Hubble Bubble Toil and Trouble
Readers of these pages will surely know that Hubble Bubble Toil and Trouble was the chant of the witches in Shakespeare’s, The Tragedy of Macbeth, as they tossed their horrible artefacts into a boiling cauldron, often coming up with varying predictions, such as, “he shall be king”.
The lasting insight of Macbeth is the tale of the damaging effects of power on those who seek power for their own sake. Metaphorically, the story is as relevant today as it was when first performed in 1606.
Like, global central bankers constantly inserting rare ingredients into global economic cauldrons; ingredients like QE, YCC (yield curve control), Jawbones, more Jawbones, tapers and the only real constant ingredient, more stimulus, leading to their own version of Hubble Bubble Toil and Trouble.
But only if modern day central banker concoctions were as accurate in their resulting predictions as the witches of Macbeth. Why markets still believe anything Central Banks predict based on their track record is amazing.
Starting with LTCM and Greenspan in the 90’s, it’s been one bail out after another. Remember subprime being contained? Even half smart investors knew it wasn’t in mid-2007 but right up until Lehman in September 2008, Central Banks saw no real issue they couldn’t manage. Even Mario Draghi’s 2012 “whatever it takes” for the EU is still running strong.
More recently, Covid stimulus added to already aggressive existing “stimulus” has rapidly increased the pace of the game and the day of financial reckoning has been brought forward. Rampant speculation across all asset markets (bar precious metals), due to a complete mispricing of capital has had investors extremely complacent about existential risks.
Make no mistake about the importance of last week’s retiring of the word “transitional” from the US Fed’s current inflationary description during their presentations. Asset market reactions have been swift, especially bonds.
Markets now believe this aggressive backtrack in guidance by the US Fed when it says, “we’re going to speed up tightening”, means an increase in the pace of the tapering and move to raise rates as soon as possible. Markets now realise that central banks have realised how far “behind the curve” they are and immediately priced themselves for policy error rapid rate rises.
So, there is your central planner prediction! We’ll do whatever it takes to combat inflation! Remember 2018 (below)? The Fed was backtracking well before Covid as markets threw a tantrum and demanded they stop raising rates!
The question is, how much stomach do central banks have for asset market turmoil before they backtrack, again? Our guess after last week is, you may not have to wait too long to find out. The massive difference is that this time we finally have the inflation that was always coming. At this stage, markets believe Central banks will do what they’ve said they will do and combat inflation with appropriate monetary policy response. Markets are wrong to believe what Central Bankers are telling them, again, just as it was in 2018.
This time will be no different. The prediction by central banks that they will fight inflation will fail. When faced with the choice of bailing out equity markets or fighting inflation they will re-juice the market.
This, below, is a much better prediction.
Let’s move to briefly assess possible effects on key portfolio positions.
Energy
It’s funny how media now starts blaming Putin and co on the current European energy price disaster and not the ESG virtue-signalling policies of the same region. In the US, energy pricing is now also political. Mercifully, some relief has been achieved thanks to Omicron hysterics and a very public release of emergency strategic oil reserves.
Overall, we’ve been happy to hold our energy related positions knowing that the real, and possibly only threat to prices in an ESG world is that of a global recession (a recession may also help with inflation).
In saying that, Chinese consumption seems “steady”, as it does India.
We still like potential long term solutions involving Uranium as well as natural gas.
Precious Metals
Precious metal prices have softened further as market belief in Central bank commitment to tapering and rate rises rose. As we’ve stated above and by the actions of 2018/19, this belief will prove to be misplaced. Do you remember how gold performed in 2018/19 when the Fed rapidly reversed monetary policy? Check it out below.
As it was in 2019, the miners are coming off a much lower base than the metal and represent some of the best risk vs reward investment in the market right now.
Finally, for those that made it this far, we would like to recommend checking out the latest edition of “TTMYGH” newsletter by Grant Williams. Grant has long been one the most brightest independent macro economic analysts we’ve followed and happy to recommend those interested to do the same. We thought his latest analysis on matters of political leadership warranted sharing.
Good luck.
