Thatâs the essential point! As has been pointed out in this thread by the undersigned for a while now, the Fedâs balance sheet actions have reached a point where they are genuinely starting to threaten market liquidity.
And even the âofficialâ budget officeâs forecast is that the entire balance sheet will turn to growth this year! Primary dealers also expect it soon.
Interest rates can crush inflation and many investorsâ attention is directed towards interest rates, but the balance sheet keeps the wheels of the financial system turning.
China and Japan have significantly reduced their holdings of U.S. government bonds.
In December, the amount of bonds held by foreign investors decreased further. China may hold some bonds abroad, but at the same time, it has significantly increased its gold reserves.
Long-standing sanctions may have influenced the countriesâ investment strategies; it remains to be seen how things progress.
Paradise of Degenerates â This is what Bloomberg aptly named, in my opinion, a report describing its time, on the rise of leveraged ETFs. I even borrowed the reportâs title for Vartti, thatâs how apt it was.
Leveraged ETFs thus track an underlying asset, such as an index or even a single stock, with a leverage factor. Usually 2x, either long or short.
In my opinion, the growth of long leveraged ETFs indicates investorsâ robust appetite for risk in a bull market. AUM has already grown to one hundred billion dollars.
Issuers, who earned a billion in revenue from these products last year, are bringing an increasingly diverse selection to investors. For example, leveraged ETFs for individual stocks are being planned, which have seen daily movements of up to 50%. A 50% drop for a 2x long leveraged ETF practically means destruction. But who cares in this market?
A small reminder from recent history as well. Does anyone remember how five years ago the COVID-19 pandemic caught the bull market with its pants down? The stock market crash began almost exactly five years agoâŠ
Vartti has a lot of content around these themes, enjoyable viewing moments!
As has been the case in each month since last October, the pace of input cost inflation quickened in February. The latest increase in input prices was the fastest since April 2023 and above the series average. The overall increase in input costs continued to be driven by services, where the rapid pace of inflation was unchanged from January. Manufacturing input prices rose for the second month running and at the fastest pace in six months, albeit one that remained modest overall. In turn, output price inflation also accelerated and was at a ten-month high in February. A solid rise in charges in the service sector contrasted with a marginal reduction in manufacturing selling prices, the fifth in the past six months. Output prices were up markedly in Germany, while France posted renewed inflation following a fall in January. The rest of the euro area also saw selling prices rise."
In addition to these, I would offer these stale metrics again.
Shiller P/E is now 37, S&P500 P/E 30. The 10-year treasury yield is now 4.42%. The market certainly cannot be called cheap at the moment, unless that AI hype delivers a proper productivity leap.
Letâs add that 1/30 = ~3.3% earnings yield, meaning many investors have a negative risk premium. My own mortgage interest rate hovers around 3%. Iâve taken a breather from index savings and gathered some war chest. Soon I just need to decide how to proceed.
Fortunately, thereâs cheap stuff to be found in the Helsinki marketâs bargain bin to lose all my money on.
Except for bank stocks. Inflation raises interest rates, and net interest income is banksâ most important source of revenue.
Could bank stocks already be considered a safe haven for those who see the inevitability of inflation, e.g., as a result of future trade wars? @Verneri_Pulkkinen
It may be that we are now, in a way, realizing Uncle Grahamâs famous saying, âStock is a voting machine in the short runâŠâ
Has the vote on current US politics begun? You donât even have to be American to vote. Uncertainty about peace in Europe would reflect in European stock markets, but not in the US. Distrust and protest against US actions, on the other hand, would penalize the US and could strengthen European stock markets.
The results of this election are being listened to and feared by the top leadership. Will political statements start to sway the direction of the stock market? At what point will it turn so that the direction of the stock market begins to influence the statements? Popcorn might run out in stores.
Letâs hope that recent actions will cause the already predictable bursting of the US stock market bubble. If stocks promise less than 1% earnings yield and government bonds over 4% yield, then it is an unsustainable situation.
What would happen if Finnish investments in the USA were significantly reduced and at least some of them were directed back to the Helsinki Stock Exchange?
We would finally get that upturn started in the Helsinki Stock Exchange too, or rather, give the already started price increase in the Helsinki Stock Exchange a chance to continue further. The halving of the earnings yield metric and at the same time the doubling of stock prices in Finland, as well as the halving of stock prices in the USA, is a completely realistic vision. This is how recommendations from non-manipulated AI should go.
The return of capital to Finland is a patriotic act. And besides, it would seem to yield better returns in this global situation.
Companies will probably postpone investments if costs rise â less borrowing from banks. In addition, consumers who barely survived the previous wave of inflation with savings and pay raises will not cope as well with a new wave â again less business for banks.
This article by Johannes Ankelo discusses, among other things, how Morgan Stanley is raising the multipolar world as one of the themes for 2025.
Tightening tariffs in the USA impact global trade and supply chains, alongside production concentration and geopolitical challenges. Companies face inflation and growth risks because shifting production away from China is slow and expensive. The article also states how, according to the investment bank, the reorganization will take years, simultaneously increasing costs, etc.
Thatâs an interesting question. In principle, yes⊠But! And an important one at that.
Banks are in many ways sensitive creatures, whose suitable habitat is an economy that is precisely the right temperature. Not too hot, because when the economy grows too quickly, bad loans are easily granted, and high interest rates can, in turn, increase credit losses.
On the other hand, not too cold either. Europeâs zero-interest rate period and negligible economic growth were a time of hibernation for the banking sector.
If the situation remains just right, meaning inflation is pleasant and interest rates are suitably elevated without banksâ net interest income suffering, for example, from competition for deposits and loans, they perform well.
On the other hand, even a small deviation from this optimal temperature makes investors remember how sensitive banks, as leveraged businesses, are to all disruptions. Banks can be part of an inflation hedge, but I wouldnât consider them the only one if one believes inflation will remain at a higher level. Pricing power companies come to mind, if they can be acquired cheaply. In addition, raw materials and perhaps short-term interest rates.
And note, cash can be good at the beginning of an inflation surge, as it was in 2022 when stocks collapsed. Ironically, in the long run, the clearest loser in inflation can be a real winner in the short term if the money is put to work in the right places.
I myself have been thinking that if there were another inflation spike, I would want to have cash and perhaps raw materials to some extent.
I think itâs time to bring up this almost two-year-old writing and theme by Verneri. I think it would be a good topic for Vartti, especially now after the elections
Indeed⊠It would be interesting to know how, from the components of that Fear and Greed index, for example, market momentum can be âextreme fearâ with the recent performance⊠In the US, they clearly havenât looked into, for example, Neste. That would blow the scale
Ironically, European stocks have outperformed American ones since the presidential electionsâŠ
This has been particularly evident in defense stocks. While in Europe, money is being invested in weapons out of necessity, in the Trump administration, thereâs talk of even sharp cuts (up to 50%!) in arms spending. These are unlikely to fully materialize, but the direction of the stocks well illustrates the changed situation on both continents.
Overall, European stocks and earnings forecasts are at an All-Time HighâŠ
In Vartti, I went through thoughts on Europeâs positive and negative factors. All in all, a concerted effort is an opportunity, but itâs easy to list numerous negative factors.
As has been pointed out in this thread by the undersigned for a while now, the Fedâs balance sheet actions have reached a point where they are genuinely starting to threaten market liquidity.
