Powell Reappointed
Jerome Powell, who has been steering the U.S. economy through the ongoing pandemic, has been reappointed as Chairman of the Federal Reserve by Joe Biden for another four-year term. He faces an extremely daunting task, hence why the FT has described his reappointment as a ‘poisoned chalice’.
Powell needs to ensure the continued revival of the U.S. economy, which necessitates quantitative easing methods - or so economic orthodoxy would have us believe. U.S. nominal GDP has grown 9.7% year-over-year, whilst the unemployment rate has fallen from 9% to 5%. Interest rates, of course, remain near zero.
Simultaneously, he needs to avoid runaway inflation at a time when demand is normalising yet supply chain bottlenecks are everywhere. The stock market, which has been inflated for a while now and is nearing dot-com valuations, is extremely sensitive to sudden rate hikes, and destabilised financial markets must be avoided.
As investors, all we can do is hope that Powell succeeds in this magician’s act of balance and timing.
Surprise Variant
A new COVID variant believed to originate from Botswana is on the loose. Named ‘omicron’ by the WHO, the strain was detected on Tuesday and is thought to be behind a surge of cases in the province of Gauteng, South Africa. It seems to have the capability to evade vaccinations and spreads faster than the Delta form.
Per the UK’s chief medical adviser to the Health and Security Agency, Dr. Susan Hopkins, in The Guardian:
“What we’re seeing in South Africa is that they were at a very, very low point, with a very low amount of cases being detected a day, and in a shorter period than two weeks they have more than doubled their epidemiology picture.”
“[The South Africans] are saying that their transmission rates, the R value that they have in Gauteng around where this was first found, is now 2, which is really quite high and we’ve not seen levels of transmission like that since right back at the beginning of the pandemic, because of all of the mitigations and steps we’ve taken. So that would cause a major problem if you had that high transmission with this type of virus in a population where it may evade the immune responses that are already there.”
In response, the EU, UK, and Israel imposed travel restrictions on several south African nations, although individuals carrying the variant have already been discovered in Hong Kong, Botswana, Israel and Belgium.
This narrative initiated a rout in the stock market. The S&P fell 1.5% and the European STOXX 600 index dropped 2.1%. Travel-related stocks like cruise and airlines slipped between 10-15%, whilst vaccine manufacturers Moderna and Pfizer gained 21% and 6%, respectively.
The S&P 500 volatility index (VIX), which has become extremely popular in recent times, shot up to its highest level since Q1 2021, illustrating the anxiety of traders and investors alike.
U.S. markets did shut down for Thanksgiving and opened only for a few hours on Black Friday, which may partly explain the buzz of volatility.
Despite the panic, we should remember that studies into omicron are preliminary - there is still insufficient data to be sure exactly how dangerous the variant is. For the time being, it makes sense to sit tight and wait for updates. I think we’re used to that by now.
Conditional Access
Jamie Dimon, the CEO of banking behemoth JP Morgan, quipped that the firm would outlast the ruling Chinese Communist Party in a speech in Boston on Tuesday.
“I’ll make a bet that we [JPM] last longer.”
“I can’t say that in China. They are probably listening anyway.”
Here’s the problem - JPM has had business in China since 1921. In fact, it was recently granted the right to operate a wholly owned investment bank in the country. Dimon’s comments were made not even a week after his return from a surprise visit to Hong Kong.
The CEO, who has led JPM for 16 years, was made to apologise the day after - not just once, but twice.
“I regret and should not have made that comment. I was trying to emphasise the strength and longevity of our company.”
“I regret my recent comment because it’s never right to joke about or denigrate any group of people, whether it’s a country, its leadership, or any part of a society and culture. Speaking in that way can take away from constructive and thoughtful dialogue in society, which is needed now more than ever.”
Western banks want exposure to China, but their footholds in the country are tentative, and slip-ups such as these can have serious consequences.
Indeed, Paul Donovan, who was chief economist at the Global Wealth Management arm of UBS, was put on leave in June of 2019 after making a comment that was perceived as a racial slur by Chinese authorities. It related to the impact of African swine fever in China:
“Chinese consumer prices rose. This was mainly due to sick pigs.”
“Does this matter? It matters if you are a Chinese pig. It matters if you like eating pork in China. It does not really matter to the rest of the world.”
Those comments also led the China railway Construction Company to remove UBS as an underwriter for a $500m to $1b dollar-denominated bond sale… talk about a massive screw up.
The Bane of Short Sellers
Tesla, which has been spearheading the EV bubble, has returned a phenomenal 1473% within the last three years. Its valuation is clearly absurd, with the stock’s P/E at 348, and EV/EBITDA at 151.
Short sellers, who bet that the stock price will fall, have been crushed at every turn, and they seem to be giving up. Indeed, the total number of shares sold short (short interest) - but not covered - has fallen from a high of 218 million in June of 2019 to 26 million currently.
The short interest ratio, which divides the number of shares sold short (short interest) by the average daily trading volume, has also dropped off significantly.
Even Michael Burry, who is famous for predicting and shorting the U.S. housing market during the financial crisis, has closed out his position. The bet had taken the form of approximately 800,000 put options on behalf of Scion Asset Management, which would have allowed him to purchase shares at a pre-agreed price.
For short sellers, this is a game of patience. Tesla is defying gravity for now, but should it be worth more than all other public carmakers combined?
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” - Benjamin Graham, Security Analysis
Musk has more influence than ever, making him something of a wildcard in this situation, and Tweets are his favourite instrument. I’m excited to see how all of this plays out.
Some things I’ve been reading and listening to this week:
“Mohnish Pabrai - The Value of Continuous Learning” - Value Investing with Legends; Columbia Business School
“The Metaverse: What It Is, Where to Find it, and Who Will Build It” - Matthew Ball
“Deutsche Bahn whistleblowers alleged fraud at Germany’s biggest infrastructure project” - Financial Times
“US to release 50m barrels of oil from reserves” - Financial Times
“Hochschild shares drop by 27% after Peru seeks to shut mines” - Financial Times
“Ukraine has uncovered Russia-backed coup plot, says president” - Financial Times
“Pragmatist Scholz bridges political differences to become Germany’s heir to Merkel” - Financial Times