Brave New World - Edition 4

Nikkei surfaces back to levels seen 30 years ago

• Nikkei still needs to gain almost 30% to surpass its record highs last seen in 1989; before the index went on to lose more than half its value.
• Japanese equity markets are trading at a lower PE multiple than S&P 500, despite their stronger earnings & lower interest rate. The Topix trades at 14 times forward earnings, compared to 21 times for the S&P 500.
• The recent changes on the political front (PM Yoshihide Suga resignation) could help step up the markets further as a new administration brings prospects of spending boost and targeted reforms

Energy – The Shortfall that no one is talking about, the shortfall that is getting serious

• Regions like North Asia, Europe and China compete over finite supply of fuels like coal & natural gas used to heat household & power factories. This has pushed the price of natural gas & electricity to record levels fueling inflation and threatening to stall the economic recovery; just when businesses reopen and people return to office.
• Demand for heating will jump when temperatures turn colder over the next few months, which could trigger power rationing.
• Utility companies are passing on price rise to consumers, at the same time everything from food to transportation costs are also rising due to supply chain issues; creating challenging environment for politicians trying to gather support for energy transition.

Real Assets vs Financial Assets ratio the lowest since atleast 1925

• Last two bottoming’s in 1999 & late 1960s, corresponded to the start of major commodity bull markets & upward inflation pressure.
• Real assets are positively correlated with inflation and interest rates, unlike financial assets like stocks and bonds. These assets have seen lower returns and lower volatility over the past 5 & 10 years as inflation fell to the lowest average levels seen since 1960s.

JPMORGAN: "Global house prices rising at fastest pace in 40years, with little sign of stopping.. As of 2Q21, house prices are tracking 13% above pre-pandemic levels."

High steel prices have manufacturers scrounging for supplies - 9/15/21

https://www.wsj.com/articles/high-steel-prices-have-manufacturers-scrounging-for-supplies-11631698202

The process of ending massive money printing has started

• ECB is the second giant to taper. While, it is way behind the Bank of Japan, the Bank of Canada, the Bank of England, the Reserve Bank of New Zealand, and the Reserve Bank of Australia; but, still ahead of the Fed.
• This is in line with the consensus among central banks, that QE needs to end before interest rates can be hiked, on the rationale that QE pushes down long-term rates, while raising policy rates pushes up short-term rates, which would wreak havoc on the yield curve.

Evergrande: First casualty of rising costs?

• China has been in a property bubble for years, with home price to income ratios over 30x (this ratio is 4x in U.S) & development of numerous vacant (ghost) cities around the country leading the value of Chinese real estate climbing to ~$52 trn.
• Real estate has been the go-to investment for retail investors (~70% of portfolio composition) in China for decades with 90% home ownership rate.
• Crisis begin as Chinese government tightened leverage restrictions on its exuberant property market. The second casualty factor was immense increase in construction material costs due to rising inflation led by supply shortages.
• Chinese property developers have thin profit margins and use tremendous debt, so any surprise increases to supply prices makes it impossible for them to break even.

(Source: Zero Hedgel)

Team

Management

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