Comment of the day

Video commentary from May 11, 2022

A link to today’s video commentary is displayed in the subscribers area.

Some of the topics covered include: stagflation stalking markets, stable dollar, bonds start to stabilize, Apple and Microsoft crash and push NDX to new low, oil companies, stable gold, China begins to stabilize.

Please note – variable hours at the end of May and beginning of June

I’m flying to Ireland on May 25 before the Chart Seminar in London on June 6-7. I can’t wait to take some time off because it’s been a long time since I’ve had more than two days off in a row. Between these dates, updates will be sporadic, but my goal is to post regular audio/video updates.

The dollar will not be the safe haven currency of choice for long

This note from Bloomberg may be of interest to subscribers. Here is a section:

This in turn brings us to an interesting observation from George Saravelos, Global Head of Currency Research at Deutsche Bank AG (NYSE:DB), who states that “we may now be reaching the tipping point where further tightening financial conditions will begin to occur”. more serious headwinds to how much we can revalue the Fed. This will result in the dollar becoming less sensitive to risk aversion due to more accommodative implications for the Fed’s path. And although it’s still in its infancy, Saravelos says “the market is starting to behave like we’re approaching that tipping point.”

Now, even if inflation peaks this year, it won’t mean that central banks will exit their tightening path, but will adjust it accordingly. Just look at the latest forward guidance from the Bank of England and the division within the voting committee. At the same time, and if we are talking about stagflation or recession, we must consider that the yen could once again attract safe-haven flows given its low inflation, Japan’s current account surplus, etc.

My opinion – Today’s monthly CPI reading was 0.3%. Analysts expected 0.2% but the previous reading was 1.2%. This is still a moderation in inflation in the short term, even if it continues to rise. Year over year, the rate is still 8.3%, which is in the middle of what was expected and the last reading.

Patience during the last bumpy leg of the bear market

Thanks to a subscriber for this report from Morgan Stanley (NYSE:MS) which might be of interest. Here is a section.

My opinion – A link to the full report is displayed in the Subscriber Area.

COVID cases finally arrive in Shanghai, which is good news for the national economy. China remains at risk of new outbreaks due to the size and age of the population and reluctance to get vaccinated. This raises the prospect of continued lockdown phases for the foreseeable future. It’s a recipe for volatility.

TerraUSD struggles are of concern to all markets

This Bloomberg article may be of interest to subscribers. Here is a section:

Much more importantly, if TerraUSD fails, it will be a blow to the hopes of many traditional financial institutions that rely on liquidity to maintain stability. This includes central banks, exchange traded funds, mutual funds, derivatives clearinghouses, stockbrokers and many more.

TerraUSD is an “algorithmic stablecoin,” meaning it attempts to maintain a market price of $1 via an algorithm rather than traditional methods such as backing each token with an actual dollar. TerraUSD can be exchanged for $1 of another cryptocurrency, in this case Luna. Therefore, if the price of TerraUSD deviates from $1, arbitrageurs should force it back.

The Federal Reserve, although not officially targeting the value of the dollar, can use a similar strategy if it wants to influence the value of the currency. If the value of the dollar falls either in terms of purchasing power or in terms of the exchange rate, the Fed’s two main policy responses are to raise interest rates to make the dollar more attractive to hold, or to sell assets to absorb the dollars, thereby reducing the supply, and driving up the price. TerraUSD mainly uses the second strategy, selling Luna to reduce the supply of TerraUSD.

The strategy relies on the existence of a liquid market for the asset being sold – primarily US Treasury securities for the Fed and Luna for TerraUSD. Unfortunately for the Fed, if the value of the dollar falls, investors may not be enthusiastic about buying Treasuries, which pay in future dollars and whose perceived credit may be compromised if they have to be sold. too much to absorb the excess foreign exchange. TerraUSD has the same problem, the value of Luna is tied to the success of the Terra product suite, which would be jeopardized by the collapse of TerraUSD

My opinion – In a bull market, leverage begets leverage. From the perspective of financial engineers, there is no strategy that cannot be improved with leverage. Stablecoins are the crypto market’s version of money market funds. They aim to maintain parity with the dollar by buying cash-like items that yield a slightly higher yield than the Fed. Algorithmic stablecoins try to do better and only trade their own tokens. This is great during a bull market. However, the value of any money market instrument lies in its ability to redeem itself at par in times of crisis. If it bends at the first sign of trouble, it is not fit for purpose.

The Chart Seminar on June 6 and 7 in London sold out

Now in its 53rd year, The Chart’s first seminar venue in the post-pandemic era will be in London on June 6-7 at the Army & Navy Club.

This event is sold out. A waiting list has now started.

To reserve your spot, please contact [email protected]

Delegated rates:

Full price: £1,799

Each additional delegate: £850

Fuller Treacy Money subscription rate: £850

Prices exclude VAT where applicable