The question “Is the Ukraine invasion a buy trigger?” does not attempt to make light of the destruction and suffering in Ukrainian. Readers look to The Dispatch for investment observations, not malformed geopolitical ramblings. We shall aim to stick to our knitting even during this unfortunate time. The massive markets reversal on Thursday was a decent indication that risks assets would put in further upside. The S&P 500 is up 3.5% and NASDAQ 100 +7.5% since markets opened on Thursday after the overnight invasion. This is not quite what many participants expected, but markets were oversold and don’t fall in a straight line. So, is this the end of the pullback and we continue to new highs?
No! Nothing this week changes the outlook for the rest of 2022: Growth has peaked, rates will rise, the Fed QE will become the Fed QT, and valuations remains elevated. Markets appear to believe that the Fed delays the start or hikes fewer times, but that’s not our base case. We’ll be looking to fade this rally
Dispatch #4 on February 25th, 2022, has the following line up of stories:
- Is the invasion a buy trigger?
- What is SWIFT and why is it important?
- Crypto & bitcoin are apolitical. Ignore the narrative machine.
- Luna foundation raised $1bn for Terra stable coin reserve.
- Home prices +18.8% YoY in December. CPI rents only +4.1% YoY.
Is the Ukraine invasion a buy trigger?
We don’t believe so. At the margin, the uncertainty is slightly growth negative. However, the feared surge in energy and other commodities did not materialize this week. Instead, we had the classic “buy the rumor sell the fact” price action. Energy products and commodities are flowing from Russia to the rest of the world. The Western Allies have not used the nuclear option of cutting Russia from the SWIFT network (see more in the next story) because they want normal trade flows. From where we sit today, global growth outlook is little changed. It’s the citizens of Ukraine that are bearing all the pain.
These thoughts of ours from Thursday, February 24th, still hold true.
Source: via Twitter
Finally, it’s worth reflecting on the still overvalued large cap indices. The megacap stocks will be challenged by slowing growth, possibly some Covid pull-forward of growth and rising rates (discount rate impact). This time is not different for valuations, as we’ve said before. The chart below is from the excellent Ed Yardeni.
SWIFT – what is it & why is it important?
The SWIFT network comes up as the nuclear option for sanctioning Russia. What is it and why is it important? These questions are answered in the Twitter thread by Sahil Bloom. A few of the tweets are shown here, but please read the entire thread via the link.
Source: Twitter thread
Iran was cut off from SWIFT with the nuclear sanctions. However, Russia is a strategic commodity supplier, and if you cut off SWIFT access then you cut off Russian supplies too. That could very well tip the world into a swift (pun intended) recession. That’s why the western countries, especially European nations dependent on Russian energy, have pushed back against kicking Russia off the SWIFT network.
Crypto and bitcoin is apolitical
This week, Senator Ted Cruz praised bitcoin during a speech at CPAC, the conservative political gathering. His narrative was that bitcoin was a conservative foil against liberal overreach. The bulk of the speech was about donation to Canadian truckers and how the government couldn’t seize bitcoin donations.
There are plenty of liberal Democratic politicians and candidates that support crypto assets. This speech and tweet are great examples of the caustic narrative machine tearing this country apart.
The seizure resistance is available to anyone using bitcoin. The dissident in Venezuela, the freedom fighter in Ukraine or the Russian government can all benefit from the decentralized network. The technology doesn’t care about our labels.
We are also seeing the “bitcoin is helping Russia evade sanctions” narrative. When you hear that accusation, remember this CNBC story that bitcoin donations to Ukraine are soaring. Crypto is NOT taking sides, despite what today’s narrative machine will try to make you believe!
Luna Foundation raised $1bn for bitcoin reserve to back UST stablecoin
This is one of the largest capital raises in the crypto universe and was done by issuing LUNA, the native token of the Terra blockchain. Terra’s UST algorithmic stablecoin has a $12bn market value and has tripled since 3Q21. This Blockworks article has more details including that the newly issued LUNA tokens have a four-year vesting period. We await official release of the details of the fund raise so that we know how many new LUNA tokens were issued, at what price and the vesting schedule.
The reserve will be in bitcoin even though UST is pegged to the US$. While we are excited for the vote of confidence on bitcoin the more prudent approach would have been to keep the reserves in the currency of the UST peg. Instead, a bitcoin reserve implicitly makes a longer-term bet than the reserve backing will rise in US$ term. Not the ideal reserve management strategy, but The Dispatch agrees that there is a high probability of this US$ reserve rising by 2025. We just need to be aware of the short-term risks of the measure.
Home price rose 18.8% YoY in December, yet rents in the CPI index only rose 4.1% YoY in January.
Home prices ended 2021 up 18.8% YoY based on the S&P Case-Shiller index.
Source: St. Louis Fed
Thankfully, surging home prices are not showing up yet in the CPI index.
This is because in 1982, the US decided to stop using house prices for inflation calculation and moved instead to a complicated “owner’s equivalent rent” (OER) calculation.
Imagine using something near 18.8% for rent in the January CPI calculation instead of the +4.1% OER that was reported. It would have raised CPI closer to a 11% increase in January! Instead, we’ll see OER catch up with home prices over the next 12-24 months, which will make it very difficult to get core-inflation lower.
Even without the true cost of housing reflected in inflation indices, the Fed’s preferred PCE index hit a 38-year high in January.
Supply/demand imbalance is well know
It’s widely acknowledged that there is a housing shortage in the country, however that has grown gradually and does not explain the sharp house price jump in 2021. The chart of inventories illustrates the supply tightness.
What’s not discussed as frequently is that units under construction are near a 50-year high, driven by multi-family.
Surging home prices can be explained by ultra-low interest rates and the wealth effect. The impact of rates is straightforward. As interest rates drop you pay less monthly to finance a given dollar value borrowed. The 30-year mortgage rate has risen 40% over the past one year, so we are now at levels where interest rates, which are historically low, become a headwind for buyers. The direction of the stock market will determine direction of travel for the wealth effect. You know our view there!
Unlike the middle 2000s, underwriting standards are solid today and demand supply balance better. While we don’t expect a collapse, this cover probably put a pin in the house price surge!
For anyone not immersed in financial market statistic, mythology and superstition, magazine covers stories have a proved a reliable contra indicator.
That’s it this week. Please remember, nothing here is investment advice. Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.
Asi
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