Prediction? Pain

Jay Powell channeled his inner Clubber Lang on Friday spooking markets. The odd part, which I can't figure out, was how markets in both the US and Europe got spooked around 8am, which was two hours before Powell's speech. Most markets experiences some volatility for the next few hours. The Dollar bounced off morning lows right after Powell's speech. Mainly on weakness from the Euro and Pound. Volatility indices for US indices jumped as well. Shorter term bonds sold off a bit, but the longer end of the curve caught a bid.

If you remember Rocky 3 though, Lang laid a whooping on Rocky in the first fight, but in the end Rocky retrains to fight with the help of former champ Apollo Creed. Rocky trains a new way to fight Creed. I'm sort of thinking like Mick right now. I'm not sure the market is ready for the what's about it hit it. The market is thinking like Rocky, it's in the best shape of its life.

For the week as a whole, the US and European Equity indices continue their slide. Asia was down just a bit, but I'm sure Monday morning in Asia will see a few red tickets stamped.

This week looks to be quite. UK is on holiday Monday and the US will be looking forward to its unofficial end of Summer holiday weekend. I'd anticipate a light weekend in trading.

Best of the Week

Edward Chancellor is the author of one of all-time favorite books, 'Devil Take the Hindmost.' He's been making the rounds on podcasts talking about his most recent book, 'The Price of Time.' The book and this interview walks through easy money in modern times and its impact. Jesse brings up a quote from the book around how speed is needed in intervention then when it doesn't work, governments offer more control to be safer, or something like that. This got me thinking about the famous Ben Franklin quote, "Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety." Edward talks about why interest is needed and how there have been arguments in the past that lenders should not take interest on debt repayments. Edward wrote how during the 17th century writers highlighted the concept of the natural market rate of interest and how it was needed rather than government fiat. This was because there were calls for lowering of rates by law. All the talk about rates made me think of the chart below from the Bank of England, which shows 700 years of real rates. Edward's grasp of financial history is second to none. If you want to learn about how these events are impacting today, I highly recommend listening to this interview. I can't wait to read this book. Find Edward's works for Reuters at Breakingviews.com and here is the link to the 'Mother of all speculative bubbles' article Jesse references from 2018. Listening time: 68 minutes

Best of the Rest

Earlier in the month, there was an announcement of Canadian TD Bank's acquisition of Cowen in the US. I didn't think much of it at first. TD is one of the big 5 Canadian banks, but a little further down the list when you think of global banks. Cowen is, or was, a smaller regional investment bank. Cowen adds additional US exposure for TD Securities in the ECM, Sales & Trading and Research space. The article quotes Clear Street's Andy Volz around how this might impact services offer to smaller US hedge funds in the Prime Brokerage space. Data from HFR showed 185 in Q1 of 2022 after what was a huge 2021 with 600 plus. Emerging funds, who are already having trouble raising funds, will now have to find another source for Prime services. Another thing I thought of here was the impact on IB ranks. Looking at ECM, it's been a rough start for 2022 for Cowen, as they've dropped 59 spots in Equity and 60 in M&A. TD is ranked 60th in ECM, 39th in M&A, and a solid 25th in DCM. If you're interested in seeing more info about the Deals market, follow my colleague, Matthew Toole . He runs the LSEG Data & Analytics Deals Intelligence team.

This is a good question. You can see from the charts below notional trading volume for Bond ETFs is increasing each region. The North American market is by far the largest, but Europe is seeing a steady by slow move to more volume and Asia has seen its volume triple in the last year. The article notes that proponent say that ETFs add liquidity and exposure, but on the other side, ETF flows are indiscriminate in the way they execute and can add to volatility. This is a short article, but I think it highlights a newish development in a market that still has pockets of old school hand to hand combat left.

Cap Group's Midyear Outlook is out. I always find their reports intriguing. There's a few main themes in this report. They start with a macro pulse around the planning for scenarios with the monetary and fiscal environments and the geopolitical events. As they cross over from macro to equities, the chart below was surprising. I did not expect the average returns to be that high. They have slides on tech, mining and healthcare equities. The final slide highlights a positive outlook for Muni bonds. That's now the second time this week I've seen/heard someone mention a positive outlook for these. Taxable equivalent high yield muni bond indices are about 9%. Depending on your belief in CPI that could be a positive real return. Looking at Refinitiv's Lipper fund flows, last month broke a trend of outflows in the High Yield Muni Bonds space.

An excellent piece from Jamie Catherwood on the role cheap money has played of late and why fundamentals should matter for investors. Jamie notes that in speculative periods momentum tends to dominate the decision process. This is sort of some of the things Edward discussed with Jesse. Also as we saw in the Cap Group report, we could be moving into a different period for equities. The research highlights the composition of returns into Business Growth, Return of Capital, and Multiple Expansion. I found the huge difference in components over the last 10 years fascinating. I wouldn't say it's completely surprising, but when you see the numbers it catches your attention. Jamie points out that multiple expansion is generally a more speculative thought process, and this leaves investors more at risk to volatility. His final paragraph is well stated, "Flashy narratives often fade, but robust fundamentals endure. Investors should heed the lessons of this selloff and ensure that they have conviction in the underlying businesses of stocks they own, and not just their share price." If you enjoy this, check out Jamie's blog that combines history and finance.

If you don't follow Eddy Elfenbein's Crossing Wall Street, I recommend this. In one of his Market Review's last week, Eddy touched on Apple's recent $5.5B bond issuance. He seems to be concerned that Apple is borrowing for stocks buybacks and dividends. He questions whether a company should be involved in financial engineering. He believes Apple is taking advantage of lower rates that could continue to move higher. Below we can see the bond have sold off a bit since being issued. Next, I charted out the Cash and Short-term investments versus debt. The assets have fallen from their highs, but are still tremendous. The real financial engineering here is that Apple did $232B in international sales in 2021. That's 63% of it's total. They do not traditionally bring that cash back to the US to avoid paying taxes. Looking at their latest 10-Q in Refinitiv's Eikon, they have $76B in FX hedging and another $84B in FX derivatives for non-accounting hedging. That's $160B in FX positions. In order to payout dividends and/or continue their ginormous share repurchase, they need cash in the USD. Borrow USD is cheaper than paying taxes. So I think Eddy's got a point that they are taking advantage of low rates, but I think it's more about tax avoidance than anything else. If there was enough cash in USD, it would look like a traditional shareholder yield play.

One for the Road

A quick article from earlier this month showing the value of farmland. My home state of New Jersey has the highest in the country at $15,900 per acre. The hard part of this many farms do not make it to the next generation of farmer, because they're either too expensive to buy from the previous owners or too high a tax bill for relatives that actually want to farm.

Thanks for reading. I pity the fool that doesn't take some time off to enjoy the warm weather before we get into the cool fall months. I'll be off next week.

Michael