Developed Market Regions – ST rates about to peak, LT rates are falling, inverted yield curve in DM Americas and Europe widened

Interest rate overview

  • DM Americas 3m yield 4.8%, DM Europe 3%, DM Pacific much lower at 1.1%
  • DM Americas 1yr yield 4.6%, DM Europe 2.8%, DM Pacific same as 3m yield at 1.1%
  • DM Americas 10yr yield 3.5%, DM Europe 2.9%, DM Pacific 1.4% is higher than 3m and 1yr yield, normal yield curve

Year-on-year changes

  • Biggest rise of 3m yield in Developed America
    • World 3m yield was up 3.2ppts, DM Americas up 4.3ppts, DM Europe up 3.3ppts, DM Pacific up 1.1ppts
  • Following 3m yield, 1yr yield YoY changes were most prominent in DM Americas and DM Europe
    • World 1yr yield was up 1.9ppts, DM Americas up 3ppts, DM Europe up 2.9ppts, DM Pacific up 0.8ppts
  • 10yr yield in DM Europe and DM Americas widened fastest, little movement in DM Pacific
    • World 10yr yield was up 0.9ppts, DM Americas up 1.2ppts, DM Europe up 1.8ppts, DM Pacific up 0.4ppts

Rate progression

  • 3m yield has risen most aggressively in DM Americas
    • DM Europe yield moved at a similar pace to World
    • DM Pacific yield only rose slightly, widening the 3m interest rate differential to other DM regions
  • Unlike World, 1yr yield has fallen in all DM regions in March 2023
  • 10yr yield in DM Americas and DM Europe moved up simultaneously
    • DM Pacific 10yr yield stayed almost flat
    • All DM 10yr rates fell MoM in March

Yield curve

  • DM Americas yield curve has inverted the most among all DM regions
    • In March 2023, the 3m yield was 1.3ppts higher than the 10yr yield
    • The degree of inversion is similar to World
  • DM Europe yield curve just inverted in March 2023
    • The yield curve turned to negative territory as the 10yr yield dropped in March by 0.4ppts compared to February
    • Though the inversion is much less extreme compared to World
  • DM Pacific sees flattening yield curve over the past 12 months, but remains positive
    • As of March 2023, the long-term 10yr yield was 0.3ppts higher compared to the short-term 3m yield
    • One year earlier, the difference was 0.9ppts

Key points

  • ST rates in DM Americas and Europe risen more aggressively than World, DM Pacific much slower
  • Small increases in LT rate in all DM regions YoY, but fell MoM
  • DM Pacific maintains a positive yield curve while inversion worsened in DM Americas and Europe

Emerging Market Regions – Massive ST rate hikes in ME&A and Frontier, LT rates more stable, no yield curve inversion in Asia

Interest rate overview

  • EM Americas 3m yield 12.7%, EM Asia 3.2%, EM Europe 14.6%, EM ME&A 52.7%, Frontier markets 23%
  • EM Americas 1yr yield 12.6%, EM Asia 3.2%, EM Europe 9.4%, EM ME&A at 23% is half 3m rate, Frontier markets 17.1%
  • EM Americas 10yr yield 11.2%, EM Asia 3.6%, EM Europe 8.8%, EM ME&A 10yr yield  at 15.4%, 1/3rd of 3m rate, Frontier markets 10yr yield 11.9%, half 1yr

Year-on-year changes

  • 3m yield has risen in all EM regions; it was most extreme in ME&A and Frontier markets
    • EM Americas 3m yield was up 3.1ppts, EM Asia up 0.9ppts, EM Europe up 0.3ppts, EM ME&A 3m yield was up 43.2ppts, Frontier 3m yield was up 10.6ppts
  • 1yr yield saw a rise in all EM regions YoY, except in EM Europe
    • EM Americas 1yr yield was up 1.8ppts, EM Asia up 0.8ppts, EM Europe down 3ppts, EM ME&A up 9.2ppts, Frontier up 4.3ppts
  • 10yr yield surged in all EM regions, except EM Europe
    • EM Americas 10yr yield was up 1ppts, EM Asia up 0.1ppts, EM Europe down 2.7ppts, EM ME&A up 2.7ppts, Frontier up 3.4ppts

Rate progression

  • 3m yield has moved in different directions among EM regions
    • ME&A and Frontier saw extreme increases in their 3m rates mainly driven by Egypt
    • EM Asia and EM Europe actually stayed flat over the past 12 months
  • Spotlight on Egypt Inflation went from 9% to 32% in 12 months
    • Russia and Ukraine account for 80% of Egypt’s wheat imports
    • Since the war, import prices  skyrocketed
    • 50% currency devaluation in 2016 and another 50% since March 2022
  • 1yr yield in all EM regions higher than World, except Asia
  • 10yr yield in EM regions were less fluctuating
    • All EM regions have a higher long-term 10y yield than World

Yield curve

  • EM Americas yield curve inverted slightly more than World
  • EM Asia yield curve is the only EM regions which didn’t see an inversion of its yield curve yet
    • Though, the yield curve has flattened over time
    • In March, the difference between the 10y yield and 3m yield was just 0.4ppts
    • One year earlier, the difference stood at 1.2ppts
  • EM Europe yield curve inversion more than doubled over the past 12 months
    • In March 2023, the long-term yield was 5.8ppts higher than the 3m yield
    • 12 months ago, the difference was only 2.8ppts
  • EM ME&A yield curve has massive inversion
    • Given the aggressive increase in 3m yield, the inversion amounted to 37.4ppts in March 2023
    • This compared to no inversion one year ago
  • Frontier yield curve stays inverted in March 2023, but a bit less MoM

Key points

  • ST rates exploded in ME&A and Frontier, EM Asia and Europe were more cautious in raising ST rates
  • LT rates of all EM regions rose and remained above World; only EM Europe saw falling yield YoY
  • Asia remains the sole EM region with no yield curve inversion, inversion looks painful for EM Europe, ME&A, and Frontier

 

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]]> https://myworstinvestmentever.com/isms-14-regional-interest-rates-low-in-asia-egypt-and-frontiers-on-fire/feed/ 0 ISMS 13: Global Interest Rates – Hikes Slow, Inversion Signals Recession https://myworstinvestmentever.com/isms-13-global-interest-rates-hikes-slow-inversion-signals-recession/ https://myworstinvestmentever.com/isms-13-global-interest-rates-hikes-slow-inversion-signals-recession/#respond Wed, 05 Apr 2023 23:01:50 +0000 https://myworstinvestmentever.com/?p=11598 World - End of DM ST rate rise, inverted yield curves remain, high rates in EM.

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World – End of DM ST rate rise, inverted yield curves remain, high rates in EM

Level – High ST global and EM rates, yield curve inversion

  • World ST rates at 5.3%, DM 3.6%, EM 7.7%
  • World 1yr rates at 4.4%, DM 3.4%, EM 5.8%
  • World 10yr rates at 4.1%, DM 3.0%, EM 5.6%

YoY rise – ST rates up massively YoY, small increase in LT rates

  • World 3m yield was up 3.2ppts, DM up 3.5ppts, EM up 2.6ppts
  • World 1yr yield was up 1.9ppts, DM up 2.6ppts, EM up 0.7ppts
  • World 10yr yield was up 0.9ppts, DM up 1.3ppts, EM up 0.1ppts

Progression – ST rate rise stopped in DM, DM LT rates fell MoM

  • 3m yield consistently grew over the past 12 months, but DM is flat MoM
  • World 1yr yield has fallen for the first time in March 2023, driven by fall in DM
  • 10yr yield has risen less extreme compared to short-term rates, again DM fell MoM

Yield curve –  Yield curve inversion steepened, especially in EM

  • World yield curve inversion has recently steepened
    • In March 2023, the yield curve inversion reached 1.2 ppts, which is higher compared to February 2023 at 0.9ppts
  • DM yield curve inverted as well, but less than World
    • Developed yield curve inversion reached negative 0.6ppts in March, a doubling of February 2023 negative 0.3ppts
  • EM yield curve saw much greater inversion
    • The inversion stood at 2ppts as of March 2023

Key points

  • High ST global and EM rates, yield curve inversion
  • ST rates up massively YoY, small increase in LT rates
  • ST rate rise stopped in DM, DM LT rates fell MoM
  • Yield curve inversion steepened, especially in EM

 

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The post ISMS 13: Global Interest Rates – Hikes Slow, Inversion Signals Recession appeared first on My Worst Investment Ever.

]]> https://myworstinvestmentever.com/isms-13-global-interest-rates-hikes-slow-inversion-signals-recession/feed/ 0 ISMS 12: CPI Racing Across the Globe https://myworstinvestmentever.com/isms-12-cpi-racing-across-the-globe/ https://myworstinvestmentever.com/isms-12-cpi-racing-across-the-globe/#respond Mon, 20 Mar 2023 23:00:57 +0000 https://myworstinvestmentever.com/?p=11503 Is global CPI going to follow the US CPI slowdown?

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Is global CPI going to follow the US CPI slowdown?

Global Markets

Global CPI has leveled off and is slowing in DMs, but still rising in EMs

  • Economies across the world have GDP of about US$90trn and an average CPI rate of 7.4%
  • The developed world has GDP of US$52trn and CPI of 6.9%
  • And the emerging world has GDP of US$38trn and a higher 8.2% CPI rate

World Jan. 2023 CPI was 7.4%, up 2.1ppts YoY; MoM DM continues to fall, while EM is rising

  • DM Jan. 2023 CPI was 6.9%, up 1.5ppts YoY, but falling slightly MoM
  • EM Jan. 2023 CPI was 8.2%, up 2.9ppts YoY, and is rising MoM

Key points

  • Global CPI was 7.4% in January, up 2.1ppts YoY, but it was flat MoM
  • Developed world CPI was 6.9%, up 1.5ppts YoY, but falling slightly MoM
  • Emerging world CPI in January at 8.2%, up 2.9ppts YoY, and it rose MoM

Developed Markets Regions

CPI is contained in DM Americas, peaking in DM Europe, and rising in DM Asia

  • With in the Developed Markets, DM Americas is the largest with US$25trn of GDP and 6.3% CPI
  • Developed Europe has US$15trn of GDP and a higher 8.3% CPI
  • Developed Pacific is smaller at US$8trn and has the lowest CPI of the developed regions at 5.1%

DM Americas CPI falling, DM Europe peaking, DM Asia rising

  • 12 months ago, DM Americas had a 7.4% CPI which is now down to 6.3%, a 1.1ppts fall
  • This means that CPI went from 2.1ppts above the global average to 1.1ppts below
  • DM Europe rose from 4.4% 12 months ago to 8.3%, up 3.8ppts
  • This means it went from 0.9ppts below to 0.8ppts above the global average
  • CPI is racing up in DM Pacific from 1.5% 12 months ago to the current 5.1%, that’s a 3.6ppts increase
  • It has gone from 3.8ppts lower than World CPI to 2.4ppts lower

Key points

  • DM Americas 6.3% January CPI is down from 7.4% 12 months ago; and has now shifted from being 2.1ppts above the global average to 1.1ppts below
  • CPI nearly doubled in DM Europe over the past 12 months from 4.4% to 8.3%, shifting from about 1ppts below to 1ppts above the global average
  • CPI in the must smaller DM Pacific region raced up from 1.5% 12 months ago to the current 5.1%; despite that massive 3.6ppts increase, it remains about 2.4ppts lower than the global average

Emerging Markets

EM CPI rising in Asia, Middle East and Africa, and Frontier markets on fire

  • EM Americas had a small GDP of US$3.8trn and CPI of 7.9%
  • EM Asia had a massive GDP of US$25.7trn and 3.2% CPI
  • EM Europe had US$3.9trn GDP and a massive 23% CPI
  • EM Middle East and Africa had a small US$1.7trn GDP and a high 10.2% CPI
  • Finally, Frontier markets had US$2.9trn GDP and 30% CPI

EM CPI rising in Asia, Middle East and Africa, and Frontier markets on fire

  • EM Americas CPI was 7.9% in January, down slightly from 8.5% 12 months ago
  • EM Asia CPI went from a tiny 1.9% 12 months ago to 3.2% and is still 4.3ppts below the World CPI
  • Most notably, this has ticked up slightly MoM
  • EM Europe CPI was 23% and over the past two months has been falling; though it is still 15.5ppts above the World average
  • EM ME&A CPI was 10.2% compared to 3.7% 12 months ago. It has now risen to be 2.8ppts above the world average compared to 1.7ppts below 12 months ago
  • Consumer prices are on fire in Frontier markets up 30% YoY in January; this is double where they were 12 months ago; CPI keeps rising MoM and is now 22.5ppts above the world average

Key points

  • EM Americas CPI was 7.9% in January, down slightly from 8.5% 12 months ago
  • EM Asia CPI went from a tiny 1.9% 12 months ago to 3.2% and is still 4.3ppts below the World CPI. Most notably, this has ticked up slightly MoM
  • EM Europe CPI was 23% and over the past two months has been falling; though it is still 15.5ppts above the World average
  • EM ME&A CPI was 10.2% compared to 3.7% 12 months ago. It has now risen to be 2.8ppts above the world average compared to 1.7ppts below 12 months ago
  • Consumer prices are on fire in Frontier markets up 30% YoY in January; this is double where they were 12 months ago; CPI keeps rising MoM and is now 22.5ppts above the world average

Developed Markets

CPI is flattening in major developed markets, led by US CPI fall

  • Top five DM countries

Only US CPI is falling YoY; UK has started falling MoM; Germany, Japan, and France are rising

  • USA CPI was 6.4% in January, down from 7.6% a year ago; it has gone from 2.2ppts above the global average to -1.1ppts below
  • February just came out for US CPI at 6.0%. Unfortunately, February numbers are not out for all the other countries, so we focus now on January
  • Japan’s CPI went racing up from 0.5% 12 months ago to 4.4% in January; though it remains at a deep discount to the global average, it appears to be closing that gap
  • Germany’s CPI doubled from 4% 12 months ago, which was 1.4ppts below the worldwide average, to 8.8% now, 1.3ppts above the global average
  • UK CPI started 12 months ago relatively high at 5.4% and is now has doubled to 10.2%; though it has fallen slightly MoM
  • France’s CPI was a low 3% a year ago and has doubled to 6.1%, which is still 1.3ppts below the global average

Key points

  • USA CPI fell to 6.4% in January and 6.0% in February, going from 2.2ppts above the global average to 1.1ppts below
  • Japan’s CPI increased by 8x from 0.5% 12 months ago to 4.4% in January
  • Germany’s CPI doubled to 8.8%, going from 1.4ppts below the worldwide average to 1.3ppts above
  • UK CPI doubled to 10.2%; though it has fallen slightly MoM
  • France’s CPI doubled to 6.1%, which is still 1.3ppts below the global average

Emerging Markets

CPI uptick in EM Asia giants, China and India, could keep EM CPI rising

  • Emerging world

CPI is rising YoY in China, India, Korea, and Russia; falling only in Brazil

  • China’s CPI at 2% is low but rising; 12 months ago, it was at 0.8%, and it has been slow to rise, partially because of the covid lockdown; it is 5.4ppts below the global average and could rise substantially
  • India’s 6.5% CPI was almost flat compared to 12 months ago, hovering at about the global average
  • Korea CPI at 5.2% has been steady at about 2ppts below the global average and is up 1.7ppts from 3.5% 12 months ago
  • Russia’s CPI was 11.8% in January and has been on a steady decline from its 18% peak in April 2022 near the start of the war; though it is still 4.3ppts above the global average
  • 12 months ago, Brazil was struggling with about 10% CPI, but previous aggressive rate hikes have cut CPI in almost half to 5.8%, taking it from 4.9ppts above the global average to 1.7ppts below

Key points

  • China’s 2% CPI is 5.4ppts below the global average and could rise substantially
  • India’s 6.5% CPI has been steady at about the global average, low risk of shock
  • Korea CPI 5.2% was up 1.7ppts but has been steady at about 2ppts below the global average
  • Russia’s CPI has been on a steady decline from its April 2022 18% peak to 11.8%
  • Over the past 12 months, Brazil cut its CPI in half to January’s 5.8%, moving it from 4.9ppts above the global average to 1.7ppts below

 

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]]> https://myworstinvestmentever.com/isms-12-cpi-racing-across-the-globe/feed/ 0 ISMS 11: US Banking Crisis and Fed Rate Cut https://myworstinvestmentever.com/isms-11-us-banking-crisis-and-fed-rate-cut/ https://myworstinvestmentever.com/isms-11-us-banking-crisis-and-fed-rate-cut/#respond Mon, 20 Mar 2023 01:00:32 +0000 https://myworstinvestmentever.com/?p=11501 Did the Fed finally break something with its aggressive rate rises? I’ve been repeating in my investment strategy that the Fed will eventually break something, and yes, they did. They did.

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Did the Fed finally break something with its aggressive rate rises? I’ve been repeating in my investment strategy that the Fed will eventually break something, and yes, they did. They did.

  • Was the collapse of the Silicon Valley Bank the beginning of the 2023 US banking crisis?
  • Has quantitative tightening ended?
  • Are we in quantitative easing?
  • Could this spread throughout the US?
  • Or the global banking system?
  • Was this caused by the government or the bad behavior of banks?
  • Is the dollar going up or down due to what’s happening?
  • Could this trigger a much-anticipated recession in America?
  • And how does this impact Feds tightening and inflation the Fed is meeting this week?
  • Did the Fed finally break something with its aggressive rate rises?

Was the collapse of the Silicon Valley Bank the beginning of the 2023 US banking crisis?

First, we start with the situation of Silicon Valley Bank, which is going bust. In Silicon Valley Bank’s case, first of all, there was a huge influx of deposits into Silicon Valley Bank over the last couple of years, as well as the whole banking sector in the US.

Where did these deposits come from? In the US, those deposits came from the US government pumping money into the hands of individuals and companies through the various and massive stimulus programs during the covid shutdown. Those stimulus packages passed by Congress went into the banks as deposits from individuals and companies.

Consider the fact that most countries around the world couldn’t do this. Thailand where I am right now, there’s no way the government could print all that money because the currency would have collapsed. And therefore, most governments did not have the privilege of having a reserve currency asset and the ability to print as much money as needed. So America is quite unique in this, and that’s one of the reasons why what’s happening in the US is may not spread to such an extent globally.

What did Silicon Valley Bank do when they got all these deposits?

Well, they didn’t have enough loans available to lend this money out. A bank does basically three things with the deposits that it receives: 1) it can hold it as cash, 2) it can buy some security or investment, like a security that could be traded, or 3) the traditional business of a bank, is they lend out money.

Now if they had a lot of opportunities to lend that money out, they would have locked that money up in loans. Now imagine that a bank had 5% cash, 5% securities, and 90% loans. If people wanted to pull their deposits out of the bank, the bank would have 5% of the money available of their total, and then another 5%, they could sell those securities and repay deposits.

Now they could also go to the government to the Fed and borrow some money to repay deposits to prevent a bank run. But it’s not so easy to get out of loans, right? If you’ve lent money to a company and need that money back, you can’t get that. So the loans are very illiquid, but securities are very liquid.

After the 2008 crisis, new regulations tried to force the banks to hold more cash

Now, let’s add that after the 2008 crisis, basically, the US government came up with new regulations that tried to force the banks to hold more cash and more securities, with the idea being that the combination of cash and securities would be highly liquid assets. And basically, the banks would then be able to pay back if any depositors came, they would be able to pay back.

In fact, at the peak liquidity of the banks, you had almost 20% of the US banking sector’s assets in cash and almost 20% in securities. That means almost 40% of the bank’s balance sheet was in highly liquid assets.

Now also what the US government did is they said, look, if you buy US Treasuries, we’ll count them as purely risk-free, meaning that you don’t have to put aside any capital for that. And remember, the US government was borrowing tons of money. So they needed the banks to own these treasuries. So they provide an incentive for the banks to own government securities, knowing that 1) those are risk-free assets, and 2) knowing that the federal government was borrowing a ton of money, and they needed the banks, not just the Fed, to buy those to buy the bonds that the Treasury was issuing.

I thought that US Treasury bonds were risk-free

And now we have all this risk that we’re talking about? Well, where US Treasuries are risk-free is they are credit risk-free. In other words, it’s almost impossible to imagine that the US government wouldn’t print the money needed to pay back the debts that they owe.

Now, when they print money to pay back debts that they owe, of course, they’re devaluing the US dollar, but still, you’re gonna get paid. So when we talk about risk-free, we’re talking about credit risk-free, but that doesn’t mean that they’re not interest rate risk-free. In other words, what does that mean?

Remember that the Treasury rate for a 10-year bond, going back a few years, was about 1%. Imagine a bank buying a huge portfolio of these 1% government bonds. And then, all of a sudden, the Fed starts to raise interest rates.

Let’s say that you own three-year government bonds. And then the Fed starts raising interest rates, and suddenly, someone out in the market could buy a three-year government bond at a, let’s say, 4-5% interest rate. And now you’re holding one that only pays 1%, holy crap; yours is not worth that much compared to others. To get other people to buy the bond you may want to sell, you’ll have to reduce the price. And it’s going to be a price reduction somewhere between 10% and 30, or 40%, depending on the maturity. In this case, we said three-year maturity. And so that means probably a 10 to 20% loss on that bond.

Did the Fed cause this problem?

Well? Yeah, I think so. Basically, what the Fed did is the Fed aggressively raised interest rates, knowing that all the banks were sitting on a large amount of US Treasury bonds. Now, in the case of US Treasury bonds, whenever you own a bond, you’re exposed to interest rate risk. So what is the risk management of a bank?

Well, the risk management of a bank basically looks at all these different risks and says, how do we hedge this particular risk? So technically, the bank’s not really in the business of trying to make a lot of money on this; they’re in the business of raising deposits and lending those out.

So what they want to do is protect the risk on their portfolio so that the value of the bond doesn’t collapse, and then all of a sudden, the bank is wiped out? Well, basically, what happened is that many of them, the larger ones, in particular, did do some hedging to try to cover this risk. Now, in the bank’s financial statements, you can see analysis, the type of analysis that they do, which is looking at interest rate risk, and they basically say if the interest rates go up by 100, or 200, or 300 bps, it would cause this amount of potential interest rate risk.

Now, if you’re holding a bond to maturity, it’s a little bit different, right? Let’s just say that you as an individual bought a US government bond, that’s a 10-year bond, and you’re gonna hold it for 10 years, and it’s earning 1%. Now, if US Treasury bonds, 10-year treasury bonds now are trading at 5%. If you wanted to sell that bond into the market, yes, you’re going to experience a loss because that bond is no longer attractive because it’s only paying 1%. So you got to reduce the price to equalize the return of that bond between this from 1% to 5%.

However, if you say, well, I don’t really care, I bought this bond for 10 years, I’m gonna hold it for 10 years to maturity, then you are not going to experience this risk, or this lower price, in fact, you’re going to get all of your money back. And so when you get all your money back at the end of the 10 years, you have gotten a pure 1% return.

And that’s part of what Silicon Valley Bank had done is that they had put there, the excess liquidity that they had, they had put into held-to-maturity bonds. When you hold to maturity under US accounting rules, you don’t need to account for this interest rate risk, because you’re going to be holding to maturity.

And there’s a lot of debate about if you were to put that security up for sale; that’s called available-for-sale securities. And for that one, you are going to have to mark it to market and say, well, there’s a big loss on this. But if you hold it to maturity, then you don’t have to. Well, also, what you’re doing is you’re not marking it to market through the P&L. You’re marking it to market through the balance sheet and the equity section of the balance sheet.

Silicon Valley Bank received a lot of deposits, they have a lot of customers, and they’re happy with their deposits there. And then something went wrong. And when that one thing went wrong, all of these friends who are all tech startups and tech companies, all of a sudden told each other, hey, take your money out; there’s a risk at Silicon Valley Bank.

And all of a sudden, Silicon Valley Bank had a run on the bank, meaning that its deposits were withdrawn superfast. So they sold their available-for-sale securities first because they’d already marked down the value of those. So they didn’t have any major loss from those.

But then they had to sell their held-to-maturity assets. It is just like if you owned a 10-year bond, you’re not going to sell it, you’re going to hold it for 10 years, but then you have an emergency in your family, and you are forced to sell it.

What is a liquidity event? How does it happen?

This is kind of a liquidity event where you need the liquidity. And what happened is that Silicon Valley Bank had to start taking losses on their held-to-maturity securities. It’s a debate because I know that in the EU and other places, banks are basically required to show the potential losses on their held-to-maturity. Also, there’s other issues about how you hedge that and how you report the hedging on it.

These are remarks by FDIC Chairman Mark Martin Greenberg at the Institute of international bankers. And he gave this presentation on March 6, so before Silicon Valley Bank collapse happened, and what did he say? I think the most important thing that he said is the following.

“The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies. First, as a result of the higher interest rates, longer term maturity assets acquired by banks when interest rates were lower are now worth less than their face values. The result is that most banks have some amount of unrealized losses on securities. The total of these unrealized losses, including securities that are available for sale or held to maturity, was about $620 billion at yearend 2022. Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry.”

Then on March 12, there was a joint statement by the Treasury of Federal Reserve and FDIC, which means Janet Yellen and Jerome Powell and FDIC Chairman Martin Greenberg. So just six days later, they said to take decisive action. I’m quoting from the the announcement,

“Today we are taking decisive actions to protect the US economy by strengthening public confidence in our banking system. This step will ensure that the US banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.

After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”

Everything that the federal government does is supported by taxpayers

Of course, everything that the federal government does is supported by taxpayers. And the result of this is that if they say that this money is coming out of a fund, the banks have contributed to the other banks, belt, also, that comes from the back of the taxpayers. So what we have here is the Fed coming in, and the Treasury and the FDIC, and basically saying, everybody’s gonna get their money back.

Now, this is a big problem. Why is this a problem? Because only a small number of depositors at Silicon Valley Bank were actually guaranteed by the FDIC. And yet here we have a blanket guarantee. And this is a particularly big moral hazard. Now, some people would say, well, you have to do that; otherwise, money’s going to come out of every bank. They’re going to move money, either home and put it under their mattress, or they’re going to go and put their money into a bigger bank that they trust more.

The Fed knows that other banks are sitting on unrealized losses related to their bond portfolio of US Treasury bonds because they’re holding 1% yielding bonds, and the Fed has increased interest rates up to almost 5%. And the result of that is that they have massive unrealized losses.

We’ve seen the chairman of the FDIC say those losses amounted to about $620 billion in his estimate at the end of 2022. Just imagine that there’s probably more that come out, you know, from under the woodwork.

Also on March 12, the Federal Reserve Board announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. Okay, so this is where the government comes in and says we’re going to protect the whole system.

How are we going to do that?

The Bank Term Funding Program (BTFP)

“The Fed set up a new borrowing facility, the Bank Term Funding Program (BTFP) offering loans of up to one year in length to banks, savings associations, credit unions and other eligible depository institutions, pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The Fund has $125 billion (bn) and it can borrow another $100 bn from Treasury.

The assets will be valued at par, so that banks won’t have to sell US treasuries at a loss in order to redeem deposits as was the case for SVB.”

So the fund can borrow 100-125 billion and another 100 billion from the Treasury. But the kicker is, remember, all of these unrealized losses are because the value of those bonds that were yielding 1% has collapsed. And those bonds now are maybe 20-30% down in price. They say the assets will be valued at par so that banks won’t have to sell US Treasuries at a loss to redeemed deposit. As was the case with Silicon Valley Bank.

Okay, so let’s talk about this for a second. What did they do? First, they gave kind of an implicit guarantee of all deposits at Silicon Valley Bank. And then the next thing they did is they said, if any other bank is facing this problem, and you’ve got massive losses, good news, we’ll help you hide those losses. We’ll hold those losses for year off your balance sheet. This is a very sneaky way of basically trying to prevent losses from hitting the balance sheets of the banks and collapsing the whole system.

Fed will hold the losses for banks at risk

Now what’s happening is all of these small and midsize and regional banks, remember, America has almost 5,000 banks, all of these guys are facing deposit outflows. The result of those deposit outflows are that they have to sell government securities. And suppose they have to sell those government securities at a loss. In that case, it’s going to crush their capital, and all of a sudden, you’re gonna have hundreds, if not thousands of banks, that could be in a difficult situation as far as capital is concerned.

So instead of that, what they’re basically saying is all you guys can come to the Fed. And you can pledge that security at 100%. We’ll hold those losses for a year, and at the end of the year, we’ll figure out what we’re going to do.

Is this quantitative easing (QE)?

Well, there are some people that say that this is not quantitative easing because it’s a swap so that it’s just one asset on the balance sheet of that now has been swapped out as cash. So technically, you could say that when you’re swapping assets with the central bank, it’s not really QE.

However, a second reason why people say that it may not be QE is because it’s also a short-term situation where in one year, those assets are going to go right back, and the losses are going to go on to the bank’s balance sheets.

Well, come on, you think that the Fed, if things go bad, a year from now, they’re going to force all the banks handle the losses?

One of the best ways to understand this, is just look at the assets of the balance sheet. Remember, that for the past year or so the central bank of the US, the Fed has been telling us that they’re doing quantitative tightening, and quantitative tightening means they’re reducing the size of their balance sheet. And also quantitative tightening has to do with, you know, increasing interest rates.

From my experience and what I’ve seen in the banking system, as well as with the Fed, my prediction is quantitative tightening won’t last for long; eventually, quantitative easing will come back. Why?

Because now, the US is in such a situation where it just can’t bear pain. Politicians can’t bear pain. Individuals can’t bear pain. And if you’re bringing pain upon the system, you’re gonna get voted out of office. Why let them bear pain when you can solve this problem?

And that’s one of the reasons why looking at the repeated times that the Fed tried to get off quantitative tightening and to quantitative easing. They wanted to do quantitative tightening but every time they did it, they barely did it. And then eventually, they had to reverse it. And they had to go back to quantitative easing.

So to answer the question that I asked at the beginning, is this the end of quantitative tightening and the beginning of QE? Yes, it is. How do I know? Because the assets of the balance sheet or the assets of the Fed just increased after roughly a year of small decreases? It increased by nearly $300 billion as a result of them providing funding and buying the assets from the bank. So the answer to that question is yes, we are now in QE5; how long it will last?

11 banks announce $30 million in deposits into First Republic Bank

“Washington, DC — The following statement was released by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, FDIC Chairman Martin J. Gruenberg, and Acting Comptroller of the Currency Michael J. Hsu:

Today, 11 banks announced $30 billion in deposits into First Republic Bank. This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system.”

Okay, so basically, they encouraged the banks to provide deposits at First Republic Bank because deposits were running out by individuals. And so these big banks basically said, we’re going to come in, and we’re going to support this bank. Now, you can’t do that with all banks in the system. But on a case-by-case basis, they were able to do that.

Is Warren Buffett going to save the US banking system?

But now, with more banks facing trouble, it brings up a whole other challenge. This is where rumors started swirling about Warren Buffett. Some people on Twitter were tracking these private jets coming to Omaha. Maybe they were gonna see Warren Buffett, maybe Warren Buffett would take a stake in the banking system? Well, it’s very possible.

If you recall, during the 2008 crisis, Goldman Sachs was about to go bust. And they did two things that really helped them stay alive. The first thing was a little bit of a trick. Goldman Sachs is not a depository type of bank taking deposits. But the Treasury Department, which was led by a former Goldman Sachs leader, let Goldman Sachs call itself a bank, and all of a sudden, that meant that they had deposit insurance guarantees. And that was one thing that helped Goldman Sachs to survive. The second one is that I believe, I don’t remember the full details, but I believe that they issued a bond to Warren Buffett, earning a high yield and guaranteed the bond by the assets of Goldman Sachs.

So it’s possible right now that something’s going on. And let’s say Warren Buffett says, I’ll put in, let’s say $50 billion into the 10 largest regional banks, but I need a guarantee from the government that that money is going to be paid back, and I need a guarantee from those banks, that money is going to get paid back. And I’m going to charge a high interest rate, let’s say 8%, something like that.

If Warren Buffett could lock in an 8% return for 10 years, and he could do that with $50 to $100 billion, he’s got plenty of cash to do that. It could be his final move to his legacy by locking in an 8% return that’s almost guaranteed by the government. What a remarkable thing that he could do with that.

So my prediction is that something like that probably will happen, he may even say that, well, even more significant, I want these 10 regional banks, I want them all to combine into one. And then you create one massive bank, and he makes a huge return, let’s say he also maybe wants equity. So he may say, I’m gonna do a convertible bond, and you’re gonna pay a high interest rate on that convertible bond, let’s say 4-8%. And I’m gonna be able to convert the bond into the shares of these individual banks, or of one conglomerate bank that they make out of it. And I’m going to be able to do that at a certain price. That’s going to allow me to make an upside there.

In the end, if he links it together with some equity, instead of an 8% fixed return, let’s say he may end up with a 15 or 20% return as these banks survive. And so the end result is that I think it’s very possible. Buffett, he’s the only one probably that’s got that much cash to do a deal.

Is the Fed going to keep raising interest rates?

Now, it’s important to remember that also, this brings us to the next thing, which is the Fed meeting that’s happening this week. So is the Fed going to keep raising rates? Well, two weeks ago or so, people expected that the Fed was going to increase interest rates by 50 basis points. And now people are expecting about 25 basis points, but the Fed may say, that’s it; we’re not increasing rates anymore. Or there is even a slight possibility the Fed says we’re cutting interest rates, boom! I mean, nobody’s predicting that.

But why would that be an important thing to do all of a sudden? The losses on those bond portfolios. That are there, because the Fed increased interest rates so fast. If you lower interest rates today, the losses on the performance portfolios fall. Remember, we heard from the head of the FDIC, that those losses were $620 billion, that $620 billion could go to $400 billion just like that, if they immediately lowered interest rates.

Or let’s just say that the Fed says we’re not going to lower interest rates, but we’re not going to increase interest rates, meaning we’re at the end of our tightening cycle, and inflation has come down. We’re okay with that. And if they do that, then the next question is, over the next 12 months, will the Fed decrease interest rates? Well, I think you’re running into a real risk that we’re facing a recession in the US.

Is the US facing a recession?

And that brings me to one of the questions I asked at the beginning of this is, are we facing a recession? And I think the answer is yes, the US in particular, is heading into a recession. We’ve had an inverted yield curve, which is one of the best predictors of it. And that inverted yield curve has been telling us that there’s a recession coming in the middle of 2023. And I think there’s every reason to believe that that’s going to be happening.

Now you may say, well, Andrew, unemployment really low and all that. Keep in mind that’s like at a peak, and just as unemployment peaks is the time that we then move into a recession. So a very, very low unemployment rate is actually a sign that we are heading into a recession.

So the answer to the question about if there is a recession coming in 2023? I think yes. And I think also, we’re going to have some serious bank problems.

But this comes to an interesting idea of ethics and insider trading. Suppose the Fed is buying assets, or making deals with someone like Buffett, that he can buy the bank’s assets, and the Fed knows that they could be reducing interest rates, or just that the Fed does reduce interest rates, all of a sudden. In that case, you are buying assets or encouraging others to buy assets that you know are going to increase in value because interest rates are going to come down. Is that insider trading?

That’s a question that I think needs to be asked.

How does this affect the global banking system?

And now, I want to get into the final part of this, which is talking about how does this affect the global banking system?

Remember, I talked about a snake eating a huge animal and watching that move through the snake? Well, that’s what was happening with the US government giving out a tremendous amount of money out to businesses and to individuals. And that money went into the banking system, and bank deposits increased massively during that time. This did not happen in most other countries around the world.

Even in Europe, what we saw was that the government basically provided funding to companies to keep people employed. So it wasn’t a surge in the deposits. And so I would say the first thing is that banks around the world are not dealing with a huge amount of deposits like Silicon Valley Bank was, as well as the US banking system. So that’s good news. In addition, many of the other central banks never printed a lot of money. And so they never had a liquidity situation like the US had.

Is the US dollar going up or down?

However, the next question that I want to try to answer is, is the US dollar going up or down? Well, this, I think, started to relate to the statement that was made on March 19.

“Coordinated central bank action to enhance the provision of US dollar liquidity

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements.

To improve the swap lines’ effectiveness in providing US dollar funding, the central banks currently offering US dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations will commence on Monday, March 20, 2023, and will continue at least through the end of April.

The network of swap lines among these central banks is a set of available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses.”

Basically, what’s happening is that people are rushing into the US dollar, they’re rushing into government treasuries, and the result is a squeeze in the Eurodollar market. Many businesses and banks throughout the world are trading in dollars and doing loans and swap agreements and all kinds of things in US dollars. The US government and the Federal Reserve are basically saying we are prepared to provide all the dollars necessary.

They’ve done this before when we faced a crisis and a tightening in US dollar liquidity. So when US dollar liquidity is so tight, and people are concerned, they’re scared, maybe the economies are doing poorly, what’s happening is, there’s a rush to US dollars. And this is saying; we’re going to deal with this by ensuring that those US dollars are available.

That’s part of the problem that the US faces as a reserve currency is that they not only have to deal with liquidity that they have to provide of US dollars in the domestic market, but they also have to deal with that in the international markets.

Could this be a global banking crisis?

And so this tries to answer the question that I was asking at the top, which is, you know, could this spread to countries around the world? Well, I would say, based upon the fact that other banks from around the world did not get such a boom in deposits as happened in the US because the US government could spend a tremendous amount in stimulus, we have less of that. So they definitely have less of that liquidity problem.

But still, interest rates have been rising around the world; the US was the most aggressive in those interest rate hikes. But basically, what you’re seeing is that there are pressures facing all the other banks around the world, but particularly, let’s say in Europe. And so the result of that is it definitely we’re starting to see some strains.

And that brings us to what happened with Credit Suisse. Over the last week or so, Credit Suisse started struggling. They weren’t able to raise additional capital, and now, UBS appears to be ready to buy Credit Suisse. But you can imagine that UBS is not going to buy Credit Suisse unless they get some guarantee from the government. And so I’m sure that that’s the negotiation that’s going on right now.

Again, whenever a banking crisis happens, the regulators and the government want banks to merge. So that raises another question, which is, is this a new banking crisis? Is it in the US, but is it globally? I would say this is a US banking crisis.

What happens if the Fed reverses quantitative easing?

This banking crisis could be the thing that leads us into a deeper recession. But also, one of the interesting things is that this could force the Fed to reverse quantitative tightening and shift to quantitative easing. Remember, I talked about the idea that they could reduce the interest rate at this Fed meeting by 100 basis points, or the next one, or the next one and do an emergency reduction?

Every time we see a crisis happening in the US, What do they do? It’s like trying to take a heroin addict off of heroin. It’s really good to take them off of heroin, but when you see them suffering, the pain of withdrawal, them screaming for that heroin, most people are going to give it to them. And so that’s what the Fed does every time the US faces a crisis. And they lower the interest rate back down to zero.

So I think it’s very, very possible that we could see that the Fed starts decreasing interest rates. They’ve broken something; they’ve broken the banking system with a massive rise in interest rates. And all of a sudden, they’re going to have to reverse and lower interest rates. And we could even see interest rates go to zero in the next couple of months; there is a very high likelihood of that happening.

It’s not what the Fed wants, but they may not have a choice. In this case, if the interest rates on the Fed went down by 100-300 basis points or went down to zero, all of a sudden, the unrealized losses on the balance sheets of the banks gone. Hey, problem solved. We just lowered rates again.

Well, basically now we’re back down to another decade, possibly of zero interest rates, and all kinds of problems that causes. But I think that that is a very real possibility. And the end result of that, of course, is what happens when interest rates go down. Well, the losses on the bond portfolios basically reduce and the problem kind of goes away.

What happens to the stock market?

So we have the potential even though we’re going into a potential recession, stock markets are already down, it could go down further, but if the Fed announces that they’re going to start cutting rates or people start to anticipate that and eventually they do, that tends to be positive for the stock market.

So it’s possible that we could have a big bounce in the stock market. And you could even argue that the financial sector could be the best-performing sector because, they’ve already been knocked down, the weakest ones have been hit, and the sector is down because everybody’s terrified. But if the Fed reversed its policy and started to reduce interest rates, we can see that these banks are going to survive.

And so if that were the case, then you could say that the Financials could be a leading performing sector in the overall market.

Let’s wrap up and answer the questions

Is this the new banking crisis that the Fed causes? Yes, it is. And yes, the Fed caused it.

Has QT ended? Yes, QT has ended.

Are we in QE5? Yes, we’ve started expanding the balance sheet of the bank of the Fed. And if they start lowering interest rates, we are definitely moving into QE5.

Could this spread throughout the US? Definitely, I think it can spread throughout the US, particularly if the Fed keeps interest rates high; we’re going to see more challenges in the banking sector.

And could it spread globally? I would say less so globally because they haven’t had such a boost in deposits from government stimulus. It’s countries like Thailand, where I am, the government could not have printed that much money and then put it in the hands of businesses and individuals, or otherwise the currency would have been crushed. The US Dollar didn’t get crushed, because it is the reserve currency. So they have a privilege.

Was this caused by the government or bad behavior by banks? Well, I would say it’s mainly caused by the government; they kept interest rates low for more than a decade. And then, all of a sudden, they almost instantly raised interest rates from close to zero to 5%. And then they thought that they were not going to break anything; but of course, things are going to break in that case. So I would say, the government caused it from the beginning. And when they tried to solve inflation, they raised rates, and now they’ve caused it again.

And also, you can blame the banks. If banks weren’t properly hedged for interest rate risk, meaning that interest rates would rise and the value of their portfolios would fall, then they’re also at fault. And they should suffer, not be bailed out.

Now is the dollar going up? I think what you can see is that it’s probably likely that the dollar is going to be strong during this time because we’ve already seen in the March 19 announcement that they’re providing dollar liquidity, which means the dollar market is tight. So, therefore, potentially strong dollar.

Could this trigger a much-anticipated recession? Absolutely. I think that this is really messing up businesses and businesses’ access to capital. And already, there’s a lot of fear out there. I think that the US recession is going to happen in the next few months.

How does this impact fed tightening and inflation? I would argue that US inflation is already on a trajectory to be down at about 4% by the end of 2023. From as high as around 7%. But basically, what I think is they’re done tightening relative to inflation. And we could even see a surprise announcement from the Fed this time or next time they meet, or an emergency meeting, that they’re cutting the Fed funds rate by 100 basis points.

Did the Fed finally break something with its aggressive rate rises? I’ve been repeating in my investment strategy that the Fed will eventually break something, and yes, they did. They did.

 

 

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]]> https://myworstinvestmentever.com/isms-11-us-banking-crisis-and-fed-rate-cut/feed/ 0 ISMS 10: US CPI Could Decline to 4% By YE23; Unless QE Revs Up https://myworstinvestmentever.com/isms-10-us-cpi-could-decline-to-4-by-ye23-unless-qe-revs-up/ https://myworstinvestmentever.com/isms-10-us-cpi-could-decline-to-4-by-ye23-unless-qe-revs-up/#respond Mon, 20 Mar 2023 00:00:40 +0000 https://myworstinvestmentever.com/?p=11489 Is US CPI going up or down by yearend 2023?

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Click here to get the PDF with all charts and graphs

Is US CPI going up or down by yearend 2023?

Feb 2023 US CPI was 6%, down from 6.4% in Jan and off its June 2022 peak 9.1%

Food accounts for 13.5% of CPI and was a high 9.5% in February

Food has come off its Aug 2022 11.4% peak

Energy accounts for 7.1% of US CPI and was up only 5.2%

Energy has come down considerably from its 41.6% June 2022 peak

When oil price rises, it causes a similar, but muted rise in the US CPI energy component

  • Correlation between oil price and the energy component of CPI is about 90%

Food and energy are a tiny part of US CPI, 79% of the weight comes from all other items

Non-food and energy items are less volatile and total CPI is coming back down to that level

  • This less volatile and slow to adjust group of products and services illustrates why I was previously arguing that overall CPI was unlikely to come down fast

Most volatility in US CPI comes from the energy component, which accounts for only 7% of CPI

The largest impact on the food category is “Food at home” which was up 10.2%

  • This is coming from supply chain pressures that take a long time to work through

Though high, food at home peaked in August 2022’s 13.5% high and has fallen 3ppts

  • Food away from home never was exceptionally high and as a result is slowly falling

Energy is 7% of US CPI and is broken equally into commodities related and services

  • Commodities is related to the oil and gas that Americans buy
  • Energy services show how energy costs feed into the price of electricity that individuals and businesses pay

Gasoline prices were the main driver and at its peak in Jun 2022 was up 60%

  • Biden’s first drawdown of emergency oil stockpiles from the Strategic Petroleum Reserve was in November 2021, just before the election

In 2022, Biden released 222 million barrels of oil from the Strategic Petroleum Reserve

  • This 38% reduction increased worldwide supply and helped bring down oil price

21% of CPI comes from products like cars and cars, which were only up 1%

  • The cost of homes is the largest part of the US CPI at 34% and it was up 7.3%

Services excluding energy services is mainly comprised of owner’s equivalent rent

  • OER is still slowly adjusting up as a result of the rise in home prices
  • This accounts for 30% of CPI and will take months to adjust down

Oil price moved from US$39/bbl in Oct 2020 to US$82/bbl 12 months later

  • The peak was US$114/bbl in June 2022

US housing price were rising at 5% per year since 2012

  • They shot up 12% in 2020 thanks to the Feds near zero interest rates
  • Then they went up a massive 18% in 2021
  • 30-year fixed mortgage rate hovered around 3% from July 2020 to October 2021. Now 6%

Summary

  • Feb 2023 US CPI was 6%, down from 6.4% in Jan and off its June 2022 peak 9.1%
  • Food accounts for 13.5% of CPI and was a high 9.5% in February; “Food at home” was up 10.2%, showing lingering supply chain pressures
  • Energy is a small component of US CPI and was up only 5.2%, down considerably from its 41.6% June 2022 peak
  • The correlation between oil price and the energy component of CPI is about 90%, so with oil prices down, US CPI is down
  • Biden’s 38% drawdown of the Strategic Petroleum Reserve in November 2021, just before the election, increased worldwide supply and helped bring about that oil fall
  • Oil prices feed slowly into the price of electricity; hence energy services were up 13.3% and will be slow to fall
  • 79% of the weight comes from ex-food and energy items, which is much less volatile
  • Cars, apparel, and the like are about 21% of CPI was only up 1%
  • The cost of homes is the largest part of the US CPI at 34% and it was up 7.3%, comprised mainly of owner’s equivalent rent which have slowly adjusted for rising home prices and is not yet reflecting the fall in home prices
  • US housing price were rising at 5% per year since 2012 and then shot up 12% in 2020 thanks to the Fed’s near zero interest rates, then prices rose a massive 18% in 2021
  • 30-year fixed mortgage rate hovered around 3% from July 2020 to October 2021. Now 6%
  • It will be many months before the slowdown in the mortgage will be reflected in US CPI

Click here to get the PDF with all charts and graphs

 

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]]> https://myworstinvestmentever.com/isms-10-us-cpi-could-decline-to-4-by-ye23-unless-qe-revs-up/feed/ 0 ISMS 9: Saving Silicon Valley Bank Brings New Risks https://myworstinvestmentever.com/isms-9-saving-silicon-valley-bank-brings-new-risks/ https://myworstinvestmentever.com/isms-9-saving-silicon-valley-bank-brings-new-risks/#respond Wed, 15 Mar 2023 23:00:14 +0000 https://myworstinvestmentever.com/?p=11467 The Silicon Valley Bank crisis started when the US government shut down its economy.

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The Silicon Valley Bank crisis started when the US government shut down its economy

The Silicon Valley Bank crisis started when the US government shut down the economy from 2020 to 2021.

Let’s take a step back to January 29th, 2020, when President Donald Trump announced a White House Coronavirus Response task force with the director of the National Institute of Allergy and Infectious Diseases, Anthony Fauci, and Deborah Brix as coordinator.

The decision to shut down the economy originated from this body but was ultimately implemented by President Trump, members of congress, and eventually President Joe Biden. This decision was truly the worst decision I have ever seen a government make in my lifetime.

Businesses and individuals saw their income collapse

During that time, businesses and individuals saw their revenues collapse and could not pay the costs necessary to sustain their businesses and livelihood.

The US government then came up with various programs to distribute money to these struggling businesses and individuals. Unfortunately, the government did not have this money to distribute.

As we all learned in political science 101, the source of any government funds, of course, comes from its citizens, but in this case, citizens and businesses were reeling from the government’s shutdown of the economy and hence had no money.

The US government had to borrow money

So the only choice the government had was to borrow money. But the US Treasury department could not borrow from the population as citizens were in dire straits. Usually, the US government would be able to borrow from foreigners; however, as other countries were suffering and for various geopolitical reasons, foreigners didn’t buy much US government debt.

In fact, in 2014, foreigners owned US$6.2trn of US Treasury Department bonds; five years later, in 2019, they only held slightly more at US$6.8trn. Throughout the crisis, the US Treasury Department could only get about one trillion dollars of foreign money to buy US Treasuries.

The US government needed trillions of dollars

But the US government needed a lot more money than that. In fact, between the end of 2019 and the end of 2021, the US government borrowed US$6.4trn, causing total US government debt to rise to US$29.6trn by the end of 2021, 122% of GDP.

So, the US government needed US$6.4trn and couldn’t get it from taxpayers or businesses at that time, so where did they get it? As I mentioned earlier, they got about US$1trn of it from foreign investors, which left a US$5.4trn hold.

In 2020/21, the Fed stepped in and lent money to the US Treasury

The solution was for the Federal Reserve to step in and lend the money to the US Treasury. Now the Fed is not allowed to buy bonds directly from the US Treasury, so the largest banks bought these bonds and then offloaded most of them to the Fed. The total assets of the Fed grew from US$4.6trn at the end of 2019 to US$8.8trn by the end of 2021, a US$4.2trn increase.

To put this into perspective, from 2020 to 2021, the US government spent US$12trn and took in taxes of US$5.1trn.

This massive injection of money raised deposits

This massive injection of money resulted in deposits of individuals and companies at US banks increasing by US$4.7trn during 2020 and 2021. The banks put about half of that money, or about US$2.2trn, into cash. About a third of those deposits, or US$1.6trn, went into securities at a time when interest rates were close to zero. In 2020 US 10-year Treasury bonds yielded about 0.9%, and it was about 1.5% in 2021.

Banks receive short-term deposits and lend long-term

Banks generally receive short-term deposits and lend that to companies on a long-term basis. But in 2020 and 2021, there was enough concern about the economy that banks didn’t lend much. Instead, they put that money into cash and securities.

In 2020 the Fed and the Treasury Department intervened and bought bonds

It’s worth noting that during March 2020, the price of bonds, especially high-risk ones, started crashing as investors started to doubt if companies could repay those bonds given the state of the economy.

The Fed and the Treasury Department devised a scheme to save the bond market by announcing that they would hire Blackrock to help them buy bonds in the market to support bond prices. This was unprecedented and could have been seen as violating the letter of the law, which generally prevents the Fed from buying bonds in the open market.

The prior main Fed intervention was after the 2008 crisis when the Fed bought US Treasuries and Mortgage-backed securities through its Quantitative Easing Program.

Silicon Valley Bank faced a boom and bust cycle in Tech

Silicon Valley Bank (SVB) appeared to be overexposed to the Tech sector and the startup community. This was not a problem when things were riding high for them. In fact, SVB took in lots of deposits from the above-described government stimulus, the IPOs, and the profitable period of 2021.

But when these types of companies started to experience a slowdown, they saw their market caps collapse and their profitability weaken. This meant that these companies started to have more of a need for the funds they had deposited at SVB.

The Fed started increasing interest rates, and bond values fell by 10-30%

Then the Fed started increasing interest rates on February 2022, and by one year later, they had moved rates up by 4.5% sending shock waves through the economy.

This rise in interest rates meant that all the bonds the banks held became worth 10-30% less than what they paid for them. The government allows a bank to avoid showing those unrealized losses by classifying those bonds as “held-to-maturity,” which the banks were likely to do with them.

Silicon Valley Bank started withdrawing deposits

However, what happened with SVB was that its customers started withdrawing deposits, which forced the bank to sell those “held-to-maturity” bonds to raise the cash needed to repay the deposits. This forced the banks to make their unrealized losses real.

Very quickly, this wiped out SVB’s capital, and the bank had to be taken control of by the Federal Deposit Insurance Corporation (FDIC), which resolves such types of cases.

“Strengthening public confidence in our banking system”

On March 12th, the Fed announced a Joint Statement with the Treasury and the FDIC to “Protect the US economy by strengthening public confidence in our banking system.” In it, they stated that depositors at SVB in California would have access to all of their money starting Monday, March 13th, and that the taxpayer would bear no losses associated with the resolution of Silicon Valley Bank.

Enter Barney Frank (you can’t make this sh*t up)

Fed, the Treasury, and FDIC announced the same for Signature Bank in New York, which was also going bust. The irony is that the guy at the center of passing the well-intentioned post-2008 bank legislation, Barney Frank, was a board member of Signature since 2015.

Frank was a long-time congressman from Massachusetts and, to quote from the bank’s website, “was instrumental in crafting the short-term US$550 billion rescue plan in response to the nation’s 2008-2009 financial crisis. Later, he co-sponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in July 2010.”

Dodd-Frank created the too-big-to-fail storyline

That act created the Financial Stability Oversight Council and the Office of Financial Research to identify threats to the financial stability of the United States and gave the Federal Reserve new powers to regulate systemically important institutions. This codified the too-big-to-fail storyline, which helped the largest banks gain protection from the US government. The irony, in this case, is rich.

President Biden repeats that no taxpayer funds will be used (spoiler alert: it’s nonsense)

The Fed, the Treasury, and FDIC statement clarified that shareholders and certain unsecured debtholders would not be protected, senior management was removed, and any losses to the Deposit Insurance Fund to support uninsured depositors would be recovered by a special assessment on banks, as required by law.

The announcement from this trio that was repeated by President Biden claimed that no taxpayer funds will be used. Which we all know is nonsense because all government funds ultimately come from the taxpayers. They will claim that these funds come from other banks, but we know that any bank or business must pass on increased government-regulatory costs.

The Bank Term Funding Program (BTFP) to guarantee banks don’t lose on bonds

Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks can meet the needs of all their depositors.

They called this the Bank Term Funding Program (BTFP), which will offer loans of up to one year to any US federally insured depository institution pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral as long as that collateral was owned as of March 12th, 2023.

The key to this measure is that these assets will be valued at par, allowing these banks to avoid offloading those securities at a loss. They announced that using the Exchange Stabilization Fund, the Department of the Treasury would provide US$25 billion as credit protection to the Federal Reserve Banks in connection with the Program.

The government is worried about bank runs

This hints that the government is worried that depositors at smaller banks will attempt to withdraw their deposits and that this Program will prevent that bank from experiencing the losses that Silicon Valley Bank experienced. Another way to think of this is that if this measure had been implemented one week prior, Silicon Valley Bank would not have gone bust.

This is another well-intentioned intervention by the government into the banking system. It is meant to stabilize things, and it likely will. But it also raises moral hazard in the banking sector and prevents poorly managed banks from suffering from their bad policies, which brings me to bad policies.

Silicon Valley Bank had bad policies

SVB had a simple solution to the dilemma they faced of having a massive amount of short-term deposits, which they invested into long-term government bonds. They could have implemented basic risk management measures such as interest rate swaps to protect the bank against rising interest rates. But, unlike well-run banks, they didn’t do this.

Government intervention is not a part of capitalism

It’s important to remember that government intervention is not a part of capitalism. Instead, it is a policy that politicians and people feel is the right thing to do when things don’t turn out the way they were planned. The problem with government intervention is that it causes unintended consequences.

The economist Milton Friedman famously said:

“One of the great mistakes is to judge [government] policies and programs by their intentions rather than their results.”

Let’s review the US government’s policies over the past few decades.

  • The government pushed FANNIE MAE and FREDDIE MAC to achieve extremely affordable housing goals, which substantially reduced the quality of housing loans in America and brought millions more into the housing market, leading to the 2007 peak of the housing market and the subsequent bust.
  • The Fed lowered interest rates to near zero in 2008/9 and kept them close to that for more than a decade.
  • The Fed started Quantitative Easing in 2008, buying assets from the banks and injecting liquidity into the market.
  • The government bailed out the US banks and failed to prosecute any major bankers for malfeasance.
  • In 2020 and 2021, The US government shut down the US economy, cut interest rates, and the Fed and the US Treasury injected more money than ever imagined into the economy.
  • In 2020 the Fed and the Treasury, for the first time, bought bonds in the bond market to prevent bond prices from crashing.
  • In 2022 the Fed went on a 12-month rampage of rising rates, bringing rates from nearly zero to close to 5%. This was the fastest rate hike seen in my lifetime, and at the time, we have repeated what is likely to break something in the economy.
  • And something did break at SVB and in the banking sector. And now, once again, the government has intervened in the bond market by announcing that it will buy bonds of banks facing losses on those bonds to prevent them from facing massive losses and going bust.

Government programs always come with unintended consequences

As I wrap up, I want to highlight that government programs always come with unintended consequences. Political leaders meddle in the economy and with capitalism with the best of intentions but slowly and steadily march toward more dangerous places.

Silicon Valley Bank and Signature Bank, interestingly both from Democrat-controlled states, depositors will get their money back, and other regional banks will survive the rush to the withdrawal of deposits and move them to the larger banks. But at what cost?

There is now more risk in the banking system because of more moral hazard

As we speak, a large amount of deposits is likely moving to the largest banks, strengthening their leadership position.

It’s quite possible that this will not seriously damage the banking industry and bank funds or ETFs, as many of them are concentrated in the large banks that could be gaining from this.

But in the end, government intervention in the banking sector just takes it further away from capitalism and brings new risks.

 

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]]> https://myworstinvestmentever.com/isms-9-saving-silicon-valley-bank-brings-new-risks/feed/ 0 ISMS 7: Financials, Cons. Disc., and Utilities Sectors Look Most Interesting https://myworstinvestmentever.com/isms-7-financials-cons-disc-and-utilities-sectors-look-most-interesting/ https://myworstinvestmentever.com/isms-7-financials-cons-disc-and-utilities-sectors-look-most-interesting/#respond Thu, 02 Mar 2023 23:00:30 +0000 https://myworstinvestmentever.com/?p=11403 What do you think: Which of the global sectors is most attractive?

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In this presentation, I will introduce you to our MSCI Sectors and their attractiveness

Click here to get the PDF with all charts and graphs

What do you think: Which of the global sectors is most attractive?

We use GICS sector classification

  • GICS The Global Industry Classification Standard (GICS®) is an industry classification system developed by Standard & Poor’s Financial Services LLC (S&P) and MSCI in 1999
  • GICS works well for the global financial community

MSCI separates stocks into 11 different sectors

  • Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Communication Services, Utilities, and Real Estate

Then 25 Industry groups

  • Some sectors such as Industrials have three Industry groups as follows:
    • Capital Goods
    • Commercial & Professional Services
    • Transportation

There are 74 industries

  • Within Transportation Industry Group there are five main Industries
    • 1) Air Freight & Logistics, 2) Passenger Airlines, 3) Marine Transportation, 4) Ground Transportation, and 5) Transportation Infrastructure

There are 163 Sub-Industries

  • Finally, within the Industrials Sector, the Transportation Industry group, the Transportation Infrastructure Industry, are 3 Sub-Industries
    • 1) Airport Services, 2) Highways & Railtracks, and 3) Marine Ports & Services

GICS sectors include 1,508 Developed Market companies, total market cap is about US$53trn

  • The largest sector is Info. Tech. at US$11trn market cap and consists of 183 companies
  • The smallest is Real Estate with a market cap of US$1.5trn and 96 companies

What is your investment framework?

  • Our investment strategies for ETFs and stocks come from our FVMR framework
  • We backtest and optimize the strategy for the factors that have worked best in each market

We do all our research in-house

  • We don’t rely on other people’s research
  • We might of course get ideas from others, but we then test those ideas in our FVMR framework

The benefit of an investment framework is that it forces discipline when emotions run high

  • Emotions from wild market events can cause you to make rash and costly decisions
  • To avoid this, stick to a framework
  • Our framework relies on data & structure, not just a feeling or opinion

Management

  • Is responsible for producing earnings

Investors

  • Set the price the company trades at

There are 4 Elements to our FVMR framework

  • Fundamentals: Strong profitability shows a company is managed well.
    • We prefer high or rising profitability.
  • Valuation: Shows how the market perceives the stock.
    • We prefer good fundamentals at relatively cheap valuations.
  • Momentum: We try to avoid “value traps” by looking for positive price and earnings momentum.
    • At times, low momentum signals an out-of-favor opportunity.
  • Risk: We prefer low business and price risk.
    • Not every stock is going to fly; some just provide stable returns and strong dividends.

Fundamentals

Info. Tech has a 23% ROE; Health Care, Cons. Staples, and Energy are each earning 20% ROE

  • 15% average is higher than the long-term average of 12%

Info. Tech. has a strong 16% net margin

  • The current market average net margin of 10% is still much higher than the long-term average of about 6%
  • 5 sectors have 7-8% net margin

What you have learned

  • Even after difficult times, Info. Tech. still has a high 23% ROE and a strong 16% net margin
  • Health Care, Cons. Staples, and Energy are each earning strong 20% ROE
  • Average ROE is 15%, higher than 12% LT average
  • The current average net margin of 10% is much higher than the LT average of about 6%
  • Info. Tech and Health Care are most profitable

Valuation

24x PE for Info Tech. is highest; Financials at 11x and Energy at 8x are the cheapest

  • Financials look interesting at this level
  • Generally, you buy cyclical energy and materials sectors when PE is high which is when earnings are at the bottom of the cycle

Info. Tech. is crazy expensive at 5.4x PB, Cons. Staples and Health Care are also expensive

  • Financials look attractive

Even after adjusting for cash, Info. Tech companies are fixed asset light

Expensive Info. Tech., Health Care, and Cons. Staples; cheap Comm. Services and Financials

Five sectors are yielding more than 3%, signaling they are potentially cheap

  • Financials look interesting

Financials are most attractive, Info. Tech. and Real Estate least

What you have learned

  • 24x PE for Info Tech. is highest; Financials at 11x and Energy at 8x are the cheapest
  • Financials look interesting at this level
  • Buy cyclical energy and materials when PE is high
  • Info. Tech. is crazy expensive at 5.4x PB, Cons. Staples and Health Care are also expensive
  • Five sectors are yielding more than 3%, signaling some are potentially cheap

Momentum

2023 revenue growth expectations are a low 2%, highest is Cons. Disc., lowest is Energy

2023 consensus earnings growth flat, up at Financials, Cons. Disc., and Utilities

Best 6-mth price momentum at defensive sectors: Health Care, Cons. Staples, and Utilities

  • Real Estate has been hit hard from Fed rate hikes

Info. Tech., Energy, and Materials are best 3-year performers, Real Estate worst

What you have learned

  • Low 2023 revenue growth expected highest growth at Cons. Disc., is Energy
  • 2023 consensus earnings growth flat, up at Financials, Cons. Disc., and Utilities
  • Best 6-mth price momentum at defensive sectors: Health Care, Cons. Staples, and Utilities
  • Info. Tech., Energy, and Materials are best 3-year performers, Real Estate worst

Financials, Cons. Disc., and Utilities look interesting

  • Financials – Cheap and good momentum
  • Cons. Disc. – Strong earnings momentum
  • Utilities – Weak fundamentals, but cheap and good earnings and price momo

Info. Tech, Health Care, and Cons. Stapes strong, but expensive

  • Info. Tech. – Strong fundamentals but expensive
  • Health Care – Strong fundamentals and price momo, but expensive
  • Cons. Staples – Strong fundamentals and price momo, but expensive

Energy and Materials appear cheap…but

  • For cyclicals we usually buy when expensive

Key points and the bottom line

  • Financials, Cons. Disc., and Utilities look interesting
  • Info. Tech, Health Care, and Cons. Stapes strong, but expensive
  • Energy and Materials appear cheap we usually buy them when expensive

Click here to get the PDF with all charts and graphs

 

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]]> https://myworstinvestmentever.com/isms-7-financials-cons-disc-and-utilities-sectors-look-most-interesting/feed/ 0 ISMS 6: UK Looks Most Interesting Among the Top 5 Stock Markets https://myworstinvestmentever.com/isms-6-uk-looks-most-interesting-among-the-top-5-stock-markets/ https://myworstinvestmentever.com/isms-6-uk-looks-most-interesting-among-the-top-5-stock-markets/#respond Thu, 23 Feb 2023 23:00:03 +0000 https://myworstinvestmentever.com/?p=11360 What do you think: Which of the largest country’s stock markets is most attractive?

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In this presentation, I will introduce you to our FVMR investment framework

And will apply it to assess the attractiveness of the top five developed countries in the world: US, Japan, Germany, UK, and France.

Click here to get the PDF with all charts and graphs

What do you think: Which of the largest country’s stock markets is most attractive?

What is your investment framework?

  • Our investment strategies for ETFs and stocks come from our FVMR framework
  • We backtest and optimize the strategy for the factors that have worked best in that market
  • We do all our research in-house
  • We don’t rely on other people’s research
  • We might, of course, get ideas from others, but we then test those ideas in our FVMR framework

The benefit of an investment framework is that it forces discipline

  • It’s easy to be emotionally affected by market events, which can cause you to make rash and costly decisions
  • To avoid this, we stick to our framework

A robust framework means our strategy relies on data and structure rather than just a feeling or an opinion

  • Management is responsible for producing earnings
  • Investors set the price the company trades at

There are Four Elements to our Framework

  • Fundamentals: Strong profitability shows a company is managed well. We prefer high or rising profitability.
  • Valuation: Shows how the market perceives the stock. We prefer good fundamentals at relatively cheap valuations.
  • Momentum: We try to avoid “value traps” by looking for positive price and earnings momentum. At times, low momentum signals an out-of-favor opportunity.
  • Risk: Prefer low business and price risk. Not every stock is going to fly; some just provide stable returns and strong dividends.

For this study, we look at the top 5 Developed Market countries ranked by GDP

  • USA – US$23trn
  • Japan – US$4.9trn
  • Germany – US$4.2trn
  • UK – US$3.2trn
  • France – US$2.9trn

EBITDA margin remains high in the US and UK at above 20%, lowest in Japan at 13%

  • Net margin is a remarkably high 12% in the US and UK, double the global LT average
  • At 7%, Japan is still double its long-term net margin of 3%
  • At 7% Germany is nearly double its long-term average of 4%

US companies have a relatively high 19% ROE, above its 16% LT average

  • Japan’s low 9% ROE  is partially driven by the low interest rate environment
  • Germany is just slightly above its 11% long-term average

European companies have paid out more cash to shareholders

  • US companies also return cash to shareholders through buybacks in addition to dividends, a reason this number is relatively low
  • Shareholder yield is about equal across these markets

US remains the most expensive market at 19x PE

  • Japan, Germany, and France at 13x
  • UK super cheap at 10x

On a PB basis, the US is very expensive at 3.7x

  • UK companies are asset-heavy
  • US revenue/asset: 0.70x
  • Japan: 0.69x, Germany: 0.58x, UK: 0.57x, and France: 0.52x

US companies are most expensive again with price-to-cash flow at 13x

  • About 50% higher than the others, which hover between 7x and 8x price-to-cash flow

Super low US dividend yield due to expensive market and payouts coming from share buybacks

  • The UK market now pays a high 4.2%
  • This shows that the market is cheap and also that inflation expectations are high

Considering ROE/PB, UK is super cheap, and the US is 2x as expensive

  • 6x PB in UK for a 16% ROE

Earnings expectations collapsed in France, Germany, and UK, but have bounced back

  • Highest expected EPS recovery in the UK
  • 2023 growth is expected to be strongest in Japan, weakest in UK

Over the past 6-months Germany and France are up about 12%, UK only half that, US neg.

  • The US market is up most over the past three years, Germany is about flat over three years
  • YTD winners are Germany and France

Things to consider about Europe

  • Lack of tech stocks in Europe compared to the US, so when value does well European markets do well
  • China reopening is positively impacting sentiment
  • Some speculate that lower oil prices and China opening may prevent a recession in Europe
  • Risk is that ECB will hike more than the Fed

UK and Italy have the highest 10-year govt bond rates

  • Europe – 2.8%
  • Germany – 2.2%
  • UK – 3.3%
  • France – 6%
  • Italy – 4.0%
  • Spain – 3.2%

So many risks

  • Nuclear war
  • Energy spike
  • US recession
  • Slower-than-expected China recovery

Key points and the bottom line

  • Considering all four elements: Fundamentals, Valuation, Momentum, and Risk
  • The US is expensive, and the UK looks cheap
  • UK looks most interesting among the top 5 stock markets

Click here to get the PDF with all charts and graphs

 

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]]> https://myworstinvestmentever.com/isms-6-uk-looks-most-interesting-among-the-top-5-stock-markets/feed/ 0 ISMS 5: How Rising Rates and Oil Prices Are Contributing to 6.4% Inflation in the US https://myworstinvestmentever.com/isms-5-how-rising-rates-and-oil-prices-are-contributing-to-6-4-inflation-in-the-us/ https://myworstinvestmentever.com/isms-5-how-rising-rates-and-oil-prices-are-contributing-to-6-4-inflation-in-the-us/#respond Thu, 16 Feb 2023 23:00:02 +0000 https://myworstinvestmentever.com/?p=11325 What do you think: Are we headed for a recession or has the Fed engineered a soft landing?

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How rising rates and oil prices are contributing to 6.4% inflation in the US

Click here to get the PDF with all charts and graphs

What do you think: Are we headed for a recession or has the Fed engineered a soft landing?

  • Jan. US CPI was up 6.4% YoY, continuing its slide from the June 2022 9.1% YoY peak, driven by high food and energy-related products
  • Food was up 10.1% YoY but continued its 5th straight month of slowdown, driven by food consumed at home was up 11.3%
  • The energy component of CPI rose 8.7% YoY; Oil was $100/bbl in Jul-2022; it’s now down to $80bbl. Oil price is the driver; however, energy commodities prices were up only 2.8%, thanks to a slower oil and gas price rise
  • All other items excluding food and energy never rose as much and are coming down more slowly. This group benefited from negative used vehicle prices, but shelter costs keep it high
  • Over the long term, energy, despite its small weight in CPI, drives consumer prices
  • Putin’s invasion of Ukraine was not the primary driver of inflation; instead, it was the oil and gas price rise in 2021 when post gov’t lockdown demand bounced back
  • Home prices rose massively thanks to Fed’s nearly-free money, and soon could start contracting
  • The oil price fell 6.1% YoY in Jan, down from its Jun-22 high rise of 60.8%; disinflation is in full swing
  • Home prices continued slowing from the July 2021 peak YoY change of 18%

Key points

  • Jan. US CPI was up 6.4% YoY, continuing its fall from its 9.1% peak in June 2022
  • The 6.4% level was kept high mainly by high food and energy prices
  • It was a slight YoY slowdown compared to Dec-22, which was 6.5%
  • Food was up 10.1% YoY but continued its 5th straight month of decline
  • Food peaked in Aug-22 at 11.4%
  • The 10.1% food price rise was driven by food consumed at home which was up 11.3%
  • Though oil price has fallen, prior oil price shocks are still feeding into the food supply chain
  • In addition, food supply chains seemed to still be damaged by the US gov’t economy lockdown
  • Energy component of CPI rose 8.7% YoY, Oil was $100/bbl in Jul-2022, now at $80bbl
  • When you smooth price changes with a 12mma you see that oil price is the driver
  • Energy commodities prices were up only 2.8%, thanks to a slower oil and gas price rise
  • Energy services were up 15.6%, driven by the prior oil price spikes feeding through
  • All other items didn’t rise as much and are coming down more slowly
  • This component of CPI is slow to adjust
  • This is why a few months ago, when I last looked at US inflation, I mentioned that inflation was unlikely to come crashing down
  • Ex-food and energy items benefited from fall in used vehicle prices; shelter remains high
  • Price rises were low for Apparel (3.1%), New vehicles (5.8%), Used cars and trucks (Negative 11.6%), and Medical care commodities (3.4%)
  • Energy, despite its small weight in CPI, seems to always drive consumer prices
  • Did Putin’s invasion of Ukraine drive inflation?
  • Oil and gas prices started their rise in 2021 when post gov’t lockdown demand kicked on
  • Home prices rose massively thanks to Fed’s nearly-free money, now falling to neg?
  • Oil price has already moved to negative, it looks like disinflation is in full swing
  • The 2007 YoY housing price increase maxed at 10%; it peaked at 19% in July 2021

Click here to get the PDF with all charts and graphs

 

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]]> https://myworstinvestmentever.com/isms-5-how-rising-rates-and-oil-prices-are-contributing-to-6-4-inflation-in-the-us/feed/ 0 ISMS 4: Bond Yields Are Showing the Fed Has Won Its Battle Against Inflation https://myworstinvestmentever.com/isms-4-bond-yields-are-showing-the-fed-has-won-its-battle-against-inflation/ https://myworstinvestmentever.com/isms-4-bond-yields-are-showing-the-fed-has-won-its-battle-against-inflation/#respond Thu, 09 Feb 2023 23:00:42 +0000 https://myworstinvestmentever.com/?p=11290 Unlike EMs, DMs benefited from nearly free money. The market believes US ST rates rise has quelled inflation. What do you think: Has the Fed succeeded at quelling inflation or not?

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Click here to get the PDF with all charts and graphs

EM don’t have reserve currency status, unlike DM they never benefited from zero rates

  • Over the past 12 months, the World average 3mth gov’t bond rate rose from 1.7% to 5.0%
  • That 3.3ppts rise highlights the rising interest rate environment we have been living through
  • In the Developed markets 3mth rates rose from zero 12 months ago, before the Ukraine war started, to the current 3.3%
  • Despite this strong rise, DM’s interest rates remained at a 1.7ppt discount to the world average
  • Meaning EMs were rising equally fast
  • So, let’s look at EMs
  • Over the past year, 3mth rates rose from an already high 4.3% to 7.4%, up 3.1ppts, double the rate of DMs and a 2.4ppt premium to the World average

DM 10yr yield starting to fall, anticipating lower inflation; EM flat for a year

  • World LT interest rates rose from 2.8% 12 months ago to 4% today, a 1.2ppts rise
  • Developed markets saw a YoY interest rate rise from 1.2% to 2.9%, up 1.7ppts rise
  • DM’s discount to the world interest rates rose from negative 1.6ppts to negative 1.1ppts
  • EM had a small rise from 5.1% to 5.6% YoY, a small 0.5ppts rise on an already high rate
  • EM premium to world fell from 2.4ppts to 1.6ppts

Key points & the bottom line

  • EM never had reserve currency status, so unlike DM, they never benefited from zero rates
  • Since rates have always been higher, borrowers in EMs have not had the same incentive to borrow as in the DMs; therefore, the balance sheet quality is strong

US led the rise, DM Europe is catching up, DM Pacific is now at a deep discount to world rates

  • DM Americas rose from 0.2% to 4.7%, up 4.5ppts
  • Its relative discount to the world narrowed from negative 1.5ppts to negative 0.3ppts

US led the rise, DM Europe is catching up, Japan now at a deep discount to world rates

  • DM Europe rose from negative 0.4% to 2.5%, up 2.9ppts
  • Its relative discount to the world widened from negative 2.1ppts to negative 2.5ppts
  • DM Pacific rose from 0% to 1.1%
  • Its relative discount widened from negative 1.7ppts to negative 3.9ppts

DM Europe LT rates rose most aggressively from near zero, preventing a currency collapse

  • DM Americas rose from 1.8% to 3.4%, up 1.7ppts; rel. discount narrowed from -1% to -0.6%
  • But LT rates fell slightly in January showing the market believes inflation has been tamed
  • DM Europe rose from 0.6% to 2.8%, up 2.2ppts; rel. discount narrowed from -2.1% to -1.2%
  • DM Pacific rose from 0.7% to 1.4%, 0.7ppts; rel. discount widened from -2% to -2.6%

Key points & the bottom line

  • US led the rise, DM Europe is catching up, DM Pacific is now at a deep discount to world rates
  • DM Europe LT rates rose most aggressively from near zero, preventing a currency collapse
  • Importantly, LT rates fell slightly in January showing the market believes inflation has been tamed

Click here to get the PDF with all charts and graphs

 

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The post ISMS 4: Bond Yields Are Showing the Fed Has Won Its Battle Against Inflation appeared first on My Worst Investment Ever.

]]> https://myworstinvestmentever.com/isms-4-bond-yields-are-showing-the-fed-has-won-its-battle-against-inflation/feed/ 0 ISMS 3: Will the US Have a Recession or a Soft Landing? https://myworstinvestmentever.com/isms-3-will-the-us-have-a-recession-or-a-soft-landing/ https://myworstinvestmentever.com/isms-3-will-the-us-have-a-recession-or-a-soft-landing/#respond Thu, 26 Jan 2023 23:00:19 +0000 https://myworstinvestmentever.com/?p=11263 Never has the US gov’t caused such a massive move in GDP. The question is, “which way is GDP going?” Will we see a recession or a soft landing?

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Never has the US gov’t caused such a massive move in GDP. The question is, “which way is GDP going?” Will we see a recession or a soft landing?

Click here to get the PDF with all charts and graphs

Reasons for a recession

  • Extreme increases in interest rates are meant to slow down the economy
    • The fastest rate-hike cycle by the Fed since the 1980s
    • In the 2004 cycle, the target rate was hiked by 4.25% in total
    • Same as in the current cycle, but it has now been done much faster
  • The massive rise in mortgage rates is dramatically slowing the property market
    • This, in turn, leads to crashing prices, which will make people feel less wealthy and hold them back from spending
  • The yield curve has inverted, which has perfectly predicted prior recessions
    • All recessions in the US since 1968 were preceded by an inverted yield curve
    • The average time from inversion until the recession started was about 1 year (about mid-2023)
  • The surge in spending supported by gov’t handouts is working itself out of the system
    • Since 2Q21, households have demonstrated stronger than usual spending behavior
    • Strong wage growth has contributed to more savings in 4Q21 onward

Reasons for a soft landing

  • High employment means the economy is robust and can withstand the rate hikes
  • Companies are highly profitable, which will allow them to bear a slowdown more easily
  • Companies are sitting on tons of cash
  • Individuals slowed their spending in anticipation of an economic slowdown
  • Democrat party leadership will pump things up (e.g., strategic petroleum reserve)
  • US banks are in a strong position, holding lots of cash and gov’t bonds
    • Reducing the risk of a financial sector crisis that would exacerbate an economic crisis
    • At the end of 2021, the banks had nearly 40% of their assets in cash and securities
    • Compared to 13% at the end of 2007
  • Gov’t spending is going to be crowded out by borrowing interest payments
    • And then politicians will pressure the Fed to cut rates

Click here to get the PDF with all charts and graphs

 

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The post ISMS 3: Will the US Have a Recession or a Soft Landing? appeared first on My Worst Investment Ever.

]]> https://myworstinvestmentever.com/isms-3-will-the-us-have-a-recession-or-a-soft-landing/feed/ 0 ISMS 2: The Man Behind the Most Successful Recession Indicator Questions It https://myworstinvestmentever.com/isms-2-the-man-behind-the-most-successful-recession-indicator-questions-it/ https://myworstinvestmentever.com/isms-2-the-man-behind-the-most-successful-recession-indicator-questions-it/#respond Thu, 19 Jan 2023 23:00:09 +0000 https://myworstinvestmentever.com/?p=11226 In a recent LinkedIn post, Campbell Harvey outlined why his yield curve inversion theory, which has a perfect record of predicting recessions, may no longer work. He concludes that we may not get a recession in 2023.

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Did the man who discovered the most successful recession indicator abandon it?

Click here to get the PDF with all charts and graphs

In a recent LinkedIn post, Campbell Harvey outlined why his yield curve inversion theory, which has a perfect record of predicting recessions, may no longer work. He concludes that we may not get a recession in 2023.

He argues that the labor market is strong compared to the past two recessions. Unfilled jobs are still high, and skilled workers losing their jobs have shorter periods before getting a new job.

The current situation is not like the 2008 or 2020 crises

This is unlike the 2008 global financial crisis and the 2020 pandemic recession, where workers had no job opportunities to pursue. Harvey argues that consumers have less indebtedness and are better prepared to withstand the rise in interest rates.

The financial sector is strong compared to the 2008 period, reducing the risk of a financial sector crisis that would exacerbate an economic crisis.

Focus on the real yield curve

Harvey also suggested that we should put more weight on the real yield curve (after adjusting for inflation), which shows no inversion, despite the inversion of the nominal yield curve.

The inverted yield curve has become a victim of its own success

Finally, he proposes that his predictor may have become a victim of its own success. Harvey argues that the reactions of economic agents could lead to lower growth, and if the economy survives the period, a soft landing is possible.

Maybe the widespread knowledge of the success of the yield curve has caused people to adjust ahead of time which will lessen the impact of the recession.

Arguments for why Harvey’s inverted yield curve signal is working just fine

But not everyone is buying his reasons for abandoning his measure. Below is a list of some of the arguments made in the comment section about why Harvey’s inverted yield curve signal is working just fine.

  • The labor force participation rate in the United States has been falling, it averaged 63% from 1948 to 2022, reaching an all-time high of 67% in 2000
  • Consumer debt is at all-time highs; most relevantly, consumer debt service payments as a percent of disposable personal income are the highest in over 13 years and still rising
  • The consumer is weak as wages are not keeping up with the fast rise in consumer prices, driven by high energy and commodities prices
  • Consumers need to borrow or tap into their savings as disposable income gets eaten up
  • Consumer savings rates are low
  • The Fed will not reduce its rate rise course soon as unemployment is still low

Will 2022 be the first time since 1968 that the inverted yield curve gives a false signal of recession?

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]]> https://myworstinvestmentever.com/isms-2-the-man-behind-the-most-successful-recession-indicator-questions-it/feed/ 0 ISMS 1: The United States Won WW2.5, but Who Lost? https://myworstinvestmentever.com/isms-1-the-united-states-won-ww2-5-but-who-lost/ https://myworstinvestmentever.com/isms-1-the-united-states-won-ww2-5-but-who-lost/#respond Thu, 12 Jan 2023 23:00:12 +0000 https://myworstinvestmentever.com/?p=11197 WW2.5 is what I like to call “The US against who?” You may say China or Russia. In my opinion, those are both wrong. It’s the US against Europe. And the US just won. The Russia-Ukraine conflict has encouraged US dominance over Europe. Let’s take a deeper look at this dominance.

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WW2.5 is what I like to call “The US against who?” You may say China or Russia. In my opinion, those are both wrong. It’s the US against Europe. And the US just won. The Russia-Ukraine conflict has encouraged US dominance over Europe. Let’s take a deeper look at this dominance.

Click here to get the PDF with all charts and graphs

Military dominance

The US has more than 60,000 troops in Europe, half of which are in Germany, a third in Italy, and the UK. The US operates more than 200 military bases in Europe. People often like to say that it’s China or maybe Russia that will take over the world. But when I look at it objectively, Russia is almost a non-issue for the US. Here’s why:

  • Economically, it’s tinier than the US
  • Militarily, the US military budget is 10X the Russian budget
  • People worldwide are more likely to prefer the US political system over the Russian one

Almost all European countries joined NATO, and the US now controls it. NATO membership means Europeans participate as “peacekeepers” in US conflicts. In today’s world, joining NATO means getting involved in military action worldwide for Europeans.

Political dominance

In 2018, Trump raised the issue of Germany’s energy dependence on Russia in a meeting with Jens Stoltenberg, Secretary-General of NATO.

The conversation shows that back when Trump was in power, the US tried to get Germany to stop getting oil and gas from Russia. This was a move to control Russia’s dominance.

The absence of former Chancellor of Germany Angela Merkel and her coalition’s political leadership in Europe​ has allowed the US to fill the gap, for example, forcing Germany to cut off the Russian oil and gas supply​. European political leaders will find it hard to oppose the US​, thus weakening Europe politically.

Cultural dominance

I find it fascinating that the 2015 Syrian refugee crisis saw nearly 1.3 million people (Syrians, Afghans, Nigerians, and others​) arrive in Europe to request asylum. This is the highest number of asylum seekers in a single year since World War II​. I believe an influx of refugees into any country will cause a cultural disruption.

Of the asylum seekers from the Syrian Crisis:​

  • 51% went to Germany​
  • 10% to France​
  • 9% to Italy​
  • 7% to Sweden​

I’m talking about the Syrian crisis in 2015 and the refugees because, since February 2022, more than 11 million Ukrainians have entered the European Union​. In the presentation, I shared an excellent chart that shows where these people are going.

The main thing about this that is interesting is that we’re not seeing 1.3 million people as we saw in the Syrian war; we see 11 million. We could estimate that many of the 11 million will return to Ukraine after the war, and we’ll remain with about 3 or 4 million permanent refugees or political asylum seekers in Europe. That still causes disruption. Whether you’re for or against accepting political asylum seekers, the fact is that it causes disruption.

Financial dominance

When you look at the GDP of the biggest countries in the world, and I break it into three groups; the Americas, Asia, and Europe, you’ll see that the US is about 24% of the total GDP. China is about 19% of the total global GDP. So in the Americas and Asia, we have dominant players, the US and China.

But in Europe, the German GDP is only 4% of the world’s total. The UK has about 3.2%, France 2.8%, and Italy 2%. Unlike the Americas and Asia, no country is a dominant economic force in Europe​. Merkel’s strong leadership is gone, with nothing to replace it​. Germany’s economy is weakened from this crisis​. This makes Europe ripe for the taking for the US.

Energy dominance

China, the US, and India are the top three energy consumers. China consumes about 26% of the world’s energy, the US 16%, India 6%, Russia 5%, and Japan 3%.

Now let’s look at consumption from fossil fuels, nuclear, hydro, and renewable perspectives. 82% of the world’s energy consumption comes from fossil fuels. As of 2021, Europe was at 71%. So they’re already down a lot on fossil fuel consumption. This means they also have a large amount of nuclear.

The world is still heavily reliant on fossil fuels, with 82% of total consumption. If we then look at what countries are producing the most oil and gas output, the first country is the US, with 18.5% of the total oil and gas output. Russia and Saudi Arabia are second at 12%, followed by Canada at 6%, Iraq at 4.6, and China at 4.4%. So what’s interesting here is that the US has just knocked out Russia, that’s 12.2% of total output. And now, Europe will have to get oil from the US or Saudi Arabia.

On page 25, you’ll see a map of Europe and Russia when you download my presentation. From the map, you can see that Russia is the heart of the European energy sources. There’s no denying that Russia is the closest and most efficient source for Europe to depend on. So, cutting off the Russian gas supply to Europe is no small thing.

It’s a fantastic accomplishment for the US to dominate Europe. And the beautiful thing about what the US did, in this case, is that they did it without a shot fired, and they had the Europeans cut it off themselves. The US has forced Europe to ban oil and gas imports from Iran since 2018. US sanctions, Germany succumb to pressure to cut off the Nord Stream 2 project.

Key points and the bottom line

  • Almost all European countries joined NATO, and the US controls NATO​
  • The weakening of Germany leaves Europe with no dominant political power to challenge the US​
  • The US-Russia showdown is destabilizing Europe through immigration​
  • All EU countries exist within the US dollar framework and are unable to exit​
  • The US cut the flow of Russian oil and gas, which weakened Europe​
  • The United States won WW2.5, and Europe willingly lost without a drop of blood being spilled

Click here to get the PDF with all charts and graphs

 

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