Yet another Munger word of wisdom on describing his perception of risk, was “show me where I’m going to die, so I’ll never go there”. A bit dark, but it fits quite well in introducing today’s discussion, since history does have a habit of repeating itself. And what better way to use history, if not to be able to anticipate the good, the bad and the ugly and act accordingly? You see, what we consider normal in our timeline, might be at the end of its own timeline in a much broader context. Given the shift in the balance of power among nations and their economies, this generation’s normal might now be due for a change. This article is a by-product of upcoming posts, that will outline and briefly look into the historical record of reserve currencies.

Why reserve currencies?

Because when there are major global developments, tensions, conflicts, wars, unexpected turmoil that might push down on the strong and lift up the rest, whispers of rising powers, who they might be and the chances of a change of scenery, are gaining ground. Possible shifts like this, imply a possible change in the global reserve currency as well. Or do they?

What are reserve currencies?

Held in large quantities by foreign central banks and major financial institutions, reserve currencies facilitate transactions, investments and given that global trade is measured in trillions, they make the world go round faster, relatively cheaper and most importantly safer.

Foreign exchange reserves are a way to meet foreign obligations, as well as appreciating a national currency when needed. A country uses its reserves to buy its own currency and increase its value when there is a risk of devaluation, so holding a substantial amount of foreign currency is the way to go.

The more demand for transactions in a specific currency, the more liquid it becomes. This provides easier access to capital for domestic firms since it can be acquired cheaper than it would, without the demand increasing its value. Other than the currency itself, investors tend to also hunt for securities denominated in the currency, like bonds that tend to be a safer bet in getting their investment back. Borrowing for the country becomes easier, allowing for investments, increased productivity, growth.

Important to note that with a strong currency, it becomes more expensive for foreign companies to buy a domestic product. It is also cheaper for domestic companies to buy foreign goods. By default then, imports increase and exports decrease, which raises the country’s trade deficit. A manageable downside though since an economy’s core doesn’t rely only on one variable.

The larger and stronger an economy gets, the more interlinked it becomes to the global economy. According to the World Bank:

When other sovereign nations are using your currency as their own, when over 65 countries peg their currency to yours, and when over 90% of forex trading involves your currency, you know you dominate. On the other side, when your GDP starts to decline at the same time that the GDP of competing countries is on the rise (with outlook of surpassing you) and/or when you are repositioned as a major partner in the global arena (EU exchanged more goods with other partners in 2021 compared to the US), you know that times might be changing.

Notwithstanding that the sanctions of the war in Ukraine, relative to the freezing of more than half a trillion dollars of Russian reserves, begs the question. Should a country hold all it’s eggs in one basket and be subject to economic paralysis if it doesn’t comply with everyone else’s decisions? This senseless war is an extreme case and the international community correctly took action but we’ve seen what people/countries would do, to protect their interests. Could the inward shift – becoming less dependent on global supply chains – be reflected on the currency reserves as well?

The USD global reserves peaked in the year 2000 at 70% (from 0% in early 1900) and had a 10% decline by 2021. Small increases in global reserves in EUR, GBP, JPY, CNY, AUD, CAD are taking portions of the 10% but nonsignificant to challenge the USD yet. History wants dominant countries and their reserve currencies, to hold that position for 100 years on average. If that’s true and the US took over Britain in 1920 (some argue it was during or after WW2 in the 1940s), then the US has held that position for 80-100 years already. Is the geopolitical scenery, the decline in GDP, the rise of the GDP of competing countries and this “average timer”, a signal for an upcoming change?

For thousands of years to the end of WW2 that saw an almost bankrupt Britain and a shift in dominance from the British pound to the United States and the US Dollar, countries and their currencies were fighting for the spot at the top of the podium. Breath in – the Byzantines and their solidus/hyperpyron gave way to the Italian Florin and Ducat, that briefly gave way to the Portuguese Real, followed by the Spanish Real and Spain’s colonial ambitions, who then gave way to the Dutch and their Guilder, who were pushed out by the French and their Livre, who lost to Britain and the British Pound who finally gave rise to the United States and the US Dollar – breathe out.

And in all of the above, the country standing at the top of the podium was constantly challenged leading to conflicts and wars, the necessary funding of these wars, retreats and abdications, debasement (see image) of the currencies, ultimately leading to the fall of one empire and the rise of another.

Debasement from what though?

From common metals like bronze and copper to precious metals like silver and gold, the mint (construction) was specific to the territory/country. The weight and the content of the metal varied and at times of scarcity, with the precious metal in the coin hardly recognizable.

Before we delve into the actual reserve currencies, their timelines, the significance of understanding what happened in the past to help us anticipate what might be coming in the future, here’s some conversation starters (or conversation enders depending on whom you ask)…

Barter was a system of exchange, that dates back thousands of years. Goods and services were exchanged for other goods and services, and that concluded a transaction. Simple.

Metals (precious as well as common) were used for bartering. Going back to 200 BC as an example, Bronze was heavily used as a medium of exchange, not so much for its value, as much for its crafting qualities (easily turned into tools or something else). The evolution of Bronze as a medium of exchange can be seen in the following steps (see image)

 

We could go even further back to the Chinese, the Lydians, the Greeks and times where only agricultural products were used for trade. In our example though we can see clearly the evolution of first having a rough medium of exchange accepted for trade, to a more fair (measured and weighted) unit of the same, to an easier to handle, transport and store coin. Cattle, general livestock, or grain were messy, required care, maintenance, space. Metals were preferred because they lasted longer and could be easily stored or carried around for miles through the trade routes.

Trade routes at that time, were all land locked. Traders were still exploring to find safe passages and it wasn’t until approx. 110 BC that the Silk Route was established connecting China and Southeast Asia with Africa and Europe. Trade routes via sea, were recorded during the Age of Discovery/Age of Exploration. That was when European countries wanted to explore the world in the 1400s. It opened up a world of opportunities as well as brutal competition, which led to the discovery of the Americas as well as new trade routes to India and the Far East.

All of the above are characteristics of the evolution of the early trade to the monetary systems we understand today. From the minting of the coins, to their value outside the boundaries of the nation (since more precious metal content in the coin made it sought after for trade), allowed new empires to rise, on the demise of another.

Past a nation’s investment in itself i.e. innovations, technology, education (also required traits at older times), things remained the same relative to who’s on top. Productivity/output, competitiveness in global trade, military competences, and the recognition of currencies as reserve currencies declared the winner. Getting there is one thing, staying there is another. There’s an old saying “a bird in hand is worth two in the bush”. You should be content with what you have rather than risk losing it all for something bigger, which is what happened every single time. No risk, no reward though and this risk is what formed the world as we know it today.

So, what were the main attributes of the years 1200 onwards relative to global reserve currencies? How did empires rise and fall and what where the characteristics of their currencies? What is the relevance today and what lessons can we possibly learn from it?

Stay tuned! #foreignreserves #reserve_currencies

The information provided is strictly for informational use. It is not meant in any way to be construed as investment advice. One should seek expert advice, as all as investment strategies involve risk of loss.

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Lets look into all these together!

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Recession or no recession? It’s always a hit and miss, listening to the experts and their forecasts on what’s going on with the markets, and their take on how things should be run by the central banks and governments.

It’s also notable that people who sat on the chairman seat of a central bank, are people that once criticized their predecessors for doing what they thought correct.

Today they face the same criticism and “expert opinion” by everyone, maybe rightly so, maybe because of the pain felt while all markets tumble and fall.

• If I bought 10 Apple stocks in August at a price of $174 (total of $1,740), at today’s price I would be losing $351
• A fund that bought 4 million Apple stocks, would have paid $696 million, and would be losing $140 million
• When tech stocks, chip stocks, media stocks, energy stocks, sector ETFs, sovereign bonds, all part of a portfolio are losing hundreds of millions of dollars each, it piles up and numbers can get scary. That’s when the blaming starts and questions like “data driven Fed, are you listening?” begins.

The IMF’s global economic outlook just came out, in part with reassuring elements of reading properly what central banks around the world are doing, but also with looming forecasted numbers of what to expect in the coming months and years.

According to their numbers, about a third of the world’s economies are facing 2 consecutive quarters of negative growth. That is the definition of recession. They also repeat that unlike your normal inflationary pressures of an overheating economy, external factors are the main drivers of the double-digit inflation we are experiencing in different parts of the world. A pandemic and its disruptions to the global supply chains, a senseless war and its disruptions to energy and food, geopolitical alliances and tensions, trade wars and embargos.

External, because under normal circumstances, inflationary pressures are caused by high demand and a low unemployment rate. Credit is more easily accessible through low interest rates, debt is increasing within its own expansionary/contractionary cycles, until the next central bank intervention, that will cool down the situation.

And although unemployment rates are indeed low and the spending power of people is strong thus requiring the said intervention, at the same time these external factors beg the question – can the central banks tame this newfound beast using the good old traditional ways?

To a certain extent the force is strong with the central banks but the fear and uncertainty of governments around the world, causes them to panic and overextend the tools they have in their disposal to fight. A central bank deals with monetary policies (money supply) while the government deals with fiscal policies (taxes and government spending). When the two try to steer a difficult situation at the same time, it’s like two people trying to drive a car with two steering wheels. It’s just not going to work.

A panic mode recently seen in the UK, which nearly caused a doom loop – when the price of sovereign bonds falls below a critical level and could destroy one of the biggest and oldest financial centres of the world. To fight the rising cost of living and the double-digit inflation, two policies came out. The first on September 8, was to cap the energy bill for a household at 2,500 pounds and would reportedly cost the government 70-100 billion pounds in the first year alone. It would be funded via bond issuance. The second on September 23, was to cut taxes of individuals and companies, also to be funded via government borrowing. Its cost was calculated at 45 billion pounds by 2027.

The tax cut announcement came a day after the 50 basis point rate hike. International markets panicked, investors lost faith in the GBP, and started a massive sell-off of assets denominated in the British Pound, while at the same time exchanging the currency for safer ones (like a strong dollar). On September 26, the British Pound hit a low of 1.03 against the dollar. When pension funds – that hold half of people’s savings – were getting margin calls and asked by the Investment Banks for more collateral on their leveraged positions, they also began a massive sale on their gilts (UK government bonds) to meet their obligations. With a rising supply and little demand, the market was already in a trajectory to disaster.

The Central Bank of England stepped in and promised to buy 65 billion worth of the supplied bonds to stabilize the market, until October 14th. Although it did prevent a doom cycle, money flew fast out of the FTSE as well. The government revised and stopped the tax cut plan but it goes to show that testing the markets has its limits.

Economists are debating whether what we’re dealing with, is an 80s Volcker situation all over again. Maybe it is, maybe not, but Paul Volker – the Fed chair at the time – was dealing with an inflation built-up over a period of +15 years following the Vietnam war, recessions, the Bretton Woods collapse, stagflation, a debt close to a trillion dollars (today’s debt is over $30 trillion) and much more. To put things in perspective, debt to GDP ratio was a little over 30% in the 80s, in contrast with over 120% today. In March 1980, inflation rate in the US was at 14.8% and interest rates were already high, in failing efforts to cool it down. Volcker raised the rates to 20% and engineered 2 recessions. It wasn’t until 1983 that inflation went down to 3%, that a period of growth had began for the US economy. Volcker was also booed and hissed for his brute-force – 20% interest rate is bound to cause a lot of pain – but today is regarded as a hero for many well-known investment advisors with billions in AuM.

Today, the Fed is dealing with hiking rates (already 5 times) from near zero, on a consecutive aggressive approach. Its dealing not only with a peaked, overheated economy but also with these external factors, all of which have an unpredicted future. Who knows when the war will end, what the world’s energy map will look like, what geopolitical effects on trade/tensions will be left behind?

Already tensions between countries are causing a turmoil to entire sectors. The second semiconductor US ban on China combined with hindered demand, has all stocks in the sector testing their lows. Most chip companies (and their clients like Apple and Microsoft) are listed on the S&P 500 and/or Nasdaq, bringing the indices down with them on a daily basis.

Similarly to Europe’s attempts to gain independence for its energy needs, China being dependent on global supply chains across the board will only push the rising giant to look how to internally complete the puzzles. China does have problems with a falling Yuan, the real estate sector (which takes up 20-25% of its GDP), the zero COVID policy restrictions that exert pressure on supply chains, and an aging demographic. Irrespective of the setbacks, with the Chinese government fighting corruption and its capital market reform, it’s still a superpower on the rise.

Deglobalization is now more alive than ever, since net exporters of valued products will first look inwards to support their own citizens, and then sell what’s available to the highest bidder. Opec + already proved that the cartel’s interests align with their profit, not with the households that will be affected by a 2-million-barrel supply cut. They already tasted the sweet $120+ per barrel earlier this year, why would they continue with an $80 price. And on that note, the United States SPR – Strategic Petroleum Reserve – is depleting while the eighth EU sanctions package is targeting even more Russian petroleum companies (as well as Russia’s manufacturing, aerospace, electronics, chemicals, crypto-asset wallets etc).

Closer to home, the EU is still trying to tackle with the Energy problems with Germany and the Netherlands pushing for joint gas purchases so that member states don’t outbid each other. The region is also evaluating caps on energy bills but with rational concerns raised by its members. Placing a cap on import increases fears of other regions around the world willing to pay more and outbidding the EU states. And what about increased demand? If the government is subsidizing a cap on my energy bill, I wouldn’t think twice to use more and it’s something that many would take advantage of.

Back to the IMF report, it considers that the war in Ukraine, the global higher cost of living from energy/food disruptions, and the slowdown in China are the main forces that currently push the markets in a volatile and fearful mode. We can measure how volatile and uncertain the market is through the “fear index”, CBOE’s VIX index currently above 30, indicating a level of extreme uncertainty. A level below 20 is what we would consider normal behavior. The three largest economies i.e. the United States, the EU and China are quote “going into a stall”.

The forecast looks into a stubborn global inflation peaking in late 2022 at 8.8% and dropping to 4.1% by 2024. That’s 2% above a country’s average target, but its also not a double digit, money hungry inflation rate. Hard to tell, but there’s some wishful thinking placed on the numbers, relative to how the external factors will settle around the globe and their aftermath.

The US dollar is keeping strong, affecting Emerging and Developing countries that hold debt in USD and find it difficult to pay their loans. Commodities are down, stock and bond markets are down around the world, secular (non-cyclical) sectors and cash are given more weight than they might deserve.

In all of this mayhem, investors are trying to guess the terminal rate, how long it will stay there and when the Fed will pivot. A crucial stage when fighting inflation because the terminal rate is when the Fed says enough, and its ready to test the theory by stopping the hikes and keeping interest rates at a level. When ready, it will loosen its tightening policy and start dropping the rates to boost growth and help stimulate the economy. If the rates drop too soon, it will push inflation back up and it might take a while before it corrects itself. If too late, the tight economy in a recessionary mode will take longer to recover.

The bond yield curve is already inverted. This means that the short term bonds are paying more than the long term bonds. Why? Under normal circumstances, bond holders get paid more interest if they buy long term maturity bonds due to the unpredictability of the long period. Short term pay less because they expire earlier. When there’s uncertainty in the markets, long term bond holders shift to short term bonds, causing the yield curve to flatten and then invert. If you can’t picture the chart, then think of the spread, the difference between the two yields. The closer the spread gets to 0, the flatter the curve. The second it goes below 0, you have an inverted curve.

Why is this important? Because inverted yield curves predicted every single recession over the years. If the inverted yield persists for a longer period, this would be yet another indicator that the economy is in a recession. Central banks take different maturities into consideration when looking at the yield curve, like the 2 year vs 10 year, or 2 year vs 30 year or an even shorter term like the 3 month T-bill.

Source: US Treasury

If it walks like a duck, sounds like a duck and looks like a duck, shouldn’t we call it a duck? The acknowledgement of a “very slight recession” in 2023 is either an understatement of what’s happening, or an overestimate of the ability of a person to actually recognize… a duck.

The information provided is strictly for informational use and is not meant in any way to be construed as investment advice. One should seek expert advice, as all as investment strategies involve risk of loss.

We might be a long way from an active Generation Alpha but in an increasingly turbulent world, it might pay to stay ahead of the curve. Born during or after 2010, Generation Alpha will be one of the largest “buyer pools” that will dominate the markets after Generation Z. With an expected 2+ billion people buying and selling by 2025 – and although currently very young – the trends of their likes/dislikes are already apparent.

Marketers are urged to take Generation Alpha’s characteristics into consideration from now when they create, market, and sell their products so that they find themselves at the right side (the buying side) of these “mini millennials”, when the time comes.

 

Some of the characteristics of Generation Alpha are:

• Environmentally and socially conscious
• Technologically savvy
• Brand aware
• Interactive/prefer to be part of an experience rather than be labelled “buyers

 

With that in mind, today’s topic will focus on the ESG side of investing which covers a great deal most of what Generation Alpha is conscious of. With one foot in a portfolio of assets and one foot out, ESG investing has been a matter of discussion and controversy among piers for years. Do corporations align their strategies with ESG standards as part of a smart marketing approach a.k.a. greenwashing? Do they bring up ESG only to cover for poor performance? Or do they really work towards making a positive impact?

 

What is ESG investing?

Looking into factors other than a company’s financials, when choosing your investment vehicles. ESG stands for Environmental (carbon footprint, water usage and waste, recycling), Social (employee training, customer service, social justice) and Governance (Board and management diversity, corruption, executive compensation) and it’s the result of various past attempts towards sustainable investing. Not taking enough steps towards sustainable investing, poses risks that although might not affect the short run, could expose a company to future threats. An ESG score/rating is assigned that indicates where a company stands in its ESG efforts.

In 2021, MSCI rated Microsoft with a AAA score (more on MSCI ratings below), the highest rating they can assign. Microsoft’s energy conservation efforts are admirable, with a target of 100% renewable energy use by 2025.

 

What is an ESG rating?

ESG ratings zoom-in to risks not considered when looking into a company’s financials. Operational and potential litigation costs are part of those risks.

MSCI ESG Research LLC, has been rating companies based on ESG characteristics since 1999. Their rating ranges from worse – CCC/B a.k.a Laggards – all the way to best – AAA/AA a.k.a. Leaders – with average ratings of BB,BBB, A. Other ESG rating companies are RobecoSAM, which was acquired by S&P Global at the end of 2019, Bloomberg ESG Disclosures, Moodys ESG Disclosures, Refinitiv, Sustainalytics ESG Risk Ratings and many more.

Companies with a high ESG score across the board (provided by more than 2 rating companies) include Microsoft, Taiwan Semiconductor, NVIDIA, Adobe. Average score examples across the board include Visa, Mastercard, LVMH (France).

Rating companies, score differently ESG efforts. For example LVMH – Luis Vuitton, a luxury goods conglomerate founded in 1923, gets Average scores by Refinitiv and MSCI but a very low score from Sustainalytics. Amazon gets excellent scores from Refinitiv but average from MSCI and Sustainalytics. All rating companies have a white paper outlining their methodology and investors can tap into them to get the information they need.

 

If ESG is a good thing, why the controversy?

With religious roots more than anything, the way of – Ethical Investing – attempted to keep people away from “wicked” assets that represented the likes of alcohol, tobacco, weapons, gambling etc. Socially Responsible Investing (SRI) became more prominent during the 70s and 80s as values-based negative screening basically told investors not to invest in a company that conflicts with their values.

As the Vietnam War came to an end, companies were still profiting from its after math. And as SRI investment pushes an industry rather than pull, religious investors steered clear from portfolios that profiteered from the war, continuing the ethical investment initiative.

The Pax World Balanced Fund provided an alternative investment vehicle and various movements/legislative acts went live relating to discrimination and environmental protection. Based on the Sullivan principles of supporting human rights, equal employment opportunities and social programs, from the year 2000 onwards ESG got more push by the United Nations who tried to integrate it into the Capital Markets.

Debates over the years relative to the social responsibility of companies date back to the 70s and include Milton Friedman’s “The social responsibility of business is to increase its profits”. A socially responsible act is one the corporate executive makes, not the business in its entirety. A socially responsible act would mean spending the money of the executive’s employers (shareholders) for a general social interest.

Examples in Friedman’s approach include spending large amounts of money to reduce pollution beyond the interest of the shareholders, hiring hardcore unemployed (hardcore: people jobless for a long time) rather than qualified personnel to help reduce poverty, refrain from raising product prices to help combat inflation (even if a rise is in the best interests of the business).

In all of the above examples, although the executive’s decision represents the business as a whole, spending someone else’s money for a general social interest might come in conflict with why the executive was hired in the first place. The employee acts as a civil servant although works (and is paid by) a private corporation whose interest, is maximizing returns.

According to a Harvard Business Review in March 2022 – referencing an analysis on Morningstar’s sustainability rating of more than 20,000 mutual funds – it was obvious that the highest rated funds attracted more capital, but none outperformed the lowest rated funds. Through studies they also found that to cover for earning’s underperformance, company executives often publicly talked about their focus on ESG (in contrast with overperforming results with little to no reference to ESG). An outright shoutout to investors, who might be investing in underperforming companies in an effort to support their ESG values. Last but not least, studies detected no improvement in ESG scores over a period of time indicating that the financial sacrifice funds potentially undertake for ESG investing, does little to nothing to improve the “wickedness” in the world.

 

Not all underperformers are created equal

NVIDIA is an example of a high ESG rated stock currently underperforming, but due for correction. A graphics processing unit (GPU) manufacturer, NVIDIA is a AAA rated company. Its GPUs are used for gaming, self-driving cars, and they power the fastest supercomputers in the US and EU. They are also used for mining crypto that use the PoW consensus protocol. Post the Ethereum Merge and the transition to PoS, a reported “unintended consequence” is the drop in sales of new GPUs, since the existing ones that powered the mining equipment will no longer be needed, and will flood the market with second hand/cheaper options.

Combined with US government restrictions on the company selling its A100/H100 products to China, it all resulted in a drop of NVIDIA’s stock price. Although due for a few challenging quarters, its an example of a AAA rated company, a leader in ESG standards that treats people fairly, socially conscious both internally and externally with its suppliers taking a hit nonetheless, ultimately affecting the returns of its shareholders.

That being said, investors are looking at the price drop as a way to enter rather than exit. Cathy Wood’s ARK Innovation Fund ETF sold a small portion of the fund’s Tesla shares in the beginning of the month, to fund a new purchase in NVIDIA ($32 million worth of it), after the sales restriction announcement and a +7% drop in its price.

 

What about other ETFs?

From $5 billion in 2006 to $378 billion in 2022, the allocation of assets with ESG standards to ETFs saw a significant rise. The largest Exchange Traded Fund in 2022 is SPDR Bloomberg SASB U.S. Corporate ESG UCITS ETF. Its size reached $6.75 billion. iShares ESG MSCI EM ETF reached $6.51 billion.

The question remains. If you have to choose between strong returns on your investment Vs doing something good i.e. ESG investing with less ROI, what would you choose? Sustainalytics research talks of a 40% – a significant percentage of investors choosing ESG investing and accepting a lower ROI. This leaves a 60% that is not willing to take a pay cut.

New information comes out daily regarding ESG investing. Major world events shaped the world as we know it today and people’s conscious efforts towards forging an even better one, generation to generation is a testament to how powerful connected voices can be. Mini millennials will inherit – a better or worse – world than their predecessors, and they are the future consumers/investors. Their exposure to technology from a young age, awareness of the environmental dangers, their pickiness in choosing the “right” brand, the social lessons they pick up from the world stage relating to discrimination, equality and human rights are in the core of what ESG is all about. Remains to be seen, what they’re willing to do with their superpower.

#minimillenials #genalpha #esginvesting #esg #futureinvestors

The information provided is strictly for informational use and is not meant in any way to be construed as investment advice. One should seek expert advice, as all as investment strategies involve risk of loss.

Two of our articles last month, touched on inflation, interest rates and bonds. Inflation in the EU is counting down the days to hit double digits, and a 75 basis point hike on interest rates is imminent. What do we know happens to bond prices when interest rates go up (and aggressively so)? They drop like flies, and as a result of the fixed coupon rate, their yields rise. 

Why is this troublesome? High yields for a country’s bonds, means it has to pay more to borrow. In the case of Italy, with an already heavy debt load, the 4% on its – Buoni del Tesoro Poliennali (BTP) – 10 year yield, is a tough one to bear. The energy crisis is making things worse, pushing for more aggressive measures, and a tool that can take some of the yield pressure off, is seen as a good thing in the eyes of our policy makers. It’s a matter for debate but to each their own. 

When government bond yields of weaker economies relative to stronger ones rise, its known as fragmentation. It needs some intervention to relieve the pressure, a tool, an anti-fragmentation tool. 

 

Join our capital market training to learn what it all means

 

What does the past tell us? 

In the past (2009 onwards), the European Central Bank had a debt crisis to tackle. Member states were in over their heads and couldn’t pay their debts. Rumors had it (it was all over the news but we’ll call it rumors), exit from the Eurozone for some countries was a possibility. 

What’s Eurozone? All the EU states that adopted the Euro as their currency. So exit from the Eurozone, would mean moonwalking back to their own currency. Thriller, right? 

To deal with the crisis and prevent the Eurozone from breaking up, the Outright Monetary Transactions (OMT) tool was introduced in 2012, which taught us that “pari passu” means “on equal footing” among other things. 

The ECB would buy sovereign (government) short term bonds (1-3 year duration) – as many bonds as it took – from highly indebted member states to secure their stay in the Eurozone. To onboard themselves on this ship, the countries would need to enter the EU bailout programs, cut spending and raise taxes. Pari passu referred to the treatment the ECB purchases would receive if the countries defaulted on their payment. “On equal footing” with other bond holders, means they would stand to lose just as much if things went sideways. Desirable outcome? – To drive the price of the bonds up and reduce their yields.  

Under normal circumstances, central banks buy securities for quantitative easing. An open market operation, by which they flood a market (their own market) with money to stimulate the economy. 

In contrast, quantitative tightening aims to reduce money supply by selling securities (gives people “title deeds” and takes money off their hands) often accompanied by increasing interest rates to cool down an overheating economy. 

In the case of the OMT purchases though, stimulating the economy was not the plan. The money injected from the purchases could not stay in the economy. Therefore, these injections would have to be sterilized (raised eyebrow? it’s a real term). Sterilization happens when the ECB removes from circulation as much money as it injects. How? Through interest-bearing deposits parked with the ECB, of equal value as the bond purchases. This way money supply stays the same, while the goal for doing it in the first place is achieved. In this specific case, the goal was to drive bond prices up and lower their yields. See article on asset correlation for more information on bonds prices and yields. 

Another way for ECB to sterilize its money injections, would be to issue other bonds for banks to buy and remove money from circulation or sell other assets it holds of equal value. 

When OMT was introduced along with the famous “whatever it takes” Draghi statement, it calmed investors and Eurozone was back in business. So it was never actually used, but its very much alive and ready to deploy if needed today. 

A central bank is a strong player and although able to temporarily solve problems it can also make things worse further into the future. For example, its important to note that a central bank doesn’t only finance it’s projects or pays its bills with “hard cash”. It is also able to print money to fund its programs, which is something that they do, more often than you think. And although countries like the US or EU are in better condition to deal with the consequences of printing money than smaller economies, its still a dangerous play and in the words of Charlie Munger “if you print too much money it eventually causes terrible trouble and the rate at which countries are printing money, puts us in a new territory in terms of size”. 

It happened many times before in Europe, the US, Japan. Add in your search engine “Weimar Republic wheelbarrows of money” and look at the images that come up. Even with that much cash, people could only buy regular amounts of goodies because of hyperinflation that comes with printing money. 

What is hyperinflation? When prices of goods and services rise at an alarming rate, rendering money worthless. Think of too much money chasing too few goods. Take the example of the over-reported Zimbabwe. The country’s inflation percentages are too mind boggling to even write about. A good example though, of a country with stagflation – remember Stag from a past article? A country with rising prices and low output resulting in low tax revenues, attempting to finance higher spending by printing money, just because it can. We’ll delve more into this another time. 

Newest introduction to ECB’s toolbox – The Transmission Protection Instrument (TPI) 

The OMT description above pretty much describes the idea of the new tool with some obvious differences. Firstly it doesn’t require member states to apply for a bailout program although it does ask for sustainable spending/debt. Also TPI is more flexible since it can purchase longer maturity debt of up to 10 years (rather than 3 years under OMT). It can also purchase private securities. More on the TPI on EU press release here

Last but not least, in the middle of it all, the Pandemic Emergency Purchase Program (PEPP). Unlike the OMT that was never used, the PEPP was heavily pushed during the pandemic (heavily as in Euro 1.850 trillion). According to ECB, it started with €750 billion, raised it by €600 billion in June 2020 and by another €500 billion in December. 

Aggressive rate hikes will take place whether we like it or not. It’s good to know that sustainable tools exist to support the markets and more importantly, that they get better over time. Its apparent that just by knowing the cushion is there, it eases the troubled minds of investors who perform their acrobatics with a safety net. Whether the new tool will be used or not, it remains to be seen. 

 

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Understanding the nature of a Forex IB

Stock markets and their listed companies form the backbone of every portfolio. We all have flashes, thoughts, jump scares, math done (crazy right?), to find the direction of company stocks. Like social trading though, that allows copying other traders who do the technical work for you, looking into professionally managed funds can also do the “leg work” of finding suitable buy/sell securities. That is, if you knew what their decisions entail.  

Even the best in the business get things wrong, and by no means do we imply that you should follow them down to the last detail. Even so, thorough research includes knowing what the “biggies” do as well. 

The US SEC requires Asset Managers with minimum $100 million in AuM (Assets under Management), to publicly disclose their holdings through a form called 13F. This form is filed every quarter and gives a sneak peek into the beautiful minds that run the largest funds in the world. It’s been reported that companies themselves sometimes rely on the 13F form to identify their shareholders. 

The form doesn’t include foreign company holdings and/or funds held under their holdings (whaat?). No, really, in the case of Berkshire Hathaway 13F filing (which is not a hedge fund or a mutual fund), you won’t see Gen Re’s fund called NEAM, with 178 holdings of their own (as of this Q report). You would need to search for New England Asset Management individually. 

Hedge funds are professionally managed pooled investments, that trade on liquid assets. They often use alternative investment strategies to try and outperform the markets like short selling, leverage, and derivatives. 

What is short selling? Borrowing an asset from a broker (interest and other charges vary per broker), selling it at its current price, and buying again at a lower price to profit from the difference. 

Example: Say you expect stock X to drop below $100. You borrow a number of stocks for $100 (with the associated interest/charges) and you sell. If the market drops as expected, you buy at the lower price and pay back the borrowed stocks. If the price rises though, there is theoretically unlimited risk since it can continue to rise and find a huge giant with a goose that lays golden eggs, and a harp etc. etc. (thumbs up if you know the reference). 

According to Wall Street Journal, Bridgewater’s hedge fund reported to be currently shorting European companies in a staggering +$7 billion. The shorted stocks are part of the Euro Stoxx 50. 

What are derivatives? A contract between two parties deriving its value from an underlying asset. Most common derivatives – we all know and love – are futures and options. Between Exchange Traded Derivatives and Over the Counter Derivatives, there are more types which we go through in our training sessions. 

Why referencing hedge funds? Because in today’s discussion we will take a sneak peek at 5 large funds through the eyes of the 13F form. We will use the form’s tool to compare Q1 and Q2 of 2022 and get a closer look at the largest buy/sells that they performed Q on Q. For the complete list of their holdings you’ll need to do a small research of your own. We just wanted to shed some light to the form, irrespective of the fund names or their positions. 

At the end we will also include Warren Buffet’s – Berkshire Hathaway – quarter comparison as well, just because the man is a legend (as mentioned the company is not a hedge fund or a mutual fund). He is the reason many are in this business, some richer than others but who’s counting?  

Notes:  

1. Funds are randomly picked. 

1. The sample lists are sorted by the largest number of shares bought and sold. 

1. Under CL, the share’s class type is mentioned. Each company defines the characteristic of its share classes as they see fit in their charter. (with voting rights or not, dividend payment terms and so on) 

1. Terms like spon/sponsored ADS or spon/sponsored ADR refer to American Depository shares/receipts 

1. ADRs are securities of foreign companies listed on US stock exchanges. They are issued by a depository bank, to represent a foreign company’s publicly traded securities. It is how investors can get access to developed or emerging markets. See our article on diversification for information on developed/emerging markets. 

1. Sponsored ADRs are issued with the participation/blessing of the foreign company. Unsponsored ADRs are candles in the wind. 

 

BlackRock Inc. Q1 2022 vs. Q2 2022 13F Holdings Comparison 

Sym	Issuer Name	Cl (stock class)	Q1 2022	Q2 2022	Diff	Chg %
AMZN	AMAZON COM INC	COM	29,143,882	587,459,057	558,315,175	1916%
WBD	WARNER BROS DISCOVERY INC	COM SER A	0	166,503,034	166,503,034	NEW
FTNT	FORTINET INC	COM	11,561,432	52,869,973	41,308,541	357%
VICI	VICI PPTYS INC	COM	58,176,039	95,846,408	37,670,369	65%
WISH	CONTEXTLOGIC INC	COM CL A	6,402,156	37,770,689	31,368,533	490%
TXMD	THERAPEUTICSMD INC	COM	24,442,512	0	-24,442,512	-100%
DISCK	DISCOVERY INC	COM SER C	24,909,437	0	-24,909,437	-100%
TNXP	TONIX PHARMACEUTICALS HLDG C	COM	34,392,362	0	-34,392,362	-100%
ISBC	INVESTORS BANCORP INC NEW	COM	35,715,997	0	-35,715,997	-100%
MFA	MFA FINL INC	COM	35,786,123	0	-35,786,123	-100%
PBCT	PEOPLES UNITED FINANCIAL INC	COM	36,670,981	0	-36,670,981	-100%
ZNGA	ZYNGA INC	CL A	45,215,373	0	-45,215,373	-100%
IVR	INVESCO MORTGAGE CAPITAL INC	COM	55,516,956	0	-55,516,956	-100%
EDU	NEW ORIENTAL ED & TECHNOLOGY	SPON ADR	64,329,110	0	-64,329,110	-100%

 

 

Bridgewater Associates, LP Q1 2022 vs. Q2 2022 13F Holdings Comparison 

Sym	Issuer Name	Cl (stock class)	Q1 2022	Q2 2022	Diff	Chg %
F	FORD MTR CO DEL	COM	2,199,950	4,620,739	2,420,789	110%
WBD	WARNER BROS DISCOVERY INC	COM SER A	0	2,213,889	2,213,889	NEW
WETF	WISDOMTREE INVTS INC	COM	156,132	2,201,350	2,045,218	1310%
CVS	CVS HEALTH CORP	COM	1,210,917	3,146,236	1,935,319	160%
CVE	CENOVUS ENERGY INC	COM	557,544	1,969,127	1,411,583	253%
	NEW ORIENTAL ED TECHNOLOGY	SPON ADR	0	1,360,704	1,360,704	NEW
T	AT&T INC	COM	2,047,133	3,393,604	1,346,471	66%
SWN	SOUTHWESTERN ENERGY CO	COM	0	1,196,019	1,196,019	NEW
PYPL	PAYPAL HLDGS INC	COM	114,312	1,267,329	1,153,017	1009%
GLD	SPDR GOLD TR	GOLD SHS	2,107,996	1,306,455	-801,541	-38%
IAU	ISHARES GOLD TR	ISHARES NEW	3,353,019	2,369,514	-983,505	-29%
BILI	BILIBILI INC	SPONS ADS REP Z	1,099,588	0	-1,099,588	-100%
KO	COCA COLA CO	COM	11,937,821	10,820,759	-1,117,062	-9%
FXI	ISHARES TR	CHINA LGCAP ETF	3,276,798	1,612,109	-1,664,689	-51%
JD	JD.COM INC	SPON ADR CL A	2,141,206	0	-2,141,206	-100%
EDU	NEW ORIENTAL ED & TECHNOLOGY	SPON ADR	6,201,032	0	-6,201,032	-100%
VWO	VANGUARD INTL EQUITY INDEX F	FTSE EMR MKT ETF	22,717,958	15,432,241	-7,285,717	-32%
BABA	ALIBABA GROUP HLDG LTD	SPONSORED ADS	7,480,545	0	-7,480,545	-100%
DIDI	DIDI GLOBAL INC	SPONSORED ADS	8,149,902	0	-8,149,902	-100%
EEM	ISHARES TR	MSCI EMG MKT ETF	19,621,771	1,435,298	-18,186,473	-93%

 

 

 

Renaissance Technologies Llc Q1 2022 vs. Q2 2022 13F Holdings Comparison 

Sym	Issuer Name	Cl (stock class)	Q1 2022	Q2 2022	Diffference	Chg %
SWN	SOUTHWESTERN ENERGY CO	COM	1,035,725	33,712,025	32,676,300	3155%
XELA	EXELA TECHNOLOGIES INC	COM NEW	17,755	15,865,037	15,847,282	89255%
PLTR	PALANTIR TECHNOLOGIES INC	CL A	12,514,847	28,204,147	15,689,300	125%
SHOP	SHOPIFY INC	CL A	0	14,036,600	14,036,600	NEW
NIO	NIO INC	SPON ADS	5,401,600	17,768,900	12,367,300	229%
VZ	VERIZON COMMUNICATIONS INC	COM	10,604,493	64,100	-10,540,393	-99%
PBR	PETROLEO BRASILEIRO SA PETRO	SPONSORED ADR	16,782,600	5,155,000	-11,627,600	-69%
TNXP	TONIX PHARMACEUTICALS HLDG C	COM	19,200,435	0	-19,200,435	-100%
ITUB	ITAU UNIBANCO HLDG S A	SPON ADR REP PFD	20,872,374	0	-20,872,374	-100%
EDU	NEW ORIENTAL ED & TECHNOLOGY	SPON ADR	37,490,100	0	-37,490,100	-100%

 

 

Tiger Global Management Llc Q1 2022 vs. Q2 2022 13F Holdings Comparison 

The fund managed $90 billion in assets at its peak, with tech stocks surging in 2021 amid the pandemic. According to Reuters though, the fund lost billions of dollars (approx. 50% in the first half of the year). Many of the shares it sold rebounded on Nasdaq’s +18% rally in the current quarter. 

Sym	Issuer Name	Cl (stock class)	Q1 2022	Q2 2022	Difference	Chg %
IOT	SAMSARA INC	COM CL A	0	4,649,140	4,649,140	NEW
BZ	KANZHUN LIMITED	SPONSORED ADS	7,280,575	11,655,423	4,374,848	60%
S	SENTINELONE INC	CL A	5,909,855	10,010,610	4,100,755	69%
AMZN	AMAZON COM INC	COM	147,743	2,613,800	2,466,057	1669%
TOST	TOAST INC	CL A	12,672,463	14,693,414	2,020,951	16%
EMBK	EMBARK TECHNOLOGY INC	COM	21,293,320	9,917,027	-11,376,293	-53%
DDL	DINGDONG CAYMAN LTD	ADS	12,141,140	118,539	-12,022,601	-99%
JD	JD.COM INC	SPON ADR CL A	48,774,995	30,525,661	-18,249,334	-37%
IS	IRONSOURCE LTD	CL A ORD SHS	20,500,000	0	-20,500,000	-100%
NU	NU HLDGS LTD	ORD SHS CL A	254,788,564	203,013,206	-51,775,358	-20%

 

 

Aqr Capital Management Llc Q1 2022 vs. Q2 2022 13F Holdings Comparison 

Symbol	Issuer Name	Cl (stock class)	Q1 2022	Q2 2022	Difference	Chg %
QRTEA	QURATE RETAIL INC	COM SER A	6,824,857	16,753,914	9,929,057	146%
VTRS	VIATRIS INC	COM	3,898,552	10,095,801	6,197,249	159%
ENDP	ENDO INTL PLC	SHS	1,264,412	6,394,925	5,130,513	406%
T	AT&T INC	COM	4,579,612	8,286,499	3,706,887	81%
GILD	GILEAD SCIENCES INC	COM	2,712,026	6,095,793	3,383,767	125%
F	FORD MTR CO DEL	COM	4,423,873	2,627,116	-1,796,757	-41%
HMY	HARMONY GOLD MINING CO LTD	SPONSORED ADR	2,206,767	320,022	-1,886,745	-85%
KMI	KINDER MORGAN INC DEL	COM	2,891,688	714,750	-2,176,938	-75%
INFY	INFOSYS LTD	SPONSORED ADR	6,044,325	1,016,971	-5,027,354	-83%
VALE	VALE S A	SPONSORED ADS	9,142,394	3,132,350	-6,010,044	-66%

 

 

And last but not least, here’s BRK: 

Berkshire Hathaway Inc Q1 2022 vs. Q2 2022 13F Holdings Comparison 

Sym	Issuer Name	Cl (stock class)	Q1 2022	Q2 2022	Diff	Chg %
OXY	OCCIDENTAL PETE CORP	COM	136,373,000	158,549,729	22,176,729	16%
ALLY	ALLY FINL INC	COM	8,969,420	30,000,000	21,030,580	235%
AMZN	AMAZON COM INC	COM	533,300	10,666,000	10,132,700	1900%
VIAC	PARAMOUNT GLOBAL	CLASS B COM	68,947,760	78,421,645	9,473,885	14%
ATVI	ACTIVISION BLIZZARD INC	COM	64,315,222	68,401,150	4,085,928	6%
AAPL	APPLE INC	COM	890,923,410	894,802,319	3,878,909	0%
CVX	CHEVRON CORP NEW	COM	159,178,117	161,440,149	2,262,032	1%
CE	CELANESE CORP DEL	COM	7,880,998	9,156,714	1,275,716	16%
MCK	MCKESSON CORP	COM	2,921,975	3,198,344	276,369	10%
MKL	MARKEL CORP	COM	420,293	467,611	47,318	11%
VZ	VERIZON COMMUNICATIONS INC	COM	1,380,111	0	-1,380,111	-100%
RPRX	ROYALTY PHARMA PLC	SHS CLASS A	1,496,372	0	-1,496,372	-100%
KR	KROGER CO	COM	57,985,263	52,437,295	-5,547,968	-10%
USB	US BANCORP DEL	COM NEW	126,417,887	119,805,135	-6,612,752	-5%
STOR	STORE CAP CORP	COM	14,754,811	6,928,413	-7,826,398	-53%
GM	GENERAL MTRS CO	COM	62,045,847	52,877,359	-9,168,488	-15%

 

 

There is no European equivalent form to the 13F that we know of. In the UK (for listed companies) the filings relate to shareholding percentages above 3%, with each percentage threshold of 1% (4,5,6 – 100%), to be disclosed to the exchange and the company itself. If the shareholding percentage falls below 3%, one last disclosure needs to be submitted until (if) the threshold is passed again. For non listed companies, the thresholds are different. 

 

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Looking at inflation in the US economy from a birds eye view and contemplating the possible outcomes of its central bank taking on mano-a-mano the +9% inflation rate, using an aggressive interest rate policy. Hmmm… Soft landing? or hard landing.

But what does an aggressive interest rate policy do? Well, as you would correctly think, it slows down an economy. It makes it harder for businesses (and consumers) to raise money, pulls back on spending and inevitably investing, with the hope that inflation will be reined in before things get out of hand.

Why is inflation so high? Consider all the push to support an economy during a pandemic, as well as the primary, secondary and tertiary sectors all out of whack. The Central Bank is mandated to intervene and stimulate the economy with monetary and fiscal policies that promote confidence, spending and investments. The more the economy grows, the more confident people get, the more they spend. And as long as the Interest rates are raised but at a decent pace, things could go back to normal given enough time.

 

 

But then an invasion of-all-things-possible takes place, sending diplomacy/politics/dialogue/tea-time/ out the window. Russia fills 10% of the World’s oil supply needs and together with Ukraine fill 25% of the world’s wheat supply needs, exporters of corn, barley, neon/palladium used in the production of semiconductors (the shortage of which is expected to run through all of 2023), all disrupted by the war. And what do you know? You eat a popsicle and end up with $25 in lumber for the stick. Inflation is the new black.

 

Slowing down an economy while combating inflation though, is the precondition of stagflation (or recession-inflation) – currently a popular meme. Stagflation (its friends call it Stag), refers to a stagnant economy with very high inflation, and a driving force for high unemployment. Ponder this – higher costs on essentials (food/gas) and less income/jobs. Stock and Bond markets hate Stag. It’s like an archvillain to a superhero, a nemesis, a world eater. And due to the Crypto correlation to the Stock Market, we should be looking at a drop there too.

Past examples of stagflation happened in the 70s after the collapse of the Bretton Woods agreement. With oil embargos creating supply shortages and increasing energy prices, the Fed’s policies to help the situation resulted in inflation dropping but with increased unemployment. As Ray Dalio (Bridgewater hedge fund founder) pointed out, “inflation was reduced by people and companies being painfully squeezed out of spending. This will be the case this time as well”. Dalio also said that “High inflation almost always requires a Recession to normalize”.

Remember: A central bank’s Primary Goal, is the balance between inflation and unemployment. Keep prices in check, with as many people as possible employed and happily spending.

 

Think of an economy like a garden. A beautiful garden needs water, balanced diet (fertilizer), sun, and care. Keeping everything in balance requires hard work but the outcome is almost never in your control. You might overwater, underwater, use the wrong fertilizer, overfertilize, plant in the wrong place (shady or sunny), prune at the wrong time, force majeure (or force manure) ending up destroying your hard work.

Such is the life of a central bank. Constantly caring for the garden, making decisions with the Primary Goal in mind. Problem is that when you overwater a garden, you can’t stop watering completely. When you use the wrong fertilizer, you can’t remove it from the soil. Most of these problems, you have to live through. Root rot might occur in the process leading to fungi diseases, yellowing and dropping of leaves.

Interest rate hikes will help to reduce inflation but will worsen other parts of the economy as they take away a consumer’s spending power, which is a direct hit on businesses, their stock prices and the economy’s growth as well.

So soft landing Vs hard landing when it comes to cooling down an overheating economy

How can one expect an inflation caused by disease and war to be fought with pets and sweet talks? Soft landing requires more moderate than aggressive policies and cools down the economy like a breeze in a hot summer day. Economic contraction is unavoidable but does not lead to a recession.

What is a recession? By definition, recession’s in the air when an economy is contracting (shrinking) for two or more consecutive quarters.

What about hard landing then? A plane landing at high speed (which is where the term got its name) is still a landing, not a crash. Yeah, but… how would you rate your enthusiasm (spending/investing) if you knew your plane is possibly going to hard land? Not very calmly I suppose. So aggressive measures take place, consecutive interest rate hikes with one higher than the other, to salvage what you can.

Large funds, ETFs and billionaire investors extraordinaire are not as pessimistic as most, like peaceful protestors in a situation they have no control over. Not only do they look domestically on what’s what but also internationally to take advantage of markets not overrun by recessionary triggers.

All in all, surf the market waves cautiously because these are unprecedented times we live in (unprecedented relative to this generation) and diversify. The retail investments world has come a long way to open up markets previously unattainable by your average intelligent mammal. When one market screams, another might sing. You just need to know what to look for.