Does the Fed matter?

15 ביוני 2022

INVESTMENT CONTEXT

• Markets are weighing a possible 75bps rates hike at today's FOMC meeting. Were the Fed to follow suit on traders' expectations, it would be the steepest tightening since 1994
  
• Traders price 255bps rate hikes from the Fed in its five remaining meetings this year
  
• China's central bank refrained from cutting the interest rate to protect yuan from policy divergence with the U.S.
  
• Freeport LNG announced its Texas assets will remain offline until September, and recover to full operations only in early 2023. Freeport LNG represents 10% of European seaborne energy supplies
  
• Russia plans to reduce capacity of gas supply on Nord Stream pipeline by 40%
  
• The U.S. extended till December 5 (instead of June 24) the validity of the license "authorizing transactions related to energy" to Russian entities under sanctions
  
• Coinbase (COIN) will shed a fifth of its staff amidst the rout in blockchain assets. COIN shares are down 85% from IPO price tag
  

PROFZERO'S TAKE

• While ProfOne ponders whether monetary policy is really the right place to look at to solve a crisis which is wholly industrial in nature, ProfZero keeps reminding that fixed income markets have taken for granted for too long the support from Central Banks. To see Italy now trying to roll over its debt without the safety net laid by the ECB will be a thing to behold - hopefully, only for positive reasons
  
• Russia pulling the plug on gas while the U.S. quietly offers the means to avoid a much-spooked default; the channels of diplomacy are apparently running on a real low profile - but with what endgame in mind?
  
• While speaking at the TechCrunch Sessions on June 15, Bill Gates characterized cryptocurrencies and NFTs as a market driven by sentiment. “As an asset class, it’s 100% based on the greater fool theory - that somebody’s going to pay more for it than I do”, he argued.
  Indeed, the faith of blockchain asset holders is being put to test - just as much as in March 2020 or in the ICO crash of 2017. Even through this, ProfZero sticks by its mantra: always look at the fundamentals. While hype has definitely played a role ever since the infancy of the blockchain industry, the merits of the technology are there to be seen - if in doubt, ask any trader how a transaction is processed, and how many operational risks are taken at each and every step. Also Mr. Gates' understanding of NFTs leaves ProfZero dubious: the market of fine arts has left dusty auction houses and brought artists closer to investors, while beyond that, tokenization is nothing but the zeitgeist of the post-consumeristic era. Is this a call to BTC to USD 1mln (like Microstrategy's Michael Saylor reiterated recently)? Absolutely not. It is a call - to stay focused on the only thing that matters - value
  

PROFONE'S TAKE

• Markets are waiting for today's decision of Federal Reserve about the next step of its rates-rising campaign. Hedge fund manager Bill Ackman said the Fed could help restore market confidence if it raises rates by 75bps today and in July - yet he also advised that 100bps would be better. On a markedly wilder note, investment manager Jeffrey Gundlach urged the Fed to take rates to 3% in one go - today. Amidst such notorious opinions, ProfOne's question is - does the Fed really matter? Actual inflation is one of fundamentals (energy and food); in May the Congressional Budget Office (CBO) forecasted inflation to cool to 2.7% only in 2023, implying that by the end or 2022 we may expect the figure to settle hardly lower than 5%. As argued also by ProfZero, this crisis is different from 2008 or 2020 - it is a crisis of the very industrial system that has been working for the last 20 years. Certainly monetary policy can and is providing already its contribution. But finance can't magically restructure energy, food and technology supply chains built in decades.
  There was a time when Wall Street was thought to make money just by waving its magic wand; the Great Financial Crisis brought that sorcery show to an end. Hopefully, we won't repeat the same mistake again