Thanksgiving 2022 Links

• Thanks to today's release of the November 2nd FOMC meeting minutes, we know that the Fed has "pivoted" as expected; they are backing off of their aggressive tightening agenda. Instead of hiking rates another 75 bps at their December 14th meeting, we are likely to see only a 50 bps hike, to 4.5%, and that could well be the last hike of this tightening cycle—which would make it the shortest tightening cycle on record (less than one year). And they might not even raise rates at all in December—that would be my preference. For more than two years I have been one of a handful of economists keeping an eye on the rapid growth of the M2 money supply. Initially I warned that it portended much higher inflation than the market was expecting. But since May of this year I have argued that inflation pressures have peaked: "Many factors have contributed to this: growth in the M2 money supply has been essentially zero since late last year; the stimulus checks have ceased; the dollar has been very strong; commodity prices have been very weak; and soaring interest rates have brought the housing market to its knees. All of these developments mean that the supply of money and the demand to hold it have come back to some semblance of balance." To sum it up, I think the Fed has gotten policy back on track, so there's no need to do more. In fact, the October M2 release showed even more of a slowdown than previously, thus underscoring the need to avoid further tightening. I'm still firmly in the inflation-is-falling camp, and it's because of the unprecedented decline in the M2 money supply, coupled with forceful actions on the part of the Fed to bolster money demand with sharply higher interest rates. As a result, I believe we are going to see a gradual decline in inflation over the next year or so. [Scott Grannis]
• A "substantial majority" of policymakers at the Federal Reserve's meeting early this month agreed it would "likely soon be appropriate" to slow the pace of interest rate hikes as debate broadened over the implications of the U.S. central bank's rapid tightening of monetary policy, according to the minutes from the session. The readout of the Nov. 1-2 meeting, at which the Fed raised its policy rate by three-quarters of a percentage point for the fourth straight time, showed officials were largely satisfied they could move rates in smaller, more deliberate steps as the economy adjusted to more expensive credit and concerns about "overshooting" seemed to increase. [Reuters] 
• This gives an interesting spin on what volatility in markets “is”, from a microstructural perspective: a security’s variance is proportional to the ratio of the arrival rate of trades to the steepness of the order book. If a lot of trades arrive very quickly, or if the order book is shallow and there isn’t much resting liquidity, then a security will be volatile. By contrast, if a security trades rarely, or has a very steep book with lots of bids and offers and trading interest, then its price will generally not move as much, and it won’t be volatile. [Quantian]
• A simple crypto rule to live by: any token or exchange that has a CEO, identifiable individual or development team associated with it is not real crypto; it's the antithesis of crypto. This substack has been warning for quite some time that all of these centralized exchanges are nothing more than grifting operations, IRS reporting nodes and CIA black ops money laundering facilitators. I have been warning since around 2019 that Tether is the single most egregious crypto scam out there. It is far worse than FTX, with Sam Bankman-Fried (SBF) and his team of scammers having had direct ties with Tether. The sordid cadre of snake oil salesmen behind Tether makes SBF look like an ethical player. [link]
• One thing Murphy does not really address but that I find captivating is the effect of increasing populations and development in the exporting countries: the Export Land Model. We see this right now with Nigeria, for example. Nigeria exports ~2MM bbl/d and is the 4th most important source of U.S. imports. Nigeria has a very young population and a total fertility rate of close to 6, with the result that their population is doubling roughly every 20 years. Combine that with increasing development (only 30 cars per 1000; even Cuba and Iraq have more) and you will see a ferocious increase in oil consumption. During our lifetimes, Nigeria will transition from oil exporter to oil importer. [CBS]
• Nigeria's crude oil production fell below 1 million barrels per day (bpd) in August, figures from its regulator show, as the nation grappled with rampant theft from its pipelines and years of underinvestment. The decline is a further threat to strained finances in Africa's most populous nation and cuts global oil supply amid soaring energy costs due to the war in Ukraine. Nigeria's total oil and condensates output dropped to an annual low of 1.18 million bpd in August, data from the Nigerian Upstream Petroleum Regulatory Commission showed. [Reuters]
• Yesterday we suggested a theory that what happened with Suntech would make sense as part of Chinese plan to capture the photovoltaic solar industry at the expense of foreign investors. Raising capital through a holding company that funnels money to China would allow a huge capacity build up, which could be followed by dumping of product that drives non-Chinese competitors out of business. After that, it would be time to foreclose on the loans to the operating subsidiary, leaving the overseas holding company with nothing. If this theory is correct, what we are witnessing right now is the "blow off", where the marks who invested in the holding company need to be let down gradually. If the Chinese were blowing off the holding company bondholders, they wouldn't explicitly decide yes or no on a bailout but just keep the conversation going. How long would it take for the bondholders to get tired of the legal fees and aggravation and just sell and move on? [CBS]
• The bullish case for the Suntech bonds (and stock) has always been that China will bail out (give money gratis) to the Suntech Power holding company that owns the Chinese manufacturing subsidiary because it... feels bad? wants to save face?... about how foreign investors paid for it to build up PV manufacturing capacity while at the same time dumping product and driving foreign competitors out of business. [CBS]
• Fourth, and finally, is that tech workers – from whom the DEI movement drew its most active and engaged disciples – no longer hold as much power over their place of employment as they once did. Gone are the days where elite tech worker could easily threaten their employer with a jump to a competitor for another plum position making $200K+. All the major tech companies are now either doing layoffs in mass numbers or have instituted hiring freezes. With potentially hundreds of thousands of tech workers soon to be out of a job – perhaps for quite a while! – I suspect many of the most fervent ideologues among them will find it more difficult to convince companies to hire them elsewhere. The idea of bringing Your Whole Self to Twitter may suddenly seem a fair bit less appealing as the job market turns. [DHH]
• At only $300 million US, the price values the refinery at only about 0.6 times its current EBITDA earning power. Using BP's long-term $60 crude planning price set, it is still only 4 times EBITDA. Such a low price is hard to justify based on the high demand for US refining capacity and instead seems like a move to improve its ESG profile given the reputation of oil sands crude with the green crowd. At 1% of BP's current EBITDA, the refinery income is barely material but still serves as a warning that BP management is at risk of doing deals for uneconomic reasons. The company is still cheap, but the risk of uneconomic deals may cause the market to continue valuing it much lower than US peers. For Cenovus, the deal is more material, improving EBITDA by around 5%. [link]
• Zillow managed to lose nearly $1 billion buying and flipping houses during the most dramatic real estate inflation in the history of the United States. They could have bought houses at random and made money, at least in nominal dollars, yet they managed to lose. MIT alum and major Joe Biden donor Sam Bankman-Fried managed to lose his own money and also money that he stole from depositors in the crypto marketplace. But how? His trading operation, Alameda Research, was started in November 2017. Bitcoin was about $7,000 back then. Today, however, Bitcoin is quoted at over 16,000 Bidies. Adjusted for inflation, perhaps this is not a great return but it looks good in nominal dollars at least. How did a guy celebrated as a genius by Sequoia Capital and the rest of the Silicon Valley smart set manage to lose money while operating in a strong tailwind? Is it like the Florida real estate boom of the mid-1920s in which people who’d been successful kept doubling down and, therefore, the recent dip in crypto prices caused losses far greater than what had been earned on the way up? [Phil G]
• This is just one example, but similar dynamics are playing out in natural gas, coal, base metals, and all manner of other commodity and base materials producing businesses. My point is: investing in a cyclical company at 6+ times peak earnings is a bad idea. But at 3x? 2x? At some valuation shares are attractive, even if future earnings will certainly trend downward. In my view, the market is discounting many of these temporary over-earners too sharply. [Alluvial]