EFFORTPOST China, Israel, Russia..yeah yeah I get it. But what about my bond portfolio, BIPOC?

Prelude: NASDAQ has heavily underperformed Europe, it's underperformed China massively. China's up 25, 30% since its January lows.

Basic:

CITI Economic Surprise Index:

Citigroup Global Markets computes and distributes an index they call The Citi Surprise Index. They survey economists and analysts to get their forecasts for a variety of variables. Then Citigroup compares the forecasts to the actual data when it is released. The index measures data surprises relative to market expectations. A positive reading means that the data releases have been stronger than expected and a negative reading means that the data releases have been worse than expected.

https://iconadvisers.com/wp-content/uploads/ICON-Econ-Surprise-2020.pdf

The index has once again turned negative for US.

So there's all these things that are going on behind the scenes and maybe we've just been so fixated on inflation (previously covered) and the Fed that we're missing this real turn. And that's why we can see this turn once again to hard landing time.

We've been very focused on the central bank divergence, the prospect of the ECB cutting interest rates in June and the Federal Reserve maybe not doing the same thing until much later this year. And we've missed the fact that the economic data has turned, that the surprise index is now negative. So, the question is, does it continue?

Investors started liking yields once they got above 460. They thought it'd be in a 10 year range, 440 to 460. Now it might pull back to 430, even 425 if the economic data continues to be weak. And to be honest, there's already been enough weak economic data that we've ignored. (All US 10 year treasury yields marked as basis points).

Then the question is how do equities respond, right? People clearly had a Goldilocks type situation in mind where bonds do well and stocks do well. That will fade. And that could fade rather quickly as people start saying, hey, this has only been a subset of the economy that's been exceptional. It's not something to be optimistic about, rather something to be more cautious about.

But investors are now very worried that there's not going to be a smooth transition. They went from no landing to maybe softish landing to hard landing. And it might be justified because the data already supports some of that fear.

Now there's obviously a question about time horizon here. And whether this is a tactical view or whether it's something that's strategic over the long term you start to see. A greater chance of some sort of downturn that could more fundamentally challenge certain equity valuations. Which is it?

To some analysts like me this is more fundamental. And we've been seeing for the past six months to a year the China resurgence as China has been trying to sell their own brands and compete more directly with the West, which I think is going to put margin pressure on US companies. And what is of more concern is that, China will work domestically first, then sell into emerging markets, which they're doing at full throttle.

But US investors have always viewed Europe kind of as a potential weak link. The US has the ability to confront China, to draw lines in the sand and fight with China. And our brands are super successful. Whereas Europe has always struck USA as a little bit more dependent on China. Xi is already meeting with Macron. Expect to see more of that. For more info, look into the cars vs cognac battle going on even as Xi visits France as France tries to rear its head as a great power once again. 20th century once more, YOLO.

And unlike in the past 20 years where when China does well, we get a big slice of that here, the US is going to get less and less of a slice of that and more and more competition. Thus this is strategic valuations territory, not just a technical or tactical trade.

But why do shrewd investors think now is the time the market's going to kind of come to terms with it or face it, given the fact that earnings have been coming in pretty well. The earnings reports (see earlier post) have seen them retain their earnings power, even if they have lost some of their pricing power. And there were a lot of things, particularly from the BLS (again, see earlier post) including the jobs report, that weren't exactly terrible.

Well, the reason I'm beating the “China scary” drum is because of this:

For the first time, as Chinese stocks are doing better, there's signs that Chinese economy has bottomed. Investors will be watching very closely for a few names to see how their sales into China go. And if their sales disappoint while Chinese brand sales, the entire model of the last 20 years breaks apart. That, oh, our sale are only weak because China's weak. That model and rationale will be deemed as outdated.

And that's when investors have to really confront these valuation issues and multiple issues.

Tl;dr - If you're investing solely based on earnings reports or your mutual funds is, be ready for a nasty shock.

Diversion:

A lot of people have been asking me about Oil and Energy so here goes:

As we head towards the election, I would not be surprised to see spots of activity in and around Russia and Ukraine, other things that kind of push crude prices higher. One theory circling in Wall Street is that if Putin wants Trump to be elected, higher crude prices would suit Putin very well. So I'd watch out on that front. Oil has been, historically, a great geopolitical hedge. As the election nears, any activity in the Russo-Ukrainian front would push oil towards more volatility.

So what did I mean by saying oil is a great hedge and it will continue to be so for the near future?

Well, BP is expected to reverse a previous commitment to reduce oil and gas production by the end of the decade amid a broader pivot in the industry to continue providing the hydrocarbons the world needs. While keeping their 2050 net-zero targets intact, Europe's major oil companies have started to scale back interim emission reduction targets, acknowledging that their priorities now lie with returning more cash to shareholders. And most if not all, of these returns come from the fossil fuel business, not from renewables.

As BP prepares to announce first-quarter results on Tuesday, shareholders expect the supermajor to announce – not necessarily this week – new oil and gas production targets that would further scale back a 2020 pledge to cut hydrocarbon production by 40% by 2030.

Natural gas markets have already turned bullish thanks to EU mulling cutting off more Russian gas as well as a late cold snap in Europe forcing EU gas inventories to reverse course. Total energies CEO Patrick Pouyanne has predicted that natural gas and LNG prices will spike after the EU stops Russian gas from the Yamal LNG project.

Meanwhile, Saudi Arabia raised the price of its flagship crude to Asia for a third consecutive month, as the kingdom tries to tighten the oil market to prevent a global surplus. The hike highlights Saudi Arabia's efforts to keep the market tight amid fading war risk in the Middle East, which has helped drive oil prices in London lower. Iraq and the United Arab Emirates continue to pump several hundred thousand barrels a day above their agreed limits.

Regarding Brent prices, Russia Ukraine war is the main issue, Israel and the Gaza conflict cannot progress indefinitely and as soon as Hamas said yes to a ceasefire, Brent fell 7%. Volatility will lessen as soon as a negotiation is reached, which can come any day against the backdrop of Rafah (if not already beginning to take form https://edition.cnn.com/middleeast/live-news/israel-hamas-war-gaza-news-05-06-24-intl-hnk/index.html ). No matter how much Saudi tries to retain that high price by cutting production, it won't and can't sustain that level of volatility and high price based on production cutting alone. Iran is a factor but an Israel that unilaterally escalates against Iran could jeopardize Israeli-Arab cooperation, which has become essential to Israel's security. (More on that here: https://archive.ph/E2KWe ).

Additional info on Geopolitics here:

https://archive.ph/g4dH9

More on China. - Xi's Europe visit:

https://archive.ph/9HMYR

https://www.politico.eu/article/xi-jinping-emmanuel-macron-ukraine-vladimir-putin-war-weapons-state-visit-paris-viktor-orban-trade-state-visit/

https://www.reuters.com/business/energy/oil-nudges-higher-after-saudi-arabia-hikes-prices-2024-05-06/

!math !r-slurs