The week ahead 10/10/2022
“Nuclear war probability is rising rapidly.” — Elon Musk, yesterday.
It’s a special kind of ~freaky~ when one of the world’s brightest people is seriously contemplating the likelihood of nuclear war. We’ve been sharing an increasing concern for geopolitics this year, in part due to that threat. Not to mention, North Korea’s central news agency recently released this photo of Kim Jung Un overseeing military drills that simulated “tactical nuclear strikes against the US and South Korea”:
It’s important to remember — our perspective in the United States is usually that we are completely right and dictators like Kim Jong Un or Vlad Putin are completely wrong. While they are absolutely evil, they’re not always inaccurate when addressing their constituents. You’re going to want to read Putin’s recent (translated) speech below:
Surging inflation in product and commodity markets had become a reality long before the events of this year. The world has been driven into this situation by many years of irresponsible macroeconomic policies pursued by the G7 countries — including uncontrolled emission and accumulation of unsecured debt.
Unable or unwilling to find other solutions, the government of leading Western economies simply accelerated their money-printing machines and used ignorant methods to cover their unprecedented budget deficits.
I have already cited this figure… Over the past two years, the money supply in the United States has grown by more than +38%. That’s 5.9 trillion dollars.
The EU’s money supply has also increased dramatically over this period. It grew by about 20%, or 2.5 trillion euros.
Today’s rising prices, accelerating inflation, shortages of food & fuel, and problems in the energy sector are the result of system-wide errors in the economic policies of the current US administration and European bureaucracy.
So, they printed money in huge quantities — and then what? Where did all that money go? It obviously went toward purchasing goods and services outside the West. This is where the newly-printed money flowed.
They literally began to vacuum up and sweep out global markets. The interests of other states, including the poorest ones, were disregarded. They were left with scraps at exorbitant prices.
While at the end of 2019, the US imported about $250 billion of goods per months; this figure has now grown to $350 billion. It’s noteworthy that the growth was +40% — exactly in proportion to the unsecured money supply printed in recent years. They handed out printed money, and used it to sweep up goods from the markets of [second tier] countries.
Obviously, such a sharp increase in demand without adequate supply has triggered a wave of shortages and global inflation. This is where the global inflation originates. — Vladimir Putin, President of Russia
Obviously, Putin is a criminal. However, he’s pretty spot-on about some of the Western World’s economic decisions. It’s a very scary combination when a powerful leader is 1) willing to wreak havoc and 2) able to convince his following / some other world leaders (i.e. China) to work with him.
Even just this morning, major US airports reportedly experienced Russian cyberattacks. We sadly believe things will get worse before they get better.
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Key Earnings Announcements:
70% of the S&P 500 will have reported earnings by the time Halloween rolls around… and it’s not looking too hot.
Monday (10/10): N/A
Tuesday (10/11): AZZ Inc, E2open
Wednesday (10/12): Duck Creek Technologies, Pepsi, Wipro Limited
Thursday (10/13): BlackRock, CMC, Delta Air Lines, Domino’s Pizza, Fastenal, Progressive, Taiwan Semiconductor, Walgreens
Friday (10/14): Citi, First Republic Bank, JPMorgan Chase, Morgan Stanley, PNC, UnitedHealth Group, US Bancorp, Wells Fargo
Looking Under the Hood:
By October 28th, a whopping 70% of the S&P 500 will have reported their earnings for Q3.
As shown above, the companies that have already reported their quarterly results (ending in August) have had the worst downward EPS revisions since the COVID-19 crash in 2020.
“Analysts are forecasting 2.4% growth in third-quarter earnings for S&P 500 companies, according to FactSet. The small share of S&P 500 companies that have already unveiled their results have reported earnings that in aggregate are only 0.4% higher than a year earlier. Four of every five of those companies have seen their shares fall in the days surrounding their reports.” — WSJ
“The picture that they’re painting, I would say it’s not a very good one.” — Nadia Lovell, senior U.S. equity strategist at UBS Global Wealth Management.
Investor Events / Global Affairs
Russian hackers are buzzing, an explanation on why England’s bond market is in the toilet, and Trump’s Truth Social could be in trouble.
European Energy Infrastructure in Questions
The question of a wide variety of systems’ resilience toward foreign (Russian) attacks has become a worldwide focus:
Trains: On Saturday, Berlin leadership blamed the disruption of its German rail network on sabotage.
Power: Early Monday, the Danish island of Bornholm suffered a power outage due to “grave damage to its cable network.”
Airports: As mentioned earlier, cyber attacks from within Russia disrupted US airports on Monday morning.
The West is Experiencing Cyberattacks:
Denmark — “The police and intelligence services must pay more attention to the protection of particularly endangered systems.”
Germany — “It was clearly a deliberate act in which crucial communication cables were consciously and deliberately cut in two separate locations”
America — “Pro-Russian hacker group Killnet directed a sequence of distributed denial-of-service (DDoS) attacks against the websites of several major American airports. “We invite everyone to commit DDoS on the civilian network infrastructure of the United States of America,” the hacker collective declared on their Telegram channel on Monday.”
Bank of England Adds to Balance Sheet
“I’ve been very clear that as well as keeping taxes low, we need to put in place measures that are going to drive growth in the economy. And that’s my priority—we’ve had relatively low growth for several decades.” — Liz Truss, Newly-elected British Prime Minister
Welp. Trying to lower taxes and increase economic durability going forward has been pretty much abandoned by the Brits. You may recall our post below, in which we called Great Britain’s economic situation a time bomb.
Early Monday, the Bank of England continued with the expanded support of pension funds at the heart of the UK bond-market crisis. The central bank is increasing the daily amounts it will buy in long-dated bonds and even created two new means of lending for pension funds to acquire more cash.
Simplifying a Complex Topic:
Bond prices and yields are inversely related. Bond prices fell and bond yields soared after the UK announced tax cut plans. Investors were concerned that the government would flood the market with new issuance of bonds to make up for tax cuts and attempt to increase borrowing while demand is already low for UK bonds. Investors were also concerned that the moves would negatively impact inflation and force the Bank of England to be more aggressive with interest rate hikes.
Through the use of derivatives (tools that allow you to trade with borrowed money), analysts realized that the UK financial system is far too exposed to leverage. Derivatives allow you to bet on the performance of assets — which in this case is UK government bonds (GILTs).
Many investors quickly sold their holdings of UK bonds after having negative feelings about the government’s “large and untargeted” plan
When there is a big sell-off in something that is tied up with derivatives products — those that used derivatives then must cover collateral calls. Often to even have the cash to cover that collateral, pension funds have to sell even more bonds. This makes it all a self-fulfilling loop of… dropping bond prices —> leading to collateral calls —> which leads to more bonds being sold —> which leads to more bond price drops.
Now the Bank of England is trying to hold it all together with glue and keep the government bond market above water.
Trump’s Truth Social Faces Adversity
While Twitter has experienced complete chaos and Elon Musk has agreed to purchase the company, Trump’s Truth Social is just trying to stay alive. Digital World Acquisition Corp (DWAC) shareholders are expected to vote today or tomorrow on a merger deadline extension with Trump Media.
DWAC has warned in the past that a failure to extend the deadline could force it to liquidate.
Whistleblower Foresees Bankruptcy:
You know that if Trump’s involved, there’s going to be some drama. William Wilkerson, a senior vice president at Trump Media, apparently filed a whistleblower complaint to the SEC — alleging securities violations within the merger.
“One way or another, this company is going to go bankrupt…I don’t think the company is going to be approved by the SEC.” — William Wilkerson
DWAC’s private investors were set to provide $1 billion to Trump Media upon completion of the merger. But at least $138 million of that funding was withdrawn, and the company moved its address to a UPS Store.
Major Economic Events
Inflations for Producers + Inflation for Consumers = potentially the final nail in the coffin for the Fed raising rates by +0.75% in its next meeting.
Monday (10/10): Fed Speeches by Chicago President & Vice Chair Brainard
Tuesday (10/11): Fed Speech by Cleveland President, NFIB Small Business Index
Wednesday (10/12): Fed Speeches by Governor Bowman, Minneapolis President, & Vice Chair Barr, FOMC Minutes, Producer Price Index
Thursday (10/13): Consumer Price Index (Core & Headline)
Friday (10/14): Fed Speeches by Governor Cook & Kansas City President, Import Price Index, Retail Sales, University of Michigan Consumer Sentiment Index
“The public had really come to think of higher inflation as the norm and to expect it to continue, and that’s what made it so hard to get inflation down in that case…The longer inflation remains well above target, the greater the risk the public does begin to see higher inflation as the norm and that has the capacity to really raise the costs of getting inflation down.” — Jerome Powell, Fed Chairman
“Recessions are painful for a lot of people. I think Powell’s right that some pain is probably inevitable…but you don’t want to cause more than is necessary…The housing market doesn’t look pretty, and that will eventually spread to the rest of the economy. — Greg Mankiw, Harvard University Economist & Advisor to President George W. Bush
“In my view, we haven’t yet made meaningful progress on inflation and until that progress is both meaningful and persistent, I support continued rate increases, along with ongoing reductions in the Fed’s balance sheet, to help restrain aggregate demand.” — Christopher Waller, Fed Governor
Which stocks moved the most last week.
Our friends at LevelFields scrub through thousands of data points each week to determine how events impact stock prices.
Ah — layoffs. We firmly believe that more job opening decreases and firings are on the way. Generally, investors can see them as positive because one of the biggest expenses for companies is always headcount.
Remember — we just had the largest-ever single drop in job openings (JOLTS), but we’re still far above the job opening levels of pre-pandemic times:
However — layoffs don’t always leads to stocks ripping upward. Last week’s largest downward move was from a therapeutics company that laid off employees. The main consideration is “will these moves from the company I’m analyzing help it survive and hopefully thrive later on?”
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Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.