Within the last few weeks, we have seen many conflicting signals moving in opposite directions of the earlier views quite quickly. It was negative, then positive, or previously looking down, then up. Investors are confused about the medium-term trend as we head into a highly likely volatile year-end.
First, let’s look at the microchip sector. With the ongoing tech war America had inflicted on China to restrict sales plus post-Covid supply chain issues, demand was expected to be high globally. News of chip shortages had resulted in car manufacturers having to reduce production as they could not procure enough chips, some of which cost less than $1 each.
Then recently, we saw a 180 degrees turnaround, as reports of a drop in PC demand emerged. There was a big surge in buying during Covid due to WFH policies. But the return to normal meant that the sales performance of the past 2 years cannot be repeated. Now we hear that there is a glut of microchips flooding the market and prices have dropped.
The next switcheroo pertains to the coming winter weather. Based on the colder-than-expected winter we had in 2021, the upcoming one was predicted to also be colder. Coupled with the climate change events we saw this year (bigger hurricanes and storms), the forecast was for a bitter winter ahead. Some parts of America even had early snow.
Then we saw some warming weather and everyone changed their minds, predicting a mild winter. Even then, with the ongoing Ukraine war with Russia, Europe is trying to prepare for a cold winter into Dec to be on the safe side.
Next, we have gas prices. It was expected to go higher as we head into winter due to Russia’s closing of the pipelines to European countries as a response to the sanctions. Futures were climbing higher as Europe scramble to secure supplies to boost their reserves and to expect the worst as winter approaches.
Then 2 weeks back, American gas prices suddenly dropped. The reason was that there was an oversupply situation as US producers ramped up production too quickly to take advantage of higher European gas prices. The situation is still being played out as the arbitrage price opportunity between countries on opposite sides of the Atlantic Ocean continues to exist.
The final flip-flop of where the economy is heading is the most confusing. The aggressive interest rate hikes by the Fed to counter raging inflation had economists talking about tipping the world into a recession. Covid had caused a huge collapse in world demand in 2020. Naturally, when we moved into an endemic post-Covid stage in 2022, a move back to normal from such a low base in 2021 would have caused an inflationary environment. In 20/20 hindsight, this was easily predictable, right?
The stock markets had been on a downward trend for most of 2022 but have recently had a volatile seesaw action. We even saw an 800 points Dow rally last night as tech staged a comeback. The Fed is targeting to announce another 75 bps hike early Nov. So are they going to succeed to fight the inflation monster or tip all of us into recession?
While a majority of pessimists see a recession ahead, there is a growing minority that thinks otherwise. They believe that even if that happens, the Fed Put might happen. It can easily pump start the economy with more money printing again like in 2021.
I wrote about many event risks into the end of 2022 previously. One had just passed and that was the election of Xi. He has firmly grasped control and shows that party stability and control is the ultimate objective, regardless of how badly the stock market behaves.
The next event risk will be the American mid-term elections on 08 Nov. Poll results are all over the place trying to predict the outcome. Frankly, one cannot trust the polling data anymore as they are inaccurate in the last few elections. Their sample size do not usually represent the overall population well.
The last risk will be how the upcoming winter will turn out. Will it be colder than last year? Climate change seemed to have made weather swings even more unpredictable this year. The probability is leaning towards a likely colder one though. Let’s also hope that the Russia-Ukraine war does not escalate higher. All bets are off if a dirty nuclear device is used.
Meanwhile, I am staying long USD against JPY, GBP, CNH and EUR on the widening interest rate differentials. I have also bought gas futures for Nov and Dec expiry dates as I see higher prices into a colder winter.
I continue to remain nimble on the equity stocks. I look for dead cat bounce opportunities to trim away the deadbeats in my portfolio in order to increase my cash reserve. China looks interesting again after Xi’s re-election. Averaging in with small bites into blue chip Chinese tech stocks after the big drop last week as a bet on the promise of more “common prosperity” for the people going forward. Tech will lead the way without the previous cut-throat kill or be killed practises.
We are heading into more bumpy days ahead as we face the last 60 days of 2022 into an uncertain 2023. Caveat Emptor!
ETH, BTC
Dad in hospital
Leave a Reply