Real interest and recession | Finance times

good morning. Netflix reported declining subscribers last night, a big surprise for the market and for me. I am one of the people who consider Netflix as a basic auxiliary/childcare tool and could not imagine that people would stop en masse , even if other streaming options multiply. I was wrong; The stock is crushed like a beetle; Tech investments are difficult. Send us an email with your thoughts: robert.armstrong@ft.com and ethan.wu@ft.com.

Real interest goes through

In the past six weeks, the real returns have increased by 100 basis on 10-year-old government bonds. This is incredibly fast. Here is the diagram:

The movement has brought the real returns into the positive area except for a few basis points. For many observers, this is a long -awaited return to reason. The idea that the monetary costs that are negative in inflation appears to many people as madness and as proof of a massively distorted central bank policy. The real returns simply rise for them because this evil politics is finally undone. From this point of view, there is not much to explain here, except maybe why the move took so long. The answer to this question is: Nobody was sure that the Fed was serious about the tightening. Now they are sure.

Nevertheless, something strange is here. Start disassembling the components of the real returns, which are nominal treasury returns and inflation expectations:

As you can see, it is a great movement among the nominal returns that drove the increase in real returns. The inflation expectations have been unchanged since the beginning of March. The mechanics are simple. The Fed pushes the interest upwards and these increases ripple down the curve (long interest rates are a number of short interest plus a bonus). The handling of the bond purchases by the central bank reduced the purchase pressure on long bonds, which could also increase their returns. At the same time, the tightening of the fed policy of inflation gives less scope and keeps the inflation expectations within the framework.

That makes sense. At the same time, however, the wild increase in the nominal returns occurred exactly at the moment the fear of a recession in 2023, caused by an aggressive fed. A recession would undoubtedly quickly bring the nominal returns down. But the market for long -term government bonds seems to ignore this possibility.

treasurists are not alone. Risk systems also ignore fear of recession. The stock prices and creditwrads have stuck a bit, but still very high or very narrow. In other words, the financing conditions for companies remain very relaxed - even if interest increases of the FED have significantly tightened the financing conditions elsewhere, such as showing a stronger dollar and higher mortgage interest.

The treasury and risk markets seem to be responsible that the Fed can increase the interest more before it brings something in the economy or at the markets and they are forced to withdraw. The markets may be right. As Edward al-Hussainy from Columbia Threadneedle likes to remind you whether you are right depends on the neutral interest rate that cannot be observed and changes over time. We only know that we hit it when a market collapses.

Another option: Investors lived in a dream and only slowly wake up. Unhedged's friend James Athey of Abrdn, who spoke about risk systems, pressed out the point as follows:

The behavior of the risk markets partially reflects the behavior learned (stocks can never fall/remain, i.e. always be long), the shift in the market structure, which results from this earlier "Fed Put" paradigm (the increase in dynamics/systematic strategies). And the belief that the Fed, as soon as inflation has inevitably normalized, can pass back on to support the markets.

Krypto or crypto miner?

Bitcoin mining shares are in the news for the wrong reasons. The two largest listed mining stocks, Riot Blockchain and Marathon Digital Holdings, made it difficult this year. Both dropped by almost 35 percent in 2022, compared to 11 percent at Bitcoin. Why does someone buy crypto miner?

Maybe the answer is so simple that where Bitcoin goes, Miner follow twice as quickly. In other words, it is leveraged bets on Bitcoin. The latest price activities seem to correspond to this story. Since Bitcoin became parabolic in 2020, Bitcoin-Miner has been crazy:

A comparison with gold helps here. Many people think that Bitcoin is digital gold. Both "raw materials" are produced by mining workers who use heavy machines- pumps and explosives for gold, specialized "ASIC" calculations for Bitcoin- and both crypto and gold mining workers sell their production on the free market.

You can imagine that the idea of ​​the levered bets also applies to gold mining companies, since sales revenues fluctuate with the gold, but the input costs are not, which creates an operational leverage. The relationship has not always kept, but it definitely looks good since 2015 during the steady increase in gold:

It all looked a bit too neat, so I took a closer look at the betas of these shares, a measure of how risky an asset compared to the market is. The catch here is the definition of "market". Usually the beta of a share is compared with the S&P 500 or a similar stock index. But to see whether Riot Blockchain works as a levered Bitcoin bet, you have to compare them with Bitcoin. Here is what I found (a beta of less than one means a lower volatility than the market):

In the past five years, the large gold mines stocks have been more volatile than the gold market (the analysis also applies to longer periods), but not the Bitcoin mining workers.

The boring reason is that the enormous volatility of Bitcoin means that mining stocks have to overcome a higher bar. But the crypto mining business also depends on the corporate strategy. Two approaches predominate, as Joe Burnett from Blockware Solutions explained to me. One runs high-quality mining rigs on a large scale. The other concludes contracts with power nets for cheap electricity. The purchase of these shares is a bet on execution competence and the price of Bitcoin.

If it is not really leveraged Bitcoin bets, we are again the original question: Why crypto mining shares? Difficult question. If you have a mandate that prohibits direct contact with Bitcoin, that's okay. But for everyone who concludes a belief on Bitcoin or Krypto, it is probably better to buy the damn coins. ( ethan wu )

a good reading

Here are some great graphics that show the challenges that Europe faces when it is seriously weaning off Russian gas.