Bottoms, Bulls and BlackRock

Fact 1: Corporate insiders have historically had a knack for buying near market bottoms.

Fact 2: Investor bullishness has declined during 2021. However, sentiment has recently recovered.

Fact 3: Over the past decade, small cap tech stocks have underperformed small cap cyclicals. Technology leadership has clearly been limited to big cap indices.

Fact 4: A sign of a liquidity trap, deposits have grown massively since the start of the pandemic, hitting $4.5 trillion. Of course, this additional savings hasn’t accrued to everyone, as many people continue to live paycheck to paycheck.

Fact 5: The post-shutdown experience was supposed to be one of massive economic recovery. Instead, Q3 GDP estimates have been trending down since the summer, with current estimates as low as <1%. Meanwhile inflation is spiking. Stagflation anyone?

Fact 6: During the pandemic, BlackRock’s AUM has quietly reached almost $10 trillion.


5 Facts Every Investor Must See

The world right now is overrun by opinions and people talking their book. What we as investors, decision makers, concerned citizens need instead are facts. Facts to form our own opinions.

To help you do this, I share facts in visual form: charts. My hope is to provide you with quick, digestible hits to provoke further thought so you can form your own opinions.

Charts and graphs are the most efficient and effective way to convey large amounts of information. Consider a simple 10yr chart of monthly stock prices, for example. That simple line enables you to absorb 240 intersecting data points (time and price), plus information on volatility and trends (implying the 10yr performance of company earnings).

All this from a 2 second look at a chart.

Fact 1: Cryptocurrencies consume the same amount of electricity as Sweden.

Fact 2: Loan loss provisions at banks are being released, providing a tailwind to earnings.

Fact 3: Electricity is being rationed across China, due to fuel shortages.

Fact 4: China’s dollar junk bond yields kiss 20%, suggesting serious market stress.

Fact 5: Ongoing supply chain shortages are due to a combination of strong demand and weak supply.

Wealth Work

Equity performance and inflation

Right now there are over 10 million job openings in the United States. Meanwhile, 4.3 million Americans quit their jobs in August. It has been a long time since labor has had so much power.

Many of these job openings and quits are hitting small businesses especially hard. Competition for skilled, unskilled and semi-skilled labor is fierce.

When the quantity demanded is high but the quantity supplied is low, prices rises. And that’s what we’re seeing in the market. Small businesses are raising worker compensation to compete for labor.

Wage inflation is now the most commonly-reported type of inflation affecting US businesses, closely followed by higher raw materials and transportation costs.

If these inflationary trends persist, it is reasonable to expect interest rates to rise. The 10yr US Treasury bond yield has risen to 1.544%, and many expect the rise to continue.

The Fed continues to buy $120b of bonds each month, so there is quite a bit of runway before they must raise short term rates, but what would happen if they did? The following chart looks at equity market returns during previous tightening cycles. Although, this time could be different as inflation today has much different characteristics than during previous cycles.

What if someone invests today and the market subsequently crashes?

The following table looks at how someone would have performed if they invested right at the market peak before major market crashes. On a long-enough time horizon, the markets have historically been quite forgiving.


The Biggest Asset Class in the World

Chinese real estate is the biggest asset class in the world. It isn’t a stretch, therefore, to argue that the success or failure of China’s property market influences the global economy. One only has to look at the ripples caused by Evergande’s recent instability to see this.

Both in absolute dollar terms and as a proportion of domestic GDP, China’s real estate sector dwarfs that of the US, even at its mid-2000s peak. Remember what happened to the US and global economy when US real estate went bust during the 2000s? This is why global markets react so violently to any hint of trouble in China.

The Chinese economy and property sector have been weakening for a while now. Data surprises in China have been negative since around June. Negative surprises are now occurring more frequently in the US and EU too.

Why do surprises (both positive and negative) matter? Economic expectations are baked into asset prices, so if a new data point defies expectations the market must adjust up or down to accommodate this new information.

Well, at least your portfolio is diversified across stocks and bonds to reduce shocks created by a Chinese real estate bust, or any other source. Right? Maybe not.

The chart below shows correlation between bond yields and stocks has declined dramatically recently. This means that when stock prices decline so do bond prices.

Climate Change

Major Drop in 2021 Canadian Field Crop Production

In Canada, October 11th was Thanksgiving, traditionally a celebration of the harvest. This year, that harvest is experiencing significant stress putting continued upward pressure on food prices.

Ongoing widespread drought conditions combined with a summer ‘heat dome’ in Western Canada have slashed projected harvests.

According to Statistics Canada:

An assessment of Normalized Difference Vegetation Index (NDVI) curves, which are a measure of plant health, indicated that in almost all parts of the Prairies, crops reached peak health well ahead of normal. In some instances, peak NDVI occurred up to four weeks earlier, before decreasing rapidly as a lack of moisture and high temperatures took a toll on plant health.

This is the first time since 1987, when Statistics Canada began monitoring crop conditions using coarse resolution satellite images, that NDVI curves have peaked so early in the growing season. The CCAP also indicates that dry conditions have impacted almost all of Western Canada. By comparison, other notable droughts such as in 2002—while difficult for many—were less widespread than this year’s.

These conditions are leading to double-digit declines in principal field crop production. Nationally, wheat production is projected to decrease 34.8% year over year to 22.9 million tonnes in 2021. Similarly, canola production is expected to fall 24.3% to 14.7 million tonnes.

The chart below illustrates year over year production declines for all principal field crops in Canada. Given widespread production declines, it seems reasonable to argue that food prices will continue to experience upward pressure.