Don’t Confuse Genius with Leverage

Nick Ferres Vantage Point Articles

It seems like an obvious point today, but it is important not to confuse genius with leverage. Extreme leverage always seems to be a good idea when it works, but it clearly operates both ways. For years the Fed have denied the fact that super-abundant liquidity and financial repression could pose financial stability risks. In January this year Jay Powell …

The Buzz Lightyear market; to infinity and beyond

Nick Ferres Vantage Point Articles

The valuation of a growth market (or company) taken to its logical extreme can be almost infinite as the discount rate approaches zero. Of course, in the real world, risk premia do (and should) exist. While market leaders in some sectors have monopoly-like power, growth is eventually constrained by competition, new entrants, market size, regulation and available resources (unless we …

Shifting the Goal Posts

Nick Ferres Vantage Point Articles

1. The Fed has upgraded its forecasts for growth, employment and inflation at the March FOMC 2. However, the Fed Funds Rate (policy rate) is projected to remain at 0.25% until end 2023 3. The key implication for markets is ongoing accommodation, reflation (positive for equity prices), yield curve steepening and USD weakness 4. As we have noted recently, inflation …

Keep it Simple

Nick Ferres Vantage Point Articles

The good news overnight was that February US consumer price inflation showed little cause for near term concern. Of course, the base effects from the low prints in March and April 2020 will roll off the annual numbers over the coming two months. However, the big picture point is that current inflation and expectations are well below the level that …

Bond Markets and the Need for Speed

Nick Ferres Vantage Point Articles

The rise in US Treasuries and sovereign bond yields has started to garner some attention from investors. While the magnitude of the move is modest in the context of the hyperbolic rise in cryptocurrencies or the recent (weather-driven) move in energy prices, a disorderly increase in yields would likely be more disruptive for some risk assets given low risk free …

The Artist Formerly Known as “High Yield”

Nick Ferres Vantage Point Articles

One of the key features of the recent episode is that the ~$10.5 trillion in global central bank liquidity has kept the bond term premia and credit spreads much more contained than in previous crises (relative to the GDP shock). Indeed, following the recent compression in high yield spreads, credit risk compensation in the US high yield market is back …

A flesh wound

Nick Ferres Vantage Point Articles

Equity market volatility at the end of January has raised concern in some quarters that there will be a broader and more sustained correction. This follows the observation by a number of high profile “value” investors over recent weeks that equities were in a bubble. While we have some sympathy for that assessment on an outright basis, we have also …

The Green New Deal & Clean Energy

Nick Ferres Vantage Point Articles

A key potential implication of the mini Blue Wave that has the Democrats controlling the House, Senate and the White House is that the Administration will put-forward friendly clean energy industry legislation. Of course, this was rapidly priced (extrapolated) by the investors. The S&P Clean Energy Index is +66% since the November election +179% over the past year. There are …

The Non-Predictions for 2021

Nick Ferres Vantage Point Articles

As is customary in December, analysts start to publish their economic and market forecasts for the following year. Of course, the challenge is that it is impossible for human beings to see the future. Given the unprecedented events this year and the nature of the COVID episode most forecasts made at the end of 2019 for this year would likely …

The Least Compelling “Value” Sector

Nick Ferres Vantage Point Articles

If the global expansion is sustainable, synchronous and supported by policy in 2021 “value” sectors of the world equity markets have a decent probability of out-performing “growth, momentum or low volatility” factors in a tactical sense next year. The historical experience from past cycles suggests that the expansion ought to continue as the cyclical tailwinds following a recession are powerful. …