YOUR QUIVER | January 3, 2023

Today's Rundown

CIO | Nadine Terman @SolsteinCapital details what she's seeing in global financial markets.

NYE Hangover

IMF head Kristalina Georgieva projects that one-third of the world may suffer from recession, if the US, EU, and China all slow as expected. Not to be outdone by negative forecasts on investors’ first day back at work in the new year, Scion Asset founder Michael Burry projects that the US will have another inflation spike after the Fed has to reverse course in 2H23. The thought is that CPI will decline in 2H23 and maybe turn negative, and then the Fed will cut rates and the gov will provide stimulus again, causing the inflation.

About Face

China’s new foreign minister talked about supporting the growth of US relations and stated that he was “deeply impressed” with Americans, noting that he’s made a lot of friends across the country. What-the-what? Maybe Xi is tired of bestie Putin and wants an exit path. Or, maybe the negative macro data is reprioritizing growth over Taiwan for now. China’s covid surge depressed economic activity to the slowest pace since Feb 2020. PMIs declined, missing expectations, and China Beige Book Intl said GDP may have contracted last Q, and a 1Q recovery is unlikely. But subways are getting filled again, and covid infections may have peaked in 11 of the country’s largest cities. China reopening themes continue to see inflows as folks speculate that there will be further Western vaccine distribution.

Sticky Situation

Inflation remains sticky. Germany’s EU harmonized CPI increased 10.2% last mo, versus the stat for Nov at 11.3%. Prices are expected to decline by -0.8% m/m. Lagarde stated that borrowing costs would increase, and Nagel warned about “a significant increase in long-term inflation expectations." The FT reported on Germany’s strong labor market driving higher rates, echoing the US’ situation. Across the world, Japan is battling inflation and higher rates too. Nikkei reports that most of the country’s food and household goods makers are going to raise prices this year. Reuters reports that major banks are going to raise home loan rates post BOJ change of heart.

Upgrades and Downgrades

Casinos were upgraded ($WYNN by WF to Overweight with px target $101, and $LVS by WF with px target $53) after a dismal Dec. $TSLA remains Underperform with Bernstein given 4Q production and delivery levels, and GS lowered its px target from $235 to $205 on the name. More downgrades ($PCG by UBS to Neutral, $FOXA by Wolfe to Underperform, $CVS by Evercore to In Line, and $CI by Cigna to Equal Weight). Maybe the shops can get together a pick a rating system…

Grading on a Curve

Verdad notes that VC returns tend to lag public mkt returns, roughly an ave of the last 5 quarters. There’s an incentive for VC’s and their clients not to market to market fully (volatility, lower valuations in years like 20222, fees, reporting to boards, etc.). The US VC Index by Cambridge Assoc was down -12.5% through June 2022 (last available data pt). The gap between public/private markets is the largest since Pets.com left our universe. Verdad notes the investor base difference between ARKK and VC funds, which arguably are invested in similar underlying companies….but one has a lot more volatility, right? ARKK outperformed VC funds in the good years but fell off a cliff last year; but the smoothing factor for VC valuations (especially small, money-losing portfolio companies) is more palatable for investors, even if it is a joke (and one related to less liquidity). Are some of these investors are in the Blackstone Real Estate Income Trust? Verdad interestingly points out that the VC index didn’t hit its high water market from 2000 until the end of 2014. If public markets continue to be soft, the curve certainly will be lowered.

UK, U-OK?

FT notes that shop closures hit the highest total in 5 yrs and reports that the UK faces the worst and longest recession of the G7. The December PMI shows that manufacturing is getting worse. Reuters reports that the Deloitte CFO survey points to UK appetite for corporate debt at 14-year low.

UBS Inflation Call

UBS expects inflation to flow faster than investors anticipate due to various factors (e.g., lower crude px, greater vehicle production, lower used vehicle wholesale px, stable import px, elevated inventories at some retailers, lower rents for new leases, easing supply constraints, softer labor market). Due to these drivers, UBS is expecting rate cuts in 2Q or 3Q.