More about the cyclical rally

good morning. The headlines on Monday were dominated by the protests in China. We are not sure about the effects on the market, although the story fits our skepticism in terms of the latest China rally. We are very excited about the opinion of our readers: robert.armstrong@ft.com and ethan.wu@ft.com.

Industrial shares, Redux

We have received two interesting - and more or less directly opposite - answers to yesterday's discussion about the surprising rally of the industrial shares. The point of this article was that it is strange that industrial values ​​show radical outperformance when everyone counts on a recession. As of today, the sector has increased by 20 percent since the end of September, compared to 11 percent in S&P.

Michael Howell from Crossborder Capital, a regular unsheded correspondent, wrote to take a classic point: it is the economy, fool. In the past few months, he argues, the US and the global economy have shown a real boost, and cyclical stocks such as industrial values ​​are simply reacting. Here, for example, the real -to -real estimate of the Atlanta FED is the inflation -adjusted growth of gross domestic product, based on the available data for the previous quarter:

This key figure is quite revised in the course of the quarter, but if we experience an inflation-adjusted GDP growth of 4 percent, the cyclical stock rally may make a lot of sense. Similarly, the Citigroup Economic Surprise Index, which depicts the extent, in which the data is ahead of the forecasts, was strongly negative in June and July, moved up in August and September and has been in a slightly positive area since then.

Howell sent this diagram, which shows the results of the real-time BIP growth model of its company compared to an index of cyclical value shares (the model uses inputs such as raw material prices, trade sensitive currencies and loan people to derive its estimate):

Howell also notes that the industrial-heavy German stock market has increased right next to the cyclical US shares, which confirms the signal.

This still leaves us with the question of how we can reconcile the US and German market data and real-time economic data with the much darker message of the deterioration of the order incoming surveys considered yesterday. But it is clear that we have to take the possibility of an increase in business seriously.

Patrick Kaser from Brandywine Global Investment Management, a value investor and another regular conversation partner, says that he "has no idea" what he should think of the industrial alleh, but:

Here are three things that suggest history:

one: The market does not normally reach its floor before the Fed actually pauses;

two: inflation usually takes more than three years to normalize; and

three: recessions occur after tightening cycles of this size

so I think it's only complacency and some try desperately to capture a seasonal rally.

number three clearly met the recessions from 1981, 1990, 2001 and 2008: they started after the key interest rates had already fallen (as you can see here). Number two is the point "longer", about which we talked about for a while. In number one, a chart of the S&P illustrates its point of view quite well during the last two interest rate cycles:

history is never fate, but Kaser's comments draw a plausible picture of a market that has not yet internalized what the Fed has to do. In contrast to Howell's comments, which indicate macroeconomic data that indicate that the slowdown could not be too bad this time.

Which side of the debate does it come to? We continue to believe in the view that inflation will slowly weaken, which indicates that there will be further economic ups and downs before the market finds a permanent low. But the fact that the stock market does not seem to agree to us lets us pause.

defi against cefi

Another week, another crypto bust. The latest is Blockfi, a crypto loan with a list of well-known PE supporters who registered bankruptcy with a tiny 9 billion dollar hole. FTX saved Blockfi in July with a credit line of $ 400 million before it was also bankrupt. Now Blockfi Sam Bankman-Fried is suing for Robinhood shares that he supposedly owes.

In the broader sense, the crypto rental services devastated this year. The largest three - Blockfi, Voyager and Celsius - have now collected. The basics of how this happened are simple enough:

• crypto loan will receive customer deposits in return for an absurd return.

• In order to earn money and at the same time to pay this absurd return, lenders have to invest customer funds in something that an evenly absurder return.

• These investments are associated with risks, often at a frightening height. The information vary. For example, Celsius awarded underground loans to crypto dealers and invested in dubious Yield Farming projects.

• If there is a decline in crypto prices, this risky, profitable stuff suffers. Customers panic and require their money. But their money is in risky things that have lost most of their value or who may be illiquid, or both.

• At this point it says: rescue operation or bankruptcy.

Since the three large crypto credit platforms plus FTX have all went bankrupt, it is hardly necessary to mention that the centralized financing or CEFI was difficult to do during this crypto crash.

But the decentralized financing, or Defi, has kept well. Defi exchanges and lending protocols (mostly) chug and enjoy an activity boost, since panic elsewhere in Krypto drives the returns in Defi. That makes sense. Most things in Defi are just software that lenders bring together with borrowers or buyers with sellers; They usually do not keep customer funds, as is the case with centralized stock exchanges.

Some recognize a pattern or at least an opportunity to repeat the advantages of decentralization. Here is a comment from the Wall Street Journal entitled "Centralization caused the FTX fiasco", which was written by the "Anti-Woke" fund manager and defi investor Vivek Ramaswamy and the regulatory authorities are not asking for defi to burden Defi that are intended for CEFI:

The critical element in [Centralized Exchanges Like FTX] is that someone-either the operator of the central limit order book or an independent agent like a broker-keeps the money of the users. . .

decentralized stock exchanges, on the other hand, do not need custody thanks to the blockchain-based innovation of the automated market maker. A stock exchange attracts liquidity providers that deposit tokenized assets into a smart contract [ie, self-executing code that take care care of clearing and settlement]. . .

Since smart contracts are publicly visible, the funds contained therein are easy to check. Since they cannot be changed by any person (provided that the underlying code is strong), the money can not be stolen by any person. Since no actor takes care of custody, there is no risk of theft by a villain manager. This system requires us that we rather trust parts of public code than potentially guilty people. . .

observers have been wondering why people would use defi if centralized stock exchanges are often faster and cheaper. FTX history turns the question upside down: Why should people entrust their money to a third party if they don't have to?

Ramaswamy's question has good answers: Defi is associated with severe compromises. Nikolaos Panigirtzoglou from JPmorgan has presented some in a recently published note that our own Robin Wigglesworth reproduced on Friday in Alphaville. Decentralized stock exchanges, says Panigirtzoglou, depend on the pricing on centralized stock exchanges, are slower and susceptible to hacking and front running in large orders.

A harder criticism that was brought up by the bank for international payment compensation last year argues that the alleged decentralization of Defi is an illusion. The BIZ initially notes that the code, which is based on Defi projects,, just like paper contracts in traditional finance, impossible can cover all eventualities. CEFI's answer is courts, supervisory authorities and other centralized institutions. Defi's answer are governance protocols, usually a kind of coordination system based on freely traded cryptocurrencies that are referred to as governance tokens. But these governance tokens are often spent on insiders and obtained from them, which puts the decision-making process of the defi protocols into the hands less.

The choice between Defi with all the above disadvantages and cefi, where their money tends to disappear, is dark. The problem is crypto itself. Centralized or decentralized, no kind of exchange deserves regulatory legitimacy, since, as we wrote last week, both of them go home with an asset that has so far been hardly understood that has so far supported little legitimate business. We hope that Cefi vs. Defi will remain a distinction that is only relevant for stock exchange speculators, criminals and crypto journalists, and not for a serious investor who has to understand it. ( ethan wu )

a good reading

In the global oil market, big changes could be imminent.