- Jim Grant has been publishing the Interest Rate Observer since 1983 (that is nearly 40 years!).
- He is a noted contrarian, who has witnessed market booms and busts and all manner of human folly in-between. Always armed with a sharp mind, a wonderful network and a skilled pen.
- This was a nice recent interview with him on his views especially on the impact of rising interest rates.
- “That’s what we try to do at Grant’s. We try to imagine how a hardened consensuses of opinion could change—how people think that there’s no alternative but the way things are, and how that could change. So yes, there will be trouble ahead, but also a lot of interesting things to do.“
Macroeconomics
Snippets on the big picture.
Poor Europe
- Europe always seems to end up looking worse.
- Europe currently has almost twice the energy burden of the US.
- Source: Blackrock.
Italian House Prices
- Almost uniquely in Europe Italian house prices have been very weak in the last several years.
- This has meant, that despite only moderately increasing income, affordability has improved a lot.
- Source: Fitch.
Mortgage Payments
- Interest rates are hitting mortgage payments hard.
- “The following graph shows the year-over-year change in principal & interest (P&I) assuming a fixed loan amount since 1977. “
- “Currently P&I is up about 21% year-over-year for a fixed amount (this doesn’t take into account the change in house prices).“
Equity and Bond Performance
- 2022 really does stand out …
- Source: Blackrock.
Oil Shocks
- Recent oil price shock is now almost the same magnitude as the worst historic shocks.
- Is the worst behind us?
- Source: Blackrock.
Equities and Yields
- Equities struggle generally when yields are rising AND forward earnings per share (EPS) expectations are falling.
- Source: Oxford Economics.
Ukraine
- This is a very useful resource for tracking what is going on in the Ukraine war.
- Produced by The Institute for Study of War (ISW) it is a daily assessment (see under “Latest”, example here) of the situation on the ground along with a useful map (pictured).
- Here is a video that time lapses all the maps since the invasion began.
- This Substack (written by Lawrence Freedman, Emeritus Professor of War Studies at King’s College) provides some very good analysis of the meta situation.
- One angle that is key to watch for second order thinking is China. This was a really great piece to understand the China angle as was this (arguing that perhaps this crisis could push China back to collective leadership).
- (h/t The Browser).
European inflation
- Europe is experiencing an unprecedented surge in producer prices relative to consumer prices.
- This surge is either going to hit margins and profits, or will need to be passed through to consumer prices.
- Source: JPM.
Earnings Sentiment
- Earnings sentiment has taken a big knock in the last two months.
- Source: themarketear.com.
Inflation Impact
- The price shock is already starting to lead to changing consumption patterns.
- h/t Daily Shot.
Recession Watching
- New home sales is a great variable to watch for recessions.
- “When the YoY change in New Home Sales falls about 20%, usually a recession will follow.”
- Any Fed tightening cycles that cause recessions show up here first.
- There are exceptions to this rule – usually due to strong spending on defence or non-residential investment holding the economy up. The pandemic also distorted the series.
- Currently this indicator isn’t flashing red.
China People’s Daily
- Chart showing the percentage of front page headlines of the People’s Daily in China containing the name of the leader.
- No comment needed.
- Source: DailyShot.
Inflation Perception
- Data from ECB showing that people perceive inflation to be a lot worse than the officially measured values.
- Interesting to see how this difference moves over time and behaves in spikes.
Crossover Point
- In 2030 the US budget will reach a crossover point where entitlements and mandatory outlays will outstrip revenues.
- This means there will be no room for non-defence discretionary spending.
- Source: JPM.
Sanctions
- Nice chart from Net Interest showing global sanctions by type.
- Interesting to see the rise of financial sanctions vs. other sanctions.
- The original source has all the data.
Historical Energy Crises
- A basket of energy commodities – seaborne thermal coal, global gas, European electricity and US gasoline – has risen by a weighted average of 4x since 2018-20 levels.
- This ranks as one of the top three worst price rises in history.
- Source.
ECB Communications
- The ECB, by introducing a new publication – “monetary policy at a glance“, is trying to address the declining and very poor readability of its existing press releases.
- The decline in readability, measured by the Reading Ease Index (REI), is largely down to the introduction of more complex monetary tools (e.g. TLTRO).
Mid-Term Elections 2022
- Incumbent President’s party typically loses seats in mid-term elections.
Export Share
- China has taken full advantage of the pandemic, gaining the most share of export growth.
