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STRATEGY: Is “Russian oligarch money” the reason equities are pricing in > 50% chance of recession while credit/bonds far lower?
Stocks are acting terribly, as fears increase of economic recession + military escalation + inflation
Equities have not managed to see any sustained “bid” in the past 8 weeks, despite markets being oversold. In fact, as highlighted later in this note, investor cash positioning, by some measures, is the highest in a decade — so by measures of sentiment and positioning, investors are already very risk off. Further downside for equities and risk markets can come if the risk of a full-blown economic recession are higher than markets have discounted.
This is not our expectation — that is, we do not think the risk of a US recession is high. But consensus is increasingly worried about this. Take a look at the tweet below:
– this investor points out the spread between 10Y less 2Y has narrowed sharply
– and is already “drawing the line” to see this spread invert
– for reasons we discuss below, we believe even the yield curve is not sending as sharp a recessionary signal as many fear
Are Oligarchs the reason equities are down > 13% from their recent highs?
The S&P 500 is off -12.8% from the January all-time highs. And now many pundits are saying “the average drawdown during a recession is -24%” so they are looking at this -12.8% as:
– pricing in 50% odds of a recession
– since -12.8 is roughly half of -24
…JPMorgan analysis shows equities pricing > 50% chance of recession versus 17% for HY
JPMorgan’s Flow of Funds report highlights the variance of recession odds priced in various markets. They employ a methodology similar to what is described above:
– equities 50%
– high yield 17% –> far lower
Given how closely linked credit and equities historically trade, this variance is sizable. In our view, there are several factors:
– bonds could be distorted by support
– equities distorted by excess selling
We don’t think it is “high yield has a bid” so we think the latter makes more sense. There is some sort of forced deleveraging in equities taking place.
Western policymakers seizing Oligarch assets = PEP on steroids = forced selling
Since policymakers in the West are now seizing Russian oligarch assets, there is a term that many fund managers are getting refreshers:
– PEP, or Politically Exposed Person
– having PEP as “investors” now poses risks for hedge funds, mutual funds, venture capitalists and private equity firms
– Thus, any fund with Russian oligarch money
– has a potential PEP
– the required response is likely these firms are doing mandatory redemptions of the capital from a PEP
– meaning, forced selling
We estimate > $300 billion, or 10% of Russia’s $3T of household net worth is held overseas in Europe and US and Asia
According to Credit Suisse, the household net worth of Russia is $3T and according to the Journal of Public Economics, much of that is held overseas:
– the top 0.01% of Russians have > 50% of their assets overseas
– This is 6% of all the wealth overseas from just the mere 0.01%
– 10% overall overseas is a low estimate
– this is $300 billion
– a staggering figure
And we estimate that many financial institutions now are dealing with a “hot potato” — the simplest answer is to redeem these assets. That is, return the $300 billion.
– or risk sanctions
This is already happening. In fact, the US is ordering hedge funds to “freeze” the assets of Russian oligarchs.
– this must be striking terror in the hedge fund industry
– think about the impacts
– forced selling
– de-risking
– lowering gross
– facing risk of further sanctions for not complying
– you can bet many firms are now evaluating their PEP exposure
– scrutinizing entities they never associated with PEP
The NY Times has an article showing that some firms have Russian money, but this relationship is obscured by LLCs and other methods to disguise the connection. This is what we see as driving this forced selling.
…but isn’t the 10Y less 2Y curve flattening? Eh… seems like the Yield Curve is wonky
We had a few clients ask us if we are worried about the 10Y less 2Y curve flattening. Sort of:
– we tend to focus on 30Y less 10Y (stable to steepening)
– or even 10Y less 1Y (stable to steepening)
But 10Y less 2Y is flat. As this investor below notes, in past cycles, an inverted 10Y less 2Y is a recession signal. Keep in mind, the 10Y less 2Y is still positive, but it is flattening.
– this person seems to believe an inversion is a “fait accompli”
…keep in mind, there is risk of “cognitive bias” particularly from the credit world
We need to be mindful that “cognitive bias” might be impacting market perceptions more than one realizes. As we stated a few weeks ago, the bond market has an incentive to root for a recession. After all, rising rates is not a formula for the $55T industry to generate profits for bond managers, investment banks and hedge funds. Thus, credit markets will have a tendency to root for a recession.
This cognitive bias is built into humans. For instance, look at this picture below:
– this looks like a red Coke can
– believe it or not, this is actually a “black and white” can
Zooming this photo shows that it is indeed there is no red on this can. But somehow, our brains see a red can.
– if this is how we are wired, are we not surprised so many see a “recession”?
The US Yield Curve has gone wonky — no other word to describe it
The yield curve, or the level of rates at various maturities is shown below:
– the curve is positively sloped
– but look a the jump from 1Y to 2Y
– then 2Y to 10Y maturities are flat
What does this mean?
I think there is something wonky. I don’t know yet. But is it super worrisome? Not clear. But this is the reason the 10Y less 2Y is so flat
– are oligarchs selling their 2Y bonds?
– kidding
STRATEGY: When there are “forced” sellers, investors should see this as an opportunity
The equity market has not found a bid. We have mistakenly expected stocks to stabilize and find a bid given the deeply oversold conditions. This has not happened.
– but we don’t believe this means stocks are destined to fall another 10%
– we also believe that PEP forced selling has caused stocks to fall more dramatically than other asset classes
In fact, as shown below, JPMorgan estimates that investors are the most overweight cash since before March 2020. This is a decade high.
– granted, war + inflation is scary
– but we believe PEP forced selling is causing funds to raise more cash
It is not just institutional investors. Look at retail money market balances. Retail investors have been raising lost of cash recently, selling stocks since late December
– so there is a ton of dry powder
– forced selling from PEP
– institutional investors de-risked most in a decade, ex-March 2020
– retail investors raising cash since December
So, our takeaway.
– we do not expect a recession
– thus, stocks have discounted a lot of bad news at -13% from peak
– forced selling and panic are leading to a lot of cash on the sidelines
DATA ON RUSSIA-UKRAINE WAR: Tracking Russia-Ukraine war statistics — 1,663 Ukrainian civilian casualties so far
Our data science team, led by tireless Ken, is scraping data from several sources to track some high level data around the Russia-Ukraine war.
– Ukrainian civilian casualties
– Ukraine population movements
– Ukraine military losses, except personnel
– Russian estimated losses of personnel and material
The number of casualties is 82 on 3/13, and a total of 1,663 have been reported to the UN. This is after 2 weeks of information and could increase because there are simply lapses and lags in reporting.
The flow of migrations out of Ukraine had been steady at about 170,000 to 210,000 per day. And a total of 2.8 million have fled so far.
– 62% are entering into Poland
– curiously, 4% or 100k or so, have entered Russia
If one is wondering about reported losses of equipment, we are citing statistics provided by the opposing ministry officials.
– est. 1013 Ukraine military vehicles lost
– est. 1234 tanks lost
– this seems like a lot of equipment
– I am wondering how many tanks and aircraft are in the Ukraine military arsenal
Russian losses are higher
– est. 12,000 Russian soldiers killed
– est. 374 tanks
– est. 74 aircraft
– est. 1,226 armored vehicles
Our team says this data is scraped and can be updated daily. So, we will post these figures for now. And that way, we can get a sense for the intensity of the hostilities.
Thomas Hu, of Kyber Capital, also shared this website which is a crowd sourced view of reported activities. There is a lot to the website, and I encourage you to check it out. The website URL is https://maphub.net/Cen4infoRes/russian-ukraine-monitor
For instance, if you click on one of the icons, a verified post is shown. There is geolocation and other data attached.
STRATEGY: 2022 theme –> BEEF –> Bitcoin (B) + Bitcoin equities (E) + Energy (E) + FAANG (F)
As for sectors, the pleas by Ukraine and sanctions are strengthening the case for our “BEEF” strategy. That is, BEEF is
– Bitcoin + Bitcoin Equities BITO 5.41% GBTC 5.38% BITW
– Energy
– FAANG FNGS 0.80% QQQ 1.04%
Combined, it can be shorted to BEEF.
PS: Homebuilders (Oct – Apr aka Golden 6 months) XHB 1.74%
Why is this making stronger BEEF?
– Energy supply is now a sovereign priority
– this helps Energy stocks
– Ukraine and Russia both want access to alternative currencies
– this strengthens case for Bitcoin and bitcoin equities
– if Global economy slows, growth stocks lead
– hence, FANG starts to lead FB AAPL 0.64% AMZN 1.70% NFLX -0.95% GOOG 1.93%
All in all, one wants to be Overweight BEEF
_____________________________
33 Granny Shot Ideas: We performed our quarterly rebalance on 2/3. Full stock list here –> Click here _____________________________
POINT 1: Daily COVID-19 cases 5,006, up +222 vs 7D ago…
Current Trends — COVID-19 cases:
- Daily cases 5,006 vs 4,784 7D ago, up +222
- 7D positivity rate 3.6% vs 4.6% 7D ago
- Hospitalized patients 22,868, down -27% vs 7D ago
- Daily deaths 1,290, down -13% vs 7D ago
On Sunday, 9 states + Puerto Rico reported a total of 5,006 new cases, up +222 vs. 7D ago. Excluding the previous positive 7D delta due to holiday data distortion, this is the first time that 7D delta turned positive since Omicron wave is in retreat. That said, we don’t see this as an immediate warning yet. In terms of the absolute level of 7D delta, +222 is relatively small. In addition, only 1/5 of US states reported COVID cases on Sunday. Therefore, some data fluctuation in one state could cause the 7D delta distorted – in fact, Sunday’s positive 7D delta is largely due to Texas (1,277 new cases, +620 vs 7D ago) where no clear sign of COVID resurgence has identified yet. So, until we see the 7D delta continuously being positive or some local/regional outbreaks being reported, we are not worried about the +222 7D delta for now. We will continue to track the data closely.
7D delta in daily cases turned positive… slightly…
7D delta in daily cases turned positive on Sunday. This is the fourth time since the Omicron wave in retreat. The prior three times were all due to holiday distortion (MLK Day and Presidents Day). That said, we do not view Sunday’s positive 7D delta as an immediate warning sign yet. As we explained above, unless we see the positive 7D delta continuously, the overall trends so far still look promising.
All US states are seeing decline in daily cases now… 49 states have seen daily cases fall over 90%…
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling (or about to fall), and the other where cases are rising
In these tables, we’ve included the vaccine penetration, case peak information, and the current case trend for 50 US states + DC. The table for states where cases are declining is sorted by case % off of their recent peak, while the table for states where cases are rising is sorted by the current daily cases to pre-surge daily cases multiple.
- The states with higher ranks are the states that have seen a more significant decline / rise in daily cases
- We also calculated the number of days during the recent case surge
- The US as a whole, UK, and Israel are also shown at the top as a reference
Daily deaths, positivity rates, and hospitalization rate are falling rapidly…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID
-Net hospitalization and positivity rates have plunged – both have fallen to the pre-Omicron levels
– Daily death finally started to decline after the daily cases peaked for a month. And as you can see below, daily deaths have also dropped rapidly, consistent with we have seen in other metrics.
POINT 2: VACCINE: vaccination pace has slowed recently… likely due to the improvement in COVID situation
Current Trends — Vaccinations:
– avg 0.3 million this past week vs 0.3 million last week
– overall, 29.3% received booster doses, 65.0% fully vaccinated, 76.3% 1-dose+ received
Vaccination frontier update –> all states now above 100% combined penetration (vaccines + infections)
*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent.
Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC).
– Currently, all states are above 100% combined penetration
– Again, this metric can be over 100%, as infected people could also be vaccinated, but 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated
There were a total of 202,483 doses administered, as reported on Sunday. The vaccination pace continues to fall and now is the lowest level since the mass rollout of COVID-19 vaccines. But it is also understandable that less people are seeking vaccination given the improvement in overall COVID situations.
This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.
In total, 556 million vaccine doses have been administered across the country. Specifically, 253 million Americans (76% of US population) have received at least 1 dose of the vaccine. 216 million Americans (65% of US population) are fully vaccinated. And 97 million Americans (29% of US population) received their booster shot.
POINT 3: Tracking the seasonality of COVID-19
As evident by trends in 2020 and 2021, seasonality appears to play an important role in the daily cases, hospitalization, and deaths trends. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus.
The possible explanations for the seasonality we observed are:
– Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer
– “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors
– Opposite effects hold true in the winter
CASES
It seems as if the main factor contributing to current case trends right now is outdoor temperature. During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, northern state cases are showing a slight spike, especially when compared to Summer 2020. This could be attributed to the introduction of the more transmissible Delta variant and the lifting of restrictions combined with pent up demand for indoor activities.
HOSPITALIZATION
Current hospitalizations appear to be similar or less than Summer 2020 rates in most states. This is likely due to increased vaccination rates and the vaccine’s ability to reduce the severity of the virus.
DEATHS
Current death rates appear to be scattered compared to 2020 rates. This is likely due to varying vaccination rates in each state. States with higher vaccination rates seem to have lower death rates given the vaccine’s ability to reduce the severity of the virus; states with lower vaccination rates seem to have higher death rates.
