20^th of July 2021

If for a brief moment we had the slightest doubt, yesterday the doubt was lifted. This time it is certain, we know that the trees are not going to the sky. The violent correction of this Monday in July sets the record straight and while two weeks ago we were counting records and up days on the fingers of two hands, this morning we are doing the same thing, but on the downside. We have gone from extreme confidence, from mastering the game of finance, to the deepest doubt, to the point of bringing back the spectre of STAGFLATION.

After the fear of inflation, here is its cousin

When you open the dictionary under “stagflation”, it says: “Economic situation of a country characterized by stagnation of activity, production, and price inflation”. Basically, if we want to apply it to what we are experiencing, we would have to start from the principle that activity will slow down massively in all corners (while we have been told for months that it is crazy, that consumption has picked up again and that some industries cannot deliver because demand is so strong and raw materials are so scarce). But we would also have to assume that employment has completely stalled and that we cannot fill the jobs that are available and that Powell’s promises, which gave us hope that things would return to normal in the fall, are nothing but lies and nonsense. This is not impossible, since all those who do not want to return to work have become traders.

This situation could quickly change if the market gets as complicated as it has been for the last five days – but that’s future music.

For the moment we are afraid of stagflation, even if it seems a bit far-fetched right now. In any case, if we needed certainty to enter “panic” mode on the world’s stock markets, we would know. The important thing in this world is not to have certainty, but to let others believe that it is a possibility. Afterwards, the herd instinct will do the rest. And if that’s not enough, we’ll say that it’s all the fault of those who don’t want to be vaccinated. Because let’s not forget that according to our political authorities, this is where the return of the virus comes from.

COVID made in India, the return of revenge

Yes, because the OTHER reason for yesterday’s drop is the return of the upgraded version of COVID. We had to admit that we saw this one coming. For the past two weeks, we had clearly popularized the return of the Indian variant and we had a feeling that we were not going to stop there. For several days we pretended not to be interested in it, assuming that in the end it was the governments that would inject money to support the economy and that there was no reason to waste time on such childishness.

And then, by dint of publishing articles all over the place on the subject, we quickly found ourselves talking more about the COVID made in India than about the billionaires who go to space for the weekend. And that was a sign that should have caught our attention. No, because I’m thinking of Jeff Bezos. The guy put all his life savings into a rocket to go and take pictures of the Earth from up there and, just when he’s ready to go, not only does an Englishman pass him by for a week, but as he’s about to play the hero – especially the hero – the media is more interested in a COVID variant from India than in Jeff Bezos’ feat and his savings. I think that’s too harsh.

But let’s get back to our stock markets. Here we are in total anguish after the return of COVID and the probable or possible or probable and possible arrival of a STAGFLATION. It was clear that under these conditions, we could not do anything but remember that trees could not climb to the sky. So the responders applied the good old New York police method under Giuliani: shoot first and ask questions later. So I won’t draw you a picture; the markets got messed up like they hadn’t been messed up since last October. Volatility soared to 25% – still in its secular downtrend, but 25% nonetheless. Trend-following traders decided it was time to take profits and the lack of liquidity due to the absence of traders who went on vacation to help spread the above-mentioned variant did the rest.

The hangover, chapter two

If yesterday morning I was talking about Monday morning hangovers, I think I can safely say that this Tuesday is not bad either. It’s been a while since we’ve experienced a day like this in the States. Europeans are a bit more used to it, but in the US, it had become rare. Except that yesterday it was bloody and some sectors were literally decapitated. We can mention oil and oil companies that were clearly massacred. Between the barrel which plunged because of the 400’000 additional drums which will arrive on the market – we can also add “the fear of a massive reconfinement, of new curfews and travel restrictions which will transform the lake of Joux into an exotic destination” – we can easily understand the panic which was on the sector.

Oil has lost 12% in 10 days and this morning at the pump, still no sign of connection to real life – yet, we, the investment experts, have already integrated the fact that air travel is not good and that considering a cruise with the Delta variant hidden in the holds, would become “mission impossible”. Yes, you will have understood, the oil sector and the travel, leisure and vacation sector, will have been the two big victims of the day. But at the same time, let’s not stigmatize! This kind of session takes very few prisoners and everyone was in the same boat. The Stagflation would have to test positive for the Indian variant and the crash would be assured.

In Asia, the question has already been asked

I might as well tell you that with yesterday’s drop, the Asian markets are in a bad position to start Tuesday by dancing the carmagnole, everything is in the red. But a little less red than we might have feared when the Dow Jones ended down more than 2%. It must be said that, as a result, we are already asking ourselves THE question of the day. The question of the day that the markets in our country will ask themselves successively, and then the Americans in the early afternoon. This question is:

“Can we go back? Or is it still too early?

No, because it’s obvious that if COVID is back and if growth and employment are pretending to stand still like volatility has for weeks, it seems pretty obvious that we’ll be waiting for news from our white knight soon. As you may have noticed, for the last two-three years, even before the crisis, at the slightest alert, the knight Powell tended to appear in his light suit and his superpowers to tell us that “things would be fine and that he would always be there for us”. Before COVID, he usually appeared after a drop of at least 20%. But since the advent of this disease that attacks the respiratory tract and that will have pushed man to invent the economic stimulus and the vaccine in the wake, Jerome Powell usually appears after a drop of 3-4% maximum. If my calculations are correct, by Thursday evening, he should come out of his batcave and save the world.

So, traders are wondering if they should buy this morning or if they should wait a little longer, so that the fear is at its peak, and the impact of Powell’s next comments will take on a more historical dimension. If we analyze the behavior of the Asian stock markets, it may still be a bit early. So in the meantime, we buy a little gold. You never know. The yellow metal is worth $1817, we feel that the notion of safe haven is clearly “has been”, but there are still some who try.

News of the day

As for the news of the day, I’m not going to hide it from you, there is a lot of talk about the Indian variant. There are plenty of experts appearing on Facebook to tell us what to do and how to deal with it. Although it’s not easy to find a place for yourself in the middle of all these exotic vacation publications that massively monopolize the news feed. We will also remember that Joe Biden took up Powell’s sketch by saying that inflation would only be temporary. He added two or three phrases of his own to make it sound like it came from him. But let’s just say that he basically has the same view as Powell and if it doesn’t work out as planned, he’s counting on Powell to act.

There are also quite a few articles about the tensions between China and the rest of the world on just about every subject. There is also Ackman giving up Universal Music, Bezos going to join Tintin in space this afternoon, that will keep us busy, just to think about something else. There is also talk of the number of cases of COVID starting to explode at the Tokyo Olympics, the suspense is unbearable to know who will have the gold medal of the fastest quarantine. Meanwhile, Toyota has given up advertising at the Olympics. They prefer not to be associated with a Games that will look like the most pathetic thing sports has ever created in the last 100 years. Olympics without an audience with masked athletes doped with hydro-alcohol solution. Bitcoin fell below 30,000 this morning and the bloodbath seems to be spreading to the crypto-currencies as well, which are looking pretty bad. I realize that technical analysis doesn’t work for cryptos, but let’s just say that if it did, it would be IMMONENT. Or maybe it’s the opportunity of a lifetime. Let’s not forget that Bitcoin goes to $100,000 before Christmas and that’s a sure thing. Yes, my hairdresser told me that. Finally, we note that the IPO of Robinhood should value the company at $35 billion.

Number of the day

As for the rest, when I started writing this column – around 4:30 am – the futures were up 0.5%. We could believe in a rebound. Now, it’s 6:30 am and we are already almost flat. I must admit that I am not convinced that the rebound will happen today. Unless Powell makes a surprise appearance. Otherwise, on the numbers side, there will be the German PPI and new construction in the US. On the other hand, it’s clearly the quarterly figures that are going to be tough. Today, we will be waiting for Halliburton, UBS Group, Philip Morris, Manpower and especially Netflix tonight.

All that’s left is to wish you a beautiful summer day – at least that much – and we’ll meet again tomorrow to see what the damage is, or simply to say that the stock market is easy when the central banks are with us. Well, especially the American central bank, because the SNB is not going to save our asses. It is content to manage its positions in the oil and arms sectors, while reading research papers on the concept of responsible investment.

In short, may the force be with you and remember that if the trees don’t reach the sky, after the rain comes the good weather.

See you tomorrow!

Thomas Veillet

CIO Merion Swiss Partners