Real Wealth Concepts


Rice Price at 15-Year High


Subscribe now to receive the following:

  1. Weekly: Key soundbites and insights from Wall Street strategists and economists.
  2. Weekly: The most important charts and punchy analyses.
  3. Occasional deep dives into the market, economy and personal finance. ETFs, asset classes and more.
  4. Coming soon for Advisor-to-Client use: Investing concept of the week.

Here’s what Investment Strategists are saying this week:

“3900 Year-End Target for the S&P”

Source: Mike Wilson, Chief U.S. Equity Strategist and Chief Investment Officer, Morgan Stanley

  • We are still against a late cycle backdrop where earnings remain at risk for most companies. Further support for that view can be seen in earnings revision breadth, which is breaking sharply lower again into negative territory and tends to lead NTM EPS forecasts.
  • Most importantly for the headline S&P 500 Index, most of the mega-cap leaders that have reported so far have not traded well post their 3Q results. With this group unable to reverse the ongoing correction and keep the index above key technical levels, this is just another reason why a rally into year-end looks more unlikely to us.
  • We think the S&P 500 price action into year-end is more likely to come down to where the average stock is trading rather than rallying to higher levels because breadth typically leads price. Based on our fundamental and technical analysis, we remain comfortable with our long-standing 3,900 year-end target for the S&P 500, which implies a 17x multiple on our 2024 EPS forecast of approximately $230.

“Grim Picture for Rice Availability in 2024”

Source: Geopolitical Futures

The global rice market is currently facing a storm due to a mix of climate change, El Nino and restrictive export policies, notably from India on non-basmati rice. These elements have driven global rice prices to a 15-year high. In response, people in countries like Thailand and Vietnam have started hoarding rice, fearing further price hikes. Vietnam’s agriculture is taking a hit from climate change, prompting some farmers to switch from rice to other crops like mango, signaling a long-term dip in rice production. This year, Myanmar joined the list of countries restricting rice exports, and it’s anticipated that India, a key player in the global rice market, will tighten its export restrictions further next year. These developments paint a grim picture for rice availability in 2024. The situation is exacerbated by China reducing water flow in the Mekong River due to lower rainfall from El Nino, affecting rice-producing regions.

“Further Downgrade to the Growth Outlook…a Buying Opportunity”

Source: David Kostin, Chief US Equity Strategist, Goldman Sachs

The equity sell-off has matched the historical rate volatility playbook: S&P 500 typically falls by 4% when Treasury yields rise by 2 standard deviations in a month. The impact of rising yields on stocks depends on the interplay between economic growth expectations, discount rates, and corporate balance sheets. Russell 2000 is particularly sensitive to the growth outlook while NASDAQ-100 is more vulnerable to discount rate risk but has less leverage. Valuations and leverage have captured investor attention since August, but focus has recently shifted to the growth outlook. We expect headwinds to valuations and balance sheets to persist but would view a substantial further downgrade to the growth outlook as a buying opportunity.

Consensus Expectations Divorced from Risks

Source: JP Morgan

Cross-Asset Strategy: We expect both demand and pricing power for corporates to soften, while interest expense and charge-offs should rise in the coming quarters due to restrictive monetary policy, tightening liquidity, diminishing consumer savings and elevated geopolitical risk. Ultimately, consensus expectations of 12% forward EPS growth, which in our view is divorced from these risks, should be revised lower. Absent pre-emptive rate cuts by global central banks, we see risks compounding with peak effect of restrictive monetary policy still ahead. We expect the Fed to stay on hold this week with a largely unchanged statement, so we keep tactical longs in 5Y USTs and weighted 5s/10s/30s belly cheapening butterflies.

“We Believe that Intermediate Rates are Presently at or Near their Peak”

Source: David Bailin, CIO, Citi Global Wealth

Although inflation is coming down, growth in the US economy remains unusually strong. The 3Q real GDP showed a massive 4.9% gain. This strength suggests to many investors that the US economy is resilient and can withstand higher interest rates. It contradicts predictions implied by an inverted yield curve.

If the expected weakening of the economy does not appear, then the likelihood of Fed rate cuts fades. This sequence of events has led to the “un-inverting” of the yield curve where longer rates rise to “compete” with short-term T-Bill rates that investors expect to remain “higher for longer”. Since late July 2023, 5yr yields have gapped higher by about 75bps, with 10-year yields up almost 100bps

While US growth measures rebounded in 3Q, we see sufficient tightening from the Fed and numerous other factors to believe that inflation is abating, US employment will slow, and supply and demand equilibrium is being reached broadly across the US.

At some point in 2024, we are likely to see the Fed change its focus on sustaining employment gains rather than forcing them down. We believe that intermediate rates are presently at or near their peak. And we can imagine intermediate rates moving lower as economic events unfold.

We therefore suggest that suitable investors move from cash to a variety of intermediate-duration bonds with an average duration of 5 years. Not only will this lock in high real yields, but it will add meaningful core income in suitable portfolios.

“A New Pressure Building” for Corporations

Source: Leo Kolivakis, Pension Pulse

One CFO of a $100 billion-plus market cap tech company tells me higher interest rates are beginning to penetrate all areas of his business. That includes hiring plans, capital allocation, and new deals. I wouldn’t say this CFO was panicked on the phone, but there is a new pressure building on his operating model to begin making changes with an eye toward slashing expenses.

This CFO isn’t alone…

My take: When economists talk about the lagged effects of rate hikes, this is what they mean. Typically takes two years since the beginning of rate hikes for full effect to be felt. Obviously highly levered companies that rely on cheap financing are first to feel the effects.

The Delusion of Debt: Wealth Will Disappear

Source: Roderick Mann, Consultant and former adjunct professor of finance

Let’s say I am a farmer, making a living, selling my crops at harvest. I buy a large and modern harvester and my farmer neighbors begin to talk about my increasing wealth.

If I bought that machine out of my savings accumulated from my farming business, it does indeed reflect my increasing wealth. But what if I had almost no savings and I borrowed 100% of the purchase price? The other farmers can’t tell the difference but in the former case, wealth was clearly on display while in the latter case, the appearance of wealth was erroneous, for the fact was I had little savings and my net worth not only didn’t change (asset = debt), but is decreasing with the depreciation of the machine.

Record debt across government, corporations, and households was a cultural phenomenon that began about 1980. Each year, total global debt increased. Only recently has the debt appeared to top off at about $325 trillion (worldwide GDP is only about $100 trillion).

When we resort to adding debt each year, our standard of living is higher than our earnings. When we stop doing that, however, and redirect capital to debt service (now more expensive than it has been in decades), and indeed start paying down the debt balance, this requires living a standard that is less than aggregate earnings.

Two out of three Americans live paycheck to paycheck, with very little in savings, but carrying balances on credit cards, mortgages, car loans, BNPL, and student debt. As the debt problem has finally moved up front and center in macroeconomic terms, the fact of poverty will be manifested in recession, deep, long, and lasting until the debt can be seriously and significantly reduced.

Much of the ‘wealth’ will disappear in the form of foreclosures and auto repossessions. Much of the debt will be discharged in the form of cancelations, forgiveness, and bankruptcy, wiping out other wealth across creditors.

The recession is a fait accompli because less debt means less GDP. Interest is a waste cost, a tax that adds nothing to productivity. As the government increases taxes and decreases spending, both will decrease GDP. As corporations redirect from R&D and plant expansion to pay down debt, output decreases. As households focus on reducing their debt, consumer spending (70% of GDP) drops.

The delusion of debt is this. Like steroids, a little helps as a source of capital, but a lot finally kills the host when too much debt means we have no choice but to reduce it.


Posted

in

by