Good morning, Bull Sheeters.
This is the last week of Q3, and stocks are still down for the month of September. But U.S. futures are gaining this morning, following Europe higher. We’re a good two weeks before the start of earnings season, so the markets will be focused on central banks, vote tallies, and the latest in Washington over the Biden Administration’s “Build Back Better” budget and debt-ceiling negotiations.
We have you covered on all of the above.
Meanwhile, there’s some good news in crypto land. Bitcoin and Ethereum’s Ether have already fully recovered losses from Friday when China announced a crytocurrency ban.
Let’s see what else is moving the market. We begin, as always, out East.
Markets update
Asia
- We begin the week with mixed markets in Asia. The Hang Seng is up 0.1%, Shanghai is down and the Nikkei is flat.
- In company news, we start—where else?—with China Evergrande. On Monday, shares in the property developer’s EV unit, which once carried a market cap greater than that of Ford, fell as much as26% in early trading. And, plenty of wealthy Chinese investors who went long on the company’s high-yield debt now find their investments under water. This kind of thing can happen when you chase yield in a low-yield world.
- The fallout from China’s pronounced crypto ban continues this morning after exchange giants Binance and Huobibarred would-be customers from opening new accounts.
Europe
- The European bourses were solidly higher with the Stoxx Europe 600 up 0.6% in the opening minutes of trading. Banks, autos and energy stocks were leading the way.
- Stillstand. That’s the German word for, yep, “gridlock.” And it’s what’s playing out in Berlin right now after Sunday’s nail-biter of an election to find a replacement for Chancellor Angela Merkel. The upshot: there’s now a scramble for the Right, Left and Center to put together a ruling coalition. It could take a while, leaving Europe’s biggest economy in a state of limbo for weeks, if not longer.
- Speaking of gridlock, there were reports of two-mile queues for petrol in the United Kingdomat the weekend as the country’s fuel crisis intensifies. Translation to American English: motorists in the U.K. spent their precious weekend lining up for hours to fill their gas tanks. In tomorrow’s vocabulary lesson: we’ll define “the boot” and “the bonnet.” In the meantime, a quick quiz: True of False, British cabbies must drive around town with a bale of hay in the boot?
U.S.
- U.S. futures are looking strong to start the week. That’s after S&P 500 closed out last week in the green; it’s down about 1.5% though for the month of September.
- The big action last week was in bond yields. The 10-year Treasury note sat at 1.4458% this morning, after jumping 13 basis points last week.
- What’s on tap this week? Fed Chair Jerome Powell and Treasury Secretary Janet Yellen appear before a Senate banking committee on Tuesday. We get pending home sales Wednesday, and Q2 GDP numbers on Thursday.
Elsewhere
- Gold is down, trading around $1,750/ounce.
- The dollar is flat.
- Crude is climbing, with Brent above $78/barrel. Don’t look now, but Goldman Sachs has a worst-case $90/barrel forecast on Brent should the fuel crisis worsen.
- Despite all the tension in China, Bitcoin is holding onto gains, trading just below $44,000. Ethereum popped nearly 10% in the past 24 hours.
***
Breaking the law
Every time I turned on the television this weekend, I got two stories back-to-back: 1) politics and 2) panic buying. Neither story was about Italy. The first had to do with the German elections. No surprise there. Here in Europe we pay a lot of attention to politics beyond our borders, particularly politics in the euro zone’s biggest economy.
The second story was the crazy scenes of motorists queuing up at petrol stations in the United Kingdom. I won’t say we’re all guilty of schadenfreude for the Brits following the world’s most tedious divorce, Brexit, but some of us do feel we have a bit more license to comment on their woes.
Whenever you see fuming motorists stuck in hours-long waits, or people coming to blows over rolls of toilet paper, that’s a sign of supply and demand breaking down. At that point, everything we learned from “Introduction to Microeconomics”—how market-pricing mechanisms smooth out the gaps between what I want and what you’re selling—goes out the window.
Panic-buying happens when there’s excessive demand, really insufficient supply, or some combination of the two. The good news is these incidents don’t last forever. Eventually, the law of supply and demand restores some order in the markets. But it’s still worth asking ourselves—cue David Byrne singing in the background—how did we get here?
UBS chief economist Paul Donovan reminds us this morning that Britain’s petrol supply was already above ordinary levels. Somebody over there was planning ahead. “However,” he writes, “demand exceeded the exceptional supply in some areas, closing petrol stations. In a week or two, demand is likely to be below normal, as people use the fuel ‘stockpiled’ in their vehicles. There are lessons here for the global patterns in goods demand.”
When news reports of panic buying hit, consumers tend to change behavior. We adapt. This might mean we cut back on unnecessary travel—no weekend getaways for a while. Or, we call the plumber and, in our best Italian, we ask if he can install a bidet (in the hopes of cutting down on toilet paper use).
Central banks will have to adapt, too. That’s the conclusion of Goldman Sachs, which finds that supply chain disruptions are jacking up prices everywhere. They are “responsible for 80% of the 2021 inflation overshoot,” Goldman calculates. It’s not just toilet paper and fuel. It is, of course, microchips and food items—and these shortages are likely to mess with the global economy, from Shanghai to Seattle.
Deutsche Bank research strategist Jim Reid, who is based in the U.K., thinks stimulus-minded central banks and politicians are partly to blame for the great mismatches we’re seeing in the global economy. “Global authorities massively stimulated demand relative to where it would have been in this environment, and in some areas have created more demand than there would have been at this stage without COVID,” Reid writes. “However the supply side has not come back as rapidly.”
When you get such a scenario you get some combination of supply shortages and price shocks. If things are really poorly managed, you get panic buying.
Why does this matter for investors?
Because, the great mismatch between supply and demand “is going to cause central banks a huge headache over the coming months.”
Reid continues, “should they tighten due to what is likely to be a prolonged period of higher prices than people thought even a couple of months ago, or should they look to the potential demand destruction of higher prices?
“The risk of a policy error is high, and the problem with forward guidance is that markets demand to know now what they might do over the next few months and quarters. So it leaves them exposed a little in uncertain times.”
Uncertain times, indeed.
***
Postscript
I have to come clean. I shortchanged everybody on the last newsletter.
On Friday morning, I was in the middle of writing up “Behind the Numbers” when I get a phone call from my neighbor in Amandola. Somebody had taken a crowbar to the front door of my house, she informed me. The thief or thieves broke in, and made off with one item of value: my mountain bike.
And so, I had to cut Friday’s newsletter short, and scramble to get up there and sort out the mess.
As a friend of mine in the next valley texted me, “humanity is so disappointing sometimes.”
True. But it can also be pretty impressive in those really low moments.
My neighbors went into action straight away. They took the smashed wooden door down, bolted it together, reset it, and it put back on the hinges. They also swept up the mess inside. They did this without my knowledge. When I pulled into the driveway in Amandola, after a three-hour drive, I was at a loss for words. My biggest concern—the security of the place—was already largely taken care of.
The local carpenter was on the scene, too, telling me how he could rebuild the door and make it even more secure. And, don’t worry, you can pay me whenever. Lastly, Renzo, my neighbor, was on the phone with his buddy to inquire about installing motion-detection flood lights and an alarm system. Everyone kept reassuring me, Don’t worry. We’ll help you take care of this.
I had very little to do except sign off on what to do next… and listen to their amateur-sleuth theories on who could possibly be the ladro (thief).
Later, I filed a complaint with the police and popped on social media to alert other bikers in the area that—okay, here’s where the lump in my throat grows—my beloved Specialized Camber was stolen. My post has been shared by more than 30 people, so I’m hoping the network effect will make it harder on the thief to re-sell it.
It’s a pretty unique mountain bike for these parts. It’s a 2015 Specialized Camber/carbon-fiber/29er.
When I was asked last year, in a Fortune all-hands edit meeting what I was most thankful for during the pandemic, I blurted out, “my shiny new bicycle.” Just about everyone else had said, “family.” Yeah, sure, them too. But, have I told you about my new mountain bike? We had a lot of amazing adventures together, pedaling from mountain village to mountain village, dipping down a single-track lane to the stream, then to the waterfalls, dodging crazy sheep dogs on the way.
My wife teased me I had fallen in love. When I protested like a teenager, she’d tease me even more.
Anyhow, this is what it looks like (before I took off those silly yellow reflectors). I’m probably expecting too much of humanity to think that I’ll ever get it back, but if, you know, you happen to come across a bike that looks like this one, you know how to reach me.
Yes, I keep combing the online marketplaces, looking for it.
Grazie di cuore.
Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com
As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.
Today's read
Correction protection: Surprising ways to cushion a portfolio during a downturn—Fortune
How a mythical $1 trillion coin became everyone’s favorite solution to the U.S. debt problem—Fortune
Robinhood Hits Campus, Where Credit Card Companies Fear to Tread—The New York Times
What the ‘Smart Money’ Knows About China’s Evergrande Crisis—Wall Street Journal
Market candy
Qu0te of the day
For sustainable and impact investors, it is the tobacco of currencies...That’s kind of a nihilistic view, but that’s the reality.
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