Comment of the Day
Video commentary for April 25th 2022
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: China lockdowns spreading to Beijing, CSI300 down 4%. commodities pullback, Dollar surges, stocks wobble but begin to steady on China threat reducing potential for outsized interest rate hikes.
Xi Puts Ideology Before Economy With Market-Busting Lockdowns
This article from Bloomberg may be of interest to subscribers. Here is a section:
China’s worst equity selloff since early 2020 reflects a growing concern about President Xi Jinping: He can’t afford the political costs of shifting from a Covid Zero strategy that is pummeling the economy.
In Shanghai, a weekslong Covid-19 lockdown got even worse, with workers in hazmat suits fanning out over the weekend to install steel fences around buildings with positive cases. In Beijing, the process is just getting started, as authorities on Monday began shutting down a bustling district in the capital to
quash fresh outbreaks.
The threat of paralyzing China’s two largest and wealthiest cities with a strategy abandoned by most countries helped push the CSI 300 down 4.9%, the gauge’s steepest one-day drop since the first such lockdown in Wuhan two years ago. The spreading lockdowns have investors worried that Xi is sacrificing the Communist Party’s reputation for pragmatic economic management to defend a political narrative that portrays him as the world’s most successful virus-fighter.
“This Covid situation is really putting China into a very dark moment, perhaps the darkest moment in economic terms for the last couple of decades,” Junheng Li, JL Warren Capital founder and chief executive officer, said of the Shanghai lockdown during an interview on Bloomberg TV. “It’s a confidence
crisis in a sense that you’ve got the most affluent city in China with this consensus disappointment and resentfulness towards a very non-sensible policy.”
“People really don’t know, what’s a clear path to get China out of this Covid situation,” Li said.
My view - Democratic capitalist systems focus on the health of the corporate/financial system to achieve social cohesion and rising living standards. Communist systems focus on sustaining political stability to achieve the same ends. That difference doesn’t become obvious until a crisis challenges it.
Email of the day on yield curve inversions
Thanks for this commentary Eoin, which I found very good. I think we can have an intermediate correction in commodities and equities. The equity correction might be longer lasting and deeper in my opinion given valuations, interest rates, and massive positioning but I agree totally that the Fed will loosen policy when the going gets tough. That's what the Fed did during the 1970s several times if my memory is correct. I think the Germans did the same during the 1920s with much worse results, but their position was much worse.
One thing regarding the yield curve. If the Fed raises rates 250 or 300 bps, the curve will invert mathematically if bond yields are unchanged or fall. However, once the market sees the Fed raising rates, long rates could increase depending on inflation and the economy.
My view - Thank you for this insightful email. I don’t want to put limits on how long or how deep a correction can be. We can only deal with the reality provided by markets. The one thing we do know is the correction is in response to tightening liquidity conditions, so it is unlikely to end until liquidity conditions ease.
Next Grocery Shock Awaits as Food Giants Face Cooking Oil Risks
This article from Bloomberg may be of interest to subscribers. Here is a section:
The move by Indonesia, which accounts for a third of global edible oil exports, will add to turmoil facing emerging markets from Sri Lanka to Egypt and Tunisia. Even developed countries could see sharp rises in supermarket prices.
Palm oil is one of the most versatile staples, used in thousands of products from food to personal care items to biofuels. Prices of cooking oils have been on a tear due to drought and labor shortages. Then the war in Ukraine roiled trade of about 80% of global sunflower oil exports, boosting demand for alternatives like palm and soybean oil and sending prices to record highs.
Indonesia’s ban applies to exports of RBD palm olein, a higher value product that has been processed. Exports of crude palm oil and RBD palm oil will still be allowed, according to people familiar with the matter. RBD olein accounts for 30% to 40% of Indonesia’s total palm oil exports.
The move could increase costs for packaged food producers such as Nestle, Mondelez (NASDAQ:MDLZ) International and Unilever. Nestle declined to comment, while the other companies didn’t respond to a request for comment. It may also force governments to choose between using vegetable oils for food or biofuels.
My view - Palm oil prices initially popped higher on the news of Indonesia’s export ban but were not spared the decline in the wider commodity complex today. Nevertheless, the longer Indonesia’s ban persists the bigger the knock-on effect for regional consumers. Inflationary pressures may ease in industrial commodities, but agricultural prices are less susceptible to slowing Chinese growth.
SoftBank Cuts Back Spending, Leaving Startups Desperate for Cash
This article from Bloomberg may be of interest to subscribers. Here is a section:
Hurt by plunging tech valuations, SoftBank is walking away from some of its loss-making portfolio firms to comply with stricter investment criteria, said the people, who asked not to be identified because the matter was not public. Many of the two Vision Funds’ portfolio of 300-plus companies are loss-making.
The Japanese investment firm offered to contribute money if Light could find another investor to lead the next fundraising round, one of the people said. But with its biggest backer offering only a token amount, other investors were wary about stepping in, the person said. The Redwood City, California-based startup has hired a consulting firm to explore options, including winding down operations.
“Their purse strings are tight as they have ever been,” the person said.
A Vision Fund spokesman and Light Chief Executive Officer Dave Grannan declined to comment.
The adoption of prudence at SoftBank’s Vision Fund -- which rewrote the rules of venture capital by deploying billions of dollars from the sovereign wealth funds of Saudi Arabia and Abu Dhabi into startups -- is an about-face from its past freewheeling largess.
For years, SoftBank’s founder and Chief Executive Officer Masayoshi Son persuaded startup founders to accept Vision Fund money by encouraging them to think bigger and promising continued support to help them expand. He would often invest more money than founders were looking for if they would try to accelerate growth.
Before approving the investment in Light, the billionaire made clear to Grannan that his interest was predicated on the startup’s ability to adapt its depth-sensing imaging technology for self-driving cars -- something Light’s founders never considered before.
My view - Ambitious startups with big ideas and no path to profits are finding the Vision Fund is a fair-weather friend. That only increases the pain they experience as yields rise. The startup sector is most acutely sensitive to tighter liquidity. Some will not survive this correction.
Eoin's personal portfolio: stop introduced on short position April 19th
One of the questions subscribers as most often is how to find details of my open trades. To make it easier I will simply repost the latest summary daily until there is a change.
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