Why the market is more reliable than the 'experts'

After the worst start to the year in decades, global bond markets have convinced themselves that they face a double threat; one from inflation destroys real yields, and the second from the Federal Reserve and other central banks to deliberately engineer sharp interest rate hikes so that they create a recession, and credit markets are even worse than sovereign debt.

Data that supports this view is highlighted, while data that does not support is mostly ignored.

Recession warning

But then in the middle of last month, long US bonds started to rally from yields near 3.5 percent and the narrative began to shift from stagflation – inflation and poor economic growth – towards an outright recession.

Forget that this might just be a value based asset allocation decision, or anything to do with rebalancing quantity funds, it’s taken as proof of new economic forecasts.

The Euro-dollar market is now saying that the Fed is not going to raise interest rates more and commodity prices are falling sharply. Ergo, although we don’t have to worry too much about inflation and the Fed, there’s definitely a recession coming. Thus, the usual conclusion of a bond analyst – sell equities and buy bonds.

Nice to know some things haven’t changed.

Using short-term price movements as an economic forecast is a particular problem with commodity markets, which need to be balanced as short-term supply and demand because they are contracts that renew every three months and are obviously also subject to pressure to leverage. and deleveraging.

Remember two years ago when oil prices entered negative territory? This has nothing to do with economic forecasts, but everything to do with the fact that the owner of the contract has no desire, much less the ability, to physically take delivery of the oil.

As to what actually happens in the real world, the combination of radical green energy policies, principally the belief that “bad” fossil fuels can be replaced overnight with “good” renewable energy at the mere stroke of a bureaucratic activist’s pen, has led to a serious mismatch. serious relationship between supply and demand, especially the lack of investment in pipelines and refineries.

The impact of this green jump has of course been exaggerated by a series of different policies on COVID-19, which have damaged supply chains and caused a sudden spike in demand.

But now we find that, while the price of primary oil has fallen, the price of refined products has not.

Thus, inflation is more than 7 percent before what Joe Biden calls “Putin’s price hike” – which has nothing to do with Putin in any way and is primarily to do with the West sanctioning itself in a grotesque act of self-harm.

This is especially true in Europe, which effectively insists on buying crude at a $35 premium compared to what Russia sells on the open market. And that’s before taking into account discounts for “friendship”, and premiums for processed products for lack of capacity.

Cost of living crisis

Of course, this system is being toyed with.

The Gulf states are not actually producing more but are exporting more crude oil (at a naturally higher price) by substituting the production they would keep for domestic consumption with cheap imports from Russia.

Refiners in China and India import discounted crude from Russia and export refined products at very high margins back to the West, which believes it is hurting the Russian economy with its sanctions.

The latest folly of the G7 is to believe that it can limit Russian oil prices through some form of buyer strike or insurance restrictions. Will this be the same oil that is already trading under $US80 and which they refuse to buy?

Meanwhile, in a further self-defeating attack, central banks in countries such as the UK and Australia scrambled to raise consumer mortgage rates to counter rising prices caused mainly by other government policies.

The cost of living crisis means people are struggling to have enough disposable income as prices of basic necessities have risen so high.

The answer then is to effectively reduce their disposable income further by increasing their mortgage costs, which still float disproportionately in comparison to many other countries including the US.

It would be funny if it weren’t so tragic (and stupid).

After years of poor forecasting models leading to zero interest rates, zero carbon policies, and zero COVID-19, we now have the same misapplied model that threatens to undermine discretionary spending.

Financial markets may be very bad at forecasting, but they are much better than the models used by “experts”.

Mark Tinker is Toscafund Hong Kong’s chief investment officer and founder of Market Thinking.

#market #reliable #experts