Most (But Not All) Supply Bottlenecks Ease, More on China’s Fixed Income and Equity Markets, and the S&P 500’s Response to Fed

Happy New Year! It looks like the bond markets finally woke up to reality last week. How far and how fast will yields rise? The Fed regional manufacturing surveys were mixed last month but solidly in growth territory. China’s Real estate crisis is sure to bring more volatility in 2022 as large maturities will need to be paid off.  Europe’s energy woes bring a wild ride with U.S. Liquified Natural Gas (LNG) to the rescue. A pair of cautionary charts on two of the markets darlings. 10 million new Covid cases reported last week is worth noting.  Finally, some charts on the market that show how we got here and illustrate just how good we have had it for the last 12 years.

1. There are many signs that the supply bottlenecks are finally resolving themselves. While the price pressures should ease going forward, the inflationary pressures are already in the system and are unlikely to be reversed (i.e. wage and rent increases are unlikely to get rolled back as are most product price increases).

Source: The Daily Shot from 1/4/2022

2. However, the most crucial bottleneck, semiconductors, continues to worsen. This is retarding auto manufacturing and sales and virtually every other capital goods product (Chips are in appliances, manufacturing equipment, HVAC components and of course, everything electronic…)

Source: Bloomberg

3. We have written about China’s real estate and other debt issues. While the central government is acting, will more of a rescue be necessary?

Source: The Daily Shot from 1/4/2022

4. Together with government “crackdowns” on tech and other industries, the Chinese equity markets are showing the strain:

Source: The Daily Shot from 1/5/2022

5. The other cost of Covid:

Source: EFG International 

6. Covid’s earlier outbreak in Europe has had a marked effect on their economy:

Source: The Daily Shot from 1/5/2022

7. As it has in South Africa, where Omicron was first discovered:

Source: The Daily Shot from 1/5/2022

8. Equivalent rents make up 42% of the CPI Index. They continue to surge:

Source: CoreLogic 

9. The markets are reacting to a much more hawkish Fed. Yesterday they released their meeting minutes, and now on the table are:

• The end of QE much sooner
• Balance sheet reduction (selling existing holdings or reverse QE)
• Faster rate hikes

Source: @bespokeinvest

10. This is scary! Economic activity related to children drives a lot of the economy (food, shelter, transport, education, toys, sporting equipment, vacations, etc). Worse still, fewer and fewer people will be around to fund the boomers in retirement:

Source: @bpolitics

11. This is a global phenomenon:

Source: arXiv

12. Please allow a boomer moment—What is worth more, a pet rock or a picture of a pet rock? A masterpiece painting, or a picture of the same? A tulip bulb or a picture of a tulip?  Seems to me that there are a few people with too much money on their hands…

Source: @acemaxx, @FT