END OF TERM REPORT

MCM in house collage

Easter neatly finishes off the first quarter too, how is the world doing? A mixed bag really, although for many of us, perhaps better than we expected.

MERKEL AND MACRON MIGHT BE RIGHT

Although I am afraid, we have moved from the tub-thumping section on the Astra Zeneca vaccine, into more of the dry analytical camp. Here, I am sad to say the evidence of a rare but fatal side effect is growing more compelling by the day. The case for the UK vaccine policy has always been pure statistics, so the disease will kill more people than the vaccine, but don’t confuse that with saying vaccines can’t kill and maim, they do.   

Given the choice, would I now have avoided the AZ shot? Yes, I probably would, and waited for the Pfizer jab to arrive on these shores. Will I duck the second Astra shot (if offered) well on health grounds yes; but if the state (or another state) is going to impose onerous restrictions on my freedom of movement as a result, well, I probably value my residual sanity enough to grin and bare my arm.

But lower down the risk pyramid? Especially for younger women, where the risk of a fatal COVID infection is vanishingly low (particularly now the wretched thing has indeed vanished here) well, I am certainly not in the camp that wants to sack them for saying “no to a needle”. Once we have choices, I think restrictions on the Oxford vaccine are now defensible.

As for a commercial product, well good luck to the Italians, having caused a trade row, I am not sure that seized vaccine shipment is much good now. Of course, we could and should export it all, strictly for use on the over 50’s; but is the product now irretrievably tainted? While those handful of fatal cases will now be tragically added to those “routine” claims for vaccine damage off the NHS. The US has pushing on for a thousand vaccine claims settled every year, for some half million dollars apiece, it is not that rare an event.

Despite that, the first quarter story still remains a medical triumph. Astra in the scheme of things has already saved thousands of lives. Other less blunt instruments will soon follow. The end of lockdown is coming. Will episodic waves of infection keep turning up, almost at random in time and space? Of course, that’s the whole thing with a mutating virus.

WHERE NEXT FOR MARKETS

Markets however are still torn, that patchy vaccine roll out and the fiscal bazookas deployed (and in cases still being deployed) are blasting it higher. However, the bond markets have reacted far more quickly than we expected and done so globally. The US having the nearest thing to a free market in town, have seen rates jump first, but they will drag everyone along, and pull every currency down against the dollar.

The issue is simply how far and how fast will rates rise. But the squeeze is already on, neither Archegos, nor Erdogan are in our view co-incidences. Both are real world impacts striking hard at billions of dollars and millions of people; there is more to come. Deliveroo may also be telling us something about the competition for single horned ungulates too, which would be rather good news.

Here is the Freddie Mac housing note, for the assiduous. We would expect markets to overshoot, as usual, so the path of the US 10 Year interest rates, may have already peaked for the year.

While the US Federal Reserve also have a (secret) number in mind, above which it can’t let interest rates go. The current US administration has become complacent on wealth creation and hates markets too, so would rather enjoy a hard correction and a softer dollar.

My guess is this gets ugly at 2% (from 1.75% now), either because markets are spooked or Central Bank action follows, so the idea that it is already close to the top looks solid, but it is becoming about fine margins. While that 2% ceiling will itself drift upwards through the year if inflation is really back.

However, for now, many people doubt if inflation or rates are going that high, or if they do, they are confident the Federal Reserve will call the bond market’s bluff. None of this is particularly good news for long term investors navigating the next six months; the fuse has already been lit.

METALS SHOW THEIR METTLE

One of the pleasures of Easter is time to tackle a growing pile of Annual Reports. These are now (for single stocks) well beyond the capacity of any sane person to absorb, but fortunately 90% of their content has become heavily standardised virtue signaling, or almost meaningless numerical disclosures, plus the familiar pang of disgust at just how useless remuneration committees really are. The system is still not working.

Out of that pile a couple of global mining stocks come to hand, which are instructive on a few levels: it is a story of steady profits, restored dividends, falling production volumes, reined in cap ex, a bit of a mess on anything you can’t easily store in bulk and flashes of resource nationalism, as China’s persistent meddling and manipulation in commodity trades continues.           

None of that speaks to me of the fabled commodity super-cycle, there is no single consistent story in those tomes. No one high volume product with no possible substitute exists; I guess copper is close, but once COVID restrictions (and workforce discontent) are removed, I expect it will just about add enough capacity to cover the expected infrastructure surge.

So, while profits were up, if production was down, that remains a story of subdued demand and price increases will now pull forward more production. So once more, this time from commodities, inflation (as all the Central Banks keep telling us), is probably going to spike higher and fall back. To embed inflation, you need persistent pricing power, not temporary shortages. Miners are not opening big new holes in the ground; indeed, they trend towards divestment still.

Overall, because of that vast liquidity surge, market rises are possibly more deferred than cancelled, but what felt a ‘no brainer’ in the autumn and winter, feels a lot less compelling, as spring arrives.

We hope you have had a rest over the break.  We will be taking a pause from writing for May Day, as opposed to Easter, although not from fraternal solidarity, but because Easter has come early this year.

Charles Gillams

Monogram Capital Management Ltd