Understanding Markets

There are many people who believe that inflation is on its way down and will soon return to 2%. While many people have pointed to the adjustments to the various short-term pressures that have caused inflation to spike since last year such as the war in Ukraine, the supply chain disruptions in China, and the tight labour markets in the US, I believe inflation is here to stay for the long-term, and it would be difficult to get back to the 2% environment. Geopolitical Tensions The shift in businesses’ focus from efficiency to resiliency post covid is inflationary in the long run.  While the theory of competitive advantage dominated in the 2000s and 2010s, national security and supply chain resiliency are top of mind these days. Supply chain disruptions caused by covid lockdowns have exposed the risks of just-in-time supply chain management. Rising US-China tensions have convinced more businesses to restore their production facilities despite the associated higher costs. The technologi...

HOW EQUITIES VS RATES MARKETS TELL DIVERGENT STORIES If there is one word to describe market sentiment this year, it is confusion . The S&P 500 rallied 9.3% in January before retracing its steps back where it started. It is now 0.98% above what it was on the 1st of January.  Major banks are divided in their market outlook in 2023, most falling into either the soft-landing or the hard-landing camps. In this publication, I will examine the divergent stories told by the equities and rates markets to argue that the market is just as confused right now as it ever was. The key source of confusion is the change in the global monetary regime since 2021. The US market has not seen a stagflationary environment since the 1980s. Due to the significant changes in the monetary landscape and the lack of historical precedents, the market requires sufficient time to adapt to the new conditions and accurately value assets.  Stock Market: Going for A Soft Landing The S&P 500 currently tr...

The Case for Shorting Bitcoin Rising Carry Cost Bitcoin’s carry cost has risen sharply over the last year as the yields on US 10-year treasuries shot ever higher. However, while yields have risen by over 340 basis points since July 2020, Bitcoin has also appreciated by 102%. All else being equal a rise in carry cost should lead to a lower price. This is one reason that supports a price correction going forward. Moreover, yields may go higher. Going back to Bridgewater’s view of sticky inflation going forward, yields on risk-free assets are expected to remain high if not climb even higher. The Federal Reserve has also said that they are willing to keep rates higher for longer to bring inflation down to its target of 2%. The only conceivable scenario where the Fed eases rates this year is if the market enters a deep recession. Goldman Sachs believes this scenario is unlikely, moreover, even if the economy is hit with a big recession, it is just another catalyst for Bitcoin prices to nos...