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‘Worst Year Ever’ For Stocks & Bonds – Global Inflation Fight Bursts ‘Everything Bubble’

‘Worst Year Ever’ For Stocks & Bonds – Global Inflation Fight Bursts ‘Everything Bubble’

Before we get to the big picture on the month,…

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'Worst Year Ever' For Stocks & Bonds - Global Inflation Fight Bursts 'Everything Bubble'

Before we get to the big picture on the month, quarter, and year, this week has ended with no 'Santa Claus' rally this year for US stocks...

Until the last few minutes, the S&P 500 pinning around 3835 just as we said as JPM's Collar trumped 0-DTE chaos, then everything melted up into the close...

As SpotGamma remarked earlier, as January is a put-heavy OPEX, any downside start to January could energize those puts, and serve to press markets lower.

This could lead to higher IV, and a reflexive selling loop to the downside. We’d then look for a rally after OPEX, as those puts expire.

Conversely, should January start off with strength, those puts could help to fuel a rally as their values collapse leading to an early, material stock rally.

OPEX could then trigger a reversal of that market strength. We currently assign edge to this scenario.

Trade the first week of January should help shed light on the timing of the rally (i.e. pre-OPEX or post-OPEX) as the machines show the way...

The dollar slipped lower, gold higher, and bitcoin lower on the week as Treasury yields surged into year-end...

Source: Bloomberg

On the year, global stocks suffered a 20% decline in 2022, the 2nd worst year since 1974, as central banks fought inflation in the face of supply chain shortages and an energy crisis due to the COVID-19 pandemic and Russia's invasion of Ukraine...

Source: Bloomberg

Worse still, as The FT reports, a traditional portfolio consisting of 60% US stocks and 40% US bonds will have seen its worst performance since 1932, when the U.S. was in the midst of the Great Depression.

As US bond returns are suffering their worst stretch in over a century...

US equity and bond markets lost a combined $17.4 trillion in 2022 at their October lows...

Source: Bloomberg

And while The Dow 'only' fell 9% in 2022, Nasdaq plunged over 33%...

Source: Bloomberg

Over $7 trillion in stock market cap has been erased from the Nasdaq 100. While the Nasdaq 100''s drop was bigger in 2008 (down 41.9%), it was only down about $1 trillion in 2008 though, because the denominators have gotten so much bigger...

Source: Bloomberg

European stocks were also slammed lower (worst year since 2018) with UK worst and Spain the prettiest horse in the glue factory...

Source: Bloomberg

With the 'longest duration' stocks having been hammered the hardest...

Source: Bloomberg

Energy stocks turned in a dramatic performance and were the only US equity sector with gains in 2022 (as Consumer Discretionary and Tech underperforming)...

Source: Bloomberg

“This has been a year to be in the bunker,” says John Bilton, head of global multi-asset strategy at JPMorgan Asset Management.

Gold ended the year unchanged as the dollar surged; and while bonds and stocks were monkeyhammered lower, crypto was really clubbed like a baby seal...

Source: Bloomberg

The volume of negative-yielding debt has collapsed in 2022 (from a peak over $18 trillion in Dec 2020, there remains a modest $113 billion left, mainly in short-dated JGBs)...

Source: Bloomberg

As The Fed unleashed its most aggressive tightening cycle in decades...

Source: LPL

Some investors welcome this new discipline.

“This has been a train crash waiting to come,” says Alexandra Morris, chief investment officer at Norway’s Skagen Funds.

“Now, money has a cost. You can’t just throw money at unprofitable businesses, very risky businesses. We need to have a much more sensible allocation of capital.”

As the year ends, 113 counterparties parked a record $2.554 trillion at the Fed’s overnight reverse repurchase agreement facility, in which counterparties like money-market funds can place cash with the central bank. That was $245 billion more than the day before, the biggest one-day increase ever.

Source: Bloomberg

Demand for the facility has tended to surge at the end of each quarter as dealers curtail their activity in the market for repurchase agreements in order to shore up their balance sheets for regulatory purposes.

US Treasury yields exploded higher this year, led by the short-end, as the market realized The Fed wasn't kidding about its anti-inflation stance. 2Y Yields rose a stunning 370bps in 2022 while 30Y yields rose over 200bps...

Source: Bloomberg

Which meant a massive flattening in the yield curve...

Source: Bloomberg

...driving the entire curve deep into inversion...

Source: Bloomberg

For some context, 2Y Yields started the year at 0.72% and ended at 4.43% (with Fed Funds now trading above it)...

Source: Bloomberg

The last six months have seen dramatic swings in the market's expectations for The Fed's monetary policy trajectory with the terminal rate surging up to around 5.00% as the expectations for a H2 2023 rate-cutting cycle (which implies a recession) surging dovishly in Q4...

Source: Bloomberg

The dollar has gained more than 8 percent over the year, but it lost more than 8 percent this quarter on expectations the Fed may not raise rates as high as previously feared...

Source: Bloomberg

Cryptos took annus horribilis to '11' this year with the big ones - BTC and ETH - down 64% and 67% respectively as chaos reigned across the ecosystem...

Source: Bloomberg

On the commodity side of the board, it was a very volatile year with copper down notably (growth/demand scares) and energy up (supply scares), though the latter is dramatically below its mid-year panic highs...

Source: Bloomberg

WTI had a volatile year as Putin invasion reactions battled China COVID restrictions

Source: Bloomberg

Despite the dollar's gains, gold ended unchanged on the year, rallying back above $1800 after triple-testing $1600 support...

Source: Bloomberg

Silver outperformed gold on the year, with Q4 seeing the gold/silver ratio top out (at 2019/2020 resistance) and fall back into the red for the year...

Source: Bloomberg

Finally, if you're hoping for a rebound in 2023, there's really only one factor you can pray for...

Source: Bloomberg

When (or if) The Fed ends its QT program? Or this?

See you in 2023!

Tyler Durden Fri, 12/30/2022 - 16:01

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New ways to protect food crops from climate change and other disruptions

“There’s no doubt we can produce enough food for the world’s population – humanity is strategic enough to achieve that. The question is whether…

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“There’s no doubt we can produce enough food for the world’s population – humanity is strategic enough to achieve that. The question is whether – because of war and conflict and corruption and destabilization – we do,” said World Food Programme leader David Beasley in an interview with Time magazine earlier this year.    

Credit: NMBU

“There’s no doubt we can produce enough food for the world’s population – humanity is strategic enough to achieve that. The question is whether – because of war and conflict and corruption and destabilization – we do,” said World Food Programme leader David Beasley in an interview with Time magazine earlier this year.    

Indeed, projections show that we are not on track to achieve Sustainable Development Goal 2 of Zero Hunger by 2030. As climate and security crises continue to destabilise our food sources, researchers are taking a critical look not just at how we produce food – but at the entire systems behind our food supplies. In this case, the systems behind the seeds that produce our food crops.    

“Whilst adapting crops to climate change and conserving their variation is essential for food security, these measures are meaningless if farmers do not have access to the seeds,” says crop scientist and food system expert Ola Westengen. Westengen leads the team of researchers from the Norwegian University of Life Sciences (NMBU) who recently reviewed the state of seed systems for small-holder farmers in low/middle income countries. Their findings are now published in the Proceedings of the National Academy of Sciences (PNAS).   

What are seed systems?    

Seed systems are the provision, management and distribution of seeds. They cover the entire seed chain, from the conservation of their diversity and variety development, to their production and distribution, and the rules that govern these activities.  In short, they are the structures that make seeds available to farmers so that crops can be sown, harvested and end up on our plates.    

Whilst a well-functioning seed system will ensure seed security for all farmers, the researchers say that, in practice, it is rarely the case that seed systems function as well as they might. Seed systems can be disrupted by conflict and disasters, as well as by problems stemming from social inequality, lack of coordination or inappropriate policies.      

What does this study tell us that we don’t already know?   

“There are recent innovations and investments by governments and donors to improve farmers’ access to diverse crop varieties and quality seeds,” explains Teshome Hunduma, a seed governance researcher and co-author of the study. “For example, there are now more flexible policies and regulations that encourage diversity in the seed systems used by farmers, rather than pushing farmers to switch to commercial seed systems that focus on less diverse commodity crops – which is the norm.” Commodity crops are those grown in large volume and high intensity for the purpose of sale, as opposed to those grown by small-holder farmers for direct processing and consumption.   

“The study highlights emerging initiatives that are helping farmers to secure food supplies, such as participatory plant breeding,” says Teshome. Participatory plant breeding is the development and selection of new crop varieties where the farmers are in control. Farmers, who know the needs of their farms best, work with researchers and others to improve crops and develop plant varieties that are in line with their household needs and culture, and that are resilient to environmental and climate challenges.    

“Farmers prefer and need different types of seeds, based on diverse social, cultural and ecological conditions,” adds ethnobotanist and co-author Sarah Paule Dalle.       

The study discusses various disruptions to farmer’s access to seeds. Social inequality is one such disruption. How so?   

“A seed system that only serves a segment of a farming society contributes to seed insecurity,” replies Teshome. “For example, commercial seed systems deliver high-yielding varieties of quality hybrid seeds. Whilst wealthy farmers can afford such seeds, poor farmers can’t.”    

“Similarly, whilst commercial seed systems that focus on commodity crops may benefit men who might primarily be interested in market value, such systems have little to offer women who want crops that provide household nutrition and meet their cultural preferences.”   

“This means poor farmers and women do not have the same access to seeds that meet their needs. The result is seed, and thus food, insecurity due to social and economic inequality.”     

Political-economic factors have driven the globalization of food systems over the last decades, which also includes seed systems. “Seeds have become big business”, say the researchers. According to studies quoted in the article, the four largest multinational companies in seed trade today control about 60% of the ~50 billion USD global commercial seed market. The large private actors have the power not only to shape markets, but also to influence science and innovation agendas and policy frameworks.     

This can be problematic, say the researchers, when private sector research and development typically focuses on the most profitable crops, such as maize and soy. Crops grown and consumed by subsistence farmers are thus largely neglected, and the potential of crop diversity – the foundation of agriculture – remains largely untapped. Technology that could help develop more robust varieties remains hypothetical.   

How does the ownership of crop diversity threaten food supplies and what can be done?      

The term crop diversity refers both to different crops and different varieties of a crop. According to the Global Crop Diversity Trust (one of the world’s primary international organizations on crop diversity conservation), securing and making available the world’s crop diversity is essential for future food and nutrition security.      

“Plant breeders and scientists use crop diversity to develop new, more resilient and productive varieties that consumers want to eat, that are nutritious and tasty, and that are adapted to local preferences, environments and challenges,” explains Benjamin Kilian, a plant genetics expert at the Global Crop Diversity Trust. The Crop Trust, together with the Norwegian University of Life Sciences, implements the major project from which this study emerged: Biodiversity for Opportunities, Livelihoods and Development (BOLD). Coordinated by Kilian, the project supports the conservation and use of crop diversity to strengthen food and nutrition security on a global scale. It builds on the Crop Wild Relatives project and is funded by the Norwegian government.   

“In the BOLD project, researchers work with genebanks, plant breeders and others in the seed value chain to co-develop seed systems that are both resilient to climate stresses and inclusive of small-holder farmers on the frontline of adaptation,” adds Westengen.     

Will access to seeds in the vulnerable areas that you are studying be improved in time to make a difference?   

“We hope so, if we make the right moves to include small-holder farmers in seed system development,” says Dalle. “A well-functioning seed system should also be resilient. That is, it should withstand shocks such as drought or pandemics and breakdowns or disruptions such as war and conflict.”    

“To do this, the system should promote a diversity of seeds, both local varieties and those improved to better adapt to stresses. It should also involve diverse groups of people such as farmer cooperatives/groups, and both public and private companies to increase the choice of seeds and seed sources. During lockdowns in the COVID-19 pandemic, for example, farmers’ own seed systems enabled access to seeds in developing countries when the activities of private companies and agro-dealers were restricted,” explains Dalle.   

Westengen summarizes: “Our study highlights links between the crucial work of the Global Crop Diversity Trust and the farmers on the frontline of adapting our food systems to climate change. It is an argument for co-designing seed system development in full cooperation with farmers and other actors in the seed system. This way, efforts can meet the needs of various groups of farmers in different agroecological contexts. There is no one-size-fits-all; if there is one natural law in biology, it is that diversity is key to future evolution. That also goes for seed systems – and food system development.”   

Navigating towards resilient and inclusive seed systems by Ola T. Westengen, Sarah Paule Dalle and Teshome Hunduma Mulesa was published in Proceedings of the National Academy of Sciences (PNAS) this week. PNAS is widely considered one of the most prestigious and highly cited multidisciplinary research journals.   


About the Norwegian University of Life Sciences (NMBU)  
NMBU’s research and education enables people all over the world to tackle the big, global challenges regarding the environment, sustainable development, how to improve human and animal health, renewable energy sources, food production, and land- and resource management. 

 About the Crop Trust 
The Crop Trust is an international organization working to conserve crop diversity and thus protect global food and nutrition security. At the core of Crop Trust is an endowment fund dedicated to providing guaranteed long-term financial support to key genebanks worldwide. The Crop Trust supports the Svalbard Global Seed Vault and coordinates large-scale projects worldwide to secure crop diversity and make it available for use. The Crop Trust is recognized as an essential element of the funding strategy of the International Treaty on Plant Genetic Resources for Food and Agriculture.  

About the BOLD Project 
BOLD (Biodiversity for Opportunities, Livelihoods, and Development) is a major 10-year project to strengthen food and nutrition security worldwide by supporting the conservation and use of crop diversity. The project works with national genebanks, pre-breeding and seed system partners globally. Funded by the government of Norway, BOLD is led by the Crop Trust in partnership with the Norwegian University of Life Sciences and the International Plant Treaty. 


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A Federal Reserve Pivot is not Bullish

An old saying cautions one to be careful of what one wishes for. Stock investors wishing for the Federal Reserve to pivot may want to rethink their logic…

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An old saying cautions one to be careful of what one wishes for. Stock investors wishing for the Federal Reserve to pivot may want to rethink their logic and review the charts.

The second largest U.S. bank failure and the deeply discounted emergency sale of Credit Suisse have investors betting the Federal Reserve will pivot. They don’t seem to care that inflation is running hot and sticky, and the Fed remains determined to keep rates “higher for longer” despite the evolving crisis.

Like Pavlov’s dogs, investors buy when they hear the pivot bell ringing. Their conditioning may prove harmful if the past proves prescient.

The Bearish History of Rate Cuts

Since 1970, there have been nine instances in which the Fed significantly cut the Fed Funds rate. The average maximum drawdown from the start of each rate reduction period to the market trough was 27.25%.

The three most recent episodes saw larger-than-average drawdowns. Of the six other experiences, only one, 1974-1977, saw a drawdown worse than the average.  

So why are the most recent drawdowns worse than those before 1990? Before 1990, the Fed was more active. As such, they didn’t allow rates to get too far above or below the economy’s natural rate. Indeed, high inflation during the 1970s and early 1980s forced Fed vigilance. Regardless of the reason, higher interest rates helped keep speculative bubbles in check.

During the last 20 years, the Fed has presided over a low-interest rate environment. The graph below shows that real yields, yields less inflation expectations, have been trending lower for 40 years. From the pandemic until the Fed started raising rates in March 2022, the 10-year real yield was often negative.

real yields wicksell

Speculation often blossoms when interest rates are predictably low. As we are learning, such speculative behavior emanating from Fed policy in 2020 and 2021 led to conservative bankers and aggressive hedge funds taking outsized risks. While not coming to their side, what was their alternative? Accepting a negative real return is not good for profits.

We take a quick detour to appreciate how the level of interest rates drives speculation.

Wicksell’s Elegant Model

A few years ago, we shared the logic of famed Swedish economist Knut Wicksell. The nineteenth-century economist’s model states two interest rates help assess economic activity. Per Wicksell’s Elegant Model:

First, there is the “natural rate,” which reflects the structural growth rate of the economy (which is also reflective of the growth rate of corporate earnings). The natural rate is the combined growth of the working-age population and productivity growth. Second, Wicksell holds that there is the “market rate” or the cost of money in the economy as determined by supply and demand.

Wicksell viewed the divergences between the natural and market rates as the mechanism by which the economic cycle is determined. If a divergence between the natural and market rates is abnormally sustained, it causes a severe misallocation of capital.

The bottom line:

Per Wicksell, optimal policy should aim at keeping the natural and market rate as closely aligned as possible to prevent misallocation. But when short-term market rates are below the natural rate, intelligent investors respond appropriately. They borrow heavily at the low rate and buy existing assets with somewhat predictable returns and shorter time horizons. Financial assets skyrocket in value while long-term, cash-flow-driven investments with riskier prospects languish.

The second half of 2020 and 2021 provide evidence of Wicksell’s theory. Despite brisk economic activity and rising inflation, the Fed kept interest rates at zero and added more to its balance sheet (QE) than during the Financial Crisis. The speculation resulting from keeping rates well below the natural rate was palpable.

What Percentage Drawdown Should We Expect This Time?

Since the market experienced a decent drawdown during the rate hike cycle starting in March 2022, might a good chunk of the rate drawdown associated with a rate cut have already occurred?

The graph below shows the maximum drawdown from the beginning of rate hiking cycles. The average drawdown during rate hiking cycles is 11.50%. The S&P 500 experienced a nearly 25% drawdown during the current cycle.

rate hikes and drawdowns

There are two other considerations in formulating expectations for what the next Federal Reserve pivot has in store for stocks.

First, the graph below shows the maximum drawdowns during rate-cutting periods and the one-year returns following the final rate cut. From May 2020 to May 2021, the one-year period following the last rate cut, the S&P 500 rose over 50%. Such is three times the 16% average of the prior eight episodes. Therefore, it’s not surprising the maximum drawdown during the current rate hike cycle was larger than average.

rate cuts and drawdowns

Second, valuations help explain why recent drawdowns during Federal Reserve pivots are worse than those before the dot-com bubble crash. The graph below shows the last three rate cuts started when CAPE10 valuations were above the historical average. The prior instances all occurred at below-average valuations.

cape 10 valuations

The current CAPE valuation is not as extended as in late 2021 but is about 50% above average. While the market has already corrected some, the valuation may still return to average or below it, as it did in 2003 and 2009.

It’s tough to draw conclusions about the 2020 drawdown. Unprecedented fiscal and monetary policies played a prominent role in boosting animal spirits and elevating stocks. Given inflation and political discord, we don’t think Fed members or politicians will be likely to gun the fiscal and monetary engines in the event of a more significant market decline.

Summary

The Federal Reserve is outspoken about its desire to get inflation to its 2% target. If they were to pivot by as much and as soon as the market predicts, something has broken. Currently, it would take a severe negative turn to the banking crisis or a rapidly deteriorating economy to justify a pivot, the likes of which markets imply. Mind you, something breaking, be it a crisis or recession, does not bode well for corporate earnings and stock prices.

There is one more point worth considering regarding a Federal Reserve pivot. If the Fed cuts Fed Funds, the yield curve will likely un-invert and return to a normal positive slope. Historically yield curve inversions, as we have, are only recession warnings. The un-inversion of yield curves has traditionally signaled that a recession is imminent. 

The graph below shows two well-followed Treasury yield curves. The steepening of both curves, shown in all four cases and other instances before 1990, accompanied a recession.

Over the past two weeks, the two-year- ten-year UST yield curve has steepened by 60 bps!

yield curves rate cuts and recessions

The post A Federal Reserve Pivot is not Bullish appeared first on RIA.

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COVID-19 impacted smoking assessment rates in community health centers, necessitating a closer examination on how procedures can be adapted

COVID-19 Impacted  Smoking Assessment Rates in Community Health Centers, Necessitating a Closer Examination on How Procedures Can be Adapted Credit: Annals…

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COVID-19 Impacted  Smoking Assessment Rates in Community Health Centers, Necessitating a Closer Examination on How Procedures Can be Adapted

Credit: Annals of Family Medicine

COVID-19 Impacted  Smoking Assessment Rates in Community Health Centers, Necessitating a Closer Examination on How Procedures Can be Adapted

Researchers from Oregon Health & Science University and OCHIN,  a large nonprofit network of community health centers, extracted electronic health record data from 217 primary care clinics between January 2019 through the end of July 2021, which included telehealth and in-person visits for 759,138 adult patients aged 18 and older years to determine how monthly rates of tobacco assessment had been affected by the COVID-19 pandemic. The team calculated the rates per 1,000 patients. The team found that between March and May 2020, tobacco assessment monthly rates declined from 155.7 per 1,000 patients down to 77.7 per 1,000 patients, a 50% decline. There was a subsequent increase in tobacco assessment between June 2020 and May 2021. However, assessments remained 33.5% lower than pre-pandemic levels. These findings are significant given the fact that tobacco use can increase the severity of COVID-19 symptoms.

What is Known on This Topic: While there is plentiful evidence on the impact that COVID-19 has had on primary health care seeking and delivery, little is known about how the pandemic affected tobacco use assessments and cessation programs.

What This Study Adds: The decline in the rate of tobacco assessments during the onset of the COVID-19 pandemic was substantial and rates have yet to return to pre-pandemic levels. Given that tobacco use can exacerbate COVID-19 symptoms, researchers recommend careful examination of procedural changes to adapt care delivery to support community health centers, specifically tobacco cessation efforts.

.Impact of COVID-19 Pandemic on Assessing Tobacco Status in Community Health Centers

Susan A. Flocke, PhD, et al,
Department of Family Medicine, Oregon Health & Science University, Portland, Oregon
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